SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2005 Commission file number 1-13905
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COMPX INTERNATIONAL INC.
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(Exact name of Registrant as specified in its charter)
Delaware 57-0981653
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(State or other jurisdiction of (IRS Employer
organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 448-1400
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
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 July 25, 2005:
Class A: 5,217,480
Class B: 10,000,000
COMPX INTERNATIONAL INC.
INDEX
Page
number
------
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2004;
June 30, 2005 (Unaudited) 3-4
Consolidated Statements of Income -
Three months and six months ended
June 30, 2004 and 2005 (Unaudited) 5
Consolidated Statements of Comprehensive Income -
Three and six months ended
June 30, 2004 and 2005 (Unaudited) 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2004 and 2005 (Unaudited) 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2005 (Unaudited) 8
Notes to Consolidated Financial Statements (Unaudited) 9-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14-19
Item 4. Controls and Procedures. 19-20
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 21
Item 6. Exhibits 21
- 2 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2004 2005
----------- --------
(Unaudited)
Current assets:
Cash and cash equivalents $ 16,803 $ 33,100
Accounts receivable, net 19,212 21,321
Receivables from affiliates 635 300
Refundable income taxes 57 553
Inventories 20,782 19,945
Prepaid expenses and other 1,390 2,105
Deferred income taxes 1,447 1,519
Current portion of note receivable - 1,306
Assets held for sale 17,957 -
-------- --------
Total current assets 78,283 80,149
-------- --------
Other assets:
Goodwill 29,012 30,559
Note receivable - 2,873
Other intangible assets 1,703 1,591
Other 195 142
Assets held for sale 10,964 -
-------- --------
Total other assets 41,874 35,165
-------- --------
Property and equipment:
Land 4,713 8,145
Buildings 26,877 26,977
Equipment 104,041 103,759
Construction in progress 2,299 5,172
-------- --------
137,930 144,053
Less accumulated depreciation 71,808 76,132
-------- --------
Net property and equipment 66,122 67,921
-------- --------
$186,279 $183,235
======== ========
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COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2004 2005
------- ---------
(Unaudited)
Current liabilities:
Accounts payable and accrued liabilities $ 18,304 $ 19,493
Income taxes payable to affiliates - 452
Income taxes 2,687 378
Liabilities related to assets held for sale 4,998 -
-------- --------
Total current liabilities 25,989 20,323
-------- --------
Noncurrent liabilities:
Deferred income taxes 4,949 6,424
Other non-current liabilities 85 63
-------- --------
Total noncurrent liabilities 5,034 6,487
-------- --------
Stockholders' equity:
Preferred stock - -
Class A common stock 52 52
Class B common stock 100 100
Additional paid-in capital 108,828 109,133
Retained earnings 38,523 38,834
Accumulated other comprehensive income 7,753 8,306
-------- --------
Total stockholders' equity 155,256 156,425
-------- --------
$186,279 $183,235
======== ========
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)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------ ------------------------
2004 2005 2004 2005
------ -------- ------- --------
Net sales $46,246 $45,730 $ 89,822 $ 92,573
Cost of goods sold 35,331 35,203 70,507 71,763
------- ------- -------- --------
Gross margin 10,915 10,527 19,315 20,810
Selling, general and administrative expense 6,126 5,802 12,191 11,924
------- ------- -------- --------
Operating income 4,789 4,725 7,124 8,886
Other general corporate income (expense), net 661 80 1,263 242
Interest expense (147) (69) (356) (138)
-------- -------- --------- ---------
Income from continuing operations
before income taxes 5,303 4,736 8,031 8,990
Provision for income taxes 2,317 2,361 3,490 4,403
------- ------- -------- --------
Income from continuing operations 2,986 2,375 4,541 4,587
Discontinued operations, net of tax 292 - 297 (477)
------- ------- -------- --------
Net income $ 3,278 $ 2,375 $ 4,838 $ 4,110
======= ======= ======== ========
Basic and diluted earnings per common share:
Continuing operations $ .20 $ .16 $ .30 $ .30
Discontinued operations .02 - .02 (.03)
------- ------- -------- --------
$ .22 $ .16 $ .32 $ .27
======= ======= ======== ========
Cash dividends per share $ - $ .125 $ - $ .25
======= ======= ======== ========
Shares used in the calculation of basic
and diluted earnings per share 15,154 15,214 15,140 15,215
======= ======= ======== ========
See accompanying notes to consolidated financial statements.
- 5 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
Three months ended Six months ended
June 30, June 30,
------------------------- -------------------------
2004 2005 2004 2005
-------- -------- -------- --------
Net income $ 3,278 $ 2,375 $ 4,838 $ 4,110
Other comprehensive income (loss) net of tax: Currency translation adjustment:
Arising during the period (479) (476) (1,918) (118)
Disposal of business unit - - - 739
------- ------- ------- -------
(479) (476) (1,918) 621
Unrealized gain (loss) on cash flow hedges - 7 - (68)
------- ------- ------- -------
Comprehensive income $ 2,799 $ 1,906 $ 2,920 $ 4,663
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
- 6 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
Cash flows from operating activities:
Net income $ 4,838 $ 4,110
Depreciation and amortization 7,285 5,368
Goodwill impairment - 864
Deferred income taxes:
Continuing operations (682) 117
Discontinued operations - (187)
Other, net 218 80
Change in assets and liabilities:
Accounts receivable (3,469) (2,091)
Inventories 1,252 756
Accounts payable and accrued liabilities (226) 1,471
Accounts with affiliates 306 1,563
Income taxes 3,397 (2,609)
Other, net 736 (787)
-------- --------
Net cash provided by operating activities 13,655 8,655
-------- --------
Cash flows from investing activities:
Capital expenditures (1,806) (7,234)
Proceeds from disposal of assets held for sale - 18,094
Cash of disposed business unit - (4,006)
Proceeds from sale of fixed assets 2,119 12
-------- --------
Net cash provided by investing activities 313 6,866
-------- --------
Cash flows from financing activities:
Indebtedness:
Additions 2,252 -
Principal payments (26,078) (19)
Proceeds from issuance of common stock 330 217
Deferred financing costs paid (28) (28)
Dividends - (3,799)
-------- --------
Net cash used by financing activities (23,524) (3,629)
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (9,556) 11,892
Currency translation (552) 171
Cash and cash equivalents at beginning of period 21,726 21,037
-------- --------
Cash and cash equivalents at end of period $ 11,618 $ 33,100
======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 428 $ 82
Income taxes 477 5,254
Noncash investing activity - note receivable received
upon disposal of business unit $ - $ 4,179
See accompanying notes to consolidated financial statements.
- 7 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2005
(In thousands)
(Unaudited)
Accumulated other
comprehensive income
(loss)
------------------------
Common Stock Additional Total
--------------- paid-in Retained Currency Hedging stockholders'
Class A Class B capital Earnings translation derivatives equity
------- ------- --------- -------- ----------- ----------- --------
Balance at December 31, 2004 $52 $100 $108,828 $38,523 $7,678 $ 75 $155,256
Net income - - - 4,110 - - 4,110
Other comprehensive income, net - - - - 621 (68) 553
Cash dividends - - - (3,799) - - (3,799)
Issuance of common stock - - 305 - - - 305
--- ---- -------- ------- ------ ----- --------
Balance at June 30, 2005 $52 $100 $109,133 $38,834 $8,299 $ 7 $156,425
=== ==== ======== ======= ====== ===== ========
See accompanying notes to consolidated financial statements.
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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, 2004 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2005 and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 2004 and 2005 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, 2004 (the "2004 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.
Commitments and contingencies are discussed in the 2004 Annual Report.
At June 30, 2005, CompX Group, Inc., a majority-owned subsidiary of NL
Industries, Inc. (NYSE: NL) owned 83% of the Company's outstanding common stock.
NL owns 82.4% of CompX Group, and a wholly owned subsidiary of Titanium Metals
Corporation (NYSE:TIE) ("TIMET") owns the remaining 17.6% of CompX Group. At
June 30, 2005, (i) the wholly owned subsidiary of TIMET owns an additional 3% of
CompX directly, (ii) Valhi, Inc. holds, directly or through a subsidiary,
approximately 83% of NL's outstanding common stock and approximately 44% of
TIMET's outstanding common stock and (iii) Contran Corporation holds, directly
or through subsidiaries, approximately 91% 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, or is held by Mr. Simmons or
persons or other entities related to Mr. Simmons. Consequently, Mr. Simmons may
be deemed to control each of such companies and the Company.
Stock options. As disclosed in the 2004 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. See Note 9. 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. No compensation
cost was recognized by the Company related to stock options in accordance with
APBO No. 25 during the interim periods of 2004 or 2005.
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.
- 9 -
Three months ended Six months ended
June 30, June 30,
------------------- ----------------------
2004 2005 2004 2005
------ ------ ------ ------
(In thousands, except per share amounts)
Net income, as reported $3,278 $2,375 $4,838 $4,110
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 (136) (23) (272) (57)
------ ------ ------ ------
Pro forma net income $3,142 $2,352 $4,566 $4,053
====== ====== ====== ======
Earnings per share - basic and diluted:
As reported $ .22 $ .16 $ .32 $ .27
====== ====== ====== ======
Pro forma $ .21 $ .15 $ .30 $ .27
====== ====== ====== ======
Note 2 - Business segment information:
Three months ended Six months ended
June 30, June 30,
--------------------- ---------------------
2004 2005 2004 2005
------ ------- ------ -------
(In thousands)
Net sales:
Security Products $19,685 $18,717 $38,449 $37,261
Precision Slides 19,805 20,224 38,057 41,308
Ergonomics 6,756 6,789 13,316 14,004
------- ------- ------- -------
Total net sales $46,246 $45,730 $89,822 $92,573
======= ======= ======= =======
Operating income:
Security Products $ 2,610 $ 2,585 $ 4,800 $ 5,306
Precision Slides 1,478 1,401 844 1,815
Ergonomics 701 739 1,480 1,765
------- ------- ------- --------
Total operating income 4,789 4,725 7,124 8,886
Interest expense (147) (69) (356) (138)
Other general corporate income, net 661 80 1,263 242
------- ------- ------- --------
Income from continuing operations
before income taxes $ 5,303 $ 4,736 $ 8,031 $ 8,990
======= ======= ======= ========
Note 3 - Inventories:
December 31, June 30,
2004 2005
------- ------
(In thousands)
Raw materials $ 4,514 $ 4,286
Work in progress 9,019 9,559
Finished products 7,184 6,030
Supplies 65 70
------- -------
$20,782 $19,945
======= =======
- 10 -
Note 4 - Accounts payable and accrued liabilities:
December 31, June 30,
2004 2005
------ -------
(In thousands)
Accounts payable $ 6,392 $ 7,420
Accrued liabilities:
Employee benefits 7,987 7,808
Professional 730 746
Insurance 448 411
Taxes other than on income 399 540
Sales rebates 291 191
Customer tooling 600 945
Other 1,457 1,432
------- -------
$18,304 $19,493
======= =======
Note 5 - Other general corporate income (expense), net:
Three months ended Six months ended
June 30, June 30,
-------------------- ----------------------
2004 2005 2004 2005
------ ----- ------ ------
(In thousands)
Interest income $ 401 $ 88 $ 826 $ 264
Currency transactions, net 169 38 313 (15)
Other, net 91 (46) 124 (7)
----- ----- ------ -----
$ 661 $ 80 $1,263 $ 242
===== ===== ====== =====
Note 6 - Provision for income taxes:
Three months ended Six months ended
June 30, June 30,
--------------------- --------------------
2004 2005 2004 2005
------ ------ ----- -----
(In thousands)
Expected tax expense $1,856 $1,657 $2,811 $3,146
Non-U.S. tax rates (89) (27) (120) (105)
Incremental U.S. tax on earnings of foreign
subsidiaries 415 675 604 1,247
State income taxes 259 53 286 125
Tax contingency reserve adjustment (358) - (358) -
Other, net 234 3 267 (10)
------ ------- ------ -------
$2,317 $ 2,361 $3,490 $ 4,403
====== ======= ====== =======
Note 7 - 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. The
Company has not entered into these contracts for trading or speculative purposes
in the past, nor does the Company currently anticipate entering into such
- 11 -
contracts for trading or speculative purposes in the future. Derivatives
used to hedge forecasted transactions and specific cash flows associated with
foreign currency denominated financial assets and liabilities which meet the
criteria for hedge accounting are designated as cash flow hedges. Consequently,
the effective portion of gains and losses is deferred as a component of
accumulated other comprehensive income and is recognized in earnings at the time
the hedged item affects earnings. Contracts that do not meet the criteria for
hedge accounting are marked-to-market at each balance sheet date with any
resulting gain or loss recognized in income currently as part of net currency
transactions. At June 30, 2005, the Company held a series of contracts to manage
such exchange rate risk to exchange an aggregate of U.S. $6.5 million for
Canadian dollars at exchange rates of Cdn. $1.25 to Cdn. $1.26 per U.S. dollar.
Such contracts mature through September 2005. The exchange rate was Cdn. $1.23
per U.S. dollar at June 30, 2005. The estimated fair value of such contracts is
not material at June 30, 2005.
Note 8 - Discontinued operations:
As discussed in the 2004 Annual Report, in December 2004 the Company's
board of directors committed to a formal plan to dispose of its Thomas Regout
operations in The Netherlands. Such operations met all of the criteria under
GAAP to be classified as an asset held for sale at December 31, 2004, and
accordingly the results of operations of Thomas Regout have been classified as
discontinued operations for all periods presented. The Company has not
reclassified its Consolidated Statements of Cash Flows to reflect discontinued
operations or assets held for sale. In classifying the net assets of the
European Thomas Regout operations as an asset held for sale, the Company
concluded that the carrying amount of the net assets of such operations exceeded
the estimated fair value less costs to sell of such operations, and accordingly
in the fourth quarter of 2004 the Company recognized a $14.4 million impairment
charge to write-down its investment in the European Thomas Regout operations to
its estimated net realizable value. Such charge represented an impairment of
goodwill.
In January 2005, the Company completed the sale of its Thomas Regout
operations in Europe for net proceeds of approximately $22.3 million. The net
proceeds consisted of approximately $18.1 million in cash and a note receivable
in the principal amount of $4.2 million. The note receivable bears interest at a
fixed rate of 7% and is payable over four years. The note receivable is
collateralized by a secondary lien on the assets sold and is subordinated to
certain third-party debt of the purchaser. Accordingly, the Company no longer
includes the results of operations of the European Thomas Regout operations
subsequent to December 31, 2004 in its consolidated financial statements. The
net proceeds from the January 2005 sale of the European Thomas Regout operations
were approximately $860,000 less than the net realizable value estimated at the
time of the goodwill impairment charge (primarily due to higher expenses
associated with the disposal of the Thomas Regout operations), and discontinued
operations in the first quarter of 2005 includes a charge related to such
differential ($477,000, net of income tax benefit) was recognized in the first
quarter of 2005. Such charge represents an additional impairment of goodwill.
During the first six months of 2004, the European Thomas Regout operations
reported net sales of $20.6 million, operating income of $1.2 million, interest
expense of $762,000 and net income of $300,000.
Note 9 - Accounting principles not yet implemented:
Inventory costs. The Company will adopt SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
- 12 -
below the low end of normal capacity, but instead a portion of fixed overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of normal capacity, the amount of fixed overhead costs
allocated to each unit of production is decreased so that inventories are not
measured above cost. SFAS No. 151 also clarifies existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company believes its production cost accounting already complies with the
requirements of SFAS No. 151, and thus the Company does not expect adoption of
SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. As permitted by regulations of the Securities and Exchange
Commission ("SEC"), the Company will adopt SFAS No. 123R, Share-Based Payment,
as of January 1, 2006. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Sholes or a lattice model). Under the transition alternatives
permitted under SFAS No. 123R, the Company will apply the new standard to all
new awards granted on or after January 1, 2006, and to all awards existing as of
December 31, 2005 which are subsequently modified, repurchased or cancelled.
Additionally, as of January 1, 2006, the Company will be required to recognize
compensation cost for the portion of any non-vested award existing as of
December 31, 2005 over the remaining vesting period. Because the number of
non-vested awards as of December 31, 2005 with respect to options granted by the
Company is not expected to be material, the effect of adopting SFAS No. 123R is
not expected to be significant in so far as it relates to existing stock
options. Should the Company, however, either grant a significant number of
options or modify, repurchase or cancel existing options in the future, the
effect on the Company's consolidated financial statements could be material.
- 13 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Overview
The Company reported operating income of $4.7 million in the second quarter
of 2005 compared to operating income of $4.8 million for the second quarter of
2004. The Company reported operating income of $8.9 million in the first six
months of 2005 compared to operating income of $7.1 million for the first six
months of 2004. The slight decrease in results during the second quarter was
primarily due to slightly lower sales in the second quarter of 2005 compared to
the second quarter of 2004. The improvement in results for the comparative
six-month periods is primarily due to higher sales in the first quarter of 2005
combined with the ongoing favorable impact of cost reduction initiatives
undertaken over the last several years and in the current period.
Results of Operations
Three months ended Six months ended
June 30, June 30,
----------------------- % --------------------- %
2004 2005 Change 2004 2005 Change
---- ---- ------ ---- ---- ------
(In thousands, except percentages)
Net sales:
Security Products $19,685 $18,717 -5% $38,449 $37,261 -3%
Precision Slides 19,805 20,224 2% 38,057 41,308 9%
Ergonomics 6,756 6,789 <1% 13,316 14,004 5%
------- ------- ------- -------
Total net sales $46,246 $45,730 -1% $89,822 $92,573 3%
======= ======= ======= =======
Operating income (loss):
Security Products $ 2,610 $ 2,585 -1% $ 4,800 $ 5,306 10%
Precision Slides 1,478 1,401 -5% 844 1,815 n.m.
Ergonomics 701 739 5% 1,480 1,765 19%
------- ------- ------- -------
Total operating income $ 4,789 $ 4,725 -1% $ 7,124 $ 8,886 25%
======= ======= ======= =======
n.m. = not meaningful
Currency. CompX has substantial operations and assets located outside the
United States (in Canada and Taiwan). CompX's sales generated from its non-U.S.
operations are denominated in both the U.S. dollar and in currencies other than
the U.S. dollar, principally the Canadian dollar and the New Taiwan 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
Precision Slides and Ergonomics segments, and do not materially affect the
Security Products segment. During the second quarter and the first six months of
2005, currency exchange rate fluctuations did not significantly impact
comparisons with 2004.
Net sales. Net sales decreased $500,000, or 1%, to $45.7 million in the
second quarter of 2005 from $46.2 million in the second quarter of 2004. The
decrease is due primarily to lower sales volume partially offset by higher
prices for certain products across all product lines. Net sales increased $2.8
million, or 3%, to $92.6 million for the first six months of 2005 from $89.8
million in the first six months of 2004. The increase is primarily due to
increases in selling prices for certain products across all segments partially
offset by sales volume decreases for certain products.
- 14 -
Cost of goods sold. The Company's cost of goods sold for the second quarter
of 2005 was comparable to 2004 while net sales decreased 1% during the same
period. Cost of goods sold increased 2% in the first six months of 2005 compared
to 2004, while net sales increased 3%. The Company's gross margin percentage
decreased slightly from 24% in the second quarter of the 2004 period to 23% in
the 2005 period and increased from 22% to 23% in the first six months of 2005 as
compared to the first six months of 2004. The changes in gross margin
percentages for the comparable periods is primarily due to the impact of fixed
cost over varying net sales amounts.
Selling, general, and administrative expense. As a percentage of net sales,
selling, general, and administrative expense was 13% of net sales in the second
quarter of 2004 and 2005. For the first six months of each year, selling,
general, and administrative expense was 14% of net sales for 2004 and 13% for
2005.
Operating income. Operating income for the second quarter of 2005 was
comparable to the second quarter of 2004. Operating income in the first six
months of 2005 increased to $8.9 million compared to $7.1 million for the first
six months of 2004. As a percentage of net sales, operating income increased to
10% for the first six months of 2005 from 8% for the first six months of 2004
primarily due to the increase in net sales.
Other general corporate income (expense), net. The components of other
general corporate income (expense), net are summarized in Note 5 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. Interest income for the second quarter and six-month
periods of 2004 includes interest income on long-term intercompany notes
receivable with the European Thomas Regout operations of $375,000 and $762,000,
respectively. Upon the sale of the Thomas Regout European operations in January,
2005, the intercompany notes receivable were extinguished and therefore no such
interest income was recorded during the 2005 periods presented. Net currency
exchange transaction gains (losses) were lower by approximately $131,000 from
the second quarter of 2004 to the second quarter of 2005 and approximately
$328,000 from the first six months of 2004 to the first six months of 2005 as
the intra-quarter swings in currency exchange rates were less volatile in 2005.
Interest expense. Interest expense declined in the interim periods of 2005
compared to 2004 due primarily to lower average levels of outstanding debt. The
Company expects interest expense will be comparable during the second half of
2005 to the second half of 2004.
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 6 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.
As disclosed in the 2004 Annual Report, CompX became a member of Contran's
consolidated U.S. federal income tax group (the "Contran Tax Group") in October
2004. As a member of the Contran Tax Group, CompX computes its provision for
income taxes on a separate company basis, using the tax elections made by
Contran. One such election is whether to claim a deduction or a tax credit
against U.S. taxable income with respect to foreign income taxes paid. During
the first six months of 2004, and prior to CompX becoming a member of the
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Contran Tax Group, CompX was able to claim a tax credit with respect to foreign
income taxes paid. During the first six months of 2005, CompX is not claiming a
credit with respect to foreign income taxes paid but instead is claiming a tax
deduction, since Contran has elected to claim a tax deduction for such items.
This has resulted in an increase in the Company's effective income tax rate in
the first six months of 2005 as compared to the same period in 2004.
Discontinued operations. See Note 8 to the Consolidated Financial
Statements.
Accounting principles not yet implemented. See Note 9 to the Consolidated
Financial Statements.
Outlook. While demand has stabilized across most product segments, certain
customers continue to seek lower priced Asian sources as alternatives to the
Company's products. CompX believes the impact of this will be mitigated through
ongoing initiatives to expand both new products and new market opportunities.
Asian sourced competitive pricing pressures are expected to continue to be a
challenge. 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 Asian based 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 pricing pressures from
Asian competitors.
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 and security products to improve operating results. These
actions, along with other activities to eliminate excess capacity, have been
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 indebtedness incurred primarily for working
capital 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.
At June 30, 2005, there were no amounts outstanding under the Company's
credit facility that matures in January 2006. The Company does not expect it
will be required to use any of its cash flow from operating activities generated
during 2005 to repay indebtedness. The Company expects to seek a renewal of its
credit facility during the second half of 2005.
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.
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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 resulted in a net use of cash of
approximately $1.7 million in the first six months of 2005 compared to providing
$2.0 million in the first six months of 2004.
As noted above, relative changes in working capital can have a significant
effect on cash flows from operating activities. The Company's average days sales
outstanding related to its continuing operations increased from 38 days at
December 31, 2004 to 42 days at June 30, 2005 due to timing of collection on the
slightly higher accounts receivable balance at the end of June. The Company's
average number of days in inventory related to its continuing operations was 52
days at December 31, 2004 and June 30, 2005.
Investing activities. Net cash provided by investing activities totaled $.3
million in the first six months of 2004 and provided for $6.9 million in the
first six months of 2005, which include the net proceeds from the sale of the
Thomas Regout operations in Europe discussed below.
On January 24, 2005, CompX completed the disposition of all of the net
assets of its Thomas Regout precision slide and window furnishing operations,
conducted at its facility in the Netherlands, to members of Thomas Regout
management for net proceeds of approximately $22.3 million. The proceeds
consisted of cash (net of costs to sell) of approximately $18.1 million and a
subordinated note for approximately $4.2 million. The subordinated note requires
annual payments over a period of four years. Historically, the Thomas Regout
European operations have not contributed significantly to net cash flows from
operations. See Note 8 to the Consolidated Financial Statements.
Capital expenditures for 2005 are estimated at approximately $12 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 March 31, 2005
approximated $3.1 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 quarterly dividends of $3.8 million,
or $.25 per share, in the first six months of 2005. During the first six months
of 2004, the Company repaid a net $24.0 million under its revolving bank credit
facility.
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, which provision was waived in connection with the
Company's sale of its Thomas Regout operations in Europe. Other than certain
operating leases discussed in the 2004 Annual Report, neither CompX nor any of
its subsidiaries or affiliates are parties to any off-balance sheet financing
arrangements.
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.
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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 Competitive products and prices, including increased competition from
low-cost manufacturing sources (such as China),
o Substitute products,
o Customer and competitor strategies,
o Costs and expenses associated with compliance with certain
requirements of the Sarbanes-Oxley Act of 2002 relating to the
evaluation of the Company's internal control over financial reporting.
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 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,
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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, tax settlement initiatives
or other tax matters,
o The ultimate ability to utilize income tax attributes, the benefit of
which has been recognized under the "more-likely-than-not" recognition
criteria,
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.
Evaluation of Disclosure 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 June 30, 2005. 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.
Internal Control Over Financial Reporting. 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:
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
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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 internal control over financial
reporting during the quarter ended June 30, 2004 that has materially affected,
or is reasonably likely to materially affect, the Company's system of internal
controls over financial reporting.
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Part II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
CompX's 2005 Annual Meeting of Stockholders was held on May 10, 2005. Paul
M. Bass, Jr., David A. Bowers, Keith R. Coogan, Edward J. Hardin, Ann Manix,
Glenn R. Simmons and Steven L. Watson were elected as directors, each receiving
votes "For" their election from at least 99.2% of the approximately 105.2
million votes eligible to be cast at the Annual Meeting.
ITEM 6. 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 adopted by the Company's board of directors, upon request.
Such requests 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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPX INTERNATIONAL INC.
(Registrant)
Date: August 2, 2005 By /s/ Darryl R. Halbert
----------------- ---------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller