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, 2004 Commission file number 1-13905
COMPX INTERNATIONAL INC.
- -------------------------------------------------------------------------------
(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
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
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
Number of shares of common stock outstanding on October 22, 2004:
Class A: 5,169,880
Class B: 10,000,000
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2003
and September 30, 2004 3-4
Consolidated Statements of Income -
Three months and nine months ended
September 30, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Three months and nine months ended
September 30, 2003 and 2004 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2003 and 2004 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2004 8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13-18
Item 4. Controls and Procedures. 18-19
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 20
- 2 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2003 2004
------------ -------------
Current assets:
Cash and cash equivalents $ 21,726 $ 16,071
Accounts receivable, net 25,737 28,181
Income taxes receivable from affiliates 306 65
Refundable income taxes 2,376 -
Inventories 26,317 26,594
Prepaid expenses and other 1,840 1,657
Deferred income taxes 1,920 1,598
-------- --------
Total current assets 80,222 74,166
-------- --------
Other assets:
Goodwill 43,325 43,022
Other intangible assets 1,945 1,762
Deferred income taxes 351 540
Other 422 368
-------- --------
Total other assets 46,043 45,692
-------- --------
Property and equipment:
Land 4,746 4,563
Buildings 28,605 26,359
Equipment 121,142 121,462
Construction in progress 636 1,559
-------- --------
155,129 153,943
Less accumulated depreciation 71,940 80,499
-------- --------
Net property and equipment 83,189 73,444
-------- --------
$209,454 $193,302
======== ========
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COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2003 2004
------------ -------------
Current liabilities:
Accounts payable and accrued liabilities $ 24,019 $ 23,668
Current portion of long-term debt - 38
Deferred income taxes 505 758
Income taxes - 2,151
-------- --------
Total current liabilities 24,524 26,615
-------- --------
Noncurrent liabilities:
Long-term debt 26,000 91
Deferred income taxes 4,550 3,393
Other non-current liabilities 21 21
-------- --------
Total noncurrent liabilities 30,571 3,505
-------- --------
Stockholders' equity:
Preferred stock - -
Class A common stock 62 52
Class B common stock 100 100
Additional paid-in capital 119,437 108,709
Retained earnings 43,433 52,160
Accumulated other comprehensive income
- currency translation 2,642 2,161
Treasury stock (11,315) -
-------- --------
Total stockholders' equity 154,359 163,182
-------- --------
$209,454 $193,302
======== ========
Commitments and contingencies (Note 1)
See accompanying notes to consolidated financial statements.
- 4 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2003 2004 2003 2004
------- ------- -------- --------
Net sales $52,534 $55,987 $153,260 $165,858
Cost of goods sold 42,871 43,490 126,868 130,022
------- ------- -------- --------
Gross margin 9,663 12,497 26,392 35,836
Selling, general and administrative expense 6,452 6,505 20,483 21,511
Restructuring expense 3,528 - 3,528 -
------- ------- -------- --------
Operating income (loss) (317) 5,992 2,381 14,325
Other general corporate (income) expense, net 84 175 572 (335)
Interest expense 300 86 963 442
------- ------- -------- --------
Income (loss) before income taxes (701) 5,731 846 14,218
Provision for income taxes (benefit) (308) 1,842 373 5,491
------- ------- -------- --------
Net income (loss) $ (393) $ 3,889 $ 473 $ 8,727
======= ======= ======== ========
Basic and diluted earnings (loss) per common
Share $ (.03) $ .26 $ .03 $ .58
======= ======= ======== ========
Cash dividends per share $ - $ - $ .125 $ -
======= ======= ======== ========
Shares used in the calculation of per share
amounts:
Basic earnings per common share 15,125 15,163 15,120 15,141
Dilutive impact of outstanding stock options - 24 - 15
------- ------- -------- --------
Diluted common shares 15,125 15,187 15,120 15,156
======= ======= ======== ========
See accompanying notes to consolidated financial statements.
- 5 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
---------------------- ---------------------
2003 2004 2003 2004
------ ------ ------ ------
Net income (loss) $(393) $3,889 $ 473 $8,727
Other comprehensive income (loss) -
currency translation adjustment, net of tax 618 1,436 9,125 (481)
----- ------ ------ ------
Comprehensive income $ 225 $5,325 $9,598 $8,246
===== ====== ====== ======
See accompanying notes to consolidated financial statements.
