SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934 - For the fiscal year ended December 31, 2005
Commission file number 1-13905
COMPX INTERNATIONAL INC.
(Exact name of registrant as specified in its charter)
Delaware 57-0981653
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(State or other jurisdiction of (IRS Employer
incorporation or 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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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
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Class A common stock New York Stock Exchange
($.01 par value per share)
Securities registered pursuant to Section 12(g) of the Act:
None.
Indicate by check mark:
If the Registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes No X
If the Registrant is not required to file reports pursuant to Section
13 or Section 15(d) of the Act. Yes No X
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
If disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of
Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. Yes No X
Whether the registrant is a large accelerated filer, an accelerated
filer or a non-accelerated filer (as defined in Rule 12b-2 of the
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 .
The aggregate market value of the 2.0 million shares of voting stock held by
nonaffiliates of CompX International Inc. as of June 30, 2005 (the last business
day of the Registrant's most recently completed second fiscal quarter)
approximated $34 million.
As of January 31, 2006, 5,234,280 shares of Class A common stock were
outstanding.
Documents incorporated by reference
The information required by Part III is incorporated by reference from the
Registrant's definitive proxy statement to be filed with the Commission pursuant
to Regulation 14A not later than 120 days after the end of the fiscal year
covered by this report.
PART I
ITEM 1. BUSINESS
General
CompX International Inc. (NYSE: CIX) is a leading manufacturer of precision
ball bearing slides, security products and ergonomic computer support systems
used in office furniture, computer-related applications and a variety of other
industries. The Company's products are principally designed for use in medium to
high-end product applications, where design, quality and durability are critical
to the Company's customers. The Company believes that it is among the world's
largest producers of precision ball bearing slides, security products consisting
of cabinet locks and other locking mechanisms and ergonomic computer support
systems. In 2005, precision ball bearing slides, security products and ergonomic
computer support systems accounted for approximately 42%, 43% and 15% of net
sales related to continuing operations, respectively.
On January 24, 2005 the registrant completed the disposition of all of the
net assets of its Thomas Regout precision slide and window furnishing
operations, conducted at its facility in the Netherlands, to members of Thomas
Regout management for proceeds of approximately $22.6 million. At December 31,
2004, the assets and liabilities of Thomas Regout are classified as "held for
sale" and accordingly the results of operations have been classified as
"discontinued operations" for all periods presented. See Note 10 to the
Consolidated Financial Statements. In August 2005, the Company completed the
acquisition of a component product business for aggregate cash consideration of
$7.3 million, net of cash acquired. See Note 2 to the Consolidated Financial
Statements.
At December 31, 2005, CompX is 83% owned by CompX Group, Inc., 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 December 31, 2005, (i) NL and TIMET own an additional 2% and 3%,
respectively, of CompX directly, (ii) Valhi, Inc. (NYSE: VHI) holds, directly or
through a subsidiary, approximately 83% of NL's outstanding common stock and
approximately 39% of TIMET's outstanding common stock and (iii) Contran
Corporation holds, directly or through subsidiaries, approximately 92% of
Valhi's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or
is held by Mr. Simmons or persons or other entities related to Mr. Simmons.
Consequently, Mr. Simmons may be deemed to control each of such companies and
the Company.
The Company maintains a website on the internet with the address of
www.compx.com. Copies of this Annual Report on Form 10-K for the year ended
December 31, 2005 and copies of the Company's Quarterly Reports on Form 10-Q for
2005 and 2006 and any Current Reports on Form 8-K for 2005 and 2006, and any
amendments thereto, are or will be available free of charge as soon as
reasonably practical after they are filed with the Securities and Exchange
Commission ("SEC") at such website. Additional information regarding the
Company, including the Company's Audit Committee Charter, the Company's Code of
Business Conduct and Ethics and the Company's Corporate Governance Guidelines,
may also be found at this website. The Company will also provide to anyone
without charge copies of such documents upon written request to the Company.
Such requests should be directed to the attention of the Corporate Secretary at
the Company's address on the cover page of this Form 10-K.
The general public may also read and copy any materials the Company files
with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549, and may obtain information on the operation of the Public
Reference Room by calling the SEC at 1-800-SEC-0330. The Company is an
electronic filer, and the SEC maintains an internet website at www.sec.gov that
contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC.
As provided by the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995, the Company cautions that the statements in this
Annual Report on Form 10-K relating to matters that are not historical facts,
including, but not limited to, statements found in this Item 1 - "Business,"
Item 1A - "Risk Factors," Item 3 - "Legal Proceedings," Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Item 7A - "Quantitative and Qualitative Disclosures About Market Risk," are
forward-looking statements that represent management's beliefs and assumptions
based on currently available information. Forward-looking statements can be
identified by the use of words such as "believes," "intends," "may," "should,"
"anticipates," "expects" or comparable terminology or by discussions of
strategies or trends. Although the Company believes that the expectations
reflected in such forward-looking statements are reasonable, it cannot give any
assurances that these expectations will prove to be correct. Such statements by
their nature involve substantial risks and uncertainties that could
significantly impact expected results, and actual future results could differ
materially from those described in such forward-looking statements. Among the
factors that could cause actual future results to differ materially are the
risks and uncertainties discussed in this Annual Report and those described from
time to time in materials filed with the Company's other filings with the SEC.
While it is not possible to identify all factors, the Company continues to face
many risks and uncertainties including, but not limited to, the following:
o Future supply and demand for the Company's products,
o Changes in costs of raw materials and other operating costs (such as
energy costs),
o General global economic and political conditions,
o Demand for office furniture,
o Service industry employment levels,
o The possibility of labor disruptions,
o Competitive products and prices, including increased competition from
low-cost manufacturing sources (such as China),
o Substitute products,
o Customer and competitor strategies,
o Costs and expenses associated with compliance with certain
requirements of the Sarbanes-Oxley Act of 2002 relating to the
evaluation of the Company's internal control over financial reporting,
o The introduction of trade barriers,
o The impact of pricing and production decisions,
o Fluctuations in the value of the U.S. dollar relative to other
currencies (such as the Canadian dollar and New Taiwan dollar),
o Potential difficulties in integrating completed or future
acquisitions,
o Decisions to sell operating assets other than in the ordinary course
of business,
o Uncertainties associated with new product development,
o Environmental matters (such as those requiring emission and discharge
standards for existing and new facilities),
o The ability of the Company to comply with covenants contained in its
revolving bank credit facility,
o The ultimate outcome of income tax audits,
o The impact of current or future government regulations,
o Possible future litigation and
o Other risks and uncertainties.
Should one or more of these risks materialize (or the consequences of such a
development worsen) or should the underlying assumptions prove incorrect, actual
results could differ materially from those forecasted or expected. The Company
disclaims any intention or obligation to update publicly or revise such
statements whether as a result of new information, future events or otherwise.
Industry Overview
Currently, approximately 43% of the Company's products are sold to the
office furniture manufacturing industry while the remainder are sold for use in
other products, such as vending equipment, electromechanical enclosures,
recreational transportation, computers and related equipment, banking equipment,
refrigerators, tool boxes and other non-office furniture applications. In 2004,
the office furniture industry began to recover from a multi-year contraction
marked by consistently negative growth rates. Consequently, CompX's historical
sales growth has been negatively affected. See Item 6 - "Selected Financial
Data" and Item 7 - "Management's Discussion and Analysis of Financial Condition
and Results of Operations." However, CompX's management believes that its
emphasis on new product development and sales of its products to non-office
furniture markets result in the potential for higher rates of growth and
diversification of risk than the office furniture industry as a whole.
Products
CompX manufactures and sells components in three major product lines:
precision ball bearing slides, security products and ergonomic computer support
systems.
Sales for the respective product lines in 2003, 2004 and 2005 are as
follows:
Years ended December 31,
2003 2004 2005
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($ in thousands)
Precision ball bearing slides $ 69,709 $ 78,522 $ 77,854
Security products 76,155 75,872 80,825
Ergonomic computer support systems 28,102 28,237 27,670
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$173,966 $182,631 $186,349
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The Company's precision ball bearing slides are sold under the CompX
Precision Slides, CompX Waterloo, Waterloo Furniture Components, CompX DurISLide
and CompX Dynaslide brand names; the Company's security products are sold under
the CompX Security Products, National Cabinet Lock, Fort Lock, Timberline Lock,
Chicago Lock, STOCK LOCKS, KeSet and TuBar brand names; and the ergonomic
computer support systems are sold under the CompX ErgonomX brand name. The
Company believes that its brand names are well recognized in the industry.
Precision ball bearing slides. CompX manufactures a complete line of
precision ball bearing slides for use in office furniture, computer-related
equipment, tool storage cabinets, imaging equipment, file cabinets, desk
drawers, automated teller machines, refrigerators and other applications. These
products include CompX's patented Integrated Slide Lock in which a file cabinet
manufacturer can reduce the possibility of multiple drawers being opened at the
same time, the adjustable patented Ball Lock which reduces the risk of
heavily-filled drawers, such as auto mechanic tool boxes, from opening while in
movement, and the Self-Closing Slide, which is designed to assist in closing a
drawer and is used in applications such as bottom mount freezers. Precision ball
bearing slides are manufactured to stringent industry standards and are designed
in conjunction with original equipment manufacturers ("OEMs") to meet the needs
of end users with respect to weight support capabilities, ease of movement and
durability.
Security products. The Company believes that it is a North American market
leader in the manufacture and sale of cabinet locks and other locking
mechanisms. CompX provides security products to various industries including
institutional furniture, banking, industrial equipment, recreational vehicles,
vending and computer. The Company's products can also be found in various
applications including ignition systems, office furniture, vending and gaming
machines, parking meters, electrical circuit panels, storage compartments,
security devices for laptop and desktop computers as well as mechanical and
electronic locks for the toolbox, medical and other industries. Some of these
products may include CompX's KeSet high security system, which has the ability
to change the keying on a single lock 64 times without removing the lock from
its enclosure and its patented high security TuBar locking system.
The Company manufactures disc tumbler locking mechanisms at all of its
security products facilities, which mechanisms provide moderate security and
generally represent the lowest cost lock to produce. CompX also manufactures pin
tumbler locking mechanisms, including its KeSet, ACE II and TuBar brand locks,
which mechanisms are more costly to produce and are used in applications
requiring higher levels of security. CompX Security Products' innovative eLock
electronic lock provides stand alone security and audit trail capability for
drug storage and other valuables through the use of a proximity card, magnetic
stripe, or keypad credentials. A substantial portion of the Company's sales
consist of products with specialized adaptations to individual manufacturers'
specifications. CompX, however, also has a standardized product line suitable
for many customers. This standardized product line is offered through a North
American distribution network through the Company's STOCK LOCKS distribution
program as well as to factory centers and to large OEMs.
Ergonomic computer support systems. CompX is a leading manufacturer and
innovator in ergonomic computer support systems and accessories. Unlike similar
products targeting the residential market, which are more price sensitive with
less emphasis on the overall value of products and service, the CompX line
consists of more highly engineered products designed to provide ergonomic
benefits for business and other sophisticated users.
Ergonomic computer support systems include articulating computer keyboard
support arms (designed to attach to desks in the workplace and home office
environments to alleviate possible strains and stress and maximize usable
workspace), CPU storage devices (which minimize adverse effects of dust and
moisture) and a number of complementary accessories, including ergonomic wrist
rest aids, mouse pad supports and flat screen computer monitor support arms.
These products include CompX's Leverlock, which is designed to make the
adjustment of an ergonomic keyboard arm easier. In addition, the Company offers
its engineering and design capabilities for the design and manufacture of
products on a proprietary basis for key customers.
Sales, Marketing and Distribution
CompX sells components to OEMs and to distributors through a dedicated
sales force. The majority of the Company's sales are to OEMs, while the balance
represents standardized products sold through distribution channels.
Sales to large OEM customers are made through the efforts of factory-based
sales and marketing professionals and engineers working in concert with field
salespeople and independent manufacturers' representatives. Manufacturers'
representatives are selected based on special skills in certain markets or
relationships with current or potential customers.
A significant portion of the Company's sales are made through distributors.
The Company has a significant market share of cabinet lock sales to the
locksmith distribution channel. CompX supports its distributor sales with a line
of standardized products used by the largest segments of the marketplace. These
products are packaged and merchandised for easy availability and handling by
distributors and the end users. Based on the Company's successful STOCK LOCKS
inventory program, similar programs have been implemented for distributor sales
of ergonomic computer support systems and, to some extent, precision ball
bearing slides. The Company also operates a small tractor/trailer fleet
associated with its Canadian facilities to provide an industry-unique service
response to major customers for those Canadian manufactured products.
The Company does not believe it is dependent upon one or a few customers,
the loss of which would have a material adverse effect on its operations. Sales
to the Company's ten largest customers accounted for approximately 44% in 2003
and 43% in each of 2004 and 2005. In 2003, sales to the Company's largest
customer was less than 10% of the Company's total sales. In 2004 and 2005, one
customer accounted for 11% and 10% of sales, respectively. In each of 2003, 2004
and 2005, eight of the Company's top ten customers were located in the United
States.
Manufacturing and Operations
At December 31, 2005, CompX operated eight manufacturing facilities related
to its continuing operations: six in North America (two in Illinois and one in
each of Canada, South Carolina, Wisconsin and Michigan) and two in Taiwan.
Precision ball bearing slides are manufactured in the facilities located in
Canada, Michigan and Taiwan. Security products are manufactured in the
facilities located in South Carolina and Illinois. Ergonomic products are
manufactured in the facility located in Canada. Other component products are
manufactured at the Wisconsin facility acquired in 2005. The Company owns all of
these facilities except for one of the Taiwan facilities, which is leased. See
also Item 2 - "Properties." CompX also leases a distribution center in
California. CompX believes that all of its facilities are well maintained and
satisfactory for their intended purposes.
Raw Materials
Coiled steel is the major raw material used in the manufacture of precision
ball bearing slides and ergonomic computer support systems. Plastic resins for
injection molded plastics are also an integral material for ergonomic computer
support systems. Purchased components and zinc are the principal raw materials
used in the manufacture of security products. These raw materials are purchased
from several suppliers and are readily available from numerous sources.
The Company occasionally enters into raw material arrangements to mitigate
the short-term impact of future increases in raw material costs. While these
arrangements do not commit the Company to a minimum volume of purchases, they
generally provide for stated unit prices based upon achievement of specified
volume purchase levels. This allows the Company to stabilize raw material
purchase prices, provided that the specified minimum monthly purchase quantities
are met. Materials purchased outside of these arrangements are sometimes subject
to unanticipated and sudden price increases. Due to the competitive nature of
the markets served by the Company's products, it is often difficult to recover
such increases in raw material costs through increased product selling prices or
raw material surcharges. Consequently, overall operating margins can be affected
by such raw material cost pressures.
Competition
The markets in which CompX participates are highly competitive. The Company
competes primarily on the basis of product design, including ergonomic and
aesthetic factors, product quality and durability, price, on-time delivery,
service and technical support. The Company focuses its efforts on the middle and
high-end segments of the market, where product design, quality, durability and
service are placed at a premium.
The Company competes in the precision ball bearing slide market primarily
on the basis of product quality and price with two large manufacturers and a
number of smaller domestic and foreign manufacturers. The Company's security
products compete with a variety of relatively small domestic and foreign
competitors. The Company competes in the ergonomic computer support systems
market primarily on the basis of product quality, features and price with one
major producer and a number of smaller domestic manufacturers, and primarily on
the basis of price with a number of foreign manufacturers. Although the Company
believes that it has been able to compete successfully in its markets to date,
price competition from foreign-sourced product continues to intensify and there
can be no assurance that the Company will be able to continue to successfully
compete in all existing markets in the future.
Patents and Trademarks
The Company holds a number of patents relating to its component products,
certain of which are believed to be important to CompX and its continuing
business activity. The Company's patents generally have a term of 20 years, and
have remaining terms ranging from less than 3 years to 18 years at December 31,
2005. CompX's major trademarks and brand names, including CompX, CompX Precision
Slides, CompX Security Products, CompX Waterloo, CompX ErgonomX, National
Cabinet Lock, KeSet, Fort Lock, Timberline Lock, Chicago Lock, ACE II, TuBar,
STOCK LOCKS, ShipFast, Waterloo Furniture Components Limited, CompX DurISLide
and CompX Dynaslide, are protected by registration in the United States and
elsewhere with respect to the products CompX manufactures and sells. The Company
believes such trademarks are well recognized in the component products industry.
International Operations
The Company has substantial operations and assets located outside the
United States, principally slide and ergonomic product operations in Canada and
slide product operations in Taiwan. The majority of the Company's 2005 non-U.S.
sales are to customers located in Canada. Foreign operations are subject to,
among other things, currency exchange rate fluctuations. The Company's results
of operations have in the past been both favorably and unfavorably affected by
fluctuations in currency exchange rates. Political and economic uncertainties in
certain of the countries in which the Company operates may expose the Company to
risk of loss. The Company does not believe that there is currently any
likelihood of material loss through political or economic instability, seizure,
nationalization or similar event. The Company cannot predict, however, whether
events of this type in the future could have a material effect on its
operations. See Item 7 - "Management's Discussion and Analysis of Financial
Condition and Results of Operations," Item 7A - "Quantitative and Qualitative
Disclosures About Market Risk" and Note 1 to the Consolidated Financial
Statements.
Environmental Matters
The Company's operations are subject to federal, state, local and foreign
laws and regulations relating to the use, storage, handling, generation,
transportation, treatment, emission, discharge, disposal and remediation of and
exposure to hazardous and non-hazardous substances, materials and wastes
("Environmental Laws"). The Company's operations also are subject to federal,
state, local and foreign laws and regulations relating to worker health and
safety. The Company believes that it is in substantial compliance with all such
laws and regulations. The costs of maintaining compliance with such laws and
regulations have not significantly impacted the Company to date, and the Company
has no significant planned costs or expenses relating to such matters. There can
be no assurance, however, that compliance with future laws and regulations will
not require the Company to incur significant additional expenditures or that
such additional costs would not have a material adverse effect on the Company's
business, consolidated financial condition, results of operations or liquidity.
Employees
As of December 31, 2005, the Company employed approximately 1,230
employees, including 750 in the United States, 330 in Canada and 150 in Taiwan.
Approximately 70% of the Company's employees in Canada are represented by a
labor union covered by a collective bargaining agreement which provides for
annual wage increases from 1% to 2.5% over the term of the contract. A new
collective bargaining agreement was ratified in December 2005 that expires in
January 2009. Wage increases for these Canadian employees historically have also
been in line with overall inflation indices. The Company believes that its labor
relations are satisfactory.
Item 1A. RISK FACTORS
Listed below are certain risk factors associated with the Company and its
businesses. In addition to the potential effect of these risk factors discussed
below, any risk factor which could result in reduced earnings or operating
losses, or reduced liquidity, could in turn adversely affect our ability to
service our liabilities or pay dividends on our common stock or adversely affect
the quoted market prices for our securities.
We sell many of our products in mature and highly competitive industries
and face price pressures in the markets in which we operate, which may result in
reduced earnings or operating losses. Each of the markets we serve is highly
competitive, with a number of competitors offering similar products. We focus
our efforts on the middle- and high-end segment of the market, where product
design, quality and durability are the primary competitive factors. Some of our
competitors may be able to drive down prices for our products because their
costs are lower than our costs, especially those located in Asia. In addition,
some of our competitors' financial, technological and other resources may be
greater than our resources, and such competitors may be better able to withstand
changes in market conditions. Our competitors may be able to respond more
quickly than we can to new or emerging technologies and changes in customer
requirements. Further, consolidation of our competitors or customers in any of
the industries in which we compete may result in reduced demand for our
products. In addition, in some of our businesses new competitors could emerge by
modifying their existing production facilities so they could manufacture
products that compete with our products. The occurrence of any of these events
could result in reduced earnings or operating losses.
Sales for certain of our products, principally precision slides and
ergonomic products, are concentrated in the office furniture industry which has
in the past experience significant changes in demand that could result in
reduced earnings or operating losses for the Company. Sales of our products to
the office furniture manufacturing industry accounted for approximately 57%, 51%
and 43% for 2003, 2004 and 2005, respectively. The future growth, if any, of the
office furniture industry will be affected by a variety of macroeconomic
factors, such as service industry employment levels, corporate cash flows and
non-residential commercial construction, as well as industry factors such as
corporate reengineering and restructuring, technology demands, ergonomic, health
and safety concerns and corporate relocations. There can be no assurance that
current or future economic or industry trends will not materially adversely
affect our business.
CompX's failure to enter into new markets would result in the continued
significant impact of fluctuations in demand within the office furniture
manufacturing industry on our operating results. In an effort to reduce our
dependence on the office furniture market for certain products and to increase
our participation in other markets, we have been devoting resources to
identifying new customers and developing new applications for those products in
markets outside of the office furniture industry, such as home appliances and
tool boxes. Developing these new applications for its products involves
substantial risk and uncertainties due to our limited experience with customers
and applications in these markets as well as facing competitors who are already
established in these markets. We may not be successful in developing new
customers or applications for our products outside of the office furniture
industry. Significant time may be required for such development and uncertainty
exists as to the extent to which we will face competition in this regard.
Our development of new products as well as innovative features for current
products is critical to sustaining and growing our sales. Historically, our
ability to provide value-added custom engineered products that address
requirements of technology and space utilization has been a key element of our
success. The introduction of new products and features requires the coordination
of the design, manufacturing and marketing of such products with potential
customers. The ability to implement such coordination may be affected by factors
beyond our control. While we will continue to emphasize the introduction of
innovative new products that target customer-specific opportunities, there can
be no assurance that any new products we introduce will achieve the same degree
of success that we have achieved with our existing products. Introduction of new
products typically requires us to increase production volume on a timely basis
while maintaining product quality. Manufacturers often encounter difficulties in
increasing production volumes, including delays, quality control problems and
shortages of qualified personnel. As we attempt to introduce new products in the
future, there can be no assurance that we will be able to increase production
volume without encountering these or other problems, which might, on our
financial condition or results of operations.
We have in the past and intend to in the future pursue a growth strategy
through acquisitions which could negatively affect operating results if the
acquired businesses are not successful. Our ability to successfully grow through
acquisitions will depend on many factors, including, among others, our ability
to identify suitable growth opportunities and to successfully integrate acquired
businesses. There can be no assurance that we will anticipate all of the
changing demands that expanding operations will impose on our management and
management information systems. Any failure by us to adapt our systems and
procedures to those changing demands could have a material adverse effect on our
results of operations and financial condition.
Higher costs of our raw materials may decrease our liquidity. Certain of
the raw materials used in our products are commodities that are subject to
significant fluctuations in price in response to world wide supply and demand.
Coiled steel is the major raw material used in the manufacture of precision ball
bearing slides and ergonomic computer support systems. Plastic resins for
injection molded plastics are also an integral material for ergonomic computer
support systems. Zinc is a principal raw material used in the manufacture of
security products. These raw materials are purchased from several suppliers and
are generally readily available from numerous sources. We occasionally enter
into raw material arrangements to mitigate the short-term impact of future
increases in raw material costs. Materials purchased outside of these
arrangements are sometimes subject to unanticipated and sudden price increases.
Should our vendors not be able to meet their contractual obligations or should
we be otherwise unable to obtain necessary raw materials, we may incur higher
costs for raw materials or may be required to reduce production levels, either
of which may decrease our liquidity as we may be unable to offset such higher
costs with increased selling prices for our products.
As a global business, we are exposed to local business risks in different
countries, which could result in operating losses. We conduct some of our
businesses in several jurisdictions outside of the United States and are subject
to risks normally associated with international operations, which include trade
barriers, tariffs, exchange controls, national and regional labor strikes,
social and political risks, general economic risks, seizures, nationalizations,
compliance with a variety of foreign laws, including tax laws, and the
difficulty in enforcing agreements and collecting receivables through foreign
legal systems. We could also be adversely affected by any restriction that
limits our ability to repatriate our foreign profits back to the United States.
We may incur losses from fluctuations in currency exchange rates. We
operate businesses in Taiwan and Canada. A significant portion of the products
produced at these locations are shipped to the U.S. and have product prices
denominated in U.S. dollars. Therefore, we are exposed to risks related to the
need to convert U.S. dollars that we receive for these products into the
currencies required to pay for the raw material and operating expenses of the
manufacturing facility, all of which could result in future losses depending on
fluctuations in foreign currency exchange rates.
If our patents are declared invalid or our trade secrets become known to
competitors, our ability to compete may be adversely affected. Protection of our
proprietary processes and other technology is important to our competitive
position. Consequently, we rely on judicial enforcement for protection of our
patents, and our patents may be challenged, invalidated, circumvented or
rendered unenforceable. Furthermore, if any pending patent application filed by
us does not result in an issued patent, or if patents are issued to us but such
patents do not provide meaningful protection of our intellectual property, then
the use of any such intellectual property by our competitors could result in
decreasing our cash flows. Additionally, our competitors or other third parties
may obtain patents that restrict or preclude our ability to lawfully produce or
sell our products in a competitive manner, which could have the same effects.
We also rely on certain unpatented proprietary know-how and continuing
technological innovation and other trade secrets to develop and maintain our
competitive position. Although it is our practice to enter into confidentiality
agreements to protect our intellectual property, because these confidentiality
agreements may be breached, such agreements may not provide sufficient
protection for our trade secrets or proprietary know-how, or adequate remedies
may not be available in the event of an unauthorized use or disclosure of such
trade secrets and know-how. In addition, others could obtain knowledge of such
trade secrets through independent development or other access by legal means.
Loss of key personnel or our ability to attract and retain new qualified
personnel could hurt our businesses and inhibit our ability to operate and grow
successfully. Our success in the highly competitive markets in which we operate
will continue to depend to a significant extent on the leadership teams of our
businesses and other key management personnel. We generally do not have binding
employment agreements with any of these managers. This increases the risks that
we may not be able to retain our current management personnel and we may not be
able to recruit qualified individuals to join our management team, including
recruiting qualified individuals to replace any of our current personnel that
may leave in the future.
Our relationships with our union employees could deteriorate. At December
31, 2005, we employed approximately 1,230 persons worldwide in our various
businesses, 230 of which are subject to a collective bargaining arrangement
which expires in January 2009. We may not be able to negotiate labor agreements
with respect to these employees on satisfactory terms or at all. If our
employees were to engage in a strike, work stoppage or other slowdown, we could
experience a significant disruption of our operations or higher ongoing labor
costs.
We are subject to many environmental and safety regulations with respect to
our operating facilities that may result in unanticipated costs or liabilities.
Most of our facilities are subject to extensive laws, regulations, rules and
ordinances relating to the protection of the environment, including those
governing the discharge of pollutants in the air and water and the generation,
management and disposal of hazardous substances and wastes or other materials.
We may incur substantial costs, including fines, damages and criminal penalties
or civil sanctions, or experience interruptions in our operations for actual or
alleged violations or compliance requirements arising under environmental laws.
Our operations could result in violations under environmental laws, including
spills or other releases of hazardous substances to the environment. Some of our
operating facilities are in densely populated urban areas or in industrial areas
adjacent to other operating facilities. In the event of an accidental release,
we could incur material costs as a result of addressing such an event and in
implementing measures to prevent such incidents. Given the nature of our
business, violations of environmental laws may result in restrictions imposed on
our operating activities or substantial fines, penalties, damages or other
costs, including as a result of private litigation.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not Applicable.
ITEM 2. PROPERTIES
The Company's principal executive offices are located in approximately
1,000 square feet of leased space at 5430 LBJ Freeway, Dallas, Texas 75240. The
following table sets forth the location, size, business operating segment and
general product types produced for each of the Company's facilities. Size
Business (square Facility Name Segment Location feet) Products Produced
Owned Facilities:
Waterloo PS/ERG Kitchener, Ontario 276,000 Slides/ergonomic
Products
Byron Center PS Byron Center, MI 143,000 Slides
National SP Mauldin, SC 198,000 Security products
Fort SP River Grove, IL 100,000 Security products
Timberline SP Lake Bluff, IL 25,000 Security products
Dynaslide PS Taipei, Taiwan 48,000 Slides
Dynaslide PS Taipei, Taiwan 18,000 Warehouse
Neenah SP Neenah, WI 44,000 Other
Leased Facilities:
Thomas Regout * Maastricht,
the Netherlands 270,000 Slides
Dynaslide PS Taipei, Taiwan 25,000 Slides
Distribution Center SP/ERG Rancho Cucamonga, CA 12,000 Product distribution
PS - Precision Slides business segment SP - Security Products business segment
ERG - Ergonomics business segment * - Discontinued operation
The Waterloo, Byron Center, National and Fort facilities are ISO-9001
registered. The Dynaslide and Neenah facilities are ISO-9002 registered. The
Company believes that all its facilities are well maintained and satisfactory
for their intended purposes.
The business operated at the Thomas Regout facility was disposed of, including
the leased facility, on January 24, 2005 and is classified as "discontinued
operations" for all periods presented.
ITEM 3. LEGAL PROCEEDINGS
The Company is involved, from time to time, in various environmental,
contractual, product liability, patent (or intellectual property) and other
claims and disputes incidental to its business. Currently no material
environmental or other material litigation is pending or, to the knowledge of
the Company, threatened. The Company currently believes that the disposition of
all claims and disputes, individually or in the aggregate, should not have a
material adverse effect on the Company's consolidated financial condition,
results of operations or liquidity.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of security holders during the quarter
ended December 31, 2005.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's Class A common stock is listed and traded on the New York
Stock Exchange (symbol: CIX). As of January 31, 2006, there were approximately
20 holders of record of CompX Class A common stock. The following table sets
forth the high and low closing sales prices per share for CompX Class A common
stock for 2004 and 2005 and dividends paid per share during such periods. On
January 31, 2006, the closing price per share of CompX Class A common stock was
$17.60.
Dividends
High Low paid
---- --- ---------
Year ended December 31, 2004
First Quarter $13.90 $ 6.35 $ -
Second Quarter 16.95 13.00 -
Third Quarter 17.60 13.97 -
Fourth Quarter 16.82 14.90 .125
Year ended December 31, 2005
First Quarter $18.05 $16.15 $.125
Second Quarter 16.98 14.45 .125
Third Quarter 19.15 15.38 .125
Fourth Quarter 17.46 15.01 .125
The Company suspended its regular quarterly dividend during the second
quarter of 2003 and reinstated its regular quarterly dividend during the fourth
quarter of 2004. However, the declaration and payment of future dividends and
the amount thereof, if any, is discretionary and is dependent upon the Company's
results of operations, financial condition, cash requirements for its
businesses, contractual requirements and restrictions and other factors deemed
relevant by the Board of Directors. The amount and timing of past dividends is
not necessarily indicative of the amount or timing of any future dividends which
might be paid.
ITEM 6. SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
the Company's Consolidated Financial Statements and Item 7 - "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
The Company's operations are comprised of a 52 or 53-week fiscal year.
Excluding 2004, each of the years 2001 through 2005 consisted of a 52-week year.
2004 was a 53-week year.
Years ended December 31,
--------------------------------
2001 2002 2003 2004 2005
---- ---- ---- ---- ----
($ in millions, except per share data)
Income Statement Data
Net sales $179.7 $166.7 $174.0 $182.6 $186.3
Operating income $ 12.6 $ 6.1 $ 8.8 $ 15.4 $ 19.1
Provision for income taxes $ 6.4 $ 3.0 $ 3.4 $ 7.8 $ 18.6
Income from continuing operations $ 8.8 $ 0.9 $ 5.8 $ 9.5 $ 0.9
Discontinued operations (1.7) (0.3) (4.5) (12.5) (0.5)
------ ------ ------ ------ ------
Net income (loss) $ 7.1 $ .6 $ 1.3 $ (3.0) $ 0.4
====== ====== ====== ====== ======
Basic and diluted earnings (loss)
per share
Continuing operations $ .58 $ .06 $ .38 $ .63 $ .06
Discontinued operations (.11) (.02) (.30) (.83) (.03)
------ ------ ------ ------ ------
$ .47 $ .04 $ .08 $ (.20) $ .03
====== ====== ====== ====== ======
Cash dividends per share $ .50 $ .50 $ .125 $ .125 $ .50
Weighted average common shares
Outstanding 15.1 15.1 15.1 15.2 15.2
Balance Sheet Data
(at year end):
Cash and other current assets $ 94.9 $ 71.3 $ 80.2 $ 78.3 $ 80.8
Total assets 222.9 200.1 210.7 186.3 188.6
Current liabilities 24.5 22.2 24.5 26.0 20.3
Long-term debt, including
current maturities 49.1 31.0 26.0 0.1 1.6
Stockholders' equity 143.0 142.0 154.4 155.3 150.1
Cash Flow Data
Net cash provided by operating
activities $ 27.7 $ 16.9 $ 24.4 $ 30.2 $ 20.0
Net cash used by investing
activities (2.7) (12.7) (8.2) (3.2) (3.7)
Net cash used by financing
activities (1.8) (25.5) (7.3) (27.1) (7.2)
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Executive Summary
The Company reported operating income of $19.1 million in 2005 compared to
operating income of $15.4 million in 2004 and $8.8 million in 2003. As more
fully described below, the Company's operating income increased from 2004 to
2005 as the favorable effect of higher sales in 2005 and the Company's ongoing
focus on reducing costs more than offset the negative impact of relative changes
in foreign currency exchange rates. The Company's operating income increased
from 2003 to 2004 due primarily to the higher sales in 2004 and improved margins
in 2004 through cost reduction efforts.
Fluctuations in foreign currency exchange rates positively impacted sales
in 2005 as compared to 2004 by $1.5 million, but negatively impacted operating
income by $2.3 million. Fluctuations in foreign currency exchange rates
positively impacted sales in 2004 as compared to 2003 by $2.5 million, but
negatively impacted operating income by $.9 million. The impact on net sales is
primarily due to the strengthening Canadian dollar in relation to the U.S.
dollar. The impact on operating income is primarily from the Company's Canadian
operations, where the majority of net sales are denominated in U.S. dollars
while the majority of expenses are denominated in Canadian dollars.
Cash provided by operating activities was $20.0 million in 2005 compared to
$30.2 million in 2004 primarily due to changes in tax liabilities as a result of
the improvement in taxable income in 2004 and 2005.
Critical Accounting Policies and Estimates
The accompanying "Management's Discussion and Analysis of Financial
Condition and Results of Operations" are based upon the Company's consolidated
financial statements, which have been prepared in accordance with accounting
principles generally accepted in the United States of America ("GAAP"). The
preparation of these financial statements requires the Company to make estimates
and judgments that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amount of revenues and expenses during the reported
period. On an on-going basis, the Company evaluates its estimates, including
those related to bad debts, inventory reserves, the recoverability of other
long-lived assets (including goodwill and other intangible assets) and the
realization of deferred income tax assets. The Company bases its estimates on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the reported amounts of assets, liabilities, revenues and
expenses. Actual results may differ from previously-estimated amounts under
different assumptions or conditions.
The Company believes the critical financial statement judgment risks of its
business are attributable to four primary areas:
o Will customer accounts receivable on the books be collected at full
book value?
o Will inventory on hand be sold with a sufficient mark up to cover the
cost to produce and ship the product?
o Will future cash flows of the Company be sufficient to recover the net
book value of long-lived assets?
o Will future taxable income be sufficient to utilize recorded deferred
income tax assets?
The Company believes the following critical accounting policies affect its
more significant judgments and estimates, as noted above, used in the
preparation of its consolidated financial statements and are applicable to all
of the Company's operating segments:
o Allowance for uncollectible accounts receivable. The Company maintains
allowances for doubtful accounts for estimated losses resulting from
the inability of its customers to make required payments. The Company
takes into consideration the current financial condition of the
customers, the age of outstanding balances and the current economic
environment when assessing the adequacy of the allowances. If the
financial condition of the Company's customers were to deteriorate,
resulting in an impairment of their ability to make payments,
increased allowances may be required.
o Inventory reserves. The Company provides reserves for estimated
obsolescence or unmarketable inventories equal to the difference
between the cost of inventory and the estimated net realizable value
using assumptions about future demand for its products and market
conditions. The Company also considers the age and the quantity of
inventory on hand in estimating the reserve. If actual market
conditions are less favorable than those projected by management,
increased inventory reserves may be required.
o Net book value of long-lived assets. The Company recognizes an
impairment charge associated with its long-lived assets, including
property and equipment, goodwill and other intangible assets, whenever
it determines that recovery of the long-lived asset is not probable.
The determination is made in accordance with applicable GAAP
requirements associated with the long-lived asset, and is based upon,
among other things, estimates of the amount of future net cash flows
to be generated by the long-lived asset and estimates of the current
fair value of the asset. Adverse changes in estimates of future net
cash flows or estimates of fair value could result in an inability to
recover the carrying value of the long-lived asset, thereby possibly
requiring an impairment charge to be recognized in the future.
Under applicable GAAP (SFAS No. 142, Goodwill and other
Intangible Assets), goodwill is required to be reviewed for impairment
at least on an annual basis. Goodwill will also be reviewed for
impairment at other times during each year when impairment indicators,
as defined, are present. No goodwill impairments were deemed to exist
as a result of the Company's annual impairment review completed during
the third quarter of 2005, as the estimated fair value of each such
reporting unit exceeded the net carrying value of the respective
reporting unit. See Notes 1 and 4 to the Consolidated Financial
Statements. The estimated fair values of these three reporting units
are determined based on discounted cash flow projections. Significant
judgment is required in estimating such cash flows. Such estimated
cash flows are inherently uncertain, and there can be no assurance
that such operations will achieve the future cash flows reflected in
its projections. In December 2004, the Company's Thomas Regout
operations met the criteria under GAAP to be classified as "held for
sale" and thus was required to be measured at the lower of its
carrying amount or estimated fair value less cost to sell. At such
time, the Company recognized a $14.4 million impairment of the
goodwill related to such operations, as the carrying amount of the net
assets exceeded the estimated fair value less cost to sell of the
operations. The disposal of such operations was completed in January
2005, and therefore the Company no longer reports goodwill
attributable to such operations at December 31, 2005. See Note 10 to
the Consolidated Financial Statements.
Under applicable GAAP (SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets), property and equipment
is not assessed for impairment unless certain impairment indicators,
as defined, are present. During 2005, no impairment indicators were
present with respect to the Company's property and equipment.
o Deferred income tax assets. The Company records a valuation allowance
to reduce its deferred income tax assets to the amount that is
believed to be realizable under the "more-likely-than-not" recognition
criteria. The Company has considered future taxable income and ongoing
prudent and feasible tax planning strategies in assessing the need for
a valuation allowance. It is possible that in the future the Company
may change its estimate of the amount of the deferred income tax
assets that would "more-likely-than-not" be realized. This would
result in an adjustment to the deferred income tax asset valuation
allowance that would either increase or decrease, as applicable,
reported net income in the period the change in estimate is made.
In addition, the Company makes an evaluation at the end of each
reporting period as to whether or not some or all of the undistributed
earnings of its foreign subsidiaries are permanently reinvested (as
that term is defined in GAAP). While the Company may have concluded in
the past that some of such undistributed earnings are permanently
reinvested, facts and circumstances can change in the future, and it
is possible that a change in facts and circumstances, such as a change
in the expectation regarding the capital needs of its foreign
subsidiaries, could result in a conclusion that some or all of such
undistributed earnings are no longer permanently reinvested. In such
an event, the Company would be required to recognize a deferred income
tax liability in an amount equal to the estimated incremental U.S.
income tax and withholding tax liability that would be generated if
all of such previously-considered permanently reinvested undistributed
earnings were distributed to the U.S. In this regard, during 2005
CompX determined that certain of the undistributed earnings of its
non-U.S. operations could no longer be considered permanently
reinvested, and in accordance with GAAP CompX recognized an aggregate
$9.0 million provision for deferred income taxes on such undistributed
earnings of its foreign subsidiaries. See Note 8 to the Consolidated
Financial Statements.
Results of Operations
The Company's operating segments are defined as components of its
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company currently has three
operating segments - Security Products, Precision Slides and Ergonomics. The
Security Products segment, with manufacturing facilities in South Carolina and
Illinois, manufactures locking mechanisms and other security products for sale
to the office furniture, banking, vending, computer and other various
industries. In August 2005, CompX completed the acquisition of a component
products business. The results of the component products business acquired,
which are not material, are included with the Security Products segment in the
tables that follow. The Precision Slides segment, with facilities in Canada,
Michigan and Taiwan, manufactures and distributes a complete line of precision
ball bearing slides for use in office furniture, computer-related equipment,
tool storage cabinets and other applications. The Ergonomics segment
manufactures and distributes ergonomic computer support systems for office
furniture from a facility in Canada that it shares with the Precision Slides
segment. Prior to 2004, the Company had aggregated the Precision Slides and
Ergonomics operating segments into a single reportable segment, CompX Waterloo,
because of the integrated facility used by the two businesses and the similar
economic characteristics, customer types, production processes, and distribution
methods. During the fourth quarter of 2004, the Company began to measure the
ergonomics business as a separate operating unit and develop appropriate
allocations relating to certain shared expenses in order to disaggregate the
2004 operating results. Disaggregated information is not available for the year
ended December 31, 2003 due to the impracticality of allocating certain
historical expenses that are shared between the two segments. Therefore,
aggregated segment amounts are reported for Precision Slides/ Ergonomics for all
periods presented as well as the disaggregated information for 2004 and 2005.
Net sales and operating income
Years ended
December 31, % Change
-------------------- ---------
2004 2005 2004-2005
(In millions)
Net sales:
Precision Slides $ 78.5 $ 77.8 (1%)
Security Products 75.9 80.8 6%
Ergonomics 28.2 27.7 (2%)
------ ------
Total net sales $182.6 $186.3 2%
====== ======
Operating income:
Precision Slides $ 1.9 $ 4.0 111%
Security Products 9.5 11.2 18%
Ergonomics 4.0 3.9 (3)%
------ ------
Total operating income $ 15.4 $ 19.1 24%
====== ======
Operating income
margin:
Precision Slides 2% 5%
Security Products 13% 14%
Ergonomics 14% 14%
Total operating income margin 8% 10%
Years ended December 31, % Change
-------------------------- ----------------
2003 2004 2005 2003 - 2004 2004 - 2005
---- ---- ---- ----------- -----------
(In millions)
Net sales:
Precision Slides/
Ergonomics $ 97.8 $106.7 $105.5 9% (1%)
Security Products 76.2 75.9 80.8 (<1%) 6%
------ ------ ------
Total net sales $174.0 $182.6 $186.3 5% 2%
====== ====== ======
Operating income (loss):
Precision Slides/
Ergonomics $ (0.7) $ 5.9 7.9 n.m. 34%
Security Products 9.5 9.5 11.2 - 18%
------ ------ ------
Total operating
Income $ 8.8 $ 15.4 $ 19.1 75% 24%
====== ====== ======
Operating income (loss)
margin:
Precision Slides/
Ergonomics (1%) 6% 7%
Security Products 12% 13% 14%
Total operating income
Margin 5% 8% 10%
n.m. - not meaningful
Year ended December 31, 2005 compared to year ended December 31, 2004
Currency. CompX has substantial operations and assets located outside the
United States (in Canada and Taiwan). A portion of CompX's sales generated from
its non-U.S. operations are denominated in currencies other than the U.S.
dollar, principally the Canadian dollar and the New Taiwan dollar. In addition,
a portion of CompX's sales generated from its non-U.S. operations are
denominated in the U.S. dollar. Most raw materials, labor and other production
costs for such non-U.S. operations are denominated primarily in local
currencies. Consequently, the translated U.S. dollar values of CompX's foreign
sales and operating results are subject to currency exchange rate fluctuations
which may favorably or unfavorably impact reported earnings and may affect
comparability of period-to-period operating results. The effects of fluctuations
in currency exchange rates affect the Precision Slides and Ergonomics segments,
and do not materially affect the Security Products segment. During 2005,
currency exchange rate fluctuations positively impacted the Company's sales
comparisons with 2004, and negatively impacted the Company's operating income
comparisons for the same periods. 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.
Net sales were positively impacted while operating income was negatively
impacted by currency exchange rates in the following amounts by segment as
compared to the currency exchange rates in effect during 2004:
Precision Security
Slides Products Ergonomics Total
------- --------- --------- -------
Impact on net sales $ 1,115 $ - $426 $ 1,541
Impact on operating income (1,295) - (956) (2,251)
Net Sales. Net sales increased $3.7 million, or 2%, in 2005 compared to
2004 principally due to increases in selling prices for certain products across
all segments to recover volatile raw material prices, sales volume associated
with the business acquired in 2005, and the net effect of fluctuations in
currency exchange rates (as discussed above), partially offset by sales volume
decreases for certain products resulting from Asian competition.
Net sales of slide products in 2005 decreased 1% as compared to 2004, while
2005 net sales of security products increased 6% and net sales of ergonomic
products decreased 2% as compared to the same period. The percentage changes in
slide and ergonomic products include the impact resulting from changes in
foreign currency exchange rates. Sales of security products are generally
denominated in U.S. dollars.
Costs of Goods Sold. The Company's cost of goods sold was flat in 2005
compared to 2004, although net sales increased during the same period. The
resulting improvement in gross margin is primarily due to the ongoing favorable
impact of a continuous focus on reducing costs partially offset by the negative
impact of currency exchange rates.
Selling, General and Administrative Expense. Selling, general and
administrative expenses consists primarily of salaries, commissions and
advertising expenses directly related to product sales. As a percentage of net
sales, selling, general and administrative expense was 13% in each of 2004 and
2005, respectively.
Operating Income. Operating income for 2005 increased $3.7 million, or 24%
compared to 2004 and operating margins increased to 10% in 2005 compared to 8%
for 2004. Continued reductions in manufacturing, fixed overhead and other
overhead costs were partially offset by the effects of the changes in currency
exchange rates and higher raw material costs.
Year ended December 31, 2004 compared to year ended December 31, 2003
Currency. During 2004, currency exchange rate fluctuations of the Canadian
dollar positively impacted the Company's sales comparisons with 2003
(principally with respect to slide products), and negatively impacted the
Company's operating income comparisons for the same period.
Net sales were positively impacted while operating income was negatively
impacted by currency exchange rates in the following amounts as compared to
2003:
Precision Security
Slides Products Ergonomics Total
------ -------- ---------- -----
Impact on net sales $ 1,992 $ - $ 479 $ 2,471
Impact on operating income 173 - (296) (123)
Net Sales. Net sales increased $8.6 million, or 5%, in 2004 compared to
2003 principally due to increases in product prices for precision slides and
ergonomic products, which were primarily a pass through of steel cost increases
to customers. Additionally, currency exchange rates favorably impacted sales
within the precision slides and ergonomic product segments.
Net sales of slide products in 2004 increased 13% as compared to 2003,
while 2004 net sales of security products decreased less than 1% and net sales
of ergonomic products increased 1% as compared to the same period. The
percentage changes in slide and ergonomic products include the impact resulting
from changes in foreign currency exchange rates. Sales of security products are
generally denominated in U.S. dollars.
Costs of Goods Sold. The Company's cost of goods sold was flat in 2004
compared to 2003, although net sales increased during the same period. The
resulting improvement in gross margin was due to the full year impact of cost
improvement initiatives completed during 2003 partially offset by the negative
impact of the aforementioned changes in currency exchange rates and increases in
the cost of steel, the primary raw material for the Company's products.
Selling, General and Administrative Expense. As a percentage of net sales,
selling, general and administrative expense increased slightly from 12% of net
sales in 2003 to 13% in 2004. A significant portion of the increase was due to
costs relating to compliance with Section 404 of the Sarbanes-Oxley Act of 2002.
Operating Income. Operating income for 2004 increased $6.6 million, or 75%
compared to 2003 and operating margins increased to 8% in 2004 compared to 5%
for 2003. Continued reductions in manufacturing, fixed overhead and other
overhead costs were partially offset by the effects of the changes in currency
exchange rates and increases in certain raw material costs (primarily steel).
General
The Company's profitability primarily depends on its ability to utilize its
production capacity effectively, which is affected by, among other things, the
demand for its products and its ability to control its manufacturing costs,
primarily comprised of labor costs and raw materials such as zinc, copper,
coiled steel and plastic resins. Raw material costs represent approximately 51%
of the Company's total cost of sales. During 2003, 2004 and 2005, worldwide
steel prices increased significantly. The Company occasionally enters into raw
material supply arrangements to mitigate the short-term impact of future
increases in raw material costs. While these arrangements do not commit the
Company to a minimum volume of purchases, they generally provide for stated unit
prices based upon achievement of specified volume purchase levels. This allows
the Company to stabilize raw material purchase prices to a certain extent,
provided the specified minimum monthly purchase quantities are met. The Company
enters into such arrangements for zinc, coiled steel and plastic resins. The
Company anticipates further significant changes in the cost of these materials,
primarily coiled steel, from their current levels for the next year. Materials
purchased on the spot market are sometimes subject to unanticipated and sudden
price increases. Due to the competitive nature of the markets served by the
Company's products, it is often difficult to recover such increases in raw
material costs through increased product selling prices or raw material
surcharges. Consequently, overall operating margins may be affected by such raw
material cost pressures.
Other general corporate income (expense), net
As summarized in Note 11 to the Consolidated Financial Statements, "other
general corporate income (expense), net" primarily includes interest income..
Interest income for the years ended December 31, 2003 and 2004 includes interest
income on long-term intercompany notes receivable from the European Thomas
Regout operations of $1.4 million and $1.5 million, respectively. Upon the sale
of the Thomas Regout European operations in January 2005, the intercompany notes
receivable were extinguished and therefore no such interest income was recorded
during 2005.
Interest expense
Interest expense declined $.2 million in 2005 compared to 2004 and declined
$.8 million in 2004 compared to 2003 due primarily to lower average levels of
borrowing on CompX's revolving bank credit facility, partially offset by higher
interest rates. Interest expense in 2006 is expected to be comparable to 2005.
Provision for income taxes
The principal reasons for the difference between CompX's effective income
tax rates and the U.S. federal statutory income tax rates are explained in Note
8 to the Consolidated Financial Statements.
CompX became a member of Contran's consolidated U.S. federal income tax
group (the "Contran Tax Group") in October 2004. As a member of the Contran Tax
Group, CompX computes its provision for income taxes on a separate company
basis, using the tax elections made by Contran. One such election is whether to
claim a deduction or a tax credit against U.S. taxable income with respect to
foreign income taxes paid. During the first nine months of 2004, and prior to
CompX becoming a member of the Contran Tax Group, CompX was able to claim a tax
credit with respect to foreign income taxes paid. Consistent with elections of
the Contran Tax Group, in 2005 CompX is not claiming a credit with respect to
foreign income taxes paid but instead is claiming a tax deduction. This has
resulted in an increase in the Company's effective income tax rate for 2005
compared to 2004.
Under GAAP, a company is required to recognize a deferred income tax
liability with respect to the incremental U.S. income taxes (federal and state)
and foreign withholding taxes that would be incurred when undistributed earnings
of a foreign subsidiary are subsequently repatriated, unless management has
determined that those undistributed earnings are permanently reinvested for the
foreseeable future. Prior to the third quarter of 2005, CompX had not recognized
a deferred tax liability related to such incremental income taxes on the
undistributed earnings of certain of its foreign operations, as those earnings
were deemed to be permanently reinvested. GAAP requires a company to reassess
the permanent reinvestment conclusion on an ongoing basis to determine if
management's intentions have changed. As of September 30, 2005, and based
primarily upon changes in management's strategic plans for certain of CompX's
non-U.S. operations, management 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 2005 the Company recognized an aggregate $9.0 million provision for
deferred income taxes on the aggregate undistributed earnings of these foreign
subsidiaries.
The Company generated a $4.2 million tax benefit in 2004 associated with
the U.S. capital loss realized in the first quarter of 2005 upon the completion
of the sale of the Thomas Regout operations. However, the Company has determined
that realization of such benefit does not currently meet the more-likely-than
not recognition criteria and therefore, the deferred tax asset has been fully
offset by a deferred income tax asset valuation allowance at December 31, 2004
and December 31, 2005. The deferred income tax benefit and the offsetting
valuation allowance are both reflected as a component of discontinued
operations. See Note 8 to the Consolidated Financial Statements.
Discontinued operations
See Note 10 to the Consolidated Financial Statements.
Related party transactions
CompX is a party to certain transactions with related parties. It is the
policy of the Company to engage in transactions with related parties on terms,
in the opinion of the Company, no less favorable to the Company than could be
obtained from unrelated parties. See Note 12 to the Consolidated Financial
Statements.
Accounting principles not yet adopted
See Note 14 to the Consolidated Financial Statements.
Outlook
While demand has stabilized across most product segments, certain customers
continue to seek lower cost Asian sources as alternatives to the Company's
products. CompX believes the impact of this will be mitigated through ongoing
initiatives to expand both new products and new market opportunities. Asian
sourced competitive pricing pressures are expected to continue to be a challenge
as Asian manufacturers, particularly those located in China, gain market share.
The Company's strategy in responding to the competitive pricing pressure has
included reducing production cost through product reengineering, improvement in
manufacturing processes or moving production to lower-cost facilities, including
its own Asian based manufacturing facilities. The Company also has emphasized
and focused on opportunities where it can provide value-added customer support
services that Asian based manufacturers are generally unable to provide. The
combination of the Company's cost control initiatives together with its
value-added approach to development and marketing of products are believed to
help mitigate the impact of competitive pricing pressures.
The Company will continue to focus on cost improvement initiatives,
utilizing lean manufacturing techniques and prudent balance sheet management in
order to minimize the impact of lower sales, particularly to the office
furniture industry, and to develop value-added customer relationships with an
additional focus on sales of the Company's higher-margin ergonomic computer
support systems and security products to improve operating results. In addition,
the Company continues to develop sources for lower cost components for certain
product lines to strengthen its ability to meet competitive pricing when
practical. These actions, along with other activities to eliminate excess
capacity, are designed to position the Company to expand more effectively on
both new product and new market opportunities to improve Company profitability.
Liquidity and Capital Resources
Summary.
The Company's primary source of liquidity on an ongoing basis is its cash
flow from operating activities, which is generally used to (i) fund capital
expenditures, (ii) repay short-term or long-term indebtedness incurred primarily
for working capital or capital expenditure purposes and (iii) provide for the
payment of dividends (if declared). From time-to-time, the Company will incur
indebtedness, primarily for short-term working capital needs, or to fund capital
expenditures or business combinations. In addition, from time-to-time, the
Company may also sell assets outside the ordinary course of business, the
proceeds of which are generally used to repay indebtedness (including
indebtedness which may have been collateralized by the assets sold) or to fund
capital expenditures or business combinations.
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities, for 2003, 2004 and 2005 have
generally been similar to the trends in the Company's earnings. Depreciation and
amortization expense decreased in 2005 compared to 2004 due to timing that
capital expenditures were placed into service during 2005 versus 2004 as well as
the effect of the January 2005 disposal of the Thomas Regout operations in
Europe. Depreciation and amortization expense also decreased in 2004 compared to
2003 due to lower capital expenditures during 2004 as the Company reduced its
production capacity. See Notes 1, 4 and 10 to the Consolidated Financial
Statements.
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, year-to-year relative changes in
assets and liabilities can significantly affect the comparability of cash flows
from operating activities. The decrease in cash provided by operating activities
in 2005 compared to 2004 is primarily the result of changes in tax liabilities
due to the improvement in taxable income in 2004 and 2005. The Company's average
days sales outstanding related to its continuing operations increased from 38
days at December 31, 2004 to 40 days at December 31, 2005 due to the timing of
collection over the slightly higher accounts receivable balance at the end of
2005. The Company's average number of days in inventory related to its
continuing operations was 52 days at December 31, 2004 and 59 days at December
31, 2005. The increase in days in inventory is primarily due to higher raw
material prices, primarily steel.
Investing activities. Net cash used by investing activities totaled $8.2
million, $3.2 million, and $3.7 million for the years ended December 31, 2003,
2004 and 2005, respectively. Capital expenditures in the past three years
emphasized manufacturing equipment which utilize new technologies and increases
automation of the manufacturing process to provide for increased productivity
and efficiency.
In August 2005, CompX completed an acquisition of a company for $7.3
million, net of cash acquired. See Note 2 to the Consolidated Financial
Statements.
On January 24, 2005, CompX completed the disposition of all of the net
assets of its Thomas Regout precision slide and window furnishing operations,
conducted at its facility in the Netherlands, to members of Thomas Regout
management for net proceeds of approximately $22.3 million. The proceeds
consisted of cash (net of costs to sell) of approximately $18.1 million and a
subordinated note for approximately $4.2 million. The subordinated note requires
annual payments over a period of four years. Historically, the Thomas Regout
European operations have not contributed significantly to net cash flows from
operations. See Note 10 to the Consolidated Financial Statements.
In June 2004, the Company received approximately $2.1 million from the sale
of its surplus Trillium facility in Ontario, Canada, which approximated the net
carrying value of such facility.
Capital expenditures for 2006 are estimated at approximately $15.7 million,
the majority of which relates to projects that emphasize improved production
efficiency including replacement of equipment that is being retired. Firm
purchase commitments for capital projects in process at December 31, 2005
approximated $2.6 million.
Financing activities. Net cash used by financing activities totaled $7.3
million, $27.1 million, and $7.2 million in 2003, 2004 and 2005, respectively.
Total cash dividends paid in each of 2003 and 2004 were $1.9 million ($.125 per
share) and $7.6 million was paid in 2005 ($.50 per share). The Company suspended
its regular quarterly dividend in the second quarter of 2003 and reinstated the
regular quarterly dividend in the fourth quarter of 2004. The Company repaid a
net $5.0 million, $26.0 million and nil under its revolving bank credit facility
during 2003, 2004 and 2005, respectively.
The Company closed on an extension of its credit facility in December 2005.
The $50 million secured revolving bank credit facility is collateralized by 65%
of the ownership interests in the Company's first-tier non-United States
subsidiaries. Provisions contained in the Revolving Bank Credit Agreement could
result in the acceleration of outstanding indebtedness prior to its stated
maturity for reasons other than defaults from failing to comply with typical
financial covenants. For example, the Company's Credit Agreement allows the
lender to accelerate the maturity of the indebtedness upon a change of control
(as defined) of the borrower. The terms of the 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. See Note 6 to the
Consolidated Financial Statements.
Off balance sheet financing arrangements. Other than certain operating
leases discussed in Note 13 to the Consolidated Financial Statements, neither
CompX nor any of its subsidiaries or affiliates are parties to any off-balance
sheet financing arrangements.
Other
Management believes that cash generated from operations and borrowing
availability under the Credit Agreement, together with cash on hand, will be
sufficient to meet the Company's liquidity needs for working capital, capital
expenditures, debt service and dividends (if declared). To the extent that the
Company's actual operating results or other developments differ from the
Company's expectations, CompX's liquidity could be adversely affected.
The Company periodically evaluates its liquidity requirements, alternative
uses of capital, capital needs and available resources in view of, among other
things, its capital expenditure requirements, dividend policy and estimated
future operating cash flows. As a result of this process, the Company has in the
past and may in the future seek to raise additional capital, refinance or
restructure indebtedness, issue additional securities, repurchase shares of its
common stock, modify its dividend policy or take a combination of such steps to
manage its liquidity and capital resources. In the normal course of business,
the Company may review opportunities for acquisitions, joint ventures or other
business combinations in the component products industry. In the event of any
such transaction, the Company may consider using available cash, issuing
additional equity securities or increasing the indebtedness of the Company or
its subsidiaries.
Contractual obligations. As more fully described in the notes to the
Consolidated Financial Statements, the Company is a party to various debt, lease
and other agreements which contractually and unconditionally commit the Company
to pay certain amounts in the future. See Notes 6 and 13 to the Consolidated
Financial Statements. The following table summarizes such contractual
commitments as of December 31, 2005 by the type and date of payment.
Payments due by period
---------------------------
Less than 1 - 3 4 - 5
Total 1 year years years
----- --------- ----- -----
(In thousands)
Long-term debt $ 1,596 $ 171 $460 $965
Operating leases 869 501 356 12
Purchase obligations 16,885 16,885 - -
Income taxes 1,098 1,098 - -
Fixed asset acquisitions 2,587 2,587 - -
------- ------- ---- ---
Total contractual cash obligations $23,035 $21,242 $816 $977
======= ======= ==== ====
The timing and amount shown for the Company's commitments related to
long-term debt, operating leases and fixed asset acquisitions are based upon the
contractual payment amount and the contractual payment date for such
commitments. The timing and amount shown for purchase obligations, which consist
of all open purchase orders and contractual obligations (primarily commitments
to purchase raw materials) is also based on the contractual payment amount and
the contractual payment date for such commitments. The amount shown for income
taxes is the consolidated amount of income taxes payable at December 31, 2005,
which is assumed to be paid during 2006. Fixed asset acquisitions include firm
purchase commitments for capital projects.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
General. The Company is exposed to market risk from changes in foreign
currency exchange rates and interest rates. The Company periodically uses
currency forward contracts to manage a portion of foreign exchange rate risk
associated with receivables, or similar exchange rate risk associated with
future sales, denominated in a currency other than the holder's functional
currency. Otherwise, the Company does not generally enter into forward or option
contracts to manage such market risks, nor does the Company enter into any such
contract or other type of derivative instrument for trading or speculative
purposes. Other than the contracts discussed below, the Company was not a party
to any material forward or derivative option contract related to foreign
exchange rates or interest rates at December 31, 2004 and 2005. See Note 1 to
the Consolidated Financial Statements.
Interest rates. The Company is exposed to market risk from changes in
interest rates, primarily related to indebtedness.
At December 31, 2004 and 2005, the Company had no amounts outstanding under
its secured Revolving Bank Credit Agreement, and the Company's remaining
indebtedness outstanding is not material.
Foreign currency exchange rates. The Company is exposed to market risk
arising from changes in foreign currency exchange rates as a result of
manufacturing and selling its products outside the United States (principally
Canada and Taiwan). A portion of CompX's sales generated from its non-U.S.
operations are denominated in currencies other than the U.S. dollar, principally
the Canadian dollar and the New Taiwan dollar. In addition, a portion of CompX's
sales generated from its non-U.S. operations are denominated in the U.S. dollar.
Most raw materials, labor and other production costs for such non-U.S.
operations are denominated primarily in local currencies. Consequently, the
translated U.S. dollar value of CompX's foreign sales and operating results are
subject to currency exchange rate fluctuations which may favorably or
unfavorably impact reported earnings and may affect comparability of
period-to-period operating results.
As already mentioned certain of CompX's sales generated by its Canadian
operations are denominated in U.S. dollars. To manage a portion of the foreign
exchange rate market risk associated with receivables, or similar exchange rate
risk associated with future sales, at December 31, 2005 CompX held a series of
short-term forward exchange contracts maturing through March 2006 to exchange an
aggregate of $6.5 million for an equivalent value of Canadian dollars at an
exchange rate of Cdn. $1.19 per U.S. dollar. At December 31, 2005, the actual
exchange rate was Cdn. $1.17 per U.S. dollar. At each balance sheet date,
outstanding currency forward contracts are marked-to-market with any resulting
gain or loss recognized in income currently unless the contract is designated as
a hedge upon which the mark-to-market adjustment is recorded in other
comprehensive income. At December 31, 2004 CompX had entered into a series of
short-term forward exchange contracts maturing through March 2005 to exchange an
aggregate of $7.2 million for an equivalent value of Canadian dollars at
exchange rates of Cdn. $1.19 to Cdn. 1.23 per U.S. dollar. At December 31, 2004,
the actual exchange rate was Cdn. $1.21 per U.S. dollar. The estimated fair
value of such contracts is not material at December 31, 2004 and 2005.
Other. The above discussion includes forward-looking statements of market
risk which assume hypothetical changes in market prices. Actual future market
conditions will likely differ materially from such assumptions. Accordingly,
such forward-looking statements should not be considered to be projections by
the Company of future events or losses. Such forward-looking statements are
subject to certain risks and uncertainties some of which are listed in
"Business-General."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information called for by this Item is contained in a separate section
of this Annual Report. See "Index of Financial Statements and Schedule" (page
F-1).
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures. The Company maintains a
system of disclosure controls and procedures. The term "disclosure controls and
procedures," as defined by regulations of the Securities and Exchange Commission
(the "SEC"), means controls and other procedures that are designed to ensure
that information required to be disclosed in the reports that the Company files
or submits to the SEC under the Securities Exchange Act of 1934, as amended (the
"Act"), is recorded, processed, summarized and reported, within the time periods
specified in the SEC's rules and forms. Disclosure controls and procedures
include, without limitation, controls and procedures designed to ensure that
information required to be disclosed by the Company in the reports that it files
or submits to the SEC under the Act is accumulated and communicated to the
Company's management, including its principal executive officer and its
principal financial officer, or persons performing similar functions, as
appropriate to allow timely decisions to be made regarding required disclosure.
Each of David A. Bowers, the Company's Vice Chairman of the Board, President and
Chief Executive Officer, and Darryl R. Halbert, the Company's Vice President,
Chief Financial Officer and Controller, have evaluated the Company's disclosure
controls and procedures as of December 31, 2005. Based upon their evaluation,
these executive officers have concluded that the Company's disclosure controls
and procedures are effective as of the date of such evaluation.
Internal Control Over Financial Reporting. The Company also maintains a
system of internal control over financial reporting. The term "internal control
over financial reporting," as defined by regulations of the SEC, means a process
designed by, or under the supervision of, the Company's principal executive and
principal financial officers, or persons performing similar functions, and
effected by the Company's board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with accounting principles generally accepted in the United States of America
("GAAP"), and includes those policies and procedures that:
o Pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the
assets of the Company.
o Provide reasonable assurance that transactions are recorded as
necessary to permit preparation of financial statements in accordance
with GAAP, and that receipts and expenditures of the Company are being
made only in accordance with authorizations of management and
directors of the Company, and
o Provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use or disposition of the Company's
assets that could have a material effect on the Company's consolidated
financial statements.
As permitted by regulations of the SEC, the Company's system of internal control
over financial reporting excludes internal control over financial reporting
related to the Company's financial statement schedules required by Article 12 of
Regulation S-X. See the index of financial statements and schedules on page F-1
of this Annual Report.
Section 404 of the Sarbanes-Oxley Act of 2002 will require the Company to
annually include a management report on internal control over financial
reporting starting with the Company's Annual Report on Form 10-K for the year
ending December 31, 2007. The Company's independent registered public accounting
firm will also be required to annually attest to the Company's internal control
over financial reporting. In order to achieve compliance with Section 404, the
Company has been documenting, testing and evaluating its internal control over
financial reporting since 2004, using a combination of internal and external
resources. The process of documenting, testing and evaluating the Company's
internal control over financial reporting under the applicable guidelines is
complex and time consuming, and available internal and external resources
necessary to assist the Company in the documentation and testing required to
comply with Section 404 are limited. While the Company currently believes it has
dedicated the appropriate resources, that it will be able to fully comply with
Section 404 in its Annual Report on Form 10-K for the year ended December 31,
2007 and be in a position to conclude that the Company's internal control over
financial reporting is effective as of December 31, 2007, because the applicable
requirements are complex and time consuming, and because currently unforeseen
events or circumstances beyond the Company's control could arise, there can be
no assurance that the Company will ultimately be able to fully comply with
Section 404 in its Annual Report on Form 10-K for the year ending December 31,
2007 or whether it will be able to conclude that the Company's internal control
over financial reporting is effective as of December 31, 2007.
Changes in Internal Control Over Financial Reporting. There has been no
change to the Company's system of internal control over financial reporting
during the quarter ended December 31, 2005 that has materially affected, or is
reasonably likely to materially affect, the Company's system of internal control
over financial reporting.
Certifications. The Company's chief executive officer is required to
annually file a certification with the New York Stock Exchange ("NYSE"),
certifying the Company's compliance with the corporate governance listing
standards of the NYSE. During 2005, the Company's chief executive officer filed
such annual certification with the NYSE. The 2005 certification was qualified in
that, while the Company had publicly disclosed in its latest proxy statement
that the audit committee chairman presided at meetings of its independent
directors and how its stockholders might communicate directly with the audit
committee chairman, it had not publicly disclosed how other interested parties
could communicate with the presiding director of the non-management directors
and had not established procedures as to who presided at meetings of the
non-management directors. The Company remediated this qualification by amending
its corporate governance guidelines on November 2, 2005 and filing a Current
Report on Form 8-K with the SEC on November 30, 2005 disclosing that the audit
committee chairman presided at meetings of the non-management directors and how
stockholders and other interested parties might communicate with the presiding
director. The Company's chief executive officer and chief financial officer are
also required to, among other things, quarterly file a certification with the
SEC regarding the quality of the Company's public disclosures, as required by
Section 302 of the Sarbanes-Oxley Act of 2002. The certifications for the year
ended December 31, 2005 have been filed as exhibits 31.1 and 31.2 to this Annual
Report on Form 10-K.
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference to
CompX's definitive Proxy Statement to be filed with the Securities and Exchange
Commission pursuant to Regulation 14A within 120 days after the end of the
fiscal year covered by this report (the "CompX Proxy Statement").
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference to the
CompX Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference to the
CompX Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference to the
CompX Proxy Statement. See also Note 12 to the Consolidated Financial
Statements.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information required by this Item is incorporated by reference to the
CompX Proxy Statement.
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULE
(a) and (c) Financial Statements and Schedule
The Registrant
The consolidated financial statements and schedules listed on the
accompanying Index of Financial Statements and Schedules (see page
F-1) are filed as part of this Annual Report.
(b) Exhibits
Included as exhibits are the items listed in the Exhibit Index. CompX
will furnish a copy of any of the exhibits listed below upon payment
of $4.00 per exhibit to cover the costs to CompX of furnishing the
exhibits. Instruments defining the rights of holders of long-term debt
issues which do not exceed 10% of consolidated total assets will be
furnished to the Commission upon request. CompX will also furnish,
without charge, a copy of its Code of Business Conduct and Ethics, as
adopted by the Board of Directors on February 24, 2004, upon request.
Such requests should be directed to the attention of CompX's Corporate
Secretary at CompX's corporate offices located at 5430 LBJ Freeway,
Suite 1700, Dallas, Texas 75240. Item No. Exhibit Item
3.1 Restated Certificate of Incorporation of Registrant - incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form S-1 (File No. 333-42643).
3.2 Amended and Restated Bylaws of Registrant, adopted by the Board of
Directors August 31, 2002 - incorporated by reference to Exhibit 3.2
of the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2002.
10.1 Share Purchase Agreement with Subordinated Loan schedule between the
Registrant and Anchor Holding B.V. dated January 24, 2005. All related
schedules and annexes will be provided to the SEC upon request.
Incorporated by reference to Exhibit 10.1 of the Registrant's Annual
Report on Form 10-K for the year ended December 31, 2004.
10.2 Intercorporate Services Agreement between the Registrant and Contran
Corporation effective as of January 1, 2004 - incorporated by
reference to Exhibit 10.2 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2003.
10.3* CompX International Inc. 1997 Long-Term Incentive Plan - incorporated
by reference to Exhibit 10.2 of the Registrant's Registration
Statement on Form S-1 (File No. 333-42643).
10.4* CompX International Inc. Variable Compensation Plan effective as of
January 1, 1999 - incorporated by reference to Exhibit 10.4 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 1998.
Item No. Exhibit Item
10.5 Agreement between Haworth, Inc. and Waterloo Furniture Components,
Ltd. and Waterloo Furniture Components, Inc. effective October 1, 1992
- incorporated by reference to Exhibit 10.3 of the Registrant's
Registration Statement on Form S-1 (File No. 333-42643).
10.6 Tax Sharing Agreement between the Registrant, NL Industries, Inc. and
Contran Corporation dated as of October 5, 2004. Incorporated by
reference to Exhibit 10.6 of the Registrant's Annual Report on Form
10-K for the year ended December 31, 2004.
10.7 $47,500,000 Credit Agreement between the Registrant and Wachovia Bank,
National Association, as Agent and various lending institutions dated
January 22, 2003 - incorporated by reference to Exhibit 10.9 of the
Registrant's Annual Report on Form 10-K for the year ended December
31, 2002.
10.8 First Amendment to Credit Agreement between Registrant and Wachovia
Bank, National Association, as Agent and various lending institutions
dated October 20, 2003 - incorporated by reference to Exhibit 10.1 at
the Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 2003.
10.9 Second Amendment to Credit Agreement between Registrant and Wachovia
Bank, National Association, as Agent and various lending institutions
dated January 7, 2005 - incorporated by reference to Exhibit 10.9 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2004.
10.10 Third Amendment to Credit Agreement between Registrant and Wachovia
Bank, National Association, as Agent and various lending institutions
dated October 31, 2005 - incorporated by reference to Exhibit 10.1 to
the Registrant's Current Report on Form 8-K dated October 31, 2005.
10.11 Agreement Regarding Shared Insurance between the Registrant, Contran
Corporation, Keystone Consolidated Industries, Inc., Kronos Worldwide,
Inc., NL Industries, Inc., Titanium Metals Corp., and Valhi, Inc.
dated October 30, 2003 - incorporated by reference to Exhibit 10.12 of
the Registrant's Annual Report on Form 10-K for the year ended
December 31, 2003.
10.12 $50,000,000 Credit Agreement between the Registrant and Wachovia Bank,
National Association, as Agent and various lending institutions dated
December 23, 2005. Certain exhibits, annexes and similar attachments
to this Exhibit 10.11 have not been filed; upon request, the
Registrant will furnish supplementally to the SEC a copy of any
omitted exhibit, annex, or attachment.
21.1 Subsidiaries of the Registrant.
23.1 Consent of PricewaterhouseCoopers LLP.
31.1 Certification
31.2 Certification
32.1 Certification
32.2 Certification
* Management contract, compensatory plan or agreement.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ David A. Bowers
-----------------------------------------------
David A. Bowers
Vice Chairman of the Board,
President and Chief Executive Officer
(Principal Executive Officer)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons in the capacities and on the
dates indicated.
Signature Title Date
--------- ----- ----
/s/ Glenn R. Simmons Chairman of the Board March 16, 2006
-----------------------------
Glenn R. Simmons
/s/ David A. Bowers Vice Chairman of the Board, President March 16, 2006
-----------------------------
David A. Bowers and
Chief Executive Officer
(Principal Executive Officer)
/s/ Darryl R. Halbert Vice President, March 16, 2006
-----------------------------
Darryl R. Halbert Chief Financial Officer
and Controller
(Principal Financial and Accounting
Officer)
/s/ Paul M. Bass, Jr. Director March 16, 2006
-----------------------------
Paul M. Bass, Jr.
/s/ Keith R. Coogan Director March 16, 2006
-----------------------------
Keith R. Coogan
/s/ Edward J. Hardin Director March 16, 2006
-----------------------------
Edward J. Hardin
/s/ Ann Manix Director March 16, 2006
--------------------------------------
Ann Manix
/s/ Steven L. Watson Director March 16, 2006
-----------------------------
Steven L. Watson
Annual Report on Form 10-K
Items 8, 15(a) and 15(d)
Index of Financial Statements and Schedule
Financial Statements Page
Report of Independent Registered Public Accounting Firm F-2
Consolidated Balance Sheets - December 31, 2004 and 2005 F-3
Consolidated Statements of Operations -
Years ended December 31, 2003, 2004 and 2005 F-5
Consolidated Statements of Comprehensive Income -
Years ended December 31, 2003, 2004 and 2005 F-6
Consolidated Statements of Cash Flows -
Years ended December 31, 2003, 2004 and 2005 F-7
Consolidated Statements of Stockholders' Equity -
Years ended December 31, 2003, 2004 and 2005 F-9
Notes to Consolidated Financial Statements F-10
Financial Statement Schedule
Schedule II - Valuation and Qualifying Accounts S-2
Schedules I, III and IV are omitted because they are not applicable.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of CompX International Inc.:
In our opinion, the accompanying consolidated financial statements listed
in the accompanying index present fairly, in all material respects, the
financial position of CompX International Inc. and its Subsidiaries at December
31, 2005 and 2004, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 2005, in conformity
with accounting principles generally accepted in the United States of America.
In addition, in our opinion, the financial statement schedule listed in the
accompanying index present fairly, in all material respects, the information set
forth therein when read in conjunction with the related consolidated financial
statements. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with the standards of the Public
Company Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
PricewaterhouseCoopers LLP
Dallas, Texas
March 16, 2006
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 2004 and 2005
(In thousands, except share data)
ASSETS 2004 2005
---- ----
Current assets:
Cash and cash equivalents $ 16,803 $ 30,592
Accounts receivable, less allowance for
doubtful accounts of $394 and $312 19,212 20,609
Receivables from affiliates 635 620
Refundable income taxes 57 401
Inventories 20,782 22,538
Prepaid expenses and other current assets 1,390 1,496
Deferred income taxes 1,447 1,903
Current portion of note receivable - 2,612
Assets held for sale 17,957 -
-------- --------
Total current assets 78,283 80,771
-------- --------
Other assets:
Goodwill 29,012 35,678
Other intangible assets 1,703 2,317
Note receivable - 1,567
Assets held for sale 10,964 -
Other 195 230
-------- --------
Total other assets 41,874 39,792
-------- --------
Property and equipment:
Land 4,713 7,868
Buildings 29,995 31,165
Equipment 100,923 107,333
Construction in progress 2,299 2,015
-------- --------
137,930 148,381
Less accumulated depreciation 71,808 80,392
-------- -------
Net property and equipment 66,122 67,989
-------- --------
$186,279 $188,552
======== ========
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
December 31, 2004 and 2005
(In thousands, except share data)
LIABILITIES AND STOCKHOLDERS' EQUITY 2004 2005
---- ----
Current liabilities:
Accounts payable and accrued liabilities $ 18,304 $ 19,238
Income taxes payable to affiliates - 771
Income taxes 2,687 327
Liabilities related to assets held for sale 4,998 -
-------- --------
Total current liabilities 25,989 20,336
-------- --------
Noncurrent liabilities:
Deferred income taxes 4,949 16,692
Long-term debt 85 1,425
-------- --------
Total noncurrent liabilities 5,034 18,117
-------- --------
Stockholders' equity:
Preferred stock, $.01 par value; 1,000 shares
authorized, none issued - -
Class A common stock, $.01 par value;
20,000,000 shares authorized; 5,178,880 and
5,234,280 shares issued and outstanding 52 52
Class B common stock, $.01 par value;
10,000,000 shares authorized, issued and outstanding 100 100
Additional paid-in capital 108,828 109,556
Retained earnings 38,523 31,320
Accumulated other comprehensive income 7,753 9,071
-------- --------
Total stockholders' equity 155,256 150,099
-------- --------
$186,279 $188,552
======== ========
Commitments and contingencies (Notes 1, 10 and 13)
See accompanying notes to consolidated financial statements.
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Years ended December 31, 2003, 2004 and 2005
(In thousands, except per share data)
2003 2004 2005
---- ---- ----
Net sales $173,966 $182,631 $186,349
Cost of goods sold 142,877 142,807 142,594
-------- -------- --------
Gross margin 31,089 39,824 43,755
Selling, general and administrative expense 21,598 24,132 24,155
-------- -------- --------
Other operating income (expense):
Currency transaction gains (losses), net (546) 185 (71)
Disposition of property and equipment (166) (479) (467)
-------- -------- --------
Operating income 8,779 15,398 19,062
Other general corporate income (expense), 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
Provision for income taxes 3,376 7,840 18,568
-------- -------- --------
Income from continuing operations 5,778 9,483 882
Discontinued operations, net of tax (4,505) (12,497) (477)
-------- -------- --------
Net income (loss) 1,273 (3,014) 405
======== ======== ========
Basic and diluted earnings (loss) per common share:
Continuing operations $ .38 $ .63 $ .06
Discontinued operations $ (.30) $ (.83) $ (.03)
-------- -------- --------
$ .08 $ (.20) $ .03
======== ======== ========
Cash dividends per share $ .125 $ .125 $ .50
======== ======== ========
Shares used in the calculation of earnings per share amounts for:
Basic earnings per share 15,121 15,148 15,212
Dilutive impact of stock options - 18 19
-------- -------- --------
Diluted earnings per share 15,121 15,166 15,231
======== ======== ========
See accompanying notes to consolidated financial statements.
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Net income (loss) $ 1,273 $(3,014) $ 405
------- ------- -------
Other comprehensive income, net of tax:
Currency translation adjustment:
Arising during the period 12,946 5,036 544
Disposal of business unit - - 739
------- ------- -------
12,946 5,036 1,283
Unrealized gain on cash flow hedges - 75 35
------- ------- -------
Total other comprehensive income 12,946 5,111 1,318
------- ------- -------
Comprehensive income $14,219 $ 2,097 $ 1,723
======= ======= =======
See accompanying notes to consolidated financial statements.
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash flows from operating activities:
Net income (loss) $ 1,273 $ (3,014) $ 405
Depreciation and amortization 14,780 14,200 10,924
Goodwill impairment - 14,400 864
Deferred income taxes:
Continuing operations (444) (394) 10,120
Discontinued operations - - (187)
Other, net 1,068 861 985
Change in assets and liabilities:
Accounts receivable (721) 2,953 (133)
Inventories 5,103 (1,300) (936)
Accounts payable and accrued liabilities 874 (2,742) (520)
Accounts with affiliates 46 (1,247) 1,562
Income taxes 668 5,383 (2,770)
Other, net 1,798 1,113 (276)
-------- -------- --------
Net cash provided by operating activities 24,445 30,213 20,038
-------- -------- --------
Cash flows from investing activities:
Capital expenditures (8,908) (5,348) (10,490)
Acquisition, net of cash acquired - - (7,342)
Cash of disposed business unit - - (4,006)
Proceeds from disposal of assets held for sale - - 18,094
Proceeds from sale of fixed assets - 2,138 27
Other, net 671 - -
-------- -------- ---------
Net cash used by investing activities (8,237) (3,210) (3,717)
-------- -------- --------
Cash flows from financing activities:
Long-term debt:
Borrowings 1,000 2,257 18
Principal payments (6,006) (28,097) (93)
Issuance of common stock - 617 639
Dividends paid (1,889) (1,896) (7,608)
Other (426) (28) (114)
-------- -------- --------
Net cash used by financing activities (7,321) (27,147) (7,158)
-------- -------- --------
Net increase (decrease) $ 8,887 $ (144) $ 9,163
======== ======== ========
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Years ended December 31, 2003, 2004 and 2005
(In thousands)
2003 2004 2005
---- ---- ----
Cash and cash equivalents:
Net increase (decrease) from:
Operating, investing and financing
Activities $ 8,887 $ (144) $ 9,163
Currency translation 432 (545) 392
Balance at beginning of year 12,407 21,726 21,037
------- ------- -------
Balance at end of year $21,726 $21,037 $30,592
======= ======= =======
Cash and cash equivalents at end of period relate to:
Continuing operations $ 19,632 $ 16,803 $ 30,592
Assets held for sale 2,094 4,234 -
------ ------ ------
$21,726 $21,037 $30,592
======= ======= =======
Supplemental disclosures:
Cash paid for:
Interest $ 1,722 $ 516 $ 259
Income taxes 2,675 4,281 9,390
Noncash investing activities:
Note receivable received upon
disposal of business unit $ - $ - $ 4,179
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Years ended December 31, 2003, 2004 and 2005
(In thousands)
Accumulated other
comprehensive income
Common stock Additional ----------------------- Total
------------------ paid-in Retained Currency Hedging Treasury stockholders'
Class A Class B capital earnings translation derivatives stock equity
------- ------- ---------- ---------- ----------- ----------- ----------- ---------
Balance at December 31, 2002 $ 62 $100 $119,387 $44,049 $(10,304) $ - $(11,315) $141,979
Net income - - - 1,273 - - - 1,273
Other comprehensive income - - - - 12,946 - - 12,946
Cash dividends - - - (1,889) - - - (1,889)
Issuance of common stock - - 50 - - - - 50
---- ---- -------- ------- -------- ---- -------- --------
Balance at December 31, 2003 62 100 119,437 43,433 2,642 - (11,315) 154,359
Net loss - - - (3,014) - - - (3,014)
Other comprehensive income - - - - 5,036 75 - 5,111
Cash dividends - - - (1,896) - - - (1,896)
Issuance of common stock 1 - 695 - - - - 696
Retirement of treasury stock (11) - (11,304) - - - 11,315 -
---- ---- -------- ------- -------- ---- -------- -----
Balance at December 31, 2004 52 100 108,828 38,523 7,678 75 - 155,256
Net income - - - 405 - - - 405
Other comprehensive income - - - - 1,283 35 - 1,318
Cash dividends - - - (7,608) - - - (7,608)
Issuance of common stock - 728 - - - - 728
---- ---- -------- ------- -------- ---- -------- --------
Balance at December 31, 2005 $ 52 $100 $109,556 $31,320 $ 8,961 $110 $ - $150,099
==== ==== ======== ======= ======== ==== ======== ========
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Summary of significant accounting policies:
Organization. CompX International Inc. (NYSE: CIX) is 83% owned by CompX
Group, a majority owned subsidiary of NL Industries, Inc. (NYSE: NL) at December
31, 2005. The Company manufactures and sells component products (precision ball
bearing slides, security products and ergonomic computer support systems). NL
owns 82% of CompX Group, and Titanium Metals Corporation (NYSE: TIE) ("TIMET")
owns the remaining 18% of CompX Group. At December 31, 2005, (i) NL and TIMET
own an additional 2% and 3%, respectively, of CompX directly, (ii) Valhi, Inc.
holds, directly or through a subsidiary, approximately 83% of NL's outstanding
common stock and approximately 39% of TIMET's outstanding common stock and (iii)
Contran Corporation holds, directly or through subsidiaries, approximately 92%
of Valhi's outstanding common stock. Substantially all of Contran's outstanding
voting stock is held by trusts established for the benefit of certain children
and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or
is held by Mr. Simmons or persons or other entities related to Mr. Simmons.
Consequently, Mr. Simmons may be deemed to control each of such companies and
the Company.
Management estimates. The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
("GAAP") requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements, and the reported amount
of revenues and expenses during the reporting period. Actual results may differ
significantly from previously-estimated amounts under different assumptions or
conditions.
