SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934 |
| |
| For quarter ended March 31, 2006 |
OR
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 1-7256
INTERNATIONAL ALUMINUM CORPORATION
(Exact name of Registrant as specified in its charter)
California | | 95-2385235 |
(State of incorporation) | | (I.R.S. Employer Identification No.) |
767 Monterey Pass Road
Monterey Park, California 91754
(323) 264-1670
(Principal executive office and telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 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 ý No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.
(Check one):
Large accelerated filer o | Accelerated filer ý | Non-accelerated filer o |
Indicate by check mark whether the registrant is a shell company ( as defined in Rule 12b-2 of the Exchange Act). Yes o No ý
At May 1, 2006 there were 4,305,338 shares of Common Stock outstanding.
INTERNATIONAL ALUMINUM CORPORATION
INDEX
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PART I – FINANCIAL INFORMATION
Unaudited
Item 1. Financial Statements.
International Aluminum Corporation
Condensed Consolidated Balance Sheets
| | March 31, 2006 | | June 30, 2005 | |
| | | | | |
Assets | | | | | |
| | | | | |
Current assets: | | | | | |
Cash and cash equivalents | | $ | 17,981,000 | | $ | 12,437,000 | |
Accounts receivable, net | | 44,605,000 | | 43,543,000 | |
Inventories | | 45,825,000 | | 41,270,000 | |
Prepaid expenses and deposits | | 2,366,000 | | 2,055,000 | |
Deferred income taxes | | 3,310,000 | | 3,310,000 | |
| | | | | |
Total current assets | | 114,087,000 | | 102,615,000 | |
| | | | | |
Property, plant and equipment, at cost | | 128,474,000 | | 125,081,000 | |
Accumulated depreciation | | (80,534,000 | ) | (78,179,000 | ) |
| | | | | |
Net property, plant and equipment | | 47,940,000 | | 46,902,000 | |
| | | | | |
Other assets: | | | | | |
Goodwill | | 667,000 | | 645,000 | |
Other | | 2,214,000 | | 1,469,000 | |
| | | | | |
Total other assets | | 2,881,000 | | 2,114,000 | |
| | | | | |
Total Assets | | $ | 164,908,000 | | $ | 151,631,000 | |
| | | | | |
Liabilities and Shareholders’ Equity | | | | | |
| | | | | |
Current liabilities: | | | | | |
Accounts payable | | $ | 15,667,000 | | $ | 9,958,000 | |
Accrued liabilities | | 14,382,000 | | 13,531,000 | |
Income taxes payable | | — | | 1,572,000 | |
| | | | | |
Total current liabilities | | 30,049,000 | | 25,061,000 | |
| | | | | |
Deferred income taxes | | 6,067,000 | | 6,067,000 | |
| | | | | |
Total liabilities | | 36,116,000 | | 31,128,000 | |
| | | | | |
Shareholders’ equity | | 128,792,000 | | 120,503,000 | |
| | | | | |
Total Liabilities and Shareholders’ Equity | | $ | 164,908,000 | | $ | 151,631,000 | |
See accompanying notes to condensed consolidated financial statements.
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International Aluminum Corporation
Condensed Consolidated Statements of Income
| | Three Months Ended | | Nine Months Ended | |
| | March 31, | | March 31, | |
| | 2006 | | 2005 | | 2006 | | 2005 | |
Net sales | | $ | 69,732,000 | | $ | 62,088,000 | | $ | 203,719,000 | | $ | 184,574,000 | |
Cost of sales | | 54,203,000 | | 48,194,000 | | 158,202,000 | | 143,014,000 | |
Gross profit | | 15,529,000 | | 13,894,000 | | 45,517,000 | | 41,560,000 | |
Selling, general and administrative expenses | | 10,245,000 | | 9,499,000 | | 29,523,000 | | 27,680,000 | |
Income from operations | | 5,284,000 | | 4,395,000 | | 15,994,000 | | 13,880,000 | |
Interest (income), net | | (94,000 | ) | (16,000 | ) | (229,000 | ) | (56,000 | ) |
Income before income taxes | | 5,378,000 | | 4,411,000 | | 16,223,000 | | 13,936,000 | |
Provision for income taxes | | 1,910,000 | | 1,680,000 | | 5,590,000 | | 5,380,000 | |
Net income | | $ | 3,468,000 | | $ | 2,731,000 | | $ | 10,633,000 | | $ | 8,556,000 | |
| | | | | | | | | |
| | | | | | | | | |
Basic and diluted EPS: | | $ | .81 | | $ | .64 | | $ | 2.48 | | $ | 2.01 | |
| | | | | | | | | |
Shares used to compute EPS: | | | | | | | | | |
Basic | | 4,305,338 | | 4,252,403 | | 4,291,153 | | 4,247,838 | |
Diluted | | 4,307,136 | | 4,261,485 | | 4,293,945 | | 4,254,968 | |
| | | | | | | | | |
Cash dividends per share | | $ | .30 | | $ | .30 | | $ | .90 | | $ | .90 | |
See accompanying notes to condensed consolidated financial statements.
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Unaudited
International Aluminum Corporation
Condensed Consolidated Statements of Cash Flows
| | Nine Months Ended | |
| | March 31, | |
| | 2006 | | 2005 | |
Cash flows from operating activities: | | | | | |
Net income | | $ | 10,633,000 | | $ | 8,556,000 | |
Adjustments for noncash transactions: | | | | | |
Depreciation and amortization | | 4,412,000 | | 4,730,000 | |
Changes in assets and liabilities: | | | | | |
Accounts receivable | | (886,000 | ) | (2,952,000 | ) |
Inventories | | (4,451,000 | ) | (12,285,000 | ) |
Prepaid expenses and other | | (1,050,000 | ) | (693,000 | ) |
Accounts payable | | 5,541,000 | | 1,686,000 | |
Accrued liabilities | | 840,000 | | 1,642,000 | |
Income taxes payable | | (1,518,000 | ) | (1,003,000 | ) |
| | | | | |
Net cash provided by (used in) operating activities | | 13,521,000 | | (319,000 | ) |
| | | | | |
Cash flows from investing activities: | | | | | |
Capital expenditures | | (5,330,000 | ) | (1,970,000 | ) |
Proceeds from sales of capital assets | | 188,000 | | 153,000 | |
| | | | | |
Net cash used in investing activities | | (5,142,000 | ) | (1,817,000 | ) |
| | | | | |
Cash flows from financing activities: | | | | | |
Dividends paid to shareholders | | (3,867,000 | ) | (3,826,000 | ) |
Exercise of stock options | | 984,000 | | 388,000 | |
Net repayments under lines of credit | | — | | (223,000 | ) |
| | | | | |
Net cash used in financing activities | | (2,883,000 | ) | (3,661,000 | ) |
| | | | | |
Effect of exchange rate changes | | 48,000 | | 40,000 | |
| | | | | |
Net change in cash and cash equivalents | | 5,544,000 | | (5,757,000 | ) |
| | | | | |
Cash and cash equivalents at beginning of period | | 12,437,000 | | 15,964,000 | |
| | | | | |
Cash and cash equivalents at end of period | | $ | 17,981,000 | | $ | 10,207,000 | |
See accompanying notes to condensed consolidated financial statements.
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Unaudited
International Aluminum Corporation
Notes To Condensed Consolidated Financial Statements
Basis of Presentation
In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments (which consist solely of normal recurring adjustments unless otherwise disclosed) necessary for fair statement, in all material respects, of the Company’s financial position as of March 31, 2006 and June 30, 2005, and the results of operations for the three and nine months ended March 31, 2006 and 2005,and the cash flows for the nine months ended March 31, 2006 and 2005. The results of operations for the nine months ended March 31, 2006 are not necessarily indicative of the results to be expected for the full year.
The financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading in any material respect. These financial statements should be read in conjunction with the financial statements and the notes thereto included in the Company’s latest annual report on Form 10-K.
Comprehensive Income
Comprehensive income, defined as net income and other comprehensive income, for the quarters ended March 31, 2006 and 2005 was $3,448,000 and $2,662,000, respectively. Comprehensive income for the nine months ended March 31, 2006 and 2005 was $11,172,000 and $9,565,000, respectively. Other comprehensive income includes foreign currency translation adjustments recorded directly in shareholders’ equity.
Balance Sheet Components | | March 31, 2006 | | June 30, 2005 | |
| | | | | |
Inventories, lower of FIFO cost or market | | | | | |
Raw materials | | $ | 38,135,000 | | $ | 34,720,000 | |
Work in process | | 1,497,000 | | 1,333,000 | |
Finished goods | | 6,193,000 | | 5,217,000 | |
| | $ | 45,825,000 | | $ | 41,270,000 | |
| | | | | |
Shareholders’ Equity | | | | | |
Common stock | | $ | 4,826,000 | | $ | 4,791,000 | |
Paid-in capital | | 5,638,000 | | 4,689,000 | |
Retained earnings | | 115,741,000 | | 108,975,000 | |
Accumulated other comprehensive income | | 2,587,000 | | 2,048,000 | |
| | $ | 128,792,000 | | $ | 120,503,000 | |
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Unaudited
Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted-average number of shares of common stock outstanding. Diluted earnings per share is computed by dividing net income by the weighted-average common shares and potentially dilutive common equivalent shares outstanding determined as follows:
| | Three Months Ended March 31, | |
| | 2006 | | 2005 | |
Numerator: | | | | | |
Net Income | | $ | 3,468,000 | | $ | 2,731,000 | |
| | | | | |
Denominator: | | | | | |
Weighted-average shares outstanding used to compute basic EPS | | 4,305,338 | | 4,252,403 | |
| | | | | |
Incremental shares issuable upon the exercise of stock options | | 1,798 | | 9,082 | |
| | | | | |
Shares used to compute diluted EPS | | 4,307,136 | | 4,261,485 | |
| | | | | |
Basic and Diluted net earnings per share | | $ | .81 | | $ | .64 | |
| | | | | |
| | Nine Months Ended March 31, | |
| | 2006 | | 2005 | |
Numerator: | | | | | |
Net Income | | $ | 10,633,000 | | $ | 8,556,000 | |
| | | | | |
Denominator: | | | | | |
Weighted-average shares outstanding used to compute basic EPS | | 4,291,153 | | 4,247,838 | |
| | | | | |
Incremental shares issuable upon the exercise of stock options | | 2,792 | | 7,130 | |
| | | | | |
Shares used to compute diluted EPS | | 4,293,945 | | 4,254,968 | |
| | | | | |
Basic and Diluted net earnings per share | | $ | 2.48 | | $ | 2.01 | |
Incremental shares issuable upon the assumed exercise of outstanding stock options are computed using the average market price during the related period. Excluded from the shares used to compute diluted earnings per share for the nine-month period of 2005, are 11,500 stock options because their inclusion would be anti-dilutive, since the stock option price was greater than the Company’s average common stock price for the period.
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Unaudited
Stock Based Compensation
The Company granted stock options for the purchase of common stock to certain executive and managerial employees under the Company’s 1991 Stock Option Plan, whose expired granting authority has been transferred to the successor plan, the 2001 Stock Option Plan. The options have an exercise price equal to the market price of the stock on the date of grant, a term of ten years and become exercisable, or vested, in equal installments over a five-year period from the date of grant so long as the employees remain in the continuous employ of the Company. Prior to July 1, 2005, the Company applied Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees”, and related Interpretations in accounting for stock options granted under the plan. Under APB No. 25, compensation cost, if any, is recognized over the respective vesting period based on the difference, if any, on the date of grant, between the fair value of the Company’s common stock and the exercise price. All options issued have an exercise price equal to the fair value on the date of grant. Accordingly, no compensation cost has been recognized for those stock options. On December 31, 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure”, which amends SFAS No. 123, “Accounting for Stock-Based Compensation”. SFAS No. 148’s transition guidance and provisions for disclosures were effective for fiscal years ending after December 15, 2002. The Company did not adopt fair value accounting for employee stock options under SFAS No. 123 and SFAS No. 148. Since all outstanding stock awards are fixed stock options with no intrinsic value at the date of grant and were fully vested before the income statement periods presented, there would have been no change in reported net income and earnings per share had compensation cost been determined based on the fair value at the grant dates as prescribed by SFAS 123. In addition, on July 1, 2005 the Company adopted SFAS No. 123R (revised 2004), “Share-Based Payment”, which replaced SFAS No. 123 and superseded APB Opinion No. 25, using the modified prospective application. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values in the first interim or annual period beginning after June 15, 2005. The pro forma disclosures previously permitted under SFAS No. 123 will no longer be an alternative to financial statement recognition. The adoption of SFAS 123R did not result in compensation cost being recorded, as all outstanding options were fully vested on the date of adoption. During the nine month period ended March 31, 2006 no options were granted.
Income Taxes
The effective tax rate for the nine months ended March 31, 2006 was 34.5% compared to 38.6% in the comparable period of the prior year. The decline was primarily attributable to a decrease of Federal income tax reserves resulting from settlement of an Internal Revenue Service Appeals case, in addition to the Domestic Manufacturers Deduction, which contributed to 1% of the decline in the rate, available as a result of the enactment of recent Federal tax legislation.
Segment Information
The Company’s operations are organized and managed by product type. The Company currently operates in three segments of the building products industry: Commercial Products, Residential Products and Aluminum Extrusions. Eliminations include all significant intercompany transactions and accounts. The Company evaluates performance based on operating income or loss before any allocation of corporate overhead, interest or taxes.
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Unaudited
The following presents the Company’s net sales, operating income and total assets by operating segment, reconciling to the Company’s totals. All data presented in thousands of dollars.
| | Three Months Ended | | Nine Months Ended | |
| | March 31, | | March 31, | |
Net Sales: | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | |
Commercial | | $ | 32,815 | | $ | 31,390 | | $ | 96,727 | | $ | 93,251 | |
Residential | | 20,621 | | 17,290 | | 64,759 | | 53,657 | |
Aluminum Extrusion | | 36,399 | | 28,992 | | 94,976 | | 85,809 | |
Total Segments | | 89,835 | | 77,672 | | 256,462 | | 232,717 | |
Eliminations | | (20,103 | ) | (15,584 | ) | (52,743 | ) | (48,143 | ) |
Total | | $ | 69,732 | | $ | 62,088 | | $ | 203,719 | | $ | 184,574 | |
| | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | |
| | March 31, | | March 31, | |
Operating Income: | | 2006 | | 2005 | | 2006 | | 2005 | |
| | | | | | | | | |
Commercial | | $ | 4,107 | | $ | 3,573 | | $ | 11,834 | | $ | 10,777 | |
Residential | | 3,097 | | 2,874 | | 11,352 | | 9,001 | |
Aluminum Extrusion | | 1,352 | | 361 | | 643 | | 1,212 | |
Total Segments | | 8,556 | | 6,808 | | 23,829 | | 20,990 | |
Eliminations | | (716 | ) | (161 | ) | (533 | ) | (41 | ) |
Corporate | | (2,556 | ) | (2,252 | ) | (7,302 | ) | (7,069 | ) |
Total | | $ | 5,284 | | $ | 4,395 | | $ | 15,994 | | $ | 13,880 | |
| | | | | | | | | |
| | March 31, | | June 30, | | | | | |
Total Assets: | | 2006 | | 2005 | | | | | |
| | | | | | | | | |
Commercial | | $ | 70,924 | | $ | 66,353 | | | | | |
Residential | | 29,769 | | 32,076 | | | | | |
Aluminum Extrusion | | 41,673 | | 42,010 | | | | | |
Total Segments | | 142,366 | | 140,439 | | | | | |
Corporate | | 22,542 | | 11,192 | | | | | |
Total | | $ | 164,908 | | $ | 151,631 | | | | | |
Legal Proceedings
Certain of the Company’s subsidiaries are defendants in a class-action lawsuit captioned Klotzer, et al. v. International Windows In Time, Inc. filed in November 2002 in the Superior Court for Solano County, California. The suit alleges, among other things, that the Company’s 6200 Series aluminum windows produced since 1993 were defective in design and manufacture. The plaintiffs seek monetary damages, attorneys’ fees and costs according to proof based upon various legal theories. The Company believes that substantially identical lawsuits have been filed against at least six other aluminum window manufacturers.
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The Company believes that the plaintiffs’ claims are without merit and intends to vigorously defend this lawsuit. The Company’s insurers have accepted defense of the lawsuit, subject to a reservation of rights. Trial date has been set for October 2, 2007. The lawsuit is in the discovery stage, and no prediction can be made as to its eventual outcome. The Company expects to incur additional legal expenses during the pendency of the lawsuit which are not expected to materially adversely affect the Company’s financial position or results of operations. Based upon current information, management also believes that the ultimate disposition of the lawsuit will have no material adverse effect upon the Company’s financial position, results of operations or cash flows.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs” (SFAS 151), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS 151 is effective for inventory costs incurred beginning July 1, 2005. Upon adoption on July 1, 2005 SFAS 151 did not have a material impact on our financial statements.
In March 2005, the FASB issued Financial Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations”. FIN 47 is an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations” and clarifies (i) that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated and (ii) when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Upon adoption on July 1, 2005 FIN 47 did not have a material impact on our financial statements.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Results of Operations
General Overview
International Aluminum Corporation (“Company”) is an integrated manufacturer of quality aluminum and vinyl products for use in commercial and residential applications. Our marketing brands are recognized leaders in their respective markets. Operations are conducted throughout North America, with headquarters in Monterey Park, California. The Company is organized into three business segments, Commercial Products, Residential Products and Aluminum Extrusion. Our performance is dependent to a significant extent upon levels of new construction, repair and remodeling for residential and commercial applications in the geographic markets we serve, all of which are affected by such factors as interest rates, consumer confidence and economic outlook.
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Unaudited
Net sales increased $7,644,000, or 12.3%, for the quarter ended March 31, 2006 and $19,145,000, or 10.4%, for the nine months then ended when compared with the respective prior year periods. Cost of sales as a percentage of net sales was 77.7% for the current quarter, relatively unchanged from 77.6% for the same period last year, and for the nine-month period was 77.7%, also relatively unchanged from 77.5% for the same period last year. Selling, general and administrative expenses increased $746,000 for the current quarter and $1,843,000 for the current nine month period compared to the same periods last year, although as a percentage of net sales decreased to 14.7% for the quarter and 14.5% year to date compared to 15.3% and 15.0%, respectively, for the comparable periods last year.
The Company includes product costs, inbound freight, purchasing, receiving, inspection, internal transfer, warehousing and other costs of the Company’s distribution network in cost of goods sold, thereby reducing gross profit by these amounts. Cost of sales and gross profit as a percent of sales for the Company may not be comparable to those of other companies in our industry, since other entities may record purchasing, warehousing and distribution costs as selling, general and administrative expense.
The contribution to these results by each segment is discussed below.
Commercial Products
Sales of the Commercial Products Group increased $1,518,000, or 4.9%, for the current quarter ended March 31, 2006 and $3,625,000, or 3.9%, for the nine months then ended compared to the same periods last year. These gains reflect increased commercial construction activity together with increased sales prices and expanded geographic market penetration.
Cost of sales as a percentage of sales was 75.1% for the current quarter versus 76.3% for the same period last year and for the current nine-month period was 75.8% compared to 76.6% for the same period last year. Despite experiencing increased aluminum costs, this Group was able to maintain material cost percentages over the current nine-month period and achieved slightly lower material cost percentages for the current quarter compared to the same periods last year. Also contributing to the lower cost of sales percentages were decreased labor and overhead cost percentages compared to the same periods last year reflecting cost containment efforts coupled with volume efficiencies as a result of the aforementioned sales increases.
Selling, general and administrative expenses increased $225,000 for the current quarter and $580,000 for the current nine-month period compared to the same periods last year, and as a percentage of sales was 12.4% for the quarter and 12.0% year-to-date, virtually unchanged compared to the same periods last year. These increases were mainly attributable to additional employment and sales representation costs of $233,000 and $524,000 for the current three and nine-month periods, respectively, relating to the increased sales.
Residential Products
Sales of the Residential Products Group increased $3,328,000, or 19.3%, for the quarter ended March 31, 2006 and $11,135,000, or 20.8%, for the nine months then ended compared to the same periods last year. Consumer demand continues to stimulate new home construction, resales of existing homes and home improvement spending in the areas served by this Group. New product development and increased sales prices have also contributed to the increase.
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Unaudited
Cost of sales as a percentage of sales was 71.5% for the current quarter versus 69.6% for the same period last year and was relatively unchanged at 70.5% for the current year-to-date period versus 70.2% last year. Higher material cost percentages due mainly to absorption of higher aluminum and energy surcharge costs were partially offset by declines in labor and overhead cost percentages. Additional labor efficiency from the increased volume during the three and nine-month periods was offset by higher costs incurred for overtime and temporary help in order to meet on-time delivery commitments.
Selling, general and administrative expenses increased $401,000 for the current quarter and $741,000 for the current nine-month period compared to the same periods last year, and as a percentage of sales, decreased to 13.5% for the quarter compared to 13.8% for the same quarter last year and decreased to 11.9% for the current nine-month period versus 13.0% last year. Increased expenses in the three and nine-month periods reflect $281,000 and $237,000, respectively, for higher legal costs and $136,000 and $493,000, respectively, for additional employment costs related to the increase in sales. In addition, the current quarter incurred $137,000 in higher advertising costs while the current nine-month period reflects $117,000 for increased general liability insurance costs. Partially offsetting the increases in the three and nine-month periods were decreases of $209,000 and $226,000, respectively, relating to retrospective workers’ compensation and general liability policies.
Aluminum Extrusion
Sales to outside customers of the Aluminum Extrusion Group increased $2,798,000, or 20.4%, for the quarter ended March 31, 2006 and $4,385,000, or 11.4%, for the nine months then ended compared to the same periods last year. During the current nine-month period the Group benefited from an increase in selling prices and a 4.9% increase in net tonnage shipped to outside customers as both facilities posted gains compared to the same period in the prior year. During the current quarter, sales at our California facility rebounded from a poor six-month period ending in December 2005 by posting a very strong 23.3% gain in tonnage shipped to outside customers compared to the same period last year, thereby achieving a year-to-date increase of 2.1%. Increased demand from existing and new customers fueled the recent gain. Increased selling prices have also contributed to current quarter and year-to-date sales increases of 33.3% and 9.7%, respectively, compared to the same periods last year. Our Texas facility, however, did not fare as well as their tonnage shipped to outside customers declined slightly by 1.7% this quarter compared to the same period last year, the second straight quarter of decline, although they have still achieved an 8.4% improvement for the current nine-month period stemming from a very robust first quarter increase. Increased selling prices compensated for the decline in tonnage as this facility posted a 6.9% increase in sales for the quarter compared to the same period last year. Although their year-to-date sales gain is a strong 13.7%, compared to the same period last year, further gains were hampered somewhat by reduced shipments to the sales areas impacted by the hurricanes suffered during the December quarter in the Gulf Coast region.
Cost of sales as a percentage of sales was 94.0% for the current quarter compared to 95.3% for the same period last year and for the current nine-month period was 96.3% versus 95.5% for the comparable period last year. A combination of factors contributed to these results. At both facilities, cost of sales as a percentage of sales decreased for the current quarter compared to the same period last year but increased for the current nine-month period compared to last year. Due to the highly competitive marketplace, selling
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prices were increased directly in line with the increased cost of aluminum, resulting in increased material cost percentages for both the current quarter and year-to-date periods. During the current quarter, and to a lesser extent for the year-to-date period, labor and overhead cost percentages declined as a result of the increased selling prices coupled with efficiencies achieved as a result of increased total volume this quarter, fueled in part by resurgent demand from intercompany customers, particularly beneficial to the Texas facility this quarter. The impact of increased utility costs, which had hindered prior quarters’ results, has been lessened this period due to the implementation, during the second quarter, of energy surcharges levied on our customers, totaling $388,000 for the current quarter and $581,000 for the current nine-month period.
Selling, general and administrative expenses decreased $184,000 for the current quarter but increased $289,000 for the current nine-month period compared to the same periods last year, and as a percentage of sales was 2.3% for the current quarter compared to 3.5% in the same period last year and for the current nine-month period was 3.1%, virtually unchanged from last year. The current quarter decrease reflects a swing from $245,000 in expense in the prior year quarter to $66,000 of income in the current quarter relating to retrospective workers’ compensation and general liability policies. The increase in the current nine-month period includes $219,000 in higher employment and sales representation costs related to the aforementioned increase in sales.
Corporate
General and administrative expenses increased $304,000 for the current quarter and $233,000 for the current nine-month period compared to the same periods last year, and as a percentage of consolidated net sales was 3.7% for the quarter and 3.6% year-to-date, virtually unchanged compared to the comparable periods last year. The comparisons primarily reflect the prior year benefiting from a reduction in costs during the third quarter due to a one-time recovery of $265,000 for previously paid legal fees.
The increase in net interest income compared to the prior year’s three and nine-month periods resulted from increased funds available for investment combined with higher rates of return.
The effective tax rate for the nine months ended March 31, 2006 was 34.5% compared to 38.6% in the comparable period of the prior year. The decline was primarily attributable to a decrease of Federal income tax reserves resulting from settlement of an Internal Revenue Service Appeals case, in addition to the Domestic Manufacturers Deduction, which contributed to 1% of the decline in the rate, available as a result of the enactment of recent Federal tax legislation.
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Unaudited
Liquidity and Capital Resources
Working capital at March 31, 2006 stood at $84,038,000, an increase of $6,484,000 from June 30, 2005. The ratio of current assets to current liabilities was 3.8 compared to 4.1 at the beginning of the year.
The Company projects net capital expenditures of approximately $5,750,000 for fiscal 2006 for expansion of production capacity, as well as normal recurring capitalized replacement items. The Company anticipates financing these expenditures through internal cash flow and cash reserves. The Company’s lines of credit remain unchanged from those described in the Company’s latest annual report on Form 10-K.
Recent Accounting Pronouncements
In November 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 151, “Inventory Costs” (SFAS 151), which clarifies the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. SFAS 151 is effective for inventory costs incurred beginning July 1, 2005. Upon adoption on July 1, 2005, SFAS 151 did not have a material impact on our financial statements.
In March 2005, the FASB issued Financial Interpretation No. 47 (FIN 47), “Accounting for Conditional Asset Retirement Obligations”. FIN 47 is an interpretation of FASB Statement No. 143, “Accounting for Asset Retirement Obligations” and clarifies (i) that an entity is required to recognize a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated and (ii) when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement obligation. Upon adoption on July 1, 2005, FIN 47 did not have a material impact on our financial statements.