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COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2003 and 2004
(In thousands)
2003 2004
------- --------
Cash flows from operating activities:
Net income $ 473 $ 8,727
Depreciation and amortization 10,577 10,621
Deferred income taxes (2,319) (1,053)
Other, net 668 343
Change in assets and liabilities:
Accounts receivable (1,467) (2,486)
Inventories 2,052 (249)
Accounts payable and accrued liabilities 1,289 (192)
Accounts with affiliates 582 241
Income taxes 1,206 4,690
Other, net 1,016 165
------- --------
Net cash provided by operating activities 14,077 20,807
------- --------
Cash flows from investing activities:
Capital expenditures (7,914) (2,742)
Proceeds from sale of fixed assets - 2,134
Other, net 695 -
------- --------
Net cash used by investing activities (7,219) (608)
------- --------
Cash flows from financing activities:
Indebtedness:
Additions 1,000 2,253
Principal payments (2,006) (28,087)
Deferred financing costs paid (416) (28)
Proceeds from issuance of common stock - 499
Dividends (1,889) -
------- --------
Net cash used by financing activities (3,311) (25,363)
------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 3,547 (5,164)
Currency translation 1,804 (491)
Cash and cash equivalents at beginning of period 12,407 21,726
Cash and cash equivalents at end of period $17,758 $ 16,071
======= ========
Supplemental disclosures - cash paid for:
Interest $ 1,083 $ 459
Income taxes 1,903 1,501
See accompanying notes to consolidated financial statements.
- 7 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2004
(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, 2003 $ 62 $100 $119,437 $43,433 $ 2,642 $(11,315) $154,359
Net income - - - 8,727 - - 8,727
Other comprehensive income, net - - - - (481) - (481)
Issuance of common stock 1 - 576 - - - 577
Retirement of treasury stock (11) - (11,304) - - 11,315 -
---- ---- -------- ------- -------- --------- --------
Balance at September 30, 2004 $ 52 $100 $108,709 $52,160 $ 2,161 $ - $163,182
==== ==== ======== ======= ======== ========= ========
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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, 2003 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2004 and the consolidated statements
of income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended September 30, 2003 and 2004 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 ("GAAP") 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, 2003 (the "2003 Annual
Report"). Certain reclassifications have been made to prior year balances to
conform to the current year presentation.
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. During the third quarter of 2004, the Company retired all of its
shares of Class A common stock held by the Company as treasury shares.
Commitments and contingencies are discussed in the 2003 Annual Report.
At September 30, 2004, NL Industries, Inc. (NYSE: NL) owned an aggregate of
68% of the Company's outstanding common stock, and Titanium Metals Corporation
("TIMET") owned an additional 15% of the Company's outstanding common stock.
Prior to September 2004, the shares of the Company's common stock held by NL
were owned by Valhi, Inc. (NYSE: VHI) and a wholly-owned subsidiary of Valhi.
Effective September 24, 2004, NL completed the acquisition of the shares of
CompX common stock previously held by Valhi and its wholly-owned subsidiary. At
September 30, 2004, (i) Contran Corporation holds, directly or through
subsidiaries, approximately 91% of Valhi's outstanding common stock, (ii) Valhi
holds, directly or through a subsidiary, approximately 84% of NL's outstanding
common stock and (iii) Valhi holds, directly or through subsidiaries,
approximately 41% of TIMET'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, or is held by Mr. Simmons or persons or other entities related
to Mr. Simmons. Mr. Simmons, the Chairman of the Board of each of Contran, Valhi
and NL and Vice Chairman of the Board of TIMET, may be deemed to control each of
such companies and the Company.
Stock options. As disclosed in the 2003 Annual Report, the Company accounts
for stock-based employee compensation related to stock options using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APBO") No. 25, Accounting for Stock Issued to Employees, and its various
interpretations. Under APBO No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise price is greater than or equal to
the market price on the grant date. Compensation cost recognized by the Company
related to stock options in accordance with APBO No. 25 was not significant
during the interim periods of 2003 or 2004.
- 9 -
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation to stock-based employee
compensation related to stock options for all options granted on or after
January 1, 1995.
