10-Q 1 cix10q0604.txt SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarter ended June 30, 2004 Commission file number 1-13905 ------------- ------- COMPX INTERNATIONAL INC. ------------------------------------------------------------------------------ (Exact name of Registrant as specified in its charter) Delaware 57-0981653 ------------------------------- -------------------------- (State or other jurisdiction of (IRS Employer organization) Identification No.) 5430 LBJ Freeway, Suite 1700, Dallas, Texas 75240-2697 ------------------------------------------------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (972) 448-1400 -------------- Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months and (2) has been subject to such filing requirements for the past 90 days. Yes X No Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes X No --- --- Number of shares of common stock outstanding on July 15, 2004: Class A: 5,156,780 Class B: 10,000,000 COMPX INTERNATIONAL INC. INDEX Page number Part I. FINANCIAL INFORMATION Item 1. Financial Statements. Consolidated Balance Sheets - December 31, 2003 and June 30, 2004 3-4 Consolidated Statements of Income - Three months and six months ended June 30, 2003 and 2004 5 Consolidated Statements of Comprehensive Income - Three and six months ended June 30, 2003 and 2004 6 Consolidated Statements of Cash Flows - Six months ended June 30, 2003 and 2004 7 Consolidated Statement of Stockholders' Equity - Six months ended June 30, 2004 8 Notes to Consolidated Financial Statements 9-12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. 13-18 Item 4. Controls and Procedures. 18-19 Part II. OTHER INFORMATION Item 4. Submission of Matters to a Vote of Security Holders 20 Item 6. Exhibits and Reports on Form 8-K. 20 - 2 - COMPX INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS (In thousands)
ASSETS December 31, June 30, 2003 2004 ------------ -------- Current assets: Cash and cash equivalents $ 21,726 $ 11,618 Accounts receivable, net 25,737 28,719 Income taxes receivable from affiliates 306 - Refundable income taxes 2,376 18 Inventories 26,317 24,750 Prepaid expenses and other 1,840 1,076 Deferred income taxes 1,920 1,980 -------- -------- Total current assets 80,222 68,161 -------- -------- Other assets: Goodwill 43,325 42,957 Other intangible assets 1,945 1,822 Deferred income taxes 351 465 Other 422 421 -------- -------- Total other assets 46,043 45,665 -------- -------- Property and equipment: Land 4,746 4,574 Buildings 28,605 26,339 Equipment 121,142 121,308 Construction in progress 636 1,271 -------- -------- 155,129 153,492 Less accumulated depreciation 71,940 78,553 -------- -------- Net property and equipment 83,189 74,939 -------- -------- $209,454 $188,765 ======== ========
- 3 - COMPX INTERNATIONAL INC. CONSOLIDATED BALANCE SHEETS (CONTINUED) (In thousands)
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, June 30, 2003 2004 ------------ --------- Current liabilities: Accounts payable and accrued liabilities $ 24,019 $ 23,150 Current portion of long-term debt - 37 Income taxes payable to affiliates - 90 Deferred income taxes 505 505 Income taxes - 975 -------- -------- Total current liabilities 24,524 24,757 -------- -------- Noncurrent liabilities: Long-term debt 26,000 2,095 Deferred income taxes 4,550 4,204 Other non-current liabilities 21 21 -------- -------- Total noncurrent liabilities 30,571 6,320 -------- -------- Stockholders' equity: Preferred stock - - Class A common stock 62 63 Class B common stock 100 100 Additional paid-in capital 119,437 119,845 Retained earnings 43,433 48,271 Accumulated other comprehensive income - currency translation 2,642 724 Treasury stock (11,315) (11,315) -------- -------- Total stockholders' equity 154,359 157,688 -------- --------- $209,454 $188,765 ======== ========
Commitments and contingencies (Note 1) See accompanying notes to consolidated financial statements. - 4 - COMPX INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data)
Three months ended Six months ended June 30, June 30, ----------------------- ----------------------- 2003 2004 2003 2004 --------- ------ ------- ------ Net sales $49,706 $56,741 $100,726 $109,871 Cost of goods sold 41,800 43,544 83,997 86,532 ------- ------- -------- -------- Gross margin 7,906 13,197 16,729 23,339 Selling, general and administrative expense 7,038 7,593 14,031 15,006 ------- ------- -------- -------- Operating income 868 5,604 2,698 8,333 Other general corporate (income) expense, net (3) (293) 488 (510) Interest expense 322 147 663 356 ------- ------- ------- -------- Income before income taxes 549 5,750 1,547 8,487 Provision for income taxes 242 2,472 681 3,649 ------- ------- ------- -------- Net income $ 307 $ 3,278 $ 866 $ 4,838 ======= ======= ======= ======== Basic and diluted earnings per common share $ .02 $ .22 $ .06 $ .32 ======= ======= ======= ======== Cash dividends per share $ - $ - $ .125 $ - ======= ======= ======= ======== Shares used in the calculation of per share amounts: Basic earnings per common share 15,120 15,134 15,118 15,130 Dilutive impact of outstanding stock options - 20 - 10 ------- ------- ------- -------- Diluted common shares 15,120 15,154 15,118 15,140 ======= ======= ======= ========
See accompanying notes to consolidated financial statements. - 5 - COMPX INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (In thousands)
Three months ended Six months ended June 30, June 30, ------------------------ ---------------------- 2003 2004 2003 2004 --------- ------- -------- ------- Net income $ 307 $ 3,278 $ 866 $ 4,838 Other comprehensive income (loss) - currency translation adjustment, net of tax 4,798 (479) 8,507 (1,918) ------- -------- ------- ------ Comprehensive income $ 5,105 $ 2,799 $ 9,373 $ 2,920 ======= ======= ======= =======
See accompanying notes to consolidated financial statements. - 6 - COMPX INTERNATIONAL INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six months ended June 30, 2003 and 2004 (In thousands)
2003 2004 ---- ---- Cash flows from operating activities: Net income $ 866 $ 4,838 Depreciation and amortization 7,051 7,285 Deferred income taxes (829) (682) Other, net 228 218 Change in assets and liabilities: Accounts receivable (84) (3,469) Inventories (9) 1,252 Accounts payable and accrued liabilities 195 (226) Accounts with affiliates (230) 306 Income taxes 1,000 3,397 Other, net 183 736 ------- -------- Net cash provided by operating activities 8,371 13,655 ------- -------- Cash flows from investing activities: Capital expenditures (4,222) (1,806) Proceeds from sale of fixed assets 64 2,119 ------- -------- Net cash provided (used) by investing activities (4,158) 313 ------- -------- Cash flows from financing activities: Indebtedness: Additions 1,000 2,252 Principal payments (2,006) (26,078) Proceeds from issuance of common stock - 330 Deferred financing costs paid (416) (28) Dividends (1,889) - ------- --------- Net cash used by financing activities (3,311) (23,524) ------- -------- Cash and cash equivalents - net change from: Operating, investing and financing activities 902 (9,556) Currency translation 248 (552) Cash and cash equivalents at beginning of period 12,407 21,726 ------- -------- Cash and cash equivalents at end of period $13,557 $ 11,618 ======= ======== Supplemental disclosures - cash paid for: Interest $ 809 $ 428 Income taxes 1,258 477
See accompanying notes to consolidated financial statements. - 7 - COMPX INTERNATIONAL INC. CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Six months ended June 30, 2004 (In thousands)
Accumulated other comprehensive Common Stock Additional income (loss)- Total --------------------- paid-in Retained currency Treasury stockholders' Class A Class B capital earnings translation stock equity ------- ------- --------- -------- ----------- --------- ----------- Balance at December 31, 2003 $62 $100 $119,437 $43,433 $ 2,642 $(11,315) $154,359 Net income - - - 4,838 - - 4,838 Other comprehensive income, net - - - - (1,918) - (1,918) Issuance of common stock 1 - 408 - - - 409 --- ---- -------- ------- -------- -------- -------- Balance at June 30, 2004 $63 $100 $119,845 $48,271 $ 724 $(11,315) $157,688 === ==== ======== ======= ======== ======== ========
See accompanying notes to consolidated financial statements. - 8 - COMPX INTERNATIONAL INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 - Basis of presentation: The consolidated balance sheet of CompX International Inc. and Subsidiaries (collectively, the "Company") at December 31, 2003 has been condensed from the Company's audited consolidated financial statements at that date. The consolidated balance sheet at June 30, 2004 and the consolidated statements of income, comprehensive income, stockholders' equity and cash flows for the interim periods ended June 30, 2003 and 2004 have been prepared by the Company, without audit. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the consolidated financial position, results of operations and cash flows have been made. The results of operations for the interim periods are not necessarily indicative of the operating results for a full year or of future operations. Certain information normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") has been condensed or omitted. The accompanying consolidated financial statements should be read in conjunction with the Company's Annual Report on Form 10-K for the year ended December 31, 2003 (the "2003 Annual Report"). Basic earnings per share of common stock is based upon the weighted average number of common shares actually outstanding during each period. Diluted earnings per share of common stock includes the impact of outstanding dilutive stock options. Commitments and contingencies are discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the 2003 Annual Report. At June 30, 2004, Valhi, Inc. (NYSE: VHI) and Valhi's wholly-owned subsidiary Valcor, Inc. owned an aggregate of 68% of the Company's outstanding common stock, and a wholly owned subsidiary of Titanium Metals Corporation, a less than majority owned affiliate of Valhi, owned an additional 9% of the Company's outstanding common stock. At June 30, 2004, Contran Corporation holds, directly or through subsidiaries, approximately 90% of Valhi's outstanding common stock. Substantially all of Contran's outstanding voting stock is held by trusts established for the benefit of certain children and grandchildren of Harold C. Simmons, of which Mr. Simmons is sole trustee, or is held by Mr. Simmons or persons or other entities related to Mr. Simmons. Mr. Simmons, the Chairman of the Board of each of Contran, Valhi and Valcor, may be deemed to control such companies and the Company. Stock options. As disclosed in the 2003 Annual Report, the Company accounts for stock-based employee compensation related to stock options using the intrinsic value method in accordance with Accounting Principles Board Opinion ("APBO") No. 25, Accounting for Stock Issued to Employees, and its various interpretations. Under APBO No. 25, no compensation cost is generally recognized for fixed stock options in which the exercise price is greater than or equal to the market price on the grant date. Compensation cost recognized by the Company related to stock options in accordance with APBO No. 25 was not significant during the interim periods of 2003 or 2004. The following table illustrates the effect on net income and earnings 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. - 9 -
Three months ended Six months ended June 30, June 30, ---------------------- ----------------------- 2003 2004 2003 2004 ------- ------ ------ ------ Net income, as reported $ 307 $3,278 $ 866 $4,838 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 (219) (136) (437) (272) ------- ------ ------ ------ Pro forma net income $ 88 $3,142 $ 429 $4,566 ======= ====== ====== ====== Earnings per share - basic and diluted: As reported $ .02 $ .22 $ .06 $ .32 ======= ====== ====== ====== Pro forma $ .01 $ .21 $ .03 $ .30 ======= ====== ====== ======
Note 2 - Business segment information:
Three months ended Six months ended June 30, June 30, ---------------------- ----------------------- 2003 2004 2003 2004 ------- ------ ------ ------ Net sales: CompX Waterloo $22,926 $26,484 $ 46,697 $ 51,216 CompX Security Products 18,835 19,685 37,264 38,449 Thomas Regout 8,221 10,738 17,314 20,597 Intersegment sales (276) (166) (549) (391) ------- ------- -------- -------- Total net sales $49,706 $56,741 $100,726 $109,871 ======= ======= ======== ======== Operating income (loss): CompX Waterloo $ (587) $ 2,396 $ (127) $ 2,744 CompX Security Products 2,468 2,768 4,691 5,117 Thomas Regout (1,013) 440 (1,866) 472 ------- ------- ------- ------- Total operating income 868 5,604 2,698 8,333 Interest expense (322) (147) (663) (356) Other general corporate income (expense), net 3 293 (488) 510 ------- ------- ------- ------- Income before income taxes $ 549 $ 5,750 $ 1,547 $ 8,487 ======= ======= ======= =======
Note 3 - Inventories:
December 31, June 30, 2003 2004 ------------ -------- (In thousands) Raw materials $ 6,170 $ 5,939 Work in process 10,852 10,331 Finished products 9,166 8,309 Supplies 129 171 ------- ------- $26,317 $24,750 ======= =======
- 10 - Note 4 - Accounts payable and accrued liabilities:
December 31, June 30, 2003 2004 ------------ --------- (In thousands) Accounts payable $ 8,597 $ 9,173 Accrued liabilities: Employee benefits 7,660 8,770 Insurance 374 403 Royalties 243 93 Restructuring 3,223 385 Sales rebates 805 722 Deferred gain on sale/leaseback 485 - Other 2,632 3,604 ------- ------- $24,019 $23,150 ======= =======
In 2003, the Company recorded a $3.3 million charge related to restructuring its Thomas Regout operations. The charge represents severance to be paid to approximately 100 terminated employees. In the first six months of 2004, the Company paid $2.8 million in severance benefits. Substantially all of the remaining severance is expected to be paid during the third quarter of 2004. Note 5 - Indebtedness:
December 31, June 30, 2003 2004 ------------- ---------- (In thousands) Revolving bank credit facility $26,000 $ 2,000 Capital lease obligations 132 ------ ------ 26,000 2,132 Less current portion - 37 ------- ------ $26,000 $ 2,095 ======= =======
Note 6 - Other general corporate income (expense), net:
Three months ended Six months ended June 30, June 30, -------------------- --------------------= 2003 2004 2003 2004 ------ ----- ---- ---- Interest income $ 35 $ 28 $ 86 $ 68 Currency transactions, net (29) 172 (624) 315 Other, net (3) 93 50 127 ---- ----- ----- ----- $ 3 $ 293 $(488) $ 510 ==== ===== ===== =====
- 11 - Note 7 - Provision for income taxes:
Three months ended Six months ended June 30, June 30, --------------------- -------------------- 2003 2004 2003 2004 ---- ------ ------ ----- Expected tax expense $ 192 $ 2,012 $ 541 $ 2,970 Non-U.S. tax rates - (92) (67) (123) Incremental U.S. tax on earnings of foreign subsidiaries 119 415 336 604 State income taxes 83 259 109 286 Other, net (152) (122) (238) (88) ----- ------ ----- ------ $ 242 $ 2,472 $ 681 $ 3,649 ===== ======= ===== =======
Note 8 -Currency forward exchange contracts: Certain of the Company's sales generated by its non-U.S. operations are denominated in U.S. dollars. The Company periodically uses currency forward contracts to manage a portion of currency exchange rate market risk associated with receivables, or similar exchange rate risk associated with future sales, denominated in a currency other than the holder's functional currency. At each balance sheet date, any such outstanding currency forward contract is marked-to-market with any resulting gain or loss recognized in income currently. These contracts are not accounted for as hedging instruments under GAAP. At December 31, 2003, the Company held a series of contracts to manage such exchange rate risk to exchange an aggregate of U.S. $4.2 million for Canadian dollars at exchange rates of Cdn. $1.30 to Cdn. $1.33 per U.S. dollar. Such contracts matured through February 2004. The exchange rate was Cdn. $1.31 per U.S. dollar at December 31, 2003. At June 30, 2004, the Company held a series of contracts to manage such exchange rate risk to exchange an aggregate of U.S. $2.9 million for Canadian dollars at exchange rates of Cdn. $1.35 to Cdn. $1.39 per U.S. dollar. Such contracts mature through August 2004. The exchange rate was Cdn. $1.35 per U.S. dollar at June 30, 2004. - 12 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS ------------------------------------------------------------------------------- Overview The Company reported net income of $3.3 million in the second quarter of 2004 compared to net income of $307,000 for the second quarter of 2003. The Company reported net income of $4.8 million in the first six months of 2004 compared to net income of $866,000 for the first six months of 2003. The improvement in net income primarily resulted from the combination of improved precision slide product sales and the favorable effect of cost reduction initiatives undertaken in 2002 and 2003. Results of Operations
Three months ended Six months ended June 30, June 30, ----------------------- % -------------------- % 2003 2004 Change 2003 2004 Change ---- ---- ------ ---- ---- ------ (In millions, except percentages) Net sales: CompX Waterloo $22,926 $26,484 16% $46,697 $ 51,216 10% CompX Security Products 18,835 19,685 5% 37,264 38,449 3% Thomas Regout 8,221 10,738 31% 17,314 20,597 19% Intersegment sales (276) (166) -40% (549) (391) -29% ------- ------- ------- -------- Total net sales $49,706 $56,741 14% $100,726 $109,871 9% ======= ======= ======== ======== Operating income (loss): CompX Waterloo $ (587) $ 2,396 n.m. $ (127) $ 2,744 n.m. CompX Security Products 2,468 2,768 12% 4,691 5,117 9% Thomas Regout (1,013) 440 n.m. (1,866) 472 n.m. ------- ------- ------- -------- Total operating income $ 868 $ 5,604 546% $ 2,698 $ 8,333 209% ======= ======= ======= ========
n.m. = not meaningful Sales for the respective product lines for the interim periods of 2003 and 2004 are as follows:
Three months ended Six months ended June 30, June 30, ----------------------- % -------------------- % 2003 2004 Change 2003 2004 Change ---- ---- ------ ---- ---- ------ (In millions, except percentages) Precision ball-bearing slides $21,340 $27,270 28% $44,509 $ 52,052 17% Security products 18,835 19,685 5% 37,264 38,449 3% Ergonomic computer support systems 7,101 6,756 -5% 13,889 13,318 -4% Other products 2,430 3,030 25% 5,064 6,052 20% ------- ------- ------- -------- $49,706 $56,741 14% $100,726 $109,871 9% ======= ======= ======== ========
Currency. CompX has substantial operations and assets located outside the United States (in Canada, the Netherlands and Taiwan). A portion of CompX's sales generated from its non-U.S. operations are denominated in currencies other than the U.S. dollar, principally the Canadian dollar, the euro and the New Taiwan dollar. In addition, a portion of CompX's sales generated from its non-U.S. operations (principally in Canada) are denominated in the U.S. dollar. Most raw materials, labor and other production costs for such non-U.S. - 13 - 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 CompX Waterloo and Thomas Regout segments, and do not materially affect the CompX Security Products segment. 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 the corresponding period in the prior year:
Three months ended Six months ended June 30, 2004 June 30, 2004 ------------------ --------------- Impact on net sales: CompX Waterloo $ 339 $1,446 CompX Security Products - - Thomas Regout 608 1,985 ----- ------ Total impact on net sales $ 947 $3,431 ===== ====== Impact on operating income: CompX Waterloo $(117) $ (804) CompX Security Products - - Thomas Regout 51 110 ----- ------ Total impact on operating income $ (66) $ (694) ===== ======
Net sales. Net sales increased $7.0 million, or 14%, to $56.7 million in the second quarter of 2004 from $49.7 million in the second quarter of 2003. Net sales increased $9.1 million, or 9%, to $109.9 million for the first six months of 2004 from $100.7 million in the first six months of 2003. These increases are due primarily to the net effect of fluctuations in currency exchange rates (as discussed above), increased sales volumes of slide and security products, the effect of price increases for certain products at CompX Waterloo and Thomas Regout and slightly lower sales volumes of ergonomic products. Cost of goods sold. The Company's cost of goods sold increased 4% in the second quarter of 2004 compared to 2003 while net sales increased 14% during the same period. Cost of goods sold increased 3% in the first six months of 2004 compared to 2003, while net sales increased 9%. The Company's gross margin percentage increased from 16% in the second quarter of the 2003 period to 23% in the 2004 period and increased from 17% to 21% in the first six months of 2004 as compared to the first six months of 2003. This improvement resulted from the favorable impact of the cost reduction efforts undertaken in 2002 and 2003, including retooling of the Company's Byron Center, Michigan facility, consolidation of two Canadian facilities into one facility and restructuring of the Thomas Regout operations. Gross margin comparisons were also favorably impacted by price increases on certain products at CompX Waterloo, relative changes in product mix at CompX Security Products, and expenses of approximately $800,000 during the first six months of 2003 associated with the consolidation of the two Canadian facilities (approximately $400,000 in the second quarter of 2003). The Company has experienced an increase in the cost of raw material, principally steel which primarily impacted its precision slide products, during the first six-months of 2004. However, the impact on gross margin has been substantially mitigated through surcharges and price increases that have been passed on to customers. Selling, general, and administrative expense. As a percentage of net sales, selling, general, and administrative expense was 14% of net sales in the second quarter of 2003 and 13% in the second quarter of 2004. For the first six months of each year, selling, general, and administrative expense was 14% of net sales. - 14 - Other general corporate income (expense), net. The components of other general corporate income (expense), net are summarized in Note 6 to the Consolidated Financial Statements, and primarily include interest income, currency exchange transaction gains and losses, and gains and losses on disposals of other assets. Net currency exchange transaction gains (losses) improved approximately $201,000 from the second quarter of 2003 to the second quarter of 2004 and approximately $939,000 from the first six months of 2003 to the first six months of 2004 as the intra-quarter swings in currency exchange rates were less volatile in 2004. Interest expense. Interest expense declined in the interim periods of 2004 compared to 2003 due primarily to lower average levels of outstanding debt. The Company expects interest expense will continue to be lower during the second half of 2004 as compared to the second half of 2003 due to lower average levels of outstanding debt. Provision for income taxes. The principal reasons for the difference between CompX's effective income tax rates and the U.S. federal statutory income tax rates are explained in Note 7 to the Consolidated Financial Statements. Income tax rates vary by jurisdiction (county and/or state), and relative changes in the geographic mix of CompX's pre-tax earnings can result in fluctuations in the effective income tax rate. Outlook. While demand has improved across most product segments certain customers are seeking lower cost Asian sources as alternatives to the Company's products. Although CompX believes the impact of this will be mitigated through ongoing initiatives to expand both new products and new market opportunities, the recent increase in order rates may be moderated to a certain extent in the near term. 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 has responded to the competitive pricing pressure in part by reducing production cost through product reengineering or improvement in manufacturing processes, moving production to lower-cost facilities and providing value-added customer support services that foreign manufacturers are generally unable to provide. However, in some cases the Company has determined to forgo unprofitable future sales in response to the competitive pricing pressures. Additionally, the Company's cost for steel continues to rise dramatically due to the continued high demand and shortages worldwide. While the Company has thus far been able to pass a majority of its higher raw material costs on to its customers through price increases and surcharges, there is no assurance that the Company would be able to continue to pass along any additional higher costs to its customers. The price increases and surcharges may accelerate the efforts of some of the Company's customers to find less expensive products from foreign manufacturers. 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 to improve operating results. The Company currently expects to realize annual cost savings of $3.5 million to $4 million as the result of the 2003 Thomas Regout headcount reduction. Although the Thomas Regout operating results are expected to improve, the Company is evaluating the strategic role of the Thomas Regout operations, including the possible sale of some or all of such operations, and additional actions could be taken in the future that could result in significant charges for asset impairment, including goodwill, and other costs in future periods. 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. - 15 - 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 indebtedness incurred primarily for working capital 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. 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 acquisitions. At June 30, 2004, substantially all of the Company's indebtedness consisted of the $2.0 million outstanding under its revolving bank credit facility that matures in January 2006. Because the maturity date of the indebtedness is not until 2006, the Company does not expect it will be required to use any of its cash flow from operating activities generated during 2004 to repay indebtedness, although it may choose to do so (as evidenced by the Company's repayment of a net $24.0 million under the revolving bank credit facility during the first six months of 2004). Consolidated cash flows. Operating activities. Trends in cash flows from operating activities, excluding changes in assets and liabilities have generally been similar to the trends in the Company's earnings. Changes in assets and liabilities result primarily from the timing of production, sales and purchases. Such changes in assets and liabilities generally tend to even out over time and result in trends in cash flows from operating activities generally reflecting earnings trends. However, period-to-period relative changes in assets and liabilities can significantly affect the comparability of cash flows from operating activities. Such changes in assets and liabilities provided cash of approximately $2.0 million in the first six months of 2004 compared to $1.1 million in the first six months of 2003. Investing activities. The capital expenditures for 2004 relate primarily to equipment additions designed to utilize new technologies thereby increasing automation and improving manufacturing efficiencies at the Company's facilities. Capital expenditures for 2004 are estimated at approximately $10 million, the majority of which relate to projects that emphasize improved production efficiency and the shifting of production capacity to lower cost facilities. Firm purchase commitments for capital projects not commenced at June 30, 2004 approximated $3.6 million. 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. Financing activities. The Company paid a quarterly dividend of $1.9 million, or $.125 per share, in the first quarter of 2003, but the Company suspended its regular quarterly dividend in the second quarter of 2003. During the first six months of 2004, the Company repaid a net $24.0 million under its revolving bank credit facility. Provisions contained in the Company's revolving bank credit facility could result in the acceleration of such indebtedness prior to its stated maturity for reasons other than defaults from failing to comply with typical financial covenants. For example, the credit agreement allows the lender to accelerate the - 16 - 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. Other than certain operating leases discussed in the 2003 Annual Report, neither CompX nor any of its subsidiaries or affiliates are parties to any off-balance sheet financing arrangements. Management believes that cash generated from operations and borrowing availability under the Company's credit facility, 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, modify its dividend policy, repurchase shares of its common stock 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, divestitures, 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. Forward Looking Information As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, the Company cautions that the statements in this Quarterly Report on Form 10-Q relating to matters that are not historical facts are forward-looking statements that represent management's beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as "believes," "intends," "may," "should," "anticipates," "expects" or comparable terminology, or by discussions of strategies or trends. Although the Company believes that the expectations reflected in such forward-looking statements are reasonable, it cannot give any assurances that these expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such forward-looking statements. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in the Company's other filings with the Securities and Exchange Commission. While it is not possible to identify all factors, the Company continues to face many risks and uncertainties including, but not limited to the following: o Future supply and demand for the Company's products, o Changes in costs of raw materials and other operating costs (such as energy and steel costs), o General global economic and political conditions, o Demand for office furniture, o Service industry employment levels, o The possibility of labor disruptions, o The ability to implement headcount reductions in a cost effective manner within the constraints of non-U.S. governmental regulations, and the timing and amount of any cost savings, o Competitive products and prices, including increased competition from low-cost manufacturing sources (such as China), o Substitute products, o Customer and competitor strategies, - 17 - o The introduction of trade barriers, o The impact of pricing and production decisions, o Fluctuations in the value of the U.S. dollar relative to other currencies (such as the euro, Canadian dollar and New Taiwan dollar), o Potential difficulties in integrating completed 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 renew or refinance its revolving bank credit facility, o The ultimate outcome of income tax audits, o The impact of current or future government regulations, o Possible future litigation and o Other risks and uncertainties. Should one or more of these risks materialize (or the consequences of such a development worsen) or should the underlying assumptions prove incorrect, actual results could differ materially from those forecasted or expected. The Company disclaims any intention or obligation to update publicly or revise such statements whether as a result of new information, future events or otherwise. ITEM 4. Controls and Procedures. The Company maintains a system of disclosure controls and procedures. The term "disclosure controls and procedures," as defined by regulations of the Securities and Exchange Commission (the "SEC"), means controls and other procedures that are designed to ensure that information required to be disclosed in the reports that the Company files or submits to the SEC under the Securities Exchange Act of 1934, as amended (the "Act"), is recorded, processed, summarized and reported, within the time periods specified in the SEC's rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits to the SEC under the Act is accumulated and communicated to the Company's management, including its principal executive officer and its principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions to be made regarding required disclosure. Each of David A. Bowers, the Company's Vice Chairman of the Board, President and Chief Executive Officer, and Darryl R. Halbert, the Company's Vice President, Chief Financial Officer and Controller, have evaluated the Company's disclosure controls and procedures as of June 30, 2004. Based upon their evaluation, these executive officers have concluded that the Company's disclosure controls and procedures are effective as of the date of such evaluation. The Company also maintains a system of internal controls over financial reporting. The term "internal control over financial reporting," as defined by regulations of the SEC, means a process designed by, or under the supervision of, the Company's principal executive and principal financial officers, or persons performing similar functions, and effected by the Company's board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America ("GAAP"), and includes those policies and procedures that: o Pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company. - 18 - o Provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company, and o Provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the Company's consolidated financial statements. There has been no change to the Company's system of internal controls over financial reporting during the quarter ended June 30, 2004 that has materially affected, or is reasonably likely to materially affect, the Company's system of internal controls over financial reporting. - 19 - Part II. OTHER INFORMATION ITEM 4. Submission of Matters to a Vote of Security Holders The Company held its Annual Meeting of Stockholders on May 19, 2004. Paul M. Bass, Jr., David A. Bowers, Keith R. Coogan, Edward J. Hardin, Ann Manix, Glenn R. Simmons and Steven L. Watson were elected as directors, each receiving votes "For" their election from over 98% of the approximately 104.6 million votes eligible to be voted at the Annual Meeting. ITEM 6. Exhibits and Reports on Form 8-K. (a) Exhibits 31.1 Certification 31.2 Certification 32.1 Certification 32.2 Certification The Company has retained a signed original of any of the above exhibits that contains signatures, and the Company will provide such exhibit to the Commission or its staff upon request. CompX will also furnish, without charge, a copy of its Code of Business Conduct and Ethics, Corporate Governance Guidelines and Audit Committee Charter, each as approved by the Board of Directors, upon request. These documents are also available on CompX's website at www.compxnet.com. Requests for any of the above documents 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. (b) Reports on Form 8-K Reports on Form 8-K for the quarter ended June 30, 2004. April 29, 2004 - Reported items 9 and 12. - 20 - SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. COMPX INTERNATIONAL INC. (Registrant) Date July 27, 2004 By /s/ Darryl R. Halbert ----------------- --------------------------- Darryl R. Halbert Vice President, Chief Financial Officer and Controller - 21 -