Forward-Looking Information
This report contains forward-looking statements with respect to the financial condition, results of operations and business of the Company. Such items are subject to certain risks and uncertainties that could cause actual results to differ materially from those set forth in such statements. The principal important risk factors and uncertainties include, but are not limited to, changes in general economic conditions, aluminum and other material costs, labor costs, interest rates, and other adverse changes in general economic conditions, consumer confidence, competition, currency exchange rates as they affect our Canadian operations, environmental factors, unanticipated legal proceedings, and conditions in the commercial and residential construction markets. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date the statements were made. The Company undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Fluctuating foreign exchange rates and commodity pricing may impact our earnings. Our foreign exchange exposure is related to activities associated with our Canadian subsidiaries. We do not attempt to manage these risks by entering into forward exchange contracts, forward commodity delivery agreements or otherwise.
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Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under SEC rules, the Company is required to maintain disclosure controls and procedures designed to ensure that information required by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms. As part of the Company’s system of disclosure controls and procedures, we have created a Disclosure Committee, which consists of certain members of the Company’s senior management. The Company’s disclosure controls and procedures are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities and Exchange Act of 1934 is accumulated and communicated to management, including the chief executive officer, chief financial officer and other members of the Disclosure Committee, as appropriate to allow timely decisions regarding required disclosure.
The Company has carried out an evaluation of the effectiveness of the design and operation of its disclosure controls and procedures as of the end of the period covered by this report. The Company’s management, including the Company’s Disclosure Committee, chief executive officer and chief financial officer, supervised and participated in the evaluation. Based on the evaluation, the chief executive officer and the chief financial officer concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control Over Financial Reporting
The Company’s evaluation of its internal control over financial reporting during the fiscal quarter to which this report relates identified no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Certain of the Company’s subsidiaries are defendants in a class-action lawsuit captioned Klotzer, et al. v. International Windows In Time, Inc. filed in November 2002 in the Superior Court for Solano County, California. The suit alleges, among other things, that the Company’s 6200 Series aluminum windows produced since 1993 were defective in design and manufacture. The plaintiffs seek monetary damages, attorneys’ fees and costs according to proof based upon various legal theories. The Company believes that substantially identical lawsuits have been filed against at least six other aluminum window manufacturers.
The Company believes that the plaintiffs’ claims are without merit and intends to vigorously defend this lawsuit. The Company’s insurers have accepted defense of the lawsuit, subject to a reservation of rights. Trial date has been set for October 2, 2007. The lawsuit is in the discovery stage, and no prediction can be made as to its eventual outcome. The Company expects to incur additional legal expenses during the pendency of the lawsuit which are not expected to materially adversely affect the Company’s financial position or results of operations. Based upon current information, management also believes that the ultimate disposition of the lawsuit will have no material adverse effect upon the Company’s financial position, results of operations or cash flows.
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Item 6. Exhibits.
(a) Exhibits:
31.1 | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
| |
31.2 | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 |
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32.1 | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 |
(b) Reports on Form 8-K:
Date of Report | | Item Reported |
| | |
February 27, 2006 | | Press release issued announcing the Company’s response to a press release issued by plaintiff’s attorneys in a previously reported class-action lawsuit. |
| | |
March 16, 2006 | | Advisement to shareholders, and others, that IAL maintains a copy of its Corporate Governance Guidelines on its website. |
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.
| | | International Aluminum Corporation | |
| | | (Registrant) | |
| | | | |
| | | | |
Date: | May 8, 2006 | | /s/ MITCHELL K. FOGELMAN | |
| | | Mitchell K. Fogelman | |
| | | Senior Vice President – Finance | |
| | | (Principal Financial Officer) | |
| | | | |
| | | | |
Date: | May 8, 2006 | | /s/ MICHAEL J. NORRING | |
| | | Michael J. Norring | |
| | | Controller | |
| | | (Principal Accounting Officer) | |
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INDEX TO EXHIBITS
| | | | Page |
| | | | |
31.1 | | Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 18 |
| | | | |
31.2 | | Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 | | 19 |
| | | | |
32.1 | | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 | | 20 |
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