Principles of consolidation. The accompanying consolidated financial
statements include the accounts of CompX International Inc. and its
majority-owned subsidiaries. All material intercompany accounts and balances
have been eliminated. Certain prior year amounts have been reclassified to
conform to the current year presentation. The Company has no involvement with
any variable interest entity covered by the scope of FASB Interpretation No.
46R, Consolidation of Variable Interest Entities.
Fiscal year. The Company's operations are reported on a 52 or 53-week
fiscal year. Excluding 2004, each of the years ended December 31, 2003 through
2005 consisted of 52 weeks. The year ended December 31, 2004 consisted of 53
weeks.
Translation of foreign currencies. Assets and liabilities of subsidiaries
whose functional currency is other than the U.S. dollar are translated at
year-end rates of exchange, and revenues and expenses are translated at average
exchange rates prevailing during the year. Resulting translation adjustments are
accumulated in stockholders' equity as part of accumulated other comprehensive
income, net of related applicable deferred income taxes. Currency transaction
gains and losses are recognized in income currently.
Cash and cash equivalents. Cash equivalents consist principally of bank
time deposits and government and commercial notes with original maturities of
three months or less.
Net sales. Sales are recorded when products are shipped and title and other
risks and rewards of ownership have passed to the customer. Shipping terms are
generally F.O.B. shipping point, although in some instances, shipping terms are
F.O.B. destination point (for which sales are recognized when the product is
received by the customer). Amounts charged to customers for shipping and
handling are not material. Sales are stated net of price, early payment and
distributor discounts and volume rebates.
Accounts receivable. The Company provides an allowance for doubtful
accounts for known and estimated potential losses rising from sales to customers
based on a periodic review of these accounts.
Inventories and cost of sales. Inventories are stated at the lower of cost
or market, net of allowance for obsolete and slow-moving inventories ($1.2
million at December 31, 2004 and 2005). Inventories are based on average cost or
the first-in, first-out method. Cost of sales includes costs for materials,
packing and finishing, shipping and handling, utilities, salary and benefits,
maintenance and depreciation.
Selling, general and administrative expenses. Selling, general and
administrative expenses include costs related to marketing, sales, distribution,
research and development and administrative functions such as accounting,
treasury and finance, and includes costs for salaries and benefits, travel and
entertainment, promotional materials and professional fees.
Goodwill and other intangible assets; amortization expense. Goodwill
represents the excess of cost over fair value of individual net assets acquired
in business combinations accounted for by the purchase method. Goodwill is not
subject to periodic amortization. Other intangible assets are stated net of
accumulated amortization. Goodwill and other intangible assets are assessed for
impairment in accordance with Statement of Financial Accounting Standards
("SFAS") No. 142, Goodwill and Other Intangible Assets. See Note 4.
Other intangible assets, consisting principally of the estimated fair value
of certain patents acquired, are amortized by the straight-line method over
their estimated useful lives (approximately 10 years remaining at December 31,
2005), with no assumed residual value at the end of the life of the intangible
assets. Other intangible assets are stated net of accumulated amortization of
$1.7 million at December 31, 2004 and $2.3 million at December 31, 2005.
Amortization expense of intangible assets was $234,000 in 2003, $231,000 in 2004
and $314,000 in 2005, and is expected to be approximately $300,000 in each of
2005 through 2009.
Property and equipment; depreciation expense. Property and equipment,
including purchased computer software for internal use, are stated at cost.
Depreciation for financial reporting purposes is computed principally by the
straight-line method over the estimated useful lives of 15 to 40 years for
buildings and 3 to 10 years for equipment and software. Accelerated depreciation
methods are used for income tax purposes, as permitted. Depreciation expense
related to continuing operations was $11.8 million in 2003, $11.5 million in
2004, and $10.6 million in 2005. Upon sale or retirement of an asset, the
related cost and accumulated depreciation are removed from the accounts and any
gain or loss is recognized in income currently. Expenditures for maintenance,
repairs and minor renewals are expensed; expenditures for major improvements are
capitalized.
When events or changes in circumstances indicate that assets may be
impaired, an evaluation is performed to determine if an impairment exists. Such
events or changes in circumstances include, among other things, (i) significant
current and prior periods or current and projected periods with operating
losses, (ii) a significant decrease in the market value of an asset or (iii) a
significant change in the extent or manner in which an asset is used. All
relevant factors are considered. The test for impairment is performed by
comparing the estimated future undiscounted cash flows (exclusive of interest
expense) associated with the asset to the asset's net carrying value to
determine if a write-down to market value or discounted cash flow value is
required. The Company assesses impairment of property and equipment in
accordance with SFAS No. 144, Accounting for the Impairment or Disposal of
Long-Lived Assets.
Self-insurance. The Company is partially self-insured for workers'
compensation and certain employee health benefits and is self-insured for most
environmental issues. Stop-loss coverage is purchased by the Company in order to
limit its exposure to any significant levels of workers' compensation or
employee health benefit claims. Self-insured losses are accrued based upon
estimates of the aggregate liability for uninsured claims incurred using certain
actuarial assumptions followed in the insurance industry and the Company's own
historical claims experience.
Derivatives and hedging activities. Certain of the Company's sales
generated by its non-U.S. operations are denominated in U.S. dollars. The
Company periodically uses currency forward contracts to manage a very nominal
portion of foreign exchange rate risk associated with receivables denominated in
a currency other than the holder's functional currency or similar exchange rate
risk associated with future sales. The Company has not entered into these
contracts for trading or speculative purposes in the past, nor does the Company
currently anticipate entering into such contracts for trading or speculative
purposes in the future. Derivatives used to hedge forecasted transactions and
specific cash flows associated with foreign currency denominated financial
assets and liabilities which meet the criteria for hedge accounting are
designated as cash flow hedges. Consequently, the effective portion of gains and
losses is deferred as a component of accumulated other comprehensive income and
is recognized in earnings at the time the hedged item affects earnings.
Contracts that do not meet the criteria for hedge accounting are
marked-to-market at each balance sheet date with any resulting gain or loss
recognized in income currently as part of net currency transactions. To manage
such exchange rate risk, at December 31, 2005, the Company held a series of
contracts to exchange an aggregate of U.S. $6.5 million for an equivalent value
of Canadian dollars at an exchange rate of Cdn. $1.19 per U.S. dollar. Such
contracts mature through March 2006. The exchange rate was $1.17 per U.S. dollar
at December 31, 2005. At December 31, 2004 the Company held contracts maturing
through March 2005 to exchange an aggregate of U.S. $7.2 million for an
equivalent value of Canadian dollars at exchange rates of Cdn. $1.19 to Cdn.
$1.23 per U.S. dollar. At December 31, 2004, the actual exchange rate was Cdn.
$1.21 per U.S. dollar. The estimated fair value of such contracts is not
material at December 31, 2004 and 2005.
Income taxes. Prior to October 1, 2004, the Company was a separate United
States federal income taxpayer and was not a member of Contran's consolidated
United States federal income tax group (the "Contran Tax Group"). Effective
October 1, 2004, CompX became a member of the Contran Tax Group. The Company is
currently and has been a part of consolidated tax returns filed by Contran in
certain United States state jurisdictions. As a member of the Contran Tax Group,
the Company is jointly and severally liable for the federal income tax liability
of Contran and the other companies included in the Contran Tax Group for all
periods in which the Company is included in the Contran Tax Group. See Note 13.
For such consolidated federal and state tax returns, intercompany allocations of
federal and state tax provisions are computed on a separate company basis.
Payments are made to, or received from Contran in the amounts that would have
generally been paid to or received from the respective federal or state tax
authority had CompX not been a member of the Contran Tax Group. The separate
company provisions and payments are computed using the tax elections made by
Contran. Under certain circumstances, such tax regulations could require Contran
to treat items differently than CompX would on a stand alone basis, and in such
instances GAAP requires CompX to conform to Contran's tax election. The Company
made net cash payments to NL Industries, Inc. for federal and state income taxes
(or to Valhi, Inc. for periods prior to the fourth quarter of 2004, for state
income taxes) of $2.3 million in 2004 and $3.5 million in 2005. The Company made
no payments to affiliates for income taxes in 2003.
Deferred income tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between the income tax and
financial reporting carrying amounts of assets and liabilities, including
undistributed earnings of foreign subsidiaries which are not permanently
reinvested. Earnings of foreign subsidiaries subject to permanent reinvestment
plans aggregated $31.3 million at December 31, 2004 and $5.5 million at December
31, 2005. Determination of the amount of unrecognized deferred tax liability on
such permanent reinvestment plans was not practicable. The Company periodically
evaluates its deferred tax assets in the various taxing jurisdictions in which
it operates and adjusts any related valuation allowance based on the estimate of
the amount of such deferred tax assets which the Company believes does not meet
the "more-likely-than-not" recognition criteria.
Earnings per share. Basic earnings per share of common stock is based upon
the weighted average number of common shares actually outstanding during each
period. Diluted earnings per share of common stock includes the impact of
outstanding dilutive stock options. The weighted average number of outstanding
stock options excluded from the calculation of diluted earnings per share
because their impact would have been antidilutive aggregated approximately
713,000 in 2003, 570,000 in 2004 and 495,000 in 2005.
Stock options. At December 31, 2005, the Company has a stock-based employee
compensation plan, which is described more fully in Note 9. The Company accounts
for stock-based employee compensation related to stock options using the
intrinsic value method in accordance with Accounting Principles Board Opinion
("APBO") No. 25, Accounting for Stock Issued to Employees, and its various
interpretations. Under APBO No. 25, no compensation cost is generally recognized
for fixed stock options in which the exercise price is greater than or equal to
the market price on the grant date. Compensation cost and the income tax benefit
related to such compensation cost) recognized by the Company related to stock
options in accordance with APBO No. 25 has not been significant in any of the
past three years. No compensation cost was capitalized as part of assets
(inventories or fixed assets) during 2003, 2004, and 2005. The following table
illustrates the effect on net income (loss) and earnings (loss) per share if the
Company 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.
Years ended December 31,
2003 2004 2005
---- ---- ----
(In thousands,
except per share data)
Net income (loss), as reported $1,273 $(3,014) $ 405
Deduct: Total stock-based employee
compensation expense related to stock options
determined under fair value based method
for all awards, net of related tax effects (875) (543) (109)
------ ------- -------
Pro forma net income (loss) $ 398 $(3,557) $ 296
====== ======= =======
Earnings (loss) per share - basic and diluted:
As reported $ .08 $ (.19) $ .03
====== ======= =======
Pro forma $ .03 $ (.23) $ .02
====== ======= =======
Fair value of financial instruments. The carrying amounts of accounts
receivable and accounts payable approximates fair value due to their short-term
nature. The carrying amount of indebtedness approximates fair value due to the
stated interest rate approximating a market rate. These estimated fair value
amounts have been determined using available market information or other
appropriate valuation methodologies.
Other. Advertising costs related to continuing operations, expensed as
incurred, were $588,000 in 2003, $554,000 in 2004 and $686,000 in 2005. Research
and development costs related to continuing operations, expensed as incurred,
were $469,000 in 2003, $317,000 in 2004, and $225,000 in 2005.
Note 2 - Business and geographic segments:
The Company's operating segments are defined as components of its
operations about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in determining how to
allocate resources and in assessing performance. The Company's chief operating
decision maker is Mr. David A. Bowers, president and chief executive officer of
the Company. The Company currently has three operating segments - Security
Products, Precision Slides and Ergonomics. The Security Products segment, with
manufacturing facilities in South Carolina and Illinois, manufactures locking
mechanisms and other security products for sale to the office furniture,
banking, vending, computer and other industries. In August 2005, CompX completed
the acquisition of a component products business for aggregate cash
consideration of $7.3 million, net of cash acquired. The purchase price has been
allocated among tangible and intangible net assets acquired based upon an
estimate of the fair value of such net assets. The pro forma effect to CompX
assuming such acquisition had been completed as of January 1, 2005, is not
material. 2005 results of the acquired component product business have been
included with Security Products since the date of acquisition. The Precision
Slides segment, with facilities in Canada, Michigan and Taiwan, manufacture and
distribute a complete line of precision ball bearing slides for use in office
furniture, computer-related equipment, tool storage cabinets and other
applications. The Ergonomics segment with a facility in Canada that it shares
with Precision Slides, manufactures and distributes ergonomic computer support
systems for office furniture. Previously, the Company had aggregated the
Precision Slides and Ergonomics operating segments into a single reportable
segment (CompX Waterloo) because of the integrated facilities of the two
business units and the similar economic characteristics, customer types,
production processes, and distribution methods. During the fourth quarter of
2004, the Company began to measure the ergonomics business as a separate
operating unit and develop appropriate allocations relating to certain shared
expenses in order to disaggregate the 2004 operating results. Prior to 2004,
disaggregated information is not available due to the impracticality of
allocating certain historical expenses that are shared between the two segments.
Therefore, aggregated segment amounts are reported for Precision
Slides/Ergonomics in current and previous periods as well as the disaggregated
information for 2004 and 2005.
The chief operating decision maker evaluates segment performance based on
segment operating income, which is defined as income before income taxes, and
interest expense, exclusive of certain general corporate income and expense
items (primarily interest income) and certain non-recurring items (such as gains
or losses on the disposition of business units and other long-lived assets
outside the ordinary course of business). For the year ending December 31, 2005,
operating income was redefined to include foreign exchange transaction gains and
losses and gains and losses from the disposal of property and equipment. Prior
period segment information has been restated to conform to the current period
classification. All corporate office operating expenses are allocated to the
three reportable segments based upon the segments' net sales. Corporate office
operating expense was $3.7 million in 2003, $5.1 million in 2004, and $5.5
million in 2005. Corporate operating expense was allocated to each of the
reportable segments as follows: Precision Slides - $2.2 million in 2004 and $2.3
million in 2005; Ergonomics - $0.8 million in 2004 and 2005; Security Products -
$1.6 million in 2003, $2.1 million in 2004 and $2.4 million in 2005; and CompX
Waterloo - $2.1 million in 2003. The accounting policies of the reportable
operating segments are the same as those described in Note 1. Capital
expenditures include additions to property and equipment, but exclude amounts
attributable to business combinations accounted for by the purchase method.
Segment assets are comprised of all assets attributable to the reportable
segments. Corporate assets are not attributable to the operating segments and
consist primarily of cash, cash equivalents and notes receivable. For geographic
information, net sales are attributable to the place of manufacture (point of
origin) and the location of the customer (point of destination); property and
equipment are attributable to their physical location. At December 31, 2004 and
2005, the net assets of non-U.S. subsidiaries included in consolidated net
assets approximated $80 million ($36 million of which relates to the
discontinued European operations) and $45 million, respectively.
The 2004 and 2005 segment information below is presented under the new
basis of segmentation. Total assets have not been presented under the new
segmentation as management has determined that such information is impractical
to obtain and no measure of asset information is used by the chief operating
decision maker.
Years ended
December 31,
2004 2005
---- ----
(In thousands)
Net sales:
Precision Slides $ 78,522 $ 77,854
Security Products 75,872 80,825
Ergonomics 28,237 27,670
-------- --------
Total net sales $182,631 $186,349
======== ========
Operating income:
Precision Slides $ 1,867 $ 3,992
Security Products 9,489 11,186
Ergonomics 4,042 3,884
-------- --------
Total operating income 15,398 19,062
Interest expense (494) (336)
Other general corporate income (expense), net 2,419 724
-------- --------
Income from continuing operations before
income taxes $ 17,323 $ 19,450
======== ========
Depreciation and amortization:
Precision Slides $ 6,458 $ 5,570
Security Products 4,237 4,102
Ergonomics 1,084 1,252
Thomas Regout** 2,421 -
-------- --------
$ 14,200 $ 10,924
======== ========
Capital expenditures:
Precision Slides $ 2,109 $ 4,520
Security Products 2,432 4,941
Ergonomics 412 1,029
Thomas Regout** 395 -
-------- --------
$ 5,348 $ 10,490
======== ========
Goodwill:
Precision Slides $ 5,270 $ 6,594
Security Products 23,742 29,084
-------- --------
$ 29,012 $ 35,678
======== ========
The segment information below is presented under the old basis of
segmentation for comparison to 2003.
Years ended December 31,
2003 2004 2005
---- ---- ----
(In thousands)
Net sales:
CompX Waterloo $ 97,811 $106,759 $105,524
Security Products 76,155 75,872 80,825
-------- -------- --------
Total net sales $173,966 $182,631 $186,349
======== ======== ========
Operating income (loss):
CompX Waterloo $ (698) 5,909 7,876
Security Products 9,477 9,489 11,186
-------- -------- --------
Total operating income 8,779 15,398 19,062
Interest expense (1,301) (494) (336)
Other general corporate income (expense), net 1,676 2,419 724
-------- -------- --------
Income from continuing operations
before income taxes $ 9,154 $ 17,323 $ 19,450
======== ======== ========
Depreciation and amortization:
CompX Waterloo $ 7,281 $ 7,542 $ 6,822
Security Products 4,843 4,237 4,102
Thomas Regout** 2,656 2,421 -
-------- -------- --------
$ 14,780 $ 14,200 $ 10,924
======== ======== ========
Capital expenditures:
CompX Waterloo $ 6,446 $ 2,521 $ 5,549
Security Products 1,901 2,432 4,941
Thomas Regout** 561 395 -
-------- -------- --------
$ 8,908 $ 5,348 $ 10,490
======== ======== ========
Years ended December 31,
2003 2004 2005
---- ---- ----
(In thousands)
Net sales:
Point of origin:
United States $ 94,298 $ 99,807 $113,510
Canada 76,443 74,157 63,918
Taiwan 13,562 16,034 14,213
Eliminations (10,337) (7,367) (5,292)
-------- -------- --------
$173,966 $182,631 $186,349
======== ======== ========
Point of destination:
United States $127,032 $138,136 $149,487
Canada 32,363 33,205 25,015
Other 14,571 11,290 11,847
-------- -------- --------
$173,966 $182,631 $186,349
======== ======== ========
December 31,
2003 2004 2005
---- ---- ----
(In thousands)
Total assets:
CompX Waterloo $ 91,131 $ 78,932 $ 80,879
Security Products 77,961 72,981 87,806
Thomas Regout** 38,595 28,921 -
Corporate and eliminations 3,056 5,445 19,867
-------- -------- --------
$210,743 $186,279 $188,552
======== ======== ========
Goodwill:
CompX Waterloo $ 4,986 $ 5,270 $ 6,594
Security Products 23,743 23,742 29,084
-------- -------- --------
$ 28,729 $ 29,012 $ 35,678
======== ======== ========
Net property and equipment:
United States $ 44,499 $ 41,328 $ 42,751
Canada 23,341 19,114 16,978
Taiwan 5,710 5,680 8,260
-------- -------- --------
$ 73,550 $ 66,122 $ 67,989
======== ======== ========
** Denotes discontinued segment. See Note 10.
Note 3 - Inventories:
December 31,
2004 2005
---- ----
(In thousands)
Raw materials $ 4,579 $ 7,098
Work in process 9,019 9,899
Finished products 7,184 5,541
------- -------
$20,782 $22,538
======= =======
Note 4 - Goodwill:
The Company has assigned its goodwill to each of its reporting units (as
that term is defined in SFAS No. 142) which correspond to the operating
segments. Under SFAS No. 142, such goodwill will be deemed to not be impaired if
the estimated fair value of the applicable reporting unit exceeds the respective
net carrying value of such reporting unit, including the allocated goodwill. If
the fair value of the reporting unit is less than carrying value, then a
goodwill impairment loss would be recognized equal to the excess, if any, of the
net carrying value of the reporting unit goodwill over its implied fair value
(up to a maximum impairment equal to the carrying value of the goodwill). The
implied fair value of reporting unit goodwill would be the amount equal to the
excess of the estimated fair value of the reporting unit over the amount that
would be allocated to the tangible and intangible net assets of the reporting
unit (including unrecognized intangible assets) as if such reporting unit had
been acquired in a purchase business combination accounted for in accordance
with GAAP as of the date of the impairment testing.
In determining the estimated fair value of the reporting units, the Company
uses appropriate valuation techniques, such as discounted cash flows. In
accordance with the requirements of SFAS No. 142, the Company reviews goodwill
for impairment during the third quarter of each year. Goodwill will also be
reviewed for impairment at other times during each year when events or changes
in circumstances indicate that an impairment might be present. No goodwill
impairments relating to continuing operations were deemed to exist as a result
of the Company's annual impairment review completed during 2003, 2004 or 2005.
However, the Company did recognize an impairment of goodwill related to its
disposed European Thomas Regout operations in December 2004. See Note 10.
Changes in the carrying amount of goodwill related to continuing operations
during the past three years is presented in the table below. Goodwill was
generated principally from acquisitions of certain business units during 1998,
1999, 2000, and the current acquisition in August of 2005. See Note 2.
Precision Security
Slides Products Total
--------- -------- -----
(In millions)
Balance at December 31, 2002 $ 4.9 $23.7 $28.6
Changes in currency
exchange rates .1 - .1
----- ----- -----
Balance at December 31, 2003 5.0 23.7 28.7
Changes in currency
exchange rates .3 - .3
----- ----- -----
Balance at December 31, 2004 5.3 23.7 29.0
Goodwill acquired during the year 1.5 5.4 6.9
Changes in currency
exchange rates (.2) - (.2)
----- ----- -----
Balance at December 31, 2005 $ 6.6 $29.1 $35.7
===== ===== =====
Note 5 - Accounts payable and accrued liabilities:
December 31,
2004 2005
---- ----
(In thousands)
Accounts payable $ 6,392 $ 7,022
Accrued liabilities:
Employee benefits 7,987 8,179
Customer tooling 600 1,319
Professional 730 720
Insurance 448 516
Taxes other than on income 399 299
Sales rebates 291 110
Other 1,457 1,073
------- -------
$18,304 $19,238
======= =======
Note 6 - Indebtedness:
December 31,
2004 2005
---- ----
(In thousands)
Other indebtedness $ 127 $ 1,596
Less current portion 42 171
------- -------
$ 85 $ 1,425
======= =======
At December 31, 2005, the Company has a $50 million secured revolving bank
credit facility that matures in January 2009 and bears interest, at the
Company's option, at rates based on either the prime rate or LIBOR. The credit
facility is collateralized by 65% of the ownership interests in the Company's
first-tier foreign subsidiaries. The facility contains certain covenants and
restrictions customary in lending transactions of this type, which among other
things, restricts the ability of CompX and its subsidiaries to incur debt, incur
liens, pay dividends or merge or consolidate with, or transfer all or
substantially all of their assets to, another entity. The facility also requires
maintenance of specified levels of net worth (as defined). In the event of a
change of control of CompX, as defined, the lenders would have the right to
accelerate the maturity of the facility. At December 31, 2005, there were no
outstanding draws against the credit facility and the full amount of the
facility was available for borrowing. The current portion of long-term debt,
relating to other indebtedness at December 31, 2004 and 2005, is included with
"Accounts payable and accrued liabilities" per the Consolidated Balance Sheets.
The credit facility permits the Company to pay dividends and/or repurchase
its common stock in an amount equal to the sum of (i) a dividend of $.125 per
share in any calendar quarter, not to exceed $8.0 million in any calendar year,
plus (ii) $20.0 million plus 50% of aggregate net income over the term of the
credit facility. In addition to the $8.0 million available annually to
repurchase common stock and or pay dividends, at December 31, 2005, $21.2
million was available for dividends and/or repurchases of the Company's common
stock under the terms of the facility.
Other indebtedness at December 31, 2005 includes certain industrial revenue
bonds assumed in connection with the August 2005 business acquisition discussed
in Note 2. Such indebtedness was prepaid in January 2006 for an amount equal to
its carrying value.
Note 7 - Employee benefit plans:
Defined contribution plans. The Company maintains various defined
contribution plans with Company contributions based on matching or other
formulas. Defined contribution plan expense related to continuing operations
approximated $1,810,000 in 2003, $1,838,000 in 2004 and $2,309,000 in 2005.
Note 8 - Income taxes:
The components of pre-tax income and the provision for income taxes
attributable to continuing operations, the difference between the provision for
income taxes and the amount that would be expected using the U.S. federal
statutory income tax rate of 35% and the comprehensive provision for income
taxes are presented below.
Years ended December 31,
2003 2004 2005
---- ---- ----
(In thousands)
Components of pre-tax income (loss) from continuing operations:
United States $ 6,258 $ 8,148 $10,564
Non-U.S. 2,896 9,175 8,886
------- ------- -------
$ 9,154 $17,323 $19,450
======= ======= =======
Provision for income taxes:
Currently payable:
U.S. federal and state $ 121 $ 4,016 $ 4,920
Foreign 1,326 4,732 3,528
------- ------- -------
1,447 8,748 8,448
------- ------- -------
Deferred income taxes (benefit):
U.S. federal and state 2,061 (273) 10,215
Foreign (132) (635) (95)
------- ------- -------
1,929 (908) 10,120
------- ------- -------
$ 3,376 $ 7,840 $18,568
======= ======= =======
Expected tax expense, at the U.S. federal
statutory income tax rate of 35% $ 3,204 $ 6,063 $ 6,808
Non-U.S. tax rates (157) (297) (253)
Incremental U.S. tax on earnings of
foreign subsidiaries 562 3,206 12,006
State income taxes and other, net (233) (377) 224
Tax contingency reserve adjustment, net - (755) (217)
------- ------- -------
$ 3,376 $ 7,840 $18,568
======= ======= =======
Comprehensive provision (benefit) for income tax benefit allocable to:
Income from continuing operations $ 3,376 $ 7,840 $18,568
Discontinued operations (2,373) (410) (387)
Other comprehensive income -
currency translation 134 380 (223)
------- ------- -------
$ 1,137 $ 7,810 $17,958
======= ======= =======
The components of net deferred tax assets (liabilities) are summarized
below.
December 31,
2004 2005
---- ----
(In thousands)
Tax effect of temporary differences related to:
Inventories $ 544 $ 769
Tax on unremitted earnings of non-U.S. subsidiaries (656) (10,472)
Property and equipment (6,613) (5,924)
Accrued liabilities and other deductible differences 2,070 2,444
Tax loss and credit carryforwards 7,239 4,690
Other taxable differences (1,851) (2,061)
Valuation allowance (4,235) (4,235)
-------- --------
$ (3,502) $(14,789)
======== ========
Net current deferred tax assets 1,447 1,903
Net noncurrent deferred tax liabilities (4,949) (16,692)
-------- --------
$ (3,502) $(14,789)
========= ========
Under GAAP, a company is required to recognize a deferred income tax
liability with respect to the incremental U.S. income taxes (federal and state)
and foreign withholding taxes that would be incurred when undistributed earnings
of a foreign subsidiary are subsequently repatriated, unless management has
determined that those undistributed earnings are permanently reinvested for the
foreseeable future. Prior to the third quarter of 2005, CompX had not recognized
a deferred tax liability related to such incremental income taxes on the
undistributed earnings of certain of its foreign operations, as those earnings
were subject to specific permanent reinvestment plans. GAAP requires a company
to reassess the permanent reinvestment conclusion on an ongoing basis to
determine if management's intentions have changed. As of September 30, 2005, and
based primarily upon changes in management's strategic plans for certain of
CompX's non-U.S. operations, management has determined that the undistributed
earnings of such subsidiaries can no longer be considered to be permanently
reinvested except for the pre-2005 earnings in Taiwan. Accordingly, and in
accordance with GAAP, in 2005 the Company recognized an aggregate $9.0 million
provision for deferred income taxes on the aggregate undistributed earnings of
these foreign subsidiaries.
In October 2004, the American Jobs Creation Act of 2004 was enacted into
law. The new law provided for a special 85% deduction for certain dividends
received from controlled foreign corporations in 2005. In the third quarter of
2005, the Company completed its evaluation of this new provision and determined
that it would not benefit from such special dividends received deduction.
In January 2005, the Company completed its disposition of the Thomas Regout
operations in Europe. See Note 10. The Company generated a $4.2 million income
tax benefit associated with the U.S. capital loss realized in the first quarter
of 2005 upon completion of the sale of the Thomas Regout operations. Recognition
of the benefit of such capital loss by the Company is appropriate under GAAP in
the fourth quarter of 2004 at the time such operations were classified as held
for sale. However, the Company has also determined, based on the weight of
available evidence, that realization of such benefit does not currently meet the
"more-likely-than-not" recognition criteria, and therefore the deferred tax
asset related to the capital loss carryforward has been fully offset by a
deferred income tax asset valuation allowance at December 31, 2004 and December
31, 2005. The $4.2 million deferred income tax benefit related to the U.S.
capital loss and the offsetting valuation allowance are both reflected as a
component of discontinued operations in 2004.
At December 31, 2005, the Company had for U.S. federal income tax purposes
net operating loss carryforwards of approximately $1.6 million which expire in
2007 through 2017. Utilization of such net operating loss carryforwards is
limited to approximately $400,000 per tax year. The Company utilized
approximately $400,000 of such carryforwards in 2005, approximately $800,000 in
2004, which included two tax years (See Note 1), and $400,000 in 2003. The
Company believes it is more-likely-than-not that such carryforwards will be
utilized to reduce future income tax liabilities, and accordingly the Company
has not provided a deferred income tax asset valuation allowance to offset the
benefit of such carryforwards.
Note 9 - Stockholders' equity:
Shares of common stock
------------------------------------------------------------
Class A Class B
------- -------
Issued and
Issued Treasury Outstanding outstanding
------ -------- ----------- -----------
Balance at December 31, 2002 6,219,680 (1,103,900) 5,115,780 10,000,000
Issued 9,000 - 9,000 -
--------- ---------- --------- ----------
Balance at December 31, 2003 6,228,680 (1,103,900) 5,124,780 10,000,000
Issued 54,100 - 54,100 -
Cancelled (1,103,900) 1,103,900 - -
---------- --------- --------- ----------
Balance at December 31, 2004 5,178,880 - 5,178,880 10,000,000
Issued 55,400 - 55,400 -
---------- ---------- --------- ----------
Balance at December 31, 2005 5,234,280 - 5,234,280 10,000,000
========== ========== ========= ==========
Class A and Class B common stock. The shares of Class A Common Stock and
Class B Common Stock are identical in all respects, except for certain voting
rights and certain conversion rights in respect of the shares of the Class B
Common Stock. Holders of Class A Common Stock are entitled to one vote per
share. CompX Group, which holds all of the outstanding shares of Class B Common
Stock, is entitled to one vote per share in all matters except for election of
directors, for which CompX Group is entitled to ten votes per share. Holders of
all classes of common stock entitled to vote will vote together as a single
class on all matters presented to the stockholders for their vote or approval,
except as otherwise required by applicable law. Each share of Class A Common
Stock and Class B Common Stock have an equal and ratable right to receive
dividends to be paid from the Company's assets when, and if declared by the
Board of Directors. In the event of the dissolution, liquidation or winding up
of the Company, the holders of Class A Common Stock and Class B Common Stock
will be entitled to share equally and ratably in the assets available for
distribution after payments are made to the Company's creditors and to the
holders of any preferred stock of the Company that may be outstanding at the
time. Shares of the Class A Common Stock have no conversion rights. Under
certain conditions, shares of Class B Common Stock will convert, on a
share-for-share basis, into shares of Class A Common Stock.
During 2004, the Company cancelled approximately 1.1 million shares of its
Class A common stock that previously was reported as treasury stock. The
aggregate $11.3 million cost of such treasury shares were allocated to common
stock at par, additional paid-in capital and retained earnings in accordance
with GAAP.
Incentive compensation plan. The CompX International Inc. 1997 Long-Term
Incentive Plan provides for the award or grant of stock options, stock
appreciation rights, performance grants and other awards to employees and other
individuals providing services to the Company. Up to 1.5 million shares of Class
A Common Stock may be issued pursuant to the plan. Generally, employee stock
options are granted at prices not less than the market price of the Company's
stock on the date of grant, vest over five years and expire ten years from the
date of grant.
The following table sets forth changes in outstanding options during the
past three years.
Amount Weighted
Exercise payable average
price per upon exercise
Shares share exercise price
------ --------- -------- -----
Outstanding at December 31, 2002 764 $10.00 -$20.00 12,995 $17.01
Canceled (145) 11.00 - 20.00 (2,311) 15.94
---- -------------- ------- ------
Outstanding at December 31, 2003 619 $10.00 -$20.00 $10,684 $17.26
Exercised (48) 10.00 - 13.00 (616) 12.83
Canceled (9) 12.50 - 13.00 (116) 12.89
---- -------------- ------- ------
Outstanding at December 31, 2004 562 $10.00 -$20.00 $ 9,952 17.71
Exercised (50) 11.59 - 14.30 (638) 12.76
Canceled (42) 13.00 - 20.00 (677) 16.12
---- -------------- ------- ------
Outstanding at December 31, 2005 470 $10.00 -$20.00 $ 8,637 $18.38
==== ============== ======= ======
Outstanding options at December 31, 2005 represent approximately 3% of the
Company's total outstanding shares of common stock at that date and expire at
various dates through 2012 with a weighted-average remaining term of 3 years. At
December 31, 2005, options to purchase 436,000 of the Company's shares were
exercisable at prices ranging from $10.00 to $20.00 per share, with an aggregate
amount payable upon exercise of $8.2 million, with a weighted-average exercise
price of $18.80 per share. The Company's market price per share at December 31,
2005 was $16.02. Of the total exercisable options at December 31, 2005, 36,500
options were exercisable at prices lower than the December 31, 2005 market price
per share with an aggregate intrinsic value (defined as the excess of the market
price of the Company's common stock over the exercise price) of $90,210. At
December 31, 2005, options to purchase 32,000 shares are scheduled to become
exercisable in 2006 and an aggregate of 672,000 shares were available for future
grants. Shares issued under the incentive stock plan are generally newly-issued
shares. The intrinsic value of the Company's options exercised aggregate
approximately $175,500 in 2004 and $238,500 in 2005, and the related income tax
benefit from such exercises was $61,500 in 2004 and $83,500 in 2005. No options
were exercised in 2003.
Other. The pro forma information included in Note 1, required by SFAS No.
123, Accounting for Stock-Based Compensation, as amended, is based on an
estimation of the fair value of CompX options issued subsequent to January 1,
1998 (the first time the Company granted stock options). No options were granted
during 2003, 2004 or 2005. The fair values of options granted prior to 2003 were
calculated using the Black-Scholes stock option valuation model. The
Black-Scholes model was not developed for use in valuing employee stock options,
but was developed for use in estimating the fair value of traded options that
have no vesting restrictions and are fully transferable. In addition, it
requires the use of subjective assumptions including expectations of future
dividends and stock price volatility. Such assumptions are only used for making
the required fair value estimate and should not be considered as indicators of
future dividend policy or stock price appreciation. Because changes in the
subjective assumptions can materially affect the fair value estimate and because
employee stock options have characteristics significantly different from those
of traded options, the use of the Black-Scholes stock option valuation model may
not provide a reliable estimate of the fair value of employee stock options.
For purposes of this pro forma disclosure, the estimated fair value of
options is amortized straight-line to expense over the options' vesting period.
Such pro forma impact on net income and basic and dilutive earnings per share is
not necessarily indicative of future effects on net income or earnings per
share. See also Note 14.
Note 10 - Discontinued operations and assets held for sale:
In December 2004, the Company's board of directors committed to a formal
plan to dispose of its Thomas Regout operations in Europe. Such operations met
all of the criteria under GAAP to be classified as an asset held for sale at
December 31, 2004, and accordingly the result of operations of Thomas Regout
have been classified as discontinued operations for all periods presented. In
classifying the net assets of the Thomas Regout operations as an asset held for
sale, the Company concluded that the carrying amount of the net assets of such
operations exceeded the estimated fair value less costs to sell such operations,
and accordingly in the fourth quarter of 2004 the Company recognized a $14.4
million impairment charge to write-down its investment in the Thomas Regout
operations to estimated realizable value. Such impairment charge represented an
impairment of goodwill.
In January 2005, the Company completed the sale of such operations for net
proceeds (net of expenses) of approximately $22.3 million. The net proceeds
consisted of approximately $18.1 million in cash at the date of sale and a $4.2
million principal amount note receivable from the purchaser bearing interest at
a fixed rate of 7% and is payable over four years. The note receivable is
collateralized by a secondary lien on the assets sold and is subordinated to
certain third-party indebtedness of the purchaser. Accordingly, the Company no
longer reports the results of operations of Thomas Regout subsequent to December
31, 2004 in its consolidated financial statements. The net proceeds from the
January 2005 sale of the European Thomas Regout operations was $864,000 less
than the net realizable value estimated at the time of the goodwill impairment
charge (primarily due to higher expenses associated with the disposal of the
Thomas Regout operations), and discontinued operations in 2005 includes a charge
related to such differential ($477,000, net of income tax benefit). Such charge
represents an additional impairment of goodwill.
Condensed income statement data for Thomas Regout is presented below. The
$14.4 million and $864,000 impairment charges are included in Thomas Regout's
operating loss for 2004 and 2005, respectively. Interest expense included in
discontinued operations represents interest on certain intercompany indebtedness
with CompX, which indebtedness arose at the time of the Company's acquisition of
Thomas Regout prior to 2003 and corresponded to certain third-party indebtedness
of the Company incurred at the time such operations were acquired.
Years ended December 31,
2003 2004 2005
---- ---- ----
(In thousands)
Net sales $35,331 $ 41,694 $ -
======= ======== ========
Operating loss $(5,383) $(10,609) $ (864)
Other expense, net (105) (797) -
Interest expense (1,390) (1,501) -
Income tax benefit 2,373 410 387
------- -------- --------
Net loss $(4,505) $(12,497) $ (477)
======= ======== ========
In accordance with generally accepted accounting principles, the assets and
liabilities relating to Thomas Regout were eliminated from the Consolidated
Balance Sheet subsequent to the completion of the sale transaction. Therefore,
the assets and liabilities relating to Thomas Regout have been aggregated and
presented on the Consolidated Balance Sheet at December 31, 2004 as current and
noncurrent "Assets held for sale" and current "Liabilities related to assets
held for sale". The Consolidated Statement of Cash Flows has not been restated
to reflect discontinued operations or assets held for sale.
A summary of the assets and liabilities held for sale is as follows:
December 31,2004
----------------
(In thousands)
Current assets
Cash $ 4,234
Receivables, net 5,456
Inventories 7,999
Other current assets 268
-------
Total current assets $17,957
=======
Noncurrent assets
Goodwill $ 1,411
Deferred income taxes 1,238
Property and equipment, net 8,315
-------
$10,964
Current liabilities:
Accounts payable and accrued liabilities $ 4,419
Deferred income taxes 579
-------
$ 4,998
=======
Note 11 - Other general corporate income (expense), net:
Years ended December 31,
2003 2004 2005
---- ---- ----
(In thousands)
Interest income $1,570 $1,612 $ 613
Other income, net 106 807 111
------ ------ ------
$ 1,676 $2,419 $ 724
======== ====== ======
Interest income includes accrued interest income of $1.4 million and $1.5
million in 2003 and 2004, respectively, on long-term notes receivable from
Thomas Regout. Upon the sale of the Thomas Regout European operations in
January, 2005, the intercompany notes receivable were extinguished and,
therefore, no such interest income was recorded in 2005.
Note 12 - Related party transactions:
The Company may be deemed to be controlled by Harold C. Simmons. See Note
1. Corporations that may be deemed to be controlled by or affiliated with Mr.
Simmons sometimes engage in (a) intercorporate transactions such as guarantees,
management and expense sharing arrangements, shared fee arrangements, joint
ventures, partnerships, loans, options, advances of funds on open account, and
sales, leases and exchanges of assets, including securities issued by both
related and unrelated parties and (b) common investment and acquisition
strategies, business combinations, reorganizations, recapitalizations,
securities repurchases, and purchases and sales (and other acquisitions and
dispositions) of subsidiaries, divisions or other business units, which
transactions have involved both related and unrelated parties and have included
transactions which resulted in the acquisition by one related party of a
publicly-held minority equity interest in another related party. The Company
continuously considers, reviews and evaluates, and understands that Contran and
related entities consider, review and evaluate such transactions. Depending upon
the business, tax and other objectives then relevant, it is possible that the
Company might be a party to one or more such transactions in the future.
Under the terms of various Intercorporate Service Agreements ("ISAs") with
Contran, Valhi and NL Industries, Inc. (a majority-owned subsidiary of Valhi),
Contran, Valhi and NL have performed certain management, tax planning, financial
and administrative services for the Company on a fee basis over the past three
years. Such fees are based upon estimates of time devoted to the affairs of the
Company by individual Contran, Valhi or NL employees and the compensation of
such persons. Because of the large number of companies affiliated with Contran,
the Company believes it benefits from cost savings and economies of scale gained
by not having certain management, financial and administrative staffs duplicated
at each entity, thus allowing certain individuals to provide services to
multiple companies but only be compensated by one entity. Fees pursuant to these
agreements aggregated $2,138,000 in 2003, $2,295,000 in 2004 and $2,625,000 in
2005.
Tall Pines Insurance Company (including a precedessor company, Valmont
Insurance Company) and EWI RE, Inc. provide for or broker certain insurance
policies for Contran and certain of its subsidiaries and affiliates, including
the Company. Tall Pines is a wholly-owned subsidiary of Valhi, and EWI is a
wholly-owned subsidiary of NL. Consistent with insurance industry practices,
Tall Pines and EWI receive commissions from the insurance and reinsurance
underwriters and/or assess fees for the policies that they provide or broker.
The aggregate premiums paid to Tall Pines (including Valmont) and EWI were
$1,029,000 in 2003, $809,000 in 2004 and $926,000 in 2005. These amounts
principally included payments for insurance, but also included commissions paid
to Tall Pines, and EWI. Tall Pines purchases reinsurance for substantially all
of the risks it underwrites. The Company expects that these relationships with
Tall Pines and EWI will continue in 2006.
Contran and certain of its subsidiaries and affiliates, including the
Company, purchase certain of their insurance policies as a group, with the costs
of the jointly-owned policies being apportioned among the participating
companies. With respect to certain of such policies, it is possible that
unusually large losses incurred by one or more insureds during a given policy
period could leave the other participating companies without adequate coverage
under that policy for the balance of the policy period. As a result, Contran and
certain of its subsidiaries and affiliates, including the Company, have entered
into a loss sharing agreement under which any uninsured loss is shared by those
entities who have submitted claims under the relevant policy. The Company
believes the benefits in the form of reduced premiums and broader coverage
associated with the group coverage for such policies justifies the risk
associated with the potential for any uninsured loss.
Note 13 - Commitments and contingencies:
Legal proceedings. The Company is involved, from time to time, in various
contractual, product liability, patent (or intellectual property), employment
and other claims and disputes incidental to its business. The Company currently
believes that the disposition of all claims and disputes, individually or in the
aggregate, if any, should not have a material adverse effect on the Company's
consolidated financial condition, results of operations or liquidity.
Environmental matters and litigation. The Company's operations are governed
by various federal, state, local and foreign environmental laws and regulations.
The Company's policy is to comply with environmental laws and regulations at all
of its plants and to continually strive to improve environmental performance in
association with applicable industry initiatives. The Company believes that its
operations are in substantial compliance with applicable requirements of
environmental laws. From time to time, the Company may be subject to
environmental regulatory enforcement under various statutes, resolution of which
typically involves the establishment of compliance programs.
Income taxes. From time to time, the Company undergoes examinations of its
income tax returns, and tax authorities have or may propose tax deficiencies.
The Company believes that it has adequately provided accruals for additional
income taxes and related interest expense which may ultimately result from such
examinations and believes that the ultimate disposition of all such examinations
should not have a material adverse effect on its consolidated financial
position, results of operations or liquidity.
Contran and the Company have agreed to a policy providing for the
allocation of tax liabilities and tax payments as described in Note 1. Under
applicable law, the Company, as well as every other member of the Contran Tax
Group, are each jointly and severally liable for the aggregate federal income
tax liability of Contran and the other companies included in the Contran Tax
Group for all periods in which the Company is included in the Contran Tax Group.
NL has agreed, however, to indemnify the Company for any liability for income
taxes of the Contran Tax Group in excess of the Company's tax liability
previously computed and paid by the Company in accordance with the tax
allocation policy.
Concentration of credit risk. The Company's products are sold primarily in
North America to original equipment manufacturers. The ten largest customers
accounted for approximately 44% in 2003 and 43% of sales in 2004 and 2005,
respectively. The HON Company accounted for approximately $20.5 million (11%)
and $19.4 million (10%) of sales from all three segments at December 31, 2004
and 2005, respectively.
Other. Royalty expense was $450,000 in 2003, $222,000 in 2004 and $66,000
in 2005. Royalties relate principally to certain products manufactured in Canada
and sold in the United States under the terms of third-party patent license
agreements, one of which expired in 2003 and the remaining agreement expires in
2021.
Rent expense, principally for equipment, was $603,000 in 2003, $744,000 in
2004 and $738,000 in 2005. At December 31, 2005, future minimum rentals under
noncancellable operating leases are approximately $501,000 in 2006, $259,000 in
2007, $66,000 in 2008, $31,000 in 2009 and $12,000 in 2010.
Note 14 - Accounting principles not yet adopted:
Inventory costs. The Company will adopt SFAS No. 151, Inventory Costs, an
amendment of ARB No. 43, Chapter 4, for inventory costs incurred on or after
January 1, 2006. SFAS No. 151 requires that the allocation of fixed production
overhead costs to inventory shall be based on normal capacity. Normal capacity
is not defined as a fixed amount; rather, normal capacity refers to a range of
production levels expected to be achieved over a number of periods under normal
circumstances, taking into account the loss of capacity resulting from planned
maintenance shutdowns. The amount of fixed overhead allocated to each unit of
production is not increased as a consequence of idle plant or production levels
below the low end of normal capacity, but instead a portion of fixed overhead
costs are charged to expense as incurred. Alternatively, in periods of
production above the high end of normal capacity, the amount of fixed overhead
costs allocated to each unit of production is decreased so that inventories are
not measured above cost. SFAS No. 151 also clarifies existing GAAP to require
that abnormal freight and wasted materials (spoilage) are to be expensed as
incurred. The Company believes its production cost accounting already complies
with the requirements of SFAS No. 151, and the Company does not expect adoption
of SFAS No. 151 will have a material effect on its consolidated financial
statements.
Stock options. As permitted by regulations of the SEC, the Company will
adopt SFAS No. 123R, Share-Based Payment, as of January 1, 2006. SFAS No. 123R,
among other things, eliminates the alternative in existing GAAP to use the
intrinsic value method of accounting for stock-based employee compensation under
APBO No. 25. Upon adoption of SFAS No. 123R, the Company will generally be
required to recognize the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of the award,
with the cost recognized over the period during which an employee is required to
provide services in exchange for the award (generally, the vesting period of the
award). No compensation cost will be recognized in the aggregate for equity
instruments for which the employee does not render the requisite service
(generally, if the instrument is forfeited before it has vested). The grant-date
fair value will be estimated using option-pricing models (e.g. Black-Sholes or a
lattice model). Under the transition alternatives permitted under SFAS No. 123R,
the Company will apply the new standard to all new awards granted on or after
January 1, 2006, and to all awards existing as of December 31, 2005 which are
subsequently modified, repurchased or cancelled. Additionally, as of January 1,
2006, the Company will be required to recognize compensation cost previously
measured under SFAS No. 123 for the portion of any non-vested award existing as
of December 31, 2005 over the remaining vesting period. Because the number of
non-vested awards as of December 31, 2005 with respect to options granted by the
Company is not material, the effect of adopting SFAS No. 123R is not expected to
be significant in so far as it relates to the recognition of compensation cost
in the Company's consolidated statements of income for existing stock options.
Should the Company, however, either grant a significant number of options or
modify, repurchase or cancel existing options in the future, the Company could
in the future recognize material amounts of compensation cost related to such
options in its consolidated financial statements.
Also upon adoption of SFAS No. 123R, the cash income tax benefit resulting
from the exercise of stock options in excess of the cumulative income tax
benefit related to such options previously recognized for GAAP financial
reporting purposes in the Company's consolidated statements of income, if any,
will be reflected as a cash inflow from financing activities in the Company's
consolidated statements of cash flows, and the Company's cash flows from
operating activities will reflect the effect of cash paid for income taxes
exclusive of such cash income tax benefit.
SFAS No. 123R also requires certain expanded disclosures regarding the
Company's stock options, and such expanded disclosures have been provided in
Note 9.
Note 15 - Quarterly results of operations (unaudited):
Quarter ended
------------ --------------
March 31 June 30 Sept. 30 Dec. 31
-------- ------- -------- -------
(In millions, except per share amounts)
2004:
Net sales $ 43.6 $46.2 $ 46.2 $ 46.6
Gross profit 8.4 10.9 10.3 10.2
Operating income 2.5 5.0 4.9 3.0
Income from continuing operations $ 1.6 $ 3.0 $ 3.5 $ 1.4
Discontinued operations - 0.3 0.3 (13.1)
------ ----- ------ ------
Net income (loss) $ 1.6 $ 3.3 $ 3.8 $(11.7)
====== ===== ====== =======
Basic and diluted earnings (loss) per share:
Continuing operations $ .10 $ .20 $ .24 $ .09
Discontinued operations - .02 .02 (.86)
------ ----- ------ -----
$ .10 $ .22 $ .26 $(.77)
====== ===== ====== =====
2005:
Net sales $ 46.8 $ 45.7 $ 47.1 $ 46.7
Gross profit 10.3 10.5 11.0 12.0
Operating income 4.1 4.7 4.8 5.5
Income (loss) from continuing
operations $ 2.2 $ 2.4 $ (6.1) $ 2.4
Discontinued operations (.5) - - -
------ ------ ------ ------
Net income (loss) $ 1.7 $ 2.4 $ (6.1) $ 2.4
====== ====== ====== ======
Basic and diluted earnings (loss) Per share:
Continuing operations $ .14 $ .16 $(.40) $ .16
Discontinued operations (.03) - - -
------ ------ ------ ------
$ .11 $ .16 $(.40) $ .16
====== ===== ===== ======
The sum of the quarterly per share amounts may not equal the annual per
share amounts due to relative changes in the weighted-average number of shares
used in the per share computations.
During the fourth quarter of 2004, the Company incurred a charge of
approximately $13.5 million (net of tax benefit of $0.9 million) to write-down
its investment in the Thomas Regout European operations to its estimated
realizable value. See Note 10.
COMPX INTERNATIONAL INC. AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(In thousands)
Additions
charged to
Balance at costs and Balance
beginning expenses Net Currency at end
Description of year (recoveries) deductions Other* translation of year
------------------ ------- ---------- ---------- ------ ----------- -------
Year ended December 31, 2003:
Allowance for doubtful accounts $ 496 $ 36 $ (234) $ - $ 15 $ 313
====== ====== ======= ==== ==== ======
Reserve for slow moving or
obsolete inventories $1,598 $1,889 $(1,699) $ - $126 $1,914
====== ====== ======= ==== ==== ======
Year ended December 31, 2004:
Allowance for doubtful accounts $ 313 $ 115 $ (46) $ - $ 12 $ 394
====== ====== ======= ==== ==== ======
Reserve for slow moving or
obsolete inventories $1,914 $1,242 $(1,969) $ - $ 29 $1,216
====== ====== ======= ==== ==== ======
Year ended December 31, 2005:
Allowance for doubtful accounts $ 394 $ (127) $ (18) $ 60 $ 3 $ 312
====== ====== ======= ==== ==== ======
Reserve for slow moving or
obsolete inventories $1,216 $ 373 $ (652) $254 $ 2 $1,193
====== ====== ======= ==== ==== ======
* Acquisition of business unit.
Note 1: Above information is presented for continuing operations only.
Note 2: Certain information has been omitted from this schedule because it is
disclosed in the notes to the Consolidated Financial Statements.