SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended June 30, 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
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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
---
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 July 21, 2006:
Class A: 5,248,280
Class B: 10,000,000
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Condensed Consolidated Balance Sheets -
December 31, 2005;June 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Income -
Three months and six months ended
June 30, 2005 and 2006 (unaudited) 5
Condensed Consolidated Statements of Comprehensive
Income - Three and six months ended
June 30, 2005 and 2006 (unaudited) 6
Condensed Consolidated Statements of Cash Flows -
Six months ended June 30, 2005 and 2006 (unaudited) 7
Condensed Consolidated Statement of Stockholders' Equity -
Six months ended June 30, 2006 (unaudited) 8
Notes to Condensed Consolidated Financial Statements
(unaudited) 9
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 16
Item 3. Quantitative and Qualitative Disclosures
About Market Risk. 21
Item 4. Controls and Procedures. 22
Part II. OTHER INFORMATION
Item 1A. Risk Factors. 23
Item 4. Submission of Matters to a Vote of Security Holders 23
Item 6. Exhibits. 23
Items 1, 2, 3, and 5 of Part II are omitted because there is no information to
report.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
ASSETS December 31, June 30,
2005 2006
--------- --------
(unaudited)
Current assets:
Cash and cash equivalents $ 30,592 $ 22,840
Accounts receivable, net 20,609 22,744
Receivables from affiliates 620 -
Refundable income taxes 401 1,649
Inventories, net 22,538 23,483
Prepaid expenses and other 1,496 1,221
Deferred income taxes 1,903 1,877
Current portion of note receivable 2,612 1,306
-------- --------
Total current assets 80,771 75,120
-------- --------
Other assets:
Goodwill 35,678 40,202
Note receivable 1,567 1,567
Other intangible assets 2,317 3,494
Other 230 501
-------- --------
Total other assets 39,792 45,764
-------- --------
Property and equipment:
Land 7,868 8,895
Buildings 31,165 33,652
Equipment 107,333 111,912
Construction in progress 2,015 5,853
-------- --------
148,381 160,312
Less accumulated depreciation 80,392 89,271
-------- --------
Net property and equipment 67,989 71,041
-------- --------
Total assets $188,552 $191,925
======== ========
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30,
2005 2006
-------- --------
(unaudited)
Current liabilities:
Accounts payable and accrued liabilities $ 19,238 $ 19,541
Income taxes payable to affiliates 771 557
Income taxes 327 -
-------- --------
Total current liabilities 20,336 20,098
-------- --------
Noncurrent liabilities:
Deferred income taxes 16,692 18,716
Long term debt and other 1,425 29
-------- --------
Total noncurrent liabilities 18,117 18,745
-------- --------
Stockholders' equity:
Preferred stock - -
Class A common stock 52 52
Class B common stock 100 100
Additional paid-in capital 109,556 109,648
Retained earnings 31,320 33,274
Accumulated other comprehensive income 9,071 10,008
-------- --------
Total stockholders' equity 150,099 153,082
-------- --------
Total liabilities and stockholders' equity $188,552 $191,925
======== ========
Commitments and contingencies (Note 1)
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
Three months ended Six months ended
June 30, June 30,
---------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(unaudited)
Net sales $45,730 $50,143 $92,573 $97,172
Cost of goods sold 35,203 37,794 71,763 73,195
------- ------- ------- -------
Gross margin 10,527 12,349 20,810 23,977
Selling, general and administrative expense 5,802 6,441 11,924 13,159
------- ------- ------- -------
Other operating income (expense):
Currency transaction gains (losses),net 38 (69) (15) (111)
Disposition of property and equipment (18) (18) (13) (91)
------- ------- ------- -------
Operating income 4,745 5,821 8,858 10,616
Other non-operating income, net 60 303 270 686
Interest expense (69) (50) (138) (112)
------- ------- ------- -------
Income from continuing operations
before income taxes 4,736 6,074 8,990 11,190
Provision for income taxes 2,361 2,284 4,403 4,927
------- ------- ------- -------
Income from continuing operations 2,375 3,790 4,587 6,263
Discontinued operations, net of tax - (500) (477) (500)
------- ------- ------- -------
Net income $ 2,375 $ 3,290 $ 4,110 $ 5,763
======= ======= ======= =======
Basic and diluted earnings per common share:
Continuing operations $ .16 $ .25 $ .30 $ .41
Discontinued operations - (.03) (.03) (.03)
------- -------- ------- -------
$ .16 $ .22 $ .27 $ .38
======= ======= ======= =======
Cash dividends per share $ .125 $ .125 $ .25 $ .25
======= ======= ======= =======
Shares used in the calculation of basic
and diluted earnings per share 15,214 15,250 15,215 15,249
======= ======= ======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
Six months ended
June 30,
2005 2006
---- ----
(unaudited)
Net income $4,110 $5,763
Other comprehensive income (loss), net of tax:
Currency translation adjustment:
Arising during the period (118) 1,040
Disposal of business unit 739 -
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621 1,040
Impact from cash flow hedges, net (68) (103)
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Total other comprehensive income, net 553 937
------ ------
Comprehensive income $4,663 $6,700
====== ======
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six months ended June 30, 2005 and 2006
(In thousands)
2005 2006
---- ----
(unaudited)
Cash flows from operating activities:
Net income $ 4,110 $ 5,763
Depreciation and amortization 5,368 5,540
Goodwill impairment 864 -
Deferred income taxes:
Continuing operations 117 1,115
Discontinued operations (187) -
Other, net 80 413
Change in assets and liabilities (net of effect of
acquisition):
Accounts receivable, net (2,091) (1,173)
Inventories, net 756 1,050
Accounts payable and accrued liabilities 1,471 (303)
Accounts with affiliates 1,563 405
Income taxes (2,609) (1,539)
Other, net (787) 4
-------- --------
Net cash provided by operating activities 8,655 11,275
-------- --------
Cash flows from investing activities:
Capital expenditures (7,234) (5,383)
Proceeds from disposal of assets held for sale 18,094 -
Cash of disposed business unit (4,006) -
Acquisition, net of cash acquired - (9,832)
Cash collected on note receivable - 1,306
Proceeds from sale of fixed assets 12 37
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Net cash provided by (used in) investing activities 6,866 (13,872)
-------- --------
Cash flows from financing activities:
Principal payments on indebtedness (19) (1,490)
Proceeds from issuance of common stock 217 -
Deferred financing costs paid (28) (105)
Dividends (3,799) (3,809)
-------- --------
Net cash used in financing activities (3,629) (5,404)
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Cash and cash equivalents - net change from:
Operating, investing and financing activities 11,892 (8,001)
Currency translation 171 249
Cash and cash equivalents at beginning of period 21,037 30,592
-------- --------
Cash and cash equivalents at end of period $ 33,100 $ 22,840
======== ========
Supplemental disclosures:
Cash paid for:
Interest $ 82 $ 181
Income taxes 5,254 4,949
Noncash investing activity - note receivable received
upon disposal of business unit $ 4,179 $ -
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended June 30, 2006
(In thousands)
Accumulated other
comprehensive income
(loss)
Common stock Additional -------------------------- Total
--------------- paid-in Retained Currency Hedging stockholders'
Class A Class B capital earnings translation derivatives equity
------- ------- --------- -------- ----------- ----------- --------
(unaudited)
Balance at December 31, 2005 $52 $100 $109,556 $ 31,320 $ 8,961 $ 110 $150,099
Net income - - - 5,763 - - 5,763
Other comprehensive income, net - - - - 1,040 (103) 937
Cash dividends - - - (3,809) - - (3,809)
Issuance of common stock - - 92 - - - 92
--- ---- -------- ------- ------- ----- --------
Balance at June 30, 2006 $52 $100 $109,648 $33,274 $10,001 $ 7 $153,082
=== ==== ======== ======= ======= ===== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
June 30, 2006
(unaudited)
Note 1 - Organization and basis of presentation:
Consolidated in this Quarterly Report are the results of CompX
International Inc. and subsidiaries. The unaudited Condensed Consolidated
Financial Statements contained in this Quarterly Report have been prepared on
the same basis as the audited Consolidated Financial Statements in our Annual
Report on Form 10-K for the year ended December 31, 2005 that we filed with the
Securities and Exchange Commission ("SEC") on March 16, 2006 (the "2005 Annual
Report"). In our opinion, we have made all necessary adjustments (which include
only normal recurring adjustments) in order to state fairly, in all material
respects, our consolidated financial position, results of operations and cash
flows as of the dates and for the periods presented. We have condensed the
Consolidated Balance Sheet at December 31, 2005 contained in this Quarterly
Report as compared to our audited Consolidated Financial Statements at that
date, and we have omitted certain information and footnote disclosures
(including those related to the Consolidated Balance Sheet at December 31, 2005)
normally included in financial statements prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). Our
results of operations for the interim periods ended June 30, 2006 may not be
indicative of our operating results for the full year. The Condensed
Consolidated Financial Statements contained in this Quarterly Report should be
read in conjunction with our 2005 Consolidated Financial Statements contained in
our 2005 Annual Report.
