SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 - For the fiscal year ended December 31, 2002
Commission file number 1-13905
COMPX INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0981653
- ------------------------------- --------------------
(State or other jurisdiction of (IRS Employer
incorporation or 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) 233-1700
--------------------
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Class A common stock New York Stock Exchange
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act:
None.
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 if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. X
---
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes No X
--- ---
The aggregate market value of the 4.7 million shares of voting stock held by
nonaffiliates of CompX International Inc. as of June 28, 2002 approximated $62.7
million.
As of February 28, 2003, 5,115,780 shares of Class A common stock were
outstanding.
Documents incorporated by reference
Certain of the information required by Part III is incorporated by reference
from the Registrant's definitive proxy statement to be filed with the Commission
pursuant to Regulation 14A not later than 120 days after the end of the fiscal
year covered by this report.
PART I
ITEM 1. BUSINESS
General
CompX International Inc. (NYSE: CIX) is a leading manufacturer of precision
ball bearing slides, security products and ergonomic computer support systems
used in office furniture, computer-related applications and a variety of other
industries. The Company's products are principally designed for use in medium to
high-end product applications, where design, quality and durability are critical
to the Company's customers. The Company believes that it is among the world's
largest producers of precision ball bearing slides, security products consisting
of cabinet locks and other locking mechanisms and ergonmomic computer support
systems. In 2002, precision ball bearing slides, security products and ergonomic
computer support systems accounted for approximately 43%, 37% and 15% of net
sales, respectively. The remaining sales were generated from sales of other
products.
Valhi, Inc. and Valhi's wholly-owned subsidiary Valcor, Inc. owned 69% of
the Company's outstanding common stock at December 31, 2002. At December 31,
2002, Contran Corporation held, directly or through subsidiaries, approximately
93% of Valhi's outstanding common stock. Substantially all of Contran's
outstanding voting stock is held by trusts established for the benefit of
certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is
sole trustee. Mr. Simmons is Chairman of the Board of each of Contran, Valhi and
Valcor and may be deemed to control each of such companies and CompX.
The Company was incorporated in Delaware in 1993 under the name National
Cabinet Lock, Inc. At that time, Valhi contributed the assets of its Cabinet
Lock Division and the stock of Waterloo Furniture Components Limited to the
Company. In 1996, the Company changed its name to CompX International Inc. In
1998, the Company issued approximately 6 million shares of its common stock in
an initial public offering and CompX acquired two additional security products
producers. CompX acquired two more slide producers in 1999 and another security
products producer in January 2000. See Note 2 to the Consolidated Financial
Statements.
The Company maintains a website on the internet with the address of
www.compxnet.com. Copies of this Annual Report on Form 10-K for the year ended
December 31, 2002 and copies of the Company's Quarterly Reports on Form 10-Q for
2002 and 2003 and any Current Reports on Form 8-K for 2002 and 2003, and any
amendments thereto, are or will be available free of charge as soon as
reasonably practical after they are filed with the Securities and Exchange
Commission ("SEC") at such website. The general public may also read and copy
any materials the Company files with the SEC at the SEC's Public Reference Room
at 450 Fifth Street, NW, Washington, DC 20549, and may obtain information on the
operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The
Company is an electronic filer, and the SEC maintains an internet website at
www.sec.gov that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 3 - "Legal Proceedings," Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and Item 7A - "Quantitative and
Qualitative Disclosures About Market Risk," 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
Annual Report and those described from time to time in materials filed with the
Company's other filings with the SEC. 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
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 The introduction of trade barriers,
o The impact of pricing and production decisions,
o Fluctuations in the value of the U.S. dollar relative to other currencies
(such as the euro, Canadian dollar and New Taiwan dollar),
o Potential difficulties in integrating completed acquisitions,
o Uncertainties associated with new product development,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o The ultimate outcome of income tax audits,
o The impact of current or future government regulations,
o Possible future litigation and
o Other risks and uncertainties.
Should one or more of these risks materialize (or the consequences of such a
development worsen) or should the underlying assumptions prove incorrect, actual
results could differ materially from those forecasted or expected. The Company
disclaims any intention or obligation to update publicly or revise such
statements whether as a result of new information, future events or otherwise.
Industry Overview
Prior to 1998, approximately 75% of the Company's products were sold to the
office furniture manufacturing industry. As a result of strategic acquisitions
in the security products industry in 1998 and 2000 and in the precision ball
bearing slide industry in 1999, the Company has expanded its product offering
and reduced its percentage of sales to the office furniture market. Currently,
approximately 62% of the Company's products are sold to the office furniture
manufacturing industry while the remainder are sold for use in other products,
such as vending equipment, electromechanical enclosures, transportation,
computers and related equipment, and other non-office furniture applications.
Beginning in 2001 and continuing throughout 2002, the office furniture industry
has experienced a contraction with consistently negative growth rates.
Consequently, CompX's sales growth has been negatively affected. See Item 6 -
"Selected Financial Data" and Item 7 - "Management's Discussion and Analysis of
Financial Condition and Results of Operations." However, CompX's management
believes that its emphasis on new product development, sales of its ergonomic
computer support systems as well as slide and security products used in computer
and other non-office furniture markets result in the potential for higher rates
of growth and diversification of risk than the office furniture industry as a
whole.
Products
CompX manufactures and sells components in three major product lines:
precision ball bearing slides, security products and ergonomic computer support
systems.
Sales for the respective product lines in 2000, 2001 and 2002 are as
follows:
Years ended December 31
2000 2001 2002
---- ---- ----
($ in thousands)
Precision ball bearing slides ........... $119,046 $ 91,822 $ 84,446
Security products ....................... 85,218 74,071 73,358
Ergonomic computer support systems ...... 41,658 36,383 29,945
Other products .......................... 7,372 9,146 8,352
-------- -------- --------
$253,294 $211,422 $196,101
======== ======== ========
The Company's precision ball bearing slides and ergonomic computer support
systems are sold under the CompX Waterloo, Waterloo Furniture Components, Thomas
Regout and Dynaslide brand names and the Company's security products are sold
under the CompX Security Products, National Cabinet Lock, Fort Lock, Timberline
Lock, Chicago Lock and TuBAR brand names. The Company believes that its brand
names are well recognized in the industry.
Precision ball bearing slides. CompX manufactures a complete line of
precision ball bearing slides for use in office furniture, computer-related
equipment, tool storage cabinets, imaging equipment, file cabinets, desk drawers
and other applications. These products include CompX's patented Integrated Slide
Lock in which a file cabinet manufacturer can reduce the possibility of multiple
drawers being opened at the same time and the adjustable patented Ball Lock
which reduces the risk of heavily-filled drawers, such as auto mechanic tool
boxes, from opening while in movement. Precision ball bearing slides are
manufactured to stringent industry standards and are designed in conjunction
with original equipment manufacturers ("OEMs") to meet the needs of end users
with respect to weight support capabilities, ease of movement and durability.
In addition to CompX's basic precision ball bearing slide product lines,
sales based on patented innovations such as the Butterfly Take Apart System, the
Integrated Slide Lock and the Ball Lock have accounted for an increasing
proportion of the Company's sales. These applications have expanded the
Company's product offerings within the office furniture industry as well as
adding products for heavy-duty tool storage cabinets, electromechanical imaging
equipment and computer server network cabinets.
Security products. The Company believes that it is a North American market
leader in the manufacture and sale of cabinet locks and other locking
mechanisms. CompX provides security products to various industries including
institutional furniture, banking, industrial equipment, vehicles, vending and
computer. The Company's products can also be found in various applications
including ignition systems, office furniture, vending and gaming machines,
parking meters, electrical circuit panels, storage compartments, security
devices for laptop and desktop computers as well as mechanical and electronic
locks for the toolbox industry. Some of these products may include CompX's KeSet
high security system, which has the ability to change the keying on a single
lock 64 times without removing the lock from its enclosure and it's patented
high security Tubar locking system.
The Company manufactures disc tumbler locking mechanisms at all of its
security products facilities, which mechanisms provide moderate security and
generally represent the lowest cost lock to produce. CompX also manufactures pin
tumbler locking mechanisms, including its KeSet, ACE II and TuBAR brand locks,
which mechanisms are more costly to produce and are used in applications
requiring higher levels of security. A substantial portion of the Company's
sales consist of products with specialized adaptations to individual
manufacturers' specifications. CompX, however, also has a standardized product
line suitable for many customers. This standardized product line is offered
through a North American distribution network through the Company's STOCK LOCKS
distribution program as well as to factory centers and to large OEMs.
Ergonomic computer support systems. CompX is a leading manufacturer and
innovator in ergonomic computer support systems. Unlike products targeting the
residential market, which are more price sensitive with less emphasis on the
overall value of products and service, the CompX line consists of more highly
engineered products designed to provide ergonomic benefits for business and
other sophisticated users.
Ergonomic computer support systems include articulating computer keyboard
support arms (designed to attach to desks in the workplace and home office
environments to alleviate possible strains and stress and maximize usable
workspace), adjustable computer table mechanisms (which provide variable
workspace heights), CPU storage devices (which minimize adverse effects of dust
and moisture) and a number of complementary accessories, including ergonomic
wrist rest aids, mouse pad supports and computer monitor support arms. These
products include CompX's Leverlock, which is designed to make the adjustment of
an ergonomic keyboard arm easier. In addition, the Company offers its
engineering and design capabilities for the design and manufacture of products
on a proprietary basis for key customers.
Other. CompX also markets and distributes a complete line of window
furnishings hardware in addition to manufacturing sheet metal products such as
filing frames in European markets.
Sales, Marketing and Distribution
CompX sells components to OEMs and to distributors through a dedicated
sales force. The majority of the Company's sales are to OEMs, while the balance
represents standardized products sold through distribution channels.
Sales to large OEM customers are made through the efforts of factory-based
sales and marketing professionals and engineers working in concert with field
salespeople and independent manufacturers' representatives. Manufacturers'
representatives are selected based on special skills in certain markets or
relationships with current or potential customers.
A significant portion of the Company's sales are made through distributors.
The Company has a significant market share of cabinet lock sales to the
locksmith distribution channel. CompX supports its distributor sales with a line
of standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling by
distributors and the end user. Based on the Company's successful STOCK LOCKS
inventory program, similar programs have been implemented for distributor sales
of ergonomic computer support systems and, to some extent, precision ball
bearing slides. The Company also operates a small tractor/trailer fleet
associated with its Canadian facilities to provide an industry-unique service
response to major customers.
The Company does not believe it is dependent upon one or a few customers,
the loss of which would have a material adverse effect on its operations. In
2000, 2001 and 2002, sales to the Company's ten largest customers accounted for
approximately 35%, 36% and 30% of sales, respectively. In 2000, 2001 and 2002,
sales to the Company's largest customer were less than 10% of the Company's
total sales. In 2000, nine of the Company's top ten customers were located in
the United States. In 2001 and 2002, eight of the Company's top ten customers
were located in the United States.
Manufacturing and Operations
At December 31, 2002, CompX operated nine manufacturing facilities: six in
North America (two in each of Illinois and Canada and one in each of South
Carolina and Michigan), one in the Netherlands and two in Taiwan. Precision ball
bearing slides or ergonomic products are manufactured in the facilities located
in Canada, the Netherlands, Michigan and Taiwan. Security products are
manufactured in the facilities located in South Carolina and Illinois. The
Company owns all of these facilities except for one of the Taiwan facilities and
the Netherlands facility, which are leased. See also Item 2 - "Properties."
CompX also leases a distribution center in California and a warehouse in Taiwan.
CompX believes that all of its facilities are well maintained and satisfactory
for their intended purposes.
Raw Materials
Coiled steel is the major raw material used in the manufacture of precision
ball bearing slides and ergonomic computer support systems. Plastic resins for
injection molded plastics are also an integral material for ergonomic computer
support systems. Purchased components, including zinc castings, are the
principal raw materials used in the manufacture of security products. These raw
materials are purchased from several suppliers and are readily available from
numerous sources.
The Company occasionally enters into raw material arrangements to mitigate
the short-term impact of future increases in raw material costs. While these
arrangements do not commit the Company to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows the Company to stabilize raw material
purchase prices, provided that the specified minimum monthly purchase quantities
are met. Materials purchased outside of these arrangements are sometimes subject
to unanticipated and sudden price increases such as rapidly increasing worldwide
steel prices in 2002. Due to the competitive nature of the markets served by the
Company's products, it is often difficult to recover such increases in raw
material costs through increased product selling prices. Consequently, overall
operating margins can be affected by such raw material cost pressures.
Competition
The markets in which CompX participates are highly competitive. The Company
competes primarily on the basis of product design, including ergonomic and
aesthetic factors, product quality and durability, price, on-time delivery,
service and technical support. The Company focuses its efforts on the middle and
high-end segments of the market, where product design, quality, durability and
service are placed at a premium.
The Company competes in the precision ball bearing slide market primarily
on the basis of product quality and price with two large manufacturers and a
number of smaller domestic and foreign manufacturers. The Company's security
products compete with a variety of relatively small domestic and foreign
competitors. The Company competes in the ergonomic computer support systems
market primarily on the basis of product quality, features and price with one
major producer and a number of smaller domestic manufacturers and primarily on
the basis of price with a number of foreign manufacturers. Although the Company
believes that it has been able to compete successfully in its markets to date,
price competition from foreign-sourced product has intensified in the current
economic market and there can be no assurance that the Company will be able to
continue to successfully compete in all existing markets in the future.
Patents and Trademarks
The Company holds a number of patents relating to its component products,
certain of which are believed to be important to CompX and its continuing
business activity. CompX's major trademarks and brand names, including CompX
Security Products, CompX Waterloo, National Cabinet Lock, KeSet, Fort Lock,
Timberline Lock, Chicago Lock, ACE II, TuBAR, Thomas Regout, STOCK LOCKS,
ShipFast, Waterloo Furniture Components Limited and Dynaslide, are protected by
registration in the United States and elsewhere with respect to the products
CompX manufactures and sells. The Company believes such trademarks are well
recognized in the component products industry.
Foreign Operations
The Company has substantial operations and assets located outside the
United States, principally slide and/or ergonomic product operations in Canada,
the Netherlands and Taiwan. The majority of the Company's 2002 non-U.S. sales
are to customers located in Canada and Europe. Foreign operations are subject
to, among other things, currency exchange rate fluctuations. The Company's
results of operations have in the past been both favorably and unfavorably
affected by fluctuations in currency exchange rates. Political and economic
uncertainties in certain of the countries in which the Company operates may
expose the Company to risk of loss. The Company does not believe that there is
currently any likelihood of material loss through political or economic
instability, seizure, nationalization or similar event. The Company cannot
predict, however, whether events of this type in the future could have a
material effect on its operations. See Item 7 - "Management's Discussion and
Analysis of Financial Condition and Results of Operations," Item 7A -
"Quantitative and Qualitative Disclosures About Market Risk" and Note 1 to the
Consolidated Financial Statements.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the use, storage, handling, generation,
transportation, treatment, emission, discharge, disposal and remediation of and
exposure to hazardous and non-hazardous substances, materials and wastes
("Environmental Laws"). The Company's operations also are subject to federal,
state, local and foreign laws and regulations relating to worker health and
safety. The Company believes that it is in substantial compliance with all such
laws and regulations. The costs of maintaining compliance with such laws and
regulations have not significantly impacted the Company to date, and the Company
has no significant planned costs or expenses relating to such matters. There can
be no assurance, however, that compliance with future Environmental Laws or
future laws and regulations governing worker health and safety will not require
the Company to incur significant additional expenditures or that such additional
costs would not have a material adverse effect on the Company's business,
consolidated financial condition, results of operations or liquidity.
Employees
As of December 31, 2002, the Company employed approximately 1,850
employees, including 665 in the United States, 700 in Canada, 300 in the
Netherlands and 185 in Taiwan. Approximately 76% of the Company's employees in
Canada are represented by a labor union covered by a collective bargaining
agreement that expires in January 2006. The Company believes that its labor
relations are satisfactory.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately 700
square feet of leased space at 5430 LBJ Freeway, Dallas, Texas 75240. The
following table sets forth the location, size, business operating segment and
general product types produced for each of the Company's facilities.
Size
Business (square
Facility Name Segment Location feet) Products Produced
Owned Facilities:
- ----------------
Manitou CW Kitchener, Ontario 276,000 Slides
Trillium CW Kitchener, Ontario 110,000 Ergonomic products
Byron Center CW Byron Center, MI 143,000 Slides
National CSP Mauldin, SC 198,000 Security products
Fort CSP River Grove, IL 100,000 Security products
Timberline CSP Lake Bluff, IL 16,000 Security products
Dynaslide CW Taipei, Taiwan 48,000 Slides
Leased Facilities:
- -----------------
Regout CR Maastricht,
the Netherlands 270,000 Slides
Dynaslide CW Taipei, Taiwan 25,000 Slides
Dynaslide CW Taipei, Taiwan 11,000 Product distribution/
Warehouse
Distribution Center CW Rancho Cucamonga, CA 12,000 Product distribution
CW - CompX Waterloo business segment
CR - CompX Regout business segment
CSP - CompX Security Products business segment
The Manitou, Trillium, Regout, Byron Center, National and Fort facilities
are ISO-9001 registered. The Dynaslide-owned facility is ISO-9002 registered.
The Company believes that all its facilities are well maintained and
satisfactory for their intended purposes.
A sale/leaseback transaction was executed on the Netherlands facility with
the municipality of Maastricht in December 2001. See Note 11 to the Consolidated
Financial Statements and see also Item 7 - "Management's Discussion and Analysis
of Financial Condition and Results of Operations."
ITEM 3. LEGAL PROCEEDINGS
The Company is involved, from time to time, in various environmental,
contractual, product liability, patent (or intellectual property) and other
claims and disputes incidental to its business. Currently no material
environmental or other material litigation is pending or, to the knowledge of
the Company, threatened. The Company currently believes that the disposition of
all claims and disputes, individually or in the aggregate, should not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2002.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A common stock is listed and traded on the New York
Stock Exchange (symbol: CIX). As of February 28, 2003, there were approximately
26 holders of record of CompX Class A common stock. The following table sets
forth the high and low closing sales prices per share for CompX Class A common
stock for 2001 and 2002, according to the New York Stock Exchange Composite
Tape, and dividends paid per share during such periods. On February 28, 2003 the
closing price per share of CompX Class A common stock according to the NYSE
Composite Tape was $6.98.
Dividends
High Low paid
Year ended December 31, 2001
First Quarter .......................... $ 11.65 $ 9.18 $ .125
Second Quarter ......................... 13.00 10.77 .125
Third Quarter .......................... 13.40 10.45 .125
Fourth Quarter ......................... 12.97 8.95 .125
Year ended December 31, 2002
First Quarter .......................... $ 14.00 $ 11.00 $ .125
Second Quarter ......................... 14.40 11.72 .125
Third Quarter .......................... 14.00 8.78 .125
Fourth Quarter ......................... 9.55 7.61 .125
The declaration and payment of future dividends and the amount thereof, if
any, will be dependent upon the Company's results of operations, financial
condition, cash requirements for its businesses, contractual requirements and
restrictions and other factors deemed relevant by the Board of Directors.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's operations are comprised of a 52 or 53-week fiscal year.
Excluding 1998, each of the years 1991 through 2002 consisted of a 52-week year.
1998 was a 53-week year.
Years ended December 31,
--------------------------------
1998 1999 2000 2001 2002
---- ---- ---- ---- ----
($ in millions, except per share data)
Income Statement Data
Net sales ..................... $ 152.1 $ 225.9 $ 253.3 $ 211.4 $ 196.1
Operating income .............. $ 30.4 $ 40.0 $ 37.3 $ 12.5 $ 6.2
Income before income taxes and
minority interest ........... $ 32.5 $ 39.2 $ 35.5 $ 12.9 $ 3.4
Income taxes .................. 12.0 14.1 13.4 5.8 2.8
Minority interest in losses ... (.2) (.1) -- -- --
-------- -------- -------- -------- --------
Net income .................. $ 20.7 $ 25.2 $ 22.1 $ 7.1 $ .6
======== ======== ======== ======== ========
Cash dividends ................ $ 1.8 $ 2.0 $ 8.1 $ 7.6 $ 7.6
Net income per basic and
diluted share ................ $ 1.37 $ 1.56 $ 1.37 $ .47 $ .04
Cash dividends per share ...... $ .18 $ .125 $ .50 $ .50 $ .50
Weighted average common shares
outstanding .................. 15.1 16.1 16.1 15.1 15.1
Balance Sheet Data
(at year end):
Cash and other current assets $ 86.5 $ 72.5 $ 83.0 $ 94.9 $ 71.3
Total assets ................ 152.4 200.4 223.7 222.9 200.1
Current liabilities ......... 20.3 26.8 28.9 24.5 22.2
Long-term debt, including
current maturities ......... 1.7 22.3 40.6 49.1 31.0
Stockholders' equity ........ 130.0 149.4 151.0 143.0 142.0
In 1998, the Company issued approximately 6 million shares of its common
stock in an initial public offering and CompX acquired two additional security
products producers. CompX acquired two more slide producers in 1999 and another
security products producer in January 2000.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Overview
The Company reported net income of $.6 million, or $.04 per diluted share
for the year ended December 31, 2002, a decrease of 91% compared to net income
of $7.1 million or $.47 per diluted share for the year ended December 31, 2001.
The Company's net income in 2000 was $22.1 million, or $1.37 per diluted share.
The continued weak economic conditions in the manufacturing sector in North
America and Europe, coupled with the substantial rise in steel prices, had a
significant impact on CompX's results in 2002. Several cost control initiatives
were commenced during the year in response to the continuing soft market demand
in order to minimize the adverse effects of lower sales and favorably position
CompX to meet demand when the economy recovers. These initiatives were in
addition to actions taken during 2001 that included a restructuring of its
European operations in the fourth quarter of 2001. The most significant 2002
action was the retooling of its Byron Center, Michigan precision slide facility
in the fourth quarter of 2002 to rationalize several products within its
precision slide product family. The Byron Center retooling is expected to
achieve operating efficiencies that should begin to positively impact operating
results in the first quarter of 2003.
During 2003, CompX anticipates continuing its focus on opportunities to
rationalize its cost structure. As part of this initiative, CompX plans to
consolidate its two Kitchener, Ontario plants into a single facility and expects
substantial completion of this action during the second quarter of 2003.
Expenses relating to this consolidation are expected to primarily consist of the
cost to move machinery and equipment and are not anticipated to include a
significant cost for the disposal of fixed assets. Other facility and product
rationalization evaluations are also under review. These other evaluations could
result in additional charges for asset impairment, including goodwill, and other
costs in future quarters.
The Company defines its operations in terms of three operating segments:
CompX Security Products, CompX Waterloo and CompX Regout (formerly called CompX
Europe). The CompX Security Products segment, with manufacturing facilities in
South Carolina and Illinois, manufactures locking mechanisms and other security
products for sale to the office furniture, banking, vending, computer and other
industries. The CompX Waterloo segment, with facilities in Canada, Michigan and
Taiwan, and the CompX Regout segment, with facilities in the Netherlands, both
manufacture a complete line of precision ball bearing slides for use in office
furniture, computer-related equipment, tool storage cabinets and other
applications. Both of these segments also either manufacture and/or distribute
ergonomic computer support systems. Because of the similar economic
characteristics between the CompX Waterloo and CompX Regout segments and due to
the identical products, customer types, production processes and distribution
methods shared by these two segments, they have been aggregated into a single
reportable segment for segment reporting purposes. Prior period segment
information has been reclassified to reflect the current operating segments.
As discussed in Notes 1 and 15 to the Consolidated Financial Statements,
beginning in 2002 the Company no longer recognizes periodic amortization of
goodwill in its results of operations. The Company would have reported net
income of approximately $9.4 million in 2001, or about $2.3 million higher
($24.5 million, or about $2.4 million higher in 2000) than what was actually
reported, if the goodwill amortization included in the Company's reported net
income had not been recognized. Of such $2.3 million difference, approximately
$1.4 million and $.9 million relate to the Company's CompX Security Products and
CompX Waterloo/CompX Regout segments, respectively (approximately $1.4 million
and $1.0 million, respectively in 2000).
Critical Accounting Policies and Estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, the recoverability of other
long-lived assets (including goodwill and other intangible assets) and the
realization of deferred income tax assets. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the critical financial statement judgment risks of its
business are attributable to four primary areas:
o Will customer accounts receivable on the books be collected at full book
value?
o Will inventory on hand be sold with a sufficient mark up to cover the cost
to produce and ship the product?
o Will future cash flows of the Company be sufficient to recover the net book
value of long-lived assets?
o Will future taxable income be sufficient to utilize recorded deferred
income tax assets?
The Company believes the following critical accounting policies affect its
more significant judgments and estimates, as noted above, used in the
preparation of its consolidated financial statements and are applicable to all
of the Company's operating segments:
o Allowance for uncollectable accounts receivable. The Company maintains
allowances for doubtful accounts for estimated losses resulting from the
inability of its customers to make required payments. The Company takes
into consideration the current financial condition of the customers, the
age of outstanding balances and the current economic environment when
assessing the adequacy of the allowances. If the financial condition of the
Company's customers were to deteriorate, resulting in an impairment of
their ability to make payments, increased allowances may be required.
o Inventory reserves. The Company provides reserves for estimated
obsolescence or unmarketable inventory equal to the difference between the
cost of inventory and the estimated net realizable value using assumptions
about future demand for its products and market conditions. The Company
also considers the age and the quantity of inventory on hand in estimating
the reserve. If actual market conditions are less favorable than those
projected by management, increased inventory reserves may be required.
o Net book value of long-lived assets. The Company recognizes an impairment
charge associated with its long-lived assets, including property and
equipment, goodwill and other intangible assets, whenever it determines
that recovery of the long-lived asset is not probable. The determination is
made in accordance with applicable GAAP requirements associated with the
long-lived asset, and is based upon, among other things, estimates of the
amount of future net cash flows to be generated by the long-lived asset and
estimates of the current fair value of the asset. Adverse changes in
estimates of future net cash flows or estimates of fair value could result
in an inability to recover the carrying value of the long-lived asset,
thereby possibly requiring an impairment charge to be recognized in the
future. Based on the Company's latest annual impairment review of goodwill
of the reporting units during the third quarter of 2002, no goodwill
impairments were deemed to exist. Based on this review, the estimated fair
value of the CompX Waterloo/CompX Regout and CompX Security Products
reporting units exceeded the net carrying values by 23% and 37%,
respectively. See Notes 1 and 15 to the Consolidated Financial Statements.
o Deferred income tax assets. The Company records a valuation allowance to
reduce its deferred income tax assets to the amount that is believed to be
realizable under the "more-likely-than-not" recognition criteria. The
Company has considered future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the need for a valuation
allowance. It is possible that in the future the Company may change its
estimate of the amount of the deferred income tax assets that would
"more-likely-than-not" be realized. This would result in an adjustment to
the deferred income tax asset valuation allowance that would either
increase or decrease, as applicable, reported net income in the period the
change in estimate is made.
Results of Operations
Net sales and operating income
Years ended December 31, % Change
-------------------------- ----------------
2000 2001 2002 2000 - 2001 2001 - 2002
---- ---- ---- ---- ----
(In millions)
Net sales:
CompX Waterloo/CompX
Regout segment ................ $168.3 $137.3 $122.7 -18% -11%
CompX Security
Products segment .............. 85.0 74.1 73.4 -13% -1%
------ ------ ------
Total net sales .............. $253.3 $211.4 $196.1 -17% -7%
====== ====== ======
Operating income (loss):
CompX Waterloo/CompX
Regout segment ................ $ 24.8 $ 5.2 $ (1.9) -79% -136%
CompX Security
Products segment .............. 12.5 7.3 8.1 -41% +10%
------ ------ ------
Total operating
income ...................... $ 37.3 $ 12.5 $ 6.2 -67% -50%
====== ====== ======
Operating income (loss) margin:
CompX Waterloo/CompX
Regout segment ................ 15% 4% (2%)
CompX Security
Products segment .............. 15% 10% 11%
Total operating income
margin ........................ 15% 6% 3%
Year ended December 31, 2002 compared to year ended December 31, 2001
Net sales decreased $15.3 million, or 7%, in 2002 compared to 2001
principally due to continued weak demand for the Company's component products
sold to the office furniture market resulting from continued weak economic
conditions in the manufacturing sector in North America and Europe. Net sales of
slide products in 2002 decreased 8% as compared to 2001, while net sales of
security products decreased 1% and net sales of ergonomic products decreased 18%
during the same period.
The Company's cost of goods sold decreased only 3% in 2002 compared to 2001
despite the 7% decrease in net sales during the same period. Therefore, the
Company's gross margin percentage decreased significantly from 21% in 2001 to
17% in 2002. The disproportionate change in cost of goods sold and its effect on
gross margins was primarily due to lower revenues from sales of slide and
ergonomic products and the resulting impact of spreading fixed factory costs
over lower volume. In addition, steel cost increases following the steel tariff
imposed by the United States government increased the Company's raw material
cost, most of which was not immediately recoverable through sales price
increases in 2002. Such steel cost increases resulted in additional 2002 raw
material costs to CompX of approximately $1.2 million compared to 2001 steel raw
material pricing. The CompX Waterloo/CompX Regout segment was most significantly
impacted by the steel cost increases, while the effects on the CompX Security
Products segment were minimal.
Operating income for 2002 decreased $6.3 million, or 50% compared to 2001
and operating margins decreased to 3% in 2002 compared to 6% for 2001. Continued
reductions in manufacturing, fixed overhead and other overhead costs partially
offset the effects of the decline in net sales in 2002. However, operating
margins in 2002 continued to be adversely impacted by the decline in volume
levels, unfavorable changes in the sales mix, increases in certain raw material
costs (primarily steel) and general competitive pricing pressures.
Through December 31, 2001, goodwill was amortized by the straight-line
method over not more than 20 years. Upon adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets,
effective January 1, 2002, goodwill is no longer subject to periodic
amortization. The Company would have reported operating income of approximately
$14.7 million in 2001 if the goodwill amortization included in the Company's
reported operating income had not been recognized. Without goodwill
amortization, operating income for the CompX Waterloo/CompX Regout segment would
have been approximately $6.0 million in 2001 and operating income for the CompX
Security Products segment would have been approximately $8.7 million.
The Company recorded a pre-tax charge in the fourth quarter of 2002 of $1.6
million, the majority of which was non-cash in nature. The fourth quarter 2002
charge relates to a retooling of the Company's precision slide manufacturing
facility in Byron Center, Michigan and includes a $1.0 million loss on disposal
of equipment, reflected in other general corporate income (expense), net in the
consolidated statements of income. The remainder of the charge is reflected in
cost of goods sold. The cost savings and operating efficiencies resulting from
the retooling are expected to begin to benefit the financial results in the
first quarter of 2003. An additional fourth quarter pre-tax charge of
approximately $1.9 million was recorded to cost of goods sold to adjust for
various changes in estimates with respect to obsolete and slow-moving inventory,
inventory overhead absorption rates and other items. Approximately $1.3 million
of this charge related to the CompX Waterloo/CompX Regout segment with the
remaining $.6 million relating to the CompX Security Products segment. Pre-tax
charges of $5.7 million were also recorded in the fourth quarter of 2001, and
are discussed in connection with sales and operating income for 2000 compared to
2001, below.
CompX has substantial operations and assets located outside the United
States (principally in Canada, the Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the Dutch guilder, the
euro and the New Taiwan dollar. In addition, a portion of CompX's sales
generated from its non-U.S. operations (principally in Canada) are denominated
in the U.S. dollar. Most raw materials, labor and other production costs for
such non-U.S. operations are denominated primarily in local currencies.
Consequently, the translated U.S. dollar values of CompX's foreign sales and
operating results are subject to currency exchange rate fluctuations which may
favorably or unfavorably impact reported earnings and may affect comparability
of period-to--period operating results. The effects of fluctuations in currency
exchange rates affect the CompX Waterloo/CompX Regout segment, and do not
materially affect the CompX Security Products segment. During 2002, the effects
of currency fluctuations did not materially impact the Company or the CompX
Waterloo/CompX Regout segment.
Year ended December 31, 2001 compared to year ended December 31, 2000
Net sales decreased $41.9 million, or 17%, in 2001 compared to 2000 due to
decreased demand for the Company's products resulting from continued weak
economic conditions in the manufacturing sector in North America and Europe, and
to a lesser extent, the negative effects of fluctuations in currency exchange
rates. Net sales of slide products in 2001 decreased 23% as compared to 2000,
while net sales of security products and ergonomic products each decreased 13%
during the same period.
Cost of goods sold decreased 10% in 2001 as compared to 2000 due to the
lower sales volume in 2001. As a percentage of sales, cost of sales increased
from 74% in 2000 to 79% in 2001 due primarily to the spreading of fixed
production costs over lower sales volumes. In addition, a $2.6 million pre-tax
charge related to various changes in estimate with respect to reserves for
obsolete and slow-moving inventory was recorded in the fourth quarter of 2001
and negatively impacted cost of goods sold.
Operating income for 2001 decreased $24.8 million, or 67% compared to 2000
and operating income margins decreased to 6% in 2001 compared to 15% for 2000.
Reductions in manufacturing, fixed overhead and related overhead costs, which
began in the first quarter of 2001, partially offset the effects of the decline
in net sales in 2001. However, despite these cost reductions, operating margins
in 2001 were adversely impacted by the decline in volume levels and the related
impact on manufacturing efficiencies, the effects of unfavorable changes in the
sales mix and general pricing pressures. Operating income at the CompX
Waterloo/CompX Regout segment decreased 79% in 2001 compared to 2000, while
operating income at the CompX Security Products segment decreased 41% for the
same period. A pre-tax $2.7 million restructuring charge in the fourth quarter
of 2001 and a proportionately larger impact resulting from unfavorable changes
in the sales mix contributed to the more substantial operating income decline at
the CompX Waterloo/CompX Regout segment as compared to the CompX Security
Products segment.
As discussed in Note 6 to the Consolidated Financial Statements, the fourth
quarter 2001 restructuring charge included headcount reductions of about 35
employees at CompX's Maastricht, the Netherlands facility, substantially all of
which had been implemented by December 31, 2001. Of the $2.7 million charge, as
adjusted for changes in currency exchange rates, approximately $.4 million was
paid in 2001, $2.0 million was paid in 2002 and $.6 million was paid in January
2003. In addition, approximately $3.0 million in pre-tax charges were recorded
in the fourth quarter of 2001. These charges are predominately comprised of $2.6
million related to various changes in estimates with respect to reserves for
obsolete and slow-moving inventory, approximately $.1 million related to
allowances for doubtful accounts, with the remainder related to other items. Of
the $3.0 million charges, approximately $.9 million related to the CompX
Waterloo/CompX Regout segment and the remaining $2.1 million related to the
CompX Security Products segment.
In 2001, excluding the effects of currency exchange rate fluctuations, the
Company's sales decreased 15% compared to 2000. Sales of the CompX
Waterloo/CompX Regout segment decreased 16%, exclusive of the effects of
currency and acquisitions. Operating income comparisons for this period,
however, were not materially impacted by the effects of currency. The effects of
currency fluctuations do not materially affect the CompX Security Products
segment.
General
The Company's profitability primarily depends on its ability to utilize its
production capacity effectively, which is affected by, among other things, the
demand for its products and its ability to control its manufacturing costs,
primarily comprised of labor costs and raw materials such as zinc, copper,
coiled steel and plastic resins. Raw material costs represent approximately 43%
of the Company's total cost of sales. During 2000 and 2001, steel prices did not
change significantly compared to the respective prior years. However, in 2002,
worldwide steel prices increased significantly following the steel tariff
imposed by the United States government. The Company occasionally enters into
raw material supply arrangements to mitigate the short-term impact of future
increases in raw material costs. While these arrangements do not commit the
Company to a minimum volume of purchases, they generally provide for stated unit
prices based upon achievement of specified volume purchase levels. This allows
the Company to stabilize raw material purchase prices to a certain extent,
provided the specified minimum monthly purchase quantities are met. The Company
entered into such arrangements for zinc, coiled steel and plastic resins in 2002
and does not anticipate further significant changes in the cost of these
materials from their current levels for the next year. Materials purchased on
the spot market are sometimes subject to unanticipated and sudden price
increases. Due to the competitive nature of the markets served by the Company's
products, it is often difficult to recover such increases in raw material costs
through increased product selling prices. Consequently, overall operating
margins may be affected by such raw material cost pressures.
At December 31, 2002, none of the Company's employees in the U.S., the
Netherlands or Taiwan were represented by bargaining units, and wage increases
for such employees historically have been in line with overall inflation
indices. Approximately 76% of the Company's Canadian employees are covered by a
three year collective bargaining agreement which provided for annual wage
increases of approximately 3.5%. Wage increases for these Canadian employees
historically have also been in line with overall inflation indices. The
collective bargaining agreement expired in January 2003 and has been replaced
with a new agreement which expires in January 2006. The new agreement retains
the general provisions of the old agreement and provides for annual wage
increases from 1% to 2.5% over the life of the contract.
In January 2000, the Company acquired substantially all of the operating
assets of Chicago Lock Company for approximately $9 million, further expanding
its security products line. This acquisition was financed through a combination
of cash on hand and increased borrowings under the Company's Revolving Senior
Credit Facility.
Selling, general and administrative expense consists primarily of salaries,
commissions and advertising expenses directly related to product sales. As a
percentage of net sales, selling, general and administrative expense was 11% in
2000, 13% in 2001 and 14% in 2002. Despite cost reduction programs implemented
in 2001, the decline in sales volumes outpaced the ability of the Company to
reduce its selling, general and administrative expense during 2001 and 2002. As
a result, the Company's selling, general and administrative expense as a
percentage of net sales increased since 2000.
Other general corporate income (expense), net
As summarized in Note 12 to the Consolidated Financial Statements, "other
general corporate income (expense), net" primarily includes interest income,
losses on disposal of property and equipment and net foreign currency
transaction gain and loss. In 2002, loss on disposal of property and equipment
included approximately $1.0 million related to the retooling of the Company's
precision slide manufacturing facility in Byron Center, Michigan. The remainder
of the pre-tax charge, $.6 million, is reflected in cost of goods sold and
related to the cost of moving and installing machinery and equipment as well as
the disposal of obsolete inventory. Interest income decreased in 2002 compared
to 2001 due primarily to lower interest rates earned on funds available for
investment combined with a lower level of funds available for investment.
Conversely, 2001 interest income increased when compared to 2000 due to higher
levels of available funds for investment. In 2001, a curtailment gain of
approximately $.1 million was included in other general corporate income, net.
This curtailment gain, more fully described in Note 8 to the Consolidated
Financial Statements, relates to the cessation of benefits provided under
CompX's defined benefit plan which covered substantially all full-time employees
of Thomas Regout International B.V. As of December 31, 2001, certain obligations
related to the terminated plan had not yet been fully settled and are reflected
in accrued pension costs. In 2002, such obligations were settled and the Company
reported a $.7 million settlement gain.
Interest expense
Interest expense declined $1.0 million in 2002 compared to 2001 due
primarily to lower average interest rates and lower levels of outstanding
indebtedness on CompX's Revolving Senior Credit Facility. In contrast, interest
expense increased $.6 million in 2001 compared to 2000 due to higher average
levels of outstanding indebtedness on CompX's Revolving Senior Credit Facility.
Interest expense in 2003 is expected to be somewhat higher compared to 2002 due
to slightly higher interest rates charged on the Company's new Revolving Bank
Credit Agreement, which is explained more fully below and in Note 7 to the
Consolidated Financial Statements.
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
9 to the Consolidated Financial Statements. Income tax rates vary by
jurisdiction (country and/or state), and relative changes in the geographic mix
of CompX's pre-tax earnings can result in fluctuations in the effective income
tax rate. Net income in 2002 was negatively impacted by an increase in the
effective income tax rate primarily as a result of lower income levels and an
increased proportion of foreign-sourced dividend income taxed at a higher
effective tax rate.
As discussed in Note 1 to the Consolidated Financial Statements, effective
January 1, 2002, the Company no longer recognizes periodic amortization of
goodwill. Under GAAP, generally there is no income tax benefit recognized for
financial reporting purposes attributable to goodwill amortization. Accordingly,
ceasing to periodically amortize goodwill beginning in 2002 resulted in a
reduction in the Company's overall effective income tax rate in 2002 as compared
to 2001, partially offsetting the increased effective tax rate on
foreign-sourced income.
Other
Reflected in the 2001 results of operations is a $2.2 million gain on the
sale/leaseback of the Company's manufacturing facility in the Netherlands, which
is discussed more fully below and in Note 11 to the Consolidated Financial
Statements.
Related party transactions
CompX is a party to certain transactions with related parties. See Note 13
to the Consolidated Financial Statements.
Outlook
The Company expects that weak market conditions will continue in the office
furniture market, the primary end-market for the Company's products. As a
result, sales volumes are expected to remain depressed through at least 2003 and
competitive pricing pressures are expected to continue. The Company has
initiated price increases on certain of its products and 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
to the office furniture industry and to develop value-added customer
relationships with additional focus on sales of the Company's higher-margin
ergonomic computer support systems to improve operating results. Among the
Company's cost control initiatives is a plan to consolidate its two Kitchener,
Ontario plants into one facility. Expenses related to this consolidation are
expected to primarily consist of the cost to move machinery and equipment and
are not anticipated to include a significant net cost for the disposal of fixed
assets. Substantial completion of the consolidation is expected by the end of
the second quarter of 2003. In addition, other facility rationalizations are
also under review and could result in additional charges for asset impairment,
including goodwill, and other costs in future quarters. These actions, along
with other activities to eliminate duplicate product lines and excess capacity,
are designed to position the Company to more effectively concentrate on both new
product and new customer opportunities to improve Company profitability.
Liquidity and Capital Resources
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities, for 2000, 2001 and 2002 have
generally been similar to the trend in the Company's earnings. Net cash provided
by operating activities, excluding changes in assets and liabilities, in 2000,
2001 and 2002 totaled $36.7 million, $21.5 million and $13.5 million,
respectively, compared to net income of $22.1 million, $7.1 million and $.6
million, respectively. Depreciation and amortization expense increased in 2001
as compared to 2000 in part due to the acquisitions discussed above and
additional expenditures on facilities improvements and enhancements discussed
below. Depreciation and amortization expense decreased in 2002 compared to 2001
due primarily to the cessation of amortization of goodwill. See Notes 1 and 15.
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. However, year-to-year relative changes in
assets and liabilities can significantly affect the comparability of cash flows
from operating activities. For example, relative changes in assets and
liabilities consumed approximately $8.3 million of cash in 2000. However, during
2001 and 2002, with CompX's specific focus on working capital management,
relative changes in assets and liabilities generated a net $6.2 million and $3.4
million, respectively, in cash. Therefore, despite the significant decline in
earnings in 2001 as compared to 2000, cash from operating activities in 2001
remained fairly consistent with 2000 primarily due to cash generated from
inventory and accounts receivable reduction initiatives undertaken during 2001.
The cash generated from these initiatives during 2001 was partially offset by a
use of cash related to relative changes in accounts payable and accrued
liabilities resulting from the overall decline in operating activity from 2000
to 2001. The inventory and accounts receivable reduction initiatives continued
during 2002, resulting in the generation of cash from relative changes in
inventory and accounts receivable, although the amount of cash generated from
such relative changes was less than the amount generated in 2001. However, this
positive cash generated was partially offset by the use of $1.7 million in cash
during 2002 relating to the restructuring reserve that was recorded in the
fourth quarter of 2001.
Investing activities. Net cash used by investing activities totaled $32.4
million, $2.7 million and $12.7 million for the years ended December 31, 2000,
2001 and 2002, respectively. Cash used by investing activities includes
approximately $9.3 million in 2000 for the Chicago Lock acquisition. In 2001,
$10.0 million in cash was provided from the sale/leaseback of the Company's
plant facility in the Netherlands. Other cash flows from investing activities in
each of the past three years related principally to capital expenditures.
Capital expenditures in the past three years emphasized manufacturing equipment
which utilizes new technologies and increases automation of the manufacturing
process to provide for increased productivity and efficiency. The capital
expenditures in 2000 relate primarily to the completion of facility expansions
at the Company's Kitchener facility, additional facility expansions at the
Company's Byron Center facility and general equipment upgrades and
modernization. Capital expenditures in 2001 and 2002 relate primarily to general
equipment upgrades and modernization.
Pursuant to the sale/leaseback of the Company's plant facility in
Maastricht, the Netherlands, CompX sold the manufacturing facility with a net
carrying value of $8.2 million for $10.0 million cash consideration in December
2001, and CompX simultaneously entered into a leaseback of the facility with a
nominal monthly rental for approximately 30 months. CompX has the option to
extend the leaseback period for up to an additional two years with monthly
rentals of $40,000 to $100,000. CompX may terminate the leaseback at any time
without penalty. In addition to the cash received up front, CompX included an
estimate of the fair market value of the monthly rental during the
nominal-rental leaseback period as part of the sale proceeds. A portion of the
gain from the sale of the facility after transaction costs, equal to the present
value of the monthly rentals over the expected leaseback period (including the
fair market value of the monthly rental during the nominal-rental leaseback
period), was deferred and is being amortized into income over the expected
leaseback period. CompX is recognizing rental expense over the leaseback period,
including amortization of the prepaid rent consisting of the estimated fair
market value of the monthly rental during the nominal-rental leaseback period.
Pursuant to the agreement, CompX is also obligated to acquire approximately 10
acres from the municipality of Maastricht for approximately $2.1 million within
the next two years.
Capital expenditures for 2003 are estimated at approximately $11 million,
the majority of which relate to projects that emphasize improved production
efficiency. Firm purchase commitments for capital projects in process at
December 31, 2002 approximated $1.4 million.
Financing activities. Net cash provided (used) by financing activities
totaled $2.1 million, $(1.8) million and $(25.5) million for the years ended
December 31, 2000, 2001 and 2002, respectively. Total cash dividends paid in
2000 were $8.1 million and in each of 2001 and 2002 were $7.6 million ($.50 per
share in each of 2000 through 2002). The Company used available cash on hand to
reduce its outstanding debt by $19 million in June 2002 and borrowed $1 million
on its unsecured Revolving Senior Credit Facility in the third quarter of 2002.
The Company's Board of Directors has authorized the Company to purchase up
to approximately 1.5 million shares of its common stock in open market or
privately-negotiated transactions at unspecified prices and over an unspecified
period of time. As of December 31, 2002, the Company had purchased approximately
1,104,000 shares for an aggregate of $11.3 million pursuant to such
authorization ($8.7 million for 844,300 shares in 2000, $2.6 million for 259,600
shares in 2001 and nil in 2002).
In January 2003, the Company replaced its expiring $100 million unsecured
Revolving Senior Credit Facility with a new $47.5 million secured Revolving Bank
Credit Agreement. Had the facility been in place at December 31, 2002, $16.5
million would have been available for future borrowing. The new credit agreement
is collateralized by substantially all of the Company's United States assets and
at least 65% of the ownership interests in the Company's first-tier non-United
States subsidiaries. Provisions contained in the Credit Agreement could result
in the acceleration of the indebtedness prior to its stated maturity for reasons
other than defaults from failing to comply with typical financial covenants. For
example, the Company's 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. See Note 7 to the Consolidated Financial
Statements. Other than certain operating leases discussed in Note 14 to the
Consolidated Financial Statements, neither CompX nor any of its subsidiaries or
affiliates are parties to any off-balance sheet financing arrangements.
Other
Management believes that cash generated from operations and borrowing
availability under the Revolving Bank Credit Agreement, together with cash on
hand, will be sufficient to meet the Company's liquidity needs for working
capital, capital expenditures, debt service and dividends. 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. In this
regard, during 2002 the Company's quarterly common stock dividend of $.125 per
share exceeded the Company's earnings per share. To the extent that the
Company's future operating results continue to be insufficient to cover such
dividend, it is possible the Company might decide to reduce or suspend its
quarterly dividend.
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, repurchase shares of its
common stock, modify its dividend policy 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, 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.
Contractual obligations. As more fully described in the notes to the
Consolidated Financial Statements, the Company is obligated to make future
payments under certain debt and lease agreements, and is a party to other
commitments. The following table summarizes these obligations as of December 31,
2002.
Payments due by period
--------------------------
Less than 1 - 3 4 - 5
Total 1 year years years
(In thousands)
Long-term debt ........................... $31,000 $ -- $ -- $31,000
Capital lease obligations and other ...... 89 89 -- --
Operating leases ......................... 1,565 662 881 22
Unconditional purchase obligations ....... 1,355 1,355 -- --
Other long-term obligation - Maastricht
real estate acquisition obligation ...... 2,085 -- 2,085 --
------- ------ ------ -------
Total contractual cash obligations ....... $36,094 $2,106 $2,966 $31,022
======= ====== ====== =======
In addition, the Company is a party to certain other agreements that
contractually and unconditionally commit the Company to pay certain amounts in
the future. While the Company believes it is probable that amounts will be spent
in the future under such contracts, the amount and/or the timing of such future
payments will vary depending on certain provisions of the applicable contract.
Agreements to which the Company is a party that fall into this category, more
fully described in Note 14 to the Consolidated Financial Statements, are CompX's
patent license agreements under which it pays royalties based on the volume of
certain products manufactured in Canada and sold in the United States.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates. The Company periodically uses
currency forward contracts to manage a portion of foreign exchange rate risk
associated with receivables, or similar exchange rate risk associated with
future sales, denominated in a currency other than the holder's functional
currency. Otherwise, the Company does not generally enter into forward or option
contracts to manage such market risks, nor does the Company enter into any such
contract or other type of derivative instrument for trading or speculative
purposes. Other than the contracts discussed below, the Company was not a party
to any forward or derivative option contract related to foreign exchange rates
or interest rates at December 31, 2001 and 2002. See Note 1 to the Consolidated
Financial Statements.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness.
At December 31, 2001 and 2002, substantially all of the Company's
outstanding indebtedness were variable rate borrowings. Such borrowings at
December 31, 2002 related principally to $31 million ($49 million at December
31, 2001) in borrowings under the Company's unsecured Revolving Senior Credit
Facility which was replaced by a $47.5 million secured Revolving Bank Credit
Agreement in January 2003. The outstanding balances at December 31, 2001 and
2002 (which approximate fair value) had a weighted-average interest rate of 4.2%
and 2.5%, respectively. Amounts outstanding under the new credit facility are
due in January 2006. The remaining indebtedness outstanding at December 31, 2001
and 2002 is not material.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products outside the United States (principally
Canada, Western Europe and Taiwan). A portion of CompX's sales generated from
its non-U.S. operations are denominated in currencies other than the U.S.
dollar, principally the Canadian dollar, the euro and the New Taiwan dollar. In
addition, a portion of CompX's sales generated from its non-U.S. operations
(principally in Canada) are denominated in the U.S. dollar. Most raw materials,
labor and other production costs for such non-U.S. operations are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
CompX's foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or unfavorably impact reported earnings
and may affect comparability of period-to-period operating results.
Certain of CompX's sales generated by its Canadian operations are
denominated in U.S. dollars. To manage a portion of the foreign exchange rate
market risk associated with receivables, or similar exchange rate risk
associated with future sales, at December 31, 2002 CompX had entered into a
series of short-term forward exchange contracts maturing through January 2003 to
exchange an aggregate of $2.5 million for an equivalent amount of Canadian
dollars at an exchange rate of Cdn. $1.57 per U.S. dollar. At each balance sheet
date, outstanding currency forward contracts are marked-to-market with any
resulting gain or loss recognized in income currently. The difference between
the estimated fair value and the face value of all such outstanding forward
contracts at December 31, 2002 is not material. At December 31, 2002, the actual
exchange rate was Cdn. $1.57 per U.S. dollar. No foreign exchange contracts were
outstanding at December 31, 2001.
Other. The above discussion includes forward-looking statements of market
risk which assume hypothetical changes in market prices. Actual future market
conditions will likely differ materially from such assumptions. Accordingly,
such forward-looking statements should not be considered to be projections by
the Company of future events or losses. Such forward-looking statements are
subject to certain risks and uncertainties some of which are listed in
"Business-General."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedules" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
CompX's definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report (the "CompX Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
CompX Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
CompX Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
CompX Proxy Statement. See also Note 13 to the Consolidated Financial
Statements.
ITEM 14. 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 SEC,
means controls and other procedures that are designed to ensure that information
required to be disclosed in the reports that the Company files or submits to the
SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is
recorded, processed, summarized and reported, within the time periods specified
in the SEC's rules and forms. Disclosure controls and procedures include,
without limitation, controls and procedures designed to ensure that information
required to be disclosed by the Company in the reports that it files or submits
to the SEC under the Act is accumulated and communicated to the Company's
management, including its principal executive officer and its principal
financial officer, as appropriate to allow timely decisions to be made regarding
required disclosure. Each of David A. Bowers, the Company's Vice Chairman of the
Board, President and Chief 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 a date within 90 days of
the filing date of this Form 10-K. Based upon their evaluation, these executive
officers have concluded that the Company's disclosure controls and procedures
are effective as of the date of such evaluation.
The Company also maintains a system of internal controls. The term
"internal controls," as defined by the American Institute of Certified Public
Accountants' Codification of Statement on Auditing Standards, AU Section 319,
means controls and other procedures designed to provide reasonable assurance
regarding the achievement of objectives in the reliability of the Company's
financial reporting, the effectiveness and efficiency of the Company's
operations and the Company's compliance with applicable laws and regulations.
There have been no significant changes in the Company's internal controls or in
other factors that could significantly affect such controls subsequent to the
date of their last evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedules
The Registrant
The consolidated financial statements and schedules listed
on the accompanying Index of Financial Statements and
Schedules (see page F-1) are filed as part of this Annual
Report.
(b) Reports on Form 8-K
No reports on Form 8-K were filed for the quarter ended
December 31, 2002.
(c) Exhibits
Included as exhibits are the items listed in the Exhibit
Index. CompX will furnish a copy of any of the exhibits
listed below upon payment of $4.00 per exhibit to cover the
costs to CompX of furnishing the exhibits. Instruments
defining the rights of holders of long-term debt issues
which do not exceed 10% of consolidated total assets will be
furnished to the Commission upon request.
Item No. Exhibit Item
3.1 Restated Certificate of Incorporation of Registrant -
incorporated by reference to Exhibit 3.1 of the Registrant's
Registration Statement on Form S-1 (File No. 333-42643).
3.2 Amended and Restated Bylaws of Registrant, adopted by the
Board of Directors August 31, 2002.
10.1 Intercorporate Services Agreement between the Registrant and
Contran Corporation effective as of January 1, 2002 -
incorporated by reference to Exhibit 10.1 of the
Registrant's Quarterly Report on Form 10-Q for the quarter
ended June 30, 2002.
10.2* CompX International Inc. 1997 Long-Term Incentive Plan -
incorporated by reference to Exhibit 10.2 of the
Registrant's Registration Statement on Form S-1 (File No.
333-42643).
10.3* CompX International Inc. Variable Compensation Plan
effective as of January 1, 1999 - incorporated by reference
to Exhibit 10.4 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 1998.
10.4 Agreement between Haworth, Inc. and Waterloo Furniture
Components, Ltd. and Waterloo Furniture Components, Inc.
effective October 1, 1992 - incorporated by reference to
Exhibit 10.3 of the Registrant's Registration Statement on
Form S-1 (File No. 333-42643).
10.5 Tax Sharing Agreement among the Registrant, Valcor, Inc. and
Valhi, Inc. dated as of January 2, 1998 - incorporated by
reference to Exhibit 10.4 of the Registrant's Registration
Statement on Form S-1 (File No. 333-42643).
Item No. Exhibit Item
10.6 $100,000,000 Credit Agreement between the Registrant,
Bankers Trust Company, as Agent and various lending
institutions dated February 26, 1998 - incorporated by
reference to Exhibit 10.5 of the Registrant's Registration
Statement on Form S-1 (File No. 333-42643).
10.7 Amendment No. 1 to Credit Agreement between Registrant,
Bankers Trust Company, as Agent and various lending
institutions, dated December 15, 1999 - incorporated by
reference to Exhibit 10.8 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 1999.
10.8 Amendment No. 2 to Credit Agreement between Registrant,
Bankers Trust Company, as Agent and various lending
institutions, dated December 2001 - incorporated by
reference to Exhibit 10.8 of the Registrant's Annual Report
on Form 10-K for the year ended December 31, 2001.
10.9 $47,500,000 Credit Agreement between the Registrant,
Wachovia Bank, National Association, as Agent and various
lending institutions dated January 22, 2003.
10.10* Employment agreement between Registrant and Wouter J.
Dammers, effective August 30, 1999 - incorporated by
reference to Exhibit 10.1 of the Registrant's Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
10.11 Asset sale/leaseback agreement between Thomas Regout
International BV and the municipality of Maastricht, the
Netherlands dated December 21, 2001 (English translation
from Dutch language document) - incorporated by reference to
Exhibit 10.12 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2001.
10.12* Agreement and General Release between the Registrant and
Brent A. Hagenbuch, effective May 22, 2002.
10.13* Agreement and General Release between the Registrant and
Stuart M. Bitting, effective July 31, 2002.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
99.1 Annual Report of the CompX Contributory Retirement Plan
(Form 11-K) to be filed under Form 10-K to this Annual
Report on Form 10-K405 within 180 days after December 31,
2002.
99.2 Certification pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
99.3 Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
* Management contract, compensatory plan or agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ David A. Bowers
------------------------------------------------
David A. Bowers
Vice Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
/s/ Glenn R. Simmons Chairman of the Board March 14, 2003
- -----------------------------
Glenn R. Simmons
/s/ David A. Bowers Vice Chairman of the Board, March 14, 2003
- ----------------------------- President and
David A. Bowers Chief Executive Officer
(Principal Executive Officer)
/s/ Darryl R. Halbert Vice President, March 14, 2003
- ----------------------------- Chief Financial Officer
Darryl R. Halbert and Controller
(Principal Financial and Accounting
Officer)
/s/ Paul M. Bass, Jr. Director March 14, 2003
- -----------------------------
Paul M. Bass, Jr.
/s/ Keith R. Coogan Director March 14, 2003
- -----------------------------
Keith R. Coogan
/s/ Edward J. Hardin Director March 14, 2003
- -----------------------------
Edward J. Hardin
/s/ Ann Manix Director March 14, 2003
- --------------------------------------
Ann Manix
/s/ Steven L. Watson Director March 14, 2003
- -----------------------------
Steven L. Watson
CERTIFICATION
I, David A. Bowers, the Vice Chairman of the Board, President and Chief
Executive Officer of CompX International Inc., certify that:
1) I have reviewed this annual report on Form 10-K of CompX International
Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
a) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 14, 2003
/s/ David A. Bowers
- -------------------------------------
David A. Bowers
Vice Chairman of the Board, President
and Chief Executive Officer
CERTIFICATION
I, Darryl R. Halbert, the Vice President, Chief Financial Officer and Controller
of CompX International Inc., certify that:
1) I have reviewed this annual report on Form 10-K of CompX International
Inc.;
2) Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this annual report;
3) Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of
the registrant as of, and for, the periods presented in this annual report;
4) The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:
a) designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within those
entities, particularly during the period in which this annual report
is being prepared;
b) evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date of
this annual report (the "Evaluation Date"); and
c) presented in this annual report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5) The registrant's other certifying officer and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent functions):
d) all significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
e) any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6) The registrant's other certifying officer and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: March 14, 2003
/s/ Darryl R. Halbert
- ------------------------------------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer and Controller
Annual Report on Form 10-K
Items 8, 14(a) and 14(d)
Index of Financial Statements and Schedules
Financial Statements Page
Report of Independent Accountants F-2
Consolidated Balance Sheets - December 31, 2001 and 2002 F-3
Consolidated Statements of Income -
Years ended December 31, 2000, 2001 and 2002 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2000, 2001 and 2002 F-6
Consolidated Statements of Cash Flows -
Years ended December 31, 2000, 2001 and 2002 F-7
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2000, 2001 and 2002 F-9
Notes to Consolidated Financial Statements F-10
Financial Statement Schedule
Report of Independent Accountants S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of CompX International Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of income, comprehensive income, cash flows and
stockholders' equity present fairly, in all material respects, the consolidated
financial position of CompX International Inc. and Subsidiaries as of December
31, 2001 and 2002, and the consolidated results of their operations and their
cash flows for each of the three years in the period ended December 31, 2002, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these financial
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
As discussed in Note 15 to the consolidated financial statements, effective
January 1, 2002 the Company changed its method of accounting for goodwill and
other intangible assets.
PricewaterhouseCoopers LLP
Dallas, Texas
February 13, 2003
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2001 and 2002
(In thousands, except share data)
ASSETS 2001 2002
---- ----
Current assets:
Cash and cash equivalents ........................ $ 33,309 $ 12,407
Accounts receivable, less allowance for
doubtful accounts of $841 and $812 .............. 23,422 22,924
Income taxes receivable from affiliates .......... 351 352
Refundable income taxes .......................... 2,032 1,378
Inventories ...................................... 30,902 28,876
Prepaid expenses and other current assets ........ 2,902 3,422
Deferred income taxes ............................ 1,944 1,983
-------- --------
Total current assets ......................... 94,862 71,342
-------- --------
Other assets:
Goodwill ......................................... 38,882 40,729
Other intangible assets .......................... 2,440 2,183
Prepaid rent ..................................... 1,079 426
Other ............................................ 577 233
-------- --------
Total other assets ........................... 42,978 43,571
-------- --------
Property and equipment:
Land ............................................. 4,368 4,344
Buildings ........................................ 29,092 29,452
Equipment ........................................ 89,773 102,347
Construction in progress ......................... 4,618 3,548
-------- --------
127,851 139,691
Less accumulated depreciation .................... 42,815 54,512
-------- --------
Net property and equipment ................... 85,036 85,179
-------- --------
$222,876 $200,092
======== ========
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2001 and 2002
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 2001 2002
---- ----
Current liabilities:
Current maturities of long-term debt ................. $ 56 $ 6
Accounts payable and accrued liabilities ............. 23,168 21,318
Payable to affiliate ................................. 15 --
Income taxes ......................................... 1,000 419
Deferred income taxes ................................ 291 408
--------- ---------
Total current liabilities ........................ 24,530 22,151
--------- ---------
Noncurrent liabilities:
Long-term debt ....................................... 49,000 31,000
Deferred income taxes ................................ 4,441 4,469
Accrued pension costs ................................ 660 --
Deferred gain on sale/leaseback ...................... 1,221 493
--------- ---------
Total noncurrent liabilities ..................... 55,322 35,962
--------- ---------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000 shares
authorized, none issued ............................. -- --
Class A common stock, $.01 par value;
20,000,000 shares authorized; 6,207,180 and 6,219,680
shares issued ....................................... 62 62
Class B common stock, $.01 par value;
10,000,000 shares authorized, issued and outstanding 100 100
Additional paid-in capital ........................... 119,224 119,387
Retained earnings .................................... 50,966 44,049
Accumulated other comprehensive income -
currency translation ................................ (16,013) (10,304)
Treasury stock, at cost - 1,103,900 shares ........... (11,315) (11,315)
--------- ---------
Total stockholders' equity ....................... 143,024 141,979
--------- ---------
$ 222,876 $ 200,092
========= =========
Commitments and contingencies (Notes 1, 11 and 14)
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
Years ended December 31, 2000, 2001 and 2002
(In thousands, except per share data)
2000 2001 2002
---- ---- ----
Net sales ................................... $ 253,294 $ 211,422 $ 196,101
Cost of goods sold .......................... 187,299 167,884 163,181
--------- --------- ---------
Gross margin .......................... 65,995 43,538 32,920
Selling, general and administrative expense . 28,693 28,310 26,713
Restructuring charge ........................ -- 2,742 --
--------- --------- ---------
Operating income ...................... 37,302 12,486 6,207
Gain on sale of plant facility .............. -- 2,246 --
Other general corporate income (expense), net 443 1,009 (910)
Interest expense ............................ (2,302) (2,859) (1,888)
--------- --------- ---------
Income before income taxes and
minority interest .................... 35,443 12,882 3,409
Provision for income taxes .................. 13,390 5,758 2,771
Minority interest in losses ................. (3) -- --
--------- --------- ---------
Net income ............................ $ 22,056 $ 7,124 $ 638
========= ========= =========
Basic and diluted earnings per common share . $ 1.37 $ .47 $ .04
========= ========= =========
Cash dividends per share .................... $ .50 $ .50 $ .50
========= ========= =========
Shares used in the calculation of earnings
per share amounts for:
Basic earnings per share .................. 16,115 15,144 15,110
Dilutive impact of stock options .......... 32 6 8
--------- --------- ---------
Diluted earnings per share ................ 16,147 15,150 15,118
========= ========= =========
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Net income ................................ $ 22,056 $ 7,124 $ 638
-------- ------- -------
Other comprehensive income - currency
translation adjustment:
Pre-tax amount ........................ (5,159) (5,097) 5,643
Less income tax benefit ............... (323) (207) (66)
-------- ------- -------
Total other comprehensive income ...... (4,836) (4,890) 5,709
-------- ------- -------
Comprehensive income ................ $ 17,220 $ 2,234 $ 6,347
======== ======= =======
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Cash flows from operating activities:
Net income .................................. $ 22,056 $ 7,124 $ 638
Depreciation and amortization ............... 12,416 14,769 13,004
Deferred income taxes ....................... 2,310 1,355 (750)
Gain on sale of plant facility .............. -- (2,246) --
Minority interest ........................... (3) -- --
Other, net .................................. (73) 465 604
Change in assets and liabilities:
Accounts receivable ....................... (826) 6,112 1,301
Inventories ............................... (7,421) 4,075 3,052
Accounts payable and accrued liabilities .. 2,746 (3,983) (2,798)
Accounts with affiliates .................. (284) (38) (16)
Income taxes .............................. (1,033) 202 1,561
Other, net ................................ (1,458) (172) 342
-------- -------- --------
Net cash provided by operating activities 28,430 27,663 16,938
-------- -------- --------
Cash flows from investing activities:
Capital expenditures ........................ (23,128) (13,283) (12,703)
Proceeds from sale of plant facility ........ -- 10,000 --
Purchase of business units .................. (9,346) -- --
Other, net .................................. 111 605 32
-------- -------- --------
Net cash used by investing activities ... (32,363) (2,678) (12,671)
-------- -------- --------
Cash flows from financing activities:
Long-term debt:
Borrowings ................................ 20,274 14,919 1,000
Principal payments ........................ (2,454) (6,511) (19,050)
Issuance of common stock .................... 1,027 -- 120
Dividends paid .............................. (8,076) (7,553) (7,555)
Common stock reacquired ..................... (8,665) (2,650) --
Other ....................................... 13 -- --
-------- -------- --------
Net cash provided (used) by financing
activities ............................. 2,119 (1,795) (25,485)
-------- -------- --------
Net increase (decrease) ....................... $ (1,814) $ 23,190 $(21,218)
======== ======== ========
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2000, 2001 and 2002
(In thousands)
2000 2001 2002
---- ---- ----
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing
activities .................................... $ (1,814) $23,190 $(21,218)
Currency translation ........................... (535) 299 316
Balance at beginning of year ..................... 12,169 9,820 33,309
-------- ------- --------
Balance at end of year ........................... $ 9,820 $33,309 $ 12,407
======== ======= ========
Supplemental disclosures:
Cash paid for:
Interest ....................................... $ 2,086 $ 3,238 $ 1,877
Income taxes ................................... 12,562 4,126 2,788
Net assets consolidated - business units acquired:
Cash and cash equivalents ...................... $ -- $ -- $ --
Goodwill ....................................... 4,837 -- --
Other intangible assets ........................ 254 -- --
Other non-cash assets .......................... 7,144 -- --
Liabilities .................................... (2,889) -- --
-------- ------- --------
Cash paid ...................................... $ 9,346 $ -- $ --
======== ======= ========
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2000, 2001 and 2002
(In thousands)
Accumulated other
comprehensive
income -
Additional currency Total
Common stock paid-in Retained translation stockholders'
Class A Class B capital earnings stock Treasury equity
------- ------- ---------- ---------- ------
Balance at December 31, 1999 $61 $100 $118,067 $37,415 $ (6,287) $ - $149,356
Net income - - - 22,056 - - 22,056
Other comprehensive income - - - - (4,836) - (4,836)
Cash dividends - - - (8,076) - - (8,076)
Issuance of common stock 1 - 1,072 - - - 1,073
Common stock reacquired - - - - - (8,665) (8,665)
Other - - 55 - - - 55
--- ---- -------- ------- -------- -------- --------
Balance at December 31, 2000 62 100 119,194 51,395 (11,123) (8,665) 150,963
Net income - - - 7,124 - - 7,124
Other comprehensive income - - - - (4,890) - (4,890)
Cash dividends - - - (7,553) - - (7,553)
Issuance of common stock - - 30 - - - 30
Common stock reacquired - - - - - (2,650) (2,650)
--- ---- -------- ------- -------- -------- --------
Balance at December 31, 2001 62 100 119,224 50,966 (16,013) (11,315) 143,024
Net income - - - 638 - - 638
Other comprehensive income - - - - 5,709 - 5,709
Cash dividends - - - (7,555) - - (7,555)
Issuance of common stock - - 156 - - - 156
Other - - 7 - - 7
--- ---- -------- ------- -------- -------- --------
Balance at December 31, 2002 $62 $100 $119,387 $44,049 $(10,304) $(11,315) $141,979
=== ==== ======== ======= ======== ======== ========
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization. CompX International Inc. (NYSE: CIX) is 69% owned by Valhi,
Inc. (NYSE: VHI) and Valhi's wholly-owned subsidiary Valcor, Inc. at December
31, 2002. The Company manufactures and sells component products (precision ball
bearing slides, security products and ergonomic computer support systems). At
December 31, 2002, Contran Corporation holds, directly or through subsidiaries,
approximately 93% of Valhi's outstanding common stock. Substantially all of
Contran's outstanding voting stock is held by trusts established for the benefit
of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons
is sole trustee. Mr. Simmons, the Chairman of the Board of each of Contran,
Valhi and Valcor, may be deemed to control each of such companies and the
Company.
Management estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amount
of revenues and expenses during the reporting period. Actual results may differ
from previously-estimated amounts under different assumptions or conditions.
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of CompX International Inc. and its
majority-owned subsidiaries. All material intercompany accounts and balances
have been eliminated. Certain prior year amounts have been reclassified to
conform to the current year presentation. The Company has no involvement with
any variable interest entity covered by the scope of FASB Interpretation No. 46,
Consolidation of Variable Interest Entities.
Fiscal year. The Company's operations are reported on a 52 or 53-week
fiscal year. The years ended December 31, 2000, 2001 and 2002 each consisted of
52 weeks, and the year ended December 31, 2003 will be a 52-week year.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related applicable deferred income taxes and minority interest.
Currency transaction gains and losses are recognized in income currently.
Cash and cash equivalents. Cash equivalents consist principally of bank
time deposits and government and commercial notes with original maturities of
three months or less.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer. Shipping terms are
generally F.O.B. shipping point, although in some instances, shipping terms are
F.O.B. destination point (for which sales are recognized when the product is
received by the customer). Amounts charged to customers for shipping and
handling are not material. The related costs incurred for shipping and handling
are also not material.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and potential losses rising from sales to customers based on
a periodic review of these accounts.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market, net of allowance for obsolete and slow-moving inventories.
Inventories are based on average cost or the first-in, first-out method.
Goodwill and other intangible assets. Goodwill represents the excess of
cost over fair value of individual net assets acquired in business combinations
accounted for by the purchase method. Through December 31, 2001, goodwill was
amortized by the straight-line method over not more than 20 years. Upon adoption
of Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and
Other Intangible Assets, effective January 1, 2002, goodwill was no longer
subject to periodic amortization. Goodwill and other intangible assets are
stated net of accumulated amortization. See Notes 5 and 15.
Other intangible assets, consisting of the estimated fair value of certain
patents acquired, have been and will continue to be upon adoption of SFAS No.
142 effective January 1, 2002, amortized by the straight-line method over the
lives of such patents (approximately 11 years remaining at December 31, 2002),
with no assumed residual value at the end of the life of the patents. Other
intangible assets are stated net of accumulated amortization of $1.0 million at
December 31, 2001 and $1.2 million at December 31, 2002. Amortization expense of
intangible assets was $361,000 in 2000, $229,000 in 2001 and $240,000 in 2002,
and is expected to be approximately $250,000 in each of 2003 through 2007.
Through December 31, 2001, when events or changes in circumstances
indicated that goodwill or other intangible assets may be impaired, an
evaluation was performed to determine if an impairment existed. Such events or
circumstances included, among other things, (i) a prolonged period of time
during which the Company's net carrying value of its investment in subsidiaries
whose common stocks are publicly traded was greater than quoted market prices
for such stocks and (ii) significant current and prior periods or current and
projected periods with operating losses related to the applicable business unit.
All relevant factors were considered in determining whether an impairment
existed. If an impairment was determined to exist, goodwill and, if appropriate,
the underlying long-lived assets associated with the goodwill, were written down
to reflect the estimated future discounted cash flows expected to be generated
by the underlying business. Effective January 1, 2002, the Company commenced
assessing impairment of goodwill and other intangible assets in accordance with
SFAS No. 142. See Note 15.
Property, equipment and depreciation. Property and equipment, including
purchased computer software for internal use, are stated at cost. Expenditures
for maintenance, repairs and minor renewals are expensed; expenditures for major
improvements are capitalized. Depreciation for financial reporting purposes is
computed principally by the straight-line method over the estimated useful lives
of 15 to 40 years for buildings and three to 10 years for equipment and
software. Accelerated depreciation methods are used for income tax purposes, as
permitted. Upon sale or retirement of an asset, the related cost and accumulated
depreciation are removed from the accounts and any gain or loss is recognized in
income currently.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. Through December 31, 2001, if the asset being tested for impairment
was acquired in a business combination accounted for by the purchase method, any
goodwill which arose out of that business combination was also considered in the
impairment test if the goodwill related specifically to the acquired asset and
not to other aspects of the acquired business, such as the customer base or
product lines. Effective January 1, 2002, the Company began assessing impairment
of goodwill in accordance with SFAS No. 142, and the Company began assessing
impairment of other long-lived assets (such as property and equipment) in
accordance with SFAS No. 144 Accounting for the Impairment or Disposal of
Long-Lived Assets. SFAS No. 144 retains the fundamental provisions of existing
GAAP with respect to the recognition and measurement of long-lived asset
impairment contained in SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Lived-Lived Assets to be Disposed Of. However, SFAS
No. 144 provides new guidance intended to address certain implementation issues
associated with SFAS No. 121, including expanded guidance with respect to
appropriate cash flows to be used to determine whether recognition of any
long-lived asset impairment is required, and if required how to measure the
amount of the impairment. SFAS No. 144 also requires that any net assets to be
disposed of by sale are to be reported at the lower of carrying value or fair
value less cost to sell, and expands the reporting of discontinued operations to
include any component of an entity with operations and cash flows that can be
clearly distinguished from the rest of the entity. Adoption of SFAS No. 144 did
not have a significant effect on the Company as of January 1, 2002. See Notes 5
and 15.
Self-insurance. The Company is partially self-insured for workers'
compensation and certain employee health benefits and is self-insured for
environmental issues. Stop-loss coverage is purchased by the Company in order to
limit its exposure to any significant levels of workers' compensation or
employee health benefit claims. Self-insured losses are accrued based upon
estimates of the aggregate liability for uninsured claims incurred using certain
actuarial assumptions followed in the insurance industry and the Company's own
historical claims experience.
Derivatives and hedging activities. The Company adopted SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities, as amended,
effective January 1, 2001. Under SFAS No. 133, all derivatives are recognized as
either assets or liabilities and measured at fair value. The accounting for
changes in fair value of derivatives depends upon the intended use of the
derivative, and such changes are recognized either in net income or other
comprehensive income. As permitted by the transition requirements of SFAS No.
133, as amended, the Company has exempted from the scope of SFAS No. 133 all
host contracts containing embedded derivatives which were issued or acquired
prior to January 1, 1999. Other than certain currency forward contracts
discussed below, the Company was not a party to any significant derivative or
hedging instrument covered by SFAS No. 133 at January 1, 2001. The accounting
for such currency forward contracts under SFAS No. 133 is not materially
different from the accounting for such contracts under prior GAAP, and therefore
the impact to the Company of adopting SFAS No. 133 was not material.
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 very nominal portion of foreign exchange rate risk
associated with receivables denominated in a currency other than the holder's
functional currency or similar exchange rate risk associated with future sales.
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. At each
balance sheet date, any such outstanding currency forward contract is
marked-to-market with any resulting gain or loss recognized in income currently
as part of net currency transactions. To manage such exchange rate risk, at
December 31, 2002 the Company held contracts maturing through January 2003 to
exchange an aggregate of U.S. $2.5 million for an equivalent amount of Canadian
dollars at an exchange rate of Cdn. $1.57 per U.S. dollar. At December 31, 2002,
the actual exchange rate was Cdn. $1.57 per U.S. dollar. No such contracts were
held at December 31, 2001.
The Company periodically uses interest rate swaps and other types of
contracts to manage interest rate risk with respect to financial assets or
liabilities. 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.
The Company was not a party to any such contract during 2000, 2001 and 2002.
Income taxes. The Company is a separate United States federal income
taxpayer and is not a member of Contran's consolidated United States federal
income tax group. The Company is however a part of consolidated tax returns
filed by Contran in certain United States state jurisdictions. For such
consolidated state tax returns, intercompany allocations of state tax provisions
are computed on a separate company basis. Payments are made to, or received from
Contran in the amounts that would have been paid to or received from the
respective state tax authority had CompX not been a part of the consolidated
state tax return.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
undistributed earnings of foreign subsidiaries which are not deemed to be
permanently reinvested. The Company periodically evaluates its deferred tax
assets in the various taxing jurisdictions in which it operates and adjusts any
related valuation allowance based on the estimate of the amount of such deferred
tax assets which the Company believes does not meet the "more-likely-than-not"
recognition criteria. Earnings of foreign subsidiaries deemed to be permanently
reinvested aggregated $54 million at December 31, 2001 and $45 million at
December 31, 2002.
Earnings per share. 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. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated approximately
848,000 in 2000, 746,000 in 2001 and 819,000 in 2002.
Stock options. At December 31, 2002, the Company has a stock-based employee
compensation plan, which is described more fully in Note 10. The Company
accounts for stock-based employee compensation related to stock options using
the intrinsic value method in accordance with Accounting Principles Board
Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, and its
various interpretations. Under APBO No. 25, no compensation cost is generally
recognized for fixed stock options in which the exercise price is greater than
or equal to the market price on the grant date. Compensation cost recognized by
the Company related to stock options in accordance with APBO No. 25 has not been
significant in any of the past three years. 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.
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands,
except per share data)
Net income, as reported ....................... $ 22,056 $ 7,124 $ 638
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 .. (1,342) (1,486) (1,572)
-------- ------- -------
Pro forma net income (loss) ................... $ 20,714 $ 5,638 $ (934)
======== ======= =======
Earnings (loss) per share - basic and diluted:
As reported ................................. $ 1.37 $ .47 $ .04
======== ======= =======
Pro forma ................................... $ 1.29 $ .37 $ (.06)
======== ======= =======
Fair value of financial instruments. The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their short-term
nature. The carrying amount of indebtedness approximates fair value due to the
stated interest rate approximating a market rate. These estimated fair value
amounts have been determined using available market information or other
appropriate valuation methodologies.
Other. Advertising costs, expensed as incurred, were $931,000 in 2000,
$1,026,000 in 2001 and $879,000 in 2002. Research and development costs,
expensed as incurred, were $1,082,000 in 2000, $510,000 in 2001 and $659,000 in
2002.
Note 2 - Business units acquired:
In January 2000, the Company acquired substantially all of the operating
assets of Chicago Lock Company for a cash purchase price of $9.4 million, using
borrowings under the Company's revolving credit facility. The Company accounted
for this acquisition by the purchase method of accounting and, accordingly, the
results of operations and cash flows of the business acquired is included in the
Company's consolidated financial statements subsequent to the date of
acquisition. The purchase price for this acquisition has been allocated to the
individual assets acquired and liabilities assumed based upon estimated fair
values.
Note 3 - Business and geographic segments:
The Company's operating segments are defined as components of its
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David Bowers, president and chief executive officer of the
Company. The Company has three operating segments - CompX Security Products,
CompX Waterloo and CompX Regout (formerly called CompX Europe). The CompX
Security Products segment, with manufacturing facilities in South Carolina and
Illinois, manufactures locking mechanisms and other security products for sale
to the office furniture, banking, vending, computer and other industries. The
CompX Waterloo segment, with facilities in Canada, Michigan and Taiwan, and the
CompX Regout segment, with facilities in the Netherlands, both manufacture
and/or distribute a complete line of precision ball bearing slides for use in
office furniture, computer-related equipment, tool storage cabinets and other
applications and ergonomic computer support systems for office furniture.
Because of the similar economic characteristics between the CompX Waterloo and
CompX Regout segments and due to the identical products, customer types,
production processes and distribution methods shared by these two segments, they
have been aggregated into a single reportable segment for segment reporting
purposes.
The chief operating decision maker evaluates segment performance based on
segment operating income, which is defined as income before income taxes,
minority interest and interest expense, exclusive of certain general corporate
income and expense items (including interest income and foreign exchange
transaction gains and losses) and special items. All corporate office operating
expenses are allocated to the two reportable segments based upon the segments'
net sales. The accounting policies of the reportable operating segments are the
same as those described in Note 1. Capital expenditures include additions to
property and equipment, but exclude amounts attributable to business
combinations accounted for by the purchase method. See Note 2.
Segment assets are comprised of all assets attributable to the reportable
segments. Corporate assets are not attributable to the operating segments and
consist primarily of cash and cash equivalents. For geographic information, net
sales are attributable to the place of manufacture (point of origin) and the
location of the customer (point of destination); property and equipment are
attributable to their physical location. At December 31, 2001 and 2002, the net
assets of non-U.S. subsidiaries included in consolidated net assets approximated
$91 million and $82 million, respectively.
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Net sales:
CompX Waterloo/CompX Regout ................. $ 168,276 $ 137,351 $ 122,743
CompX Security Products ..................... 85,018 74,071 73,358
--------- --------- ---------
Total net sales ........................... $ 253,294 $ 211,422 $ 196,101
========= ========= =========
Operating income (loss):
CompX Waterloo/CompX Regout ................. $ 24,822 $ 5,166 $ (1,869)
CompX Security Products ..................... 12,480 7,320 8,076
--------- --------- ---------
Total operating income .................... 37,302 12,486 6,207
Interest expense ............................ (2,302) (2,859) (1,888)
Gain on sale of plant facility .............. -- 2,246 --
Other general corporate income (expense), net 443 1,009 (910)
--------- --------- ---------
Income before income taxes and
minority interest ........................ $ 35,443 $ 12,882 $ 3,409
========= ========= =========
Depreciation and amortization:
CompX Waterloo/CompX Regout ................. $ 7,697 $ 9,136 $ 8,235
CompX Security Products ..................... 4,719 5,633 4,769
--------- --------- ---------
$ 12,416 $ 14,769 $ 13,004
========= ========= =========
Capital expenditures:
CompX Waterloo/CompX Regout ................. $ 13,611 $ 6,831 $ 11,121
CompX Security Products ..................... 9,517 6,452 1,582
--------- --------- ---------
$ 23,128 $ 13,283 $ 12,703
========= ========= =========
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Net sales:
Point of origin:
Canada .......................... $ 99,088 $ 81,326 $ 69,803
United States ................... 106,294 88,302 86,432
The Netherlands ................. 35,767 32,216 29,626
Taiwan .......................... 12,145 9,578 10,240
-------- -------- --------
$253,294 $211,422 $196,101
======== ======== ========
Point of destination:
United States ................... $159,658 $130,534 $126,182
Canada .......................... 43,903 35,475 29,601
Europe .......................... 34,858 37,097 33,115
Other ........................... 14,875 8,316 7,203
-------- -------- --------
$253,294 $211,422 $196,101
======== ======== ========
December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Total assets:
CompX Waterloo/CompX Regout ........ $131,707 $128,502 $111,271
CompX Security Products ............ 90,321 92,503 87,795
Corporate and eliminations ......... 1,644 1,871 1,026
-------- -------- --------
$223,672 $222,876 $200,092
======== ======== ========
Goodwill:
CompX Waterloo/CompX Regout ........ $ 17,055 $ 15,139 $ 16,986
CompX Security Products ............ 25,158 23,743 23,743
-------- -------- --------
$ 42,213 $ 38,882 $ 40,729
======== ======== ========
Net property and equipment:
United States ...................... $ 47,555 $ 48,863 $ 46,251
Canada ............................. 24,410 23,420 23,046
The Netherlands .................... 17,259 7,323 10,034
Taiwan ............................. 5,735 5,430 5,848
-------- -------- --------
$ 94,959 $ 85,036 $ 85,179
======== ======== ========
Note 4 - Inventories:
December 31,
2001 2002
---- ----
(In thousands)
Raw materials ............................ $ 9,677 $ 6,573
Work in process .......................... 12,619 12,602
Finished products ........................ 8,494 9,532
Supplies ................................. 112 169
------- -------
$30,902 $28,876
Note 5 - Goodwill:
Changes in the carrying amount of goodwill during the past three years is
presented in the table below. Goodwill was generated principally from
acquisitions of certain business units during 1998, 1999 and 2000.
CompX
CompX Waterloo/ Security
CompX Regout Products Total
(In millions)
Balance at December 31, 1999 ............... $19.9 $21.8 $41.7
Goodwill acquired/adjusted during
the year .................................. (.6) 4.7 4.1
Changes in currency
exchange rates ............................ (1.2) -- (1.2)
Periodic amortization ...................... (1.0) (1.4) (2.4)
----- ----- -----
Balance at December 31, 2000 ............... 17.1 25.1 42.2
Changes in currency
exchange rates ............................ (1.0) -- (1.0)
Periodic amortization ...................... (.9) (1.4) (2.3)
----- ----- -----
Balance at December 31, 2001 ............... 15.2 23.7 38.9
Changes in currency
exchange rates ............................ 1.8 -- 1.8
----- ----- -----
Balance at December 31, 2002 ............... $17.0 $23.7 $40.7
===== ===== =====
Upon adoption of SFAS No. 142 effective January 1, 2002, the goodwill
related to the CompX Security Products and CompX Waterloo/CompX Regout segments
was assigned to reporting units (as defined in SFAS No. 142) consisting of the
reportable operating segments to which the goodwill relates.
Note 6 - Accounts payable and accrued liabilities:
December 31,
2001 2002
---- ----
(In thousands)
Accounts payable ............................... $ 9,459 $ 9,106
Accrued liabilities:
Employee benefits ............................ 6,619 7,065
Insurance .................................... 573 478
Royalties .................................... 223 246
Restructuring ................................ 2,278 540
Deferred gain on sale/leaseback .............. 479 805
Other ........................................ 3,537 3,078
------- -------
$23,168 $21,318
In 2001, the Company recognized a charge of $2.7 million related to a
consolidation and rationalization of CompX's European operations. This
restructuring effort included headcount reductions of about 35 employees at the
Company's Maastricht, the Netherlands facility, substantially all of which had
been implemented by December 31, 2001. As adjusted for changes in currency
exchange rates, through December 31, 2002 approximately $2.4 million of the
total charge has been paid. The remaining $.6 million was paid in January 2003.
Note 7 - Indebtedness:
December 31,
2001 2002
---- ----
(In thousands)
Revolving bank credit facility ................. $49,000 $31,000
Other .......................................... 56 6
------- -------
49,056 31,006
Less current portion ........................... 56 6
------- -------
$49,000 $31,000
At December 31, 2002, the Company had a $100 million unsecured revolving
bank credit facility expiring in February 2003 which bore interest at LIBOR plus
a margin resulting in an interest rate of 2.5% at December 31, 2002. In January
2003, this credit facility was replaced with a secured $47.5 million revolving
bank credit facility which bears interest at the Company's option, of either;
(i) the bank's prime rate plus the applicable basis point margin or (ii) LIBOR
plus the applicable basis point margin (resulting in a weighted-average interest
rate of 3.3% at loan inception). Borrowings are available for the Company's
general corporate purposes, including acquisitions, and are due no later than
January 2006. The credit facility is collateralized by substantially all of the
Company's United States assets and by at least 65% of the ownership interests in
the Company's first-tier foreign subsidiaries. The facility contains certain
covenants and restrictions customary in lending transactions of this type, which
are similar to the covenants in the former agreement and, among other things,
restricts the ability of CompX and its subsidiaries to incur debt, incur liens,
pay dividends, merge or consolidate with, or transfer all or substantially all
of their assets to another entity. The facility also requires maintenance of
specified levels of net worth (as defined). In the event of a change of control
of CompX, as defined, the lenders would have the right to accelerate the
maturity of the facility. CompX would also be required under certain conditions
to use the net proceeds from the sale of assets outside the ordinary course of
business to reduce outstanding borrowings under the facility, and such a
transaction would also result in a permanent reduction of the size of the
facility.
Amounts outstanding at December 31, 2002 under the prior facility are
classified as a noncurrent liability because those borrowings were refinanced on
a long-term basis under the terms of the new facility. At December 31, 2002, the
equivalent of $16.5 million would have been available for borrowing under the
terms of the new facility. Approximately $6.3 million was available for dividend
under the terms of the prior credit facility at December 31, 2002. Under the
terms of the new facility, the Company is permitted to pay dividends and/or
repurchase its common stock in an amount equal to the sum of (i) the current
dividend rate of $.125 per share in any calendar quarter, not to exceed $8.0
million in any calendar year, plus (ii) $6.0 million plus 50% of aggregate net
income over the term of the credit facility.
Aggregate maturities of long-term debt at December 31, 2002 are shown in
the table below.
Years ending December 31, Amount
(In thousands)
2003 $ 6
2006 31,000
-------
$31,006
Note 8 - Employee benefit plans:
Defined contribution plans. The Company maintains various defined
contribution plans with Company contributions based on matching or other
formulas. Defined contribution plan expense approximated $1,608,000 in 2000,
$1,720,000 in 2001 and $1,748,000 in 2002.
Defined benefit plans. Through January 1, 2001, the Company maintained a
defined benefit pension plan covering substantially all full-time employees of
Thomas Regout B.V. Variances from actuarially assumed rates resulted in
increases or decreases in accumulated pension obligations, pension expense and
funding requirements. As of January 1, 2001, the Company ceased providing future
benefits under the plan, thus reducing certain pension benefit obligations. In
connection with this curtailment, the Company recognized a curtailment gain of
approximately $116,000 in 2001. As of December 31, 2001, certain obligations
related to the terminated plan had not yet been fully settled and are reflected
in accrued pension costs. In 2002, such obligations were settled and the Company
reported a settlement gain of $677,000. See Note 12.
The rates used in determining the actuarial present value of benefit
obligations are presented below:
December 31,
2001
Discount rate 6.25%
Rate of increase in future compensation levels Not applicable
Long-term rate of return on assets 4.0 %
The funded status of the Company's defined benefit pension plans, the
components of net periodic defined benefit pension cost and the rates used in
determining the actuarial present value of benefit obligations are presented in
the tables below.
Years ended December 31,
2001 2002
---- ----
(In thousands)
Change in projected benefit obligations ("PBO"):
PBO at beginning of the year ................... $ 2,301 $ 1,279
Actuarial gains ................................ (766) --
Curtailment gain ............................... (116) --
Settlement ..................................... -- (1,259)
Change in foreign exchange rates ............... (140) (20)
------- -------
PBO at end of the year ..................... $ 1,279 $ --
======= =======
Years ended December 31,
2001 2002
---- ----
(In thousands)
Change in fair value of plan assets:
Fair value of plan assets at beginning of
the year .......................................... $ 1,055 $ 1,019
Actual return on plan assets ....................... 61 --
Employer contributions ............................. -- 240
Settlement ......................................... -- (1,259)
Change in foreign exchange rates ................... (97) --
------- -------
Fair value of plan assets at end of year ....... $ 1,019 $ --
======= =======
Funded status at year end:
Plan assets less than PBO .......................... $ 260 $ --
Unrecognized gains ................................. 640 --
------- -------
$ 900 $ --
======= =======
Amounts recognized in the balance sheet -
accrued pension costs:
Current .......................................... $ 240 $ --
Noncurrent ....................................... 660 --
------- -------
$ 900 $ --
======= =======
Years ended December 31,
------------------------------
2000 2001 2002
---- ---- ----
(In thousands)
Net periodic pension cost (benefit):
Service cost benefits ...................... $ 131 $-- $-
Interest cost on PBO ....................... 80 -- --
Expected return on plan assets ............. (35) (61) --
Unrecognized gains ......................... -- 19 --
----- ---- ----
$ 176 $(42) $-
===== ==== ====
Note 9 - Income taxes:
The components of pre-tax income and the provision for income taxes, the
difference between the provision for income taxes and the amount that would be
expected using the U.S. federal statutory income tax rate of 35% and the
comprehensive provision for income taxes are presented below.
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Components of pre-tax income (loss):
United States ............... $ 7,746 $ (998) $(1,913)
Non-U.S ..................... 27,697 13,880 5,322
------- -------- -------
$35,443 $ 12,882 $ 3,409
======= ======== =======
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Provision for income taxes:
Currently payable (refundable):
U.S. federal and state ................... $ 2,385 $ (844) $ 1,128
Foreign .................................. 8,695 5,247 2,394
-------- ------- -------
11,080 4,403 3,522
-------- ------- -------
Deferred income taxes (benefit):
U.S ...................................... 1,034 1,941 (114)
Foreign .................................. 1,276 (586) (637)
-------- ------- -------
2,310 1,355 (751)
-------- ------- -------
$ 13,390 $ 5,758 $ 2,771
======== ======= =======
Expected tax expense, at the U.S. federal
statutory income tax rate of 35% ............ $ 12,405 $ 4,509 $ 1,193
Non-U.S. tax rates ........................... (90) (353) (290)
Incremental U.S. tax on earnings of
foreign subsidiary .......................... 198 330 1,099
No tax benefit for goodwill amortization ..... 610 693 --
State income taxes and other, net ............ 267 579 769
-------- ------- -------
$ 13,390 $ 5,758 $ 2,771
======== ======= =======
Comprehensive provision for income tax
benefit allocable to:
Pre-tax income ............................. $ 13,390 $ 5,758 $ 2,771
Other comprehensive income -
currency translation ...................... (323) (207) (66)
-------- ------- -------
$ 13,067 $ 5,551 $ 2,705
======== ======= =======
The components of net deferred tax assets (liabilities) are summarized
below.
December 31,
2001 2002
---- ----
(In thousands)
Tax effect of temporary differences related to:
Inventories ............................................ $ 630 $ 575
Property and equipment ................................. (7,890) (8,510)
Accrued liabilities and other deductible differences ... 2,987 2,087
Tax loss and credit carryforwards ...................... 4,831 5,769
Other taxable differences .............................. (3,346) (2,815)
Valuation allowance .................................... -- --
------- -------
$(2,788) $(2,894)
======= =======
Net current deferred tax assets .......................... $ 1,944 $ 1,983
Net current deferred tax liabilities ..................... (291) (408)
Net noncurrent deferred tax liabilities .................. (4,441) (4,469)
------- -------
$(2,788) $(2,894)
======= =======
At December 31, 2002, the Company has net operating loss ("NOL")
carryforwards, which expire in 2007 through 2018, of approximately $8.4 million
for U.S. federal income tax purposes. The NOL carryforwards arose from the
acquisition of Thomas Regout USA, Inc. These losses may only be used to offset
future taxable income of the acquired subsidiary and are not available to offset
taxable income of other subsidiaries. Utilization of certain portions of the NOL
carryforward is limited to approximately $400,000 annually. The Company utilized
none of such NOL carryforward in 2000, 2001 or 2002. At December 31, 2002, the
Company also has the equivalent of approximately $5.8 million of tax loss
carryforwards in the Netherlands with no expiration date. The Company believes
that it is more-likely-than-not that all such NOLs will be utilized to reduce
future income tax liabilities. Consequently, no valuation allowance has been
recorded to offset the deferred tax asset related to these NOLs.
Note 10 - Stockholders' equity:
Shares of common stock
--------------------------------------------------
Class A Class B
------------------------------------ -----------
Issued and
Issued Treasury Outstanding outstanding
Balance at December 31, 1999 6,147,380 -- 6,147,380 10,000,000
Issued ..................... 57,300 -- 57,300 --
Reacquired ................. -- (844,300) (844,300) --
--------- ---------- ---------- ----------
Balance at December 31, 2000 6,204,680 (844,300) 5,360,380 10,000,000
Issued ..................... 2,500 -- 2,500 --
Reacquired ................. -- (259,600) (259,600) --
--------- ---------- ---------- ----------
Balance at December 31, 2001 6,207,180 (1,103,900) 5,103,280 10,000,000
Issued ..................... 12,500 -- 12,500 --
--------- ---------- ---------- ----------
Balance at December 31, 2002 6,219,680 (1,103,900) 5,115,780 10,000,000
========= ========== ========== ==========
Class A and Class B common stock. The shares of Class A Common Stock and
Class B Common Stock are identical in all respects, except for certain voting
rights and certain conversion rights in respect of the shares of the Class B
Common Stock. Holders of Class A Common Stock are entitled to one vote per
share. Valcor, which holds all of the outstanding shares of Class B Common
Stock, is entitled to one vote per share in all matters except for election of
directors, for which Valcor is entitled to ten votes per share. Holders of all
classes of common stock entitled to vote will vote together as a single class on
all matters presented to the stockholders for their vote or approval, except as
otherwise required by applicable law. Each share of Class A Common Stock and
Class B Common Stock have an equal and ratable right to receive dividends to be
paid from the Company's assets when, and if declared by the Board of Directors.
In the event of the dissolution, liquidation or winding up of the Company, the
holders of Class A Common Stock and Class B Common Stock will be entitled to
share equally and ratably in the assets available for distribution after
payments are made to the Company's creditors and to the holders of any preferred
stock of the Company that may be outstanding at the time. Shares of the Class A
Common Stock have no conversion rights. Under certain conditions, shares of
Class B Common Stock will convert, on a share-for-share basis, into shares of
Class A Common Stock.
Reacquired common stock. The Company's Board of Directors has authorized
the Company to purchase up to approximately 1.5 million shares of its common
stock in open market or privately-negotiated transactions at unspecified prices
and over an unspecified period of time. As of December 31, 2002, the Company had
purchased approximately 1,104,000 shares for an aggregate of $11.3 million
pursuant to such authorization.
Incentive compensation plan. The CompX International Inc. 1997 Long-Term
Incentive Plan provides for the award or grant of stock options, stock
appreciation rights, performance grants and other awards to employees and other
individuals providing services to the Company. Up to 1.5 million shares of Class
A Common Stock may be issued pursuant to the plan. Generally, employee stock
options are granted at prices not less than the market price of the Company's
stock on the date of grant, vest over five years and expire ten years from the
date of grant.
The following table sets forth changes in outstanding options during the
past three years.
Amount
Exercise payable
price per upon
Shares share exercise
(In thousands, except
per share amounts)
Outstanding at December 31, 1999 658 $15.88 -$20.00 $12,784
Granted 292 12.50 - 19.63 5,360
Exercised (57) 17.94 - 20.00 (1,073)
Canceled (171) 15.88 - 20.00 (3,290)
---- -------------- -------
Outstanding at December 31, 2000 722 12.50 - 20.00 13,781
Granted 330 10.00 - 13.00 4,181
Canceled (196) 13.00 - 20.00 (3,691)
---- -------------- -------
Outstanding at December 31, 2001 856 10.00 - 20.00 14,271
Granted 25 11.00 - 14.30 328
Exercised (10) 12.06 (120)
Canceled (107) 11.59 - 20.00 (1,484)
---- -------------- -------
Outstanding at December 31, 2002 764 $10.00 -$20.00 $12,995
==== ============== =======
Outstanding options at December 31, 2002 represent approximately 5% of the
Company's total outstanding shares of common shares at that date and expire
through 2012 with a weighted-average remaining term of 7 years. At December 31,
2002, options to purchase 378,000 of the Company's shares were exercisable at
prices ranging from $10.00 to $20.00 per share, or an aggregate amount payable
upon exercise of $7.0 million, with a weighted-average exercise price of $16.74
per share. These exercisable options are exercisable through 2012. All of such
exercisable options are exercisable at prices higher than the Company's December
31, 2002 market price of $8.37 per share. At December 31, 2002, options to
purchase 149,000 shares are scheduled to become exercisable in 2003 and an
aggregate of 496,000 shares were available for future grants.
Other. The pro forma information included in Note 1, required by SFAS No.
123, Accounting for Stock-Based Compensation, is based on an estimation of the
fair value of CompX options issued subsequent to January 1, 1998 (the first time
the Company granted stock options). The weighted-average fair values of CompX
options granted during 2000, 2001 and 2002 were $7.86, $4.53 and $5.05 per
share, respectively. The fair values of such options were calculated using the
Black-Scholes stock option valuation model with the following weighted-average
assumptions: stock price volatility of 37% to 45%, risk-free rates of return of
5.1% to 6.9%, dividend yields of nil to 5.0% and an expected term of 10 years.
The Black-Scholes model was not developed for use in valuing employee stock
options, but was developed for use in estimating the fair value of traded
options that have no vesting restrictions and are fully transferable. In
addition, it requires the use of subjective assumptions including expectations
of future dividends and stock price volatility. Such assumptions are only used
for making the required fair value estimate and should not be considered as
indicators of future dividend policy or stock price appreciation. Because
changes in the subjective assumptions can materially affect the fair value
estimate and because employee stock options have characteristics significantly
different from those of traded options, the use of the Black-Scholes stock
option valuation model may not provide a reliable estimate of the fair value of
employee stock options.
For purposes of this pro forma disclosure, the estimated fair value of
options is amortized to expense over the options' vesting period. Such pro forma
impact on net income and basic and dilutive earnings per share is not
necessarily indicative of future effects on net income or earnings per share.
Note 11 - Gain on sale of plant facility:
In 2001, the Company recorded a $2.2 million pre-tax gain related to the
sale/leaseback of its manufacturing facility in the Netherlands. Pursuant to the
sale/leaseback, CompX sold the manufacturing facility with a net carrying value
of $8.2 million for $10.0 million cash consideration in December 2001, and CompX
simultaneously entered into a leaseback of the facility with a nominal monthly
rental for approximately 30 months. CompX has the option to extend the leaseback
period for up to an additional two years with monthly rentals of $40,000 to
$100,000. CompX may terminate the leaseback at any time without penalty. In
addition to the cash received up front, CompX included an estimate of the fair
market value of the monthly rental during the nominal-rental leaseback period as
part of the sale proceeds. A portion of the gain from the sale of the facility
after transaction costs, equal to the present value of the monthly rentals over
the expected leaseback period (including the fair market value of the monthly
rental during the nominal-rental leaseback period), was deferred and is being
amortized into income over the expected leaseback period. CompX is recognizing
rental expense over the leaseback period, including amortization of the prepaid
rent consisting of the estimated fair market value of the monthly rental during
the nominal-rental leaseback period. Pursuant to the agreement, CompX is also
obligated to acquire approximately 10 acres from the municipality of Maastricht
for approximately $2.1 million within the next two years.
Note 12 - Other general corporate income (expense), net:
Years ended December 31,
2000 2001 2002
---- ---- ----
(In thousands)
Net foreign currency transaction gain (loss) .. $ (117) $ 636 $ (865)
Interest income ............................... 569 574 381
Defined benefit plan curtailment gain ......... -- 116 --
Defined benefit plan settlement gain .......... -- -- 677
Gain (loss) on disposal of property and
equipment .................................... 27 (126) (1,193)
Other income (expense), net ................... (36) (191) 90
------- ------- -------
$ 443 $ 1,009 $ (910)
======= ======= =======
In 2002, losses on disposal of property and equipment included $1,047,000
related to the retooling of the Company's precision slide manufacturing facility
in Byron Center, Michigan. The remainder of the charges for retooling are
recorded as cost of goods sold and relate to the cost of moving and installing
machinery and equipment as well as the disposal of obsolete inventory.
Note 13 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
It is the policy of the Company to engage in transactions with related
parties on terms, in the opinion of the Company, no less favorable to the
Company than could be obtained from unrelated parties.
Under the terms of various Intercorporate Service Agreements ("ISAs") with
Contran, Valhi and NL Industries, Inc., a majority-owned subsidiary of Valhi,
Contran, Valhi and NL have performed certain management, tax planning, financial
and administrative services for the Company on a fee basis over the past three
years. Such fees are based upon estimates of time devoted to the affairs of the
Company by individual Contran, Valhi or NL employees and the compensation of
such persons. Because of the large number of companies affiliated with Contran,
the Company believes it benefits from cost savings and economies of scale gained
by not having certain management, financial and administrative staffs duplicated
at each entity, thus allowing certain individuals to provide services to
multiple companies but only be compensated by one entity. These ISAs are
reviewed and approved by the applicable independent directors of the companies
that are parties to the agreement. In addition, certain occupancy and related
office services are provided based upon square footage occupied. Fees pursuant
to these agreements aggregated $689,000 in 2000, $1,245,000 in 2001 and
$1,744,000 in 2002.
Certain of the Company's insurance coverages that were reinsured in 2000,
2001 and 2002 were arranged for and brokered by EWI Re, Inc. Parties related to
Contran own all of the outstanding common stock of EWI. Through December 31,
2000, a son-in-law of Harold C. Simmons managed the operations of EWI.
Subsequent to December 31, 2000, and pursuant to an agreement that, as amended,
may be terminated with 90 days' written notice by either party, such son-in-law
provides advisory services to EWI as requested by EWI, for which such son-in-law
is paid $11,875 per month and receives certain other benefits under EWI's
benefit plans. Such son-in-law is also currently the Chairman of the Board of
EWI. The Company generally does not compensate EWI directly for insurance, but
understands that, consistent with insurance industry practice, EWI receives a
commission for its services from the insurance underwriters.
Through January 2002, an entity controlled by one of Harold C. Simmons'
daughters owned a majority of EWI, and Contran owned all or substantially all of
the remainder of EWI. In January 2002, NL purchased EWI from its previous owners
for an aggregate cash purchase price of approximately $9 million, and EWI became
a wholly-owned subsidiary of NL. The purchase was approved by a special
committee of NL's board of directors consisting of two of its independent
directors, and the purchase price was negotiated by the special committee based
upon its consideration of relevant factors, including but not limited to due
diligence performed by independent consultants and an appraisal of EWI conducted
by an independent third party selected by the special committee.
The Company and other entities related to Contran participate in a combined
risk management program. Net charges from related parties related to this buying
program, principally charges for insuring property and other risks, aggregated
$563,000 in 2000, $889,000 in 2001 and $1,094,000 in 2002. These fees and
charges are principally pass-through in nature.
Note 14 - Commitments and contingencies:
Legal proceedings. The Company is involved, from time to time, in various
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to its business. The Company currently
believes that the disposition of all claims and disputes, individually or in the
aggregate, if any, should not have a material adverse effect on the Company's
consolidated financial condition, results of operations or liquidity.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
The Company's policy is to comply with environmental laws and regulations at all
of its plants and to continually strive to improve environmental performance in
association with applicable industry initiatives. The Company believes that its
operations are in substantial compliance with applicable requirements of
environmental laws. From time to time, the Company may be subject to
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs.
Income taxes. The Company is undergoing examinations of certain of its
income tax returns, and tax authorities have or may propose tax deficiencies.
The Company believes that it has adequately provided accruals for additional
income taxes and related interest expense which may ultimately result from such
examinations and believes that the ultimate disposition of all such examinations
should not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
Concentration of credit risk. The Company's products are sold primarily in
North America and Europe to original equipment manufacturers. The ten largest
customers accounted for approximately 35%, 36% and 30% of sales in 2000, 2001
and 2002, respectively, with no single customer accounting for more than 10% of
sales.
Other. Royalty expense was $1,073,000 in 2000, $672,000 in 2001 and
$708,000 in 2002. Royalties relate principally to certain products manufactured
in Canada and sold in the United States under the terms of a third-party patent
license agreement.
Rent expense, principally for equipment, was $1,072,000 in 2000, $1,861,000
in 2001 and $1,009,000 in 2002. At December 31, 2002, future minimum rentals
under noncancellable operating leases are approximately $662,000 in 2003,
$399,000 in 2004, $292,000 in 2005, $190,000 in 2006 and $22,000 in 2007.
Firm purchase commitments for capital projects in process at December 31,
2002 approximated $1.4 million.
Note 15 - Accounting principles newly adopted in 2002:
Goodwill. The Company adopted SFAS No. 142, Goodwill and Other Intangible
Assets, effective January 1, 2002. Under SFAS No. 142, goodwill, is no longer
amortized on a periodic basis. Goodwill is subject to an impairment test to be
performed at least on an annual basis, and such impairment reviews may result in
future periodic write-downs charged to earnings. Under the transition provisions
of SFAS No. 142, all goodwill existing as of June 30, 2001 ceased to be
periodically amortized as of January 1, 2002, and all goodwill arising in a
purchase business combination completed on or after July 1, 2001 was not
periodically amortized from the date of such combination.
As discussed in Note 5, the Company has assigned its goodwill to two
reporting units (as that term is defined in SFAS No. 142). Goodwill was assigned
to two reporting units attributable to the two operating segments, one
consisting of CompX's security products operations and the other consisting of
CompX's ergonomic products and slide products operations. Under SFAS No. 142,
such goodwill will be deemed to not be impaired if the estimated fair value of
the applicable reporting unit exceeds the respective net carrying value of such
reporting unit, including the allocated goodwill. If the fair value of the
reporting unit is less than carrying value, then a goodwill impairment loss
would be recognized equal to the excess, if any, of the net carrying value of
the reporting unit goodwill over its implied fair value (up to a maximum
impairment equal to the carrying value of the goodwill). The implied fair value
of reporting unit goodwill would be the amount equal to the excess of the
estimated fair value of the reporting unit over the amount that would be
allocated to the tangible and intangible net assets of the reporting unit
(including unrecognized intangible assets) as if such reporting unit had been
acquired in a purchase business combination accounted for in accordance with
GAAP as of the date of the impairment testing.
In determining the estimated fair value of the reporting units, the Company
uses appropriate valuation techniques, such as discounted cash flows, to
estimate the fair value of the two reporting units. The Company completed its
initial, transitional goodwill impairment analysis under SFAS No. 142 as of
January 1, 2002, and no goodwill impairments were deemed to exist as of such
date. Starting in 2002, in accordance with the requirements of SFAS No. 142, the
Company reviews the goodwill of its two reporting units for impairment during
the third quarter of each year. Goodwill will also be reviewed for impairment at
other times during each year when events or changes in circumstances indicate
that an impairment might be present. No goodwill impairments were deemed to
exist as a result of the Company's impairment review completed during the third
quarter of 2002.
The following table presents what the Company's consolidated net income,
and related per share amounts, would have been in 2000 and 2001 if the goodwill
amortization included in the Company's reported consolidated net income had not
been recognized.
Years ended December 31,
2000 2001 2002
---- ---- ----
(In millions,
except per share data)
Net income, as reported ....................... $ 22.1 $ 7.1 $ .6
Goodwill amortization ......................... 2.4 2.3 --
Incremental income taxes ...................... -- -- --
------ ------ ------
Adjusted net income ......................... $ 24.5 $ 9.4 $ .6
====== ====== ======
Basic and diluted net income per share,
as reported .................................. $ 1.37 $ .47 $ .04
Goodwill amortization ......................... .14 .15 --
Incremental income taxes ...................... -- -- --
------ ------ ------
Adjusted basic and diluted net
income per share ........................... $ 1.51 $ .62 $ .04
====== ====== ======
Impairment of long-lived assets. The Company adopted SFAS No. 144,
effective January 1, 2002. SFAS No. 144 retains the fundamental provisions of
existing GAAP with respect to the recognition and measurement of long-lived
asset impairment contained in SFAS No. 121. However, SFAS No. 144 provides new
guidance intended to address certain implementation issues associated with SFAS
No. 121, including expanded guidance with respect to appropriate cash flows to
be used to determine whether recognition of any long-lived asset impairment is
required, and if required how to measure the amount of the impairment. SFAS No.
144 also requires that net assets to be disposed of by sale are to be reported
at the lower of carrying value or fair value less cost to sell, and expands the
reporting of discontinued operations to include any component of an entity with
operations and cash flows that can be clearly distinguished from the rest of the
entity. Adoption of SFAS No. 144 did not have a significant impact on the
Company.
Note 16 - Accounting principles not yet adopted:
Asset retirement obligations. The Company will adopt SFAS No. 143,
Accounting for Asset Retirement Obligations, on January 1, 2003. Under SFAS No.
143, the fair value of a liability for an asset retirement obligation covered
under the scope of SFAS No. 143 would be recognized in the period in which the
liability is incurred, with an offsetting increase in the carrying amount of the
related long-lived asset. Over time, the liability would be accreted to its
present value, and the capitalized cost would be depreciated over the useful
life of the related asset. Upon settlement of the liability, an entity would
either settle the obligation for its recorded amount or incur a gain or loss
upon settlement. The Company does not have any asset retirement obligations
covered by the scope of SFAS No. 143, and therefore adoption of such standard
did not have a significant effect on the Company as of January 1, 2003.
The Company will adopt SFAS No. 146, Accounting for Costs Associated with
Exit or Disposal Activities, on January 1, 2003 for exit or disposal activities
initiated on or after the date of adoption. Under SFAS No. 146, costs associated
with exit activities, as defined, that are covered by the scope of SFAS No. 146
will be recognized and measured initially at fair value, generally in the period
in which the liability is incurred. Costs covered by the scope of SFAS No. 146
include termination benefits provided to employees, costs to consolidate
facilities or relocate employees, and costs to terminate contracts (other than a
capital lease). Under existing GAAP, a liability for such an exit cost is
recognized at the date an exit plan is adopted, which may or may not be the date
at which the liability has been incurred.
Guarantees. The Company has no guarantees covered by the disclosure
requirements of FIN No. 45, Guarantor's Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of Others, as of
December 31, 2002. As required by the transition provisions of FIN No. 45,
beginning in 2003 the Company will adopt the recognition and initial measurement
provisions of this FIN on a prospective basis for any guarantees issued or
modified after December 31, 2002.
Note 17 - Quarterly results of operations (unaudited):
Quarter ended
----------------------
March 31 June 30 Sept. 30 Dec. 31
---- ---- ---- ----
(In millions, except per share amounts)
2001:
Net sales ............................... $ 59.6 $ 53.4 $ 51.5 $ 47.0
Operating income (loss) ................. 6.8 5.3 4.1 (3.8)
Net income (loss) ....................... 3.7 2.7 2.1 (1.4)
Basic and diluted earnings (loss)
per share .............................. $ .24 $ .18 $ .14 $ (.09)
2002:
Net sales ............................... $ 48.6 $ 51.0 $ 48.8 $ 47.7
Operating income (loss) ................. 2.5 2.7 1.3 (.3)
Net income (loss) ....................... 1.3 .8 .2 (1.8)
Basic and diluted earnings (loss)
per share .............................. $ .09 $ .05 $ .02 $ (.12)
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted-average number of shares
used in the per share computations.
During the fourth quarter of 2002, the Company recorded the following
significant adjustments:
o A $1.6 million pre-tax charge related to a re-tooling of the Company's
precision slide manufacturing facility in Byron Center, Michigan. $1.0
million of such charge was non-cash in nature and is reflected in other
general corporate income (expenses), net, with the remainder reflected in
cost of goods sold.
o A $1.9 million pre-tax charge, recorded as cost of goods sold, related to
various changes in estimates with respect to obsolete and slow-moving
inventory, inventory overhead absorption rates and other items.
Approximately $1.3 million of this charge related to the CompX
Waterloo/CompX Regout segment, with the remaining $.6 million relating to
the CompX Security Products segment.
The aggregate effect of these fourth quarter 2002 adjustments was a pre-tax
charge of $3.5 million ($2.3 million, or $.15 per diluted share, net of income
taxes).
During the fourth quarter of 2001, the Company recorded the following
significant adjustments:
o A $2.7 million pre-tax restructuring charge related to CompX's European
operations. See Note 6.
o A $2.2 million pre-tax gain on the sale/leaseback of its manufacturing
facility located in Maastricht, the Netherlands. See Note 11.
o A $3.0 million pre-tax charge related to changes in estimates with respect
to reserves for obsolete and slow-moving inventory and other items.
Approximately $2.1 million of this charge related to the CompX Security
Products segment with the remaining $.9 million relating to the CompX
Waterloo/CompX Regout segment.
The aggregate effect of these fourth quarter 2001 adjustments was a pre-tax
charge of $3.5 million ($2.0 million, or $.13 per diluted share, net of income
taxes).
REPORT OF INDEPENDENT ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE
To the Stockholders and Board of Directors of CompX International Inc.:
Our audits of the consolidated financial statements referred to in our
report dated February 13, 2003, appearing on page F-2 of this 2002 Annual Report
on Form 10-K of CompX International Inc., also included an audit of the
financial statement schedule listed in the index on page F-1 of this Form 10-K.
In our opinion, this financial statement schedule presents fairly, in all
material respects, the information set forth therein when read in conjunction
with the related consolidated financial statements.
PricewaterhouseCoopers LLP
Dallas, Texas
February 13, 2003
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
Balance at charged to Balance
beginning costs and Net Currency at end
Description of year expenses deductions translation of year
------------------ --------- ---------- ---------- ----------- -------
Year ended December 31, 2000:
Allowance for doubtful accounts ....... $ 725 $ (123) $ (79) $ (36) $ 487
====== ======= ======= ===== ======
Amortization of goodwill .............. $2,730 $ 2,390 $ -- $ (55) $5,065
====== ======= ======= ===== ======
Amortization of other intangible assets $ 426 $ 361 $ -- $ (2) $ 785
====== ======= ======= ===== ======
Year ended December 31, 2001:
Allowance for doubtful accounts ....... $ 487 $ 636 $ (296) $ 14 $ 841
====== ======= ======= ===== ======
Amortization of goodwill .............. $5,065 $ 2,304 $ -- $ (75) $7,294
====== ======= ======= ===== ======
Amortization of other intangible assets $ 785 $ 229 $ -- $ (4) $1,010
====== ======= ======= ===== ======
Year ended December 31, 2002:
Allowance for doubtful accounts ....... $ 841 $ 458 $ (541) $ 54 $ 812
====== ======= ======= ===== ======
Amortization of goodwill .............. $7,294 $ -- $ -- $ 332 $7,626
====== ======= ======= ===== ======
Amortization of other intangible assets $1,010 $ 240 $ -- $ (1) $1,249
====== ======= ======= ===== ======