SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 2003 Commission file number 1-13905
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COMPX INTERNATIONAL INC.
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(Exact name of Registrant as specified in its charter)
Delaware 57-0981653
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(State or other jurisdiction of (IRS Employer
organization) Identification No.)
5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 448-1400
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Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months and (2) has been subject to such filing requirements for
the past 90 days. Yes X No
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes No --- X
Number of shares of common stock outstanding on August 1, 2003:
Class A: 5,124,780
Class B: 10,000,000
CompX International Inc. (the "Company") filed its Quarterly Report on Form 10-Q
for the quarter ended June 30, 2003 (the "Form 10-Q") with the Securities and
Exchange Commission on August 5, 2003. This amendment No. 1 to the Form 10-Q is
being filed to include certain certifications as separate Exhibits No. 31.1,
31.2, 32.1 and 32.2. At the time of original filing, the Company's software had
not been updated to allow these certifications to be filed as separate exhibits,
and such certifications were originally filed as a part of the Form 10-Q itself.
The Company's software has now been updated, and such certifications are hereby
filed as separate exhibits to the Company's Form 10-Q. For the convenience of
the reader, the Company is re-filing the entire Form 10-Q. No modifications have
been made to the Form 10-Q except as described above.
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2002
and June 30, 2003 3-4
Consolidated Statements of Income -
Three months and six months ended
June 30, 2002 and 2003 5
Consolidated Statements of Comprehensive Income -
Three months and six months ended
June 30, 2002 and 2003 6
Consolidated Statements of Cash Flows -
Six months ended June 30, 2002 and 2003 7
Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2003 8
Notes to Consolidated Financial Statements 9-12
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 13-18
Item 4. Controls and Procedures. 18-19
Part II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security
Holders. 20
Item 6. Exhibits and Reports on Form 8-K. 20
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2002 2003
------------ --------
Current assets:
Cash and cash equivalents ........................ $ 12,407 $ 13,557
Accounts receivable, net ......................... 22,924 24,443
Income taxes receivable from affiliates .......... 352 582
Refundable income taxes .......................... 1,378 1,085
Inventories ...................................... 28,876 30,621
Prepaid expenses and other ....................... 3,422 3,622
Deferred income taxes ............................ 1,983 1,880
-------- --------
Total current assets ......................... 71,342 75,790
-------- --------
Other assets:
Goodwill ......................................... 40,729 41,906
Other intangible assets .......................... 2,183 2,064
Prepaid rent ..................................... 426 --
Other ............................................ 233 401
-------- --------
Total other assets ........................... 43,571 44,371
-------- --------
Property and equipment:
Land ............................................. 4,344 4,692
Buildings ........................................ 29,452 30,831
Equipment ........................................ 102,347 113,569
Construction in progress ......................... 3,548 3,341
-------- --------
139,691 152,433
Less accumulated depreciation .................... 54,512 65,428
-------- --------
Net property and equipment ................... 85,179 87,005
-------- --------
$200,092 $207,166
======== ========
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2002 2003
------------ --------
Current liabilities:
Current maturities of long-term debt ............. $ 6 $ --
Accounts payable and accrued liabilities ......... 21,318 22,847
Deferred income taxes ............................ 408 459
Income taxes ..................................... 419 532
--------- ---------
Total current liabilities .................... 22,151 23,838
--------- ---------
Noncurrent liabilities:
Long-term debt ................................... 31,000 30,000
Deferred income taxes ............................ 4,469 3,813
Deferred gain on sale/leaseback .................. 493 2
--------- ---------
Total noncurrent liabilities ................. 35,962 33,815
--------- ---------
Stockholders' equity:
Preferred stock .................................. -- --
Class A common stock ............................. 62 62
Class B common stock ............................. 100 100
Additional paid-in capital ....................... 119,387 119,437
Retained earnings ................................ 44,049 43,026
Accumulated other comprehensive income (loss)
- currency translation .......................... (10,304) (1,797)
Treasury stock ................................... (11,315) (11,315)
--------- ---------
Total stockholders' equity ................... 141,979 149,513
--------- ---------
$ 200,092 $ 207,166
========= =========
Commitments and contingencies (Note 1)
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2002 2003 2002 2003
---- ---- ---- ----
Net sales .......................................... $51,017 $ 49,706 $99,586 $100,726
