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, 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
--------------
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
Indicate by check mark whether the Registrant is a shell company (as defined in
rule 12b-2 of the Exchange Act). Yes No X
Number of shares of common stock outstanding on October 24, 2005:
Class A: 5,234,280
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;
September 30, 2005 (Unaudited) 3-4
Consolidated Statements of Operations -
Three months and nine months ended
September 30, 2004 and 2005 (Unaudited) 5
Consolidated Statements of Comprehensive Income (Loss)-
Three and nine months ended
September 30, 2004 and 2005 (Unaudited) 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2004 and 2005 (Unaudited) 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2005 (Unaudited) 8
Notes to Consolidated Financial Statements (Unaudited) 9-14
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 15-21
Item 4. Controls and Procedures. 21-22
Part II. OTHER INFORMATION
Item 6. Exhibits 23
-2-
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2004 2005
------------- -------------
(Unaudited)
Current assets:
Cash and cash equivalents $ 16,803 $ 28,348
Accounts receivable, net 19,212 22,291
Receivables from affiliates 635 300
Refundable income taxes 57 370
Inventories 20,782 22,711
Prepaid expenses and other 1,390 1,807
Deferred income taxes 1,447 2,916
Current portion of note receivable - 1,306
Assets held for sale 17,957 -
-------- --------
Total current assets 78,283 80,049
-------- --------
Other assets:
Goodwill 29,012 35,734
Note receivable - 2,873
Other intangible assets 1,703 2,438
Other 195 138
Assets held for sale 10,964 -
-------- --------
Total other assets 41,874 41,183
-------- --------
Property and equipment:
Land 4,713 7,846
Buildings 29,995 31,136
Equipment 100,923 107,800
Construction in progress 2,299 2,355
-------- --------
137,930 149,137
Less accumulated depreciation 71,808 80,063
-------- --------
Net property and equipment 66,122 69,074
-------- --------
$186,279 $190,306
======== ========
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COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2004 2005
----------- ------------
(Unaudited)
Current liabilities:
Accounts payable and accrued liabilities $ 18,304 $ 22,347
Income taxes payable to affiliates - 15
Income taxes 2,687 538
Liabilities related to assets held for sale 4,998 -
-------- --------
Total current liabilities 25,989 22,900
-------- --------
Noncurrent liabilities:
Deferred income taxes 4,949 16,745
Long term debt 85 1,469
-------- --------
Total noncurrent liabilities 5,034 18,214
-------- --------
Stockholders' equity:
Preferred stock - -
Class A common stock 52 52
Class B common stock 100 100
Additional paid-in capital 108,828 109,556
Retained earnings 38,523 30,809
Accumulated other comprehensive income 7,753 8,675
-------- --------
Total stockholders' equity 155,256 149,192
-------- --------
$186,279 $190,306
======== ========
Commitments and contingencies (Note 1)
See accompanying notes to consolidated financial statements.
- 4 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
----------------------- -----------------------
2004 2005 2004 2005
------- ------- -------- --------
Net sales $46,234 $47,135 $136,056 $139,708
Cost of goods sold 35,929 36,153 106,438 107,916
------- ------- -------- --------
Gross margin 10,305 10,982 29,618 31,792
Selling, general and administrative expense 5,232 6,029 17,424 17,953
------- ------- -------- --------
Operating income 5,073 4,953 12,194 13,839
Other general corporate income, net 215 100 1,478 339
Interest expense (86) (91) (442) (228)
------- ------- -------- --------
Income from continuing operations
before income taxes 5,202 4,962 13,230 13,950
Provision for income taxes 1,658 11,082 5,148 15,483
------- ------- -------- --------
Income (loss) from continuing operations 3,544 (6,120) 8,082 (1,533)
Discontinued operations, net of tax 345 - 645 (477)
------- ------- -------- --------
Net income (loss) $ 3,889 $(6,120) $ 8,727 $ (2,010)
======= ======= ======== ========
Basic and diluted earnings (loss) per common share:
Continuing operations $ .24 $ (.40) $ .54 $ (.10)
Discontinued operations .02 - .04 (.03)
------- ------- -------- --------
$ .26 $ (.40) $ .58 $ (.13)
======= ======= ======== ========
Cash dividends per share $ - $ .125 $ - $ .375
======= ======= ======== ========
Shares used in the calculation of basic
and diluted earnings (loss) per share 15,187 15,246 15,156 15,225
======= ======= ======== ========
See accompanying notes to consolidated financial statements.
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COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
Three months ended Nine months ended
September 30, September 30,
-------------------------- -------------------------
2004 2005 2004 2005
-------- -------- ------- --------
Net income (loss) $ 3,889 $(6,120) $ 8,727 $(2,010)
Other comprehensive income (loss) net of tax:
Currency translation adjustment:
Arising during the period 1,436 368 (481) 250
Disposal of business unit - - - 739
------- ------- ------- -------
1,436 368 (481) 989
Unrealized gain (loss) on hedging derivatives
- 1 - (67)
------- ------- ------- -------
Comprehensive income (loss) $ 5,325 $(5,751) $ 8,246 $(1,088)
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
- 6 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
Cash flows from operating activities:
Net income (loss) $ 8,727 $ (2,010)
Depreciation and amortization 10,621 8,118
Goodwill impairment - 864
Deferred income taxes:
Continuing operations (1,053) 8,828
Discontinued operations - (187)
Other, net 343 275
Change in assets and liabilities:
Accounts receivable (2,486) (1,877)
Inventories (249) (763)
Accounts payable and accrued liabilities (192) 2,641
Accounts with affiliates 241 1,126
Income taxes 4,690 (2,264)
Other, net 165 (532)
-------- --------
Net cash provided by operating activities 20,807 14,219
-------- --------
Cash flows from investing activities:
Capital expenditures (2,742) (8,654)
Proceeds from disposal of assets held for sale - 18,094
Cash of disposed business unit - (4,006)
Acquisition, net of cash acquired - (7,342)
Proceeds from sale of fixed assets 2,134 19
-------- --------
Net cash used by investing activities (608) (1,889)
-------- --------
Cash flows from financing activities:
Indebtedness:
Additions 2,253 -
Principal payments (28,087) (48)
Proceeds from issuance of common stock 499 639
Deferred financing costs paid (28) (28)
Dividends - (5,704)
-------- --------
Net cash used by financing activities (25,363) (5,141)
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (5,164) 7,189
Currency translation (491) 122
Cash and cash equivalents at beginning of period 21,726 21,037
-------- --------
Cash and cash equivalents at end of period $ 16,071 $ 28,348
======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 459 $ 105
Income taxes 1,501 7,860
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
Nine months ended September 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 loss - - - (2,010) - - (2,010)
Other comprehensive income, net - - - - 989 (67) 922
Cash dividends - - - (5,704) - - (5,704)
Issuance of common stock - - 728 - - - 728
--- ---- -------- ------- ------ ----- --------
Balance at September 30, 2005 $52 $100 $109,556 $30,809 $8,667 $ 8 $149,192
=== ==== ======== ======= ====== ===== ========
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 September 30, 2005 and the consolidated statements
of income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended September 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 September 30, 2005, CompX Group, Inc., a majority-owned subsidiary of NL
Industries, Inc. (NYSE: NL) owned 82.6% 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 September 30, 2005, (i) the wholly owned subsidiary of TIMET and NL own an
additional 3.2% and .3%, respectively, of CompX directly, (ii) Valhi, Inc.
holds, directly or through a subsidiary, approximately 83% of NL's outstanding
common stock and approximately 41% of TIMET's outstanding common stock and (iii)
Contran Corporation holds, directly or through subsidiaries, approximately 92%
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 Nine months ended
September 30, September 30,
-------------------- -------------------------
2004 2005 2004 2005
------ -------- ------ --------
(In thousands, except per share amounts)
Net income (loss), as reported $3,889 $(6,120) $8,727 $(2,010)
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 (135) (28) (407) (85)
------ ------- ------ -------
Pro forma net income (loss) $3,754 $(6,148) $8,320 $(2,095)
====== ======= ====== =======
Earnings per share - basic and diluted:
As reported $ .26 $ (.40) $ .58 $ (.13)
====== ======= ====== =======
Pro forma $ .25 $ (.40) $ .55 $ (.14)
====== ======= ====== =======
Note 2 - Business segment information:
Three months ended Nine months ended
September 30, September 30,
---------------------- ------------------------
2004 2005 2004 2005
------- -------- ------- -------
(In thousands)
Net sales:
Security Products $19,105 $21,599 $ 57,554 $ 58,861
Precision Slides 19,925 18,665 57,982 59,989
Ergonomics 7,204 6,871 20,520 20,858
------- ------- -------- --------
Total net sales $46,234 $47,135 $136,056 $139,708
======= ======= ======== ========
Operating income:
Security Products $ 2,576 $ 2,973 $ 7,380 $ 8,280
Precision Slides 1,087 1,001 1,926 2,815
Ergonomics 1,410 979 2,888 2,744
------- ------- -------- --------
Total operating income 5,073 4,953 12,194 13,839
Interest expense (86) (91) (442) (228)
Other general corporate income, net 215 100 1,478 339
------- ------- -------- --------
Income from continuing operations
before income taxes $ 5,202 $ 4,962 $ 13,230 $ 13,950
======= ======= ======== ========
In August 2005, CompX completed the acquisition of a component products
business for aggregate cash consideration of $7.3 million, net of cash acquired.
The purchase price has been allocated among the tangible and intangible net
assets acquired based upon a preliminary estimate of the fair value of such net
assets. The pro forma effect to CompX, assuming such acquisition had been
completed as of January 1, 2005, is not material.
- 10 -
Note 3 - Inventories:
December 31, September 30,
2004 2005
------------ ------------
(In thousands)
Raw materials $ 4,514 $ 7,534
Work in progress 9,019 9,942
Finished products 7,184 5,169
Supplies 65 66
------- -------
$20,782 $22,711
======= =======
Note 4 - Accounts payable and accrued liabilities:
December 31, September 30,
2004 2005
------------ -------------
(In thousands)
Accounts payable $ 6,392 $ 8,126
Accrued liabilities:
Employee benefits 7,987 9,188
Customer tooling 600 1,352
Professional 730 874
Insurance 448 421
Taxes other than on income 399 703
Sales rebates 291 251
Other 1,457 1,432
------- -------
$18,304 $22,347
======= =======
Note 5 - Other general corporate income (expense), net:
Three months ended Nine months ended
September 30, September 30,
-------------------- ----------------------
2004 2005 2004 2005
------ ------ ------ -------
(In thousands)
Interest income $ 394 $144 $1,220 $408
Currency transactions, net (106) (42) 209 (58)
Other, net (73) (2) 49 (11)
----- ---- ------ ----
$ 215 $100 $1,478 $339
===== ==== ====== ====
Note 6 - Provision for income taxes:
Three months ended Nine months ended
September 30, September 30,
-------------------- ----------------------
2004 2005 2004 2005
------ ------ ------ -------
(In thousands)
Expected tax expense $1,820 $1,737 $4,631 $ 4,883
Non-U.S. tax rates (131) (44) (251) (149)
Incremental U.S. tax on earnings of foreign
subsidiaries 332 9,695 936 10,942
State income taxes - 178 286 303
Tax contingency reserve adjustment (198) (169) (556) (169)
Other, net (165) (317) 102 (327)
------ ------- ------ -------
$1,658 $11,080 $5,148 $15,483
====== ======= ====== =======
- 11 -
Under GAAP, a company is required to recognize a deferred income tax
liability with respect to the incremental U.S. (federal and state) and foreign
withholding taxes that would be incurred when undistributed earnings of a
foreign subsidiary are subsequently repatriated, unless management has
determined that those undistributed earnings are permanently reinvested for the
foreseeable future. Prior to the third quarter of 2005, CompX had not recognized
a deferred tax liability related to such incremental income taxes on the
undistributed earnings of certain of its foreign operations, as those earnings
were deemed to be permanently reinvested. GAAP requires a company to reassess
the permanent reinvestment conclusion on an ongoing basis to determine if
management's intentions have changed. As of September 30, 2005, and based
primarily upon changes in management's strategic plans for certain of CompX's
non-U.S. operations, management has determined that the undistributed earnings
of such subsidiaries can no longer be considered to be permanently reinvested
except for the pre-2005 earnings in Taiwan. Accordingly, and in accordance with
GAAP, in the third quarter of 2005 the Company recognized an aggregate $9.0
million provision for deferred income taxes on the aggregate undistributed
earnings of these foreign subsidiaries.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provided for a special 85% deduction for certain dividends
received from a controlled foreign corporation in 2005. In the third quarter of
2005, the Company completes its evaluation of this new provision and determined
that it would not benefit from such special dividends received deduction.
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
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. The Company had no outstanding currency contracts as of September
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 the European Thomas Regout operations
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 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.
- 12 -
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 (before income tax benefit) 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 nine months of 2004, the European Thomas Regout operations
reported net sales of $30.5 million, operating income of $2.1 million, interest
expense of $1.1 million and net income of $645,000.
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
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, if 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
- 13 -
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, 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.
- 14 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Overview
The Company reported operating income of $5.0 million in the third quarter
of 2005 compared to operating income of $5.1 million for the third quarter of
2004. The Company reported operating income of $13.8 million in the first nine
months of 2005 compared to operating income of $12.2 million for the first nine
months of 2004. The slight decrease in results during the third quarter was
primarily due to the negative impact of currency exchange rates in the third
quarter of 2005 compared to the third quarter of 2004. The improvement in
results for the comparative nine-month periods is primarily due to higher sales
in the first quarter of 2005 combined with the ongoing favorable impact of a
continuous focus on reducing costs partially offset by the negative impact of
currency exchange rates. The results of the component products business acquired
in August 2005 (see Note 2 to the Consolidated Financial Statements), which are
not material, are included with the Security Products segment in the tables
below.
Results of Operations
Three months ended Nine months ended
September 30, % September 30, %
2004 2005 Change 2004 2005 Change
---- ---- ------ ---- ---- ------
(In thousands, except percentages)
Net sales:
Security Products $19,105 $21,599 13.1% $ 57,554 $58,861 2.3%
Precision Slides 19,925 18,665 -6.3% 57,982 59,989 3.5%
Ergonomics 7,204 6,871 -4.6% 20,520 20,858 1.6%
------- ------- -------- ------
Total net sales $46,234 $47,135 1.9% $136,056 $139,708 2.7%
======= ======= ======== ========
Operating income:
Security Products $ 2,576 $2,973 15.4% $ 7,380 $8,280 12.2%
Precision Slides 1,087 1,001 -7.9% 1,926 2,815 46.2%
Ergonomics 1,410 979 -30.6% 2,888 2,744 -5.0%
------- -------- ------- ------
Total operating income $ 5,073 $4,953 -2.4% $12,194 $13,839 13.5%
======= ====== ======= =======
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. 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:
- 15 -
Three months ended Nine months ended
September 30, 2004 September 30, 2004
vs. 2005 vs. 2005
------------------ -------------------
(In thousands)
Currency impact on net sales:
Security Products $ - $ -
Precision Slides 288 984
Ergonomics 130 365
----------- -----------
Total currency impact on net sales $ 418 $ 1,349
=========== ===========
Currency impact on operating income:
Security Products $ - $ -
Precision Slides (420) (1,061)
Ergonomics (260) (727)
----------- -----------
Total currency impact on operating
income $ (680) $ (1,788)
=========== ===========
Net sales. Net sales increased $900,000, or 2%, to $47.1 million in the
third quarter of 2005 from $46.2 million in the third quarter of 2004. The
increase is due primarily to sales volume associated with the business acquired
in August 2005 and the net effect of fluctuations in currency exchange rates (as
discussed above) and increases in selling prices for certain products across all
segments to recover volatile raw material prices, partially offset by lower
Precision Slides and Ergonomics sales volume. Net sales increased $3.6 million,
or 3%, to $139.7 million for the first nine months of 2005 from $136.1 million
in the first nine months of 2004. The increase is primarily due to increases in
selling prices for certain products across all segments, sales volume associated
with the acquired business and the net effect of fluctuations in currency
exchange rates (as discussed above), partially offset by sales volume decreases
for certain products.
Cost of goods sold. The Company's cost of goods sold for the third quarter
of 2005 was comparable to 2004 while net sales increased 2% during the same
period. Cost of goods sold increased 1% in the first nine months of 2005
compared to 2004, while net sales increased 3%. The Company's gross margin
percentage increased slightly from 22% in the third quarter of the 2004 period
to 23% in the 2005 period and increased from 22% to 23% in the first nine months
of 2005 as compared to the first nine months of 2004. The changes in gross
margin percentages for the comparable periods is primarily due to the ongoing
favorable impact of a continuous focus on reducing costs partially offset by the
negative impact of currency exchange rates.
Selling, general, and administrative expense. As a percentage of net sales,
selling, general, and administrative expense was 11% of net sales in the third
quarter of 2004 and 13% in the third quarter of 2005. The increase is primarily
due to the timing of expenses on work relating to the Company's compliance with
section 404 of the Sarbanes-Oxley Act of 2002. For the first nine months of each
year, selling, general, and administrative expense was 13% of net sales for 2004
and 2005.
Operating income. Operating income for the third quarter of 2005 was
comparable to the third quarter of 2004. Operating income in the first nine
months of 2005 increased to $13.8 million compared to $12.2 million for the
first nine months of 2004. As a percentage of net sales, operating income
increased to 10% for the first nine months of 2005 from 9% for the first nine
months of 2004 primarily due to the increase in net sales and the favorable
impact of a continuous focus on reducing costs partially offset by the negative
impact of currency exchange rates (as discussed above).
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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 fixed assets. Interest income for the third quarter and nine-month
periods of 2004 includes interest income on long-term intercompany notes
receivable from the European Thomas Regout operations of $379,000 and $1.1
million, 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.
Interest expense. Interest expense declined in the nine-month period of
2005 compared to 2004 due primarily to lower average levels of outstanding debt.
The Company expects interest expense will be comparable during the fourth
quarter of 2005 to the fourth quarter 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 nine months of 2004, and prior to CompX becoming a member of the
Contran Tax Group, CompX was able to claim a tax credit with respect to foreign
income taxes paid. Consistent with elections of the Contran Tax Group, during
the first nine months of 2005, CompX is not claiming a credit with respect to
foreign income taxes paid but instead is claiming a tax deduction. This has
resulted in an increase in the Company's effective income tax rate in the first
nine months of 2005 as compared to the same period in 2004.
Under GAAP, a company is required to recognize a deferred income tax
liability with respect to the incremental U.S. (federal and state) and foreign
withholding taxes that would be incurred when undistributed earnings of a
foreign subsidiary are subsequently repatriated, unless management has
determined that those undistributed earnings are permanently reinvested for the
foreseeable future. Prior to the third quarter of 2005, CompX had not recognized
a deferred tax liability related to such incremental income taxes on the
undistributed earnings of certain of its foreign operations, as those earnings
were deemed to be permanently reinvested. GAAP requires a company to reassess
the permanent reinvestment conclusion on an ongoing basis to determine if
management's intentions have changed. As of September 30, 2005, and based
primarily upon changes in management's strategic plans for certain of CompX's
non-U.S. operations, management has determined that the undistributed earnings
of such subsidiaries can no longer be considered to be permanently reinvested
except for the pre-2005 earnings in Taiwan. Accordingly, and in accordance with
GAAP, in the third quarter of 2005 the Company recognized an aggregate $9.0
million provision for deferred income taxes on the aggregate undistributed
earnings of these foreign subsidiaries.
Discontinued operations. See Note 8 to the Consolidated Financial
Statements.
Accounting principles not yet implemented. See Note 9 to the Consolidated
Financial Statements.
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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. In addition,
the Company continues to develop sources for lower cost components for certain
product lines to strengthen its ability to meet competitive pricing when
practical. 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 September 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 close on an
extension of its credit facility during the fourth quarter 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.
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 nine months of 2005 compared to
providing $2.2 million in the first nine months of 2004.
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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 43 days at September 30, 2005 due to timing of collection
on the slightly higher accounts receivable balance at the end of September. The
Company's average number of days in inventory related to its continuing
operations was 52 days at December 31, 2004 and 57 days at September 30, 2005.
The increase in days in inventory is primarily due to higher raw material
prices, primarily steel.
Investing activities. Net cash used by investing activities totaled $.6
million in the first nine months of 2004 and $1.9 million in the first nine
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 $11 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,
2005 approximated $4.4 million.
In August 2005, CompX completed an acquisition of a company for $7.3
million, net of cash acquired. See Note 2 to the Consolidated Financial
Statements.
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 $5.7 million,
or $.375 per share, in the first nine months of 2005. During the first nine
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,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
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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 September 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 September 30, 2005 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 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 November 4, 2005 By /s/ Darryl R. Halbert
----------------- ---------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller
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