We are majority-owned by CompX Group, Inc., which owns 83% of our
outstanding common stock at June 30, 2006. CompX Group, Inc. is a majority-owned
subsidiary of NL Industries, Inc. (NYSE: NL). 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 June 30, 2006, (i) NL and TIMET own an
additional 2% and 3%, respectively, of us directly, (ii) Valhi, Inc. (NYSE: VHI)
holds, directly or through a subsidiary, approximately 83% of NL's outstanding
common stock and approximately 35% 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 (for 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 company and us.
Refer to our 2005 Annual Report for a discussion of commitments and
contingencies.
Unless otherwise indicated, references in this report to "we", "us" or
"our" refer to CompX International Inc. and its subsidiaries, taken as a whole.
Note 2 - Business segment information:
We define our operating segments as components of our operations for which
separate financial information is available and is regularly evaluated by the
chief operating decision maker in determining how to allocate resources and in
assessing performance. Our chief operating decision maker is David A. Bowers,
president and chief executive officer. We currently have three operating
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segments - Security Products, Furniture Components, and Marine Components.
Previously, the results of the Marine Components segment had been presented as
Other. Our Security Products segment, with manufacturing facilities in South
Carolina and Illinois, manufactures locking mechanisms and other security
products for sale to the mailbox, transportation, furniture, banking, vending
and other industries. Our Furniture Components segment, with facilities in
Canada, Michigan and Taiwan, manufactures 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. Our Marine Components segment with facilities in Wisconsin and
Illinois, manufactures and distributes marine instruments, hardware, and
accessories, for performance boats.
In April 2006, we completed an acquisition of a marine component products
business for aggregate cash consideration of $9.8 million, net of cash acquired.
We completed this acquisition to expand our Marine Components business segment.
We have included the results of operations and cash flows of the acquired
business in our Condensed Consolidated Financial Statements starting in April
2006. The purchase price has been allocated among the tangible and intangible
net assets acquired based upon an estimate of the fair value of such net assets.
The pro forma effect to us, assuming this immaterial acquisition had been
completed as of January 1, 2005, is not material.
Previously, we had the following operating segments: Security Products,
Precision Slides, and Ergonomics. During the first quarter of 2006, we
reorganized our internal management structure, and as a result precision slides
and ergonomics products businesses are now evaluated as a single operating unit
(referred to as Furniture Components). Our segment information now reflects our
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.
Corporate expenses are now no longer allocated but instead are presented as a
separate item within operating income. The prior period segment information
shown below has been restated to conform to the current period presentation for
these changes.
Three months ended Six months ended
June 30, June 30,
-------------------- -----------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Net sales:
Furniture Components $27,013 $24,285 $55,312 $48,029
Security Products 18,717 20,448 37,261 40,866
Marine Components - 5,410 - 8,277
------- ------- -------- --------
Total net sales $45,730 $50,143 $92,573 $97,172
======= ======= ======= =======
Operating income:
Furniture Components $2,956 $2,348 $5,171 $4,542
Security Products 3,138 3,724 6,392 7,582
Marine Components - 873 - 1,219
Corporate operating expense (1,349) (1,124) (2,705) (2,727)
------- ------- -------- --------
Total operating income 4,745 5,821 8,858 10,616
Other non-operating income, net 60 303 270 686
Interest expense (69) (50) (138) (112)
------- ------- -------- --------
Income from continuing operations
before income taxes $ 4,736 $ 6,074 $ 8,990 $ 11,190
======= ======= ======== ========
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The information below provides disclosure of segment information with
respect to each year in the three-year period ended December 31, 2005, based on
our 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
Marine Components - - 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
Marine Components - - 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
Marine Components - - 207
Corporate depreciation 269 111 43
Thomas Regout** 2,612 2,421 -
-------- -------- -----
Total deprecation and amortization $ 14,780 $ 14,200 $ 10,924
======== ======== ========
Capital expenditures:
Furniture Components $ 6,446 $ 2,521 $ 5,549
Security Products 1,901 2,432 4,909
Marine Components - - 32
Thomas Regout** 561 395 -
-------- -------- --------
Total capital expenditures $ 8,908 $ 5,348 $ 10,490
======== ======== ========
Total assets:
Furniture Components $ 88,928 $ 77,717 $ 77,226
Security Products 77,024 72,794 76,875
Marine Components - - 10,614
Thomas Regout** 38,595 28,921 -
Corporate and eliminations 6,196 6,847 23,837
-------- -------- --------
Total assets $210,743 $186,279 $188,552
======== ======== ========
Goodwill:
Furniture Components $ 4,986 $ 5,270 $ 6,594
Security Products 23,743 23,742 23,742
Marine Components - - 5,342
-------- -------- --------
Total goodwill $ 28,729 $ 29,012 $ 35,678
======== ======== ========
** Denotes disposed segment.
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Note 3 - Inventories, net:
December 31, June 30,
2005 2006
--------- ----------
(In thousands)
Raw materials $ 7,098 $ 8,439
Work in progress 9,899 9,642
Finished products 5,541 5,402
------- -------
Total $22,538 $23,483
======= =======
Note 4 - Accounts payable and accrued liabilities:
December 31, June 30,
2005 2006
-------- ----------
(In thousands)
Accounts payable $ 7,022 $ 7,336
Accrued liabilities:
Employee benefits 8,179 7,411
Customer tooling 1,319 660
Professional fees 720 826
Insurance 516 959
Taxes other than on income 299 695
Other 1,183 1,654
------- -------
Total $19,238 $19,541
======= =======
Note 5 - Indebtedness:
December 31, June 30,
2005 2006
----------- -------
(In thousands)
Other indebtedness $1,596 $83
Less current maturities 171 54
----- ---
Total $ 1,425 $29
======= ===
Other indebtedness at December 31, 2005 includes certain industrial revenue
bonds which were prepaid at its carrying value in February 2006.
Note 6 - Other non-operating income, net:
Three months ended Six months ended
June 30, June 30,
------------------- -------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Interest income $ 88 $291 $264 $665
Other, net (28) 12 6 21
---- ---- ---- ----
Total $ 60 $303 $270 $686
==== ==== ==== ====
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Note 7 - Provision for income taxes:
Six months ended
June 30,
2005 2006
-------- ------
(In thousands)
Expected tax expense $3,146 $3,917
Non-U.S. tax rates (105) (151)
Incremental U.S. tax on earnings of foreign subsidiaries 1,247 1,066
U.S. State income taxes, net 125 302
Reduction in Canadian income tax rate - (159)
Other, net (10) (48)
------ ------
Total $4,403 $4,927
====== ======
In June 2006, Canada enacted a 2% reduction in the Canadian federal income
tax rate and the elimination of the federal surtax. The 2% reduction will be
phased in from 2008 to 2010, and the federal surtax will be eliminated in 2008.
As a result, during the second quarter of 2006 we recognized a $159,000 income
tax benefit related to the effect of such reduction on our previously recorded
net deferred income tax liability.
Note 8 - Currency forward exchange contracts:
Certain of our sales generated by our non-U.S. operations are denominated
in U.S. dollars. We periodically use 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. We have not entered into
these contracts for trading or speculative purposes in the past, nor do we
anticipate entering into such contracts for trading or speculative purposes in
the future. Most of our currency forward contracts meet the criteria for hedge
accounting under GAAP and are designated as cash flow hedges. For these currency
forward contracts, gains and losses representing the effective portion of our
hedges are deferred as a component of accumulated other comprehensive income,
and are subsequently recognized in earnings at the time the hedged item affects
earnings. Occasionally, we enter into currency forward contracts which do not
meet the criteria for hedge accounting. For these contracts, we mark-to-market
the estimated fair value of such contracts at each balance sheet date, with any
resulting gain or loss recognized in income currently as part of net currency
transactions. At June 30, 2006, we held a series of contracts to manage exchange
rate risk to exchange an aggregate of U.S. $2.8 million for Canadian dollars at
an exchange rate of Cdn. $1.12 per U.S. dollar. These contracts qualify for
hedge accounting and mature through August 2006. The exchange rate was Cdn.
$1.12 per U.S. dollar at June 30, 2006. The estimated fair value of the
contracts is not material at June 30, 2006.
Note 9 - Discontinued operations:
Discontinued operations relates to our former Thomas Regout operations in
the Netherlands. Prior to December 2004, the Thomas Regout European operations
were classified as held for use. A formal plan of disposal adopted by our board
of directors in December 2004 resulted in the reclassification of such
operations to held for sale. Based upon the estimated realizable value (or fair
value less costs to sell) of the net assets disposed, we determined that the
goodwill associated with the assets held for sale was partially impaired. In
- 13 -
determining the estimated realizable value of the Thomas Regout operations as of
December 31, 2004, when we classified it as held for sale, we used the sales
price inherent in the definitive agreement reached with the purchaser in January
2005 and our estimate of the related transaction costs (or costs to sell). In
January 2005, we completed the sale of Thomas Regout for net proceeds that were
approximately $864,000 less than previously estimated (primarily due to higher
expenses associated with the sale). These additional expenses reflect a
refinement of our previous estimate of the realizable value of the Thomas Regout
operations and accordingly we recognized a further impairment of goodwill.
Therefore, discontinued operations for the first six months of 2005 includes a
charge for the additional expenses ($477,000, net of income tax benefit).
Discontinued operations in the second quarter of 2006 represents an expense of
$500,000 for our change in estimate of certain indemnification obligations we
had to the purchaser of the Thomas Regout operations.
Note 10 - Recent accounting pronouncements:
Inventory costs - Statement of Financial Accounting Standards ("SFAS") No.
151, Inventory Costs, an amendment of ARB No. 43, Chapter 4, became effective
for us for inventory costs incurred on or after January 1, 2006. SFAS No. 151
requires that allocation of fixed production overhead costs to inventory be
based on normal capacity of the production facilities, as defined by SFAS No.
151. SFAS No. 151 also clarifies the accounting for abnormal amounts of idle
facility expense, freight handling costs and wasted material, requiring those
items be recognized as current-period charges. Our existing production cost
policies complied with the requirements of SFAS No. 151, therefore the adoption
of SFAS No. 151 did not affect our Condensed Consolidated Financial Statements.
Stock options - We adopted the fair value provisions of SFAS No. 123R,
Share-Based Payment, on January 1, 2006 using the modified prospective
application method. SFAS No. 123R, among other things, requires the cost of
employee compensation paid with equity instruments to be measured based on the
grant-date fair value. That cost is then recognized over the vesting period.
Using the modified prospective method, we will apply the provisions of the
standard to all new equity compensation granted after January 1, 2006 and any
existing awards vesting after January 1, 2006. The number of non-vested equity
awards we had issued as of December 31, 2005 was not material. Prior to the
adoption of SFAS No. 123R we 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.
Recognized compensation cost related to stock options was not significant during
the first six months of 2005 or the first six months of 2006. If we 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 our results of operations for
the first six months of 2005 would not have been material.
Effective January 1, 2006, SFAS No. 123R requires the cash income tax
benefit resulting from the exercise of stock options in excess of the cumulative
income tax benefit previously recognized for GAAP financial reporting purposes
(which for us did not represent a significant amount in the first six months of
2006) to be reflected as a component of cash flows from financing activities in
our Condensed Consolidated Financial Statements. SFAS No. 123R also requires
certain expanded disclosures regarding equity compensation, and we provided
these expanded disclosures in our 2005 Annual Report.
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Uncertain tax positions. In the second quarter of 2006 the Financial
Accounting Standards Board ("FASB") issued FASB Interpretation No. ("FIN") 48,
Accounting for Uncertain Tax Positions, which will become effective for us on
January 1, 2007. FIN No. 48 clarifies when and how much of a benefit we can
recognize in our Consolidated Financial Statements for certain positions taken
in our income tax returns under SFAS No. 109, Accounting for Income Taxes, and
enhances the disclosure requirements for our income tax policies and reserves.
Among other things, FIN No. 48 will prohibit us from recognizing the benefits of
a tax position unless we believe it is more-likely-than-not that our position
would prevail with the applicable tax authorities and limits the amount of the
benefit to the largest amount for which we believe the likelihood of realization
is greater than 50%. FIN No. 48 also requires companies to accrue penalties and
interest on the difference between tax positions taken on their tax returns and
the amount of benefit recognized for financial reporting purposes under the new
standard. Our current income tax accounting policies comply with this aspect of
the new standard. We will also be required to classify any reserves we might
have for uncertain tax positions in a separate current or noncurrent liability,
depending on the nature of the tax position. We are currently evaluating the
impact of FIN No. 48 on our Consolidated Financial Statements.
- 15 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
-------------------------------------------------------------------------------
Overview
We are a leading manufacturer of precision ball bearing slides, security
products and ergonomic computer support systems used in the office furniture,
transportation, tool storage and a variety of other industries. We have recently
entered the performance marine components industry through the acquisition of
two performance marine manufacturers. Operating income was $5.8 million in the
second quarter of 2006 compared to $4.7 million in the same period of 2005.
Operating income was $10.6 million for the six-month period ended June 30, 2006
compared to $8.9 million for the comparable period of 2005. The increase in
results during the second quarter and for the comparative six-month periods is
primarily due to a more favorable product mix, the impact of two marine
acquisitions (the first in August 2005, and the second in April of 2006), and
our on-going focus on reducing costs partially offset by the negative impact of
changes in currency exchange rates within Furniture Components.
Results of Operations
Three months ended Six months ended
June 30, June 30,
-------------------- % ------------------ %
2005 2006 Change 2005 2006 Change
---- ---- ------ ---- ---- ------
(In thousands, except percentages)
Net sales:
Furniture Components $27,013 $24,285 (10)% $55,312 $48,029 (13)%
Security Products 18,717 20,448 9 % 37,261 40,866 10 %
Marine Components - 5,410 n.m. - 8,277 n.m.
------- ------- ------- -------
Total net sales $45,730 $50,143 10 % $92,573 $97,172 5 %
======= ======= ======= =======
Gross margin:
Furniture Components $ 5,306 $4,661 (12)% $10,102 $ 9,426 (7)%
Security Products 5,221 6,058 16 % 10,708 12,182 14 %
Marine Components - 1,630 n.m. - 2,369 n.m.
------- ------- ------- -------
Total gross margin $10,527 $12,349 17 % $20,810 $23,977 15 %
======= ======= ======= =======
Operating income:
Furniture Components $ 2,956 $2,348 (21)% $ 5,171 $ 4,542 (12)%
Security Products 3,138 3,724 19 % 6,392 7,582 19 %
Marine Components - 873 n.m. - 1,219 n.m.
Corporate operating
expense (1,349) (1,124) (17) % (2,705) (2,727) 1%
------- ------- ------- -------
Total operating income $ 4,745 $ 5,821 23 % $ 8,858 $10,616 20 %
======= ======= ======= =======
n.m. = not meaningful
Net sales. Net sales increased $4.4 million, or 10%, to $50.1 million in
the second quarter of 2006 from $45.7 million in the second quarter of 2005. Net
sales increased $4.6 million, or 5%, to $97.2 million for the first six months
of 2006 from $92.6 million in the first six months of 2005. The increase are due
primarily to sales volume from the acquisition of two marine component products
businesses, in April 2006 and August 2005, and a general increase in sales
volume to new and existing customers within Security Products, partially offset
by sales volume decreases for certain Furniture Components products resulting
from increased Asian competition and an unfavorable Canadian dollar exchange
rate which has caused operational difficulties for many of our Canadian
customers.
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Cost of goods sold and gross margin. Our cost of goods sold increased $2.6
million, or 7%, to $37.8 million in the second quarter of 2006 from $35.2
million in the second quarter of 2005. Cost of goods sold increased 2% in the
first six months of 2006 compared to 2005, while net sales increased 5% for the
same period. Our gross margin percentage increased from 23% in the second
quarter of 2005 to 25% in the second quarter of 2006 and increased from 22% to
25% in the first six months of 2006 as compared to the first six months of 2005.
The improvements in gross margin percentages for the comparable periods are
primarily due to an improved product mix as the decline in lower margin
Furniture Components sales were offset by increasing sales of higher-margin
Security Products and Marine Components.
Selling, general, and administrative expense. As a percentage of net sales,
selling, general, and administrative expense was relatively flat in the second
quarter of 2006 and 2005, and for the first six months of each year.
Operating income. Operating income increased $1.1 million, or 23%, to $5.8
million in the second quarter of 2006 from $4.7 million in the second quarter of
2005. Operating income in the first six months of 2006 increased $1.8 million,
or 20%, to $10.6 million compared to $8.9 million for the first six months of
2005. As a percentage of net sales, operating income increased to 11% for the
first six months of 2006 from 10% for the first six months of 2005 primarily due
to the increase in net sales and more favorable product mix as well as the
favorable impact of a continuous focus on reducing costs across all segments,
partially offset by the negative impact of currency exchange rates (as discussed
below).
Currency. Our furniture components segment has substantial operations and
assets located outside the United States (in Canada and Taiwan). Sales generated
from our non-U.S. operations are denominated in both the U.S. dollar and in
currencies other than the U.S. dollar, principally the Canadian dollar and the
New Taiwan 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 our 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. Our Furniture Component segment's net sales
were positively impacted while their operating income was negatively impacted by
currency exchange rates in the following amounts as compared to the currency
exchange rates in effect during the corresponding period in the prior year:
Three months ended Six months ended
June 30, 2005 June 30, 2005
vs. 2006 vs. 2006
----------------- ------------
(In thousands)
Currency impact on net sales $ 496 $ 744
Currency impact on operating income $(709) $(952)
Other non-operating income, net. The components of other non-operating
income, net are summarized in Note 6 to the Condensed Consolidated Financial
Statements, and primarily include interest income. Interest income has increased
approximately $400,000 for the six months period ending June 30, 2006 as
compared to the same period in 2005 due to higher interest rates on invested
cash balances.
Interest expense. Interest expense declined in the six-month period of 2006
compared to 2005 due primarily to lower average levels of outstanding debt.
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Provision for income taxes. A tabular reconciliation between our effective
income tax rates and the U.S. federal statutory income tax rate of 35% is
included in Note 7 to the Condensed Consolidated Financial Statements. Our
income tax rates vary by jurisdiction (country and/or state), and relative
changes in the geographic mix of pre-tax earnings can result in fluctuations in
the effective income tax rate. Generally, the effective tax rate on income
derived from our U.S. operations, including the effect of U.S. state income
taxes, is lower than the effective tax rate on income derived from our non-U.S.
operations, in part due to our election to not claim foreign tax credits. Our
election to not claim foreign tax credits is the primary reason our effective
income tax rates in 2005 and 2006 are higher than the 35% U.S. federal statutory
income tax rate.
Our effective income tax rate from continuing operations for the second
quarter of 2006 declined to 38% as compared to the 50% effective income tax rate
for the same period in 2005, and declined to 44% in the first six months of 2006
as compared to the 49% effective income tax rate for the first six months of
2005. The decrease is primarily due to a higher percentage of our income in 2006
being derived from our U.S. operations as compared to 2005. In addition, our
provision for income taxes in the second quarter of 2006 includes a $159,000
income tax benefit related to the effect of such reduction on our previously
recorded net deferred income tax liability. Other than the effect of the
$159,000 income tax benefit we recognized in the second quarter of 2006, we
currently expect our effective income tax rate for the remainder of 2006 will
approximate our effective income tax rate in the first half of the year.
Discontinued operations. See Note 9 to the Condensed Consolidated Financial
Statements.
Recent accounting pronouncements.See Note 10 to the Condensed Consolidated
Financial Statements.
Critical Accounting Policies. There have been no changes in the second
quarter of 2006 with respect to our critical accounting policies presented in
Management's Discussion and Analysis of Financial Condition and Results of
Operation in our 2005 Annual Report.
Outlook. The component product markets we operate in are highly competitive
in terms of product pricing and features. Our strategy is to focus on areas
where we can provide products that have value-added, user-oriented features
which enable our customers to compete more effectively in their markets. One of
the focal points of our strategy is to replace low margin, commodity type
products with higher margin user-oriented feature products. Additionally, we
believe our focus on collaborating with customers to identify solutions and our
ability to provide a high level of customer service enable us to compete
effectively. In response to competitive pricing pressure, we continuously focus
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 our margins. We actively seek 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. To date we have been able to effectively mitigate the
impact of higher material cost on our margins, however, we may not be able to
achieve these same results in future periods.
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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 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. Changes in assets and
liabilities are comparable resulting in a net use of cash of approximately $1.6
million and $1.7 million for the first six months of 2006 and 2005,
respectively.
Relative changes in working capital can have a significant effect on cash
flows from operating activities. Our average days sales outstanding ("DSO")
increased from 40 days at December 31, 2005 to 41 days at June 30, 2006 due to
timing of collection on the higher accounts receivable balance at the end of
June. For comparative purposes, our average DSO increased from 38 days at
December 31, 2004 to 42 days at June 30, 2005. Our average number of days in
inventory ("DII") was 59 days at December 31, 2005 and 57 days at June 30, 2006.
The decrease in days in inventory is primarily due to a lower commodity raw
material balance at June 30, 2006 as a result of the utilization of a higher
than normal commodity raw material inventory balance acquired in the latter part
of 2005 as part of our strategy to mitigate the significant volatility in
commodity prices. For comparative purposes, our average DII was 52 days at
December 31, 2004 and June 30, 2005 primarily as a result lower commodity raw
materials balances in the first six months of 2005.
Investing activities. Net cash provided by investing activities totaled
$6.9 million in the first six months of 2005 compared to net cash used in
investing activities of $13.9 million in the first six months of 2006. Net cash
for 2005 includes the net proceeds from the sale of the Thomas Regout operations
in Europe, and net cash used in 2006 includes cash paid for a marine component
products business, both of which are discussed below.
On January 24, 2005, we completed the disposition of all of the net assets
of our Thomas Regout precision slide and window furnishing operations, conducted
at our 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 $4.2 million subordinated note requires annual
payments over a period of four years, and we received the first payment on this
subordinated note of $1.3 million in the first six months of 2006. Historically,
the Thomas Regout European operations did not contribute significantly to net
cash flows from operations. See Note 9 to the Condensed Consolidated Financial
Statements.
In April 2006, we completed an immaterial acquisition of a marine component
products company for $9.8 million, net of cash acquired. See Note 2 to the
Condensed Consolidated Financial Statements.
Financing activities. Net cash used in financing activities totaled $3.6
million and $5.4 million for the six months ended June 30, 2005 and 2006,
respectively. In the first six months of 2006, we prepaid certain indebtedness
we assumed in a prior acquisition, reducing debt by $1.5 million. In addition,
we paid aggregate quarterly dividends of $3.8 million, or $.25 per share, in
each of the first six months of 2005 and 2006.
Other. We believe that cash generated from operations and borrowing
availability under our $50 million revolving credit facility, together with cash
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on hand, will be sufficient to meet our liquidity needs for working capital,
capital expenditures, debt service and dividends (if declared). To the extent
that actual operating results or other developments differ from our
expectations, our liquidity could be adversely affected.
Provisions contained in our revolving credit facility 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 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.
Periodically, we evaluate liquidity requirements, alternative uses of
capital, capital needs and available resources in view of, among other things,
our capital expenditure requirements, dividend policy and estimated future
operating cash flows. As a result of this process, we have in the past and may
in the future seek to raise additional capital, refinance or restructure
indebtedness, issue additional securities, modify our dividend policy or take a
combination of such steps to manage liquidity and capital resources. In the
normal course of business, we may review opportunities for acquisitions, joint
ventures or other business combinations in the component products industry. In
the event of any such transaction, we may consider using available cash, issuing
additional equity securities or increasing our indebtedness.
Future cash requirements.
Our primary source of liquidity on an ongoing basis is our cash flow from
operating activities, which is generally used to (i) fund capital expenditures,
(ii) repay short-term indebtedness incurred primarily for working capital
purposes and (iii) provide for the payment of dividends (if declared). From
time-to-time, we will incur indebtedness, primarily for short-term working
capital needs or to fund capital expenditures. From time-to-time, we may also
sell assets outside the ordinary course of business, the proceeds of which are
generally used to repay indebtedness (including indebtedness which may have been
collateralized by the assets sold) or to fund capital expenditures or business
acquisitions.
At June 30, 2006, we had $50 million available under our $50 million
revolving credit facility that matures in January 2009. We do not expect to be
required to use any of our cash flow from operating activities generated during
2006 to repay indebtedness.
Firm purchase commitments for capital projects in process at June 30, 2006
approximated $4.3 million.
There have been no material changes in our contractual obligations since we
filed our 2005 Annual Report, and we refer you to the report for a complete
description of these commitments.
Off balance sheet financing arrangements. We do not have any off-balance
sheet financing agreements other than the operating leases discussed in our 2005
Annual Report.
Forward Looking Information
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, we caution that the statements in this Quarterly
Report on Form 10-Q relating to matters that are not historical facts are
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forward-looking statements that represent our 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 we believe that the expectations reflected in such forward-looking
statements are reasonable, we do not know if our 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 our other filings
with the Securities and Exchange Commission. While it is not possible to
identify all factors, we continue to face many risks and uncertainties
including, but not limited to the following:
o Future supply and demand for our 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 our 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 Our ability to comply with covenants contained in our 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. We
disclaim 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.
We are exposed to market risk, including foreign currency exchange rates,
interest rates and security prices. There have been no material changes in these
market risks since we filed our 2005 Annual Report, and we refer you to the
report for a complete description of these risks.
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ITEM 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures. We maintain 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 we file or submit 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 us in the
reports that we file or submit to the SEC under the Act is accumulated and
communicated to our management, including our principal executive officer and
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, our Vice Chairman of the Board, President and Chief
Executive Officer, and Darryl R. Halbert, our Vice President, Chief Financial
Officer and Controller, have evaluated our disclosure controls and procedures as
of June 30, 2006. Based upon their evaluation, these executive officers have
concluded that our disclosure controls and procedures are effective as of June
30, 2006.
Internal Control Over Financial Reporting. We also maintain 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, our principal executive and principal financial
officers, or persons performing similar functions, and effected by our 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 our
assets.
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that our receipts and expenditures are being made only
in accordance with authorizations of our management and directors, and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of our assets that
could have a material effect on our Condensed Consolidated Financial
Statements.
Changes in Internal Control Over Financial Reporting. There has been no
change to our internal control over financial reporting during the quarter ended
June 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
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Part II. OTHER INFORMATION
ITEM 1A. Risk Factors.
There have been no material changes in the second quarter of 2006 with
respect to our risk factors presented in Item 1A. in our 2005 Annual Report on
Form 10-K.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Our 2006 Annual Meeting of Stockholders was held on May 16, 2006. Paul M.
Bass, Jr., David A. Bowers, Norman S. Edelcup, Edward J. Hardin, Ann Manix,
Glenn R. Simmons and Steven L. Watson were elected as directors, each receiving
votes "For" their election from at least 99.4% of the approximately 105.2
million votes eligible to be cast at the Annual Meeting.
ITEM 6. Exhibits.
31.1 Certification
31.2 Certification
32.1 Certification
32.2 Certification
We have retained a signed original of any of the above exhibits
that contains signatures, and we will provide such exhibit to the
Commission or its staff upon request. We will also furnish,
without charge, a copy of our Code of Business Conduct and
Ethics, Corporate Governance Guidelines and Audit Committee
Charter, each as adopted by our board of directors, upon request.
Such requests should be directed to the attention of our
Corporate Secretary at our 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 August 3, 2006 By /s/ Darryl R. Halbert
------------------- ---------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller
(Principal Financial and Accounting Officer)
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