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, 2006 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 a large accelerated filer, an
accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the
Exchange Act). Large accelerated filer Accelerated filer Non-accelerated filer
X.
Indicate by check mark whether the Registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act). Yes No X .
Number of shares of common stock outstanding on April 26, 2006:
Class A: 5,234,280
Class B: 10,000,000
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 2005;
March 31, 2006 (Unaudited) 3-4
Consolidated Statements of Income -
Three months ended March 31, 2005 and 2006 (Unaudited) 5
Consolidated Statements of Comprehensive Income -
Three months ended March 31, 2005 and 2006 (Unaudited) 6
Consolidated Statements of Cash Flows -
Three months ended March 31, 2005 and 2006 (Unaudited) 7
Consolidated Statement of Stockholders' Equity -
Three months ended March 31, 2006 (Unaudited) 8
Notes to Consolidated Financial Statements (Unaudited) 9-15
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16-20
Item 3. Quantitative and Qualitative Disclosure About
Market Risk 20
Item 4. Controls and Procedures. 20-21
Part II. OTHER INFORMATION
Item 1A. Risk Factors 22
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds 22
Item 3. Defaults Upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits. 22
- 2 -
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, March 31,
2005 2006
----------- -----------
(Unaudited)
Current assets:
Cash and cash equivalents $ 30,592 $ 28,540
Accounts receivable, net 20,609 22,733
Receivables from affiliates 620 300
Refundable income taxes 401 850
Inventories 22,538 22,005
Prepaid expenses and other 1,496 945
Deferred income taxes 1,903 1,902
Current portion of note receivable 2,612 2,612
-------- --------
Total current assets 80,771 79,887
-------- --------
Other assets:
Goodwill 35,678 35,753
Other intangible assets 2,317 2,221
Note receivable 1,567 1,567
Other 230 385
-------- --------
Total other assets 39,792 39,926
-------- --------
Property and equipment:
Land 7,868 8,559
Buildings 31,165 31,648
Equipment 107,333 109,447
Construction in progress 2,015 3,525
-------- --------
148,381 153,179
Less accumulated depreciation 80,392 85,081
-------- --------
Net property and equipment 67,989 68,098
-------- --------
$188,552 $187,911
======== ========
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COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, March 31,
2005 2006
---------- -----------
(Unaudited)
Current liabilities:
Accounts payable and accrued liabilities $ 19,238 $ 17,306
Income taxes payable to affiliates 771 2,273
Income taxes 327 -
-------- --------
Total current liabilities 20,336 19,579
-------- --------
Noncurrent liabilities:
Long-term debt and other 1,425 41
Deferred income taxes 16,692 17,372
-------- --------
Total noncurrent liabilities 18,117 17,413
-------- --------
Stockholders' equity:
Preferred stock - -
Class A common stock 52 52
Class B common stock 100 100
Additional paid-in capital 109,556 109,556
Retained earnings 31,320 31,889
Accumulated other comprehensive income
- currency translation 9,071 9,322
-------- --------
Total stockholders' equity 150,099 150,919
-------- --------
$188,552 $187,911
======== ========
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, 2005 and 2006
(In thousands, except per share data)
(Unaudited)
2005 2006
---- ----
Net sales $46,843 $47,029
Cost of goods sold 36,560 35,402
------- -------
Gross margin 10,283 11,627
Selling, general and administrative expense 6,122 6,718
Other operating income (expense):
Currency transaction losses, net (54) (41)
Disposition of property and equipment 5 (73)
------- -------
Operating income 4,112 4,795
Other non-operating income, net 210 382
Interest expense (69) (61)
------- -------
Income from continuing operations before
income taxes 4,253 5,116
Provision for income taxes 2,041 2,643
------- -------
Income from continuing operations 2,212 2,473
Discontinued operations, net of tax (477) -
------- -------
Net income $ 1,735 $ 2,473
======= =======
Basic and diluted earnings (loss) per common share:
Continuing operations $ .14 $ .16
Discontinued operations (.03) -
------- -------
$ .11 $ .16
======= =======
Cash dividends per share $ .125 $ .125
======= =======
Shares used in the calculation of basic and diluted
earnings per share 15,216 15,248
======= =======
See accompanying notes to consolidated financial statements.
- 5 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Net income $1,735 $2,473
------ ------
Other comprehensive income, net of tax:
Currency translation adjustment:
Arising during the period 358 361
Disposal of business unit 739 -
------ ------
1,097 361
Impact from cash flow hedges, net (75) (110)
------ ------
Total other comprehensive income 1,022 251
------ ------
Comprehensive income $2,757 $2,724
====== ======
See accompanying notes to consolidated financial statements.
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COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three months ended March 31, 2005 and 2006
(In thousands)
(Unaudited)
2005 2006
---- ----
Cash flows from operating activities:
Net income $ 1,735 $ 2,473
Depreciation and amortization 2,707 2,685
Deferred income taxes:
Continuing operations 66 661
Discontinued operations (187) -
Other, net 877 353
Change in assets and liabilities:
Accounts receivable (2,341) (2,124)
Inventories (46) 343
Accounts payable and accrued liabilities 605 (1,881)
Accounts with affiliates 178 1,732
Income taxes (1,734) (621)
Other, net 87 343
-------- --------
Net cash provided by operating activities 1,947 3,964
-------- --------
Cash flows from investing activities:
Capital expenditures (5,146) (2,583)
Proceeds from disposal of assets held for sale 18,094 -
Cash of disposed business unit (4,006) -
Other, net 6 7
-------- --------
Net cash provided (used) by investing activities 8,948 (2,576)
-------- --------
Cash flows from financing activities:
Indebtedness:
Principal payments (10) (1,476)
Deferred financing costs paid (28) (105)
Dividends (1,899) (1,904)
Issuance of common stock 191 -
--------- ---------
Net cash used by financing activities (1,746) (3,485)
-------- --------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 9,149 (2,097)
Currency translation 219 45
Cash and cash equivalents at beginning of period 21,037 30,592
-------- --------
Cash and cash equivalents at end of period $ 30,405 $ 28,540
======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 55 $ 152
Income taxes 2,834 945
Noncash investing activity - note receivable
received upon disposal of business unit $ 4,179 $ -
See accompanying notes to consolidated financial statements.
- 7 -
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Three months ended March 31, 2006
(In thousands)
(Unaudited)
Accumulated other
comprehensive
income
Common Stock Additional --------------------------- Total
--------------- paid-in Retained Currency Hedging stockholders'
Class A Class B capital Earnings translation Derivatives equity
------- ------- --------- -------- --------- ----------- --------
Balance at December 31, 2005 $52 $100 $109,556 $31,320 $8,961 $ 110 $150,099
Net income - - - 2,473 - - 2,473
Other comprehensive income, net - - - - 361 (110) 251
Cash dividends - - - (1,904) - - (1,904)
--- ---- -------- ------- ------ ------ --------
Balance at March 31, 2006 $52 $100 $109,556 $31,889 $9,322 $ - $150,919
=== ==== ======== ======= ====== ====== ========
See accompanying notes to consolidated financial statements.
- 8 -
COMPX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Note 1 - Basis of presentation and accounting principles newly adopted in 2006:
The consolidated balance sheet of CompX International Inc. and Subsidiaries
(collectively, the "Company") at December 31, 2005 has been condensed from the
Company's audited consolidated financial statements at that date. The
consolidated balance sheet at March 31, 2006 and the consolidated statements of
income, comprehensive income, stockholders' equity and cash flows for the
interim periods ended March 31, 2005 and 2006 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. The year-end
balance sheet data was derived from audited financial statements, but does not
include all disclosures required by accounting principles generally accepted in
the United States of America ("GAAP"). Certain information normally included in
financial statements prepared in accordance with 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, 2005 (the "2005 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 the 2005 Annual Report.
At March 31, 2006, 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% of CompX Group, and a wholly owned subsidiary of Titanium Metals
Corporation (NYSE:TIE) ("TIMET") owns the remaining 18% of CompX Group. At March
31, 2006, (i) NL and TIMET own an additional 2% and 3% respectively of CompX
directly, (ii) Valhi, Inc. (NYSE: VHI) holds, directly or through a subsidiary,
approximately 83% of NL's outstanding common stock and approximately 37% of
TIMET's outstanding common stock and (iii) Contran Corporation holds, directly
or through subsidiaries, approximately 92% 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.
Inventory costs. The Company adopted 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
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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; therefore, the effect on the consolidated
financial statements as a result of the adoption of SFAS No. 151 was immaterial.
Stock options. In accordance with regulations set forth by the SEC, the
Company adopted SFAS No. 123R, Share-Based Payment, as of January 1, 2006. 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, if 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 previously measured
under SFAS No. 123 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 was not material, the effect of adopting SFAS No. 123R, in so far as it
relates to the recognition of compensation cost in the Company's consolidated
statements of income for existing stock options, did not have a material effect
on the Company's consolidated financial statements. Should the Company, however,
either grant a significant number of options or modify, repurchase or cancel
existing options in the future, the Company could in the future recognize
material amounts of compensation cost related to such options in its
consolidated financial statements.
Also upon adoption of SFAS No. 123R, the cash income tax benefit resulting
from the exercise of stock options in excess of the cumulative income tax
benefit related to such options previously recognized for GAAP financial
reporting purposes in the Company's consolidated statements of income, if any,
will be reflected as a cash inflow from financing activities in the Company's
consolidated statements of cash flows, and the Company's cash flows from
operating activities will reflect the effect of cash paid for income taxes
exclusive of such cash income tax benefit. No stock options were exercised
during the first quarter of 2006; therefore, no such income tax benefits have
been recognized as a component of cash flows from financing activities at March
31, 2006.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosures were provided in the 2005
Annual Report.
Prior to January 1, 2006, the Company accounted 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 was 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
was not significant during the first three months of 2005 or the first three
- 10 -
months of 2006. 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, the effect on the
Company's results of operations for the first three months of 2005 would not
have been material.
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's chief operating
decision maker is David A. Bowers, president and chief executive officer of the
Company. The Company currently has two operating segments - Security Products
and Furniture Components. The Security Products segment, with manufacturing
facilities in South Carolina and Illinois, manufactures locking mechanisms and
other security products for sale to the mailbox, transportion, furniture,
banking, vending and other industries. The Furniture Components segment, with
facilities in Canada, Michigan and Taiwan, manufacture a complete line of
precision ball bearing slides and ergonomic computer support systems for use in
office furniture, computer-related equipment, tool storage cabinets and other
applications.
Previously, the Company had three operating segments: Security Products,
Precision Slides, and Ergonomics. During the first quarter of 2006, the Company
changed its internal management structure such that its precision slides and
ergonomics products businesses are now evaluated as a single operating unit
(referred to as Furniture Components). Segment information at March 31, 2006
reflects the new internal management structure. Additionally, in prior periods,
the reported amount of operating income for each operating segment included an
allocation of corporate operating expenses based upon the amount of each
segment's net sales. At March 31, 2006, such corporate expenses have not been so
allocated but instead are presented as a separate item within operating income.
Prior period segment information has been restated to conform to the current
period presentation for all items as mentioned above.
- 11 -
Three months ended
March 31,
2005 2006
---- ----
(In thousands)
Net sales:
Security Products $18,544 $20,417
Furniture Components 28,299 23,745
Other - 2,867
------- -------
Total net sales $46,843 $47,029
======= =======
Operating income (loss):
Security Products $ 3,255 $ 3,859
Furniture Components 2,212 2,194
Other - 346
Corporate operating expenses (1,355) (1,604)
------- -------
Total operating income 4,112 4,795
Interest expense (69) (61)
Other non-operating income, net 210 382
------- -------
Income from continuing operations before
income taxes $ 4,253 $ 5,116
======= =======
- 12 -
The information below provides disclosure of segment information with
respect to each year in the three-year period ended December 31, 2005, based on
the Company's new operating unit structure.
Years ended December 31,
-------------------------------------
2003 2004 2005
---- ---- ----
(In thousands)
Net sales:
Furniture Components $ 97,811 $106,759 $105,524
Security Products 76,155 75,872 76,667
Other - - 4,158
-------- -------- --------
Total net sales $173,966 $182,631 $186,349
======== ======== ========
Operating income (loss):
Furniture Components $ 1,359 $ 8,885 $ 10,985
Security Products 11,078 11,604 13,141
Other - - 427
Corporate operating expenses (3,658) (5,091) (5,491)
-------- -------- --------
Total operating income 8,779 15,398 19,062
Interest expense (1,301) (494) (336)
Other non-operating income, net 1,676 2,419 724
-------- -------- --------
Income from continuing operations
before income taxes $ 9,154 $ 17,323 $ 19,450
======== ======== ========
Depreciation and amortization:
Furniture Components $ 7,155 $ 7,477 $ 6,798
Security Products 4,744 4,191 3,876
Other - - 207
Corporate depreciation 269 111 43
Thomas Regout** 2,612 2,421 -
-------- -------- --------
$ 14,780 $ 14,200 $ 10,924
======== ======== ========
Capital expenditures:
Furniture Components $ 6,446 $ 2,521 $ 5,549
Security Products 1,901 2,432 4,909
Other - - 32
Thomas Regout** 561 395 -
-------- -------- --------
$ 8,908 $ 5,348 $ 10,490
======== ======== ========
Total assets:
Furniture Components $ 88,928 $ 77,717 $ 77,226
Security Products 77,024 72,794 76,875
Other - - 10,614
Thomas Regout** 38,595 28,921 -
Corporate and eliminations 6,196 6,847 23,837
-------- -------- --------
$210,743 $186,279 $188,552
======== ======== ========
Goodwill:
Furniture Components $ 4,986 $ 5,270 $ 6,594
Security Products 23,743 23,742 23,742
Other - - 5,342
-------- -------- --------
$ 28,729 $ 29,012 $ 35,678
======== ======== ========
** Denotes disposed segment.
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Note 3 - Inventories:
December 31, March 31,
2005 2006
------------ ---------
(In thousands)
Raw materials $ 7,098 $ 6,423
Work in process 9,899 9,876
Finished products 5,541 5,706
------- -------
$22,538 $22,005
======= =======
Note 4 - Accounts payable and accrued liabilities:
December 31, March 31,
2005 2006
--------- ----------
(In thousands)
Accounts payable $ 7,022 $ 6,782
Accrued liabilities:
Employee benefits 8,179 6,385
Customer tooling 1,319 849
Professional fees 720 786
Insurance 516 567
Taxes other than on income 299 398
Sales rebates 110 72
Other 1,073 1,467
------- -------
$19,238 $17,306
======= =======
Note 5 - Indebtedness:
December 31, March 31,
2005 2006
---------- --------
(In thousands)
Other indebtedness $1,596 $ 93
Less current portion 171 52
----- ----
$ 1,425 $ 41
======= ====
Other indebtedness at December 31, 2005 includes certain industrial revenue
bonds which were prepaid in February 2006 for an amount equal to its carrying
value.
Note 6 - Other non-operating income, net:
Three months ended
March 31,
2005 2006
---- ----
(In thousands)
Interest income $ 176 $375
Other, net 34 7
----- ----
$ 210 $382
===== ====
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Note 7 - Provision for income taxes:
Three months ended
March 31,
2005 2006
---- ----
(In thousands)
Expected tax expense, at the U.S. federal statutory
income tax rate of 35% $1,489 $1,791
Non-U.S. tax rates (78) (83)
Incremental U.S. tax on earnings of foreign
Subsidiaries 572 770
State income taxes and other, net 58 78
Valuation allowance - 87
--- -----
$2,041 $2,643
====== ======
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, 2006, the Company held a series of contracts to
manage such exchange rate risk to exchange an aggregate of U.S. $5.2 million for
Canadian dollars at an exchange rate of Cdn. $1.16 per U.S. dollar. Such
contracts qualify for hedge accounting and mature through June 2006. The
exchange rate was Cdn. $1.17 per U.S. dollar at March 31, 2006. The estimated
fair value of such contracts is not material at March 31, 2006.
Note 9 - Discontinued operations:
Discontinued operations relates to the Company's former Thomas Regout
operations in the Netherlands. In January 2005, CompX completed the sale of such
operations for net proceeds that were approximately $864,000 less than
previously estimated (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).
- 15 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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Overview
The Company reported operating income of $4.8 million in the first quarter
of 2006 compared to operating income of $4.1 million for the first quarter of
2005. The operating income improved due to a more favorable product mix, the
impact of the acquisition of a small components business in August 2005 and the
Company's ongoing focus on reducing costs.
Results of Operations
Three months ended
March 31,
------------------------ %
2005 2006 Change
---- ---- ------
(In millions)
Net sales:
Security Products $18,544 $20,417 10%
Furniture Components 28,299 23,745 (16%)
Other - 2,867 n.m.
------- -------
Total net sales $46,843 $47,029 <1%
======= =======
Operating income (loss):
Security Products $ 3,255 $ 3,859 19%
Furniture Components 2,212 2,194 -1%
Other - 346 n.m.
Corporate operating expenses (1,355) (1,604) 18%
------- -------
Total operating income $ 4,112 $ 4,795 17%
======= =======
n.m. = not meaningful
Net sales. Net sales of $47.0 million in the first quarter of 2006 were
comparable with net sales of $46.8 million in the first quarter of 2005. Net
sales were impacted by a general increase in sales volume within security
products and other, partially offset by sales volume decreases for certain
Furniture Components products resulting from increased competition.
Cost of goods sold. The Company's cost of goods sold decreased 3% in the
first quarter of 2006 compared to 2005 while net sales were flat for the same
period. The Company's gross margin percentage increased from 22% in the 2005
period to 25% in the 2006 period. This improvement resulted from the favorable
impact of a continuous focus on reducing costs across all segments and increases
in sales of higher margin products within security products.
Selling, general, and administrative expense. As a percentage of net sales,
selling, general, and administrative expense was 13% of net sales in 2005 and
14% in 2006.
Operating income. Operating income in the first quarter of 2006 increased
to $4.8 million compared to $4.1 million for the first quarter of 2005. As a
percentage of net sales, operating income increased to 10% for the first quarter
of 2006 from 9% for the first quarter of 2005 due to the improvement in gross
margins discussed above.
Currency. CompX has substantial operations and assets located outside the
United States (in Canada and Taiwan). A portion of CompX's sales generated from
- 16 -
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 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 Furniture Components segment, and do not
materially affect the Security Products segment. Fluctuations in foreign
currency exchange rates did not have a significant effect on sales or operating
income in the first quarter of 2006 as compared to the first quarter of 2005.
Other non-operating income, net. The components of other non-operating
income, net are summarized in Note 6 to the Consolidated Financial Statements,
and primarily include interest income.
Interest expense. Interest expense declined in the first quarter of 2006
compared to the first quarter of 2005 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.
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. Consistent with elections of the Contran Tax Group,
in 2005 and 2006 CompX is not claiming a credit with respect to foreign income
taxes paid but instead is claiming a tax deduction. This is the primary cause of
the Company's effective income tax rate for the periods ending March 31, 2005
and 2006 being higher than the U.S. federal statutory income tax rate.
Outlook. The component product areas where the Company operates are highly
competitive in terms of product pricing and features. The Company's strategy is
to focus on areas where it can provide products that have value-added,
user-oriented features which enable its customers to compete more effectively in
their markets. One of the focal points of this strategy is to replace low
margin, commodity type products with higher margin user-oriented feature
products. Additionally, it believes that its focus on collaborating with
customers to identify solutions and its ability to provide a high level of
customer service enable it to compete effectively. In response to competitive
pricing pressure, the Company continuously focuses on reducing production cost
through product reengineering, improvement in manufacturing processes or moving
production to lower-cost facilities.
Raw material prices, especially steel, zinc and copper, continue to be
volatile putting pressure on CompX's margins. The Company actively seeks to
mitigate the margin impact by entering into raw material supply agreements in
order to stabilize the cost for a period of time, execute larger volume tactical
spot purchases at prices that are expected to be favorable compared to future
prices and, if necessary, pass on the cost increases to customers through
surcharges and price increases.
Accounting principles newly adopted in 2006. See Note 1 to the Consolidated
Financial Statements.
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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 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 March 31, 2006, there were no amounts outstanding under the Company's
credit facility that matures in January 2009. The Company does not expect it
will be required to use any of its cash flow from operating activities generated
during 2006 to repay indebtedness.
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. 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 $3.3
million in the first quarter of 2005 compared to a net use of cash of $2.2
million in the first quarter of 2006.
As noted above, relative changes in working capital can have a significant
effect on cash flows from operating activities. The Company's average days sales
outstanding increased from 40 days at December 31, 2005 to 44 days at March 30,
2006 due to timing of collection and a higher accounts receivable balance at the
end of March. The Company's average number of days in inventory was 59 days at
December 31, 2005 and 57 days at March 31, 2006. The decrease in days in
inventory is primarily due to lower raw materials inventory.
Investing activities. Net cash provided by investing activities totaled
$9.0 million in the first quarter of 2005 compared to net cash used by investing
activities of $2.6 million in the first quarter of 2006. Net cash for 2005
included 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 had not contributed significantly to net cash flows from
operations.
Firm purchase commitments for capital projects in process at March 31, 2006
approximated $4.7 million.
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Financing activities. Net cash used by financing activities totaled $1.7
million and $3.5 million in the first quarter of 2005 and 2006, respectively.
The Company prepaid certain industrial revenue bonds reducing debt by $1.5
million in the first quarter of 2006 and paid quarterly dividends of $1.9
million, or $.125 per share, in the first quarter of 2005 and 2006,
respectively.
Provisions contained in the Company's Revolving Bank Credit Agreement could
result in the acceleration of outstanding 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 Company's Credit Agreement could
result in the acceleration of all or a portion of the indebtedness following a
sale of assets outside of the ordinary course of business.
Other. 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, debt service and dividends (if declared). To the extent
that the Company's actual operating results or other developments differ from
the Company's expectations, CompX's liquidity could be adversely affected.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, the Company has in the
past and may in the future seek to raise additional capital, refinance or
restructure indebtedness, issue additional securities, 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.
Off balance sheet financing arrangements. Other than certain operating
leases discussed in the 2005 Annual Report, neither CompX nor any of its
subsidiaries are parties to any off-balance sheet financing arrangements.
Forward Looking Information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Quarterly Report on Form 10-Q relating to matters that are not historical facts
are forward-looking statements that represent management's beliefs and
assumptions based on currently available information. Forward-looking statements
can be identified by the use of words such as "believes," "intends," "may,"
"should," "anticipates," "expects" or comparable terminology, or by discussions
of strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. Among the
factors that could cause actual future results to differ materially are the
risks and uncertainties discussed in this Quarterly Report and those described
from time to time in the Company's other filings with the Securities and
Exchange Commission. While it is not possible to identify all factors, the
Company continues to face many risks and uncertainties including, but not
limited to the following:
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o Future supply and demand for the Company's products,
o Changes in costs of raw materials and other operating costs (such as
energy costs),
o General global economic and political conditions,
o Demand for office furniture,
o Service industry employment levels,
o The possibility of labor disruptions,
o 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 comply with covenants contained in 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 3. QUANTITATIVE AND QUALITATITVE DISCLOSURE ABOUT MARKET RISK.
Reference is made to the 2005 Annual Report for a discussion of the market
risks associated with the changes in foreign currency exchange rates and
interest rates that affect the Company. There have been no material changes in
such market risks since the Company filed the 2005 Annual Report.
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
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
- 20 -
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,
2006. Based upon their evaluation, these executive officers have concluded that
the Company's disclosure controls and procedures are effective as of March 31,
2006.
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.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's internal control over financial reporting during the
quarter ended March 31, 2006 that has materially affected, or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
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Part II. OTHER INFORMATION
ITEM 1A. Risk Factors.
Reference is made to the 2005 Annual Report for a discussion of the risk
factors related to the Company's businesses. There have been no material changes
in such risk factors since the Company filed the 2005 Annual Report.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None
Item 3. Defaults Upon Senior Securities.
None
Item 4. Submission of Matters to a Vote of Security Holders.
None
Item 5. Other Information.
None
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.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPX INTERNATIONAL INC.
------------------------
(Registrant)
Date May 4, 2006 By /s/ Darryl R. Halbert
----------------- ---------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller