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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2004 Commission file number 1-13905
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COMPX INTERNATIONAL INC.
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(Exact name of Registrant as specified in its charter)
Delaware 57-0981653
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(State or other jurisdiction of (IRS Employer
organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 448-1400
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes X No
--- ---
Number of shares of common stock outstanding on July 15, 2004:
Class A: 5,156,780
Class B: 10,000,000
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2003
and June 30, 2004 3-4
Consolidated Statements of Income -
Three months and six months ended
June 30, 2003 and 2004 5
Consolidated Statements of Comprehensive Income -
Three and six months ended June 30, 2003 and 2004 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2003 and 2004 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2004 8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13-18
Item 4. Controls and Procedures. 18-19
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 20
Item 6. Exhibits and Reports on Form 8-K. 20
- 2 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2003 2004
------------ --------
Current assets:
Cash and cash equivalents $ 21,726 $ 11,618
Accounts receivable, net 25,737 28,719
Income taxes receivable from affiliates 306 -
Refundable income taxes 2,376 18
Inventories 26,317 24,750
Prepaid expenses and other 1,840 1,076
Deferred income taxes 1,920 1,980
-------- --------
Total current assets 80,222 68,161
-------- --------
Other assets:
Goodwill 43,325 42,957
Other intangible assets 1,945 1,822
Deferred income taxes 351 465
Other 422 421
-------- --------
Total other assets 46,043 45,665
-------- --------
Property and equipment:
Land 4,746 4,574
Buildings 28,605 26,339
Equipment 121,142 121,308
Construction in progress 636 1,271
-------- --------
155,129 153,492
Less accumulated depreciation 71,940 78,553
-------- --------
Net property and equipment 83,189 74,939
-------- --------
$209,454 $188,765
======== ========
- 3 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2003 2004
------------ ---------
Current liabilities:
Accounts payable and accrued liabilities $ 24,019 $ 23,150
Current portion of long-term debt - 37
Income taxes payable to affiliates - 90
Deferred income taxes 505 505
Income taxes - 975
-------- --------
Total current liabilities 24,524 24,757
-------- --------
Noncurrent liabilities:
Long-term debt 26,000 2,095
Deferred income taxes 4,550 4,204
Other non-current liabilities 21 21
-------- --------
Total noncurrent liabilities 30,571 6,320
-------- --------
Stockholders' equity:
Preferred stock - -
Class A common stock 62 63
Class B common stock 100 100
Additional paid-in capital 119,437 119,845
Retained earnings 43,433 48,271
Accumulated other comprehensive income
- currency translation 2,642 724
Treasury stock (11,315) (11,315)
-------- --------
Total stockholders' equity 154,359 157,688
-------- ---------
$209,454 $188,765
======== ========
Commitments and contingencies (Note 1)
See accompanying notes to consolidated financial statements.
- 4 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
----------------------- -----------------------
2003 2004 2003 2004
--------- ------ ------- ------
Net sales $49,706 $56,741 $100,726 $109,871
Cost of goods sold 41,800 43,544 83,997 86,532
------- ------- -------- --------
Gross margin 7,906 13,197 16,729 23,339
Selling, general and administrative expense 7,038 7,593 14,031 15,006
------- ------- -------- --------
Operating income 868 5,604 2,698 8,333
Other general corporate (income) expense, net (3) (293) 488 (510)
Interest expense 322 147 663 356
------- ------- ------- --------
Income before income taxes 549 5,750 1,547 8,487
Provision for income taxes 242 2,472 681 3,649
------- ------- ------- --------
Net income $ 307 $ 3,278 $ 866 $ 4,838
======= ======= ======= ========
Basic and diluted earnings per common share $ .02 $ .22 $ .06 $ .32
======= ======= ======= ========
Cash dividends per share $ - $ - $ .125 $ -
======= ======= ======= ========
Shares used in the calculation of per share amounts:
Basic earnings per common share 15,120 15,134 15,118 15,130
Dilutive impact of outstanding stock options - 20 - 10
------- ------- ------- --------
Diluted common shares 15,120 15,154 15,118 15,140
======= ======= ======= ========
See accompanying notes to consolidated financial statements.
- 5 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Six months ended
June 30, June 30,
------------------------ ----------------------
2003 2004 2003 2004
--------- ------- -------- -------
Net income $ 307 $ 3,278 $ 866 $ 4,838
Other comprehensive income (loss) -
currency translation adjustment, net of tax 4,798 (479) 8,507 (1,918)
------- -------- ------- ------
Comprehensive income $ 5,105 $ 2,799 $ 9,373 $ 2,920
======= ======= ======= =======
See accompanying notes to consolidated financial statements.
- 6 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2003 and 2004
(In thousands)
2003 2004
---- ----
Cash flows from operating activities:
Net income $ 866 $ 4,838
Depreciation and amortization 7,051 7,285
Deferred income taxes (829) (682)
Other, net 228 218
Change in assets and liabilities:
Accounts receivable (84) (3,469)
Inventories (9) 1,252
Accounts payable and accrued liabilities 195 (226)
Accounts with affiliates (230) 306
Income taxes 1,000 3,397
Other, net 183 736
------- --------
Net cash provided by operating activities 8,371 13,655
------- --------
Cash flows from investing activities:
Capital expenditures (4,222) (1,806)
Proceeds from sale of fixed assets 64 2,119
------- --------
Net cash provided (used) by investing activities (4,158) 313
------- --------
Cash flows from financing activities:
Indebtedness:
Additions 1,000 2,252
Principal payments (2,006) (26,078)
Proceeds from issuance of common stock - 330
Deferred financing costs paid (416) (28)
Dividends (1,889) -
------- ---------
Net cash used by financing activities (3,311) (23,524)
------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 902 (9,556)
Currency translation 248 (552)
Cash and cash equivalents at beginning of period 12,407 21,726
------- --------
Cash and cash equivalents at end of period $13,557 $ 11,618
======= ========
Supplemental disclosures - cash paid for:
Interest $ 809 $ 428
Income taxes 1,258 477
See accompanying notes to consolidated financial statements.
- 7 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2004
(In thousands)
Accumulated
other
comprehensive
Common Stock Additional income (loss)- Total
--------------------- paid-in Retained currency Treasury stockholders'
Class A Class B capital earnings translation stock equity
------- ------- --------- -------- ----------- --------- -----------
Balance at December 31, 2003 $62 $100 $119,437 $43,433 $ 2,642 $(11,315) $154,359
Net income - - - 4,838 - - 4,838
Other comprehensive income, net - - - - (1,918) - (1,918)
Issuance of common stock 1 - 408 - - - 409
--- ---- -------- ------- -------- -------- --------
Balance at June 30, 2004 $63 $100 $119,845 $48,271 $ 724 $(11,315) $157,688
=== ==== ======== ======= ======== ======== ========
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, 2003 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2004 and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 2003 and 2004 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations. Certain
information normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP") has been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2003 (the "2003 Annual Report").
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 2003 Annual
Report.
At June 30, 2004, Valhi, Inc. (NYSE: VHI) and Valhi's wholly-owned
subsidiary Valcor, Inc. owned an aggregate of 68% of the Company's outstanding
common stock, and a wholly owned subsidiary of Titanium Metals Corporation, a
less than majority owned affiliate of Valhi, owned an additional 9% of the
Company's outstanding common stock. At June 30, 2004, 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, or is held by Mr.
Simmons or persons or other entities related to Mr. Simmons. Mr. Simmons, the
Chairman of the Board of each of Contran, Valhi and Valcor, may be deemed to
control such companies and the Company.
Stock options. As disclosed in the 2003 Annual Report, the Company accounts
for stock-based employee compensation related to stock options using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APBO") No. 25, Accounting for Stock Issued to Employees, and its various
interpretations. Under APBO No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise price is greater than or equal to
the market price on the grant date. Compensation cost recognized by the Company
related to stock options in accordance with APBO No. 25 was not significant
during the interim periods of 2003 or 2004.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation to stock-based employee
compensation related to stock options for all options granted on or after
January 1, 1995.
- 9 -
Three months ended Six months ended
June 30, June 30,
---------------------- -----------------------
2003 2004 2003 2004
------- ------ ------ ------
Net income, as reported $ 307 $3,278 $ 866 $4,838
Deduct: Total stock-based employee
compensation expense related to stock
options determined under fair value
based method for all awards, net of related
tax effects (219) (136) (437) (272)
------- ------ ------ ------
Pro forma net income $ 88 $3,142 $ 429 $4,566
======= ====== ====== ======
Earnings per share - basic and diluted:
As reported $ .02 $ .22 $ .06 $ .32
======= ====== ====== ======
Pro forma $ .01 $ .21 $ .03 $ .30
======= ====== ====== ======
Note 2 - Business segment information:
Three months ended Six months ended
June 30, June 30,
---------------------- -----------------------
2003 2004 2003 2004
------- ------ ------ ------
Net sales:
CompX Waterloo $22,926 $26,484 $ 46,697 $ 51,216
CompX Security Products 18,835 19,685 37,264 38,449
Thomas Regout 8,221 10,738 17,314 20,597
Intersegment sales (276) (166) (549) (391)
------- ------- -------- --------
Total net sales $49,706 $56,741 $100,726 $109,871
======= ======= ======== ========
Operating income (loss):
CompX Waterloo $ (587) $ 2,396 $ (127) $ 2,744
CompX Security Products 2,468 2,768 4,691 5,117
Thomas Regout (1,013) 440 (1,866) 472
------- ------- ------- -------
Total operating income 868 5,604 2,698 8,333
Interest expense (322) (147) (663) (356)
Other general corporate income
(expense), net 3 293 (488) 510
------- ------- ------- -------
Income before income taxes $ 549 $ 5,750 $ 1,547 $ 8,487
======= ======= ======= =======
Note 3 - Inventories:
December 31, June 30,
2003 2004
------------ --------
(In thousands)
Raw materials $ 6,170 $ 5,939
Work in process 10,852 10,331
Finished products 9,166 8,309
Supplies 129 171
------- -------
$26,317 $24,750
======= =======
- 10 -
Note 4 - Accounts payable and accrued liabilities:
December 31, June 30,
2003 2004
------------ ---------
(In thousands)
Accounts payable $ 8,597 $ 9,173
Accrued liabilities:
Employee benefits 7,660 8,770
Insurance 374 403
Royalties 243 93
Restructuring 3,223 385
Sales rebates 805 722
Deferred gain on sale/leaseback 485 -
Other 2,632 3,604
------- -------
$24,019 $23,150
======= =======
In 2003, the Company recorded a $3.3 million charge related to
restructuring its Thomas Regout operations. The charge represents severance to
be paid to approximately 100 terminated employees. In the first six months of
2004, the Company paid $2.8 million in severance benefits. Substantially all of
the remaining severance is expected to be paid during the third quarter of 2004.
Note 5 - Indebtedness:
December 31, June 30,
2003 2004
------------- ----------
(In thousands)
Revolving bank credit facility $26,000 $ 2,000
Capital lease obligations 132
------ ------
26,000 2,132
Less current portion - 37
------- ------
$26,000 $ 2,095
======= =======
Note 6 - Other general corporate income (expense), net:
Three months ended Six months ended
June 30, June 30,
-------------------- --------------------=
2003 2004 2003 2004
------ ----- ---- ----
Interest income $ 35 $ 28 $ 86 $ 68
Currency transactions, net (29) 172 (624) 315
Other, net (3) 93 50 127
---- ----- ----- -----
$ 3 $ 293 $(488) $ 510
==== ===== ===== =====
- 11 -
Note 7 - Provision for income taxes:
Three months ended Six months ended
June 30, June 30,
--------------------- --------------------
2003 2004 2003 2004
---- ------ ------ -----
Expected tax expense $ 192 $ 2,012 $ 541 $ 2,970
Non-U.S. tax rates - (92) (67) (123)
Incremental U.S. tax on earnings of foreign
subsidiaries 119 415 336 604
State income taxes 83 259 109 286
Other, net (152) (122) (238) (88)
----- ------ ----- ------
$ 242 $ 2,472 $ 681 $ 3,649
===== ======= ===== =======
Note 8 -Currency forward exchange contracts:
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a portion of currency exchange rate market risk associated
with receivables, or similar exchange rate risk associated with future sales,
denominated in a currency other than the holder's functional currency. At each
balance sheet date, any such outstanding currency forward contract is
marked-to-market with any resulting gain or loss recognized in income currently.
These contracts are not accounted for as hedging instruments under GAAP. At
December 31, 2003, the Company held a series of contracts to manage such
exchange rate risk to exchange an aggregate of U.S. $4.2 million for Canadian
dollars at exchange rates of Cdn. $1.30 to Cdn. $1.33 per U.S. dollar. Such
contracts matured through February 2004. The exchange rate was Cdn. $1.31 per
U.S. dollar at December 31, 2003. At June 30, 2004, the Company held a series of
contracts to manage such exchange rate risk to exchange an aggregate of U.S.
$2.9 million for Canadian dollars at exchange rates of Cdn. $1.35 to Cdn. $1.39
per U.S. dollar. Such contracts mature through August 2004. The exchange rate
was Cdn. $1.35 per U.S. dollar at June 30, 2004.
- 12 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Overview
The Company reported net income of $3.3 million in the second quarter of
2004 compared to net income of $307,000 for the second quarter of 2003. The
Company reported net income of $4.8 million in the first six months of 2004
compared to net income of $866,000 for the first six months of 2003. The
improvement in net income primarily resulted from the combination of improved
precision slide product sales and the favorable effect of cost reduction
initiatives undertaken in 2002 and 2003.
Results of Operations
Three months ended Six months ended
June 30, June 30,
----------------------- % -------------------- %
2003 2004 Change 2003 2004 Change
---- ---- ------ ---- ---- ------
(In millions, except percentages)
Net sales:
CompX Waterloo $22,926 $26,484 16% $46,697 $ 51,216 10%
CompX Security Products 18,835 19,685 5% 37,264 38,449 3%
Thomas Regout 8,221 10,738 31% 17,314 20,597 19%
Intersegment sales (276) (166) -40% (549) (391) -29%
------- ------- ------- --------
Total net sales $49,706 $56,741 14% $100,726 $109,871 9%
======= ======= ======== ========
Operating income (loss):
CompX Waterloo $ (587) $ 2,396 n.m. $ (127) $ 2,744 n.m.
CompX Security Products 2,468 2,768 12% 4,691 5,117 9%
Thomas Regout (1,013) 440 n.m. (1,866) 472 n.m.
------- ------- ------- --------
Total operating income $ 868 $ 5,604 546% $ 2,698 $ 8,333 209%
======= ======= ======= ========
n.m. = not meaningful
Sales for the respective product lines for the interim periods of 2003 and
2004 are as follows:
Three months ended Six months ended
June 30, June 30,
----------------------- % -------------------- %
2003 2004 Change 2003 2004 Change
---- ---- ------ ---- ---- ------
(In millions, except percentages)
Precision ball-bearing
slides $21,340 $27,270 28% $44,509 $ 52,052 17%
Security products 18,835 19,685 5% 37,264 38,449 3%
Ergonomic computer support
systems 7,101 6,756 -5% 13,889 13,318 -4%
Other products 2,430 3,030 25% 5,064 6,052 20%
------- ------- ------- --------
$49,706 $56,741 14% $100,726 $109,871 9%
======= ======= ======== ========
Currency. CompX has substantial operations and assets located outside the
United States (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 (principally in Canada) are denominated in the U.S. dollar.
Most raw materials, labor and other production costs for such non-U.S.
- 13 -
operations are denominated primarily in local currencies. Consequently, the
translated U.S. dollar values of CompX's foreign sales and operating results are
subject to currency exchange rate fluctuations which may favorably or
unfavorably impact reported earnings and may affect comparability of
period-to-period operating results. The effects of fluctuations in currency
exchange rates affect the CompX Waterloo and Thomas Regout segments, and do not
materially affect the CompX Security Products segment. Net sales were positively
impacted while operating income was negatively impacted by currency exchange
rates in the following amounts by segment as compared to the currency exchange
rates in effect during the corresponding period in the prior year:
Three months ended Six months ended
June 30, 2004 June 30, 2004
------------------ ---------------
Impact on net sales:
CompX Waterloo $ 339 $1,446
CompX Security Products - -
Thomas Regout 608 1,985
----- ------
Total impact on net sales $ 947 $3,431
===== ======
Impact on operating income:
CompX Waterloo $(117) $ (804)
CompX Security Products - -
Thomas Regout 51 110
----- ------
Total impact on operating income $ (66) $ (694)
===== ======
Net sales. Net sales increased $7.0 million, or 14%, to $56.7 million in
the second quarter of 2004 from $49.7 million in the second quarter of 2003. Net
sales increased $9.1 million, or 9%, to $109.9 million for the first six months
of 2004 from $100.7 million in the first six months of 2003. These increases are
due primarily to the net effect of fluctuations in currency exchange rates (as
discussed above), increased sales volumes of slide and security products, the
effect of price increases for certain products at CompX Waterloo and Thomas
Regout and slightly lower sales volumes of ergonomic products.
Cost of goods sold. The Company's cost of goods sold increased 4% in the
second quarter of 2004 compared to 2003 while net sales increased 14% during the
same period. Cost of goods sold increased 3% in the first six months of 2004
compared to 2003, while net sales increased 9%. The Company's gross margin
percentage increased from 16% in the second quarter of the 2003 period to 23% in
the 2004 period and increased from 17% to 21% in the first six months of 2004 as
compared to the first six months of 2003. This improvement resulted from the
favorable impact of the cost reduction efforts undertaken in 2002 and 2003,
including retooling of the Company's Byron Center, Michigan facility,
consolidation of two Canadian facilities into one facility and restructuring of
the Thomas Regout operations. Gross margin comparisons were also favorably
impacted by price increases on certain products at CompX Waterloo, relative
changes in product mix at CompX Security Products, and expenses of approximately
$800,000 during the first six months of 2003 associated with the consolidation
of the two Canadian facilities (approximately $400,000 in the second quarter of
2003). The Company has experienced an increase in the cost of raw material,
principally steel which primarily impacted its precision slide products, during
the first six-months of 2004. However, the impact on gross margin has been
substantially mitigated through surcharges and price increases that have been
passed on to customers.
Selling, general, and administrative expense. As a percentage of net sales,
selling, general, and administrative expense was 14% of net sales in the second
quarter of 2003 and 13% in the second quarter of 2004. For the first six months
of each year, selling, general, and administrative expense was 14% of net sales.
- 14 -
Other general corporate income (expense), net. The components of other
general corporate income (expense), net are summarized in Note 6 to the
Consolidated Financial Statements, and primarily include interest income,
currency exchange transaction gains and losses, and gains and losses on
disposals of other assets. Net currency exchange transaction gains (losses)
improved approximately $201,000 from the second quarter of 2003 to the second
quarter of 2004 and approximately $939,000 from the first six months of 2003 to
the first six months of 2004 as the intra-quarter swings in currency exchange
rates were less volatile in 2004.
Interest expense. Interest expense declined in the interim periods of 2004
compared to 2003 due primarily to lower average levels of outstanding debt. The
Company expects interest expense will continue to be lower during the second
half of 2004 as compared to the second half of 2003 due to lower average levels
of outstanding debt.
Provision for income taxes. The principal reasons for the difference
between CompX's effective income tax rates and the U.S. federal statutory income
tax rates are explained in Note 7 to the Consolidated Financial Statements.
Income tax rates vary by jurisdiction (county and/or state), and relative
changes in the geographic mix of CompX's pre-tax earnings can result in
fluctuations in the effective income tax rate.
Outlook. While demand has improved across most product segments certain
customers are seeking lower cost Asian sources as alternatives to the Company's
products. Although CompX believes the impact of this will be mitigated through
ongoing initiatives to expand both new products and new market opportunities,
the recent increase in order rates may be moderated to a certain extent in the
near term. Asian sourced competitive pricing pressures are expected to continue
to be a challenge as Asian manufacturers, particularly those located in China,
gain market share. The Company has responded to the competitive pricing pressure
in part by reducing production cost through product reengineering or improvement
in manufacturing processes, moving production to lower-cost facilities and
providing value-added customer support services that foreign manufacturers are
generally unable to provide. However, in some cases the Company has determined
to forgo unprofitable future sales in response to the competitive pricing
pressures.
Additionally, the Company's cost for steel continues to rise dramatically
due to the continued high demand and shortages worldwide. While the Company has
thus far been able to pass a majority of its higher raw material costs on to its
customers through price increases and surcharges, there is no assurance that the
Company would be able to continue to pass along any additional higher costs to
its customers. The price increases and surcharges may accelerate the efforts of
some of the Company's customers to find less expensive products from foreign
manufacturers. The Company will continue to focus on cost improvement
initiatives, utilizing lean manufacturing techniques and prudent balance sheet
management in order to minimize the impact of lower sales particularly to the
office furniture industry and to develop value-added customer relationships with
an additional focus on sales of the Company's higher-margin ergonomic computer
support systems to improve operating results. The Company currently expects to
realize annual cost savings of $3.5 million to $4 million as the result of the
2003 Thomas Regout headcount reduction. Although the Thomas Regout operating
results are expected to improve, the Company is evaluating the strategic role of
the Thomas Regout operations, including the possible sale of some or all of such
operations, and additional actions could be taken in the future that could
result in significant charges for asset impairment, including goodwill, and
other costs in future periods. These actions, along with other activities to
eliminate excess capacity, are designed to position the Company to expand more
effectively on both new product and new market opportunities to improve Company
profitability.
- 15 -
Liquidity and Capital Resources
Summary.
The Company's primary source of liquidity on an ongoing basis is its cash
flow from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay short-term indebtedness incurred primarily for working
capital purposes and (iii) provide for the payment of dividends (if declared).
From time-to-time, the Company will incur indebtedness, primarily for short-term
working capital needs or to fund capital expenditures. From time-to-time, the
Company may also sell assets outside the ordinary course of business, the
proceeds of which are generally used to repay indebtedness (including
indebtedness which may have been collateralized by the assets sold) or to fund
capital expenditures or business acquisitions.
At June 30, 2004, substantially all of the Company's indebtedness consisted
of the $2.0 million outstanding under its revolving bank credit facility that
matures in January 2006. Because the maturity date of the indebtedness is not
until 2006, the Company does not expect it will be required to use any of its
cash flow from operating activities generated during 2004 to repay indebtedness,
although it may choose to do so (as evidenced by the Company's repayment of a
net $24.0 million under the revolving bank credit facility during the first six
months of 2004).
Consolidated cash flows.
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities have generally been similar to the
trends in the Company's earnings. Changes in assets and liabilities result
primarily from the timing of production, sales and purchases. Such changes in
assets and liabilities generally tend to even out over time and result in trends
in cash flows from operating activities generally reflecting earnings trends.
However, period-to-period relative changes in assets and liabilities can
significantly affect the comparability of cash flows from operating activities.
Such changes in assets and liabilities provided cash of approximately $2.0
million in the first six months of 2004 compared to $1.1 million in the first
six months of 2003.
Investing activities. The capital expenditures for 2004 relate primarily to
equipment additions designed to utilize new technologies thereby increasing
automation and improving manufacturing efficiencies at the Company's facilities.
Capital expenditures for 2004 are estimated at approximately $10 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 June 30, 2004
approximated $3.6 million.
In June 2004, the Company received approximately $2.1 million from the sale
of its surplus Trillium facility in Ontario, Canada, which approximated the net
carrying value of such facility.
Financing activities. The Company paid a quarterly dividend of $1.9
million, or $.125 per share, in the first quarter of 2003, but the Company
suspended its regular quarterly dividend in the second quarter of 2003. During
the first six months of 2004, the Company repaid a net $24.0 million under its
revolving bank credit facility.
Provisions contained in the Company's revolving bank credit facility could
result in the acceleration of such indebtedness prior to its stated maturity for
reasons other than defaults from failing to comply with typical financial
covenants. For example, the credit agreement allows the lender to accelerate the
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maturity of the indebtedness upon a change of control (as defined) of the
borrower. The terms of the credit agreement could result in the acceleration of
all or a portion of the indebtedness following a sale of assets outside of the
ordinary course of business. Other than certain operating leases discussed in
the 2003 Annual Report, neither CompX nor any of its subsidiaries or affiliates
are parties to any off-balance sheet financing arrangements.
Management believes that cash generated from operations and borrowing
availability under the Company's credit facility, together with cash on hand,
will be sufficient to meet the Company's liquidity needs for working capital,
capital expenditures, debt service and dividends (if declared). To the extent
that the Company's actual operating results or other developments differ from
the Company's expectations, CompX's liquidity could be adversely affected.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, the Company has in the
past and may in the future seek to raise additional capital, refinance or
restructure indebtedness, issue additional securities, modify its dividend
policy, repurchase shares of its common stock or take a combination of such
steps to manage its liquidity and capital resources. In the normal course of
business, the Company may review opportunities for acquisitions, divestitures,
joint ventures or other business combinations in the component products
industry. In the event of any such transaction, the Company may consider using
available cash, issuing additional equity securities or increasing the
indebtedness of the Company or its subsidiaries.
Forward Looking Information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "anticipates," "expects" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. Among the
factors that could cause actual future results to differ materially are the
risks and uncertainties discussed in this Quarterly Report and those described
from time to time in the Company's other filings with the Securities and
Exchange Commission. While it is not possible to identify all factors, the
Company continues to face many risks and uncertainties including, but not
limited to the following:
o Future supply and demand for the Company's products,
o Changes in costs of raw materials and other operating costs (such as
energy and steel costs),
o General global economic and political conditions,
o Demand for office furniture,
o Service industry employment levels,
o The possibility of labor disruptions,
o The ability to implement headcount reductions in a cost effective
manner within the constraints of non-U.S. governmental regulations,
and the timing and amount of any cost savings,
o Competitive products and prices, including increased competition from
low-cost manufacturing sources (such as China),
o Substitute products,
o Customer and competitor strategies,
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o The introduction of trade barriers,
o The impact of pricing and production decisions,
o Fluctuations in the value of the U.S. dollar relative to other
currencies (such as the euro, Canadian dollar and New Taiwan dollar),
o Potential difficulties in integrating completed or future
acquisitions, o Decisions to sell operating assets other than in the
ordinary course of business,
o Uncertainties associated with new product development,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o The ability of the Company to renew or refinance its revolving bank
credit facility,
o The ultimate outcome of income tax audits,
o The impact of current or future government regulations,
o Possible future litigation and
o Other risks and uncertainties.
Should one or more of these risks materialize (or the consequences of such a
development worsen) or should the underlying assumptions prove incorrect, actual
results could differ materially from those forecasted or expected. The Company
disclaims any intention or obligation to update publicly or revise such
statements whether as a result of new information, future events or otherwise.
ITEM 4. Controls and Procedures.
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission (the "SEC"), means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of David A. Bowers, the Company's Vice
Chairman of the Board, President and Chief Executive Officer, and Darryl R.
Halbert, the Company's Vice President, Chief Financial Officer and Controller,
have evaluated the Company's disclosure controls and procedures as of June 30,
2004. Based upon their evaluation, these executive officers have concluded that
the Company's disclosure controls and procedures are effective as of the date of
such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP"), and
includes those policies and procedures that:
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.
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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 June 30, 2004 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
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Part II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on May 19, 2004. Paul
M. Bass, Jr., David A. Bowers, Keith R. Coogan, Edward J. Hardin, Ann Manix,
Glenn R. Simmons and Steven L. Watson were elected as directors, each receiving
votes "For" their election from over 98% of the approximately 104.6 million
votes eligible to be voted at the Annual Meeting.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
31.1 Certification
31.2 Certification
32.1 Certification
32.2 Certification
The Company has retained a signed original of any of the
above exhibits that contains signatures, and the Company
will provide such exhibit to the Commission or its staff
upon request. CompX will also furnish, without charge, a
copy of its Code of Business Conduct and Ethics, Corporate
Governance Guidelines and Audit Committee Charter, each as
approved by the Board of Directors, upon request. These
documents are also available on CompX's website at
www.compxnet.com. Requests for any of the above documents
should be directed to the attention of CompX's Corporate
Secretary at CompX's corporate offices located at 5430 LBJ
Freeway, Suite 1700, Dallas, Texas 75240.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2004.
April 29, 2004 - Reported items 9 and 12.
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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 July 27, 2004 By /s/ Darryl R. Halbert
----------------- ---------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller
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