Three months ended Nine months ended
September 30, September 30,
------------------- ---------------------
2003 2004 2003 2004
------ ------ ------ ------
(In thousands, except per share amounts)
Net income (loss), as reported $ (393) $3,889 $ 473 $8,727
Deduct: Total stock-based employee
compensation expense related to stock
options determined under fair value
based method for all awards, net of related
tax effects (219) (135) (656) (407)
------ ------ ------ ------
Pro forma net income $ (612) $3,754 $ (183) $8,320
====== ====== ====== ======
Earnings per share - basic and diluted:
As reported $ (.03) $ .26 $ .03 $ .58
====== ====== ====== ======
Pro forma $ (.04) $ .25 $ (.01) $ .55
====== ====== ====== ======
Note 2 - Business segment information:
Three months ended Nine months ended
September 30, September 30,
--------------------- ------------------------
2003 2004 2003 2004
------- ------ -------- --------
(In thousands)
Net sales:
CompX Waterloo $25,303 $27,115 $ 72,001 $ 78,331
CompX Security Products 18,790 19,105 56,054 57,554
Thomas Regout 8,943 9,908 26,256 30,505
Intersegment sales (502) (141) (1,051) (532)
------- ------- -------- --------
Total net sales $52,534 $55,987 $153,260 $165,858
======= ======= ======== ========
Operating income (loss):
CompX Waterloo $ 337 $ 2,467 $ 211 $ 5,211
CompX Security Products 2,859 2,540 7,550 7,657
Thomas Regout (3,513) 985 (5,380) 1,457
------- ------- -------- --------
Total operating income (317) 5,992 2,381 14,325
Interest expense (300) (86) (963) (442)
Other general corporate income
(expense), net (84) (175) (572) 335
------- ------- -------- --------
Income before income taxes $ (701) $ 5,731 $ 846 $ 14,218
======= ======= ======== ========
Note 3 - Inventories:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Raw materials $ 6,170 $ 7,180
Work in process 10,852 10,757
Finished products 9,166 8,578
Supplies 129 79
------- -------
$26,317 $26,594
======= =======
- 10 -
Note 4 - Accounts payable and accrued liabilities:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Accounts payable $ 8,597 $ 9,827
Accrued liabilities:
Employee benefits 7,831 9,350
Insurance 374 325
Royalties 243 88
Restructuring 3,223 -
Sales rebates 805 939
Deferred gain on sale/leaseback 485 -
Other 2,461 3,139
------- -------
$24,019 $23,668
======= =======
In 2003, the Company recorded a $3.3 million charge related to
restructuring its Thomas Regout operations. The charge represents severance to
be paid to approximately 100 terminated employees. As of September 30, 2004, all
severance benefits had been paid by the Company.
Note 5 - Indebtedness:
December 31, September 30,
2003 2004
------------ -------------
(In thousands)
Revolving bank credit facility $26,000 $ -
Capital lease obligations - 129
------- ----
26,000 129
Less current portion - 38
------- ----
$26,000 $ 91
======= ====
Note 6 - Other general corporate income (expense), net:
Three months ended Nine months ended
September 30, September 30,
------------------- --------------------
2003 2004 2003 2004
------ ------ ------ ----
(In thousands)
Interest income $ 40 $ 15 $ 126 $ 83
Currency transactions, net (67) (118) (691) 198
Other, net (57) (72) (7) 54
---- ----- ----- ----
$(84) $(175) $(572) $335
==== ===== ===== ====
- 11 -
Note 7 - Provision for income taxes:
Three months ended Nine months ended
September 30, September 30,
-------------------- ---------------------
2003 2004 2003 2004
------ ------ ------ ------
(In thousands)
Expected tax expense $(245) $2,006 $ 296 $4,976
Non-U.S. tax rates (18) (133) (85) (256)
Incremental U.S. tax on earnings of foreign
subsidiaries (46) 332 290 936
State income taxes (85) - 24 286
Other, net 86 (363) (152) (451)
----- ------ ------- ------
$(308) $1,842 $ 373 $5,491
===== ====== ======= ======
Note 8 -Currency forward exchange contracts:
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a portion of currency exchange rate market risk associated
with receivables, or similar exchange rate risk associated with future sales,
denominated in a currency other than the holder's functional currency. At each
balance sheet date, any such outstanding currency forward contract is
marked-to-market with any resulting gain or loss recognized in income currently.
