SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended March 31, 2005 Commission file number 1-13905
-------------- -------
COMPX INTERNATIONAL INC.
- ------------------------------------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 57-0981653
- ------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
- ------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 448-1400
--------------
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No --- X
Number of shares of common stock outstanding on April 25, 2005:
Class A: 5,195,780
Class B: 10,000,000
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2004;
March 31, 2005 (Unaudited) 3-4
Consolidated Statements of Income -
Three months ended March 31, 2004 and 2005 (Unaudited) 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2004 and 2005 (Unaudited) 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 2004 and 2005 (Unaudited) 7
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2005 (Unaudited) 8
Notes to Consolidated Financial Statements (Unaudited) 9-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14-18
Item 4. Controls and Procedures. 18-19
Part II. OTHER INFORMATION
Item 6. Exhibits. 20
- 2 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2004 2005
------------- ---------
(Unaudited)
Current assets:
Cash and cash equivalents $ 16,803 $ 30,405
Accounts receivable, net 19,212 21,606
Receivables from affiliates 635 1,234
Refundable income taxes 57 222
Inventories 20,782 20,838
Prepaid expenses and other 790 628
Deferred income taxes 1,447 1,609
Assets held for sale 17,957 -
-------- --------
Total current assets 77,683 76,542
-------- --------
Other assets:
Goodwill 29,012 29,106
Other intangible assets 1,703 1,646
Note receivable - 4,179
Assets held for sale 10,964 -
Other 195 218
-------- --------
Total other assets 41,874 35,149
-------- --------
Property and equipment:
Land 4,713 8,168
Buildings 26,877 27,076
Equipment 104,041 103,921
Construction in progress 2,299 3,841
-------- --------
137,930 143,006
Less accumulated depreciation 71,808 74,253
-------- --------
Net property and equipment 66,122 68,753
-------- --------
$185,679 $180,444
======== ========
- 3 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2004 2005
--------- -----------
(Unaudited)
Current liabilities:
Accounts payable and accrued liabilities $ 17,704 $ 18,125
Income taxes 2,687 947
Liabilities related to assets held for sale 4,998 -
-------- --------
Total current liabilities 25,389 19,072
-------- --------
Noncurrent liabilities:
Long-term debt 85 75
Deferred income taxes 4,949 4,992
-------- --------
Total noncurrent liabilities 5,034 5,067
-------- --------
Stockholders' equity:
Preferred stock - -
Class A common stock 52 52
Class B common stock 100 100
Additional paid-in capital 108,828 109,019
Retained earnings 38,523 38,359
Accumulated other comprehensive income
- currency translation 7,753 8,775
-------- --------
Total stockholders' equity 155,256 156,305
-------- --------
$185,679 $180,444
======== ========
Commitments and contingencies (Note 1)
See accompanying notes to consolidated financial statements.
- 4 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
Three months ended March 31, 2004 and 2005
(In thousands, except per share data)
(Unaudited)
2004 2005
---- ----
Net sales $43,576 $46,843
Cost of goods sold 35,175 36,560
------- -------
Gross margin 8,401 10,283
Selling, general and administrative expense 6,067 6,122
------- -------
Operating income 2,334 4,161
Other general corporate income, net 603 161
Interest expense (209) (69)
------- -------
Income from continuing operations before
income taxes 2,728 4,253
Provision for income taxes 1,173 2,041
------- -------
Income from continuing operations 1,555 2,212
Discontinued operations, net of tax 5 (477)
------- -------
Net income $ 1,560 $ 1,735
======= =======
Basic and diluted earnings (loss) per common share:
Continuing operations $ .10 $ .14
Discontinued operations .00 (.03)
------- -------
$ .10 $ .11
======= =======
Cash dividends per share $ - $ .125
======= =======
Shares used in the calculation of basic and diluted earnings per share
15,125 15,216
======= =======
See accompanying notes to consolidated financial statements.
- 5 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
Net income $ 1,560 $1,735
------- ------
Other comprehensive income (loss), net of tax: Currency translation adjustment:
Arising during the period (1,439) 358
Disposal of business unit - 739
------- ------
(1,439) 1,097
Unrealized loss on cash flow hedges - (75)
------- ------
Total other comprehensive income (1,439) 1,022
------- ------
Comprehensive income $ 121 $2,757
======= ======
See accompanying notes to consolidated financial statements.
- 6 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2004 and 2005
(In thousands)
(Unaudited)
2004 2005
---- ----
Cash flows from operating activities:
Net income $ 1,560 $ 1,735
Depreciation and amortization 3,746 2,707
Deferred income taxes:
Continuing operations (562) 66
Discontinued operations - (187)
Other, net 102 877
Change in assets and liabilities:
Accounts receivable (1,964) (2,341)
Inventories 1,782 (46)
Accounts payable and accrued liabilities (2,266) 605
Accounts with affiliates 50 178
Income taxes 1,038 (1,734)
Other, net (122) 87
-------- --------
Net cash provided by operating activities 3,364 1,947
-------- --------
Cash flows from investing activities:
Capital expenditures (609) (5,146)
Proceeds from disposal of assets held for sale - 18,094
Cash of disposed business unit - (4,006)
Other, net 10 6
-------- --------
Net cash provided (used) by investing activities (599) 8,948
-------- --------
Cash flows from financing activities:
Indebtedness:
Additions 252 -
Principal payments (12,064) (10)
Deferred financing costs paid (28) (28)
Dividends - (1,899)
Issuance of common stock _ 191
-------- ---------
Net cash used by financing activities (11,840) (1,746)
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities (9,075) 9,149
Currency translation (286) 219
Cash and cash equivalents at beginning of period 21,726 21,037
-------- --------
Cash and cash equivalents at end of period $ 12,365 $ 30,405
======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 252 $ 55
Income taxes 521 2,834
Noncash investing and financing activities:
Note receivable $ - $ 4,179
See accompanying notes to consolidated financial statements.
- 7 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2005
(In thousands)
(Unaudited)
Accumulated other
comprehensive
income (loss)-
Common Stock Additional ------------------------- Total
--------------- paid-in Retained Currency Hedging stockholders'
Class A Class B capital Earnings translation Derivatives equity
------- ------- --------- -------- ----------- ----------- --------
Balance at December 31, 2004 $52 $100 $108,828 $38,523 $7,678 $ 75 $155,256
Net income - - - 1,735 - - 1,735
Other comprehensive income, net - - - - 1,097 (75) 1,022
Cash dividends - - - (1,899) - - (1,899)
Issuance of common stock - - 191 - - - 191
--- ---- -------- ------- ------ ------ --------
Balance at March 31, 2005 $52 $100 $109,019 $38,359 $8,775 $ - $156,305
=== ==== ======== ======= ====== ====== ========
See accompanying notes to consolidated financial statements.
- 8 -
COMPX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation:
The consolidated balance sheet of CompX International Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2004 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2005 and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended March 31, 2004 and 2005 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations. Certain
information normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
("GAAP") has been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2004 (the "2004 Annual Report").
Basic earnings per share of common stock is based upon the weighted average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the 2004 Annual
Report.
At March 31, 2005, CompX Group, Inc., a majority-owned subsidiary of NL
Industries, Inc. (NYSE: NL) owned 83% of the Company's outstanding common stock.
NL owns 82.4% of CompX Group, and a wholly owned subsidiary of Titanium Metals
Corporation (NYSE:TIE) ("TIMET") owns the remaining 17.6% of CompX Group. At
March 31, 2005, (i) the wholly owned subsidiary of 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 43% 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. Consequently, Mr. Simmons may
be deemed to control each of such companies and the Company.
Stock options. As disclosed in the 2004 Annual Report, the Company accounts
for stock-based employee compensation related to stock options using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APBO") No. 25, Accounting for Stock Issued to Employees, and its various
interpretations. See Note 10. Under APBO No. 25, no compensation cost is
generally recognized for fixed stock options in which the exercise price is
greater than or equal to the market price on the grant date. Compensation cost
recognized by the Company related to stock options in accordance with APBO No.
25 was not significant during the first three months of 2004 or 2005.
The following table illustrates the effect on net income and earnings per
share if the Company had applied the fair value recognition provisions of
- 9 -
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting for
Stock-Based Compensation to stock-based employee compensation related to stock
options for all options granted on or after January 1, 1995.
Three months ended
March 31,
2004 2005
---- ----
(In thousands)
Net income, as reported $1,560 $ 1,735
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 (136) (34)
------ -------
Pro forma net income $1,424 $ 1,701
====== =======
Earnings per share - basic and diluted:
As reported $ .10 $ .11
====== =======
Pro forma $ .09 $ .11
====== =======
Note 2 - Business segment information:
Three months ended
March 31,
2004 2005
---- ----
(In thousands)
Net sales:
Security Products $18,764 $18,544
Precision Slides 18,251 21,101
Ergonomics 6,561 7,198
------- -------
Total net sales $43,576 $46,843
======= =======
Operating income (loss):
Security Products $ 2,187 $ 2,720
Precision Slides (586) 413
Ergonomics 733 1,028
------- -------
Total operating income 2,334 4,161
Interest expense (209) (69)
Other general corporate income, net 603 161
------- -------
Income from continuing operations before
income taxes $ 2,728 $ 4,253
======= =======
Note 3 - Inventories:
December 31, March 31,
2004 2005
----------- -----------
(In thousands)
Raw materials $ 4,514 $ 4,774
Work in process 9,019 9,776
Finished products 7,184 6,214
Supplies 65 74
------- -------
$20,782 $20,838
======= =======
- 10 -
Note 4 - Accounts payable and accrued liabilities:
December 31, March 31,
2004 2005
--------- ------------
(In thousands)
Accounts payable $ 6,392 $ 7,468
Accrued liabilities:
Employee benefits 7,987 6,964
Professional fees 730 666
Insurance 448 511
Taxes other than on income 399 393
Sales rebates 291 612
Other 1,457 1,511
------- -------
$17,704 $18,125
======= =======
Note 5 - Indebtedness:
December 31, March 31,
2004 2005
----------- ---------
(In thousands)
Capital lease obligations $127 $117
Less current portion 42 42
---- ----
$ 85 $ 75
==== ====
Note 6 - Other general corporate income (expense), net:
Three months ended
March 31,
2004 2005
---- ----
(In thousands)
Interest income $ 427 $ 176
Currency exchange transactions, net 143 (54)
Other, net 33 39
----- -----
$ 603 $ 161
===== =====
Note 7 - Provision for income taxes:
Three months ended
March 31,
2004 2005
---- ----
(In thousands)
Expected tax expense $ 955 $1,489
Non-U.S. tax rates (31) (78)
Incremental U.S. tax on earnings of foreign
subsidiaries 189 572
State income taxes 27 72
Other, net 33 (14)
------ ------
$1,173 $2,041
====== ======
- 11 -
Note 8 - Currency forward exchange contracts:
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a portion of currency exchange rate market risk associated
with receivables, or similar exchange rate risk associated with future sales,
denominated in a currency other than the holder's functional currency. 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. At March 31, 2005, the Company held a series of contracts to
manage such exchange rate risk to exchange an aggregate of U.S. $2.5 million for
Canadian dollars at exchange rates of Cdn. $1.20 to Cdn. $1.23 per U.S. dollar.
Such contracts matured through May 2005. The exchange rate was Cdn. $1.21 per
U.S. dollar at March 31, 2005. The estimated fair value of such contracts is not
material at March 31, 2005.
Note 9 - Discontinued operations:
As discussed in the 2004 Annual Report, in December 2004 the Company's
board of directors committed to a formal plan to dispose of its Thomas Regout
operations in The Netherlands. Such operations met all of the criteria under
GAAP to be classified as an asset held for sale at December 31, 2004, and
accordingly the results of operations of Thomas Regout have been classified as
discontinued operations for all periods presented. The Company has not
reclassified its Consolidated Statements of Cash Flows to reflect discontinued
operations or assets held for sale. In classifying the net assets of the
European Thomas Regout operations as an asset held for sale, the Company
concluded that the carrying amount of the net assets of such operations exceeded
the estimated fair value less costs to sell of such operations, and accordingly
in the fourth quarter of 2004 the Company recognized a $14.4 million impairment
charge to write-down its investment in the European Thomas Regout operations to
its estimated net realizable value. Such charge represented an impairment of
goodwill.
In January 2005, the Company completed the sale of its Thomas Regout
operations in Europe for net proceeds of approximately $22.3 million. The net
proceeds consisted of approximately $18.1 million in cash and a note receivable
in the principal amount of $4.2 million. The note receivable bears interest at a
fixed rate of 7% and is payable over four years. The note receivable is
collateralized by a secondary lien on the assets sold and is subordinated to
certain third-party debt of the purchaser. Accordingly, the Company no longer
includes the results of operations of the European Thomas Regout operations
subsequent to December 31, 2004 in its consolidated financial statements. The
net proceeds from the January 2005 sale of the European Thomas Regout operations
were approximately $860,000 less than the net realizable value estimated at the
time of the goodwill impairment charge (primarily due to higher expenses
associated with the disposal of the Thomas Regout operations), and discontinued
operations in the first quarter of 2005 includes a charge related to such
differential ($477,000, net of income tax benefit) was recognized in the first
quarter of 2005. Such charge represents an additional impairment of goodwill.
During the first quarter of 2004, the European Thomas Regout operations
reported net sales of $9.9 million, operating income of $400,000, interest
expense of $400,000 and a nominal amount of net income.
- 12 -
Note 10 - Accounting principles not yet implemented:
Inventory costs. The Company will adopt SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs is charged to expense as incurred. Alternatively, in periods of production
above the high end of normal capacity, the amount of fixed overhead costs
allocated to each unit of production is decreased so that inventories are not
measured above cost. SFAS No. 151 also clarifies existing GAAP to require that
abnormal freight and wasted materials (spoilage) are to be expensed as incurred.
The Company believes its production cost accounting already complies with the
requirements of SFAS No. 151, and the Company does not expect adoption of SFAS
No. 151 will have a material effect on its consolidated financial statements.
Stock options. As permitted by regulations of the Securities and Exchange
Commission ("SEC"), the Company will adopt SFAS No. 123R, Share-Based Payment,
as of January 1, 2006. SFAS No. 123R, among other things, eliminates the
alternative in existing GAAP to use the intrinsic value method of accounting for
stock-based employee compensation under APBO No. 25. Upon adoption of SFAS No.
123R, the Company will generally be required to recognize the cost of employee
services received in exchange for an award of equity instruments based on the
grant-date fair value of the award, with the cost recognized over the period
during which an employee is required to provide services in exchange for the
award (generally, the vesting period of the award). No compensation cost will be
recognized in the aggregate for equity instruments for which the employee does
not render the requisite service (generally, the instrument is forfeited before
it has vested). The grant-date fair value will be estimated using option-pricing
models (e.g. Black-Sholes or a lattice model). Under the transition alternatives
permitted under SFAS No. 123R, the Company will apply the new standard to all
new awards granted on or after January 1, 2006, and to all awards existing as of
December 31, 2005 which are subsequently modified, repurchased or cancelled.
Additionally, as of January 1, 2006, the Company will be required to recognize
compensation cost for the portion of any non-vested award existing as of
December 31, 2005 over the remaining vesting period. Because the number of
non-vested awards as of December 31, 2005 with respect to options granted by the
Company is not expected to be material, the effect of adopting SFAS No. 123R is
not expected to be significant in so far as it relates to existing stock
options. Should the Company, however, either grant a significant number of
options or modify, repurchase or cancel existing options in the future, the
effect on the Company's consolidated financial statements could be material.
- 13 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
- -------------------------------------------------------------------------------
Overview
The Company reported income from continuing operations of $2.2 million in
the first quarter of 2005 compared to income of $1.6 million for the first
quarter of 2004. The overall improvement is primarily the result of the
favorable impact of cost reduction initiatives undertaken over the last several
years as well as those initiated in the current period.
Results of Operations
Three months ended
March 31,
------------------------- %
2004 2005 Change
---------- -------- ------
(In millions)
Net sales:
Security Products $18,764 $18,544 (1)%
Precision Slides 18,251 21,101 16%
Ergonomics 6,561 7,198 10%
------- -------
Total net sales $43,576 $46,843 7%
======= =======
Operating income (loss):
Security Products $ 2,187 $ 2,720 24%
Precision Slides (586) 413 n.m.
Ergonomics 733 1,028 40%
------- -------
Total operating income $ 2,334 $ 4,161 78%
======= =======
n.m. = not meaningful
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 the first quarter of 2005, currency exchange rate fluctuations did not
significantly impact comparisons with 2004.
Net sales. Net sales increased $3.2 million, or 7%, to $46.8 million in the
first quarter of 2005 from $43.6 million in the first quarter of 2004 due
primarily to an increase in selling prices for certain products across all
segments.
Cost of goods sold. The Company's cost of goods sold increased 4% in the
first quarter of 2005 compared to 2004 while net sales increased 7% during the
same period. The Company's gross margin percentage increased from 19% in the
2004 period to 22% in the 2005 period. This improvement resulted from the
- 14 -
favorable impact of the cost reduction initiatives undertaken over the last
several years as well as those initiated in the current period. Gross margin
comparisons were also favorably impacted by selling price increases on certain
Precision Slides and Ergonomics products and relative changes in product mix at
Security Products in the first quarter of 2005 as compared to the first quarter
of 2004.
Selling, general, and administrative expense. As a percentage of net sales,
selling, general, and administrative expense was 14% of net sales in 2004 and
13% in 2005.
Operating income. Operating income in the first quarter of 2005 increased
to $4.2 million compared to $2.3 million for the first quarter of 2004. As a
percentage of net sales, operating income increased to 9% for the first quarter
of 2005 from 5% for the first quarter of 2004 due to the improvement in gross
margins discussed above.
Other general corporate income (expense), net. The components of other
general corporate income (expense), net are summarized in Note 6 to the
Consolidated Financial Statements, and primarily include interest income,
currency exchange transaction gains and losses, and gains and losses on
disposals of other assets. Currency exchange transactions, net were
approximately $200,000 lower in the first quarter of 2005 compared to the first
quarter of 2004 due to less volatility in intra-quarter currency exchange rates
in 2005.
Interest expense. Interest expense declined in the first quarter of 2005
compared to the first quarter of 2004 due primarily to lower average levels of
outstanding debt.
Provision for income taxes. The principal reasons for the difference
between CompX's effective income tax rates and the U.S. federal statutory income
tax rates are explained in Note 7 to the Consolidated Financial Statements.
Income tax rates vary by jurisdiction (country, county and/or state), and
relative changes in the geographic mix of CompX's pre-tax earnings can result in
fluctuations in the effective income tax rate.
As disclosed in the 2004 Annual report, CompX became a member of Contran's
consolidated U.S. federal income tax group (the "Contran Tax Group") in October
2004. As a member of the Contran Tax Group, CompX computes its provision for
income taxes on a separate company basis, using the tax elections made by
Contran. One such election is whether to claim a deduction or a tax credit
against U.S. taxable income with respect to foreign income taxes paid. During
the first quarter of 2004, and prior to CompX becoming a member of the Contran
Tax Group, CompX was able to claim a tax credit with respect to foreign income
taxes paid. During the first quarter of 2005, CompX is not claiming a credit
with respect to foreign income taxes paid but instead is claiming a tax
deduction, since Contran has elected to claim a tax deduction for such items.
This has resulted in an increase in the Company's effective income tax rate in
the first quarter of 2005 as compared to the same period in 2004.
Discontinued operations. See Note 9 to the Consolidated Financial
Statements.
Accounting principles not yet implemented. See Note 10 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
- 15 -
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
manufacturing processes or moving production to lower-cost facilities, including
our own Asian based manufacturing facilities. The Company also has emphasized
and focused on opportunities where it can provide value-added customer support
services that Asian based manufacturers are generally unable to provide. The
combination of the Company's cost control initiatives together with its
value-added approach to development and marketing of products are believed to
help mitigate the impact of pricing pressures from Asian competitors.
Additionally, the Company's cost for steel continues to be unstable due to
the continued high demand and shortages in various parts of the world. 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 indebtedness incurred primarily for working
capital purposes and (iii) provide for the payment of dividends (if declared).
From time-to-time, the Company will incur indebtedness, primarily for short-term
working capital needs or to fund capital expenditures. From time-to-time, the
Company may also sell assets outside the ordinary course of business, the
proceeds of which are generally used to repay indebtedness (including
indebtedness which may have been collateralized by the assets sold) or to fund
capital expenditures.
At March 31, 2005, there were no amounts outstanding under the Company's
credit facility that matures in January 2006. The Company does not expect it
will be required to use any of its cash flow from operating activities generated
during 2005 to repay indebtedness. The Company expects to seek a renewal of its
credit facility during the second half of 2005.
Consolidated cash flows.
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities have generally been similar to the
trends in the Company's earnings. Changes in assets and liabilities result
primarily from the timing of production, sales and purchases. Such changes in
assets and liabilities generally tend to even out over time and result in trends
in cash flows from operating activities generally reflecting earnings trends.
However, period-to-period relative changes in assets and liabilities can
significantly affect the comparability of cash flows from operating activities.
Such changes in assets and liabilities resulted in a net use of cash of
approximately $1.5 million in the first quarter of 2004 compared to a net use of
cash of $3.3 million in the first quarter of 2005.
- 16 -
Investing activities. Net cash used by investing activities totaled $.6
million in the first quarter of 2004 and provided for $9.0 million in the first
quarter of 2005, which include the net proceeds from the sale of the Thomas
Regout operations in Europe discussed below.
On January 24, 2005, CompX completed the disposition of all of the net
assets of its Thomas Regout precision slide and window furnishing operations,
conducted at its facility in the Netherlands, to members of Thomas Regout
management for net proceeds of approximately $22.3 million. The proceeds
consisted of cash (net of costs to sell) of approximately $18.1 million and a
subordinated Note for approximately $4.2 million. The subordinated note requires
annual payments over a period of four years. Historically, the Thomas Regout
European operations have not contributed significantly to net cash flows from
operations. See Note 9 to the Consolidated Financial Statements.
Firm purchase commitments for capital projects not commenced at March 31,
2005 approximated $2.5 million.
Financing activities. Net cash used by financing activities totaled $11.8
million and $1.7 million in the first quarter of 2004 and 2005, respectively.
The Company reduced debt by $11.8 million in the first quarter of 2004 and paid
a quarterly dividend of $1.9 million, or $.125 per share, in the first quarter
of 2005.
Provisions contained in the Company's revolving bank credit facility could
result in the acceleration of such indebtedness prior to its stated maturity for
reasons other than defaults from failing to comply with typical financial
covenants. For example, the credit agreement allows the lender to accelerate the
maturity of the indebtedness upon a change of control (as defined) of the
borrower. The terms of the credit agreement could result in the acceleration of
all or a portion of the indebtedness following a sale of assets outside of the
ordinary course of business, which provision was waived in connection with the
Company's sale of its Thomas Regout operations in Europe. Other than certain
operating leases discussed in the 2004 Annual Report, neither CompX nor any of
its subsidiaries are parties to any off-balance sheet financing arrangements.
Management believes that cash generated from operations and borrowing
availability under the Company's credit facility, together with cash on hand,
will be sufficient to meet the Company's liquidity needs for working capital,
capital expenditures, debt service and dividends. 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.
Forward Looking Information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
- 17 -
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "anticipates," "expects" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. Among the
factors that could cause actual future results to differ materially are the
risks and uncertainties discussed in this Quarterly Report and those described
from time to time in the Company's other filings with the Securities and
Exchange Commission. While it is not possible to identify all factors, the
Company continues to face many risks and uncertainties including, but not
limited to the following:
o Future supply and demand for the Company's products,
o Changes in costs of raw materials and other operating costs (such as
energy 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, o Possible
future litigation and
o Other risks and uncertainties.
Should one or more of these risks materialize (or the consequences of such a
development worsen) or should the underlying assumptions prove incorrect, actual
results could differ materially from those forecasted or expected. The Company
disclaims any intention or obligation to update publicly or revise such
statements whether as a result of new information, future events or otherwise.
ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the SEC, means controls and other
- 18 -
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 March 31,
2005. Based upon their evaluation, these executive officers have concluded that
the Company's disclosure controls and procedures are effective as of the date of
such evaluation.
Internal Control Over Financial Reporting. The Company also maintains
internal control 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 GAAP, and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company.
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company, and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's consolidated
financial statements.
There has been no change to the Company's internal control over financial
reporting during the quarter ended March 31, 2005 that has materially affected,
or is reasonably likely to materially affect, the Company's internal control
over financial reporting.
- 19 -
Part II. OTHER INFORMATION
ITEM 6. Exhibits.
Exhibits
31.1 Certification
31.2 Certification
32.1 Certification
32.2 Certification
The Company has retained a signed original of any of the above
exhibits that contains signatures, and the Company will provide
such exhibit to the Commission or its staff upon request. CompX
will also furnish, without charge, a copy of its Code of Business
Conduct and Ethics and its Audit Committee Charter, each as
approved 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.
- 20 -
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPX INTERNATIONAL INC.
------------------------------------
(Registrant)
Date May 2, 2005 By /s/ Darryl R. Halbert
----------------- ---------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller
- 21 -