SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 2003 Commission file number 1-13905
------------------ -------
COMPX INTERNATIONAL INC.
- -------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 57-0981653
(State or other jurisdiction of (IRS Employer
organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 448-1400
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No X
Number of shares of common stock outstanding on October 28, 2003:
Class A: 5,124,780
Class B: 10,000,000
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2002
and September 30, 2003 3-4
Consolidated Statements of Operations -
Three months and nine months ended
September 30, 2002 and 2003 5
Consolidated Statements of Comprehensive Income -
Three months and nine months ended
September 30, 2002 and 2003 6
Consolidated Statements of Cash Flows -
Nine months ended September 30, 2002 and 2003 7
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 2003 8
Notes to Consolidated Financial Statements 9-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14-19
Item 4. Controls and Procedures. 19-20
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 21
- 2 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, September 30,
2002 2003
----------- -------------
Current assets:
Cash and cash equivalents ........................ $ 12,407 $ 17,758
Accounts receivable, net ......................... 22,924 26,028
Income taxes receivable from affiliates .......... 352 --
Refundable income taxes .......................... 1,378 1,075
Inventories ...................................... 28,876 28,649
Prepaid expenses and other ....................... 3,422 2,671
Deferred income taxes ............................ 1,983 1,918
-------- --------
Total current assets ......................... 71,342 78,099
-------- --------
Other assets:
Goodwill ......................................... 40,729 42,138
Other intangible assets .......................... 2,183 2,007
Prepaid rent ..................................... 426 --
Other ............................................ 233 361
-------- --------
Total other assets ........................... 43,571 44,506
-------- --------
Property and equipment:
Land ............................................. 4,344 4,750
Buildings ........................................ 29,452 30,610
Equipment ........................................ 102,347 112,951
Construction in progress ......................... 3,548 3,672
-------- --------
139,691 151,983
Less accumulated depreciation .................... 54,512 67,440
-------- --------
Net property and equipment ................... 85,179 84,543
-------- --------
$200,092 $207,148
======== ========
See accompanying notes to consolidated financial statements.
- 3 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2002 2003
------------ -------------
Current liabilities:
Current maturities of long-term debt ............. $ 6 $ --
Accounts payable and accrued liabilities ......... 21,318 24,118
Income taxes payable to affiliates ............... -- 230
Deferred income taxes ............................ 408 460
Income taxes ..................................... 419 171
-------- --------
Total current liabilities .................... 22,151 24,979
-------- --------
Noncurrent liabilities:
Long-term debt ................................... 31,000 30,000
Deferred income taxes ............................ 4,469 2,429
Deferred gain on sale/leaseback .................. 493 2
-------- --------
Total noncurrent liabilities ................. 35,962 32,431
-------- --------
Stockholders' equity:
Preferred stock .................................. -- --
Class A common stock ............................. 62 62
Class B common stock ............................. 100 100
Additional paid-in capital ....................... 119,387 119,437
Retained earnings ................................ 44,049 42,633
Accumulated other comprehensive income (loss)
- currency translation .......................... (10,304) (1,179)
Treasury stock ................................... (11,315) (11,315)
-------- --------
Total stockholders' equity ................... 141,979 149,738
-------- --------
$ 200,092 $ 207,148
========= =========
Commitments and contingencies (Note 1)
See accompanying notes to consolidated financial statements.
- 4 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
--------------------- --------------------
2002 2003 2002 2003
--------- ---------- ---------- --------
Net sales ................................... $ 48,839 $ 52,534 $148,425 $153,260
Cost of goods sold .......................... 41,172 42,871 121,300 126,868
-------- -------- -------- --------
Gross margin ............................ 7,667 9,663 27,125 26,392
Selling, general and administrative ......... 6,407 6,452 20,666 20,483
Restructuring expense ....................... -- 3,528 -- 3,528
-------- -------- -------- --------
Operating income (loss) ................. 1,260 (317) 6,459 2,381
Other general corporate expense (income), net (99) 84 46 572
Interest expense ............................ 291 300 1,629 963
-------- -------- -------- --------
Income (loss) before income taxes ....... 1,068 (701) 4,784 846
Provision for income taxes (benefit) ........ 826 (308) 2,380 373
-------- -------- -------- --------
Net income (loss) ....................... $ 242 $ (393) $ 2,404 $ 473
======== ======== ======== ========
Basic and diluted earnings (loss) per
common share ............................... $ .02 $ (.03) $ .16 $ .03
======== ======== ======== ========
Cash dividends per share .................... $ .125 $ -- $ .375 $ .125
======== ======== ======== ========
Shares used in the calculation of per
share amounts:
Basic earnings (loss) per common share ... 15,116 15,125 15,108 15,120
Dilutive impact of outstanding
stock options ........................... -- -- 15 --
-------- -------- -------- --------
Diluted common shares .................... 15,116 15,125 15,123 15,120
======== ======== ======== ========
See accompanying notes to consolidated financial statements.
- 5 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Nine months ended
September 30, September 30,
------------------- -----------------
2002 2003 2002 2003
-------- --------- ------- --------
Net income (loss) ........................ $ 242 $(393) $2,404 $ 473
Other comprehensive income (loss) -
Currency translation adjustment,
net of tax ............................. (2,670) 618 3,344 9,125
------- ----- ------ ------
Comprehensive income (loss) ........ $(2,428) $ 225 $5,748 $9,598
======= ===== ====== ======
See accompanying notes to consolidated financial statements.
- 6 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2002 and 2003
(In thousands)
2002 2003
------ -------
Cash flows from operating activities:
Net income ......................................... $ 2,404 $ 473
Depreciation and amortization ...................... 9,899 10,577
Deferred income taxes .............................. (817) (2,319)
Other, net ......................................... (416) 668
Change in assets and liabilities:
Accounts receivable .............................. (432) (1,467)
Inventories ...................................... 507 2,052
Accounts payable and accrued liabilities ......... (2,469) 1,289
Accounts with affiliates ......................... 18 582
Income taxes ..................................... 903 1,206
Other, net ....................................... (203) 1,016
-------- -------
Net cash provided by operating activities ...... 9,394 14,077
-------- -------
Cash flows from investing activities:
Capital expenditures ............................... (9,900) (7,914)
Other, net ......................................... -- 695
-------- -------
Net cash used by investing activities .......... (9,900) (7,219)
-------- -------
Cash flows from financing activities:
Indebtedness:
Additions ....................................... 1,000 1,000
Principal payments .............................. (19,037) (2,006)
Deferred financing costs paid ................... -- (416)
Dividends .......................................... (5,665) (1,889)
Issuance of common stock ........................... 120 --
-------- -------
Net cash used by financing activities .......... (23,582) (3,311)
-------- -------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (24,088) 3,547
Currency translation ............................... 857 1,804
Cash and cash equivalents at beginning of period ..... 33,309 12,407
-------- -------
Cash and cash equivalents at end of period ........... $ 10,078 $ 17,758
======== ========
Supplemental disclosures - cash paid for:
Interest ......................................... $ 1,593 $ 1,083
Income taxes ..................................... 2,320 1,903
See accompanying notes to consolidated financial statements.
- 7 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 2003
(In thousands)
Accumulated
other
comprehensive
Additional income (loss)- Total
Common Stock paid-in Retained currency Treasury stockholders'
Class A Class B capital earnings translation stock equity
Balance at December 31, 2002 .. $62 $100 $119,387 $ 44,049 $(10,304) $(11,315) $ 141,979
Net income .................... -- -- -- 473 -- -- 473
Other comprehensive income, net -- -- -- -- 9,125 -- 9,125
Issuance of common stock ...... -- -- 50 -- -- -- 50
Cash dividends ................ -- -- -- (1,889) -- -- (1,889)
--- ---- -------- -------- -------- -------- ---------
Balance at September 30, 2003 . $62 $100 $119,437 $ 42,633 $ (1,179) $(11,315) $ 149,738
=== ==== ======== ======== ======== ======== =========
See accompanying notes to consolidated financial statements.
