SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended September 30, 1999 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 incorporation
or organization) Identification No.)
16825 Northchase Drive, Suite 1200, Houston, Texas 77060
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (281) 423-3377
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
Number of shares of Class A common stock outstanding on November 5, 1999:
6,147,380.
<PAGE>
COMPX INTERNATIONAL INC.
INDEX
Page
number
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Consolidated Balance Sheets - December 31, 1998
and September 30, 1999 3-4
Consolidated Statements of Income -
Three months and nine months ended
September 30, 1998 and 1999 5
Consolidated Statements of Comprehensive Income -
Nine months ended September 30, 1998 and 1999 6
Consolidated Statement of Stockholders' Equity -
Nine months ended September 30, 1999 7
Consolidated Statements of Cash Flows -
Nine months ended September 30, 1998 and 1999 8-9
Notes to Consolidated Financial Statements 10-13
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. 14-18
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K. 19
<PAGE>
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS
(In thousands)
<TABLE>
<CAPTION>
ASSETS December 31, September 30,
1998 1999
---- ----
Current assets:
<S> <C> <C>
Cash and cash equivalents .................... $ 47,363 $ 18,506
Accounts receivable .......................... 18,976 28,354
Receivable from affiliate .................... 573 382
Refundable income taxes ...................... 524 1,679
Inventories .................................. 16,952 25,082
Prepaid expenses ............................. 1,381 1,492
Deferred income taxes ........................ 688 956
-------- --------
Total current assets ..................... 86,457 76,451
-------- --------
Other assets:
Goodwill ..................................... 22,317 35,248
Other intangible assets ...................... 2,938 2,783
Deferred income taxes ........................ -- 2,619
Other ........................................ 400 2,709
-------- --------
Total other assets ....................... 25,655 43,359
-------- --------
Property and equipment:
Land ......................................... 1,219 3,626
Buildings .................................... 13,678 26,570
Equipment .................................... 39,216 58,891
Construction in progress ..................... 3,533 9,271
-------- --------
57,646 98,358
Less accumulated depreciation ................ 17,376 23,428
-------- --------
Net property and equipment ............... 40,270 74,930
-------- --------
$152,382 $194,740
======== ========
</TABLE>
<PAGE>
COMPX INTERNATIONAL INC.
CONSOLIDATED BALANCE SHEETS (CONTINUED)
(In thousands)
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY December 31, September 30,
1998 1999
---- ----
Current liabilities:
<S> <C> <C>
Current maturities of long-term debt ......... $ 609 $ 726
Accounts payable and accrued liabilities ..... 17,243 23,755
Income taxes ................................. 2,415 202
-------- --------
Total current liabilities ................ 20,267 24,683
-------- --------
Noncurrent liabilities:
Long-term debt ............................... 1,082 21,072
Deferred income taxes ........................ 983 2,086
Accrued pension cost ......................... -- 1,335
Other ........................................ -- 484
-------- --------
Total noncurrent liabilities ............. 2,065 24,977
-------- --------
Minority interest .............................. 4 98
-------- --------
Stockholders' equity:
Preferred stock .............................. -- --
Class A common stock ......................... 61 61
Class B common stock ......................... 100 100
Additional paid-in capital ................... 118,027 118,067
Retained earnings ............................ 14,270 32,365
Accumulated other comprehensive income
-currency translation ....................... (2,412) (5,611)
-------- --------
Total stockholders' equity ............... 130,046 144,982
-------- --------
$152,382 $194,740
======== ========
</TABLE>
Commitments and contingencies (Note 1)
<PAGE>
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF INCOME
(In thousands)
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30,
1998 1999 1998 1999
<S> <C> <C> <C> <C>
Net sales .................................................. $ 38,698 $ 55,941 $ 110,513 $ 166,114
-------- -------- --------- ---------
Costs and expenses:
Cost of sales ............................................. 26,048 40,412 73,996 118,558
Selling, general and administrative ....................... 4,226 6,121 15,500 18,821
Other income, net ......................................... (888) (471) (2,307) (626)
Interest expense .......................................... 135 400 956 1,236
-------- -------- --------- ---------
29,521 46,462 88,145 137,989
-------- -------- --------- ---------
Income before income taxes
and minority interest ................................ 9,177 9,479 22,368 28,125
Provision for income taxes ................................. 3,259 3,413 8,278 10,124
-------- -------- --------- ---------
Income before minority interest ........................ 5,918 6,066 14,090 18,001
Minority interest .......................................... (54) (28) (132) (94)
Net income ............................................. $ 5,972 $ 6,094 $ 14,222 $ 18,095
======== ======== ========= =========
Basic and diluted earnings
per common share .......................................... $ .37 $ .38 $ .97 $ 1.12
======== ======== ========= =========
Shares used in the calculation of earnings per common share:
Basic earnings per common share ......................... 16,145 16,147 14,688 16,146
Dilutive impact of outstanding
stock options .......................................... 7 1 32 --
-------- -------- --------- ---------
Diluted earnings per common share ....................... 16,152 16,148 14,720 16,146
======== ======== ========= =========
</TABLE>
<PAGE>
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Nine months ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
---- ----
<S> <C> <C>
Net income ..................................... $ 14,222 $ 18,095
Other comprehensive income -
currency translation adjustment, net of tax .. (1,062) (3,199)
Comprehensive income ..................... $ 13,160 $ 14,896
======== ========
</TABLE>
<PAGE>
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Nine months ended September 30, 1999
(In thousands)
<TABLE>
<CAPTION>
Accumulated
other
comprehensive
Additional income - Total
Common Stock paid-in Retained currency stockholders'
Class A Class B capital Earnings translation equity
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998 $61 $100 $118,027 $14,270 $(2,412) $ 130,046
Issuance of common stock .... -- -- 40 -- -- 40
Net income .................. -- -- -- 18,095 -- 18,095
Other comprehensive income .. -- -- -- -- (3,199) (3,199)
--- ---- -------- ------- ------- ---------
Balance at September 30, 1999 $61 $100 $118,067 $32,365 $(5,611) $ 144,982
=== ==== ======== ======= ======= =========
</TABLE>
<PAGE>
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine months ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
---- ----
Cash flows from operating activities:
<S> <C> <C>
Net income ................................... $ 14,222 $ 18,095
Depreciation, depletion and amortization ..... 3,618 6,899
Deferred income taxes ........................ (408) (170)
Noncash stock award of Management Shares ..... 3,298 --
Other, net ................................... (142) (188)
-------- --------
20,588 24,636
Change in assets and liabilities:
Accounts receivable ........................ (2,598) (3,201)
Inventories ................................ (516) 310
Accounts payable and accrued liabilities ... 409 (4,624)
Accounts with affiliates ................... (996) 440
Income taxes ............................... (1,807) (1,963)
Other, net ................................. (1,023) 1,001
-------- --------
Net cash provided by operating activities 14,057 16,599
-------- --------
Cash flows from investing activities:
Capital expenditures ......................... (7,611) (12,653)
Purchase of business units ................... (33,372) (53,121)
Other, net ................................... 297 (2,404)
-------- --------
Net cash used by investing activities .... (40,686) (68,178)
-------- --------
Cash flows from financing activities:
Indebtedness:
Additions ................................. 395 20,000
Principal payments ........................ -- (886)
Deferred financing costs paid ............. (220) --
Repayment of demand note to Valcor ........... (50,000) --
Dividends .................................... (1,800) --
Issuance of common stock ..................... 110,378 -
-------- --------
Net cash provided by financing activities 58,753 19,114
-------- --------
Net increase (decrease) in cash and cash
equivalents ................................... $ 32,124 $(32,465)
======== ========
</TABLE>
<PAGE>
COMPX INTERNATIONAL INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)
Nine months ended September 30, 1998 and 1999
(In thousands)
<TABLE>
<CAPTION>
1998 1999
---- ----
Cash and cash equivalents:
Net change from operating, investing
<S> <C> <C>
and financing activities .................... $ 32,124 $(32,465)
Business unit acquired ....................... -- 4,157
Currency translation ......................... (803) (549)
-------- --------
31,321 (28,857)
Balance at beginning of period ............... 19,187 47,363
-------- --------
Balance at end of period ..................... $ 50,508 $ 18,506
======== ========
Supplemental disclosures:
Cash paid for:
Interest ................................... $ 1,096 $ 817
Income taxes ............................... 11,337 12,954
Business units acquired - net assets consolidated:
Cash and cash equivalents .................... $ -- $ 4,157
Goodwill and other intangibles ............... 23,399 15,837
Other non-cash assets ........................ 17,782 52,799
Liabilities .................................. (7,809) (19,672)
-------- --------
Cash paid .................................. $ 33,372 $ 53,121
======== ========
</TABLE>
<PAGE>
COMPX INTERNATIONAL INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1 - Basis of presentation:
The consolidated balance sheet at December 31, 1998 has been condensed
from the Company's audited consolidated financial statements at that date. The
consolidated balance sheet at September 30, 1999 and the consolidated statements
of income, comprehensive income, cash flows and stockholders' equity for the
interim periods ended September 30, 1998 and 1999 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 generally accepted accounting principles 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, 1998 (the "1998 Annual Report"). Commitments and contingencies are
discussed in "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and the 1998 Annual Report.
Note 2 - Business segment information:
The Company operates in one business segment - the manufacture and sale
of component products (ergonomic computer support systems, precision ball
bearing slides and security products) for furniture and other markets. The
Company is a 64%-owned subsidiary of Valhi, Inc.(NYSE: VHI) and Valhi's
wholly-owned subsidiary Valcor, Inc.
<TABLE>
<CAPTION>
Three months ended Nine months ended
September 30, September 30
--------------- ------------
1998 1999 1998 1999
---- ---- ---- ----
(In thousands)
<S> <C> <C> <C> <C>
Net sales ....... $ 38,698 $ 55,941 $ 110,513 $ 166,114
======== ======== ========= =========
Operating income $ 8,424 $ 9,408 $ 21,017 $ 28,735
Other income, net 888 471 2,307 626
Interest expense (135) (400) (956) (1,236)
- ----------------- -------- -------- --------- ---------
Income before
income taxes ... $ 9,177 $ 9,479 $ 22,368 $ 28,125
======== ======== ========= =========
</TABLE>
In 1999, the Company changed its definition of segment operating income,
which was previously defined as income before income taxes and interest expense,
exclusive of certain non-recurring items (such as gains or losses on disposition
of business units) and certain general corporate income and expense items
(including interest and dividend income) which are not attributable to the
operations of the reportable segment. The revised definition of operating income
now also excludes all interest income and foreign currency transaction gains and
losses. The effect of this change in definition on previously reported operating
income in the third quarter and the first nine months of 1998 is a decrease of
$.3 million and $1.1 million, respectively. Operating income for the third
quarter of 1998 and the nine months ended September 30, 1998, as presented
above, has been restated based on the Company's new definition.
<PAGE>
Note 3 - Inventories:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---- ----
(In thousands)
<S> <C> <C>
Raw materials .................................. $ 6,520 $ 8,851
Work in process ................................ 5,748 7,907
Finished products .............................. 4,634 8,270
Supplies ....................................... 50 54
-------- --------
$ 16,952 $ 25,082
======== ========
</TABLE>
Note 4 - Accounts payable and accrued liabilities:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---- ----
(In thousands)
<S> <C> <C>
Accounts payable ............................... $ 8,589 $ 9,522
Accrued liabilities:
Employee benefits ............................ 4,498 8,052
Insurance .................................... 842 791
Royalties .................................... 504 413
Other ........................................ 2,810 4,977
-------- --------
$ 17,243 $ 23,755
======== ========
</TABLE>
Note 5 - Indebtedness:
<TABLE>
<CAPTION>
December 31, September 30,
1998 1999
---- ----
(In thousands)
<S> <C> <C>
Unsecured revolving senior credit facility ..... $ -- $ 20,000
Other .......................................... 1,691 1,798
-------- --------
1,691 21,798
Less current maturities ........................ 609 726
-------- --------
$ 1,082 $ 21,072
======== ========
</TABLE>
<PAGE>
Note 6 - Accrued pension cost:
Accrued pension cost of $1.3 million at September 30, 1999 relates to a
defined benefit pension plan covering substantially all full time employees of
Thomas Regout. See Note 9.
Note 7 - Other income:
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, September 30,
1998 1999 1998 1999
(In thousands) (In thousands)
<S> <C> <C> <C> <C>
Interest income ........................ $ 689 $ 196 $ 1,672 $ 616
Foreign currency transactions, net ..... 198 180 382 (231)
Other, net ............................. 1 95 253 241
-------- -------- --------- ---------
$ 888 $ 471 $ 2,307 $ 626
======== ======== ========= =========
</TABLE>
Note 8 - Provision for income taxes:
<TABLE>
<CAPTION>
Nine months ended
September 30,
1998 1999
---- ----
(In thousands)
<S> <C> <C>
Expected tax expense ........................... $ 7,829 $ 9,844
Foreign rates and incremental tax on non-U.S. earnings 222 274
No tax benefit for amortization of goodwill .... 194 425
State income taxes and other, net .............. 33 (419)
-------- --------
$ 8,278 $ 10,124
</TABLE>
<PAGE>
Note 9 - Acquisitions:
In January 1999, the Company acquired Thomas Regout Holding N.V.
("Thomas Regout"), a producer of precision ball bearing slides based in The
Netherlands. The aggregate cash consideration of $53.1 million, including
acquisition costs, was funded using cash on hand and borrowings of $20 million
under the Company's revolving credit facility. See Note 5. The Company has
accounted for the Thomas Regout acquisition under the purchase method of
accounting, and, accordingly, Thomas Regout's results of operations and cash
flows are included in the Company's consolidated financial statements beginning
January 1, 1999. The purchase price of Thomas Regout has been allocated to the
individual assets acquired and liabilities assumed based upon preliminary
estimated fair values. The actual allocation may be different from the
preliminary allocation due to refinements in the estimates of the fair values of
the net assets acquired. As previously reported, in March and November 1998 the
Company acquired two locking systems producers - Fort Lock Corporation and
related assets and Timberline Lock, Ltd. and related assets.
Assuming the Fort Lock and Thomas Regout acquisitions had occurred as
of January 1, 1998, the Company's unaudited pro forma net sales, operating
income and net income for the nine months ended September 30, 1998 would have
been $156.5 million, $23.9 million, and $15.0 million, respectively, and diluted
earnings per common share would have been $1.02 per share. The pro forma effect
of the Timberline acquisition is not material. The unaudited pro forma financial
information is not necessarily indicative of the actual results had the
transactions occurred at the beginning of the period, nor do they purport to
represent the results of future operations of the combined companies.
In September 1999, the Company signed a definitive agreement to acquire
the business of Yinjoy Corporation and certain of its affiliates ("Yinjoy").
Yinjoy produces the Dynaslide(R) line of precision ball bearing drawer slides in
two manufacturing plants in Taipei, Taiwan. Yinjoy's unaudited net sales for its
latest fiscal year were $10.4 million. The purchase price of $11.5 million
includes all the assets and operations that produce the Dynaslide(R) products
and is expected to be financed with existing cash. Effective upon its
completion, the acquisition will be accounted for by the purchase method, and
Yinjoy's results of operations and cash flows will be included in the Company's
subsequent consolidated financial statements. The completion of the Yinjoy
acquisition is expected to occur in November 1999. In September 1999, as part of
the definitive agreement, the Company loaned the shareholders of Yinjoy
Corporation $2.5 million. The loan will be applied to the purchase price upon
completion of the acquisition, and, pursuant to a related security agreement,
the proceeds of the loan are held in a separate bank account pending completion
of the acquisition. The loan is included in other noncurrent assets - other in
the Company's September 30, 1999 consolidated balance sheet.
<PAGE>
Note 10 - Foreign currency forward contracts:
Certain of the Company's sales generated by its Canadian operations are
denominated in U.S. dollars. In the past, the Company has periodically entered
into currency forward contracts to manage a very nominal portion of foreign
exchange rate market risk associated with receivables denominated in a currency
other than the holder's functional currency. In July 1999, to hedge its exposure
to losses associated with holding foreign currency denominated receivables, the
Company entered into a series of short-term forward exchange contracts maturing
through November 1999 to exchange an aggregate of U.S. $7.0 million for an
equivalent amount of Canadian dollars at rates between Cdn $1.4881 and Cdn $1.50
per U.S. dollar. At September 30, 1999, $5.0 million of these contracts remained
outstanding. In October 1999, the Company entered into an additional series of
short-term forward exchange contracts maturing through March 2000 to exchange an
aggregate of U.S. $9.5 million for an equivalent amount of Canadian dollars at
rates between Cdn $1.4886 and Cdn $1.4856 per U.S. dollar.
Note 11 - New accounting principles not yet adopted:
The Company will adopt Statement of Financial Accounting Standards
("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities,
as amended, no later than the first quarter of 2001. Under SFAS No. 133, all
derivatives will be recognized as either assets or liabilities and measured at
fair value. The accounting for changes in fair value of derivatives will depend
upon the intended use of the derivative. The Company is currently studying this
new accounting rule. The impact of adopting SFAS No. 133, if any, has not yet
been determined, but will be dependent upon the extent to which the Company is a
party to derivative contracts or hedging activities covered by SFAS No. 133 at
the time of adoption.
<PAGE>
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Overview
In January 1999, the Company acquired Thomas Regout, a precision ball
bearing slide producer, for a purchase price of $53.1 million using available
cash on hand and $20 million of borrowings under the Company's $100 million
revolving bank credit facility. As previously reported, in March and November of
1998 the Company acquired Fort Lock Corporation and related assets and
Timberline Lock, Ltd., and related assets, respectively.
The Company reported net income of $6.1 million in the third quarter of
1999 and $6.0 million in the third quarter of 1998. The Company reported net
income of $18.1 million in the first nine months of 1999 compared to net income
of $14.2 million for the first nine months of 1998. Operating results for the
first nine months of 1998 include a first quarter nonrecurring charge of $3.3
million ($2.3 million after tax) related to shares of the Company's Class A
common stock awarded to key individuals in connection with the Company's March
1998 initial public offering. Exclusive of the charge associated with the stock
award, net income in the first nine months of 1999 increased 10% compared to the
first nine months of 1998. Operating income in the third quarter of 1999 was
$9.4 million, an increase of 12% over operating income of $8.4 million in the
third quarter of 1998. For the first nine months of 1999, operating income
increased $7.7 million, or 37%, to $28.7 million from $21.0 million for the
first nine months of 1998. Excluding the effect of the charge associated with
the stock award, operating income in the first nine months of 1999 increased 18%
over the first nine months of 1998. The increased operating income in the 1999
periods is due primarily to the Thomas Regout, Fort Lock and Timberline
acquisitions.
Approximately 43% of the Company's 1999 net sales are generated by its
Canadian operations. About 60% of these Canadian-produced sales are denominated
in U.S. dollars while substantially all of the related costs are incurred in
Canadian dollars. Consequently, fluctuations in exchange rates between the U.S.
dollar and the Canadian dollar affect the Company's operating results. Such
exchange rate fluctuations resulted in reduced income before income taxes and
minority interest by $.3 million in the third quarter of 1999 compared to the
third quarter of 1998. In the first nine months of 1999 fluctuations in exchange
rates resulted in reduced income before income taxes and minority interest by
$.5 million compared to the first nine months of 1998.
Assuming the Thomas Regout and Fort Lock acquisitions occurred on
January 1, 1998, the Company's unaudited pro forma net sales would have been
$51.4 million for the third quarter of 1998, and unaudited pro forma operating
income would have been $8.8 million. For the first nine months of 1998,
unaudited pro forma net sales would have been $156.5 million and unaudited pro
forma operating income would have been $23.9 million. Excluding the nonrecurring
stock award charge discussed above, unaudited pro forma operating income in the
first nine months of 1998 would have been $27.2 million. The pro forma effect of
the Timberline acquisition is not material. The unaudited pro forma financial
information reflects the change in the Company's definition of operating income.
See Note 2 to the Consolidated Financial Statements. The unaudited pro forma
financial information is not necessarily indicative of actual results had the
transactions occurred at the beginning of the periods, nor does it purport to
represent results of future operations of the merged companies.
<PAGE>
Results of Operations
<TABLE>
<CAPTION>
Nine months ended Nine months ended
September 30, % September 30, %
1998 1999 Change 1998 1999 Change
(In thousands) (In thousands)
<S> <C> <C> <C> <C> <C> <C>
Net sales ...... $38,698 $55,941 +44% $110,513 $166,114 +50%
Operating income 8,424 9,408 +12% 21,017 28,735 +37%
</TABLE>
Net sales. Net sales increased $17.2 million, or 44%, to $55.9 million
for the third quarter of 1999 from $38.7 million in the third quarter of 1998.
The increase is due primarily to the inclusion of the results of operations for
the full quarter of 1999 of Timberline Lock and Thomas Regout (acquired in
November 1998 and January 1999, respectively). Excluding the effect of these
acquisitions, net sales increased 9% compared to the third quarter of 1998. The
9% increase in net sales reflects an increase in the Company's product sales to
the office furniture industry (primarily slides and ergonomic products) which
increased 13% from the third quarter of 1998 and an increase in sales of
security products of 3%. Net sales in the first nine months of 1999 increased
$55.6 million, or 50%. The increase is due primarily to the Thomas Regout, Fort
Lock and Timberline acquisitions. Excluding the effect of these acquisitions,
net sales in the first nine months of 1999 increased 6%. This increase reflects
a 3% improvement in sales of slide and ergonomic products and a 10% improvement
in sales of security products. The increase in sales of slide and ergonomic
products reflects the third quarter recovery from the first and second quarter
slowdown in the Company's product sales to the office furniture industry.
Operating income. Operating income in the third quarter of 1999 was
$9.4 million compared to $8.4 million for the third quarter of 1998. The
increase of $1.0 million, or 12%, is due primarily to the two business units
acquired. Excluding these acquisitions, operating income increased 3% compared
to the third quarter of 1998. The higher operating income resulted from the
increase in the Company's product sales to the office furniture industry
(primarily slides and ergonomic products) and from increased sales of the
Company's security products. Operating income in the first nine months of 1999
increased 37% due to the Thomas Regout, Fort Lock and Timberline Lock
acquisitions. Excluding the effect of these acquisitions and the stock award
charge discussed above, operating income decreased 2%. The 2% decrease reflects
the slowdown in the Company's product sales to the office furniture industry in
the first six months of 1999 offset by an increase in product sales to the
office furniture industry in the third quarter of 1999 and increased sales of
security products.
Year 2000 Issue
As a result of certain computer programs being written using two digits
rather than four to define the applicable year, certain of the Company's
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculation causing disruption of operations, including, among
other things, a temporary inability to process transactions, send invoices or
engage in normal business activities.
The Company has installed information systems upgrades for both its U.S.
and Canadian facilities which contain, among many other features, software
compatibility with the Year 2000 Issue. The Company does not currently
anticipate spending significant additional funds to address software
compatibility with the Year 2000 Issue with respect to its own internal systems.
<PAGE>
As part of its Year 2000 compliance plan, the Company is seeking
confirmation from its major software and hardware vendors, primary suppliers and
major customers that they are developing and implementing plans to become, or
that they have become, Year 2000 compliant. Confirmations received by the
Company to-date indicate that such vendors, suppliers and customers generally
are in the process of becoming Year 2000 compliant by December 31, 1999. The
major software vendors used by the Company have already delivered Year 2000
compliant software. Notwithstanding these efforts, the Company's ability to
affect the Year 2000 preparedness of such vendors, suppliers and customers is
limited.
The Company is developing a contingency plan to deal with potential Year
2000 Issues related to business interruption that may occur on January 1, 2000
or thereafter. The Company's plan is expected to be completed in the fourth
quarter of 1999.
Although the Company expects its systems to be Year 2000 compliant
before December 31, 1999, it cannot predict the outcome or success of the Year
2000 compliance programs of its vendors, suppliers and customers. The Company
also cannot predict whether its major software vendors, who continue to test for
Year 2000 compliance, will find additional problems that might result in
unplanned upgrades of their applications after December 31, 1999. As a result of
these uncertainties, the Company cannot predict the impact on its consolidated
financial condition or results of operations resulting from noncompliant Year
2000 systems that the Company directly or indirectly relies upon. Should the
Company's Year 2000 compliance plan not be successful or be delayed beyond
January 2000, or should one or more suppliers, vendors or customers fail to
adequately address their Year 2000 Issues, the consequences to the Company could
be far reaching and material, including an inability to produce products at its
manufacturing facilities, which could lead to an indeterminate amount of lost
revenue. Although not anticipated, the most reasonably likely worst-case
scenario of failure by the Company or its key suppliers or customers to become
Year 2000 compliant would be a short-term slowdown or cessation of manufacturing
operations at one or more of the Company's facilities, delays in delivery of
product to customers and a short-term inability on the part of the Company to
process orders and billings in a timely manner.
Euro Conversion
Beginning January 1, 1999, eleven of the fifteen members of the European
Union ("EU"), including The Netherlands and France, adopted a new European
currency unit (the "euro") as their common legal currency. Following the
introduction of the euro, the participating countries' national currencies
remain legal tender as denominations of the euro from January 1, 1999 through
January 1, 2002, and the exchange rates between the euro and such national
currencies are fixed.
The functional currencies of the Company's French lock operations and
the recently acquired Thomas Regout operations in Maastricht, The Netherlands,
will convert to the euro from their respective national currencies over a
two-year period beginning in 1999. The euro conversion may impact the Company's
operations including, among other things, changes in product pricing decisions
necessitated by cross-border price transparencies. Such changes in product
pricing decisions could impact both selling prices and purchasing costs and,
consequently, favorably or unfavorably impact results of operations.
<PAGE>
In 1998 the Company assessed and evaluated the impact of the euro
conversion on its business and made the necessary systems conversions.
Modifications of information systems to handle euro-denominated transactions
have been implemented and were not extensive.
Because of the inherent uncertainty of the ultimate effect of the euro
conversion, the Company cannot accurately predict the impact of the euro
conversion on its results of operations, financial condition or liquidity
Liquidity and Capital Resources
Consolidated cash flows
Operating activities. Trends in cash flows from operating activities,
excluding changes in assets and liabilities and non-cash stock award charges,
are generally similar to the trends in the Company's earnings. Such cash flows
totaled $20.6 million and $24.6 million in the first nine months of 1998 and
1999, respectively, compared to net income of $14.2 million and $18.1 million,
respectively.
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.
Investing activities. Net cash used by investing activities totaled
$40.7 million and $68.2 million in the first nine months of 1998 and 1999,
respectively. Included in cash used by investing activities in the first nine
months of 1999 is the $53.1 million purchase price for the acquisition of Thomas
Regout. The increase in capital expenditures in 1999 relates primarily to
capacity expansion and tooling costs at the Company's Kitchener facility,
equipment additions designed to improve manufacturing efficiencies at the
Company's security products facilities and the development of electronic
commerce capabilities. Other cash flows from investing activities include a loan
of $2.5 million made to the shareholders of Yinjoy Corporation as part of the
definitive agreement for the acquisition of Yinjoy Corporation and certain of
its affiliates. The loan will be applied to the purchase price of $11.5 million
upon completion of the acquisition. The Yinjoy acquisition will be financed with
existing cash and is expected to be completed in November 1999.
Capital expenditures in 1999 are estimated at approximately $17 million,
the majority of which relate to projects that emphasize improved production
efficiency and increased production capacity and the development of electronic
commerce capabilities. Firm purchase commitments for capital projects not
commenced at September 30, 1999 were not material.
Financing activities. Net cash provided by financing activities totaled
$58.8 million and $19.1 million in the first nine months of 1998 and 1999,
respectively. Net cash provided by financing activities in 1998 includes $110.4
million of net proceeds from the Company's March 1998 initial public offering
and the repayment of a $50 million demand note to Valcor. The Company paid
dividends to its parent company aggregating $1.8 million in 1998 prior to
completion of the Company's initial public offering. No dividends were paid
during the first nine months of 1999. Cash flows from financing activities in
the first nine months of 1999 includes $20.0 million of borrowings used to
finance a portion of the acquisition of Thomas Regout.
<PAGE>
Management believes that cash generated from operations and borrowing
availability under the unsecured revolving senior credit facility ($80 million
available for borrowing at September 30, 1999), together with cash on hand, will
be sufficient to meet the Company's liquidity needs for working capital, capital
expenditures and debt service.
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 in light of its capital
resources and estimated future operating cash flows. As a result of this
process, the Company may in the future seek to raise additional capital,
refinance or restructure indebtedness, issue additional securities, 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.
The statements in this Quarterly Report on Form 10-Q relating to
matters that are not historical facts are forward-looking statements based on
management's beliefs and assumptions using currently available information.
Although the Company believes the expectations reflected in such forward-looking
statements are reasonable, it cannot give any assurance that these expectations
will prove to be correct. Such statements, by their nature, involve a number of
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 include, but are not limited to, general economic
and political conditions, demand for office furniture, service industry
employment levels, competitive products and prices, the introduction of tariff
or non-tariff barriers, potential difficulties in integrating completed
acquisitions, environmental matters, government regulations and possible changes
therein possible disruptions of normal business activity from Year 2000 issues
and other risks and uncertainties as discussed in this Quarterly Report and the
Company's other filings with the Securities and Exchange Commission. Should one
or more of these risks materialize (or the consequences of such a development
worsen), or should the underlying consequences prove incorrect, actual results
could differ materially from those forecasted or expected. The Company disclaims
any intention or obligation to update or revise any forward-looking statement
whether as a result of new information, future events or otherwise.
<PAGE>
Part II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
27.1 Financial Data Selected for the nine-month period ended
September 30, 1999.
(b) Reports on Form 8-K
Reports on Form 8-K for the quarter ended September 30, 1999.
July 20, 1999 - Reported Items 5 and 7
July 21, 1999 - Reported Items 5 and 7
September 20, 1999 - Reported Items 5 and 7
October 15, 1999 - Reported Items 5 and 7
October 18, 1999 - Reported Items 5 and 7
<PAGE>
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.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
COMPX INTERNATIONAL INC.
(Registrant)
Date November 12, 1999 By /s/ John A. Miller
---------------------------------------
John A. Miller
Vice President and
Chief Financial Officer
(Principal Financial Officer)
Date November 12, 1999 By /s/ Todd W. Strange
---------------------------------------
Todd W. Strange
Vice President and Controller
(Principal Accounting Officer)
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM COMPX
INTERNATIONAL INC.'S CONSOLIDATED FINANCIAL STATEMENTS FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
CONSOLIDATED FINANCIAL STATEMENTS.
</LEGEND>
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<NAME> COMPX INTERNATIONAL INC.
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