These contracts are not accounted for as hedging instruments under GAAP. At
December 31, 2003, the Company held a series of contracts to manage such
exchange rate risk to exchange an aggregate of U.S. $4.2 million for Canadian
dollars at exchange rates of Cdn. $1.30 to Cdn. $1.33 per U.S. dollar. Such
contracts matured through February 2004. The exchange rate was Cdn. $1.31 per
U.S. dollar at December 31, 2003. At September 30, 2004, the Company held a
series of contracts to manage such exchange rate risk to exchange an aggregate
of U.S. $3.1 million for Canadian dollars at exchange rates of Cdn. $1.29 to
Cdn. $1.31 per U.S. dollar. Such contracts mature through November 2004. The
exchange rate was Cdn. $1.28 per U.S. dollar at September 30, 2004. The
financial impact of the outstanding currency forward contracts was not
significant at September 30, 2004 and December 31, 2003.
- 12 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Overview
The Company reported net income of $3.9 million in the third quarter of
2004 compared to a net loss of $393,000 for the third quarter of 2003. The
Company reported net income of $8.7 million in the first nine months of 2004
compared to net income of $473,000 for the first nine months of 2003. The
improvement in net income primarily resulted from the combination of improved
precision slide product sales and the favorable effect of cost reduction
initiatives undertaken in 2002 and 2003. In addition, the Company recognized a
$3.5 million restructuring charge related to Thomas Regout in the third quarter
of 2003.
Results of Operations
Three months ended Nine months ended
September 30, September 30,
---------------------- % ---------------------- %
2003 2004 Change 2003 2004 Change
------- ------ ------ ------- ------- ------
(In thousands, except percentages)
Net sales:
CompX Waterloo $25,303 $27,115 7% $ 72,001 $ 78,331 9%
CompX Security Products 18,790 19,105 2% 56,054 57,554 3%
Thomas Regout 8,943 9,908 11% 26,256 30,505 16%
Intersegment sales (502) (141) n.m. (1,051) (532) n.m.
------- ------- -------- --------
Total net sales $52,534 $55,987 7% $153,260 $165,858 8%
======= ======= ======== ========
Operating income (loss):
CompX Waterloo $ 337 $ 2,467 n.m. $ 211 $ 5,211 n.m.
CompX Security Products 2,859 2,540 -11% 7,550 7,657 1%
Thomas Regout (3,513) 985 n.m. (5,380) 1,457 n.m.
------- ------- -------- --------
Total operating income $ (317) $ 5,992 n.m. $ 2,381 $ 14,325 n.m.
======= ======= ======== ========
n.m. = not meaningful
Sales for the respective product lines for the interim periods of 2003 and
2004 are as follows:
Three months ended Nine months ended
September 30, September 30,
-------------------- % --------------------- %
2003 2004 Change 2003 2004 Change
------- -------- ------ ------- -------- ------
(In thousands, except percentages)
Precision ball-bearing
slides $24,282 $26,885 11% $ 68,791 $ 78,936 15%
Security products 18,790 19,105 2% 56,054 57,554 3%
Ergonomic computer support
systems 6,667 7,204 8% 20,556 20,522 *
Other products 2,795 2,793 * 7,859 8,846 13%
------- ------- -------- --------
$52,534 $55,987 7% $153,260 $165,858 8%
======= ======= ======== ========
* within +1%
Currency. CompX has substantial operations and assets located outside the
United States (in Canada, the Netherlands and Taiwan). A portion of CompX's
- 13 -
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, a portion of CompX's sales generated from its
non-U.S. operations (principally in Canada) 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 values 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. The effects of fluctuations in currency
exchange rates affect the CompX Waterloo and Thomas Regout segments, and do not
materially affect the CompX Security Products segment. Net sales were positively
impacted while operating income was negatively impacted by currency exchange
rates in the following amounts by segment as compared to the currency exchange
rates in effect during the corresponding period in the prior year:
Three months ended Nine months ended
September 30, 2003 September 30, 2003
------------------ ------------------
vs. 2004 vs. 2004
------------------ ------------------
(In thousands)
Impact on net sales:
CompX Waterloo $ 352 $ 1,798
CompX Security Products - -
Thomas Regout 729 2,714
------ -------
Total impact on net sales $1,081 $ 4,512
====== =======
Impact on operating income:
CompX Waterloo $ (219) $(1,024)
CompX Security Products - -
Thomas Regout 65 175
------ -------
Total impact on operating income $ (154) $ (849)
====== =======
Net sales. Net sales increased $3.5 million, or 7%, to $56.0 million in the
third quarter of 2004 from $52.5 million in the third quarter of 2003. Net sales
increased $12.6 million, or 8%, to $165.9 million for the first nine months of
2004 from $153.3 million in the first nine months of 2003. These increases are
due primarily to the net effect of fluctuations in currency exchange rates (as
discussed above), increased sales volumes of slide and security products, and
the effect of price increases for certain products at CompX Waterloo and Thomas
Regout.
Cost of goods sold. The Company's cost of goods sold increased 1% in the
third quarter of 2004 compared to 2003 while net sales increased 7% during the
same period. Cost of goods sold increased 2% in the first nine months of 2004
compared to 2003, while net sales increased 8%. The Company's gross margin
percentage increased from 18% in the third quarter of the 2003 period to 22% in
the 2004 period and increased from 17% to 22% in the first nine months of 2004
as compared to the first nine months of 2003. This improvement resulted from the
favorable impact of the cost reduction efforts undertaken in 2002 and 2003,
including retooling of the Company's Byron Center, Michigan facility,
consolidation of two Canadian facilities into one facility and restructuring of
the Thomas Regout operations. Gross margin comparisons were also favorably
impacted by price increases on certain products at CompX Waterloo, relative
changes in product mix at CompX Security Products, and expenses of approximately
$900,000 during the first nine months of 2003 associated with the consolidation
of the two Canadian facilities (approximately $100,000 in the third quarter of
2003). The Company has experienced an increase in the cost of raw materials,
principally steel, which primarily impacted its precision slide products, during
the first nine-months of 2004. However, the impact on gross margin has been
substantially mitigated through surcharges and price increases that have been
passed on to customers.
- 14 -
Selling, general, and administrative expense. As a percentage of net sales,
selling, general, and administrative expense was 12% of net sales in the third
quarter of 2003 and 2004. For the first nine months of each year, selling,
general, and administrative expense was 13% of net sales.
Other general corporate income (expense), net. The components of other
general corporate income (expense), net are summarized in Note 6 to the
Consolidated Financial Statements, and primarily include interest income,
currency exchange transaction gains and losses, and gains and losses on
disposals of other assets. Net currency exchange transaction gains (losses)
improved approximately $889,000 from the first nine months of 2003 to the first
nine months of 2004 primarily as a result of less volatility in currency
exchange rates in 2004.
Interest expense. Interest expense declined in the interim periods of 2004
compared to 2003 due primarily to lower average levels of outstanding debt. The
Company expects interest expense will continue to be lower during the fourth
quarter of 2004 as compared to the fourth quarter of 2003 due to lower average
levels of outstanding debt.
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 7 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.
Outlook. While demand has improved across most product segments, certain
customers are seeking lower cost Asian sources as alternatives to the Company's
products. Although CompX believes the impact of this will be mitigated through
ongoing initiatives to expand both new products and new market opportunities,
the recent increase in order rates may be moderated to a certain extent in the
near term. Asian sourced competitive pricing pressures are expected to continue
to be a challenge as Asian manufacturers, particularly those located in China,
gain market share. The Company's strategy in responding to the competitive
pricing pressure has included reducing production cost through product
reengineering, improvement in manufacturing processes or moving production to
lower-cost facilities including our own Asian based manufacturing facilities.
The Company also has emphasized and focused on opportunities where it can
provide value-added customer support services that foreign manufacturers are
generally unable to provide. The combination of the Company's cost control
initiatives together with its value-added approach to development and marketing
of products are believed to help mitigate the impact of competitive pricing
pressures.
Additionally, the Company's cost for steel continues to rise dramatically
due to the continued high demand and shortages worldwide. While the Company has
thus far been able to pass a majority of its higher raw material costs on to its
customers through price increases and surcharges, there is no assurance that the
Company would be able to continue to pass along any additional higher costs to
its customers. The price increases and surcharges may accelerate the efforts of
some of the Company's customers to find less expensive products from foreign
manufacturers. The Company will continue to focus on cost improvement
initiatives, utilizing lean manufacturing techniques and prudent balance sheet
management in order to minimize the impact of lower sales particularly to the
office furniture industry and to develop value-added customer relationships with
an additional focus on sales of the Company's higher-margin ergonomic computer
support systems to improve operating results. Although the Thomas Regout
- 15 -
operating results have improved and are expected to continue to improve, the
Company is evaluating the strategic role of the Thomas Regout operations,
including the possible sale of some or all of such operations, and additional
actions could be taken in the future that could result in significant charges
for asset impairment, including goodwill, and other costs in future periods.