Cost of goods sold ................................. 41,266 41,800 80,128 83,997
------- -------- ------- --------
9,751 7,906 19,458 16,729
Selling, general and administrative ................ 7,072 7,038 14,259 14,031
------- -------- ------- --------
Operating income ............................... 2,679 868 5,199 2,698
Other general corporate expense (income), net ...... 456 (3) 145 488
Interest expense ................................... 655 322 1,338 663
------- -------- ------- --------
Income before income taxes ..................... 1,568 549 3,716 1,547
Provision for income taxes ......................... 737 242 1,554 681
------- -------- ------- --------
Net income ..................................... $ 831 $ 307 $ 2,162 $ 866
======= ======== ======= ========
Basic and diluted earnings per common share ........ $ .05 $ .02 $ .14 $ .06
======= ======== ======= ========
Cash dividends per share ........................... $ .125 $ -- $ .25 $ .125
======= ======== ======= ========
Shares used in the calculation of per share amounts:
Basic earnings per common share ................. 15,105 15,120 15,104 15,118
Dilutive impact of outstanding
stock options .................................. 17 -- 15 --
------- -------- ------- --------
Diluted common shares ........................... 15,122 15,120 15,119 15,118
======= ======== ======= ========
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2002 2003 2002 2003
---- ---- ---- ----
Net income ............................. $ 831 $ 307 $2,162 $ 866
Other comprehensive income -
Currency translation adjustment,
net of tax ........................... 6,212 4,798 6,014 8,507
------ ------ ------ ------
Comprehensive income ............. $7,043 $5,105 $8,176 $9,373
====== ====== ====== ======
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2002 and 2003
(In thousands)
2002 2003
---- ----
Cash flows from operating activities:
Net income ......................................... $ 2,162 $ 866
Depreciation and amortization ...................... 6,466 7,051
Deferred income taxes .............................. (62) (829)
Other, net ......................................... (408) 228
-------- --------
8,158 7,316
Change in assets and liabilities:
Accounts receivable .............................. (598) (84)
Inventories ...................................... 869 (9)
Accounts payable and accrued liabilities ......... (320) 195
Accounts with affiliates ......................... (47) (230)
Income taxes ..................................... (393) 1,000
Other, net ....................................... 104 183
-------- --------
Net cash provided by operating activities ...... 7,773 8,371
-------- --------
Cash flows from investing activities:
Capital expenditures ............................... (7,519) (4,222)
Other, net ......................................... -- 64
-------- --------
Net cash used by investing activities .......... (7,519) (4,158)
-------- --------
Cash flows from financing activities:
Indebtedness:
Additions ....................................... -- 1,000
Principal payments .............................. (19,025) (2,006)
Deferred financing costs paid ................... -- (416)
Dividends .......................................... (3,776) (1,889)
-------- --------
Net cash used by financing activities .......... (22,801) (3,311)
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities ...... (22,547) 902
Currency translation ............................... 378 248
Cash and cash equivalents at beginning of period ..... 33,309 12,407
-------- --------
Cash and cash equivalents at end of period ........... $ 11,140 $ 13,557
======== ========
Supplemental disclosures:
Cash paid for:
Interest ......................................... $ 1,252 $ 809
Income taxes ..................................... 2,317 1,258
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2003
(In thousands)
Accumulated
other
comprehensive
Additional income (loss)- Total
Common Stock paid-in Retained currency Treasury stockholders'
Class A Class B capital earnings translation stock equity
------- ------- --------- -------- ----------- --------- --------
Balance at December 31, 2002 .. $62 $100 $119,387 $ 44,049 $(10,304) $(11,315) $ 141,979
Net income .................... -- -- -- 866 -- -- 866
Other comprehensive income, net -- -- -- -- 8,507 -- 8,507
Issuance of common stock ...... -- -- 50 -- -- -- 50
Cash dividends ................ -- -- -- (1,889) -- -- (1,889)
--- ---- -------- -------- -------- -------- ---------
Balance at June 30, 2003 ...... $62 $100 $119,437 $ 43,026 $ (1,797) $(11,315) $ 149,513
=== ==== ======== ======== ======== ======== =========
COMPX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet of CompX International Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2002 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at June 30, 2003 and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended June 30, 2002 and 2003 have been prepared by the Company,
without audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the consolidated
financial position, results of operations and cash flows have been made. The
results of operations for the interim periods are not necessarily indicative of
the operating results for a full year or of future operations. Certain
information normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America
has been condensed or omitted. The accompanying consolidated financial
statements should be read in conjunction with the Company's Annual Report on
Form 10-K for the year ended December 31, 2002 (the "2002 Annual Report").
Basic earnings per share of common stock is based upon the weighted-average
number of common shares actually outstanding during each period. Diluted
earnings per share of common stock includes the impact of outstanding dilutive
stock options.
Commitments and contingencies are discussed in "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the 2002 Annual
Report.
The Company is 69% owned by Valhi, Inc. (NYSE: VHI) and Valhi's
wholly-owned subsidiary Valcor, Inc. At June 30, 2003, Contran Corporation
holds, directly or through subsidiaries, approximately 90% of Valhi's
outstanding common stock. Substantially all of Contran's outstanding voting
stock is held by trusts established for the benefit of certain children and
grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee. Mr.
Simmons, the Chairman of the Board of each of Contran, Valhi and Valcor, may be
deemed to control such companies and the Company.
Stock options. As disclosed in the 2002 Annual Report, the Company accounts
for stock-based employee compensation related to stock options using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APBO") No. 25, Accounting for Stock Issued to Employees, and its various
interpretations. Under APBO No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise price is greater than or equal to
the market price on the grant date. Compensation cost recognized by the Company
related to stock options in accordance with APBO No. 25 was not significant
during the first six months of 2002 or 2003.
The following table illustrates the effect on net income and earnings per
share for the periods presented if the Company had applied the fair value
recognition provisions of Statement of Financial Accounting Standards ("SFAS")
No. 123, Accounting for Stock-Based Compensation to stock-based employee
compensation related to stock options for all options granted on or after
January 1, 1995.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands, except per share data)
Net income, as reported .................. $ 831 $ 307 $ 2,162 $ 866
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 ...... (395) (219) (786) (437)
----- ----- ------- -----
Pro forma net income ..................... $ 436 $ 88 $ 1,376 $ 429
===== ===== ======= =====
Earnings per share - basic and diluted:
As reported ............................ $ .05 $ .02 $ .14 $ .06
===== ===== ======= =====
Pro forma .............................. $ .03 $ .01 $ .09 $ .03
===== ===== ======= =====
Note 2 - Business segment information:
The Company's operating segments are defined as components of its
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company has three operating
segments - CompX Security Products, CompX Waterloo and CompX Regout. The CompX
Security Products segment, with manufacturing facilities in South Carolina and
Illinois, manufactures locking mechanisms and other security products for sale
to the office furniture, banking, vending, computer and other industries. The
CompX Waterloo segment, with facilities in Canada, Michigan and Taiwan, and the
CompX Regout segment, with facilities in the Netherlands, both manufacture
and/or distribute a complete line of precision ball bearing slides for use in
office furniture, computer-related equipment, tool storage cabinets and other
applications and ergonomic computer support systems for office furniture.
Because of the similar economic characteristics between the CompX Waterloo and
CompX Regout segments and due to the identical products, customer types,
production processes and distribution methods shared by these two segments, they
have been aggregated into a single reportable segment for segment reporting
purposes.
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)
Net sales:
CompX Waterloo/CompX Regout . $ 31,725 $ 30,871 $ 62,113 $ 63,462
CompX Security Products ..... 19,292 18,835 37,473 37,264
-------- -------- -------- ---------
Total net sales ........... $ 51,017 $ 49,706 $ 99,586 $ 100,726
======== ======== ======== =========
Operating income (loss):
CompX Waterloo/CompX Regout . $ 303 $ (1,600) $ 714 $ (1,993)
CompX Security Products ..... 2,376 2,468 4,485 4,691
-------- -------- -------- ---------
Total operating income .... 2,679 868 5,199 2,698
Interest expense .............. (655) (322) (1,338) (663)
Other general corporate income
(expense), net ............... (456) 3 (145) (488)
-------- -------- -------- ---------
Income before income taxes .. $ 1,568 $ 549 $ 3,716 $ 1,547
======== ======== ======== =========
Note 3 - Inventories:
December 31, June 30,
2002 2003
---- ----
(In thousands)
Raw materials ............................ $ 6,573 $ 8,155
Work in process .......................... 12,602 12,149
Finished products ........................ 9,532 10,182
Supplies ................................. 169 135
------- -------
$28,876 $30,621
======= =======
Note 4 - Accounts payable and accrued liabilities:
December 31, June 30,
2002 2003
---- ----
(In thousands)
Accounts payable ............................... $ 9,106 $10,528
Accrued liabilities:
Employee benefits ............................ 7,331 7,396
Insurance .................................... 478 358
Royalties .................................... 246 142
Restructuring ................................ 540 --
Deferred gain on sale/leaseback .............. 805 881
Other ........................................ 2,812 3,542
------- -------
$21,318 $22,847
======= =======
In 2001, a charge of $2.7 million was recorded related to a consolidation
and rationalization of CompX's European operations. This restructuring effort
included headcount reductions of about 35 employees at the Company's Maastricht,
the Netherlands facility, substantially all of which had been implemented by
December 31, 2001. As adjusted for changes in currency exchange rates,
approximately $3.0 million was paid through March 31, 2003, which satisfied the
Company's obligations related to this restructuring.
Note 5 - Indebtedness:
December 31, June 30,
2002 2003
---- ----
(In thousands)
Revolving bank credit facility ................. $31,000 $30,000
Other .......................................... 6 --
------- -------
31,006 30,000
Less current maturities ........................ 6 --
------- -------
$31,000 $30,000
======= =======
Note 6 - Other general corporate income (expense), net:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)
Interest income ........................ $ 111 $ 35 $ 295 $ 86
Foreign currency transactions, net ..... (640) (29) (930) (624)
Defined benefit pension plan
settlement gain ....................... -- -- 677 --
Other, net ............................. 73 (3) (187) 50
----- ----- ----- -----
$(456) $ 3 $(145) $(488)
===== ===== ===== =====
Note 7 - Provision for income taxes:
Three months ended Six months ended
June 30, June 30,
------------------ ----------------
2002 2003 2002 2003
---- ---- ---- ----
(In thousands)
Expected tax expense ................... $ 549 $ 192 $ 1,301 $ 541
Non-U.S. tax rates ..................... (116) -- (203) (67)
Incremental U.S. tax on earnings of
foreign subsidiaries .................. 735 119 783 336
State income taxes ..................... (7) 83 10 109
Other, net ............................. (424) (152) (337) (238)
----- ------- ------- -----
$ 737 $ 242 $ 1,554 $ 681
===== ======= ======= =====
Note 8 - Foreign currency forward contracts:
Certain of the Company's sales generated by its non-U.S. operations are
denominated in U.S. dollars. The Company periodically uses currency forward
contracts to manage a portion of foreign exchange rate market risk associated
with receivables, or similar exchange rate risk associated with future sales,
denominated in a currency other than the holder's functional currency. At each
balance sheet date, any such outstanding currency forward contract is marked to
market with any resulting gain or loss recognized in income currently. These
contracts are not accounted for as hedging instruments under SFAS No. 133. At
December 31, 2002, the Company held a series of contracts to manage such
exchange rate risk to exchange an aggregate of U.S. $2.5 million for an
equivalent amount of Canadian dollars at an exchange rate of Cdn. $1.57 per U.S.
dollar. Such contracts matured through January 2003. At June 30, 2003, the
Company held a series of contracts to manage such exchange rate risk to exchange
an aggregate of U.S. $4.2 million for an equivalent amount of Canadian dollars
at exchange rates of Cdn. $1.34 to Cdn. $1.38 per U.S. dollar. Such contracts
mature through August 2003.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS -
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Overview
The Company reported net income of $.3 million in the second quarter of
2003, a decrease of 63% from net income of $.8 million for the second quarter of
2002. The Company reported net income of $.9 million in the first six months of
2003, a 60% decrease from net income of $2.2 million in the first six months of
2002.
CompX anticipates continuing its focus on opportunities to rationalize its
cost structure throughout 2003. As part of this initiative, CompX has
consolidated its two Kitchener, Ontario plants into a single facility. Expenses
relating to this consolidation were approximately $.8 million in the first six
months of 2003 ($.4 million in the three months ended June 30, 2003) and are
included in cost of goods sold. Cost benefits associated with such consolidation
are expected to begin to be realized in the second half of 2003. In addition,
other cost evaluations are also under review at all locations, particularly with
respect to the CompX Regout operations. Such evaluations could result in further
headcount reductions and other charges for asset impairment, including goodwill,
in the last half of 2003, which could be material.
Results of Operations
Three months ended Six months ended
June 30, % June 30, %
------------------ ------------------
2002 2003 Change 2002 2003 Change
---- ---- ------ ---- ---- ------
(In thousands) (In thousands)
Net sales:
CompX Waterloo/CompX Regout $31,725 $ 30,871 -3% $62,113 $ 63,462 2%
CompX Security Products ... 19,292 18,835 -2% 37,473 37,264 -1%
------- -------- ------- ---------
Total net sales ......... $51,017 $ 49,706 -3% $99,586 $ 100,726 1%
======= ======== ======= =========
Operating income (loss):
CompX Waterloo/CompX Regout $ 303 $ (1,600) -628% $ 714 $ (1,993) -379%
CompX Security Products ... 2,376 2,468 4% 4,485 4,691 5%
------- -------- ------- ---------
Total operating income .. $ 2,679 $ 868 -68% $ 5,199 $ 2,698 -48%
======= ======== ===== ======= ========= ==
Operating income margin:
CompX Waterloo/CompX Regout 1% -5% 1% -3%
CompX Security Products ... 12% 13% 12% 13%
Total operating income
margin ................. 5% 2% 5% 3%
Sales for the respective product lines in the second quarter of 2002 and
2003 are as follows:
Three months ended Six months ended
June 30, % June 30, %
------------------ ----------------
2002 2003 Change 2002 2003 Change
---- ---- ------ ---- ---- ------
(In thousands) (In thousands)
Precision ball-bearing slides $22,239 $21,340 -4% $ 42,777 $ 44,509 4%
Security products ........... 19,292 18,835 -2% 37,473 37,264 -1%
Ergonomic computer support
systems .................... 7,430 7,101 -4% 15,267 13,889 -9%
Other products .............. 2,056 2,430 18% 4,069 5,064 24%
------- ------- -------- --------
$51,017 $49,706 -3% $ 99,586 $100,726 1%
======= ======= ======== ========
Net sales. Net sales decreased $1.3 million, or 3%, to $49.7 million in the
second quarter of 2003 from $51.0 million in the second quarter of 2002. Net
sales increased $1.1 million or 1% in the first six months of 2003 from $99.6
million in the first six months of 2002. Favorable fluctuations in currency
exchange rates had a positive impact of $1.9 million and $3.6 million in the
second quarter and first six months of 2003, respectively. Excluding the effects
of changes in currency exchange rates, the decrease in sales in the second
quarter of 2003 is principally due to unit sales volume decreases of precision
ball-bearing slides. The decrease in precision ball-bearing slides sales volume
is primarily due to the continued softness in demand for office furniture and
such decline is consistent with the report of the Business and Institutional
Furniture Manufacturer's Association (BIFMA), which indicated that North
American office furniture shipments were down 8.5% for the first five months of
2003. Sales for the first six months of 2003 would have decreased 3% as compared
to the first six months of 2002, if the effects of currency exchange rates had
been excluded. Such decrease is primarily due to sales volume decreases of
ergonomic computer support systems which are also impacted by soft demand for
office furniture as well as ongoing weakness in the overall economic
environment.
Cost of goods sold. The Company's cost of goods sold increased 1% in the
second quarter of 2003 compared to 2002 while net sales decreased 3% during the
same period. Cost of goods sold increased 5% in the first six months of 2003
compared to 2002, while net sales increased 1%. The Company's gross margin
percentage decreased from 19% in the second quarter of 2002 to 16% in the second
quarter of 2003 and decreased from 20% to 17% in the first six months of 2003 as
compared to the first six months of 2002. The disproportionate change in cost of
goods sold and its effect on gross margins was primarily due to fluctuations in
currency exchange rates that negatively impacted cost of goods sold by
approximately $2.5 million and $4.3 million for the three and six month periods
ended June 30, 2003, respectively. Lower revenues from the decline in unit sales
of higher-margin ergonomic products as well as the expenses incurred in the
first six months of 2003 related to consolidation of the Company's two Canadian
facilities also negatively impacted cost of goods sold. In addition, CompX
Regout was negatively impacted in the second quarter of 2003 by continued
softening of the European economy which resulted in lower sales and
manufacturing inefficiencies due to reduced levels of capacity utilization.
Operating income. Operating income in the second quarter of 2003 was $.9
million compared to $2.7 million for the second quarter of 2002, decreasing 68%
from the second quarter of 2002. Similarly, operating income in the first six
months of 2003 decreased 48% from $5.2 million in the first six months of 2002.
As a percentage of net sales, operating income was 2% for the second quarter of
2003 compared to 5% for the second quarter of 2002 and 3% for the first-six
months of 2003 compared to 5% for the same period in 2002. Despite the positive
effects of continued cost reductions and certain price increases, operating
income in the second quarter of 2003 declined as compared to the second quarter
of 2002 due to the unfavorable effects of changes in the sales mix (particularly
at the CompX Waterloo/CompX Regout segment), unfavorable relative changes in
currency exchange rates, expenses associated with the consolidation of the
Company's Canadian facilities and weak demand due to continued declines in the
overall European economy.
CompX has substantial operations and assets located outside the United
States (principally in Canada, the Netherlands and Taiwan). A portion of CompX's
sales generated from its non-U.S. operations are denominated in currencies other
than the U.S. dollar, principally the Canadian dollar, the euro and the New
Taiwan dollar. In addition, a portion of CompX's sales generated from its
non-U.S. operations are denominated in the U.S. dollar. Most raw materials,
labor and other production costs for such non-U.S. operations are denominated
primarily in local currencies. Consequently, the translated U.S. dollar value of
CompX's foreign sales and operating results are subject to currency exchange
rate fluctuations which may favorably or unfavorably impact reported earnings
and may affect comparability of period-to-period operating results. During the
second quarter and first six months of 2003, currency exchange rate fluctuations
of the Canadian dollar and the euro positively impacted the Company's sales
comparisons with the corresponding period of the prior year (principally with
respect to slide products) and exchange rate fluctuations of the Canadian
dollar, the New Taiwan dollar and the euro negatively impacted the Company's
operating income comparisons for the corresponding periods.
The following table summarizes the effect of currency exchange rate
fluctuations for the three and six month periods ended June 30, 2002 and 2003:
Percentage change - Percentage change -
three months ended six months ended
June 30, 2002 vs. 2003 June 30, 2002 vs. 2003
---------------------- ----------------------
Including Excluding Including Excluding
effects of effects of effects of effects of
currency currency currency currency
fluctuations fluctuations fluctuations fluctuations
Net sales:
CompX Waterloo/CompX Regout -3% -9% 2% -4%
CompX Security Products -2% -2% -1% -1%
Total net sales -3% -6% 1% -3%
Operating income (loss):
CompX Waterloo/CompX Regout -628% -201% -379% -110%
CompX Security Products 4% 4% 5% 5%
Total operating income -68% -19% -48% -11%
Outlook. While signs of recovery are beginning to surface in the overall
economy, the Company has not experienced a strengthening in customer orders as
of the end of the second quarter of 2003. For the remainder of the year, the
Company does not expect this situation to change significantly since a majority
of CompX's customers are in the office furniture industry, which tends to lag
behind the overall economy in a recovery. Additionally, the European office
furniture industry experienced continued economic decline in the spring that has
put added pressure on operating results. In response to the current economic
conditions, CompX continues to focus on improving lean manufacturing efficiency
and cost improvement initiatives as well as pursuit of business opportunities
for its products outside of the office furniture industry. Additionally, due to
the continued challenges of the European economy, the Company is currently
undergoing an analysis of cost savings initiatives and strategic alternatives
with respect to its European operations. This analysis, which is expected to be
completed by the end of the third quarter of 2003, may result in charges for
asset impairment, including goodwill, and other restructuring charges during the
second half of 2003. The Company believes its balance sheet, which has enabled
spending on growth and profitability improvement initiatives despite the
difficulties of the market environment, continues to provide the ability to take
advantage of new business opportunities as they arise.
General Corporate and Other Items
Other general corporate income (expense), net. The components of other
general corporate income (expense), net are summarized in Note 6 to the
Consolidated Financial Statements, and primarily include interest income,
foreign currency transaction gains and losses, gains and losses on disposals of
other assets and a settlement gain relating to CompX's terminated defined
benefit pension plan in 2002. Interest income decreased in the second quarter
and first six months of 2003 as compared to the corresponding periods in 2002
primarily due to a lower level of funds available for investment.
Interest expense. Interest expense declined in the second quarter and first
six months of 2003 compared to the corresponding periods in 2002 due primarily
to lower average levels of borrowing under CompX's Revolving Bank Credit
Agreement offset, in part, by higher interest rates on the Company's outstanding
indebtedness. For the second half of 2003, interest expense is expected to be
slightly higher than the same period in 2002 due to higher interest rates
charged under the Company's new Revolving Bank Credit Agreement entered into in
January 2003.
Provision for income taxes. The principal reasons for the difference
between CompX's effective income tax rates and the U.S. federal statutory income
tax rates are explained in Note 7 to the Consolidated Financial Statements.
Income tax rates vary by jurisdiction (county and/or state), and relative
changes in the geographic mix of CompX's pre-tax earnings can result in
fluctuations in the effective income tax rate.
Liquidity and Capital Resources
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities have generally been similar to the
trends in the Company's earnings. Net cash provided by operating activities,
excluding changes in assets and liabilities, totaled $8.2 million and $7.3
million in the first six months of 2002 and 2003, respectively, compared to net
income of $2.2 million and $.9 million, respectively.
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.
Investing activities. Net cash used by investing activities totaled $7.5
million and $4.2 million in the first six months of 2002 and 2003, respectively,
and substantially consisted of capital expenditures.
Capital expenditures for 2003 relate primarily to equipment additions
designed to increase automation and improve manufacturing efficiencies at the
Company's facilities. Capital expenditures for the remainder of 2003 are
estimated at approximately $4 million to $5 million, the majority of which
relate to projects that emphasize improved production efficiency and the
shifting of production capacity to lower cost facilities. Firm purchase
commitments for capital projects not commenced at June 30, 2003 approximated
$1.4 million.
Financing activities. Net cash used by financing activities totaled $22.8
million and $3.3 million in the first six months of 2002 and 2003, respectively.
The Company paid a quarterly dividend of $1.9 million, or $.125 per share, in
the first quarter of 2003 and suspended its regular quarterly dividend starting
in the second quarter of 2003. Depending upon the Company's future operations
and requirements for cash, it is possible the Company may decide to reinstate
its quarterly dividend.
Under the terms of the Company's $47.5 million secured Revolving Bank
Credit Agreement, $17.5 million was available for future borrowing at June 30,
2003. The credit agreement is collateralized by substantially all of the
Company's United States assets and at least 65% of the ownership interests in
the Company's first-tier non-United States subsidiaries. Provisions contained in
the Credit Agreement could result in the acceleration of the indebtedness prior
to its stated maturity for reasons other than defaults such as failing to comply
with typical financial covenants. For example, the Company's Credit Agreement
allows the lender to accelerate the maturity of the indebtedness upon a change
of control (as defined) of the borrower. The terms of the Credit Agreement could
result in the acceleration of all or a portion of the indebtedness following a
sale of assets outside of the ordinary course of business.
Management believes that cash generated from operations and borrowing
availability under the Company's Revolving Bank Credit Agreement, together with
cash on hand, will be sufficient to meet the Company's liquidity needs for
working capital, capital expenditures and debt service. To the extent that the
Company's actual operating results or other developments differ from the
Company's expectations, CompX's liquidity could be adversely affected.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, the Company has in the
past and may in the future seek to raise additional capital, refinance or
restructure indebtedness, issue additional securities, modify its dividend
policy, repurchase shares of its common stock or take a combination of such
steps or other steps to manage its liquidity and capital resources. In the
normal course of business, the Company may review opportunities for
acquisitions, divestitures, joint ventures or other business combinations in the
component products industry. In the event of any such transaction, the Company
may consider using its then available cash, issuing additional equity securities
or increasing the indebtedness of the Company or its subsidiaries.
Forward Looking Information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "anticipates," "expects" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. Among the
factors that could cause actual future results to differ materially are the
risks and uncertainties discussed in this Quarterly Report and those described
from time to time in the Company's other filings with the Securities and
Exchange Commission. While it is not possible to identify all factors, the
Company continues to face many risks and uncertainties including, but not
limited to the following:
o Future supply and demand for the Company's products,
o Changes in costs of raw materials and other operating costs (such as energy
costs),
o General global economic and political conditions,
o Demand for office furniture,
o Service industry employment levels,
o The possibility of labor disruptions,
o The ability to implement headcount reduction in a cost effective manner
within the constraints of non-U.S. governmental regulations,
o Competitive products and prices, including increased competition from
low-cost manufacturing sources (such as China),
o Substitute products,
o Customer and competitor strategies,
o The introduction of trade barriers,
o The impact of pricing and production decisions,
o Fluctuations in the value of the U.S. dollar relative to other currencies
(such as the euro, Canadian dollar and New Taiwan dollar),
o Potential difficulties in integrating completed acquisitions,
o Uncertainties associated with new product development,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o The ultimate outcome of income tax audits,
o The impact of current or future government regulations,
o Possible future litigation and
o Other risks and uncertainties.
Should one or more of these risks materialize (or the consequences of such a
development worsen) or should the underlying assumptions prove incorrect, actual
results could differ materially from those forecasted or expected. The Company
disclaims any intention or obligation to update publicly or revise such
statements whether as a result of new information, future events or otherwise.
Non-GAAP Financial Measures
In an effort to provide investors with additional information regarding the
Company's results of operations as determined by accounting principles generally
accepted in the United States of America ("GAAP"), the Company has disclosed
certain non-GAAP information which the Company believes provides useful
information to investors:
o The Company discloses percentage changes in its sales and operating income
excluding the effects of foreign currency translation, so that such changes
can be analyzed without the impact of changes in foreign currency exchange
rates, thereby facilitating period-to-period comparisons.
ITEM 4. Controls and Procedures.
The Company maintains a system of disclosure controls and procedures. The
term "disclosure controls and procedures," as defined by regulations of the
Securities and Exchange Commission (the "SEC"), means controls and other
procedures that are designed to ensure that information required to be disclosed
in the reports that the Company files or submits to the SEC under the Securities
Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized
and reported, within the time periods specified in the SEC's rules and forms.
Disclosure controls and procedures include, without limitation, controls and
procedures designed to ensure that information required to be disclosed by the
Company in the reports that it files or submits to the SEC under the Act is
accumulated and communicated to the Company's management, including its
principal executive officer and its principal financial officer, or persons
performing similar functions, as appropriate to allow timely decisions to be
made regarding required disclosure. Each of David A. Bowers, the Company's Vice
Chairman of the Board, President and Chief Executive Officer, and Darryl R.
Halbert, the Company's Vice President, Chief Financial Officer and Controller,
have evaluated the Company's disclosure controls and procedures as of June 30,
2003. Based upon their evaluation, these executive officers have concluded that
the Company's disclosure controls and procedures are effective as of the date of
such evaluation.
The Company also maintains a system of internal controls over financial
reporting. The term "internal control over financial reporting," as defined by
regulations of the SEC, means a process designed by, or under the supervision
of, the Company's principal executive and principal financial officers, or
persons performing similar functions, and effected by the Company's board of
directors, management and other personnel, to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with accounting
principles generally accepted in the United States of America ("GAAP"), and
includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of the assets of the
Company.
o Provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with GAAP, and
that receipts and expenditures of the Company are being made only in
accordance with authorizations of management and directors of the Company,
and
o Provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of the Company's assets that
could have a material effect on the Company's consolidated financial
statements.
There has been no change to the Company's system of internal controls over
financial reporting during the quarter ended June 30, 2003 that has materially
affected, or is reasonably likely to materially affect, the Company's system of
internal controls over financial reporting.
Part II. OTHER INFORMATION
ITEM 4. Submission of Matters to a Vote of Security Holders.
The Company held its Annual Meeting of Stockholders on May 19, 2003. Paul
M. Bass, Jr., David A. Bowers, Keith R. Coogan, Edward J. Hardin, Ann Manix,
Glenn R. Simmons and Steven L. Watson were elected as directors, each receiving
votes "For" their election from over 98% of the approximately 105.1 million
votes eligible to be voted at the Annual Meeting.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
The Company has retained a signed original of any exhibit listed
below that contains signatures, and the Company will provide any such exhibit to
the Commission or its staff upon request.
10.1 Intercorporate Services Agreement between the Registrant and
Contran Corporation effective as of January 1, 2003.
31.1 Certification.
31.2 Certification.
32.1 Certification.
32.2 Certification.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended June 30, 2003:
April 24, 2003 - Reported item 9.
May 20, 2003 - Reported item 9.
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 August 4, 2003 By /s/ Darryl R. Halbert
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Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller