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, 2004
Commission file number 1-13905
COMPX INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0981653
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(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) 448-1400
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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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
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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
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The aggregate market value of the 3.4 million shares of voting stock held by
nonaffiliates of CompX International Inc. as of June 30, 2004 approximated $51.0
million.
As of January 31, 2005, 5,178,880 shares of Class A common stock were
outstanding.
Documents incorporated by reference
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 ergonomic computer support
systems. In 2004, precision ball bearing slides, security products and ergonomic
computer support systems accounted for approximately 43%, 42% and 15% of net
sales related to continuing operations, respectively.
On January 24, 2005 the registrant completed the disposition of all of the
net assets of its Thomas Regout precision slide and window furnishing
operations, conducted at its facility in the Netherlands, to members of Thomas
Regout management for proceeds of approximately $22.6 million. At December 31,
2004, the assets and liabilities of Thomas Regout are classified as "held for
sale" and the results of operations for the 2004 and prior periods are
classified as results from "discontinued operations". See Note 10 to the
Consolidated Financial Statements.
At December 31, 2004, CompX is 83% owned by CompX Group, Inc., a majority
owned subsidiary of NL Industries, Inc. (NYSE: NL). NL owns 82.4% of CompX
Group, and Titanium Metals Corporation (NYSE: TIE) ("TIMET") owns the remaining
17.6% of CompX Group. At December 31, 2004, (i) TIMET owns an additional 2% of
CompX directly, (ii) Valhi, Inc. (NYSE: VHI) holds, directly or through a
subsidiary, approximately 83% of NL's outstanding common stock and approximately
41% of TIMET's outstanding common stock and (iii) Contran Corporation holds,
directly or through subsidiaries, approximately 91% of Valhi's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is sole trustee, or is held by Mr.
Simmons or persons or other entities related to Mr. Simmons. Mr. Simmons, the
Chairman of the Board of each of Contran, Valhi and NL and Vice Chairman of the
Board of TIMET, may be deemed to control each of such companies and the Company.
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.
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, 2004 and copies of the Company's Quarterly Reports on Form 10-Q for
2004 and 2005 and any Current Reports on Form 8-K for 2004 and 2005, 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. Additional information regarding the
Company, including the Company's Audit Committee Charter, the Company's Code of
Business Conduct and Ethics and the Company's Corporate Governance Guidelines,
may also be found at this website.
1
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 Costs and expenses associated with compliance with certain
requirements of the Sarbanes-Oxley Act of 2002 relating to the
evaluation of the Company's internal control over financial reporting,
o The introduction of trade barriers,
o The impact of pricing and production decisions,
o Fluctuations in the value of the U.S. dollar relative to other
currencies (such as the Canadian dollar and New Taiwan dollar),
o Potential difficulties in integrating completed or future
acquisitions,
o Decisions to sell operating assets other than in the ordinary course
of business,
o Uncertainties associated with new product development,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
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,
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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
Historically, approximately three-fourths 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 55% 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,
recreational transportation, computers and related equipment, banking equipment,
refrigerators, tool boxes and other non-office furniture applications. In 2004,
the office furniture industry began to recover from a multi-year contraction
marked by consistently negative growth rates. Consequently, CompX's historical
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 products used in 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 2002, 2003 and 2004 are as
follows:
Years ended December 31
2002 2003 2004
---- ---- ----
($ in thousands)
Precision ball bearing slides $ 63,417 $ 69,709 $ 78,522
Security products 73,358 76,155 75,872
Ergonomic computer support systems 29,896 28,102 28,237
----------- ----------- -----------
$166,671 $173,966 $182,631
======== ======== ========
The Company's precision ball bearing slides are sold under the CompX
Waterloo, Waterloo Furniture Components and Dynaslide brand names; the Company's
security products are sold under the CompX Security Products, National Cabinet
Lock, Fort Lock, Timberline Lock, Chicago Lock, STOCK LOCKS, KeSet and TuBar
brand names; and the ergonomic computer support systems are sold under the CompX
ErgonomX brand name. 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, automated teller machines, refrigerators 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
3
same time, the adjustable patented Ball Lock which reduces the risk of
heavily-filled drawers, such as auto mechanic tool boxes, from opening while in
movement, and the Butterfly Take Apart System, which is designed to easily
disengage drawers from cabinets. 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.
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, recreational 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 its
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. CompX Security Products' innovative eLock
electronic lock provides stand alone security and audit trail capability for
drug storage and other valuables through the use of a proximity card, magnetic
stripe, or keypad credentials. 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 and accessories. Unlike similar
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), 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.
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
4
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 for those Canadian manufactured products.
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
2002, 2003 and 2004, sales to the Company's ten largest customers accounted for
approximately 38%, 44% and 43% of sales, respectively. In 2002 and 2003, sales
to the Company's largest customer were less than 10% of the Company's total
sales. In 2004, one customer accounted for 11% of sales. In each of 2002, 2003
and 2004, eight of the Company's top ten customers were located in the United
States.
Manufacturing and Operations
At December 31, 2004, CompX operated seven manufacturing facilities related
to its continuing operations: five in North America (two in Illinois and one in
each of Canada, South Carolina and Michigan) and two in Taiwan. Precision ball
bearing slides are manufactured in the facilities located in Canada, Michigan
and Taiwan. Security products are manufactured in the facilities located in
South Carolina and Illinois. Ergonomic products are manufactured in the facility
located in Canada. The Company owns all of these facilities except for one of
the Taiwan facilities, which is 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 and zinc 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 through 2004. 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.
5
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 unique 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. The Company's patents generally have a term of 20 years from
the date of filing, and have remaining terms ranging from4 to 19 years at
December 31, 2004. CompX's major trademarks and brand names, including CompX,
CompX Security Products, CompX Waterloo, CompX ErgonomX, National Cabinet Lock,
KeSet, Fort Lock, Timberline Lock, Chicago Lock, ACE II, TuBar, 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.
International Operations
The Company has substantial operations and assets located outside the
United States, principally slide and ergonomic product operations in Canada and
slide product operations in Taiwan. The majority of the Company's 2004 non-U.S.
sales are to customers located in Canada. 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
6
("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 laws and regulations 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, 2004, the Company employed approximately 1,450
employees, including 800 in the United States, 470 in Canada and 180 in Taiwan.
Approximately 76% of the Company's employees in Canada are represented by a
labor union covered by a collective bargaining agreement which provides for
annual wage increases from 1% to 2.5% over the life of the contract. Wage
increases for these Canadian employees historically have also been in line with
overall inflation indices. The collective bargaining agreement 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
1,000 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:
Waterloo PS/ERG Kitchener, Ontario 276,000 Slides/ergonomic
Products
Byron Center PS Byron Center, MI 143,000 Slides
National SP Mauldin, SC 198,000 Security products
Fort SP River Grove, IL 100,000 Security products
Timberline SP Lake Bluff, IL 16,000 Security products
Dynaslide PS Taipei, Taiwan 48,000 Slides
Leased Facilities:
Thomas Regout * Maastricht,
the Netherlands 270,000 Slides
Dynaslide PS Taipei, Taiwan 25,000 Slides
Dynaslide PS Taipei, Taiwan 11,000 Product distribution/
Warehouse
Distribution Center SP Rancho Cucamonga, CA 12,000 Product distribution
PS - Precision Slides business segment
SP - Security Products business segment
ERG - Ergonomics business segment
* - Discontinued operation
The Waterloo, 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.
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The business operated at the Thomas Regout facility was disposed of, including
the leased facility, on January 24, 2005 and is classified as "discontinued
operations" at December 31, 2004.
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, 2004.
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 January 31, 2005, there were approximately
18 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 2003 and 2004 and dividends paid per share during such periods. On
January 31, 2005, the closing price per share of CompX Class A common stock was
$16.95.
Dividends
High Low paid
---- --- ----------
Year ended December 31, 2003
First Quarter $ 8.38 $ 5.93 $.125
Second Quarter 6.39 4.95 -
Third Quarter 6.90 5.11 -
Fourth Quarter 7.10 5.80 -
Year ended December 31, 2004
First Quarter $ 13.90 $ 6.35 -
Second Quarter 16.95 13.00 -
Third Quarter 17.60 13.97 -
Fourth Quarter 16.82 14.90 $.125
The Company suspended its regular quarterly dividend during the second
quarter of 2003 and reinstated its regular quarterly dividend during the fourth
quarter of 2004. However, the declaration and payment of future dividends and
the amount thereof, if any, is discretionary and is dependent upon the Company's
results of operations, financial condition, cash requirements for its
businesses, contractual requirements and restrictions and other factors deemed
relevant by the Board of Directors. The amount and timing of past dividends is
not necessarily indicative of the amount or timing of any future dividends which
might be paid.
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ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's operations are comprised of a 52 or 53-week fiscal year. Each
of the years 2000 through 2003 consisted of a 52-week year. 2004 was a 53-week
year. 2005 will be a 52-week year.
Years ended December 31,
--------------------------------
2000 2001 2002 2003 2004
---- ---- ---- ---- ----
($ in millions, except per share data)
Income Statement Data
Net sales $217.6 $179.7 $166.7 $174.0 $182.6
Operating income $ 33.5 $ 12.6 $ 6.1 $ 9.5 $ 15.7
Provision for income taxes $ 12.5 $ 6.4 $ 3.0 $ 3.4 $ 7.8
Income from continuing operations $ 21.0 $ 8.8 $ 0.9 $ 5.8 $ 9.5
Discontinued operations 1.1 (1.7) (0.3) (4.5) (12.5)
------- ------ ------ ------ ------
Net income (loss) $ 22.1 $ 7.1 $ .6 $ 1.3 $ (3.0)
====== ====== ====== ====== ======
Basic and
diluted earnings (loss) per share
Continuing operations $ 1.30 $ .58 $ .06 $ .38 $ .63
Discontinued operations .07 (.11) (.02) (.30) (.83)
------ ------ ------ ------ ------
$ 1.37 $ .47 $ .04 $ .08 $ (.20)
====== ====== ====== ====== ======
Cash dividends per share $ .50 $ .50 $ .50 $ .125 $ .125
Weighted average common shares
Outstanding 16.1 15.1 15.1 15.1 15.2
Balance Sheet Data
(at year end):
Cash and other current assets $ 83.0 $ 94.9 $ 71.3 $ 80.2 $ 77.7
Total assets 223.7 222.9 200.1 210.7 185.7
Current liabilities 28.9 24.5 22.2 24.5 25.4
Long-term debt, including
current maturities 40.6 49.1 31.0 26.0 0.1
Stockholders' equity 151.0 143.0 142.0 154.4 155.3
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Executive Summary
The Company reported income from continuing operations of $9.5 million, or
$.63 per diluted share, in 2004 compared to income of $5.8 million, or $.38 per
diluted share, in 2003 and $1.0 million, or $.06 per diluted share, in 2002. As
more fully described below, the Company's diluted earnings per share from
continuing operations increased from 2003 to 2004 due primarily to the net
effects of (i) higher sales in 2004, (ii) improved margins in 2004 through cost
reduction efforts, (iii) lower interest expense in 2004 and (iv) a higher
effective income tax rate in 2004. The Company's diluted earnings per share from
continuing operations increased from 2002 to 2003 due primarily to the net
effects of (i) higher sales in 2003, (ii) improved margins in 2003 through cost
reduction efforts, (iii) lower interest expense in 2003 and (iv) a higher
effective income tax rate in 2002.
Fluctuations in foreign currency exchange rates did not significantly
affect the Company's results in 2004 as compared to 2003. Fluctuations in
currency exchange rates in 2003 as compared to 2002 positively impacted sales by
$3.3 million but negatively impacted cost of goods sold by $5.6 million and
operating profit by $3.0 million. The impact on net sales is primarily due to
the weakening U.S. dollar in relation to the Canadian dollar. The impact on
operating income is primarily from the Company's Canadian operations, where the
majority of net sales are denominated in U.S. dollars while the majority of
expenses are denominated in Canadian dollars.
Cash provided by operating activities improved to $30.2 million in 2004
from $24.4 million in 2003. Improvement in income from continuing operations was
a significant contributor to the improvement in cash flow.
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?
10
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 uncollectible 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 inventories 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.
Under applicable GAAP (SFAS no. 142, Goodwill and other
Intangible Assets), goodwill is required to be reviewed for impairment
at least on an annual basis. Goodwill will also be reviewed for
impairment at other times during each year when impairment indicators,
as defined, are present. Based on the Company's latest annual
impairment review of goodwill of the reporting units during the third
quarter of 2004, no goodwill impairments were deemed to exist. Based
on this review, the estimated fair value of the Security Products
reporting units exceeded the net carrying value by 124%, CompX
Waterloo by 395%, and Thomas Regout by 61%. See Notes 1 and 4 to the
Consolidated Financial Statements. The estimated fair values of these
three reporting units are determined based on discounted cash flow
projections. Significant judgment is required in estimating such cash
flows. Such estimated cash flows are inherently uncertain, and there
can be no assurance that such operations will achieve the future cash
flows reflected in its projections. In December 2004, the Company's
Thomas Regout operations met the criteria under GAAP to be classified
as "held for sale" and thus was required to be measured at the lower
of its carrying amount or estimated fair value less cost to sell. At
such time, the Company recognized a $14.4 million impairment of the
goodwill related to such operations, as the carrying amount of the net
assets exceed the estimated fair value less cost to sell of the
operations. See Note 10 to the Consolidated Financial Statements.
Under applicable GAAP (SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets), property and equipment
11
is not assessed for impairment unless certain impairment indicators,
as defined, are present. During 2004, no impairment indicators were
present with respect to the Company's property and equipment.
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
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 currently has three
operating segments - Security Products, Precision Slide and Ergonomics. The
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
Precision Slide segment, with facilities in Canada, Michigan and Taiwan,
manufactures and distributes a complete line of precision ball bearing slides
for use in office furniture, computer-related equipment, tool storage cabinets
and other applications. The Ergonomics segment manufactures and distributes
ergonomic computer support systems for office furniture from a facility in
Canada that it shares with the Precision Slide segment. Previously, the Company
has aggregated the Precision Slide and Ergonomics operating segments into a
single reportable segment, CompX Waterloo, because of the integrated facility
used by the two businesses and the similar economic characteristics, customer
types, production processes, and distribution methods. During the fourth quarter
of 2004, the Company began to measure the ergonomics business as a separate
operating unit and develop appropriate allocations relating to certain shared
expenses in order to disaggregate the 2004 operating results. Prior to 2004,
disaggregated information is not available due to the impracticality of
allocating certain historical expenses that are shared between the two segments.
Therefore, aggregated segment amounts are reported for Precision Slides/
Ergonomics in current and previous periods as well as the disaggregated
information for 2004.
Net sales and operating income
Years ended December 31, 2004
(In millions)
Net Operating Operating
sales income income margin
------- ---------- -------------
Precision Slides $ 78.5 $ 1.4 2%
Security Products 75.9 9.3 12%
Ergonomics 28.2 5.0 18%
------ -----
Total $182.6 $15.7 9%
====== =====
12
Years ended December 31, % Change
-------------------------- -------------------------
2002 2003 2004 2002 - 2003 2003 - 2004
---- ---- ---- ----------- -----------
(In millions)
Net sales:
Precision Slides/ $ 93.3 $ 97.8 $106.7 5% 9%
Ergonomics
Security Products 73.4 76.2 75.9 4% (<1%)
------ ------ ------
Total net sales $166.7 $174.0 $182.6 4% 5%
====== ====== ======
Operating income (loss):
Precision Slides/ $ (1.6) $ - $ 6.4 n.m. n.m.
Ergonomics
Security Products 7.7 9.5 9.3 23% (2%)
------ ------ ------
Total operating
income $ 6.1 $ 9.5 $ 15.7 55% 65%
====== ====== ======
Operating income (loss)
margin:
Precision Slides/ (2%) 0% 6%
Ergonomics
Security Products 10% 12% 12%
Total operating income
margin 4% 5% 9%
n.m. - not meaningful
Year ended December 31, 2004 compared to year ended December 31, 2003
Currency. CompX has substantial operations and assets located outside the
United States (in Canada 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 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 Precision Slides and
Ergonomics segments, and do not materially affect the Security Products segment.
During 2004, currency exchange rate fluctuations positively impacted the
Company's sales comparisons with 2003, and negatively impacted the Company's
operating income comparisons for the same 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 2003:
Precision Security
Slides Products Ergonomics Total
---------- --------- ---------- ------
Impact on net sales $ 1,992 $ - $479 $ 2,471
Impact on operating income (230) - (624) (854)
Net Sales. Net sales increased $8.6 million, or 5%, in 2004 compared to
2003 principally due to increases in product prices for precision slides and
ergonomic products, which were primarily a pass through of steel cost increases
to customers. Additionally, currency exchange rates favorably impacted sales
within the precision slides and ergonomic product segments.
14
Net sales of slide products in 2004 increased 13% as compared to 2003,
while 2004 net sales of security products decreased less than 1% and net sales
of ergonomic products increased 1% as compared to the same period. The
percentage changes in slide and ergonomic products include the impact resulting
from changes in foreign currency exchange rates. Sales of security products are
generally denominated in U.S. dollars.
Costs of Goods Sold. The Company's cost of goods sold was flat in 2004
compared to 2003, although net sales increased during the same period. The
resulting improvement in gross margin was due to the full year impact of cost
improvement initiatives completed during 2003 partially offset by the negative
impact of the aforementioned changes in currency exchange rates and increases in
the cost of steel, the primary raw material for the Company's products.
Selling, General and Administrative Expense. Selling, general and
administrative expenses consists primarily of salaries, commissions and
advertising expenses directly related to product sales. As a percentage of net
sales, selling, general and administrative expense increased slightly from 12%
of net sales in 2003 to 13% in 2004. A significant portion of the increase was
due to costs relating to compliance with Section 404 of the Sarbanes-Oxley Act
of 2002.
Operating Income. Operating income for 2004 increased $6.2 million, or 65%
compared to 2003 and operating margins increased to 9% in 2004 compared to 5%
for 2003. Continued reductions in manufacturing, fixed overhead and other
overhead costs were partially offset by the effects of the changes in currency
exchange rates and increases in certain raw material costs (primarily steel).
Year ended December 31, 2003 compared to year ended December 31, 2002
Currency. During 2003, currency exchange rate fluctuations of the Canadian
dollar positively impacted the Company's sales comparisons with 2002
(principally with respect to slide products), and negatively impacted the
Company's operating income comparisons.
Net sales were positively impacted while operating income was negatively
impacted by currency exchange rates in the following amounts as compared to
2002:
Precision
Slides/ Security
Ergonomics Products Total
---------- -------- -------
Impact on net sales $ 3,275 $ - $ 3,275
Impact on operating income (3,057) - (3,057)
Net Sales. Net sales increased $7.3 million, or 4%, in 2003 compared to
2002 principally due to the strengthening of the Canadian dollar in relation to
the U.S. dollar, combined with a strong fourth quarter for Security Products. In
addition to the favorable impact of changes in foreign currency exchange rates,
net sales increased in 2003 as compared to 2002 due to higher sales volumes of
security products, and precision slide products in North America partially
offset by lower sales volumes of ergonomic products.
Net sales of slide products in 2003 increased 10% as compared to 2002,
while net sales of security products increased 4% and net sales of ergonomic
products decreased 6% during the same period. The percentage changes in slide
and ergonomic products include the impact resulting from changes in foreign
currency exchange rates. Sales of security products are generally denominated in
U.S. dollars.
Costs of Goods Sold. The Company's cost of goods sold increased 4% in 2003
compared to 2002, which was a lower rate of increase than the increase in net
14
sales during the same period. Cost of goods sold as a percent of net sales was
lower than 2002 as cost improvement initiatives, such as improving facility
efficiency, were partially offset by expenses to consolidate the two Kitchener,
Ontario plants into a single facility during 2003, the negative impact of the
aforementioned changes in currency exchange rates and increases in the cost of
steel, the primary raw material for the Company's products.
Selling, General and Administrative Expense. Selling, general and
administrative expenses consist primarily of salaries, commissions and
advertising expenses directly related to product sales. As a percentage of net
sales, selling, general and administrative expense declined slightly from 14% of
net sales in 2002 to 12% in 2003.
2002 Charges. 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. 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 Precision
Slides/Ergonomics segment with the remaining $.6 million relating to the CompX
Security Products segment.
Operating Income. Operating income for 2003 increased $3.4 million, or 55%
compared to 2002 and operating margins improved to 5% in 2003 compared to 4% for
2002. Continued reductions in manufacturing, fixed overhead and other overhead
costs combined with the impact of the fourth quarter 2002 charge partially
offset the effects of the changes in currency exchange rates, changes in product
mix, and increases in certain raw material costs (primarily steel).
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 46%
of the Company's total cost of sales. During 2002, 2003 and 2004, worldwide
steel prices increased significantly. 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
enters into such arrangements for zinc, coiled steel and plastic resins and
anticipates further significant changes in the cost of these materials,
primarily coiled steel, 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.
Other general corporate income (expense), net
As summarized in Note 11 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
15
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 expense
Interest expense declined $.8 million in 2004 compared to 2003 and declined
$.6 million in 2003 compared to 2002 due primarily to lower average levels of
borrowing on CompX's revolving bank credit facility, partially offset by higher
interest rates. Interest expense in 2005 is expected to be lower compared to
2004 due to the reduction in the 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
8 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 loss in 2004 was negatively impacted by an increase in the
effective income tax rate primarily as a result of an increased proportion of
foreign-sourced dividend income taxed at a higher effective tax rate.
The Company expects to generate a $4.2 million tax benefit associated with
the U.S. capital loss expected to be realized in the first quarter of 2005 upon
the completion of the sale of the Thomas Regout operations. However, the Company
has determined that realization of such benefits does not currently meet the
more-likely-than not recognition criteria and therefore, the deferred tax asset
has been fully offset by a deferred income tax asset valuation allowance at
December 31, 2004. The deferred income tax benefit and the offsetting valuation
allowance are both reflected as a component of discontinued operations. See Note
8 to the Consolidated Financial Statements.
Discontinued operations
See Note 10 to the Consolidated Financial Statements.
Related party transactions
CompX is a party to certain transactions with related parties. See Note 12
to the Consolidated Financial Statements.
Accounting principles not yet adopted
See Note 14 to the Consolidated Financial Statements.
Outlook
While demand has stabilized across most product segments, certain customers
are seeking lower cost Asian sources as alternatives to the Company's products.
CompX believes the impact of this will be mitigated through ongoing initiatives
to expand both new products and new market opportunities. Asian sourced
competitive pricing pressures are expected to continue to be a challenge as
Asian manufacturers, particularly those located in China, gain market share. The
Company's strategy in responding to the competitive pricing pressure has
included reducing production cost through product reengineering, improvement in
16
manufacturing processes or moving production to lower-cost facilities, including
our own Asian based manufacturing facilities. The Company also has emphasized
and focused on opportunities where it can provide value-added customer support
services that Asian based manufacturers are generally unable to provide. The
combination of the Company's cost control initiatives together with its
value-added approach to development and marketing of products are believed to
help mitigate the impact of 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. 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.
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 or long-term indebtedness incurred primarily
for working capital or capital expenditure 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 or business combinations. In addition, 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 combinations.
At December 31, 2004, the Company had no amounts outstanding under its
credit agreement, which expires in January 2006.
Cash provided by operating activities improved to $30.2 million in 2004
from $24.4 million in 2003. The improvement in cash provided by operating
activities is primarily attributable to the improvement in operating results.
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities, for 2002, 2003 and 2004 have
generally been similar to the trend in the Company's earnings. Depreciation and
amortization expense decreased in 2004 compared to 2003 due to lower capital
expenditures during 2003 and 2004 as the Company reduced is production capacity,
but increased in 2003 compared to 2002 due to an increase in the amount of
assets put into service during 2001 and 2002 relating to specific customer
volumes combined with the impact of changes in currency exchange rates. See
Notes 1 and 4.
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
17
from operating activities. In 2002, the declines in accounts receivable and
accounts payable are the result of the lower sales volumes, but the inventory
decrease is relatively more significant as the Company began to realize some of
the benefit of its lean manufacturing initiatives. For 2003, the increase in
sales volumes resulted in higher accounts receivable and accounts payable
balances while the Company continued to actively reduce inventory levels. In
2004, the lower accounts receivable was the result of higher than normal
payments received during December due to focused collection efforts, the
decrease in accrued liabilities was the result of payments relating to the 2003
Thomas Regout restructuring accrual and the positive cash flow from income taxes
relating to the timing of refunds received during 2004 and an increase in
accrued income taxes resulting from the improvement in taxable income.
Investing activities. Net cash used by investing activities totaled $12.7
million, $8.2 million, and $3.2 million for the years ended December 31, 2002,
2003 and 2004, respectively. Capital expenditures in the past three years
emphasized manufacturing equipment which utilize new technologies and increases
automation of the manufacturing process to provide for increased productivity
and efficiency. Capital expenditures in 2002 through 2004 relate primarily to
general equipment upgrades, modernization, and capacity increases relating to
specific customer volumes. 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 the facility.
Capital expenditures for 2005 are estimated at approximately $15.3 million,
the majority of which relates to projects that emphasize improved production
efficiency including replacement of equipment that is being retired. Firm
purchase commitments for capital projects in process at December 31, 2004
approximated $3.3 million.
Financing activities. Net cash used by financing activities totaled $25.5
million, $7.3 million, and $27.1 million in 2002, 2003 and 2004, respectively.
Total cash dividends paid in 2002 was $7.6 million ($.50 per share) and in each
of 2003 and 2004 were $1.9 million ($.125 per share). The Company suspended its
regular quarterly dividend in the second quarter of 2003 and reinstated the
regular quarterly dividend in the fourth quarter of 2004. The Company repaid a
net $18.0 million, $5.0 million and $26.0 million under its revolving bank
credit facility during 2002, 2003 and 2004, respectively.
The Company's $47.5 million secured revolving bank credit facility 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 Revolving Bank 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, which provision was waived in
conjunction with the Company's sale of its Thomas Regout operations. See Note 6
to the Consolidated Financial Statements. Other than certain operating leases
discussed in Note 13 to the Consolidated Financial Statements, neither CompX nor
any of its subsidiaries or affiliates are parties to any off-balance sheet
financing arrangements.
Other
On January 24, 2005, CompX completed the disposition of all of the net
assets of its Thomas Regout precision slide and window furnishing operations,
conducted at its facility in the Netherlands, to members of Thomas Regout
management for net proceeds of approximately $22.6 million. The proceeds
consisted of cash (net of costs to sell) of approximately $18.4 million and a
18
subordinated note for approximately $4.2 million. The subordinated note requires
annual payments over a period of four years. Historically, the Thomas Regout
European operations have not contributed significantly to net cash flows from
operations. See Note 10 to the Consolidated Financial Statements.
Management believes that cash generated from operations and borrowing
availability under the 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, 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,
2004.
Payments due by period
---------------------------
Less than 1 - 3 4 - 5
Total 1 year years years
(In thousands)
Long-term debt $ - $ - $ - $ -
Capital lease obligations and other - - - -
Operating leases 1,214 613 601 -
Purchase obligations 12,572 12,572 - -
Income taxes 2,687 2,687 - -
Fixed asset acquisitions 3,301 3,301 - -
------- ------- ---- ---
Total contractual cash obligations $19,774 $19,173 $601 $ -
======= ======= ==== ===
The purchase obligations consist of all open purchase orders and
contractual obligations, primarily commitments to purchase raw materials. Fixed
asset acquisitions include firm purchase commitments for capital projects.
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
19
to any forward or derivative option contract related to foreign exchange rates
or interest rates at December 31, 2003 and 2004. 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, 2004, the Company had no amounts outstanding under its
secured Revolving Bank Credit Agreement. At December 31, 2003, substantially all
of the Company's outstanding indebtedness was variable rate borrowings. Such
borrowings at December 31, 2003 related principally to $26 million in borrowings
under the Company's secured Revolving Bank Credit Agreement. The outstanding
balances at December 31, 2003 (which approximate fair value) had a
weighted-average interest rate of 3.2%. The credit facility expires in January
2006 and any amounts outstanding would be due at that time. The remaining
indebtedness outstanding at December 31, 2003 and 2004 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 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 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.
As already mentioned 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, 2004 CompX held a series of
short-term forward exchange contracts maturing through March 2005 to exchange an
aggregate of $7.2 million for an equivalent value of Canadian dollars at
exchange rates of Cdn. $1.19 to Cdn. 1.23 per U.S. dollar. At December 31, 2004,
the actual exchange rate was Cdn. $1.21 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 unless the contract is
designated as a hedge upon which the mark-to-market adjustment is recorded in
other comprehensive income. At December 31, 2003 CompX had entered into a series
of short-term forward exchange contracts maturing through February 2004 to
exchange an aggregate of $4.2 million for an equivalent value of Canadian
dollars at exchange rates of Cdn. $1.30 to Cdn. 1.33 per U.S. dollar. At
December 31, 2003, the actual exchange rate was Cdn. $1.31 per U.S. dollar. The
estimated fair value of such contracts is not material at December 31, 2003 and
2004.
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."
20
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 Schedule" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. 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 December
31, 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.
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.
As permitted by regulations of the SEC, the Company's system of internal
controls over financial reporting excludes internal controls over financial
reporting related to the Company's financial statement schedules required by
21
Article 12 of Regulation S-X. See the index of financial statements and
schedules on page F-1 of this Annual Report. There has been no change to the
Company's system of internal controls over financial reporting during the
quarter ended December 31, 2004 that has materially affected, or is reasonably
likely to materially affect, the Company's system of internal controls over
financial reporting.
The Company's chief executive officer is required to annually file a
certification with the New York Stock Exchange ("NYSE"), certifying the
Company's compliance with the corporate governance listing standards of the
NYSE. During 2004, the Company's chief executive officer filed such annual
certification with the NYSE, indicating that he was not aware of any violations
by the Company of the NYSE corporate governance listing standards. The Company's
chief executive officer and chief financial officer are also required to, among
other things, quarterly file a certification with the SEC regarding the quality
of the Company's public disclosures, as required by Section 302 of the
Sarbanes-Oxley Act of 2002. The certifications for the year ended December 31,
2004 have been filed as exhibits 31.1 and 31.2 to this Annual Report on Form
10-K.
Section 404 of the Sarbanes-Oxley Act of 2002 will require the Company to
annually include a management report on internal control over financial
reporting starting with the Company's Annual Report on Form 10-K for the year
ended December 31, 2006. The Company's independent auditors will also be
required to annually attest to the Company's internal control over financial
reporting. In order to achieve compliance with Section 404, the Company has been
documenting, testing and evaluating its internal control over financial
reporting since 2004, using a combination of internal and external resources.
The process of documenting, testing and evaluating the Company's internal
control over financial reporting under the applicable guidelines is complex and
time consuming, and available internal and external resources necessary to
assist the Company in the documentation and testing required to comply with
Section 404 are limited. While the Company currently believes it has dedicated
the appropriate resources, that it will be able to fully comply with Section 404
in its Annual Report on Form 10-K for the year ended December 31, 2006 and be in
a position to conclude that the Company's internal control over financial
reporting is effective as of December 31, 2006, because the applicable
requirements are complex and time consuming, and because currently unforeseen
events or circumstances beyond the Company's control could arise, there can be
no assurance that the Company will ultimately be able to fully comply with
Section 404 in its Annual Report on Form 10-K for the year ended December 31,
2006 or whether it will be able to conclude that the Company's internal control
over financial reporting is effective as of December 31, 2006.
22
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 12 to the Consolidated Financial
Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the
CompX Proxy Statement.
23
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) and (d) Financial Statements and Schedule
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
Reports on Form 8-K for the quarter ended December 31, 2004:
October 27, 2004 - Reported items 7.01 and 9.01
November 9, 2004 - Reported items 2.02, 7.01 and 9.01
December 29, 2004 - Reported items 2.05, 2.06, 7.01 and 9.01.
(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. CompX will also furnish, without charge, a copy of
its Code of Business Conduct and Ethics, as adopted by the Board of
Directors on February 24, 2004, upon request. Such requests should be
directed to the attention of CompX's Corporate Secretary at CompX's
corporate offices located at 5430 LBJ Freeway, Suite 1700, Dallas, Texas
75240.
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 - incorporated by reference to
Exhibit 3.2 of the Registrant's Annual Report on Form 10-K for
the year ended December 31, 2002.
10.1 Share Purchase Agreement with Subordinated Loan schedule between
the Registrant and Anchor Holding B.V. dated January 24, 2005.
All related schedules and annexes will be provided to the SEC
upon request.
10.2 Intercorporate Services Agreement between the Registrant and
Contran Corporation effective as of January 1, 2004 -
incorporated by reference to Exhibit 10.2 of the Registrant's
Annual Report on Form 10-K for the year ended December 31, 2003.
10.3* 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).
10.4* 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.
10.5 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).
24
Item No. Exhibit Item
-------- ------------
10.6 Tax Sharing Agreement between the Registrant, NL Industries, Inc.
and Contran Corporation dated as of October 5, 2004.
10.7 $47,500,000 Credit Agreement between the Registrant, Wachovia
Bank, National Association, as Agent and various lending
institutions dated January 22, 2003 - incorporated by reference
to Exhibit 10.9 of the Registrant's Annual Report on Form 10-K
for the year ended December 31, 2002.
10.8 First Amendment to Credit Agreement between Registrant, Wachovia
Bank, and National Association, as Agent and various lending
institutions dated October 20, 2003 - incorporated by reference
to Exhibit 10.1 at the Registrant's Quarterly Report on Form 10-Q
for the quarter ended September 30, 2003.
10.9 Second Amendment to Credit Agreement between Registrant, Wachovia
Bank, and National Association, as Agent and various lending
institutions dated January 7, 2005.
10.10 Agreement Regarding Shared Insurance between the Registrant,
Contran Corporation, Keystone Consolidated Industries, Inc.,
Kronos Worldwide, Inc., NL Industries, Inc., Titanium Metals
Corp., and Valhi, Inc. dated October 30, 2003 - incorporated by
reference to Exhibit 10.12 of the Registrant's Annual Report on
Form 10-K for the year ended December 31, 2003.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
31.1 Certification
31.2 Certification
32.1 Certification
32.2 Certification
* Management contract, compensatory plan or agreement.
25
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 30, 2005
- -----------------------------
Glenn R. Simmons
/s/ David A. Bowers Vice Chairman of the March 30, 2005
- ----------------------------- Board, President and
David A. Bowers Chief Executive Officer
(Principal Executive Officer)
/s/ Darryl R. Halbert Vice President, March 30, 2005
- ----------------------------- Chief Financial Officer
Darryl R. Halbert and Controller
(Principal Financial and
Accounting Officer)
/s/ Paul M. Bass, Jr. Director March 30, 2005
- -----------------------------
Paul M. Bass, Jr.
/s/ Keith R. Coogan Director March 30, 2005
- -----------------------------
Keith R. Coogan
/s/ Edward J. Hardin Director March 30, 2005
- -----------------------------
Edward J. Hardin
/s/ Ann Manix Director March 30, 2005
- --------------------------------------
Ann Manix
/s/ Steven L. Watson Director March 30, 2005
- -----------------------------
Steven L. Watson
26
Annual Report on Form 10-K
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedule
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2003 and 2004 F-3
Consolidated Statements of Operations -
Years ended December 31, 2002, 2003 and 2004 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2002, 2003 and 2004 F-6
Consolidated Statements of Cash Flows -
Years ended December 31, 2002, 2003 and 2004 F-7
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2002, 2003 and 2004 F-9
Notes to Consolidated Financial Statements F-10
Financial Statement Schedule
Report of Independent Registered Public Accounting Firm S-1
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of CompX International Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, 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, 2004 and 2003, and the consolidated results of their operations
and their cash flows for each of the three years in the period ended December
31, 2004, 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
statements in accordance with the standards of the Public Company Accounting
Oversight Board (United States). Those standards 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.
PricewaterhouseCoopers LLP
Dallas, Texas
March 30, 2005
F-2
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2003 and 2004
(In thousands, except share data)
ASSETS 2003 2004
---- ----
Current assets:
Cash and cash equivalents $ 19,632 $ 16,803
Accounts receivable, less allowance for
doubtful accounts of $313 and $394 21,435 19,212
Income taxes receivable from affiliates 306 635
Refundable income taxes 2,376 57
Inventories 20,970 20,782
Prepaid expenses and other current assets 863 790
Deferred income taxes 1,920 1,447
Assets held for sale 12,720 17,957
-------- --------
Total current assets 80,222 77,683
-------- --------
Other assets:
Goodwill 28,729 29,012
Other intangible assets 1,945 1,703
Assets held for sale 25,875 10,964
Other 422 195
-------- --------
Total other assets 56,971 41,874
-------- --------
Property and equipment:
Land 4,746 4,713
Buildings 28,605 26,877
Equipment 100,731 104,041
Construction in progress 597 2,299
-------- --------
134,679 137,930
Less accumulated depreciation 61,129 71,808
-------- --------
Net property and equipment 73,550 66,122
-------- --------
$210,743 $185,679
======== ========
F-3
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2003 and 2004
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 2003 2004
---- ----
Current liabilities:
Accounts payable and accrued liabilities $ 17,435 $ 17,704
Income taxes - 2,687
Liabilities related to assets held for sale 7,089 4,998
-------- --------
Total current liabilities 24,524 25,389
-------- --------
Noncurrent liabilities:
Long-term debt 26,000 85
Deferred income taxes 5,839 4,949
Liabilities related to assets held for sale 21 -
-------- --------
Total noncurrent liabilities 31,860 5,034
-------- --------
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; 6,228,680 and
5,178,880 shares issued 62 52
Class B common stock, $.01 par value;
10,000,000 shares authorized, issued and outstanding 100 100
Additional paid-in capital 119,437 108,828
Retained earnings 43,433 38,523
Accumulated other comprehensive income 2,642 7,753
Treasury stock, at cost - 1,103,900 shares (11,315) -
-------- --------
Total stockholders' equity 154,359 155,256
-------- --------
$210,743 $185,679
======== ========
Commitments and contingencies (Notes 1, 10 and 13)
See accompanying notes to consolidated financial statements.
F-4
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2002, 2003 and 2004
(In thousands, except per share data)
2002 2003 2004
---- ---- ----
Net sales $166,671 $173,966 $182,631
Cost of goods sold 137,591 142,877 142,807
-------- -------- --------
Gross margin 29,080 31,089 39,824
Selling, general and administrative expense 22,954 21,598 24,132
-------- -------- --------
Operating income 6,126 9,491 15,692
Other general corporate income (expense), net (300) 964 2,125
Interest expense (1,888) (1,301) (494)
-------- -------- --------
Income from continuing operations
before income taxes 3,938 9,154 17,323
Provision for income taxes 2,976 3,376 7,840
-------- -------- --------
Income from continuing operations 962 5,778 9,483
Discontinued operations, net of tax (324) (4,505) (12,497)
-------- -------- --------
Net income (loss) 638 1,273 (3,014)
======== ======== ========
Basic and diluted earnings (loss) per common share:
Continuing operations $ .06 $ .38 $ .63
Discontinued operations $ (.02) $ (.30) $ (.83)
-------- -------- ---------
$ .04 $ .08 $ (.20)
======== ======== =========
Cash dividends per share $ .50 $ .125 $ $.125
======== ======== =========
Shares used in the calculation of earnings per share amounts for:
Basic earnings per share 15,110 15,121 15,148
Dilutive impact of stock options 8 - 18
-------- -------- --------
Diluted earnings per share 15,118 15,121 15,166
======== ======== ========
See accompanying notes to consolidated financial statements.
F-5
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Net income (loss) $ 638 $ 1,273 $(3,014)
------- ------- -------
Other comprehensive income
Currency translation adjustment,
net of income tax effect of $(66),
$134, and $380 5,709 12,946 5,036
Unrealized gain on cash flow hedges - - 75
------- ------- -------
Total other comprehensive income 5,709 12,946 5,111
------- ------- -------
Comprehensive income $ 6,347 $14,219 $ 2,097
======= ======= =======
See accompanying notes to consolidated financial statements.
F-6
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 638 $ 1,273 $ (3,014)
Depreciation and amortization 13,004 14,780 14,200
Goodwill impairment - - 14,400
Deferred income taxes (750) (444) (394)
Other, net 604 1,068 861
Change in assets and liabilities:
Accounts receivable 1,301 (721) 2,953
Inventories 3,052 5,103 (1,300)
Accounts payable and accrued liabilities (2,798) 874 (2,742)
Accounts with affiliates (16) 46 (1,247)
Income taxes 1,561 668 5,383
Other, net 342 1,798 1,113
-------- -------- --------
Net cash provided by operating activities 16,938 24,445 30,213
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (12,703) (8,908) (5,348)
Proceeds from sale of fixed assets - - 2,138
Other, net 32 671 -
-------- -------- ---------
Net cash used by investing activities (12,671) (8,237) (3,210)
-------- -------- --------
Cash flows from financing activities:
Long-term debt:
Borrowings 1,000 1,000 2,257
Principal payments (19,050) (6,006) (28,097)
Issuance of common stock 120 - 617
Dividends paid (7,555) (1,889) (1,896)
Other - (426) (28)
-------- -------- --------
Net cash used in financing activities (25,485) (7,321) (27,147)
-------- -------- ---------
Net increase (decrease) $(21,218) $ 8,887 $ (144)
======== ======== ========
F-7
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2002, 2003 and 2004
(In thousands)
2002 2003 2004
---- ---- ----
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing
activities $(21,218) $ 8,887 $ (144)
Currency translation 316 432 (545)
Balance at beginning of year 33,309 12,407 21,726
-------- ------- -------
Balance at end of year $ 12,407 $21,726 $21,037
======== ======= =======
Supplemental disclosures:
Cash paid for:
Interest $ 1,877 $ 1,722 $ 516
Income taxes 2,788 2,675 4,281
See accompanying notes to consolidated financial statements.
F-8
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2002, 2003 and 2004
(In thousands)
Accumulated other
comprehensive income-
Common stock Additional ---------------------- Total
----------------- paid-in Retained Currency Hedging Treasury stockholders'
Class A Class B capital earnings translation derivatives stock equity
------- ------- ---------- ---------- ----------- -------- ---------- ---------
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
Net income - - - 1,273 - - - 1,273
Other comprehensive income - - - - 12,946 - - 12,946
Cash dividends - - - (1,889) - - - (1,889)
Issuance of common stock - - 50 - - - - 50
---- ---- -------- -------- -------- --- -------- --------
Balance at December 31, 2003 62 100 119,437 43,433 2,642 - (11,315) 154,359
Net loss - - - (3,014) - - - (3,014)
Other comprehensive income - - - - 5,036 75 - 5,111
Cash dividends - - - (1,896) - - - (1,896)
Issuance of common stock 1 - 695 - - - - 696
Retirement of treasury stock (11) - (11,304) - - - 11,315 -
---- ---- -------- ------- -------- --- -------- --------
Balance at December 31, 2004 $ 52 $100 $108,828 $38,523 $ 7,678 $75 $ - $155,256
==== ==== ======== ======= ======== === ======== ========
See accompanying notes to consolidated financial statements.
F-9
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization. CompX International Inc. (NYSE: CIX) is 83% owned by CompX
Group, a majority owned subsidiary of NL Industries, Inc. (NYSE: NL) at December
31, 2004. The Company manufactures and sells component products (precision ball
bearing slides, security products and ergonomic computer support systems). NL
owns 82.4% of CompX Group, and Titanium Metals Corporation (NYSE: TIE) ("TIMET")
owns the remaining 17.6% of CompX Group. At December 31, 2004, (i) TIMET owns an
additional 2% of CompX directly, (ii) Valhi, Inc. holds, directly or through a
subsidiary, approximately 83% of NL's outstanding common stock and approximately
41% of TIMET's outstanding common stock and (iii) Contran Corporation holds,
directly or through subsidiaries, approximately 91% of Valhi's outstanding
common stock. Substantially all of Contran's outstanding voting stock is held by
trusts established for the benefit of certain children and grandchildren of
Harold C. Simmons, of which Mr. Simmons is sole trustee, or is held by Mr.
Simmons or persons or other entities related to Mr. Simmons. Mr. Simmons, the
Chairman of the Board of each of Contran, Valhi and NL, 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, including presenting the results of
operations and financial position of the Company's operations in The Netherlands
as discontinued operations. See Note 10. The Company has no involvement with any
variable interest entity covered by the scope of FASB Interpretation No. 46R,
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, 2002 and 2003 each consisted of 52
weeks, and the year ended December 31, 2004 consisted of 53 weeks. December 31,
2005 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 resulting translation adjustments are accumulated
in stockholders' equity as part of accumulated other comprehensive income, net
of related applicable deferred income taxes. Revenues and expenses are
translated at average exchange rates prevailing during the year. 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
F-10
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. Sales are stated net of price, early payment and
distributor discounts and volume rebates.
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. Cost of
sales includes costs for materials, packing and finishing, shipping and
handling, utilities, salary and benefits, maintenance and depreciation.
Selling, general and administrative expenses. Selling, general and
administrative expenses include costs related to marketing, sales, distribution,
and administrative functions such as accounting, treasury and finance, and
includes costs for salaries and benefits, travel and entertainment, promotional
materials and professional fees.
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. Goodwill is not subject to periodic
amortization. Other intangible assets are stated net of accumulated
amortization. Goodwill and other intangible assets are assessed for impairment
in accordance with Statement of Financial Accounting Standards ("SFAS") No. 142,
Goodwill and Other Intangible Assets. See Note 4.
Other intangible assets, consisting of the estimated fair value of certain
patents acquired, are amortized by the straight-line method over the lives of
such patents (approximately 9 years remaining at December 31, 2004), with no
assumed residual value at the end of the life of the patents. Other intangible
assets are stated net of accumulated amortization of $1.5 million at December
31, 2003 and $1.7 million at December 31, 2004. Amortization expense of
intangible assets was $240,000 in 2002, $234,000 in 2003 and $231,000 in 2004,
and is expected to be approximately $250,000 in each of 2005 through 2009.
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 3 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.
F-11
Self-insurance. The Company is partially self-insured for workers'
compensation and certain employee health benefits and is self-insured for most
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. 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. Derivatives used to hedge forecasted transactions and
specific cash flows associated with foreign currency denominated financial
assets and liabilities which meet the criteria for hedge accounting are
designated as cash flow hedges. Consequently, the effective portion of gains and
losses is deferred as a component of accumulated other comprehensive income and
is recognized in earnings at the time the hedged item affects earnings.
Contracts that do not meet the criteria for hedge accounting are
marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at December 31, 2004, the Company held a series of
contracts to exchange an aggregate of U.S. $7.2 million for an equivalent value
of Canadian dollars at exchange rates of Cdn. $1.19 to Cdn. $1.23 per U.S.
dollar. Such contracts mature through March 2005. The exchange rate was $1.21
per U.S. dollar at December 31, 2004. At December 31, 2003 the Company held
contracts maturing through February 2004 to exchange an aggregate of U.S. $4.2
million for an equivalent value of Canadian dollars at an exchange rates of Cdn.
$1.30 to Cdn. $1.33 per U.S. dollar. At December 31, 2003, the actual exchange
rate was Cdn. $1.31 per U.S. dollar. The estimated fair value of such contracts
is not material at December 31, 2003 and 2004.
Income taxes. Prior to October 1, 2004, the Company was a separate United
States federal income taxpayer and was not a member of Contran's consolidated
United States federal income tax group. Effective October 1, 2004, CompX became
a member of Contran's consolidated United States federal income tax group. The
Company is currently and has been a part of consolidated tax returns filed by
Contran in certain United States state jurisdictions. For such consolidated
federal and state tax returns, intercompany allocations of federal and state tax
provisions are computed on a separate company basis. Payments are made to, or
received from Contran in the amounts that would have generally been paid to or
received from the respective federal or state tax authority had CompX not been a
part of the respective consolidated tax return. The separate company provisions
and payments are computed using the tax elections made by Contran. Under certain
circumstances, such tax regulations could require Contran to treat items
differently than CompX would on a stand alone basis, and in such instances GAAP
requires CompX to conform to Contran's tax election.
F-12
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 $43.1 million at December 31, 2003 and $24.4 million at
December 31, 2004.
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
819,000 in 2002, 713,000 in 2003 and 570,000 in 2004.
Stock options. At December 31, 2004, the Company has a stock-based employee
compensation plan, which is described more fully in Note 9. 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,
2002 2003 2004
---- ---- ----
(In thousands,
except per share data)
Net income (loss), as reported $ 638 $1,273 $(3,014)
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 (1,572) (875) (543)
------- ------ -------
Pro forma net income (loss) $ (934) $ 398 $(3,557)
======= ====== =======
Earnings (loss) per share - basic and diluted:
As reported $ .04 $ .08 $ (.19)
======= ====== =======
Pro forma $ (.06) $ .03 $ (.23)
======= ====== =======
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.
F-13
Other. Advertising costs, expensed as incurred, were $879,000 in 2002,
$588,000 in 2003 and $554,000 in 2004. Research and development costs, expensed
as incurred, were $499,000 in 2002, $469,000 in 2003, and $317,000 in 2004.
Note 2 - 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 currently has three operating segments - Security Products,
Precision Slides and Ergonomics. The 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 Precision Slides segment,
with facilities in Canada, Michigan and Taiwan, manufacture and distribute a
complete line of precision ball bearing slides for use in office furniture,
computer-related equipment, tool storage cabinets and other applications. The
Ergonomics segment with a facility in Canada that it shares with Precision
Slides, manufactures and distributes ergonomic computer support systems for
office furniture. Previously, the Company had aggregated the Precision Slides
and Ergonomics operating segments into a single reportable segment (CompX
Waterloo) because of the integrated facilities of the two business units and the
similar economic characteristics, customer types, production processes, and
distribution methods. During the fourth quarter of 2004, the Company began to
measure the ergonomics business as a separate operating unit and develop
appropriate allocations relating to certain shared expenses in order to
disaggregate the 2004 operating results. Prior to 2004, disaggregated
information is not available due to the impracticality of allocating certain
historical expenses that are shared between the two segments. Therefore,
aggregated segment amounts are reported for Precision Slides/Ergonomics in
current and previous periods as well as the disaggregated information for 2004.
The chief operating decision maker evaluates segment performance based on
segment operating income, which is defined as income before income taxes, and
interest expense, exclusive of certain general corporate income and expense
items (including interest income and foreign exchange transaction gains and
losses) and certain non-recurring items (such as gains or losses on the
disposition of business units and other long-lived assets outside the ordinary
course of business). All corporate office operating expenses are allocated to
the three 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.
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, 2003 and 2004, the net
assets of non-U.S. subsidiaries included in consolidated net assets approximated
$88 million and $80 million, respectively.
F-14
The current period segment information below is presented under the new basis of
segmentation. Total assets have not been presented under the new segmentation as
management has determined that such information is impractical to obtain and no
measure of asset information is used by the chief operating decision maker.
Year ended December 31, 2004
----------------------------------------------------------------------------
(In thousands)
Net Operating Depreciation/ Capital
Sales Income Amortization Expenditures Goodwill
----- --------- ------------ ------------ --------
Security Products $ 75,872 $ 9,304 $ 7,542 $2,432 $23,742
Precision Slides 78,522 1,358 3,153 2,109 5,270
Ergonomics 28,237 5,030 1,084 412 -
Thomas Regout** - - 2,421 395 -
-------- ------- ------- ------ -------
TOTAL $182,631 $15,692 $14,200 $5,348 $29,012
======== ======= ======= ====== =======
The segment information below is presented under the old basis of
segmentation for comparison to prior years.
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Net sales:
CompX Waterloo $ 93,313 $ 97,811 $106,759
Security Products 73,358 76,155 75,872
-------- -------- --------
Total net sales $166,671 $173,966 $182,631
======== ======== ========
Operating income (loss):
CompX Waterloo $ (1,628) $ 20 6,388
Security Products 7,754 9,471 9,304
-------- -------- --------
Total operating income 6,126 9,491 15,692
Interest expense (1,888) (1,301) (494)
Other general corporate income (expense), net (300) 964 2,125
-------- -------- --------
Income from continuing operations
before income taxes $ 3,938 $ 9,154 $ 17,323
======== ======== ========
Depreciation and amortization:
CompX Waterloo $ 6,450 $ 7,281 $ 7,542
Security Products 4,769 4,843 4,237
Thomas Regout** 1,785 2,656 2,421
-------- -------- --------
$ 13,004 $ 14,780 $ 14,200
======== ======== ========
Capital expenditures:
CompX Waterloo $ 8,601 $ 6,446 $ 2,521
Security Products 1,582 1,901 2,432
Thomas Regout** 2,520 561 395
-------- -------- --------
$ 12,703 $ 8,908 $ 5,348
======== ======== ========
F-15
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Net sales:
Point of origin:
United States $ 86,721 $ 94,298 $ 99,807
Canada 71,589 76,443 74,157
Taiwan 14,759 13,562 16,034
Eliminations (6,398) (10,337) (7,367)
-------- -------- --------
$166,671 $173,966 $182,631
======== ======== ========
Point of destination:
United States $126,168 $127,032 $138,136
Canada 29,455 32,363 33,205
Other 11,048 14,571 11,290
-------- -------- --------
$166,671 $173,966 $182,631
======== ======== ========
December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Total assets:
CompX Waterloo $ 73,411 $ 91,131 $ 78,932
Security Products 87,795 77,961 72,381
Thomas Regout** 37,860 38,595 28,921
Corporate and eliminations 1,026 3,056 5,445
-------- -------- --------
$200,092 $210,743 $185,679
======== ======== ========
Goodwill:
CompX Waterloo $ 4,846 $ 4,986 $ 5,270
Security Products 23,743 23,743 23,742
-------- -------- --------
$ 28,589 $ 28,729 $ 29,012
======== ======== ========
Net property and equipment:
United States $ 46,251 $ 44,499 $ 41,328
Canada 23,046 23,341 19,114
Taiwan 5,848 5,710 5,680
-------- -------- --------
$ 75,145 $ 73,550 $ 66,122
======== ======== ========
** Denotes discontinued segment. See Note 10.
Note 3 - Inventories:
December 31,
2003 2004
---- ----
(In thousands)
Raw materials $ 4,025 $ 4,514
Work in process 9,568 9,019
Finished products 7,248 7,184
Supplies 129 65
------- -------
$20,970 $20,782
F-16
Note 4 - Goodwill:
Goodwill. Under SFAS No. 142, goodwill is not 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.
The Company has assigned its goodwill to the each of its reporting units
(as that term is defined in SFAS No. 142) which correspond to the operating
segments. 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. 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 goodwill 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 2002, 2003 or 2004.
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 Security
Waterloo Products Total
-------- ---------- -----
(In millions)
Balance at December 31, 2001 $ 4.9 $23.7 $28.6
Changes in currency
exchange rates - - -
----- ----- ---
Balance at December 31, 2002 4.9 23.7 28.6
Changes in currency
exchange rates .1 - .1
----- ----- -----
Balance at December 31, 2003 5.0 23.7 28.7
Changes in currency
exchange rates .3 - .3
----- ----- -----
Balance at December 31, 2004 $ 5.3 $23.7 $29.0
===== ===== =====
F-17
Note 5 - Accounts payable and accrued liabilities:
December 31,
2003 2004
---- ----
(In thousands)
Accounts payable $ 8,029 $ 6,392
Accrued liabilities:
Employee benefits 6,389 7,987
Professional 188 730
Insurance 374 448
Other taxes 462 399
Other 1,993 1,748
------- -------
$17,435 $17,704
======= =======
Note 6 - Indebtedness:
December 31,
2003 2004
---- ----
(In thousands)
Revolving bank credit facility $26,000 $ -
Other - 127
------- -------
26,000 127
Less current portion - 42
------- -------
$26,000 $ 85
======= =======
At December 31, 2004, the Company has a $47.5 million secured revolving
bank credit facility maturing in January 2006 which bears interest, at the
Company's option, at rates based on either the prime rate or LIBOR. The credit
facility is collateralized by substantially all of the Company's United States
tangible assets and a pledge of 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
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. At December 31, 2004, there were no outstanding draws against the
credit facility and the full amount of the facility was available for borrowing.
The credit facility permits the Company to pay dividends and/or repurchase
its common stock in an amount equal to the sum of (i) a dividend 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. In addition to the $8.0 million available annually to
repurchase common stock and or pay dividends, at December 31, 2004, $4.2 million
was available for dividends and/or repurchases of the Company's common stock
under the terms of the facility.
F-18
Note 7 - 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 $1,683,000 in 2002,
$1,810,000 in 2003 and $1,838,000 in 2004.
Note 8 - 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,
2002 2003 2004
---- ---- ----
(In thousands)
Components of pre-tax income (loss) from continuing operations:
United States $ (1,914) $ 6,258 $ 8,148
Non-U.S. 5,852 2,896 9,175
-------- ------- -------
$ 3,938 $ 9,154 $17,323
======== ======= =======
Years ended December 31,
2002 2003 2004
---- ---- ----
(In thousands)
Provision for income taxes:
Currently payable:
U.S. federal and state $ 1,128 $ 121 $ 4,016
Foreign 2,394 1,326 4,732
------- ------- -------
3,522 1,447 8,748
------- ------- -------
Deferred income taxes (benefit):
U.S. (114) 2,061 (273)
Foreign (432) (132) (635)
------- ------- -------
(546) 1,929 (908)
------- ------- -------
$ 2,976 $ 3,376 $ 7,840
======= ======= =======
Expected tax expense, at the U.S. federal
statutory income tax rate of 35% $ 1,379 $ 3,204 $ 6,063
Non-U.S. tax rates (286) (157) (297)
Incremental U.S. tax on earnings of
Foreign subsidiary 1,099 562 3,206
State income taxes and other, net 784 (233) (377)
Tax contingency reserve adjustment - - (755)
------- ------- -------
$ 2,976 $ 3,376 $ 7,840
======= ======= =======
Comprehensive provision (benefit) for income tax benefit allocable to:
Income from continuing operations $ 2,976 $ 3,376 $ 7,840
Discontinued operations (206) (2,373) (410)
Other comprehensive income -
currency translation (66) 134 380
------- ------- -------
$ 2,704 $ 1,137 $ 7,810
======= ======= =======
F-19
The components of net deferred tax assets (liabilities) are summarized
below.
December 31,
2003 2004
---- ----
(In thousands)
Tax effect of temporary differences related to:
Inventories $ 935 $ 544
Property and equipment (7,679) (6,613)
Accrued liabilities and other deductible differences 1,252 5,053
Tax loss and credit carryforwards 3,346 3,004
Other taxable differences (1,773) (1,255)
Valuation allowance - (4,235)
------- --------
$(3,919) $ (3,502)
======= ========
Net current deferred tax assets $ 1,920 1,447
Net noncurrent deferred tax liabilities (5,839) (4,949)
------- --------
$(3,919) $ 3,502
======= ========
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law contains several provisions that could impact the Company.
These provisions provide for, among other things, a special deduction from U.S.
taxable income equal to a stipulated percentage of qualified income from
domestic production activities (as defined) beginning in 2005, and a special 85%
dividends received deduction for certain dividends received from controlled
foreign corporations. Both of these provisions are complex and subject to
numerous limitations. The Company is still studying the new law, including the
technical provisions related to the two complex provisions noted above. The
effect on the Company of the new law, if any, has not yet been determined, in
part because the Company has not definitively determined whether its operations
qualify for the special deduction or whether it would benefit from the special
dividends received deduction. If the Company determines it qualifies for the
special deduction, the tax benefit of such special deduction would be recognized
in the period earned. With respect to the special dividends received deduction
on certain dividends received from controlled foreign corporations, the Company
will likely not be able to complete its evaluation of whether it would benefit
from the special dividends received deduction until sometime after the U.S.
government has issued clarifying regulations regarding this provision of the
Act, the timing for the issuance of which is not known. The aggregate amount of
unremitted earnings that is potentially subject to the special dividends
received deduction is approximately $29.5 million at December 31, 2004. The
Company is unable to reasonably estimate a range of income tax effects if such
unremitted earnings would be repatriated and eligible for the special dividends
received deduction, as the calculation would be extremely complex.
In January 2005, the Company completed its disposition of the Thomas Regout
operations in Europe. See Note 10. The Company currently expects to generate a
$4.2 million income tax benefit associated with the U.S. capital loss expected
to be realized in the first quarter of 2005 upon completion of the sale of the
Thomas Regout operations. Recognition of the benefit of such capital loss by the
Company is appropriate under GAAP in the fourth quarter of 2004 at the time such
operations were classified as held for sale. However, the Company has also
determined, based on the weight of available evidence, that realization of such
benefit does not currently meet the more-likely-than-not-criteria, and therefore
F-20
the deferred tax asset related to the capital loss carryforward has been fully
offset by a deferred income tax asset valuation allowance at December 31, 2004.
The $4.2 million deferred income tax benefit related to the U.S. capital loss
and the offsetting valuation allowance are both reflected as a component of
discontinued operations.
At December 31, 2004, the Company had for U.S. federal income tax purposes
net operating loss carryforwards of approximately $8.3 million which expire in
2007 through 2018. Such net operating loss carryforwards may only be used to
offset future taxable income of a subsidiary of the Company, and utilization of
certain portions of the carryforwards is limited to approximately $400,000 per
year. The Company utilized approximately $59,000 of such carryforwards in 2004
(none in 2002 and 2003). The Company believes it is more-likely-than-not that
such carryforwards will be utilized to reduce future income tax liabilities, and
accordingly the Company has not provided a deferred income tax asset valuation
allowance to offset the benefit of such carryforwards.
Note 9 - Stockholders' equity:
Shares of common stock
-----------------------------------------------------------
Class A Class B
------------------------------------------- -------
Issued and
Issued Treasury Outstanding outstanding
--------- --------- ----------- -----------
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
Issued 9,000 - 9,000 -
----------- ---------- --------- ------
Balance at December 31, 2003 6,228,680 (1,103,900) 5,124,780 10,000,000
Issued 54,100 - 54,100 -
Retirement (1,103,900) 1,103,900 - -
---------- ---------- --------- -------
Balance at December 31, 2004 5,178,880 - 5,178,880 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. CompX Group, 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 CompX Group 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.
During 2004, the Company cancelled approximately 1.1 million shares of its
Class A common stock that previously was reported as treasury stock. The
aggregate $11.3 million cost of such treasury shares were allocated to common
stock at par, additional paid-in capital and retained earnings in accordance
with GAAP.
F-21
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, 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
Canceled (145) 11.00 - 20.00 (2,311)
---- -------------- -------
Outstanding at December 31, 2003 619 $10.00 -$20.00 $10,684
Exercised (48) 10.00 - 13.00 (616)
Canceled (9) 12.50 - 13.00 (116)
---- -------------- -------
Outstanding at December 31, 2004 562 $10.00 -$20.00 $ 9,952
==== ============== =======
Outstanding options at December 31, 2004 represent approximately 4% of the
Company's total outstanding shares of common shares at that date and expire
through 2012 with a weighted-average remaining term of 5 years. At December 31,
2004, options to purchase 467,000 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 $8.6 million, with a weighted-average exercise price of $18.45
per share. These exercisable options are exercisable through 2012. The Company's
market price per share at December 31, 2004 was $16.53. At December 31, 2004,
options to purchase 56,000 shares are scheduled to become exercisable in 2005
and an aggregate of 636,000 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 2002 was $5.05, (no options were granted in 2003 or
2004). 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
F-22
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.
See also Note 14.
Note 10 - Discontinued operations and assets held for sale:
In December 2004, the Company's board of directors committed to a formal
plan to dispose of its Thomas Regout operations in Europe. Such operations met
all of the criteria under GAAP to be classified as an asset held for sale at
December 31, 2004, and accordingly the result of operations of Thomas Regout
have been classified as discontinued operations for all periods presented. In
classifying the net assets of the Thomas Regout operations as an asset held for
sale, the Company concluded that the carrying amount of the net assets of such
operations exceeded the estimated fair value less costs to sell such operations,
and accordingly in the fourth quarter of 2004 the Company recognized a $14.4
million impairment charge to write-down its investment in the Thomas Regout
operations to estimated realizable value. Such impairment charge represented an
impairment of goodwill.
In January 2005, the Company completed the sale of such operations for net
proceeds (net of expenses) of approximately $22.6 million. The net proceeds
consisted of approximately $18.4 million in cash and a note receivable in the
principal amount of $4.2 million. The note receivable bears interest at a fixed
rate of 7% and is payable over four years. The note receivable is collateralized
by a secondary lien on the assets sold and is subordinated to certain
third-party debt of the purchaser. Accordingly, the Company will no longer
report the results of operations of Thomas Regout subsequent to December 31,
2004. The net proceeds from the sale of Thomas Regout approximated the net
realizable value previously estimated at the time the goodwill impairment charge
was recognized.
Condensed income statement data for Thomas Regout is presented below. The
$14.4 million impairment charge is included in Thomas Regout's operating loss
for 2004. Interest expense included in discontinued operations represents
interest on certain intercompany indebtedness with CompX, which indebtedness
arose at the time of the Company's acquisition of Thomas Regout prior to 2002
and corresponded to certain third-party indebtedness of the Company incurred at
the time such operations were acquired.
Years ended December 31,
------------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net sales $31,278 $35,331 $ 41,694
======= ======= ========
Operating income (loss) $ 81 $(5,383) $(10,609)
Other income (expense) 687 (105) (797)
Interest expense (1,298) (1,390) (1,501)
Income tax benefit 206 2,373 410
------- ------- --------
Net $ (324) $(4,505) $(12,497)
======= ======= ========
In accordance with generally accepted accounting principles, the assets and
liabilities relating to Thomas Regout will be eliminated from the Consolidated
F-23
Balance Sheet subsequent to the completion of the sale transaction. Therefore,
the assets and liabilities relating to Thomas Regout have been aggregated and
presented on the Consolidated Balance Sheet at December 31, 2003 and 2004 as
current and noncurrent "Assets held for sale" and current and noncurrent
"Liabilities related to assets held for sale". The Consolidated Statement of
Cash Flows has not been restated to reflect discontinued operations or assets
held for sale.
An analysis of the assets and liabilities held for sale is as follows:
December 31,
--------------
(In thousands)
2003 2004
---- ----
Current assets
Cash $ 2,094 $ 4,234
Receivables, net 4,302 5,456
Inventories 5,347 7,999
Other current assets 977 268
------- -------
Total current assets $12,720 $17,957
======= =======
Noncurrent assets
Goodwill $14,596 $ 1,411
Deferred income tax 1,642 1,238
Plant, property and equipment, net 9,637 8,315
------- -------
$25,875 $10,964
======= =======
Current liabilities
Accounts payable and accrued liabilities $ 6,584 $ 4,419
Deferred income taxes 505 579
------- -------
$ 7,089 $ 4,998
======= =======
Noncurrent liabilities
Other noncurrent liabilities $ 21 $ -
======= ====
Note 11 - Other general corporate income (expense), net:
Years ended December 31,
---------------------------------
2002 2003 2004
---- ---- ----
(In thousands)
Net foreign currency transaction gain (loss) $ (727) $ (546) $ 185
Interest income 1,607 1,570 1,612
Loss on disposal of property and equipment (1,193) (166) (479)
Other income, net 13 106 807
------ ------ ------
$ (300) $ 964 $2,125
====== ====== ======
In 2002, net losses on disposal of property and equipment included $1
million loss 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.
Interest income includes accrued interest income of $1.3 million, $1.4
million and $1.5 million in 2002, 2003 and 2004, respectively, on long-term
notes receivable from Thomas Regout.
F-24
Note 12 - 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. In addition, certain
occupancy and related office services are provided based upon square footage
occupied. Fees pursuant to these agreements aggregated $1,744,000 in 2002,
$2,138,000 in 2003 and $2,295,000 in 2004.
Tall Pines Insurance Company (including a precedessor company, Valmont
Insurance Company) and EWI RE, Inc. provide for or broker certain insurance
policies for Contran and certain of its subsidiaries and affiliates, including
the Company. Tall Pines is a wholly-owned subsidiary of Valhi, and EWI is a
wholly-owned subsidiary of NL. Prior to January 2002, an entity controlled by
one of Harold C. Simmons' daughters owned a majority of EWI, and Contran owned
the remainder of EWI. In January 2002, NL purchased EWI from its previous
owners. Consistent with insurance industry practices, Tall Pines, Valmont and
EWI receive commissions from the insurance and reinsurance underwriters for the
policies that they provide or broker. The aggregate premiums paid to Tall Pines
(including Valmont) and EWI were $1,094,000 in 2002, $1,029,000 in 2003 and
$809,000 in 2004. These amounts principally included payments for insurance and
reinsurance premiums paid to third parties, but also included commissions paid
to Tall Pines, and EWI. The Company expects that these relationships with Tall
Pines and EWI will continue in 2005.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
F-25
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
Note 13 - 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. From time to time, the Company undergoes examinations 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 to original equipment manufacturers. The ten largest customers
accounted for approximately 38%, 44% and 43% of sales in 2002, 2003 and 2004,
respectively. The Hon Company accounted for approximately $20.5 million (11%) of
sales from all three segments at December 31, 2004.
Other. Royalty expense was $708,000 in 2002, $450,000 in 2003 and $222,000
in 2004. Royalties relate principally to certain products manufactured in Canada
and sold in the United States under the terms of a third-party patent license
agreements, one of which expired in 2003 and the remaining agreement expires in
2021.
Rent expense, principally for equipment, was $713,000 in 2002, $603,000 in
2003 and $744,000 in 2004. At December 31, 2003, future minimum rentals under
noncancellable operating leases are approximately $613,000 in 2005, $425,000 in
2006, $172,000 in 2007, $4,000 in 2008 and none in 2009.
Firm purchase commitments for capital projects in process and for raw
material and other purchase commitments at December 31, 2004 approximated $3.3
million and $12.6 million, respectively. The purchase obligations consist of all
open purchase orders and contractual obligations, primarily commitments to
purchase raw materials.
F-26
Note 14 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. The Company will adopt SFAS No. 123R, Share-Based Payment,
as of July 1, 2005. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Sholes or a lattice model). Under the transition alternatives
permitted under SFAS No. 123R, the Company will apply the new standard to all
new awards granted on or after July 1, 2005, and to all awards existing as of
June 30, 2005 which are subsequently modified, repurchased or cancelled.
Additionally, beginning July 1, 2005, the Company will be required to recognize
compensation cost for the portion of any non-vested award existing as of June
30, 2005 over the remaining vesting period. Because the number of non-vested
awards as of June 30, 2005 with respect to options granted by the Company is not
expected to be material, the effect of adopting SFAS No. 123R is not expected to
be significant in so far as it relates to existing stock options. Should the
Company, however, grant a significant number of options in the future, the
effect on the Company's consolidated financial statements could be material.
F-27
Note 15 - Quarterly results of operations (unaudited):
Quarter ended
---------------------------------------------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions, except per share amounts)
2003:
Net sales $ 42.3 $41.8 $ 44.1 $ 45.7
Operating income 2.5 1.7 3.0 2.2
Income from continuing operations $ 1.3 $ 1.1 $ 2.0 $ 1.4
Discontinued operations (0.7) (0.8) (2.4) (0.6)
------ ----- ------ ------
Net income $ 0.6 $ 0.3 $ (0.4) $ 0.8
====== ===== ====== ======
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.08 $ 0.07 $ 0.13 $ 0.09
Discontinued operations (0.04) (0.05) (0.16) (0.04)
------ ------ ------ ------
$ 0.04 $ 0.02 $(0.03) $ 0.05
====== ====== ====== ======
2004:
Net sales $ 43.6 $ 46.2 $ 46.2 $ 46.6
Operating income 2.3 4.8 5.1 3.5
Income from continuing operations $ 1.6 $ 3.0 $ 3.5 $ 1.4
Discontinued operations - 0.3 0.3 (13.1)
------ ------ ------ ------
Net income (loss) $ 1.6 $ 3.3 $ 3.8 $(11.7)
====== ====== ====== ======
Basic and diluted earnings (loss) per share:
Continuing operations $ 0.10 $ 0.20 $ 0.24 $ 0.09
Discontinued operations - 0.02 0.02 (0.86)
----- ------ ------ ------
$0.10 $ 0.22 $ 0.26 $(0.77)
===== ====== ====== ======
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 2004, the Company incurred a charge of
approximately $13.5 million (net of tax benefit of $0.9 million) to write-down
its investment in Thomas Regout to its estimated realizable value. See Note 10.
F-28
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors of CompX International Inc.:
Our audits of the consolidated financial statements referred to in our
report dated March 30, 2005, appearing in the 2004 Annual Report on Form 10-K
also included an audit of the financial statement schedules listed in Item
15(a)(2) 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
March 30, 2005
S-1
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, 2002:
Allowance for doubtful accounts $ 571 $ 48 $(124) $ 1 $ 496
====== ====== ===== ==== ======
Amortization of other intangible assets $1,010 $ 240 $ - $ (1) $1,249
====== ====== ===== ==== ======
Year ended December 31, 2003:
Allowance for doubtful accounts $ 496 $ 36 $(234) $ 15 $ 313
====== ====== ===== ==== ======
Amortization of other intangible assets $1,249 $ 234 $ - $ 19 $1,502
====== ====== ===== ==== ======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 313 $ 115 $ (46) $ 12 $ 394
====== ====== =====- ==== ======
Amortization of other intangible assets $1,502 $ 231 $ - $ 14 $1,747
====== ====== ===== ==== ======
Note: Above information is presented for continuing operations only.
S-2