SEC Filing Html Data
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 September 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
- ------------------------------- --------------------------
(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 November 1, 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 September 30, 2002 3-4
Consolidated Statements of Income -
Three months and nine months ended
September 30, 2001 and 2002 5
Consolidated Statements of Comprehensive Income -
Three months and nine months ended
September 30, 2001 and 2002 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2001 and 2002 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2002 8
Notes to Consolidated Financial Statements 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-20
Item 4. Controls and Procedures. 21
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 22
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2001 2002
---- ----
Current assets:
Cash and cash equivalents ........................ $ 33,309 $ 10,078
Accounts receivable, net ......................... 23,422 24,274
Income taxes receivable from affiliates .......... 351 319
Refundable income taxes .......................... 2,032 1,302
Inventories ...................................... 30,902 30,980
Prepaid expenses and other ....................... 2,902 3,395
Deferred income taxes ............................ 1,944 2,177
-------- --------
Total current assets ......................... 94,862 72,525
-------- --------
Other assets:
Goodwill ......................................... 38,882 39,916
Other intangible assets .......................... 2,440 2,331
Deferred income taxes ............................ 3,132 4,221
Prepaid rent ..................................... 1,079 596
Other ............................................ 577 306
-------- --------
Total other assets ........................... 46,110 47,370
-------- --------
Property and equipment:
Land ............................................. 4,368 4,344
Buildings ........................................ 26,182 26,375
Equipment ........................................ 92,683 100,505
Construction in progress ......................... 4,618 7,755
-------- --------
127,851 138,979
Less accumulated depreciation .................... 42,815 53,157
-------- --------
Net property and equipment ................... 85,036 85,822
-------- --------
$226,008 $205,717
======== ========
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2001 2002
---- ----
Current liabilities:
Current maturities of long-term debt ........... $ 56 $ 31,019
Accounts payable and accrued liabilities ....... 23,168 21,282
Payable to affiliate ........................... 15 1
Deferred income taxes .......................... 291 391
Income taxes ................................... 1,000 398
--------- ---------
Total current liabilities .................. 24,530 53,091
--------- ---------
Noncurrent liabilities:
Long-term debt ................................. 49,000 --
Deferred income taxes .......................... 7,573 8,711
Accrued pension costs .......................... 660 --
Deferred gain on sale/leaseback ................ 1,221 645
--------- ---------
Total noncurrent liabilities ............... 58,454 9,356
--------- ---------
Stockholders' equity:
Preferred stock ................................ -- --
Class A common stock ........................... 62 62
Class B common stock ........................... 100 100
Additional paid-in capital ..................... 119,224 119,387
Retained earnings .............................. 50,966 47,705
Accumulated other comprehensive income
- currency translation ........................ (16,013) (12,669)
Treasury stock ................................. (11,315) (11,315)
--------- ---------
Total stockholders' equity ................. 143,024 143,270
--------- ---------
$ 226,008 $ 205,717
========= =========
Commitments and contingencies (Note 1)
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------------ ---------------------
2001 2002 2001 2002
---- ---- ---- ----
Net sales .......................................... $ 51,484 $ 48,839 $ 164,438 $148,425
Cost of sales ...................................... 40,255 41,172 127,062 121,300
-------- -------- --------- --------
11,229 7,667 37,376 27,125
Selling, general and administrative ................ 7,113 6,407 21,111 20,666
-------- -------- --------- --------
Operating income ............................... 4,116 1,260 16,265 6,459
Other expense (income), net ........................ (691) (99) (910) 46
Interest expense ................................... 604 291 2,276 1,629
-------- -------- --------- --------
Income before income taxes ..................... 4,203 1,068 14,899 4,784
Provision for income taxes ......................... 2,132 826 6,443 2,380
-------- -------- --------- --------
Net income ..................................... $ 2,071 $ 242 $ 8,456 $ 2,404
======== ======== ========= ========
Basic and diluted earnings per common share ........ $ .14 $ .02 $ .56 $ .16
======== ======== ========= ========
Cash dividends per share ........................... $ .125 $ .125 $ .375 $ .375
======== ======== ========= ========
Shares used in the calculation of per share amounts:
Basic earnings per common share ................. 15,103 15,116 15,158 15,108
Dilutive impact of outstanding
stock options .................................. 13 -- 7 15
-------- -------- --------- --------
Diluted common shares ........................... 15,116 15,116 15,165 15,123
======== ======== ========= ========
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Nine months ended
September 30,
2001 2002
---- ----
Net income ........................................... $ 8,456 $2,404
Other comprehensive income (loss) -
Currency translation adjustment, net of tax ........ (3,022) 3,344
------- ------
Comprehensive income ........................... $ 5,434 $5,748
======= ======
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2001 and 2002
(In thousands)
2001 2002
---- ----
Cash flows from operating activities:
Net income ........................................... $ 8,456 $ 2,404
Depreciation and amortization ........................ 11,128 9,899
Deferred income taxes (benefit) ...................... 1,503 (817)
Other, net ........................................... 370 (416)
-------- --------
21,457 11,070
Change in assets and liabilities:
Accounts receivable ................................ 2,387 (432)
Inventories ........................................ 309 507
Accounts payable and accrued liabilities ........... (7,087) (2,469)
Accounts with affiliates ........................... -- 18
Income taxes ....................................... 355 903
Other, net ......................................... (108) (203)
-------- --------
Net cash provided by operating activities ........ 17,313 9,394
-------- --------
Cash flows from investing activities:
Capital expenditures ................................. (9,345) (9,900)
Other, net ........................................... 5 --
-------- --------
Net cash used by investing activities ............ (9,340) (9,900)
-------- --------
Cash flows from financing activities:
Indebtedness:
Additions ......................................... 14,919 1,000
Principal payments ................................ (6,504) (19,037)
Dividends ............................................ (5,665) (5,665)
Common stock reacquired .............................. (2,650) --
Issuance of common stock ............................. -- 120
-------- --------
Net cash provided (used) by financing activities . 100 (23,582)
-------- --------
Net increase (decrease) in cash and cash equivalents ... 8,073 (24,088)
Currency translation ................................... 96 857
-------- --------
8,169 (23,231)
Cash and cash equivalents:
Balance at beginning of period ....................... 9,820 33,309
-------- --------
Balance at end of period ............................. $ 17,989 $ 10,078
======== ========
Supplemental disclosures - cash paid for:
Interest ............................................. $ 2,590 $ 1,593
Income taxes ......................................... 4,614 2,320
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 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 .................... -- -- -- 2,404 -- -- 2,404
Other comprehensive income, net -- -- -- -- 3,344 -- 3,344
Issuance of common stock ...... -- -- 156 -- -- -- 156
Cash dividends ................ -- -- -- (5,665) -- -- (5,665)
Other ......................... -- -- 7 -- -- -- 7
--- ---- -------- -------- -------- -------- ---------
Balance at September 30, 2002 . $62 $100 $119,387 $ 47,705 $(12,669) $(11,315) $ 143,270
=== ==== ======== ======== ======== ======== =========
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 September 30, 2002 and the consolidated statements
of income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended September 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 sale 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 Nine months ended
September 30, September 30,
--------------- -----------------
2001 2002 2001 2002
---- ---- ---- ----
(In thousands)
Net sales:
CompX Waterloo/CompX Regout $ 32,822 $ 29,833 $ 106,581 $ 91,946
CompX Security Products .... 18,662 19,006 57,857 56,479
-------- -------- --------- ---------
Total net sales .......... $ 51,484 $ 48,839 $ 164,438 $ 148,425
======== ======== ========= =========
Operating income (loss):
CompX Waterloo/CompX Regout $ 1,765 $ (957) $ 8,870 $ (243)
CompX Security Products .... 2,351 2,217 7,395 6,702
-------- -------- --------- ---------
Total operating income ... 4,116 1,260 16,265 6,459
Other general corporate
income (expense), net ....... 691 99 910 (46)
Interest expense ............. (604) (291) (2,276) (1,629)
-------- -------- --------- ---------
Income before income taxes . $ 4,203 $ 1,068 $ 14,899 $ 4,784
======== ======== ========= =========
Note 3 - Inventories:
December 31, September 30,
2001 2002
------ ------
(In thousands)
Raw materials ............................ $ 9,677 $ 7,206
Work in process .......................... 12,619 14,242
Finished products ........................ 8,494 9,414
Supplies ................................. 112 118
------- -------
$30,902 $30,980
======= =======
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
Changes in foreign exchange rates ......... 1.0 -- 1.0
----- ----- -----
Balance at September 30, 2002 ............. $16.2 $23.7 $39.9
===== ===== =====
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 $1.2 million at September 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 10.50 years
remaining at September 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 September 30,
2001 and 2002 and $180,000 in each of the first nine 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, September 30,
2001 2002
------ -----
(In thousands)
Accounts payable ............................... $ 9,459 $ 8,348
Accrued liabilities:
Employee benefits ............................ 6,619 7,104
Insurance .................................... 361 452
Royalties .................................... 223 99
Restructuring ................................ 2,278 548
Deferred gain on sale/leaseback .............. 479 751
Other ........................................ 3,749 3,980
------- -------
$23,168 $21,282
======= =======
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. As adjusted for changes in currency
exchange rates, through September 30, 2002 approximately $2.6 million of the
total charge has been paid. Of the remainder, $75,000 is expected to be paid in
the last three months of 2002 and $475,000 in 2003.
Note 6 - Indebtedness:
December 31, September 30,
2001 2002
---- ----
(In thousands)
Revolving bank credit facility, due February 2003 ...... $49,000 $31,000
Other .................................................. 56 19
------- -------
49,056 31,019
Less current maturities ................................ 56 31,019
------- -------
$49,000 $ --
======= =======
Note 7 - Other expense (income), net:
Nine months ended
September 30,
2001 2002
----- ------
(In thousands)
Interest income ...................................... $(432) $(336)
Foreign currency transactions, net ................... (445) 885
Defined benefit pension plan settlement gain ......... -- (677)
Other, net ........................................... (33) 174
----- -----
$(910) $ 46
===== =====
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:
Nine months ended
September 30,
2001 2002
----- ----
Expected tax expense ..................................... $ 5,215 $ 1,674
Non-U.S. tax rates ....................................... (264) (233)
No tax benefit for amortization of goodwill .............. 520 --
Incremental U.S. tax and rate differences on earnings of
foreign subsidiaries .................................... 684 1,101
U.S. state income taxes, net ............................. 145 122
Other, net ............................................... 143 (284)
------- -------
$ 6,443 $ 2,380
Note 9 - Foreign currency forward contracts:
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. To manage a portion of the foreign exchange rate
risk associated with receivables, or similar exchange rate risk associated with
future sales, CompX will periodically enter into short-term forward currency
exchange contracts. At each balance sheet date, any such outstanding currency
forward contracts are marked-to-market with any resulting gain or loss
recognized in income currently. These contracts are not accounted for as hedging
instruments under SFAS No. 133. At September 30, 2002, the Company held
contracts to manage such exchange rate risk to exchange an aggregate of U.S.
$9.0 million for an equivalent amount of Canadian dollars at an exchange rate of
Cdn. $1.5745 per U.S. dollar. Such contracts mature through January 2003. The
estimated fair value of all such currency forward contracts is not material at
September 30, 2002. At September 30, 2002, the actual exchange rate was Cdn.
$1.5785 per U.S. dollar.
Note 10 - 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 or CompX Waterloo/CompX Regout reporting unit
exceeds the respective net carrying value of such reporting unit, 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. In accordance with the
requirements of SFAS No. 142, the Company has also completed its annual
impairment review of goodwill of the reporting units during the third quarter of
2002. No goodwill impairments were deemed to exist after the completion of
either the initial transitional goodwill impairment analysis or the annual
impairment review. 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 $2.6 million, or $.17 per share, and $10.2 million, or $.67 per share, for
the three and nine month periods ended September 30, 2001, respectively, if the
goodwill amortization included in the Company's reported net income had not been
recognized.
Three months ended Nine months ended
September 30, September 30,
------------------- ----------------
2001 2002 2001 2002
------ -------- ------ ------
(In millions, except per share amounts)
Net income as reported ..................... $ 2.1 $ .2 $ 8.5 $ 2.4
Adjustment - goodwill amortization ......... .5 -- 1.7 --
------ ------ ------ ------
Adjusted net income ........................ $ 2.6 $ .2 $ 10.2 $ 2.4
====== ====== ====== ======
Diluted net income per share as
reported .................................. $ .14 $ .02 $ .56 $ .16
Adjustment - goodwill amortization ......... .03 -- .11 --
------ ------ ------ ------
Adjusted diluted net income per share ...... $ .17 $ .02 $ .67 $ .16
====== ====== ====== ======
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 11 - 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 $.2 million in the third quarter of
2002, a decrease of 88% from net income of $2.1 million for the third quarter of
2001. The Company reported net income of $2.4 million in the first nine months
of 2002, a 72% decrease from net income of $8.5 million in the first nine months
of 2001.
As discussed in Note 10 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 $2.6 million in the third 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 nine month period ended September 30, 2001,
net income would have been $10.2 million or about $1.7 million higher than
reported net income if goodwill amortization had not been recognized.
Amortization of goodwill attributable to each reportable segment for the first
nine months of 2001 is proportionate to the goodwill amortization reported for
the third quarter of 2001.
Results of Operations
Three months ended Nine months ended
September 30, % September 30, %
----------------- Better ----------------- Better
2001 2002 (Worse) 2001 2002 (Worse)
----- ------ ------- ------ ------ -------
(In thousands) (In thousands)
Net sales:
CompX Waterloo/CompX Regout $32,822 $ 29,833 -9% $106,581 $ 91,946 -14%
CompX Security Products ... 18,662 19,006 +2% 57,857 56,479 -2%
----- -------- --------- -----
Total net sales ......... $51,484 $ 48,839 -5% $164,438 $ 148,425 -10%
===== ======== ========= =====
Operating income (loss):
CompX Waterloo/CompX Regout $ 1,765 $ (957) -154% $ 8,870 $ (243) -103%
CompX Security Products ... 2,351 2,217 -6% 7,395 6,702 -9%
----- -------- --------- -----
Total operating income .. $ 4,116 $ 1,260 -69% $ 16,265 $ 6,459 -60%
===== ======== ========= =====
Operating income margin:
CompX Waterloo/CompX Regout 5% -3% 8% *
CompX Security Products ... 13% 12% 13% 12%
Total operating income
margin .................. 8% 3% 10% 4%
* less than 1%
Net sales. Net sales decreased in the third quarter and first nine 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 6% and 13% to
$20.4 million and $63.2 million for the three and nine month periods ended
September 30, 2002, respectively, compared to the same periods in 2001, with
sales of ergonomic products decreasing 18% and 19% to $7.2 million and $22.5
million for the same comparable periods. As compared to the corresponding period
in 2001, sales of security products increased 2% for the third quarter of 2002
in part due to price increases implemented during July 2002, partially offset by
lower volume. Sales of security products decreased 2% for the nine month period
ended September 30, 2002 as compared to the corresponding period in 2001,
primarily due to lower volume.
Operating income. Operating income decreased in the third quarter and first
nine 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 primarily with respect to precision slide
products. If goodwill amortization included in CompX's reported operating income
had not been recognized during the third quarter and first nine months of 2001,
total operating income would have decreased 73% and 64% in the third quarter and
first nine month period of 2002, respectively, compared to the same periods in
2001. Similarly, operating income at the CompX Security Products segment would
have decreased 18% and 21% and operating income at the CompX Waterloo/CompX
Regout segment would have decreased 148% and 103% for the same comparable
periods. See Note 10 to the Consolidated Financial Statements.
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 third
quarter and first nine 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).
The following table summarizes the effect of currency exchange rate
fluctuations for the three and nine month periods ended September 30, 2001 and
2002:
Percentage better (worse) - Percentage better (worse) -
three months ended nine months ended
September 30, 2001 vs. 2002 September 30, 2001 vs. 2002
--------------------------- ---------------------------
Without Without
With effects effects of With effects effects of
of currency currency of currency currency
fluctuations fluctuations fluctuations fluctuations
Net sales:
CompX Waterloo/CompX Regout -9% -10% -14% -13%
CompX Security Products +2% +2% -2% -2%
Total net sales -5% -6% -10% -9%
Operating income:
CompX Waterloo/CompX Regout -154% -161% -103% -106%
CompX Security Products -6% -6% -9% -9%
Total operating income -69% -72% -60% -62%
Outlook. The Company expects to record a pre-tax charge in the fourth
quarter of 2002 of between $1.7 million to $2.2 million, the majority of which
will be non-cash in nature. This charge relates to a retooling of the Company's
precision slide manufacturing facility in Byron Center, Michigan. The cost
savings resulting from the retooling are currently expected to begin to benefit
the financial results in the first quarter of 2003. In addition, the Company is
finalizing a plan to consolidate its two Kitchener, Ontario plants into one
facility. A final decision on implementing this activity is expected prior to
year end and, if implemented, substantial completion of the consolidation would
be expected by the end of the first quarter of 2003. Other facility
rationalizations are also under review. These activities could result in charges
for asset impairment and other related costs in addition to the charge referred
to above.
The Company currently expects that soft market conditions will continue 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 through at
least the first half of 2003 and competitive pricing pressures are expected to
continue. Furthermore, worldwide steel price increases 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
has initiated price increases on certain of its products and 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 results.
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 Regout's terminated
defined benefit pension plan. Also included in other general corporate income,
net are other gains and losses on disposals of property and equipment and other
assets.
Interest income decreased in the third quarter and first nine 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 combined with a lower level of funds available for investment.
Interest expense. Interest expense declined in the third quarter of 2002
and first nine months of 2002 compared to the corresponding periods of 2001 due
primarily to lower average interest rates and lower average outstanding balances
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 (country, 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. Net income in the third quarter
of 2002 was negatively impacted by an increase in the effective income tax rate
primarily as a result of lower income levels and an increased proportion of
foreign-sourced income taxed at a higher effective tax rate.
As discussed in Note 10 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-sourced 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 $21.5 million and $11.1
million in the first nine months of 2001 and 2002, respectively, compared to net
income of $8.5 million and $2.4 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 $9.3
million and $9.9 million in the first nine months of 2001 and 2002,
respectively.
Capital expenditures in 2002 relate primarily to tooling costs at the
Company's facilities and equipment additions designed to improve manufacturing
efficiencies at the Company's production facilities. Capital expenditures for
2002 are estimated at approximately $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 at September 30, 2002 approximated $3.6 million.
Financing activities. Net cash provided (used) by financing activities
totaled $.1 million and ($23.6) million in the first nine months of 2001 and
2002, respectively. The Company paid its regular quarterly dividend of $1.9
million, or $.125 per share, in the third quarter of 2002 ($5.7 million, or
$.375 per share for the first nine months of 2002). The Company used available
cash on hand to reduce its outstanding debt by $19 million in June 2002 and
borrowed $1 million on its revolving bank credit facility in the third quarter
of 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 September 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 $100 million unsecured revolving bank credit
facility ($69 million available for borrowing at September 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 replace its existing revolving bank credit
facility prior to its expiration in February 2003 with a new credit agreement.
The Company anticipates voluntarily reducing the facility from $100 million to
$50 million in line with the Company's current credit needs. A $50 million
credit facility is currently expected to be adequate to meet the Company's
liquidity and working capital needs. The Company also anticipates that the new
agreement will be secured and bear interest at a higher rate than the existing
revolving bank credit facility, which is reflective of current market
conditions. There can be no assurance however, that the Company will be able to
successfully negotiate a replacement credit facility, or that the terms of the
facility, if agreed upon, will be on terms as those described above.
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," "expects" 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, including increased competition from low-cost manufacturing
sources such as China, 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.
ITEM 4. Controls and Procedures.
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission ("SEC"), means controls and other procedures
that are designed to ensure that information required to be disclosed in the
reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, as appropriate
to allow timely decisions to be made regarding required disclosure. Each of
David A. Bowers, the Company's Vice Chairman of the Board, President and Chief
Operating Officer (Chief Executive Officer), and Darryl R. Halbert, the
Company's Vice President and Controller (Chief Financial Officer), have
evaluated the Company's disclosure controls and procedures as of a date within
90 days of the filing date of this Form 10-Q. Based upon their evaluation, these
executive officers have concluded that the Company's disclosure controls and
procedures are effective as of the date of such evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Part II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
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 September 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 November 1, 2002 By /s/ Darryl R. Halbert
------------------- ---------------------------
Darryl R. Halbert
Vice President and Controller
(Principal Financial and Accounting Officer)
CERTIFICATION
I, David A. Bowers, the Vice Chairman of the Board, President and Chief
Operating Officer of CompX International Inc., certify that:
1) I have reviewed this quarterly report on Form 10-Q of CompX International
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002
/s/ David A. Bowers
- --------------------------------------
David A. Bowers
Vice Chairman of the Board, President
and Chief Operating Officer
CERTIFICATION
I, Darryl R. Halbert, the Vice President and Controller of CompX
International Inc., certify that:
1) I have reviewed this quarterly report on Form 10-Q of CompX International
Inc.;
2) Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3) Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and cash
flows of the registrant as of, and for, the periods presented in this
quarterly report;
4) The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this quarterly
report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this quarterly report (the "Evaluation Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: November 1, 2002
/s/ Darryl R. Halbert
- ---------------------------
Darryl R. Halbert
Vice President and Controller
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 September 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)
November 1, 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 September 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)
November 1, 2002