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 September 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
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Number of shares of common stock outstanding on October 20, 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; September 30, 2006 (unaudited) 3
Condensed Consolidated Statements of Operations -
Three months and nine months ended
September 30, 2005 and 2006 (unaudited) 5
Condensed Consolidated Statements of Comprehensive
Income (Loss) - Nine months ended
September 30, 2005 and 2006 (unaudited) 6
Condensed Consolidated Statements of Cash Flows -
Nine months ended September 30, 2005 and 2006 (unaudited) 7
Condensed Consolidated Statement of Stockholders' Equity -
Nine months ended September 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. 23
Item 4. Controls and Procedures. 23
Part II. OTHER INFORMATION
Item 1A.Risk Factors. 25
Item 6. Exhibits. 25
Items 1, 2, 3, 4 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, September 30,
2005 2006
----------- -----------
(unaudited)
Current assets:
Cash and cash equivalents $ 30,592 $ 25,772
Accounts receivable, net 20,609 23,027
Receivables from affiliates 620 176
Refundable income taxes 401 520
Inventories, net 22,538 23,631
Prepaid expenses and other 1,496 1,051
Deferred income taxes 1,903 1,878
Current portion of note receivable 2,612 1,306
-------- ---------
Total current assets 80,771 77,361
-------- ---------
Other assets:
Goodwill 35,678 40,287
Note receivable 1,567 1,567
Other intangible assets 2,317 3,323
Other 230 593
-------- ---------
Total other assets 39,792 45,770
-------- ---------
Property and equipment:
Land 7,868 8,843
Buildings 31,165 33,720
Equipment 107,333 111,619
Construction in progress 2,015 8,637
-------- ---------
148,381 162,819
Less accumulated depreciation 80,392 90,810
------- ---------
Net property and equipment 67,989 72,009
-------- ---------
Total assets $ 188,552 $ 195,140
========= =========
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
2005 2006
----------- ------------
(unaudited)
Current liabilities:
Accounts payable and accrued liabilities $ 19,238 $ 20,587
Income taxes payable to affiliates 771 161
Income taxes 327 -
-------- -------
Total current liabilities 20,336 20,748
-------- --------
Noncurrent liabilities:
Deferred income taxes 16,692 19,276
Long term debt and other 1,425 17
-------- --------
Total noncurrent liabilities 18,117 19,293
-------- --------
Stockholders' equity:
Preferred stock - -
Class A common stock 52 52
Class B common stock 100 100
Additional paid-in capital 109,556 109,831
Retained earnings 31,320 35,173
Accumulated other comprehensive income 9,071 9,943
-------- --------
Total stockholders' equity 150,099 155,099
-------- --------
Total liabilities and stockholders' equity $188,552 $195,140
======== ========
Commitments and contingencies (Note 1)
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
Three months ended Nine months ended
September 30, September 30,
------------ -------------
2005 2006 2005 2006
------ ------ ------ -----
(unaudited)
Net sales $47,135 $48,812 $139,708 $145,984
Cost of goods sold 36,153 35,955 107,916 109,150
------ ------- ------- -------
Gross margin 10,982 12,857 31,792 36,834
Selling, general and administrative expense 6,029 6,673 17,953 19,832
Other operating income (expense):
Currency transaction gains (losses),net (42) 31 (58) (80)
Disposition of property and equipment (135) (3) (141) (94)
------- ------- ------- -------
Operating income 4,776 6,212 13,640 16,828
Other non-operating income, net 277 318 538 1,005
Interest expense (91) (50) (228) (162)
------ ------- -------- -------
Income from continuing operations
before income taxes 4,962 6,480 13,950 17,671
Provision for income taxes 11,082 2,675 15,483 7,603
------- ------- ------- -------
Income (loss) from continuing operations (6,120) 3,805 (1,533) 10,068
Discontinued operations, net of tax - - (477) (500)
------- -------- -------- -------
Net income (loss) $(6,120) $ 3,805 $ (2,010) $ 9,568
======= ======== ======== ========
Basic and diluted earnings (loss) per common share:
Continuing operations $ (.40) $ .25 $ (.10) $.66
Discontinued operations - - (.03) (.03)
------- -------- -------- --------
(.40) $ .25 $ (.13) $ .63
======= ======== ======== ========
Cash dividends per share $ .125 $ .125 $ .375 $ .375
======= ======== ======== ========
Shares used in the calculation of basic
and diluted earnings per share 15,246 15,260 15,225 15,253
======= ======== ======== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
Nine months ended September 30, 2005 and 2006
(In thousands)
2005 2006
------ ----
(unaudited)
Net income (loss) $(2,010) $ 9,568
Other comprehensive income, net of tax:
Currency translation adjustment:
Arising during the period 250 982
Disposal of business unit 739 -
------- -------
989 982
Impact from cash flow hedges, net (67) (110)
------- -------
Total other comprehensive income, net 922 872
------- -------
Comprehensive income (loss) $(1,088) $10,440
======= =======
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 2005 and 2006
(In thousands)
2005 2006
---- ----
(unaudited)
Cash flows from operating activities:
Net income (loss) $(2,010) $ 9,568
Depreciation and amortization 8,118 8,326
Goodwill impairment 864 -
Deferred income taxes:
Continuing operations 8,828 1,574
Discontinued operations (187) -
Other, net 275 877
Change in assets and liabilities (exclusive of
acquisitions):
Accounts receivable, net (1,877) (1,490)
Inventories, net (763) 536
Accounts payable and accrued liabilities 2,641 748
Accounts with affiliates 1,126 (166)
Income taxes (2,264) (322)
Other, net (532) 87
------- ------
Net cash provided by operating activities 14,219 19,738
------- ------
Cash flows from investing activities:
Capital expenditures (8,654) (9,070)
Proceeds from disposal of assets held for sale 18,094 -
Cash of disposed business unit (4,006) -
Acquisitions, net of cash acquired (7,342) (9,832)
Cash collected on note receivable - 1,306
Proceeds from sale of fixed assets 19 45
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Net cash used in investing activities (1,889) (17,551)
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Cash flows from financing activities:
Principal payments on indebtedness (48) (1,516)
Proceeds from issuance of common stock 639 104
Deferred financing costs paid (28) (105)
Dividends (5,704) (5,715)
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Net cash used in financing activities (5,141) (7,232)
-------- ------
Cash and cash equivalents - net change from:
Operating, investing and financing activities 7,189 (5,045)
Currency translation 122 225
Cash and cash equivalents at beginning of period 21,037 30,592
------- ------
Cash and cash equivalents at end of period $28,348 $25,772
======= =======
Supplemental disclosures:
Cash paid for:
Interest $ 105 $ 105
Income taxes,net 7,860 6,524
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
Nine months ended September 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 - - - 9,568 - - 9,568
Other comprehensive income, net - - - - 982 (110) 872
Cash dividends - - - (5,715) - - (5,715)
Issuance of common stock - - 275 - - - 275
--- ---- -------- ------- ------ ----- --------
Balance at September 30, 2006 $52 $100 $109,831 $35,173 $9,943 $ - $155,099
==== ==== ======== ======= ====== ===== ========
See accompanying Notes to Condensed Consolidated Financial Statements.
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COMPX INTERNATIONAL INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
September 30, 2006
(unaudited)
Note 1 - Organization and basis of presentation:
Organization - We are a leading manufacturer of component products. CompX
Group, Inc., owns 83% of our outstanding common stock at September 30, 2006.
CompX Group, Inc. is a majority-owned subsidiary of NL Industries, Inc. (NYSE:
NL). NL owns 82% of CompX Group, and Titanium Metals Corporation (NYSE: TIE)
("TIMET") owns the remaining 18% of CompX Group. At September 30, 2006, (i) NL
and TIMET each 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 and
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.
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 September 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. Certain reclassifications have been made to prior year
balances to conform to the current year presentation.
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 (NYSE: CIX), taken
as a whole.
Note 2 - Business segment information:
We currently have three operating segments - Security Products, Furniture
Components, and Marine Components. Prior to the second quarter of 2006, 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
- 9 -
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 the 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 acquisition had been completed as of
January 1, 2005, is not material.
During the first quarter of 2006, we reorganized our internal management
structure, and as a result our previously separate precision slides and
ergonomics products businesses are now evaluated as a single Furniture
Components operating unit. Our segment information now reflects our new internal
management structure. Additionally, prior to the first quarter of 2006, the
reported amount of operating income for each of our segments 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. Prior period segment
information shown below has been restated to conform to the current
presentation.
Three months ended Nine months ended
September 30, September 30,
------------------- ------------------
2005 2006 2005 2006
---- ---- ---- ----
(In thousands)
Net sales:
Furniture Components $25,536 $23,661 $ 80,847 $ 71,690
Security Products 19,791 21,247 57,053 62,114
Marine Components 1,808 3,904 1,808 12,180
------- ------- -------- --------
Total net sales $47,135 $48,812 $139,708 $145,984
======= ======= ======== ========
Operating income:
Furniture Components $ 2,589 $ 3,306 $ 7,788 $ 7,848
Security Products 3,324 4,021 9,716 11,604
Marine Components 241 210 241 1,428
Corporate operating expense (1,378) (1,325) (4,105) (4,052)
------- ------- -------- ---------
Total operating income 4,776 6,212 13,640 16,828
Other non-operating income, net 277 318 538 1,005
Interest expense (91) (50) (228) (162)
------- ------- -------- --------
Income from continuing operations
before income taxes $ 4,962 $ 6,480 $ 13,950 $ 17,671
======= ======= ======== ========
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.
- 10 -
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:
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
Other non-operating income, net 1,676 2,419 724
Interest expense (1,301) (494) (336)
-------- -------- --------
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 discontinued operations.
- 11 -
Note 3 - Inventories, net:
December 31, September 30,
2005 2006
---------- ------------
(In thousands)
Raw materials $ 6,801 $ 6,268
Work in progress 9,116 9,260
Finished products 6,621 8,103
------- -------
Total $22,538 $23,631
======= =======
Note 4 - Accounts payable and accrued liabilities:
December 31, September 30,
2005 2006
---------- ------------
(In thousands)
Accounts payable $ 7,022 $ 7,266
Accrued liabilities:
Employee benefits 8,179 8,927
Customer tooling 1,319 714
Professional fees 720 820
Insurance 516 597
Taxes other than on income 299 608
Other 1,183 1,655
------- -------
Total $19,238 $20,587
======= =======
Note 5 - Indebtedness:
December 31, September 30,
2005 2006
----------- -------------
(In thousands)
Other indebtedness $1,596 $ 54
Less current maturities 171 37
------ -----
Total $1,425 $ 17
====== =====
Other indebtedness at December 31, 2005 includes certain industrial revenue
bonds which were prepaid at their carrying value in February 2006.
Note 6 - Other non-operating income, net:
Three months ended Nine months ended
September 30, September 30,
------------------ -----------------
2005 2006 2005 2006
------ ----- ----- -----
(In thousands)
Interest income $144 $358 $408 $1,023
Other, net 133 (40) 130 (18)
---- ---- ---- ------
Total $277 $318 $538 $1,005
==== ==== ==== ======
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Note 7 - Provision for income taxes:
Nine months ended
September 30,
2005 2006
-------- ------
(In thousands)
Expected tax expense $ 4,883 $ 6,186
Non-U.S. tax rates (149) (265)
Incremental U.S. tax on earnings of non-U.S. subsidiaries 10,942 1,532
U.S. state income taxes, net 303 460
Canadian tax rate change - (159)
Other, net (496) (151)
------- -------
Total $15,483 $ 7,603
======= =======
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.
Certain of our U.S. tax returns are currently being examined, and tax
authorities could propose tax deficiencies. To date, the tax authorities have
not proposed any tax deficiencies. We believe we have adequate accruals for
additional taxes and related interest expense which may ultimately result from
tax examinations. We believe the ultimate disposition of tax examinations should
not have a material adverse effect on our consolidated financial position,
results of operations or liquidity.
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 September 30, 2006, we had no outstanding currency contracts.
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
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
- 13 -
operations and accordingly we recognized a further impairment of goodwill.
Therefore, discontinued operations for the nine months ended September 30, 2005
includes a charge for the additional expenses ($477,000, net of income tax
benefit). Discontinued operations for the nine months ended September 30, 2006
represents an expense of $500,000 for a 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. 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 nine months ended September 30,
2005 or 2006. If we had applied the fair value recognition provisions of SFAS
No. 123, Accounting for Stock-Based Compensation, to stock-based employee
compensation related to stock options for all options granted on or after
January 1, 1995, the effect on our results of operations for the nine months
ended September 30, 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 nine months ended
September 30, 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.
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.
- 14 -
Quantifying Financial Statement Misstatements - In September 2006 the SEC
issued Staff Accounting Bulletin ("SAB") No. 108 expressing their views
regarding the process of quantifying financial statement misstatements. The SAB
is effective for us no later than the fourth quarter of 2006. According to SAB
No. 108 both the "rollover" and "iron curtain" approaches must be considered
when evaluating a misstatement for materiality. We do not expect the adoption of
SAB No. 108 to have a material effect on our previously reported consolidated
financial position or results of operations at the date of adoption.
Fair Value Measurements - In September 2006 the FASB issued SFAS No. 157,
Fair Value Measurements, which will become effective for us on January 1, 2007.
SFAS No. 157 generally provides a consistent, single fair value definition and
measurement techniques for GAAP pronouncements. SFAS No. 157 also establishes a
fair value hierarchy for different measurement techniques based on the objective
nature of the inputs in various valuation methods. We will be required to ensure
all of our fair value measurements are in compliance with SFAS No. 157 on a
prospective basis beginning in the first quarter of 2007. In addition, we will
be required to expand our disclosures regarding the valuation methods and level
of inputs we utilize in the first quarter of 2007. The adoption of this standard
will not have a material effect 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 recently
entered the performance marine components industry through our acquisition of
two performance marine components manufacturers.
Operating income was $6.2 million in the third quarter of 2006 compared to
$4.8 million in the same period of 2005. Operating income was $16.8 million for
the nine-month period ended September 30, 2006 compared to $13.6 million for the
comparable period of 2005. The increase in results during the third quarter and
for the comparative nine-month periods is primarily due to a more favorable
product mix, the impact of our two marine acquisitions in August 2005 and April
2006, and our on-going focus on reducing costs partially offset by the negative
impact of changes in currency exchange rates within Furniture Components.
We reported a net loss of $6.1 million in the third quarter of 2005,
principally due to a $9.0 million provision for deferred income taxes on the
aggregate undistributed earnings of certain of our non-U.S. subsidiaries, as
further discussed below.
Results of Operations
Three months ended Nine months ended
September 30, September 30,
------------------- ---------------
2005 % 2006 % 2005 % 2006 %
---- - ---- - ---- - ---- -
(Dollars in thousands)
Net sales $47,135 100.0% $48,812 100.0% $139,708 100.0% $145,984 100.0%
Cost of goods sold 36,153 76.7 35,955 73.7 107,916 77.2 109,150 74.8
------ ---- ------ ---- -------- ----- -------- ----
Gross margin 10,982 23.3 12,857 26.3 31,792 22.8 36,834 25.2
Operating costs
and expenses 6,206 13.2 6,645 13.6 18,152 13.0 20,006 13.7
------ ---- ------ ---- -------- ---- -------- ----
Operating income $ 4,776 10.1% $ 6,212 12.7% $13,640 9.8% $ 16,828 11.5%
======= ==== ======= ==== ======== ===== ======== ====
Net sales. Net sales increased $1.7 million, or 4%, to $48.8 million in the
third quarter of 2006 from $47.1 million in the third quarter of 2005. Net sales
increased $6.3 million, or 4%, to $146 million for the first nine months of 2006
from $139.7 million in the first nine months of 2005. The increases are due to
sales volume from the acquisition of two marine component products businesses in
April 2006 and August 2005, which increased sales by $2.1 million and $10.4
million in the third quarter and first nine months of 2006, respectively, sales
volume increases in Security Products due to improved demand and the favorable
effect of currency exchange rates on Furniture Components sales, offset in part
by sales volume decreases in Furniture Components due to competition from lower
priced Asian manufacturers.
Cost of goods sold and gross margin. Our cost of good sold percent improved
to 74% from 77% in the third quarter of 2006 compared to the third quarter of
2005. Our cost of goods sold percent also improved to 75% from 77% for the first
nine months of 2006 compared to the first nine months of 2005. As a result of
our improvements in cost of goods sold, our gross margin percentage increased
from 23% in the third quarter of 2005 to 26% in the third quarter of 2006 and
increased from 23% to 25% in the first nine months of 2006 as compared to the
first nine 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 increased sales of
higher-margin Security Products and Marine Components.
- 16 -
Operating costs and expenses. As a percentage of net sales, operating costs
and expenses were relatively flat in the third quarter of 2006 and 2005, and for
the first nine months of each year.
Operating income. Operating income increased $1.4 million, or 30%, to $6.2
million in the third quarter of 2006 from $4.8 million in the third quarter of
2005. Operating income in the first nine months of 2006 increased $3.2 million,
or 23%, to $16.8 million compared to $13.6 million for the first nine months of
2005. As a percentage of net sales, operating income increased to 12% for the
first nine months of 2006 from 10% for the first nine 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). The majority of
sales generated from our non-U.S. operations are denominated in the U.S. dollar
with the remainder denominated in foreign currencies, principally the Canadian
dollar and the New Taiwan dollar. Most raw materials, labor and other production
costs for our non-U.S. operations are denominated primarily in local currencies.
Consequently, the translated U.S. dollar values of our non-U.S. 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 Nine months ended
September 30, 2005 September 30, 2005
vs. 2006 vs. 2006
------------------ ------------------
(In thousands)
Currency impact on net sales $ 265 $ 1,009
Currency impact on operating income $(226) $(1,178)
The positive impact on sales relates to sales denominated in non-U.S.
dollar currencies translating into higher U.S. dollar sales due to a
strengthening of the local currency in relation to the U.S. dollar. The negative
impact on operating income results from the U.S. dollar denominated sales of
non-U.S. operations converting into lower local currency amounts due to the
weakening of the U.S. dollar. This negatively impacts margin as it results in
less local currency generated from sales to cover the costs of non-U.S.
operations which are denominated in local currency.
Other non-operating income, net. Other non-operating income increased
primarily due to increases in interest income of approximately $615,000 for the
nine-month period ending September 30, 2006 as compared to the same period in
2005 primarily due to higher interest rates on invested cash balances.
Interest expense. Interest expense declined in the nine-month period of
2006 compared to 2005 due primarily to lower average levels of outstanding debt.
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 an election to not claim a credit with respect to
foreign income taxes paid but instead claim a tax deduction, consistent with our
inclusion in Contran's consolidated U.S. federal income tax group. The election
to not claim foreign tax credits is the primary reason our effective income tax
rate in 2006 is higher than the 35% U.S. federal statutory income tax rate.
- 17 -
Under GAAP, we are required to recognize a deferred income tax liability
with respect to the incremental U.S. (federal and state) and foreign withholding
taxes that we would incur when the undistributed earnings of our foreign
subsidiaries are subsequently repatriated, unless we determine that those
undistributed earnings are permanently reinvested for the foreseeable future.
Prior to the third quarter of 2005, we had not recognized a deferred tax
liability related to the incremental income taxes on the undistributed earnings
of certain of our non-U.S. operations, as we deemed those earnings to be
permanently reinvested. GAAP requires us to reassess the permanent reinvestment
conclusion on an ongoing basis to determine if our intentions have changed. As
of September 30, 2005, and based primarily upon changes in our strategic plans
for certain of our non-U.S. operations, we determined that the undistributed
earnings of such subsidiaries could no longer be considered to be permanently
reinvested except for the pre-2005 earnings in Taiwan. Accordingly, and in
accordance with GAAP, in the third quarter of 2005 we recognized an aggregate
$9.0 million provision for deferred income taxes on the aggregate undistributed
earnings of these non-U.S. subsidiaries.
Our effective income tax rate from continuing operations for the third
quarter and the first nine months of 2006 was 41% and 43%, respectively, as
compared to our effective income tax rates for the same periods in 2005,
excluding the $9.0 million provision discussed above, of 42% and 46%,
respectively. Our provision for income taxes for the first nine months of 2006
includes a $159,000 income tax benefit recorded in the second quarter related to
the effect of the reduction in the Canadian federal income tax rate and the
elimination of the federal surtax on our previously recorded net deferred income
tax liability. Other than the effect of the $159,000 income tax benefit, we
currently expect our effective income tax rate for the remainder of 2006 will
approximate our effective income tax rate for the nine months ended September
30, 2006.
Discontinued operations. See Note 9 to the Condensed Consolidated Financial
Statements.
- 18 -
Segment Results
The key performance indicator for our segments is the level of its
operating income margins.
Three months ended Nine months ended
September 30, % September 30, %
2005 2006 Change 2005 2006 Change
---- ---- ------ ---- ---- ------
(Dollars in thousands)
Net sales:
Furniture Components $25,536 $23,661 (7.3%) $ 80,847 $ 71,690 (11.3%)
Security Products 19,791 21,247 7.4% 57,053 62,114 8.9%
Marine Components 1,808 3,904 116% 1,808 12,180 574%
--------- --------- -------- --------
Total net sales $47,135 $48,812 3.6% $139,708 $145,984 4.5%
======= ======= ======== ========
Gross margin:
Furniture Components $ 5,089 $ 5,553 9.1% $ 15,191 $ 14,979 (1.4%)
Security Products 5,535 6,399 15.6% 16,243 18,581 14.4%
Marine Components 358 905 153% 358 3,274 814%
------- ------- ------- --------
Total gross margin $10,982 $12,857 17.1% $ 31,792 $ 36,834 15.9%
======= ======= ======== ========
Operating income:
Furniture Components $ 2,589 $ 3,306 27.7% $ 7,788 $ 7,848 0.8%
Security Products 3,324 4,021 21.0% 9,716 11,604 19.4%
Marine Components 241 210 (12.9%) 241 1,428 493%
Corporate operating
expense (1,378) (1,325) (3.8%) (4,105) (4,052) (1.3%)
------- ------- -------- -------
Total operating income $ 4,776 $ 6,212 30.1% $ 13,640 $ 16,828 23.4%
======= ======= ======== ========
Furniture Components. Furniture Components net sales declined 7% to $23.7
million in the third quarter of 2006 compared to $25.5 million in the same
period last year, and declined 11% to $71.7 million in the first nine months of
2006 compared to $80.8 million in the same period in the prior year as the
unfavorable effect of lower sales volumes more than offset the favorable effect
of changes in foreign currency exchange rates. However, operating income
improved from $2.6 million in the third quarter of 2005 to $3.3 million in the
third quarter of 2006 and was flat at $7.8 for the comparative nine- month
periods, as the negative effects of foreign exchange rates were more than offset
by improvements in gross margin. Our Furniture Components business faces a
number of operational challenges including competitive pressures from Asia and
an unfavorable Canadian dollar exchange rate which has caused operational
difficulties for many of our Canadian customers. We are actively seeking
additional sales opportunities to offset the decline in Canadian sales.
Furniture Components gross margin was 20% in the third quarter of 2005 and 24%
in the third quarter of 2006. Gross margin improved from 19% in the first nine
months of 2005 to 21% in the first nine months of 2006. The improvement in gross
margin is the result of our focus over the last several years on reducing costs
and gaining operational efficiencies through workforce reductions and process
improvements in all of our facilities, particularly our Canadian facility, as
well as on replacing high volume, low margin customers lost to Asian competitors
with lower volume, higher margin sales.
Security Products. Security Products net sales increased 7% to $21.2
million in the third quarter of 2006 compared to $19.8 million in the same
period last year, and increased 9% to $62.1 million in the first nine months of
2006 compared to $57.1 million in the same period in the prior year. We expanded
our business to existing Security Products customers while gaining new customers
during 2006. We also improved our gross margin from 28% in the third quarter of
2005 to 30% in the same period in 2006, and from 28% for the first nine months
of 2005 to 30% in the first nine months of 2006 by focusing on controlling costs
and increasing higher margin business during 2006. As a result, operating income
in the segment increased 21% and 19% in the quarter and nine months ended
September 30, 2006 compared to the same periods in 2005.
- 19 -
Marine Components. Marine Components net sales increased during the third
quarter and nine-month periods as compared to 2005 due to the impact of
acquisitions. We acquired an initial marine component company in August 2005
with an additional acquisition occurring in April 2006.
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 that
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. While this strategy is likely
to result in lower volumes in the short term, management expects the long term
effect to increase both sales and profits. 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 through raw material supply
agreements, tactical spot purchases, surcharges and price increases; however, we
may not be able to achieve these same results in future periods.
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 operating 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. For the first nine months
of 2006 and 2005, changes in assets and liabilities are comparable, resulting in
a net use of cash of approximately $.6 million and $1.7 million, respectively.
The change in cash provided by operating activities from September 30, 2006 as
compared to September 30, 2005 is the result of an increase in net income
combined with the change in deferred income taxes, discussed above.
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 43 days at September 30, 2006 due
to timing of collection on the higher accounts receivable balance at the end of
September. For comparative purposes, our average DSO increased from 38 days at
December 31, 2004 to 43 days at September 30, 2005. Our average number of days
in inventory ("DII") was 59 days at December 31, 2005 and 60 days at September
30, 2006. The increase in days in inventory is primarily due to the higher cost
of commodity raw materials at September 30, 2006. For comparative purposes, our
average DII was 52 and 57 days at December 31, 2004 and September 30, 2005,
respectively, primarily as a result of lower commodity raw materials costs in
the first nine months of 2005 compared to 2006.
Investing activities. Net cash used in investing activities totaled $1.9
million in the first nine months of 2005 compared to $17.6 million used in the
first nine months of 2006. Net cash for 2005 includes the net proceeds from the
sale of the Thomas Regout operations in Europe offset by cash paid for a marine
component product business. Net cash used in 2006 includes cash paid for a
marine component products business offset by the collection of $1.3 million for
the first payment on the $4.2 million subordinated note which originated as a
result of the sale of the European Thomas Regout operations in 2005. See Notes 2
and 9 to the Condensed Consolidated Financial Statements.
Financing activities. Net cash used in financing activities totaled $5.1
million and $7.2 million for the nine months ended September 30, 2005 and 2006,
respectively. In the first nine 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 $5.7 million, or $.38 per share, in
each of the first nine months of 2005 and 2006.
- 20 -
Other. We believe that cash generated from operations and borrowing
availability under our $50 million revolving credit facility, together with cash
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 September 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 September 30,
2006 approximated $2.9 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.
Recent accounting pronouncements.See Note 10 to the Condensed Consolidated
Financial Statements.
Critical Accounting Policies. There have been no changes in the third
quarter of 2006 with respect to our critical accounting policies presented in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in our 2005 Annual Report.
- 21 -
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
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.
- 22 -
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.
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 September 30, 2006. Based upon their evaluation, these executive officers
have concluded that our disclosure controls and procedures are effective as of
September 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
- 23 -
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
September 30, 2006 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
- 24 -
Part II. OTHER INFORMATION
ITEM 1A. Risk Factors.
There have been no material changes in the third quarter of 2006 with
respect to our risk factors presented in Item 1A. in our 2005 Annual Report.
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.
- 25 -
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 November 1, 2006 By /s/ Darryl R. Halbert
-------------------- ---------------------------
Darryl R. Halbert
Vice President, Chief Financial Officer
and Controller
(Principal Financial and Accounting Officer)
- 26 -