SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2002 Commission file number 1-13905
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COMPX INTERNATIONAL INC.
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(Exact name of Registrant as specified in its charter)
Delaware 57-0981653
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(State or other jurisdiction of (IRS Employer
organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 448-1400
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Number of shares of Class A common stock outstanding on August 9, 2002:
5,115,780.
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2001
and June 30, 2002 3-4
Consolidated Statements of Income -
Three months and six months ended
June 30, 2001 and 2002 5
Consolidated Statements of Comprehensive Income -
Three months and six months ended
June 30, 2001 and 2002 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2001 and 2002 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2002 8
Notes to Consolidated Financial Statements 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-19
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders. 20
Item 6. Exhibits and Reports on Form 8-K. 20
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2001 2002
------ -------
Current assets:
Cash and cash equivalents ........................ $ 33,309 $ 11,140
Accounts receivable, net ......................... 23,422 24,756
Income taxes receivable from affiliates .......... 351 384
Refundable income taxes .......................... 2,032 4,041
Inventories ...................................... 30,902 31,114
Prepaid expenses and other ....................... 2,902 2,906
Deferred income taxes ............................ 1,944 1,956
-------- --------
Total current assets ......................... 94,862 76,297
-------- --------
Other assets:
Goodwill ......................................... 38,882 40,286
Other intangible assets .......................... 2,440 2,397
Deferred income taxes ............................ 3,132 3,053
Prepaid rent ..................................... 1,079 811
Other ............................................ 577 349
-------- --------
Total other assets ........................... 46,110 46,896
-------- --------
Property and equipment:
Land ............................................. 4,368 4,433
Buildings ........................................ 26,182 26,755
Equipment ........................................ 92,683 100,970
Construction in progress ......................... 4,618 6,922
-------- --------
127,851 139,080
Less accumulated depreciation .................... 42,815 50,816
-------- --------
Net property and equipment ................... 85,036 88,264
-------- --------
$226,008 $211,457
======== ========
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2001 2002
-------- -------
Current liabilities:
Current maturities of long-term debt ........... $ 56 $ 30,031
Accounts payable and accrued liabilities ....... 23,168 22,590
Payable to affiliate ........................... 15 1
Deferred income taxes .......................... 291 45
Income taxes ................................... 1,000 792
--------- ---------
Total current liabilities .................. 24,530 53,459
--------- ---------
Noncurrent liabilities:
Long-term debt ................................. 49,000 --
Deferred income taxes .......................... 7,573 9,661
Accrued pension costs .......................... 660 --
Deferred gain on sale/leaseback ................ 1,221 877
--------- ---------
Total noncurrent liabilities ............... 58,454 10,538
--------- ---------
Stockholders' equity:
Preferred stock ................................ -- --
Class A common stock ........................... 62 62
Class B common stock ........................... 100 100
Additional paid-in capital ..................... 119,224 119,260
Retained earnings .............................. 50,966 49,352
Accumulated other comprehensive income
- currency translation ........................ (16,013) (9,999)
Treasury stock ................................. (11,315) (11,315)
--------- ---------
Total stockholders' equity ................. 143,024 147,460
--------- ---------
$ 226,008 $ 211,457
========= =========
Commitments and contingencies (Note 1)
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
-------------- ----------------
2001 2002 2001 2002
------ ------ ------ ------
Net sales ................................. $53,371 $51,017 $ 112,954 $99,586
Cost of sales ............................. 41,095 41,266 86,806 80,128
------- ------- --------- -------
12,276 9,751 26,148 19,458
Selling, general and administrative ....... 6,932 7,072 13,999 14,259
------- ------- --------- -------
Operating income ...................... 5,344 2,679 12,149 5,199
Other expense (income), net ............... 20 456 (219) 145
Interest expense .......................... 868 655 1,672 1,338
------- ------- --------- -------
Income before income taxes ............ 4,456 1,568 10,696 3,716
Provision for income taxes ................ 1,796 737 4,311 1,554
------- ------- --------- -------
Net income ............................ $ 2,660 $ 831 $ 6,385 $ 2,162
======= ======= ========= =======
Basic and diluted earnings per common share $ .18 $ .05 $ .42 $ .14
======= ======= ========= =======
Cash dividends per share .................. $ .125 $ .125 $ .25 $ .25
======= ======= ========= =======
Shares used in the calculation
of per share amounts:
Basic earnings per common share ........ 15,114 15,105 15,185 15,104
Dilutive impact of outstanding
stock options ......................... 9 17 5 15
------- ------- --------- -------
Diluted common shares .................. 15,123 15,122 15,190 15,119
======= ======= ========= =======
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Six months ended
June 30, June 30,
-------------- ---------------
2001 2002 2001 2002
------ ------ ------ ------
Net income ............................. $ 2,660 $ 831 $ 6,385 $2,162
Other comprehensive income -
Currency translation adjustment,
net of tax ........................... (53) 6,212 (3,556) 6,014
------- ------ ------- ------
Comprehensive income ............. $ 2,607 $7,043 $ 2,829 $8,176
======= ====== ======= ======
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2001 and 2002
(In thousands)
2001 2002
---- ----
Cash flows from operating activities:
Net income ........................................... $ 6,385 $ 2,162
Depreciation and amortization ........................ 7,314 6,466
Deferred income taxes ................................ 581 (62)
Other, net ........................................... 190 (408)
-------- --------
14,470 8,158
Change in assets and liabilities:
Accounts receivable ................................ 1,265 (598)
Inventories ........................................ (469) 869
Accounts payable and accrued liabilities ........... (6,480) (320)
Accounts with affiliates ........................... 62 (47)
Income taxes ....................................... (449) (393)
Other, net ......................................... 532 104
-------- --------
Net cash provided by operating activities ........ 8,931 7,773
-------- --------
Cash flows from investing activities -
capital expenditures .................................. (6,966) (7,519)
-------- --------
Cash flows from financing activities:
Indebtedness:
Additions ......................................... 14,919 --
Principal payments ................................ (6,485) (19,025)
Dividends ............................................ (3,778) (3,776)
Common stock reacquired .............................. (2,650) --
-------- --------
Net cash provided (used) by financing activities . 2,006 (22,801)
-------- --------
Net increase (decrease) in cash and cash equivalents ... 3,971 (22,547)
Currency translation ................................... 20 378
-------- --------
3,991 (22,169)
Cash and cash equivalents:
Balance at beginning of period ....................... 9,820 33,309
-------- --------
Balance at end of period ............................. $ 13,811 $ 11,140
======== ========
Supplemental disclosures - cash paid for:
Interest ............................................. $ 1,949 $ 1,252
Income taxes ......................................... 3,983 2,317
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2002
(In thousands)
Accumulated
other
comprehensive
Additional income (loss)- Total
Common Stock paid-in Retained currency Treasury stockholders'
Class A Class B capital earnings translation stock equity
Balance at December 31, 2001 .. $62 $100 $119,224 $ 50,966 $(16,013) $(11,315) $ 143,024
Net income .................... -- -- -- 2,162 -- -- 2,162
Other comprehensive income, net -- -- -- -- 6,014 -- 6,014
Issuance of common stock ...... -- -- 36 -- -- -- 36
Cash dividends ................ -- -- -- (3,776) -- -- (3,776)
--- ---- -------- -------- -------- -------- ---------
Balance at June 30, 2002 ...... $62 $100 $119,260 $ 49,352 $ (9,999) $(11,315) $ 147,460
=== ==== ======== ======== ======== ======== =========
COMPX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of CompX International Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2001 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2002 and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 2001 and 2002 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations. Certain
information normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
has been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2001 (the "2001 Annual Report").
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the 2001 Annual
Report.
The Company is 69% owned by Valhi, Inc. (NYSE: VHI) and Valhi's
wholly-owned subsidiary Valcor, Inc. Contran Corporation holds, directly or
through subsidiaries, approximately 93% of Valhi's outstanding common stock.
Substantially all of Contran's outstanding voting stock is held by trusts
established for the benefit of certain children and grandchildren of Harold C.
Simmons, of which Mr. Simmons is sole trustee. Mr. Simmons, the Chairman of the
Board of each of Contran, Valhi and Valcor, may be deemed to control such
companies and the Company.
Note 2 - Business segment information:
The Company defines its operations in terms of three operating segments -
CompX Security Products, CompX Waterloo and CompX Regout (formerly called CompX
Europe). The CompX Security Products segment, with manufacturing facilities in
South Carolina and Illinois, manufactures locking mechanisms and other security
products for sales to the office furniture, banking, vending, computer and other
industries. The CompX Waterloo segment, with facilities in Canada, Michigan and
Taiwan, and the CompX Regout segment, with facilities in the Netherlands, both
manufacture a complete line of precision ball bearing slides for use in office
furniture, computer-related equipment, tool storage cabinets and other
applications, and manufacture or distribute ergonomic computer support
accessories for office furniture. Because of the similar economic
characteristics between the CompX Waterloo and CompX Regout segments and due to
the identical products, customer types, production processes and distribution
methods shared by these two segments, they have been aggregated into a single
reportable segment for segment reporting purposes.
Three months ended Six months ended
June 30, June 30,
---------------- -----------------
2001 2002 2001 2002
---- ---- ---- ----
(In thousands)
Net sales:
CompX Waterloo/CompX Regout $ 34,702 $ 31,725 $ 73,759 $ 62,113
CompX Security Products ... 18,669 19,292 39,195 37,473
-------- -------- --------- --------
Total net sales ......... $ 53,371 $ 51,017 $ 112,954 $ 99,586
======== ======== ========= ========
Operating income:
CompX Waterloo/CompX Regout $ 2,872 $ 303 $ 7,106 $ 714
CompX Security Products ... 2,472 2,376 5,043 4,485
-------- -------- --------- --------
Total operating income .. 5,344 2,679 12,149 5,199
Other general corporate
income, net ................ (20) (456) 219 (145)
Interest expense ............ (868) (655) (1,672) (1,338)
-------- -------- --------- --------
Income before income taxes $ 4,456 $ 1,568 $ 10,696 $ 3,716
======== ======== ========= ========
Note 3 - Inventories:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Raw materials ............................ $ 9,677 $ 7,907
Work in process .......................... 12,619 13,726
Finished products ........................ 8,494 9,329
Supplies ................................. 112 152
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$30,902 $31,114
======= =======
Note 4 - Goodwill and other intangible assets:
Goodwill. Changes in the carrying amount of goodwill are presented in the
table below.
Operating segment
CompX Waterloo/ CompX Security
CompX Regout Products Total
(In millions)
Balance at December 31, 2001 .................. $15.2 $23.7 $38.9
Goodwill acquired during
the period ................................... -- -- --
Changes in foreign exchange rates ............. 1.4 -- 1.4
----- ----- -----
Balance at June 30, 2002 ...................... $16.6 $23.7 $40.3
===== ===== =====
Upon adoption of Statement of Financial Accounting Standards ("SFAS") No.
142, Goodwill and Other Intangible Assets, effective January 1, 2002 (See Note
10), the goodwill related to the CompX Security Products segment and the CompX
Waterloo/CompX Regout segment was assigned to reporting units (as defined in
SFAS No. 142) consisting of the reportable operating segments to which the
goodwill relates.
Other intangible assets. Other intangible assets consisting of the
estimated fair value of certain patents acquired, are stated net of accumulated
amortization of $1.1 million at June 30, 2002 (December 31, 2001 - $1.0
million). Such intangible assets have been, and will continue to be after
adoption of SFAS No. 142 effective January 1, 2002, amortized by the
straight-line method over the lives of the patents (approximately 10.75 years
remaining at June 30, 2002) with no assumed residual value at the end of the
life of the patents. Amortization expense of intangible assets was approximately
$60,000 in each of the three month periods ending June 30, 2001 and 2002 and
$120,000 in each of the first six months of 2001 and 2002. Such amortization
expense is expected to be approximately $250,000 in each of calendar years 2002
through 2006.
Note 5 - Accounts payable and accrued liabilities:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Accounts payable ............................... $ 9,459 $10,241
Accrued liabilities:
Employee benefits ............................ 6,619 7,182
Insurance .................................... 361 396
Royalties .................................... 223 117
Restructuring ................................ 2,278 683
Deferred gain on sale/leaseback .............. 479 765
Other ........................................ 3,749 3,206
------- -------
$23,168 $22,590
======= =======
In 2001, a charge of $2.7 million (euro 3.1 million) was recorded related
to a consolidation and rationalization of CompX's Regout operations. This
restructuring effort included headcount reductions of about 35 employees at the
Company's Maastricht, the Netherlands facility, substantially all of which had
been implemented by December 31, 2001. Through June 30, 2002, approximately $2.2
million of the total charge has been paid. Of the remainder, $100,000 is
expected to be paid in the last six months of 2002 and $600,000 in 2003. The
restructuring liability has also changed due to fluctuations in foreign currency
exchange rates.
Note 6 - Indebtedness:
December 31, June 30,
2001 2002
---- ----
(In thousands)
Revolving bank credit facility, due February 2003 ...... $49,000 $30,000
Other .................................................. 56 31
------- -------
49,056 30,031
Less current maturities ................................ 56 30,031
------- -------
$49,000 $ --
======= =======
Note 7 - Other expense (income), net:
Three months ended Six months ended
June 30, June 30,
-------------- ---------------
2001 2002 2001 2002
---- ---- ---- ----
(In thousands)
Interest income ........................ $(134) $(111) $(287) $(295)
Foreign currency transactions, net ..... 197 640 88 930
Defined benefit pension plan
settlement gain ....................... -- -- -- (677)
Other, net ............................. (43) (73) (20) 187
----- ----- ----- -----
$ 20 $ 456 $(219) $ 145
===== ===== ===== =====
As of January 1, 2001, the Company ceased providing future benefits under a
defined benefit pension plan covering substantially all full-time employees of
Thomas Regout International B.V. This action reduced certain pension benefit
obligations and resulted in a curtailment gain in the fourth quarter of 2001.
Certain other remaining obligations related to the terminated plan were fully
settled during the first quarter of 2002, resulting in a settlement gain of
approximately $677,000.
Note 8 - Provision for income taxes:
Three months ended Six months ended
June 30, June 30,
--------------- ----------------
2001 2002 2001 2002
---- ---- ---- ----
(In thousands)
Expected tax expense ............... $ 1,560 $ 549 $ 3,744 $ 1,301
Non-U.S. tax rates ................. (77) (116) (174) (203)
No tax benefit for amortization of
goodwill .......................... 172 -- 346 --
Other, net ......................... 141 304 395 456
------- ------- ------- -------
$ 1,796 $ 737 $ 4,311 $ 1,554
======= ======= ======= =======
Note 9 - Accounting principles newly adopted in 2002:
Goodwill. The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective January 1, 2002. Under SFAS No. 142, goodwill is no longer
amortized on a periodic basis. Goodwill is subject to an impairment test to be
performed at least on an annual basis, and impairment reviews may result in
future periodic write-downs charged to earnings. Under the transition provisions
of SFAS No. 142, all goodwill existing as of June 30, 2001 ceased to be
periodically amortized as of January 1, 2002, and all goodwill arising in a
purchase business combination completed on or after July 1, 2001 was not
periodically amortized from the date of such combination.
As discussed in Note 4, the Company has assigned its goodwill to two
reporting units (as that term is defined in SFAS No. 142). Under SFAS No. 142,
such goodwill will be deemed to not be impaired if the estimated fair value of
the CompX Security Products and CompX Waterloo/CompX Regout reporting units
exceeds the respective net carrying value of such reporting units, including the
allocated goodwill. If the fair value of the reporting unit is less than
carrying value, then a goodwill impairment loss would be recognized equal to the
excess, if any, of the net carrying value of the reporting unit goodwill over
its implied fair value (up to a maximum impairment equal to the carrying value
of the goodwill). The implied fair value of reporting unit goodwill would be the
amount equal to the excess of the estimated fair value of the reporting unit
over the amount that would be allocated to the tangible and intangible net
assets of the reporting unit (including unrecognized intangible assets) as if
such reporting unit had been acquired in a purchase business combination
accounted for in accordance with GAAP as of the date of the impairment testing.
In determining the estimated fair value of the reporting units, the Company
will use discounted cash flow valuation techniques.
The Company has completed its initial, transitional goodwill impairment
analysis under SFAS No. 142 as of January 1, 2002, and no goodwill impairments
were deemed to exist. In accordance with the requirements of SFAS No. 142, the
Company will review goodwill of the reporting units for impairment during the
third quarter of each year starting in 2002. Goodwill will also be reviewed for
impairment at other times during each year when events or changes in
circumstances indicate that an impairment might be present.
As shown in the following table, the Company would have reported net income
of $3.2 million, or $.21 per share, and $7.4 million, or $.49 per share, for the
three and six month periods ended June 30, 2001, respectively, if the goodwill
amortization included in the Company's reported net income had not been
recognized.
Three months ended Six months ended
June 30, June 30,
-------------- -------------
2001 2002 2001 2002
---- ---- ---- ----
(In millions, except per share amounts)
Net income as reported ...................... $ 2.7 $ .8 $ 6.4 $ 2.2
Adjustment - goodwill amortization .......... .5 -- 1.0 --
----- ----- ----- -----
Adjusted net income ......................... $ 3.2 $ .8 $ 7.4 $ 2.2
===== ===== ===== =====
Diluted net income per share as
reported ................................... $ .18 $ .05 $ .42 $ .14
Adjustment - goodwill amortization .......... .03 -- .07 --
----- ----- ----- -----
Adjusted diluted net income per share ....... $ .21 $ .05 $ .49 $ .14
===== ===== ===== =====
Impairment of long-lived assets. The Company adopted SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets, effective
January 1, 2002. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that any net assets to be
disposed of by sale are to be reported at the lower of carrying value or fair
value less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 did
not have a significant effect on the Company as of January 1, 2002.
Note 10 - Accounting principles not yet adopted:
The Company will adopt SFAS No. 143, Accounting for Asset Retirement
Obligations, no later than January 1, 2003. Under SFAS No. 143, the fair value
of a liability for an asset retirement obligation covered under the scope of
SFAS No. 143 would be recognized in the period in which the liability is
incurred, with an offsetting increase in the carrying amount of the related
long-lived asset. Over time, the liability would be accreted to its present
value, and the capitalized cost would be depreciated over the useful life of the
related asset. Upon settlement of the liability, an entity would either settle
the obligation for its recorded amount or incur a gain or loss upon settlement.
The Company is still studying this standard to determine, among other things,
whether it has any asset retirement obligations which are covered under the
scope of SFAS No. 143, and the effect, if any, to the Company of adopting SFAS
No. 143 has not yet been determined.
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, no later than January 1, 2003 for exit or disposal
activities initiated on or after the date of adoption. Under SFAS No. 146, costs
associated with exit activities, as defined, that are covered by the scope of
SFAS No. 146 will be recognized and measured initially at fair value, generally
in the period in which the liability is incurred. Costs covered by the scope of
SFAS No. 146 include termination benefits provided to employees, costs to
consolidate facilities or relocate employees, and costs to terminate contracts
(other than a capital lease). Under existing GAAP, a liability for such an exit
cost is recognized at the date an exit plan is adopted, which may or may not be
the date at which the liability has been incurred.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Overview
The Company reported net income of $.8 million in the second quarter of
2002, a decrease of 69% from net income of $2.7 million for the second quarter
of 2001. The Company reported net income of $2.2 million in the first six months
of 2002, a 66% decrease from net income of $6.4 million in the first six months
of 2001.
As discussed in Note 9 to the Consolidated Financial Statements, beginning
in 2002 the Company no longer recognizes periodic amortization of goodwill in
its results of operations. The Company would have reported net income of
approximately $3.2 million in the second quarter of 2001, or about $500,000
higher, if goodwill amortization included in the Company's reported net income
had not been recognized. Of such $500,000 difference, approximately $200,000
relates to amortization of goodwill attributable to the Company's CompX
Waterloo/CompX Regout segment and $300,000 relates to the Company's CompX
Security Products segment. For the six month period ended June 30, 2001, net
income would have been $7.4 million or about $1.0 million higher than reported
net income if goodwill amortization had not been recognized. Amortization of
goodwill attributable to each reportable segment for the first six months of
2001 is proportionate to the goodwill amortization reported for the second
quarter of 2001.
Results of Operations
Three months ended Six months ended
June 30, June 30,
--------------- % -------------- %
2001 2002 Change 2001 2002 Change
---- ---- ------ ---- ---- ----
(In thousands) (In thousands)
Net sales:
CompX Waterloo/CompX Regout $34,702 $31,725 -9% $ 73,759 $62,113 -16%
CompX Security Products ... 18,669 19,292 3% 39,195 37,473 -4%
---- -------- ------- ----
Total net sales ......... $53,371 $51,017 -4% $112,954 $99,586 -12%
==== ======== ======= ====
Operating income:
CompX Waterloo/CompX Regout $ 2,872 $ 303 -89% $ 7,106 $ 714 -90%
CompX Security Products ... 2,472 2,376 -4% 5,043 4,485 -11%
---- -------- ------- ----
Total operating income .. $ 5,344 $ 2,679 -50% $ 12,149 $ 5,199 -57%
==== ======== ======= ====
Operating income margin:
CompX Waterloo/CompX Regout 8% 1% 10% 1%
CompX Security Products ... 13% 12% 13% 12%
Total operating income
margin: ................. 10% 5% 11% 5%
Net sales. Net sales decreased in the second quarter and first six months
of 2002 compared to the same periods in 2001 principally due to continued weak
demand for the Company's component products sold to the office furniture market
resulting from continued weak economic conditions in the manufacturing sector in
North America and Europe. Net sales of slide products decreased 4% and 16% for
the three and six month periods ended June 30, 2002 compared to the same periods
in 2001, with sales of ergonomic products decreasing 16% and 19% for the same
comparable periods. As compared to the corresponding period in 2001, sales of
security products increased 3% for the second quarter of 2002, in part due to
new business development and increased orders in advance of implementation of
July 2002 price increases. Sales of security products decreased 4% for the six
month period ended June 30, 2002 as compared to the corresponding period.
Operating income. Operating income decreased in the second quarter and
first six months of 2002 compared to the same periods in 2001. Despite the
positive effects of continued cost reductions and no amortization of goodwill in
2002, operating income in 2002 was adversely impacted by the continuing decline
in net sales, changes in product mix and increases in certain raw material costs
(primarily steel). In addition, competitive pricing pressures from customers
caused certain selling price decreases. If goodwill amortization included in
CompX's reported operating income had not been recognized during the second
quarter and first six months of 2001, total operating income would have
decreased 55% and 61% in the second quarter and first six month period of 2002
compared to the same periods in 2001. Similarly, operating income at the CompX
Security Products segment would have decreased 16% and 22% and operating income
at the CompX Waterloo/CompX Regout segment would have decreased 90% and 91% for
the same comparable periods. Note 9 to the Consolidated Financial Statements
more fully discusses the transitional impact of the adoption of SFAS No. 142,
Goodwill and Other Intangible Assets, as of January 1, 2002.
CompX has substantial operations and assets located outside the United
States (principally in Canada, the Netherlands and Taiwan, and all within the
CompX Waterloo/CompX Regout segment). A portion of CompX's sales generated from
its non-U.S. operations are denominated in currencies other than the U.S.
dollar, principally the Canadian dollar, the euro and the New Taiwan dollar. In
addition, approximately 60% of CompX's sales generated from its Canadian
operations are denominated in the U.S. dollar. Most raw materials, labor and
other production costs for such non-U.S. operations are denominated primarily in
local currencies. Consequently, the translated U.S. dollar value of CompX's
foreign sales and operating results are subject to currency exchange rate
fluctuations which may favorably or unfavorably impact reported earnings and may
affect comparability of period-to-period operating results. During the second
quarter and first six months of 2002, currency exchange rate fluctuations of the
Canadian dollar and the New Taiwan dollar negatively impacted the Company's
sales comparisons with the corresponding period of the prior year, however
currency exchange rate fluctuations with respect to the euro substantially
offset this negative impact (principally with respect to slide products).
Excluding the effect of currency, the Company's net sales decreased 5% in the
second quarter of 2002 and decreased 11% in the first six months of 2002
compared to the corresponding periods in 2001. The net sales of the Company's
CompX Waterloo/CompX Regout segment decreased 9% and 15% for the same comparable
periods. Currency exchange rate fluctuations with respect to the Canadian dollar
positively affected CompX's operating income comparisons with the corresponding
period of the prior year whereas exchange rate fluctuations in the euro, New
Taiwan dollar and other currencies did not materially impact these operating
income comparisons. Excluding the effect of currency, operating income decreased
49% and 59% in the second quarter and first six months of 2002 compared to 2001
and operating income for the CompX Waterloo/CompX Regout segment decreased 49%
and 76%, for the same comparable periods.
Outlook. The Company currently expects that soft market conditions will
continue for the near-term in the office furniture market, the primary
end-market for the Company's products. As a result, sales volumes are expected
to remain at depressed levels for at least the remainder of the year, while
competitive pricing pressures are expected to continue. Furthermore, the
worldwide steel price increase that followed the steel tariff imposed this year
by the United States government are expected to continue to negatively impact
margins on the Company's precision slide and ergonomic computer support products
where steel is the primary raw material. The Company will continue to focus on
cost improvement initiatives and prudent balance sheet management in order to
minimize the impact of lower sales to the office furniture industry and to
develop value-added customer relationships to improve operating earnings. In
connection with these cost improvement initiatives, the Company may consider
strategies that could result in capacity reductions, the consolidation of
existing facilities and production rebalancing which, depending on the outcome,
may result in future restructuring charges.
General Corporate and other items
Other general corporate income, net. The components of other general
corporate income, net are summarized in Note 7 to the Consolidated Financial
Statements, and primarily include interest income, foreign currency transaction
gains and losses and a settlement gain relating to CompX's terminated defined
benefit pension plan. See Note 7 to the Consolidated Financial Statements.
Interest income decreased in the second quarter and increased in the first
six months of 2002 as compared to the corresponding periods in 2001. The
decrease in interest income is primarily due to lower interest rates earned on
funds available for investment. The increase in interest income in the six month
period ending June 30, 2002 is primarily due to a higher level of funds
available for investment in the first half of 2002 compared to the first half of
2001. Also included in other general corporate income, net are other gains and
losses on disposals of property and equipment and other assets.
Interest expense. Interest expense declined in the second quarter of 2002
and first six months of 2002 compared to the corresponding periods of 2001 due
primarily to lower average interest rates on CompX's Revolving Senior Credit
Facility. Assuming interest rates do not increase significantly from year-end
2001 levels, interest expense in the remainder of 2002 is expected to continue
to be lower compared to the same periods in 2001 due to lower average interest
rates on the Company's Revolving Senior Credit Facility and due to lower
outstanding balances.
Provision for income taxes. The principal reasons for the difference
between CompX's effective income tax rates and the U.S. federal statutory income
tax rates are explained in Note 8 to the Consolidated Financial Statements.
Income tax rates vary by jurisdiction (county and/or state), and relative
changes in the geographic mix of CompX's pre-tax earnings can result in
fluctuations in the effective income tax rate. The effective tax rate for the
three months ended June 30, 2002 increased to 47.0% from 40.3% for the second
quarter of 2001 due to lower income levels and an increased proportion of
foreign-source income which is taxed at a higher effective tax rate.
As discussed in Note 9 to the Consolidated Financial Statements, effective
January 1, 2002, the Company no longer recognizes periodic amortization of
goodwill. Under GAAP, generally there is no income tax benefit recognized for
financial reporting purposes attributable to goodwill amortization. Accordingly,
ceasing to periodically amortize goodwill beginning in 2002 reduced the
Company's overall effective income tax rate as compared to 2001, partially
offsetting the increased effective tax rate on foreign-source income.
Liquidity and Capital Resources
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities, are generally similar to the trends
in the Company's earnings. Such cash flows totaled $14.5 million and $8.2
million in the first six months of 2001 and 2002, respectively, compared to net
income of $6.4 million and $2.2 million, respectively.
Changes in assets and liabilities result primarily from the timing of
production, sales and purchases. Such changes in assets and liabilities
generally tend to even out over time and result in trends in cash flows from
operating activities generally reflecting earnings trends.
Investing activities. Net cash used by investing activities totaled $7.0
million and $7.5 million in the first six months of 2001 and 2002, respectively.
The capital expenditures for 2002 relate primarily to tooling costs at the
Company's facilities and equipment additions designed to improve manufacturing
efficiencies at the Company's security products and ergonomic and slide products
facilities. Capital expenditures for 2002 are estimated at approximately $10
million to $13 million, the majority of which relate to projects that emphasize
improved production efficiency and shifting production capacity to lower cost
facilities. Firm purchase commitments for capital projects not commenced at June
30, 2002 approximated [$1.5] million.
Financing activities. Net cash provided (used) by financing activities
totaled $2.0 million and ($22.8) million in the first six months of 2001 and
2002, respectively. The Company paid its regular quarterly dividend of $1.9
million, or $.125 per share, in the second quarter of 2002 ($3.8 million, or
$.25 per share for the first six months of 2002). In addition, the Company used
available cash on hand to reduce its outstanding debt by $19 million in June
2002.
CompX's board of directors has authorized CompX to purchase up to 1.5
million shares of its common stock in open market or privately-negotiated
transactions over an unspecified period of time. Through June 30, 2002, the
Company had purchased 1.1 million shares pursuant to such authorization for an
aggregate of $11.3 million. None of such shares were purchased during 2002.
Management believes that cash generated from operations and borrowing
availability under the Company's unsecured revolving bank credit facility ($70
million available for borrowing at June 30, 2002), together with cash on hand,
will be sufficient to meet the Company's liquidity needs for working capital,
capital expenditures, debt service and dividends for the foreseeable future.
CompX expects to renew its existing revolving bank credit facility prior to its
expiration in February 2003. There can be no assurance however, that such
renewal will occur, or that the Company will be able to obtain comparable terms
under the new credit facility.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements in light of its capital resources
and estimated future operating cash flows. As a result of this process, the
Company has in the past and may in the future seek to raise additional capital,
refinance or restructure indebtedness, issue additional securities, modify its
dividend policy, repurchase shares of its common stock or take a combination of
such steps to manage its liquidity and capital resources. In the normal course
of business, the Company may review opportunities for acquisitions,
divestitures, joint ventures or other business combinations in the component
products industry. In the event of any such transaction, the Company may
consider using available cash, issuing additional equity securities or
increasing the indebtedness of the Company or its subsidiaries.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "anticipates," "expected" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. Among the
factors that could cause actual future results to differ materially are the
risks and uncertainties discussed in this Quarterly Report and those described
from time to time in the Company's other filings with the Securities and
Exchange Commission. While it is not possible to identify all factors, the
Company continues to face many risks and uncertainties including, but not
limited to, future supply and demand for the Company's products, changes in
costs of raw materials and other operating costs (such as energy costs), general
global economic and political conditions, demand for office furniture, service
industry employment levels, the possibility of labor disruptions, competitive
products and prices, substitute products, customer and competitor strategies,
the introduction of trade barriers, the impact of pricing and production
decisions, fluctuations in the value of the U.S. dollar relative to other
currencies (such as the euro, Canadian dollar and New Taiwan dollar), potential
difficulties in integrating completed acquisitions, uncertainties associated
with new product development, environmental matters (such as those requiring
emission and discharge standards for existing and new facilities), government
regulations and possible changes therein, possible future litigation, the
ability of the Company to renew or obtain credit facilities and other risks and
uncertainties. Should one or more of these risks materialize (or the
consequences of such a development worsen), or should the underlying assumptions
prove incorrect, actual results could differ materially from those forecasted or
expected. The Company disclaims any intention or obligation to update publicly
or revise such statements whether as a result of new information, future events
or otherwise.
Part II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on May 14, 2002. Paul
M. Bass, Jr., David A. Bowers, Edward J. Hardin, Ann Manix, Glenn R. Simmons and
Steven L. Watson were elected as directors, each receiving votes "For" their
election from over 99% of the approximately 105.1 million votes eligible to be
voted at the Annual Meeting.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
10.1 Intercorporate Services Agreement between the Registrant and
Contran Corporation effective as of January 1, 2002.
99.1 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.2 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2002.
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPX INTERNATIONAL INC.
-----------------------------
(Registrant)
Date August 14, 2002 By /s/ Darryl R. Halbert
------------------ ---------------------------
Darryl R. Halbert
Vice President and Controller
(Principal Financial and Accounting Officer)
Exhibit 10.1
INTERCORPORATE SERVICES AGREEMENT
This INTERCORPORATE SERVICES AGREEMENT (the "Agreement"), effective as of
January 1, 2002, amends and supersedes the Intercorporate Services Agreement
effective as of January 1, 2001 between CONTRAN CORPORATION, a Delaware
corporation ("Contran"), and COMPX INTERNATIONAL INC., a Delaware corporation
("Recipient").
Recitals
A. Employees and agents of Contran and affiliates of Contran perform
management, financial and administrative functions for Recipient without direct
compensation from Recipient.
B. Recipient does not separately maintain the full internal capability to
perform all necessary management, financial and administrative functions that
Recipient requires.
C. The cost of maintaining the additional personnel by Recipient necessary
to perform the functions provided for by this Agreement would exceed the fee set
forth in Section 3 of this Agreement and that the terms of this Agreement are no
less favorable to Recipient than could otherwise be obtained from a third party
for comparable services.
D. Recipient desires to continue receiving the management, financial and
administrative services presently provided by Contran and affiliates of Contran
and Contran is willing to continue to provide such services under the terms of
this Agreement.
Agreement
For and in consideration of the mutual premises, representations and
covenants herein contained, the parties hereto mutually agree as follows:
Section 1. Services to be Provided. Contran agrees to make available to
Recipient the following services (the "Services") to be rendered by the internal
staff of Contran and affiliates of Contran:
(a) Consultation in the development and implementation of Recipient's
corporate business strategies, plans and objectives;
(b) Consultation in management and conduct of corporate affairs and
corporate governance consistent with the charter and bylaws of Recipient;
(c) Consultation in maintenance of financial records and controls,
including preparation and review of periodic financial statements and
reports to be filed with public and regulatory entities and those required
to be prepared for financial institutions or pursuant to indentures and
credit agreements;
(d) Consultation in cash management and in arranging financing
necessary to implement the business plans of Recipient;
(e) Consultation in tax management and administration, including,
without limitation, preparation and filing of tax returns, tax reporting,
examinations by government authorities and tax planning;
(f) Consultation with respect to employee benefit plans and incentive
compensation arrangements;
(g) Certain administration and management services with respect to
Recipient's insurance and risk management needs, including:
(i) management of claims (including insured and self-insured workers
compensation and liability claims);
(ii) budgeting and related activities;
(iii) coordination of property loss control program; and
(iv) administration of Recipient's insurance program, excluding all
employee benefit and welfare related programs; and
(h) Such other services as may be requested by Recipient or deemed
necessary and proper from time to time.
This Agreement does not apply to, and the Services provided for herein do not
include, any services that Glenn R. Simmons or Steven L. Watson may provide to
Recipient in their roles as members of Recipient's board of directors or any
other activity related to such board of directors.
Section 2. Miscellaneous Services. It is the intent of the parties hereto
that Contran provide only the Services requested by Recipient in connection with
routine management, financial and administrative functions related to the
ongoing operations of Recipient and not with respect to special projects,
including corporate investments, acquisitions and divestitures. The parties
hereto contemplate that the Services rendered in connection with the conduct of
Recipient's business will be on a scale compared to that existing on the
effective date of this Agreement, adjusted for internal corporate growth or
contraction, but not for major corporate acquisitions or divestitures, and that
adjustments may be required to the terms of this Agreement in the event of such
major corporate acquisitions, divestitures or special projects. Recipient will
continue to bear all other costs required for outside services including, but
not limited to, the outside services of attorneys, auditors, trustees,
consultants, transfer agents and registrars, and it is expressly understood that
Contran assumes no liability for any expenses or services other than those
stated in Section 1. In addition to the fee paid to Contran by Recipient for the
Services provided pursuant to this Agreement, Recipient will pay to Contran the
amount of out-of-pocket costs incurred by Contran in rendering such Services.
Section 3. Fee for Services. Recipient agrees to pay to Contran $414,500
quarterly on the first business day of each quarter, commencing as of January 1,
2002, pursuant to this Agreement.
Section 4. Original Term. Subject to the provisions of Section 5 hereof,
the original term of this Agreement shall be from January 1, 2002 to December
31, 2002.
Section 5. Extensions. This Agreement shall be extended on a
quarter-to-quarter basis after the expiration of its original term unless
written notification is given by Contran or Recipient thirty (30) days in
advance of the first day of each successive quarter or unless it is superseded
by a subsequent written agreement of the parties hereto.
Section 6. Limitation of Liability. In providing its Services hereunder,
Contran shall have a duty to act, and to cause its agents to act, in a
reasonably prudent manner, but neither Contran nor any officer, director,
employee or agent of Contran or its affiliates shall be liable to Recipient for
any error of judgment or mistake of law or for any loss incurred by Recipient in
connection with the matter to which this Agreement relates, except a loss
resulting from willful misfeasance, bad faith or gross negligence on the part of
Contran.
Section 7. Indemnification of Contran by Recipient. Recipient shall
indemnify and hold harmless Contran, its affiliates and their respective
officers, directors and employees from and against any and all losses,
liabilities, claims, damages, costs and expenses (including attorneys' fees and
other expenses of litigation) to which Contran or any such person may become
subject arising out of the Services provided by Contran to Recipient hereunder,
provided that such indemnity shall not protect any person against any liability
to which such person would otherwise be subject by reason of willful
misfeasance, bad faith or gross negligence on the part of such person.
Section 8. Confidentiality. Except as otherwise required by applicable law,
each of the parties agrees that it will maintain in confidence all confidential
information regarding the other party supplied to it in the course of the
performance of this Agreement.
Section 9. Further Assurances. Each of the parties will make, execute,
acknowledge and deliver such other instruments and documents, and take all such
other actions, as the other party may reasonably request and as may reasonably
be required in order to effectuate the purposes of this Agreement and to carry
out the terms hereof.
Section 10. Notices. All communications hereunder shall be in writing and
shall be addressed, if intended for Contran, to Three Lincoln Centre, 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240, Attention: President, or such other
address as it shall have furnished to Recipient in writing, and if intended for
Recipient, to Three Lincoln Centre, 5430 LBJ Freeway, Suite 1700, Dallas, Texas
75240, Attention: President, or such other address as it shall have furnished to
Contran in writing.
Section 11. Amendment and Modification. Neither this Agreement nor any term
hereof may be changed, waived, discharged or terminated other than by agreement
in writing signed by the parties hereto.
Section 12. Successors and Assigns. This Agreement shall be binding upon
and inure to the benefit of Contran and Recipient and their respective
successors and assigns, except that neither party may assign its rights under
this Agreement without the prior written consent of the other party.
Section 13. Governing Law. This Agreement shall be governed by, and
construed and interpreted in accordance with, the laws of the state of Texas.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed and delivered as of the date first above written.
CONTRAN CORPORATION
By: /s/ Steven L. Watson
----------------------------------
Steven L. Watson, President
COMPX INTERNATIONAL INC.
By: /s/ Stuart M. Bitting
----------------------------------
Stuart M. Bitting, Vice President
Exhibit 99.1
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CompX International Inc. (the
Company) on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, David A.
Bowers, Vice Chairman of the Board, President and Chief Operating Officer (Chief
Executive Officer) of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as
adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ David A. Bowers
David A. Bowers
Vice Chairman of the Board, President and Chief Operating Officer
(Chief Executive Officer)
August 14, 2002
Exhibit 99.2
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of CompX International Inc. (the
Company) on Form 10-Q for the period ending June 30, 2002 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Darryl R.
Halbert, Vice President and Controller (Chief Financial Officer) of the Company,
certify, pursuant to 18 U.S.C. ss.1350, as adopted pursuant to ss.906 of the
Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of Section 13(a) or
15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all
material respects, the financial condition and result of operations of the
Company.
/s/ Darryl R. Halbert
Darryl R. Halbert
Vice President and Controller (Chief Financial Officer)
August 14, 2002