These actions, along with other activities to eliminate excess capacity, are
designed to position the Company to expand more effectively on both new product
and new market opportunities to improve Company profitability.
Liquidity and Capital Resources
Summary.
The Company's primary source of liquidity on an ongoing basis is its cash
flow from operating activities, which is generally used to (i) fund capital
expenditures (ii) repay short-term or long-term indebtedness incurred primarily
for working capital or capital expenditure purposes and (iii) provide for the
payment of dividends (if declared). From time-to-time, the Company will incur
indebtedness, primarily for short-term working capital needs or to fund capital
expenditures. From time-to-time, the Company may also sell assets outside the
ordinary course of business, the proceeds of which are generally used to repay
indebtedness (including indebtedness which may have been collateralized by the
assets sold) or to fund capital expenditures or business acquisitions.
Consolidated cash flows.
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities have generally been similar to the
trends in the Company's earnings. 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.
However, period-to-period relative changes in assets and liabilities can
significantly affect the comparability of cash flows from operating activities.
Such changes in assets and liabilities provided cash of approximately $2.2
million in the first nine months of 2004 compared to $4.7 million in the first
nine months of 2003.
Investing activities. The capital expenditures for 2004 relate primarily to
equipment additions designed to utilize new technologies thereby increasing
automation and improving manufacturing efficiencies at the Company's facilities.
Capital expenditures for 2004 are estimated at approximately $7 million, the
majority of which relate to projects that emphasize improved production
efficiency and the shifting of production capacity to lower cost facilities.
Firm purchase commitments for capital projects not commenced at September 30,
2004 approximated $3.5 million.
In June 2004, the Company received approximately $2.1 million from the sale
of its surplus Trillium facility in Ontario, Canada, which approximated the net
carrying value of such facility.
Financing activities. The Company paid a quarterly dividend of $1.9
million, or $.125 per share, in the first quarter of 2003, but the Company
suspended its regular quarterly dividend in the second quarter of 2003. During
the first nine months of 2004, the Company repaid a net $26.0 million under its
revolving bank credit facility. The Company has resumed the quarterly dividend
of $1.9 million, or $.125 per share for the fourth quarter of 2004.
Provisions contained in the Company's revolving bank credit facility could
result in the acceleration of such indebtedness prior to its stated maturity for
reasons other than defaults from failing to comply with typical financial
covenants. For example, the credit agreement allows the lender to accelerate the
maturity of the indebtedness upon a change of control (as defined) of the
borrower. The terms of the credit agreement could result in the acceleration of
all or a portion of the indebtedness following a sale of assets outside of the
ordinary course of business. Other than certain operating leases discussed in
the 2003 Annual Report, neither CompX nor any of its subsidiaries or affiliates
are parties to any off-balance sheet financing arrangements.
- 16 -
Management believes that cash generated from operations and borrowing
availability under the Company's credit facility, together with cash on hand,
will be sufficient to meet the Company's liquidity needs for working capital,
capital expenditures, debt service and dividends (if declared). To the extent
that the Company's actual operating results or other developments differ from
the Company's expectations, CompX's liquidity could be adversely affected.
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, dividend policy 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.
Forward Looking Information
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 the following:
o Future supply and demand for the Company's products,
o Changes in costs of raw materials and other operating costs (such as energy
and steel costs),
o General global economic and political conditions,
o Demand for office furniture,
o Service industry employment levels,
o The possibility of labor disruptions,
o The ability to implement headcount reductions in a cost effective manner
within the constraints of non-U.S. governmental regulations, and the timing
and amount of any cost savings,
o Competitive products and prices, including increased competition from
low-cost manufacturing sources (such as China),
o Substitute products,
o Customer and competitor strategies,
- 17 -
o The implementation of the requirements adopted by the Securities and
Exchange Commission in response to the Sarbanes-Oxley Act of 2002 relating
to the evaluation of the Company's internal control structure could result
in required improvements to our internal control structure that could be
costly to implement, divert attention of management and finance staff and
may cause operating expenses to increase,
o The introduction of trade barriers,
o The impact of pricing and production decisions,
o Fluctuations in the value of the U.S. dollar relative to other currencies
(such as the euro, Canadian dollar and New Taiwan dollar),
o Potential difficulties in integrating completed or future acquisitions,
o Decisions to sell operating assets other than in the ordinary course of
business,
o Uncertainties associated with new product development,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o The ability of the Company to renew or refinance its revolving bank credit
facility,
o The ultimate outcome of income tax audits,
o The impact of current or future government regulations,
o Possible future litigation and
o 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 (the "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, or persons
performing similar functions, 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 Executive Officer, and Darryl R.
Halbert, the Company's Vice President, Chief Financial Officer and Controller,
have evaluated the Company's disclosure controls and procedures as of September
30, 2004. 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 over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP"), and
includes those policies and procedures that:
- 18 -
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company.
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended September 30, 2004 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
- 19 -
Part II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification
31.2 Certification
32.1 Certification
32.2 Certification
The Company has retained a signed original of any of the above
exhibits that contains signatures, and the Company will provide such
exhibit to the Commission or its staff upon request. CompX will also
furnish, without charge, a copy of its Code of Business Conduct and
Ethics, Corporate Governance Guidelines and Audit Committee Charter,
each as approved by the Board of Directors, upon request. These
documents are also available on CompX's website at www.compxnet.com.
Requests for any of the above documents should be directed to the
attention of CompX's Corporate Secretary at CompX's corporate offices
located at 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 2004.
July 28, 2004 - Reported items 9 and 12.
September 16, 2004 - Reported 7.01 and 9.01.
- 20 -
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 October 26, 2004 By /s/ Darryl R. Halbert
---------------------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller
- 21 -
Exhibit 31.1
CERTIFICATION
I, David A. Bowers, the Vice Chairman of the Board, President and Chief
Executive 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 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
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d - 15(e)) for the registrant and we
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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
control over financial reporting which are reasonably likely to
adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 26, 2004
/s/David A. Bowers
- ----------------------------------------
David A. Bowers
Vice Chairman of the Board, President
and Chief Executive Officer
Exhibit 31.2
CERTIFICATION
I, Darryl R. Halbert, the Vice President, Chief Financial Officer 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 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
report;
3) Based on my knowledge, the financial statements, and other financial
information included in this 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 report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and we
have:
a) Designed such disclosure controls and procedures, or caused such
disclosure controls and procedures to be designed under our
supervision, 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 report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures and presented in this report our conclusions about the
effectiveness of the disclosure controls and procedures, as of the end
of the period covered by this report based on such evaluation; and
c) Disclosed in this report any change in the registrant's internal
control over financial reporting that occurred during the registrant's
most recent fiscal quarter (the registrant's fourth fiscal quarter in
the case of an annual report) that has materially affected, or is
reasonably likely to materially affect, the registrant's internal
control over financial reporting; and
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation of internal control over financial reporting, 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
control over financial reporting which are reasonably likely to could
adversely affect the registrant's ability to record, process,
summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
control over financial reporting.
Date: October 26, 2004
/s/Darryl R. Halbert
----------------------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller
Exhibit 32.1
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, 2004 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 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 Executive Officer
October 26, 2004
Note: The certification the registrant furnishes in this exhibit is not deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liabilities of that Section. Registration
Statements or other documents filed with the Securities and Exchange Commission
shall not incorporate this exhibit by reference, except as otherwise expressly
stated in such filing.
Exhibit 32.2
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, 2004 as filed with the
Securities and Exchange Commission on the date hereof (the Report), I, Darryl R.
Halbert, Vice President, Chief Financial Officer and Controller 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, Chief Financial Officer
and Controller
October 26, 2004
Note: The certification the registrant furnishes in this exhibit is not deemed
"filed" for purposes of Section 18 of the Securities Exchange Act of 1934, as
amended, or otherwise subject to the liabilities of that Section. Registration
Statements or other documents filed with the Securities and Exchange Commission
shall not incorporate this exhibit by reference, except as otherwise expressly
stated in such filing.