- 8 -
COMPX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of CompX International Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 2003 and the consolidated statements
of operations, comprehensive income, stockholders' equity and cash flows for the
interim periods ended September 30, 2002 and 2003 have been prepared by the
Company, without audit. In the opinion of management, all adjustments,
consisting only of normal recurring adjustments, necessary to present fairly the
consolidated financial position, results of operations and cash flows have been
made. The results of operations for the interim periods are not necessarily
indicative of the operating results for a full year or of future operations.
Certain information normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of
America has been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 (the "2002 Annual Report").
Basic earnings per share of common stock is based upon the weighted-average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the 2002 Annual
Report.
The Company is 69% owned by Valhi, Inc. (NYSE: VHI) and Valhi's
wholly-owned subsidiary Valcor, Inc. At September 30, 2003, Contran Corporation
holds, directly or through subsidiaries, approximately 90% of Valhi's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of certain children and
grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr.
Simmons, the Chairman of the Board of each of Contran, Valhi and Valcor, may be
deemed to control such companies and the Company.
Stock options. As disclosed in the 2002 Annual Report, the Company accounts
for stock-based employee compensation related to stock options using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APBO") No. 25, Accounting for Stock Issued to Employees, and its various
interpretations. Under APBO No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise price is greater than or equal to
the market price on the grant date. Compensation cost recognized by the Company
related to stock options in accordance with APBO No. 25 was not significant
during the 2002 or 2003 interim periods.
The following table illustrates the effect on net income (loss) and
earnings (loss) per share for the periods presented if the Company had applied
the fair value recognition provisions of Statement of Financial Accounting
Standards ("SFAS") No. 123, Accounting for Stock-Based Compensation to
stock-based employee compensation related to stock options for all options
granted on or after January 1, 1995.
- 9 -
Three months ended Nine months ended
September 30, September 30,
------------------ -------------------
2002 2003 2002 2003
-------- -------- -------- ---------
(In thousands, except per share data)
Net income (loss), as reported ........... $ 242 $(393) $ 2,404 $ 473
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 ...... (393) (219) (1,179) (656)
----- ----- ------- -----
Pro forma net income (loss) .............. $(151) $(612) $ 1,225 $(183)
===== ===== ======= =====
Earnings (loss) per share - basic
and diluted:
As reported ............................ $ .02 $(.03) $ .16 $ .03
===== ===== ======= =====
Pro forma .............................. $(.01) $(.04) $ .08 $(.01)
===== ===== ======= =====
Note 2 - Business segment information:
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 has three operating
segments - CompX Security Products, CompX Waterloo and CompX Regout. 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.
Previously, the Company has aggregated the CompX Waterloo and CompX Regout
operating segments into a single reportable segment because of the similar
economic characteristics, products, customer types, production processes, and
distribution methods. Due to the continued weakness in the European office
furniture market and the divergence in operating income between the two
segments, the Company has determined that these two segments no longer have
similar economic characteristics, and accordingly the Company no longer
aggregates the CompX Waterloo and CompX Regout operating segments. Aggregated
segment amounts reported for CompX Waterloo / CompX Regout in previous periods
have been reclassified to conform to the current presentation.
- 10 -
Three months ended Nine months ended
September 30, September 30,
------------------- ---------------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)
Net sales:
CompX Waterloo $22,735 $25,303 $ 70,017 $ 72,001
CompX Security Products 19,006 18,790 56,479 56,054
CompX Regout 7,098 8,441 21,929 25,205
------- ------- -------- --------
Total net sales $48,839 $52,534 $148,425 $153,260
======= ======= ======== ========
Operating income (loss):
CompX Waterloo $ (836) $ 337 $ (3) $ 211
CompX Security Products 2,217 2,859 6,702 7,550
CompX Regout (121) (3,513) (240) (5,380)
------- ------- -------- --------
Total operating income (loss) 1,260 (317) 6,459 2,381
Interest expense (291) (300) (1,629) (963)
Other general corporate income
(expense), net 99 (84) (46) (572)
------- ------- -------- --------
Income (loss) before income taxes $ 1,068 $ (701) $ 4,784 $ 846
======= ======= ======= =======
Note 3 - Inventories:
December 31, September 30,
2002 2003
------------ --------------
(In thousands)
Raw materials ............................ $ 6,573 $ 6,480
Work in process .......................... 12,602 11,948
Finished products ........................ 9,532 10,079
Supplies ................................. 169 142
------- -------
$28,876 $28,649
======= =======
Note 4 - Accounts payable and accrued liabilities:
December 31, September 30,
2002 2003
------------ ---------------
(In thousands)
Accounts payable ............................... $ 9,106 $ 8,289
Accrued liabilities:
Employee benefits ............................ 7,331 7,610
Insurance .................................... 478 353
Royalties .................................... 246 164
Restructuring ................................ 540 3,619
Deferred gain on sale/leaseback .............. 805 665
Other ........................................ 2,812 3,418
------- -------
$21,318 $24,118
======= =======
Due to continued operating losses at the Company's Regout subsidiary in
Europe resulting from the continued downturn in the European office furniture
market, the Company commenced a strategic analysis of the Regout segment during
the third quarter of 2003. As part of the ongoing analysis of the operations,
the Company determined that it should significantly reduce headcount in the
operations in order to be competitive. Prior to the end of September, the
Company finalized and communicated to the employees a restructuring plan
detailing the cost to terminate approximately 100
- 11 -
employees, and accordingly the Company recognized a $3.5 million restructuring
charge in the third quarter of 2003 related to the headcount reduction. The $3.5
million represents severance to be paid to the terminated employees, which is
expected to be paid through the end of the second quarter of 2004. No amounts
have been paid pursuant to this restructuring as of September 30, 2003.
In 2001, the Company recognized a charge of $2.7 million related to
headcount reductions of about 35 employees at the CompX Regout facility,
substantially all of which had been implemented by December 31, 2001. As
adjusted for changes in currency exchange rates, approximately $3.0 million was
paid through March 31, 2003 (including $.6 million in 2003), which satisfied the
Company's obligations related to this restructuring.
Note 5 - Indebtedness:
December 31, September 30,
2002 2003
------------ -------------
(In thousands)
Revolving bank credit facility ................. $31,000 $30,000
Other .......................................... 6 --
------- -------
31,006 30,000
Less current maturities ........................ 6 --
------- -------
$31,000 $30,000
======= =======
Note 6 - Other general corporate income (expense), net:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2003 2002 2003
------- --------- ------- -------
(In thousands)
Interest income .......................... $ 41 $ 40 $ 336 $ 126
Foreign currency transactions, net ....... 45 (67) (885) (691)
Defined benefit pension plan
settlement gain ......................... -- -- 677 --
Other, net ............................... 13 (57) (174) (7)
---- ---- ----- -----
$ 99 $(84) $ (46) $(572)
==== ==== ===== =====
Note 7 - Provision for (benefit from) income taxes:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2002 2003 2002 2003
-------- ------- -------- -------
(In thousands)
Expected tax expense ................... $ 373 $ (245) $ 1,674 $ 296
Non-U.S. tax rates ..................... (30) (18) (233) (85)
Incremental U.S. tax on earnings of
foreign subsidiaries .................. 318 (46) 1,101 290
State income taxes ..................... 112 (85) 122 24
Other, net ............................. 53 86 (284) (152)
----- ------- ------- -----
$ 826 $ (308) $ 2,380 $ 373
===== ======= ======= =====
- 12 -
Note 8 - Foreign currency forward contracts:
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a portion of foreign exchange rate market risk associated
with receivables, or similar exchange rate risk associated with future sales,
denominated in a currency other than the holder's functional currency. At each
balance sheet date, any such outstanding currency forward contract is marked to
market with any resulting gain or loss recognized in income currently. These
contracts are not designated or accounted for as hedging instruments under SFAS
No. 133. At December 31, 2002, the Company held a series of contracts to manage
such exchange rate risk 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. Such contracts matured through January 2003. At September 30, 2003, the
Company held a series of contracts to manage such exchange rate risk to exchange
an aggregate of U.S. $4.2 million for an equivalent amount of Canadian dollars
at exchange rates of Cdn. $1.35 to Cdn. $1.41 per U.S. dollar. The exchange rate
was Cdn. $1.35 per U.S. dollar at September 30, 2003. Such contracts mature
through November 2003.
- 13 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Overview
The Company reported a net loss of $.4 million in the third quarter of
2003, down from net income of $.2 million for the third quarter of 2002. The
third quarter 2003 results include a pre-tax $3.5 million restructuring charge,
as discussed below. The Company reported net income of $.5 million in the first
nine months of 2003, an 80% decrease from net income of $2.4 million in the
first nine months of 2002.
CompX anticipates continuing its focus on opportunities to rationalize its
cost structure throughout 2003 and into 2004. Due to continued operating losses
at the Company's Regout subsidiary in Europe resulting from the continued
downturn in the European office furniture market, the Company commenced a
strategic analysis of the Regout segment during the third quarter of 2003. As
part of the ongoing analysis of these operations, the Company determined that it
should significantly reduce headcount in the operations in order to be
competitive. Prior to the end of September, the Company finalized and
communicated to the employees a restructuring plan detailing the cost to
terminate approximately 100 employees, and accordingly the Company recognized a
$3.5 million restructuring charge in the third quarter of 2003 related to the
headcount reduction. The $3.5 million represents severance to be paid to the
terminated employees, which is expected to be paid through the end of the second
quarter of 2004. The Company expects the restructuring to result in annual cost
savings of approximately $3.5 to $4 million which is expected to begin to
positively impact financial results in the second quarter of 2004.
Also, CompX has completed the consolidation of its two Kitchener, Ontario
plants into a single facility during 2003. Expenses relating to this
consolidation were approximately $.9 million in the first nine months of 2003
($.1 million in the three months ended September 30, 2003) and are included in
cost of goods sold. Cost benefits associated with the consolidation are
beginning to be realized in the second half of 2003 and are expected to be fully
realized in the first quarter of 2004 following the pending sale of the surplus
facility in December 2003.
Results of Operations
Three months ended Nine months ended
September 30, September 30,
---------------------- % ------------------- %
2002 2003 Change 2002 2003 Change
------- ------- ----- -----
(In thousands) (In thousands)
Net sales:
CompX Waterloo $22,735 $25,303 11% $ 70,017 $ 72,001 3%
CompX Security Products 19,006 18,790 -1% 56,479 56,054 -1%
CompX Regout 7,098 8,441 19% 21,929 25,205 15%
------- ------- -------- --------
Total net sales $48,839 $52,534 8% $148,425 $153,260 3%
======= ======= ======== ========
Operating income (loss):
CompX Waterloo $ (836) $ 337 nm $ (3) $ 211 nm
CompX Security Products 2,217 2,859 29% 6,702 7,550 13%
CompX Regout (121) (3,513) nm (240) (5,380) nm
------- ------- -------- --------
Total operating income (loss) $ 1,260 $ (317) nm $ 6,459 $ 2,381 -63%
======= ======= ======== ========
Operating income (loss) margin:
CompX Waterloo -4% 1% *% *%
CompX Security Products 12% 15% 12% 13%
CompX Regout -2% -42% -1% -21%
Total operating income
(loss)margin 3% -1% 4% 2%
* less than 1%
n.m. = not meaningful
- 14 -
Net sales for the respective product lines in the 2002 and 2003 interim
periods are as follows:
Three months ended Nine months ended
September 30, September 30,
------------------- % ----------------- %
2002 2003 Change 2002 2003 Change
-------- -------- -------- -------
(In thousands) (In thousands)
Net sales:
Precision ball-bearing slides $20,395 $24,282 19% $ 63,171 $ 68,791 9%
Security products ........... 19,006 18,790 -1% 56,479 56,054 -1%
Ergonomic computer support
Systems .................... 7,186 6,667 -7% 22,454 20,556 -8%
Other products .............. 2,252 2,795 24% 6,321 7,859 24%
------- ------- -------- --------
Total net sales .... $48,839 $52,534 8% $148,425 $153,260 3%
======= ======= ======== ========
Net sales. Net sales increased $3.7 million, or 8%, to $52.5 million in the
third quarter of 2003 from $48.8 million in the third quarter of 2002. Net sales
increased $4.8 million, or 3%, in the first nine months of 2003 from $148.4
million in the first nine months of 2002. Favorable fluctuations in currency
exchange rates had a positive impact on net sales of $2.0 million and $6.3
million in the third quarter and first nine months of 2003, respectively, as
discussed below. In addition to the favorable impact of changes in currency
exchange rates, sales increased in the third quarter of 2003 as compared to the
third quarter of 2002 due principally to higher sales volumes of precision
ball-bearing slides. Offsetting the favorable effect of changes in currency
exchange rates during the first nine months of 2003 as compared to the same
period of 2002, sales were negatively impacted by lower sales volumes of
ergonomic computer support systems which are impacted by the continued soft
demand for office furniture as well as ongoing weakness in the overall economic
environment.
Cost of goods sold. The Company's cost of goods sold increased 4% in the
third quarter of 2003 compared to 2002 while net sales increased 8% during the
same period. Cost of goods sold increased 5% in the first nine months of 2003
compared to 2002, while net sales increased 3%. The Company's gross margin as a
percent of net sales increased from 16% in the third quarter of 2002 to 18% in
the third quarter of 2003 and decreased from 18% to 17% in the first nine months
of 2003 as compared to the first nine months of 2002. Fluctuations in currency
exchange rates negatively impacted cost of goods sold by approximately $2.6
million and $7.6 million for the three and nine month periods ended September
30, 2003, respectively. The gross margin percent improvement in the third
quarter of 2003 as compared to the same quarter of the prior year is primarily
due to cost improvement initiatives, such as improving facility efficiency,
partially offset by the negative currency impact and costs to complete the
Canadian facilities consolidation. Gross margin as a percent of net sales
declined for the nine months ended September 30, 2003 versus the same period
last year as the negative currency impact, facilities consolidation expenses,
and a downturn in the European office furniture market exceeded the positive
impact of the cost improvement initiatives. The Company currently expects
continued improvement in gross margins as a percent of net sales resulting from
those cost improvement initiatives, but such improvements could be offset by
potential adverse changes in foreign currency exchange rates.
Operating income. Operating loss in the third quarter of 2003 was $.3
million compared to operating income of $1.3 million for the third quarter of
2002. Similarly, operating income in the first nine months of 2003 decreased to
$2.4 million for the first nine months of 2003 from $6.5 million in the first
nine months of 2002. As a percentage of net sales, operating income was -1% for
the third quarter of 2003 compared to 3% for the third quarter of 2002 and 2%
for the first-nine months of 2003 compared to 4% for the same period in
- 15 -
2002. Despite the positive effects of continued cost reductions and certain
price increases, operating income in the third quarter of 2003 declined as
compared to the third quarter of 2002 due to the $3.5 million restructuring
charge, unfavorable effects of changes in the sales mix, unfavorable relative
changes in currency exchange rates, expenses associated with the consolidation
of the Company's Canadian facilities and weak demand due to a continued decline
in the overall European economy.
Currency. 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 euro
and the New Taiwan dollar. In addition, a portion of CompX's sales generated
from its non-U.S. operations are denominated in the U.S. dollar. Most raw
materials, labor and other production costs for such non-U.S. operations are
denominated primarily in local currencies. Consequently, the translated U.S.
dollar value of CompX's foreign sales and operating results are subject to
currency exchange rate fluctuations which may favorably or unfavorably impact
reported earnings and may affect comparability of period-to-period operating
results. During the third quarter and first nine months of 2003, currency
exchange rate fluctuations of the Canadian dollar and the euro positively
impacted the Company's sales comparisons with the corresponding period of the
prior year (principally with respect to slide products), and exchange rate
fluctuations of the Canadian dollar, the New Taiwan dollar and the euro
negatively impacted the Company's operating income comparisons for the
corresponding periods.
Net sales were positively impacted while operating income was negatively
impacted by currency exchange rates in the following amounts by segment as
compared to the currency exchange rates in effect during the corresponding
period in the prior year:
Three months ended Nine months ended
September 30, 2003 September 30, 2003
------------------ ------------------
(In thousands)
Impact on net sales:
CompX Waterloo ................................... $ 867 $ 2,090
CompX Security Products .......................... -- --
CompX Regout ..................................... 1,100 4,231
------- -------
Total impact on net sales ........................ $ 1,967 $ 6,321
======= =======
Impact on operating income (loss):
CompX Waterloo ................................... $ (885) $(1,937)
CompX Security Products .......................... -- --
CompX Regout ..................................... (436) (677)
------- -------
Total impact on operating income (loss) .......... $(1,321) $(2,614)
======= =======
Outlook. While signs of recovery are surfacing in the overall economy, the
Company has not experienced a sustained strengthening in customer orders as of
the end of the third quarter of 2003. For the remainder of the year, the Company
does not expect this situation to change significantly since a majority of
CompX's customers are in the office furniture industry, which tends to lag
behind the overall economy in a recovery. Additionally, the European office
furniture industry experienced continued economic decline in 2003 that put added
pressure on operating results. In response to the current economic conditions,
CompX continues to focus on improving lean manufacturing efficiency and cost
improvement initiatives as well as pursuing business opportunities for its
products in new market segments. The Company believes its balance sheet, which
has enabled spending on growth and profitability improvement initiatives despite
the difficulties of the market environment, continues to provide the ability to
take advantage of new business opportunities as they arise. The Company
currently expects to realize annual cost savings of $3.5 to $4 million as a
result of the current Regout headcount reduction. However, the Company continues
with its ongoing strategic analysis
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of the operations, and additional actions could be taken in the future that
would negatively impact the Company's operating results.
General Corporate and Other Items
Other general corporate income (expense), net. The components of other
general corporate income (expense), net are summarized in Note 6 to the
Consolidated Financial Statements, and primarily include interest income,
foreign currency transaction gains and losses, gains and losses on disposals of
other assets and a settlement gain relating to CompX's terminated defined
benefit pension plan in 2002. Interest income decreased in the third quarter and
first nine months of 2003 as compared to the corresponding periods in 2002
primarily due to a lower level of funds available for investment.
Interest expense. Interest expense increased in the third quarter of 2003
compared to the same period in 2002 due to higher interest rates charged under
the Company's new Revolving Bank Credit Agreement entered into in January 2003.
Interest expense declined in the first nine months of 2003 compared to the
corresponding period in 2002 due primarily to lower average levels of borrowing
under CompX's Revolving Bank Credit Agreement offset, in part, by higher
interest rates on the Company's outstanding indebtedness.
Provision for income taxes. The principal reasons for the difference
between CompX's effective income tax rates and the U.S. federal statutory income
tax rates are explained in Note 7 to the Consolidated Financial Statements.
Income tax rates vary by jurisdiction (county, state and/or country), and
relative changes in the geographic mix of CompX's pre-tax earnings can result in
fluctuations in the effective income tax rate.
Liquidity and Capital Resources
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities have generally been similar to the
trends in the Company's earnings. Net cash provided by operating activities,
excluding changes in assets and liabilities, totaled $11.1 million and $9.3
million in the first nine months of 2002 and 2003, respectively, compared to net
income of $2.4 million and $.5 million, respectively.
Changes in assets and liabilities result primarily from the timing of
production, sales and purchases. The Company focuses significant effort on
managing working capital to maximize cash flow from operations. In particular,
the company has implemented lean manufacturing initiatives that have resulted in
a reduction of days in inventory to 60.8 days as of September 30, 2003 from 62.7
days as of December 31, 2002. The change in inventory has generated more than $2
million of cash flow for the nine months ended September 30, 2003. The remaining
changes in assets and liabilities generally tend to even out over time and
result in trends in cash flows from operating activities generally reflecting
earnings trends.
Investing activities. Net cash used by investing activities totaled $9.9
million and $7.2 million in the first nine months of 2002 and 2003,
respectively, and substantially consisted of capital expenditures.
Capital expenditures for 2003 relate primarily to equipment additions
designed to increase automation and improve manufacturing efficiencies at the
Company's facilities. Capital expenditures for the remainder of 2003 are
estimated at approximately $1.5 million to $2.5 million, the majority of which
relate to projects that emphasize improved production efficiency and the
shifting of production capacity to lower cost facilities. Firm purchase
commitments for capital projects not commenced at September 30, 2003
approximated $.5 million.
- 17 -
Financing activities. Net cash used by financing activities totaled $23.6
million and $3.3 million in the first nine months of 2002 and 2003,
respectively. The Company paid a quarterly dividend of $1.9 million, or $.125
per share, in the first quarter of 2003 and suspended its regular quarterly
dividend starting in the second quarter of 2003. Depending upon the Company's
future operations and requirements for cash, it is possible the Company may
decide to resume a quarterly dividend.
Under the terms of the Company's $47.5 million secured Revolving Bank
Credit Agreement, $17.5 million was available for future borrowing at September
30, 2003. The 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 such as 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.
Management believes that cash generated from operations and borrowing
availability under the Company's Revolving Bank Credit Agreement, together with
cash on hand, will be sufficient to meet the Company's liquidity needs for
working capital, capital expenditures and debt service. To the extent that the
Company's actual operating results or other developments differ from the
Company's expectations, CompX's liquidity could be adversely affected.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, the Company has in the
past and may in the future seek to raise additional capital, refinance or
restructure indebtedness, issue additional securities, modify its dividend
policy, repurchase shares of its common stock or take a combination of such
steps or other steps to manage its liquidity and capital resources. In the
normal course of business, the Company may review opportunities for
acquisitions, divestitures, joint ventures or other business combinations in the
component products industry. In the event of any such transaction, the Company
may consider using its then available cash, issuing additional equity securities
or increasing the indebtedness of the Company or its subsidiaries.
Forward Looking Information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "anticipates," "expects" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. Among the
factors that could cause actual future results to differ materially are the
risks and uncertainties discussed in this Quarterly Report and those described
from time to time in the Company's other filings with the Securities and
Exchange Commission. While it is not possible to identify all factors, the
Company continues to face many risks and uncertainties including, but not
limited to the following:
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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 The ability to implement headcount reduction in a cost effective manner
within the constraints of non-U.S. governmental regulations, and the timing
and amount of any cost savings,
o Competitive products and prices, including increased competition from
low-cost manufacturing sources (such as China),
o Substitute products,
o Customer and competitor strategies,
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.
ITEM 4. Controls and Procedures.
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission (the "SEC"), means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of David A. Bowers, the Company's Vice
Chairman of the Board, President and Chief Executive Officer, and Darryl R.
Halbert, the Company's Vice President, Chief Financial Officer and Controller,
have evaluated the Company's disclosure controls and procedures as of September
30, 2003. 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.
- 19 -
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP"), and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company.
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended September 30, 2003 that has
materially affected, or is reasonably likely to materially affect, the Company's
system of internal controls over financial reporting.
- 20 -
Part II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The Company has retained a signed original of any exhibit listed below that
contains signatures, and the Company will provide any such exhibit to the
Commission or its staff upon request.
10.1 First Amendment to $47,500,000 Credit Agreement between the
Registrant, Wachovia Bank, National Association, as Agent and
various lending institutions dated October 20, 2003.
31.1 Certification.
31.2 Certification.
32.1 Certification.
32.2 Certification.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 2003:
August 6, 2003 - Reported item 9.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPX INTERNATIONAL INC.
------------------------
(Registrant)
Date October 30, 2003 By /s/Darryl R. Halbert
------------------ ---------------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller