**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

**FORM10-Q**

 
| **ý** | ** ** | **QUARTERLY****REPORT PURSUANT TO  SECTION 13 OF THE SECURITIES EXCHANGE ACT OF 1934**                                                                             |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|       |       |                                                                                                                                                               |
|       |       | **For  quarter ended December 31, 2005**                                                                                                                           |
|       |       |                                                                                                                                                               |   |   |
| **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**

 

**INTERNATIONALALUMINUM CORPORATION**

(Exactname 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**

(Principalexecutive 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 SecuritiesExchange Act of 1934 during the preceding 12 months and (2) has been subject tosuch filing requirements for the past 90 days. Yes  ý    No  o

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, or a non-acceleratedfiler.  See definition of “acceleratedfiler 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 registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).Yes  o    No  ý

 

At February 1, 2006 there were 4,305,338shares of Common Stock outstanding.

 

Page 1 of 20 Pages

 

 

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INTERNATIONALALUMINUM CORPORATION

 

INDEX

 
| ** **                     | **Page** |
|--------------------------------|----------|
| PART  I. Financial Information |     |
|                           |     |   |   |
|                           | Item 1.  | Financial Statements. |   |
|                           |     |   |   |
|                           |     | Condensed Consolidated  Balance Sheets - December 31, 2005 and June 30, 2005 (unaudited) | 3 |
|                           |     |   |   |
|                           |     | Condensed Consolidated  Statements of Income - three months and six months ended December 31, 2005  and 2004 (unaudited) | 4 |
|                           |     |   |   |
|                           |     | Condensed Consolidated  Statements of Cash Flows - six months ended December 31, 2005 and 2004  (unaudited) | 5 |
|                           |     |   |   |
|                           |     | Notes to Condensed  Consolidated Financial Statements (unaudited)  | 6 |
|                           |     |   |   |
|                           | Item 2.  | Management’s Discussion and Analysis of  Financial Condition and Results of Operations. | 10 |
|                           |     |   |   |
|                           | Item 3.  | Quantitative and Qualitative  Disclosures About Market Risk. | 14 |
|                           |     |   |   |
|                           | Item 4.  | Controls and Procedures. | 14 |
|                           |     |   |   |
| PART II. Other Information     |     |
|                           |     |   |   |
|                           | Item 1.  | Legal Proceedings. | 15 |
|                           |     |   |   |
|                           | Item 6.  | Exhibits. | 15 |
|                           |     |   |   |
| Signatures                     | 16       |
|                                |          |  |  |  |

 

2

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PARTI – FINANCIAL INFORMATION

 

Unaudited

Item 1.     FinancialStatements.

 

International Aluminum Corporation

 

Condensed Consolidated Balance Sheets

 
| ** **                                       | ** ** | **December 31, 2005** | ** **  | **June 30, 2005** | ** ** |
|--------------------------------------------------|------------|---------------------------------|-------------|-------------------|------------|
| Assets                                           |       |                            |        |              |       |
|                                             |       |                            |        |              |       |
| Current  assets:                                 |       |                            |        |              |       |
| Cash and cash equivalents                        |       | $                               | 17,236,000  |              | $          | 12,437,000 |   |
| Accounts receivable, net                         |       | 42,602,000                      |        | 43,543,000        |       |
| Inventories                                      |       | 41,062,000                      |        | 41,270,000        |       |
| Prepaid expenses and deposits                    |       | 3,401,000                       |        | 2,055,000         |       |
| Deferred income taxes                            |       | 3,310,000                       |        | 3,310,000         |       |
|                                             |       |                            |        |              |       |
| Total current assets                             |       | 107,611,000                     |        | 102,615,000       |       |
|                                             |       |                            |        |              |       |
| Property,  plant and equipment, at cost          |       | 128,488,000                     |        | 125,081,000       |       |
| Accumulated  depreciation                        |       | (80,203,000                     | )           | (78,179,000       | )          |
|                                             |       |                            |        |              |       |
| Net property, plant and equipment                |       | 48,285,000                      |        | 46,902,000        |       |
|                                             |       |                            |        |              |       |
| Other  assets:                                   |       |                            |        |              |       |
| Goodwill                                         |       | 668,000                         |        | 645,000           |       |
| Other                                            |       | 1,974,000                       |        | 1,469,000         |       |
|                                             |       |                            |        |              |       |
| Total other assets                               |       | 2,642,000                       |        | 2,114,000         |       |
|                                             |       |                            |        |              |       |
| Total Assets                                     |       | $                               | 158,538,000 |              | $          | 151,631,000 |   |
|                                             |       |                            |        |              |       |
| Liabilities  and Shareholders’ Equity       |       |                            |        |              |       |
|                                             |       |                            |        |              |       |
| Current  liabilities:                            |       |                            |        |              |       |
| Accounts payable                                 |       | $                               | 12,621,000  |              | $          | 9,958,000 |   |
| Accrued liabilities                              |       | 13,214,000                      |        | 13,531,000        |       |
| Income taxes payable                             |       | —                          |        | 1,572,000         |       |
|                                             |       |                            |        |              |       |
| Total current liabilities                        |       | 25,835,000                      |        | 25,061,000        |       |
|                                             |       |                            |        |              |       |
| Deferred  income taxes                           |       | 6,067,000                       |        | 6,067,000         |       |
|                                             |       |                            |        |              |       |
| Total  liabilities                               |       | 31,902,000                      |        | 31,128,000        |       |
|                                             |       |                            |        |              |       |
| Shareholders’  equity                       |       | 126,636,000                     |        | 120,503,000       |       |
|                                             |       |                            |        |              |       |
| Total  Liabilities and Shareholders’ Equity |       | $                               | 158,538,000 |              | $          | 151,631,000 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

3

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Unaudited

 

International Aluminum Corporation

 

Condensed Consolidated Statements of Income

 
| ** **                                    | ** ** | **Three Months Ended   December 31,** | ** ** | **Six Months Ended   December 31,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|-------------------------------------|------------|
| ** **                                    | ** ** | ** **                            |
| ** **                                    | **2005**   | ** **                            | **2004**   | ** **                          | **2005**   | ** ** | **2004** | ** ** |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Net sales                                     |       | $                                     | 65,730,000 |                                | $          | 61,759,000 |   | $ | 133,987,000 |   | $ | 122,486,000 |   |
| Cost of  sales                                |       | 51,057,000                            |       | 48,057,000                          |       | 103,999,000 |   | 94,820,000 |   |
| Gross profit                                  |       | 14,673,000                            |       | 13,702,000                          |       | 29,988,000 |   | 27,666,000 |   |
| Selling,  general and administrative expenses |       | 9,679,000                             |       | 9,195,000                           |       | 19,278,000 |   | 18,181,000 |   |
| Income from operations                        |       | 4,994,000                             |       | 4,507,000                           |       | 10,710,000 |   | 9,485,000 |   |
| Interest  (income) expense, net               |       | (84,000                               | )          | (34,000                             | )          | (135,000 | ) | (40,000 | ) |
| Income before income taxes                    |       | 5,078,000                             |       | 4,541,000                           |       | 10,845,000 |   | 9,525,000 |   |
| Provision  for income taxes                   |       | 1,500,000                             |       | 1,750,000                           |       | 3,680,000 |   | 3,700,000 |   |
| Net income                                    |       | $                                     | 3,578,000  |                                | $          | 2,791,000 |   | $ | 7,165,000 |   | $ | 5,825,000 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Basic and  diluted EPS:                       |       |                                  |       |                                |       |   |   |   |   |
| Continuing operations                         |       | $                                     | .83        |                                | $          | .66 |   | $ | 1.67 |   | $ | 1.37 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Shares used  to compute EPS:                  |       |                                  |       |                                |       |   |   |   |   |
| Basic                                         |       | 4,295,631                             |       | 4,244,794                           |       | 4,285,074 |   | 4,244,794 |   |
| Diluted                                       |       | 4,297,327                             |       | 4,253,944                           |       | 4,288,362 |   | 4,250,948 |   |
|                                          |       |                                  |       |                                |       |   |   |   |   |
| Cash dividends  per share                     |       | $                                     | .30        |                                | $          | .30 |   | $ | .60 |   | $ | .60 |   |

 

See accompanying notes to condensedconsolidated financial statements.

 

4

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Unaudited

 

International Aluminum Corporation

 

Condensed Consolidated Statements of Cash Flows

 
| ** **                                           | ** ** | **Six Months Ended   December 31,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                           | ** ** | **2005**                            | ** ** | **2004** | ** ** |
|                                                 |       |                                |       |   |   |
| Cash flows  from operating activities:               |       |                                |       |   |   |
| Net income                                           |       | $                                   | 7,165,000  |   | $ | 5,825,000 |   |
| Adjustments for noncash transactions:                |       |                                |       |   |   |
| Depreciation and amortization                        |       | 2,937,000                           |       | 3,177,000 |   |
| Changes in assets and liabilities:                   |       |                                |       |   |   |
| Accounts receivable                                  |       | 1,122,000                           |       | (2,834,000 | ) |
| Inventories                                          |       | 314,000                             |       | (6,674,000 | ) |
| Prepaid expenses and other                           |       | (1,843,000                          | )          | (1,878,000 | ) |
| Accounts payable                                     |       | 2,488,000                           |       | (413,000 | ) |
| Accrued liabilities                                  |       | (327,000                            | )          | (490,000 | ) |
| Income taxes payable                                 |       | (1,515,000                          | )          | (997,000 | ) |
|                                                 |       |                                |       |   |   |
| Net cash provided by (used in) operating  activities |       | 10,341,000                          |       | (4,284,000 | ) |
|                                                 |       |                                |       |   |   |
| Cash flows  from investing activities:               |       |                                |       |   |   |
| Capital expenditures                                 |       | (4,102,000                          | )          | (1,071,000 | ) |
| Proceeds from sales of capital assets                |       | 102,000                             |       | 95,000 |   |
|                                                 |       |                                |       |   |   |
| Net cash used in investing activities                |       | (4,000,000                          | )          | (976,000 | ) |
|                                                 |       |                                |       |   |   |
| Cash flows  from financing activities:               |       |                                |       |   |   |
| Dividends paid to shareholders                       |       | (2,575,000                          | )          | (2,547,000 | ) |
| Exercise of stock options                            |       | 984,000                             |       | — |   |
| Net repayments under lines of credit                 |       | —                              |       | (224,000 | ) |
|                                                 |       |                                |       |   |   |
| Net cash used in financing activities                |       | (1,591,000                          | )          | (2,771,000 | ) |
|                                                 |       |                                |       |   |   |
| Effect of  exchange rate changes                     |       | 49,000                              |       | 43,000 |   |
|                                                 |       |                                |       |   |   |
| Net change  in cash and cash equivalents             |       | 4,799,000                           |       | (7,988,000 | ) |
|                                                 |       |                                |       |   |   |
| Cash and cash equivalents at beginning of  period    |       | 12,437,000                          |       | 15,964,000 |   |
|                                                 |       |                                |       |   |   |
| Cash and  cash equivalents at end of period          |       | $                                   | 17,236,000 |   | $ | 7,976,000 |   |

 

See accompanying notes to condensed consolidatedfinancial statements.

 

5

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Unaudited

 

International Aluminum Corporation

 

Notes To Condensed Consolidated Financial Statements

 

Basis of Presentation

 

In the opinion ofmanagement, the accompanying unaudited consolidated financial statementscontain all adjustments (which consist solely of normal recurring adjustmentsunless otherwise disclosed) necessary for fair statement, in all materialrespects, of the Company’s financial position as of December 31, 2005 andJune 30, 2005, and the results of operations and the cash flows for the sixmonths ended December 31, 2005 and 2004. The results of operations for the six months ended December 31, 2005 arenot necessarily indicative of the results to be expected for the full year.

 

The financial statementsincluded herein have been prepared by the Company pursuant to the rules andregulations of the Securities and Exchange Commission.  Certain information and footnote disclosuresnormally included in financial statements prepared in accordance with generallyaccepted accounting principles in the United States of America have beencondensed or omitted pursuant to such rules and regulations, although theCompany believes that the disclosures are adequate to make the informationpresented not misleading in any material respect.  These financial statements should be read inconjunction with the financial statements and the notes thereto included in theCompany’s latest annual report on Form 10-K.

 

Comprehensive Income

 

Comprehensive income,defined as net income and other comprehensive income, for the quarters ended December31, 2005 and 2004 was $3,547,000 and $3,308,000, respectively.  Comprehensive income for the six months endedDecember 31, 2005 and 2004 was $7,724,000 and $6,904,000, respectively.  Other comprehensive income includes foreigncurrency translation adjustments recorded directly in shareholders’ equity.

 
| **Balance Sheet Components**               | ** ** | **December 31, 2005** | ** **  | **June 30, 2005** | ** ** |
|--------------------------------------------|------------|-----------------------|-------------|-------------------|------------|
|                                       |       |                  |        |              |       |
| Inventories,  lower of FIFO cost or market |       |                  |        |              |       |
| Raw materials                              |       | $                     | 34,339,000  |              | $          | 34,720,000 |   |
| Work in process                            |       | 854,000               |        | 1,333,000         |       |
| Finished goods                             |       | 5,869,000             |        | 5,217,000         |       |
|                                       |       | $                     | 41,062,000  |              | $          | 41,270,000 |   |
|                                       |       |                  |        |              |       |
| Shareholders’  Equity                 |       |                  |        |              |       |
| Common stock                               |       | $                     | 4,826,000   |              | $          | 4,791,000 |   |
| Paid-in capital                            |       | 5,638,000             |        | 4,689,000         |       |
| Retained earnings                          |       | 113,565,000           |        | 108,975,000       |       |
| Accumulated other comprehensive income     |       | 2,607,000             |        | 2,048,000         |       |
|                                       |       | $                     | 126,636,000 |              | $          | 120,503,000 |   |

 

6

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Unaudited

 

Earnings Per Share

 

Basic earnings per share iscomputed by dividing net income by the weighted-average number of shares ofcommon stock outstanding.  Dilutedearnings per share is computed by dividing net income by the weighted-averagecommon shares and potentially dilutive common equivalent shares outstandingdetermined as follows:

 
| ** **                                                      | ** ** | **Three Months Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                      | ** ** | **2005**                            | ** ** | **2004** | ** ** |
| Numerator:                                                      |       |                                |       |   |   |
| Net Income                                                      |       | $                                   | 3,578,000  |   | $ | 2,791,000 |   |
|                                                            |       |                                |       |   |   |
| Denominator:                                                    |       |                                |       |   |   |
| Weighted-average shares outstanding used to  compute basic EPS  |       | 4,295,631                           |       | 4,244,794 |   |
|                                                            |       |                                |       |   |   |
| Incremental shares issuable upon the exercise  of stock options |       | 1,696                               |       | 9,150 |   |
|                                                            |       |                                |       |   |   |
| Shares used  to compute diluted EPS                             |       | 4,297,327                           |       | 4,253,944 |   |
|                                                            |       |                                |       |   |   |
| Basic and  Diluted net earnings per share                       |       | $                                   | .83        |   | $ | .66 |   |

 
| ** **                                                      | ** ** | **Six Months Ended December 31,** | ** ** |
|-----------------------------------------------------------------|------------|-----------------------------------|------------|
| ** **                                                      | **2005**   | ** **                        | **2004**   | ** ** |
| Numerator:                                                      |       |                              |       |   |   |
| Net Income                                                      |       | $                                 | 7,165,000  |   | $ | 5,825,000 |   |
|                                                            |       |                              |       |   |   |
| Denominator:                                                    |       |                              |       |   |   |
| Weighted-average  shares outstanding used to compute basic EPS  |       | 4,285,074                         |       | 4,244,794 |   |
|                                                            |       |                              |       |   |   |
| Incremental  shares issuable upon the exercise of stock options |       | 3,288                             |       | 6,154 |   |
|                                                            |       |                              |       |   |   |
| Shares used  to compute diluted EPS                             |       | 4,288,362                         |       | 4,250,948 |   |
|                                                            |       |                              |       |   |   |
| Basic and  Diluted net earnings per share                       |       | $                                 | 1.67       |   | $ | 1.37 |   |

 

Incrementalshares issuable upon the assumed exercise of outstanding stock options arecomputed using the average market price during the related period. Excludedfrom the shares used to compute diluted earnings per share for the three- andsix-month periods of 2004, are 13,500 and 17,250, respectively, stock optionsbecause their inclusion would be anti-dilutive, since the stock option pricewas greater than the Company’s average common stock price for these periods.

 

7

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Unaudited

 

Stock Based Compensation

 

The Company granted stockoptions for the purchase of common stock to certain executive and managerialemployees under the Company’s 1991 Stock Option Plan, whose expired grantingauthority has been transferred to the successor plan, the 2001 Stock OptionPlan.  The options have an exercise priceequal to the market price of the stock on the date of grant, a term of tenyears and become exercisable, or vested, in equal installments over a five-yearperiod from the date of grant so long as the employees remain in the continuousemploy of the Company.  Prior to July 1,2005, the Company applied Accounting Principles Board (APB) Opinion No. 25, “Accountingfor Stock Issued to Employees”, and related Interpretations in accounting forstock options granted under the plan. Under APB No. 25, compensation cost, if any, is recognized over therespective vesting period based on the difference, if any, on the date ofgrant, between the fair value of the Company’s common stock and the exerciseprice.  All options issued have anexercise price equal to the fair value on the date of grant.  Accordingly, no compensation cost has beenrecognized for those stock options.  OnDecember 31, 2002, the FASB issued SFAS No. 148, “Accounting forStock-Based Compensation – Transition and Disclosure”, which amends SFASNo. 123, “Accounting for Stock-Based Compensation”.  SFAS No. 148’s transition guidance andprovisions for disclosures were effective for fiscal years ending afterDecember 15, 2002.  The Company didnot adopt fair value accounting for employee stock options under SFASNo. 123 and SFAS No. 148. Since all outstanding stock awards are fixed stock options with nointrinsic value at the date of grant and were fully vested before the incomestatement periods presented, there would have been no change in reported netincome and earnings per share had compensation cost been determined based onthe fair value at the grant dates as prescribed by SFAS 123.  In addition, on July 1, 2005 the Company adoptedSFAS No. 123R (revised 2004), “Share-Based Payment”, which replaced SFAS No.123 and superseded APB Opinion No. 25, using the modified prospectiveapplication.  SFAS No. 123R requires allshare-based payments to employees, including grants of employee stock options,to be recognized in the financial statements based on their fair values in thefirst interim or annual period beginning after June 15, 2005.  The pro forma disclosures previouslypermitted under SFAS No. 123 will no longer be an alternative to financialstatement recognition.  The adoption ofSFAS 123R did not result in compensation cost being recorded, as alloutstanding options were fully vested on the date of adoption.

 

Income Taxes

 

Theeffective tax rate for the six months ended December 31, 2005 was 33.9%compared to 38.8% in the comparable period of the prior year.  The decline was primarily attributable to adecrease of Federal income tax reserves resulting from settlement of an IRSAppeals case, in addition to the Domestic Manufacturers Deduction, whichcontributed to 1% of the decline in the rate, available as a result of theenactment of recent Federal tax legislation.

 

Segment Information

 

The Company’soperations are organized and managed by product type.  The Company currently operates in threesegments 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 anyallocation of corporate overhead, interest or taxes.

 

8

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Unaudited

 

The followingpresents the Company’s net sales, operating income and total assets byoperating segment, reconciling to the Company’s totals.  All data presented in thousands of dollars.

 
| ** **          | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|---------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **Net Sales:**      | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                |       |                                 |       |                               |       |   |   |   |   |
| Commercial          |       | $                                    | 32,726     |                               | $          | 31,652 |   | $ | 63,912 |   | $ | 61,861 |   |
| Residential         |       | 21,457                               |       | 17,803                             |       | 44,138 |   | 36,367 |   |
| Aluminum  Extrusion |       | 28,727                               |       | 29,775                             |       | 58,577 |   | 56,817 |   |
| Total Segments      |       | 82,910                               |       | 79,230                             |       | 166,627 |   | 155,045 |   |
| Eliminations        |       | (17,180                              | )          | (17,471                            | )          | (32,640 | ) | (32,559 | ) |
| Total               |       | $                                    | 65,730     |                               | $          | 61,759 |   | $ | 133,987 |   | $ | 122,486 |   |

 
| ** **            | ** ** | **Three Months Ended  December 31,** | ** ** | **Six Months Ended  December 31,** | ** ** |
|-----------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **Operating Income:** | ** ** | **2005**                             | ** ** | **2004**                           | ** ** | **2005** | ** ** | **2004** | ** ** |
|                  |       |                                 |       |                               |       |   |   |   |   |
| Commercial            |       | $                                    | 3,807      |                               | $          | 3,577 |   | $ | 7,727 |   | $ | 7,204 |   |
| Residential           |       | 3,731                                |       | 3,025                              |       | 8,255 |   | 6,127 |   |
| Aluminum  Extrusion   |       | (391                                 | )          | 521                                |       | (709 | ) | 851 |   |
| Total Segments        |       | 7,147                                |       | 7,123                              |       | 15,273 |   | 14,182 |   |
| Eliminations          |       | 199                                  |       | (15                                | )          | 183 |   | 120 |   |
| Corporate             |       | (2,352                               | )          | (2,601                             | )          | (4,746 | ) | (4,817 | ) |
| Total                 |       | $                                    | 4,994      |                               | $          | 4,507 |   | $ | 10,710 |   | $ | 9,485 |   |

 
| **Total Assets:**   | ** ** | **Dec. 31,  2005** | ** ** | **June 30,  2005** | ** ** |
|---------------------|------------|--------------------|------------|--------------------|------------|
|                |       |               |       |               |       |
| Commercial          |       | $                  | 69,145     |               | $          | 66,353 |   |
| Residential         |       | 30,130             |       | 32,076             |       |
| Aluminum  Extrusion |       | 38,066             |       | 42,010             |       |
| Total Segments      |       | 137,341            |       | 140,439            |       |
| Corporate           |       | 21,197             |       | 11,192             |       |
| Total               |       | $                  | 158,538    |               | $          | 151,631 |   |

 

Recent AccountingPronouncements

 

In November 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 151, “InventoryCosts” (SFAS 151), which clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material.  SFAS 151 is effective for inventory costsincurred beginning July 1, 2005.  Uponadoption on July 1, 2005 SFAS 151 did not have a material impact on ourfinancial statements.

 

9

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Unaudited

 

In March 2005, the FASBissued Financial Interpretation No. 47 (FIN 47), “Accounting for ConditionalAsset Retirement Obligations”.  FIN 47 isan interpretation of FASB Statement No. 143, “Accounting for Asset RetirementObligations” and clarifies (i) that an entity is required to recognize aliability for the fair value of a conditional asset retirement obligation whenincurred if the liability’s fair value can be reasonably estimated and (ii)when an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. Upon adoption on July 1, 2005 FIN 47 did not have a material impact onour financial statements.

 

Item 2.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations.

 

Results of Operations

 

General Overview

 

International AluminumCorporation (“Company”) is an integrated manufacturer of quality aluminum andvinyl products for use in commercial and residential applications.  Our marketing brands are recognized leadersin their respective markets.  Operationsare conducted throughout North America, with headquarters in Monterey Park,California.  The Company is structuredinto three business segments, Commercial Products, Residential Products andAluminum Extrusion.  Our performance isdependent to a significant extent upon levels of new construction, repair andremodeling for residential and commercial construction in the geographicmarkets we serve, all of which are affected by such factors as interest rates,consumer confidence and economic outlook.

 

Net sales increased$3,971,000, or 6.4%, for the quarter ended December 31, 2005 and $11,501,000,or 9.4%, for the six months then ended when compared with the respective prioryear periods.  Cost of sales as apercentage of net sales was 77.7% for the current quarter, relatively unchangedfrom 77.8% for the same period last year, and for the six-month period was77.6%, reflecting a slight increase compared to 77.4% for the same period lastyear.  Selling, general andadministrative expenses increased $484,000 for the current quarter and$1,097,000 for the year compared to the same periods last year, although as apercentage of net sales decreased to 14.7% for the quarter and 14.4% year todate compared to 14.9% and 14.8%, respectively, for the comparable periods lastyear.

 

The Companyincludes product costs, inbound freight, purchasing, receiving, inspection,internal transfer, warehousing and other costs of the Company’s distributionnetwork in cost of goods sold, thereby reducing gross profit by these amounts.  Cost of sales and gross profit as a percentof sales for the Company may not be comparable to those of other companies inour industry, since other entities may record purchasing, warehousing anddistribution costs as selling, general and administrative expense.

 

The contribution to theseresults by each segment is discussed below.

 

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Commercial Products

 

Sales of the CommercialProducts Group increased $1,009,000, or 3.2%, for the current quarter endedDecember 31, 2005 and $2,107,000, or 3.4%, for the six months then endedcompared to the same periods last year. These gains reflect increased commercial construction activity togetherwith increased sales prices and expanded geographic market penetration.

 

Cost of sales as apercentage of sales was 76.9% for the current quarter versus 77.2% for the sameperiod last year and for the current six-month period was 76.2% compared to76.8% for the same period last year.  Duringthe current three and six-month periods this Group experienced slightly highermaterial costs reflecting the absorption of increased aluminum costs.  Offsetting these increases were decreasedlabor and overhead cost percentages compared to the same periods last yearreflecting cost-containment efforts coupled with volume efficiencies as aresult of the aforementioned sales increases.

 

Selling, general andadministrative expenses increased $117,000 for the current quarter and $355,000for the year compared to the same periods last year, and as a percentage ofsales were 11.5% for the quarter and 11.8% year to date, virtually unchangedcompared to the same periods last year. The current six-month period includes $230,000 for increased sales representationcosts relating to the increased sales. Adding to the increased costs was aswing from $94,000 in income in the prior year to $5,000 in expense in thecurrent year relating to retrospective workers’ compensation and generalliability policies.  A similar effectimpacted the current quarter, as income of $18,000 was recorded forretrospective workers’ compensation and general liability policies versushigher income of $126,000 being recorded in the same period last year.

 

Residential Products

 

Sales of the ResidentialProducts Group increased $3,692,000, or 20.8%, for the quarter ended December31, 2005 and $7,807,000, or 21.6%, for the six months then ended compared tothe same periods last year. Consumer demand continued to stimulate new homeconstruction, resales of existing homes and home improvement spending in theareas served by this group.  New productdevelopment and increased sales prices have also contributed to the increase insales.

 

Cost of sales as apercentage of sales was relatively unchanged at 70.6% for the current quarterversus 70.9% for the same period last year and 70.1% current year-to-dateversus 70.5% last year.  Slightly highermaterial cost percentages for the current three and six-month periods wereoffset by declines in labor and overhead cost percentages. Additional laborefficiency from the increased volume during the three and six-month periods wasoffset by higher costs incurred for overtime and temporary help in order tomeet on-time delivery commitments.

 

Selling, general andadministrative expenses increased $410,000 for the current quarter and $340,000for the current six-month period compared to the same periods last year, and asa percentage of sales, at 12.0% for the quarter, were virtually unchanged fromthe same quarter last year and decreased to 11.2% for the current six-monthperiod versus 12.7% last year.  Increasedexpenses in the three and six-month periods reflect $177,000 and $377,000,respectively, for additional employment costs related to the increase in sales,and $78,000 and $110,000, respectively, for current year general liabilityinsurance.

 

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Partially offsetting these increases weredecreases of $153,000 and $221,000 for advertising costs for the currentquarter and year-to-date periods, respectively. The current quarter increase in expenses also reflected a swing from$77,000 in income in the prior year quarter to $181,000 expense in the currentquarter relating to retrospective workers’ compensation and general liabilitypolicies.

 

Aluminum Extrusion

 

Sales of the AluminumExtrusion Group increased $1,587,000, or 6.4%, for the six-month period endedDecember 31, 2005, but decreased $730,000, or 5.9%, for the three months thenended compared to the same periods last year. During the current six-month period the group benefited from an increasein selling prices and a slight 1.7% increase in net tonnage shipped to outsidecustomers.  A 14.5% tonnage increase overthe same period at our Texas facility was substantially offset by declines atour California facility.  During thecurrent quarter however, increased selling prices did not compensate for theGroup’s 9.9% decrease in tonnage shipped, as both facilities were impacted bydeclines in tonnage shipped to outside customers due to competitive pressurefrom off-shore suppliers and reduced shipments to the areas impacted by therecent hurricanes in the Gulf Coast region.

 

Cost of sales as apercentage of sales was 97.9% for the current quarter compared to 95.6% for thesame period last year and for the six-month period was 97.7% versus 95.7% forthe comparable period last year.  Acombination of factors contributed to these results.  At both facilities, cost of sales as apercentage of sales increased for the current three and six-month periodscompared to the same periods last year. Due to the highly competitive marketplace, selling prices were increaseddirectly in line with the increased cost of aluminum, resulting in increased materialcost percentages.  At the Californiafacility, total tonnage shipped, including to intercompany customers, for thecurrent quarter and year-to-date declined 13.7% and 5.7%, respectively.  In response to these declines,cost-containment efforts resulted in labor cost percentages only slightlyhigher than those recorded in the same periods last year.  During the current quarter overhead costsdeclined, although as a percentage of sales increased compared to the sameperiod last year as normally recurring expenses were spread over diminishedvolume.  For the current six-monthperiod, overhead costs, and cost percentages, increased due to higher thanexpected maintenance, tooling and utility costs.  At the Texas facility, total tonnage shipped,including to intercompany customers, for the current quarter declined 3.7%, butfor the current six-month period slightly increased by 1.4% compared to lastyear.  Cost-containment efforts enabledthis facility to achieve decreased labor costs, and cost percentages, for thecurrent three and six-month periods compared to last year.  Higher overhead cost percentages wererecorded as cost-containment efforts were hampered by higher than normalutility, maintenance and tooling costs.

 

Selling, general andadministrative expenses increased $206,000 for the current quarter and $473,000for the current year compared to the same periods last year, and as apercentage of sales were 3.5% for both the three and six-month periods,compared to 2.7% and 2.8%, for the respective prior year periods.  The current quarter increase reflected aswing from $14,000 in income in the prior year quarter to $172,000 expense inthe current quarter relating to retrospective workers’ compensationpolicies.  The increase in the currentsix-month period included $311,000 in higher costs relating to retrospectiveworkers’ compensation policies and $138,000 in additional employment costs.

 

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Corporate

 

General andadministrative expenses decreased $249,000 for the current quarter and $71,000for the current year compared to the same periods last year, and as apercentage of consolidated net sales decreased to 3.6% for the quarter and 3.5%year-to-date compared to 4.2% and 3.9%, respectively, for the comparableperiods last year.  The decreasesresulted primarily from reduced expenses for employment, legaland audit services and depreciation. Partially offsetting these decreases were increased costs forprofessional services and directors’ fees.

 

The increasein net interest income compared to the prior year’s three and six-month periodsresulted from increased funds available for investment combinedwith higher rates of return.

 

The effectivetax rate for the six months ended December 31, 2005 was 33.9% compared to 38.8%in the comparable period of the prior year. The decline was primarily attributable to a decrease ofFederal income tax reserves resulting from settlement of an IRS Appeals case,in addition to the Domestic Manufacturers Deduction, which contributed to 1% ofthe decline in the rate, available as a result of the enactment of recentFederal tax legislation.

 

#### Liquidityand Capital Resources

 

Working capital at December31, 2005 stood at $81,776,000, an increase of $4,222,000 from June 30,2005.  The ratio of current assets tocurrent liabilities was 4.2, which was relatively unchanged from the beginningof the year.

 

The Company projects netcapital expenditures of approximately $5,750,000 for fiscal 2006 for expansionof production capacity, as well as normal recurring capitalized replacementitems.  The Company anticipates financingthese expenditures through internal cash flow and cash reserves.  The Company’s lines of credit remainunchanged from those described in the June 30, 2005 Annual Report toShareholders.

 

Recent AccountingPronouncements

 

In November 2004, theFinancial Accounting Standards Board (FASB) issued SFAS No. 151, “InventoryCosts” (SFAS 151), which clarifies the accounting for abnormal amounts of idlefacility expense, freight, handling costs, and wasted material.  SFAS 151 is effective for inventory costsincurred beginning July 1, 2005.  Uponadoption on July 1, 2005, SFAS 151 did not have a material impact on ourfinancial statements.

 

In March 2005, the FASBissued Financial Interpretation No. 47 (FIN 47), “Accounting for ConditionalAsset Retirement Obligations”.  FIN 47 isan interpretation of FASB Statement No. 143, “Accounting for Asset RetirementObligations” and clarifies (i) that an entity is required to recognize aliability for the fair value of a conditional asset retirement obligation whenincurred if the liability’s fair value can be reasonably estimated and (ii)when an entity would have sufficient information to reasonably estimate thefair value of an asset retirement obligation. Upon adoption on July 1, 2005, FIN 47 did not have a material impact onour financial statements.

 

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Forward-Looking Information

 

This reportcontains forward-looking statements with respect to the financial condition,results of operations and business of the Company.  Such items are subject to certain risks anduncertainties that could cause actual results to differ materially from thoseset forth in such statements. The principal important risk factors anduncertainties include, but are not limited to, changes in general economicconditions, aluminum and other material costs, labor costs, interest rates, andother 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 thecommercial and residential construction markets.  Readers are cautioned not to place unduereliance on these forward-looking statements, which speak only as of the datethe statements were made. The Company undertakes no obligation to publiclyupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.

 

Item3.  Quantitative and QualitativeDisclosures About Market Risk.

 

Fluctuatingforeign exchange rates and commodity pricing may impact our earnings.  Our foreign exchange exposure is related toactivities associated with our Canadian subsidiaries.  We do not attempt to manage these risks byentering into forward exchange contracts, forward commodity delivery agreementsor otherwise.

 

Item4.  Controls and Procedures.

 

Evaluation of DisclosureControls and Procedures

 

Under SECrules, the Company is required to maintain disclosure controls and proceduresdesigned to ensure that information required by the Company in the reports thatit files or submits under the Securities Exchange Act of 1934 is recorded,processed, summarized and reported within the time periods specified in theSEC’s rules and forms. As part of the Company’s system of disclosurecontrols and procedures, we have created a Disclosure Committee, which consistsof certain members of the Company’s senior management. The Company’s disclosurecontrols and procedures are designed to ensure that information required to bedisclosed by the Company in the reports that it files or submits under theSecurities and Exchange Act of 1934 is accumulated and communicated tomanagement, including the chief executive officer, chief financial officer andother members of the Disclosure Committee, as appropriate to allow timelydecisions regarding required disclosure.

 

The Companyhas carried out an evaluation of the effectiveness of the design and operationof its disclosure controls and procedures as of the end of the period coveredby this report. The Company’s management, including the Company’s DisclosureCommittee and its chief executive officer and chief financial officer,supervised and participated in the evaluation. Based on the evaluation, thechief executive officer and the chief financial officer concluded that theCompany’s disclosure controls and procedures were effective as of the end ofthe period covered by this report.

 

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Changes in Internal ControlOver Financial Reporting

 

The Company’sevaluation of its internal control over financial reporting during the fiscalquarter to which this report relates identified no change in the Company’sinternal control over financial reporting that has materially affected, or isreasonably likely to materially affect, the Company’s internal control overfinancial reporting.

 

PARTII - OTHER INFORMATION

 

Item 1.  Legal Proceedings.

 

The Companyand certain of its subsidiaries are defendants in a class action lawsuitcaptioned Klotzer, et al. v. International Windows In Time, Inc. (FCS021196)filed in the Superior Court for Solano County, California. The suit allegesthat the Company’s 6200 Series aluminum windows were defective in design andmanufacture.  The plaintiffs seekmonetary damages, attorneys’ fees and costs based upon various legaltheories.  Substantially identicallawsuits have been filed against at least six other aluminum windowmanufacturers.  The Company believes theplaintiffs’ claims are without merit and intends to vigorously defend thislawsuit.  The Company also believes it isinsured with respect to most, if not all of plaintiffs’ claims.  The suit is in its preliminary stages and noprediction can be made as to its eventual outcome.  Based upon current information, management,after consultation with legal counsel, believes the ultimate dispositionthereof will have no material effect upon either the Company’s financialposition, results of operations, or cash flows.

 

Item 6.  Exhibits.

 

(a)                                  Exhibits:

 

31.1                           Certificationof the Chief Executive Officer pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

 

31.2                           Certification of the Chief Financial Officer pursuant toSection 302 of the Sarbanes-Oxley Act of 2002

 

32.1                           Certification of the Chief Executive Officerand Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adoptedpursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

(b)                                 Reports on Form 8-K:

 
| **Date of Report** | ** ** | **Item Reported**                                                                                                                               |
|--------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|
|               |       |                                                                                                                                            |
| November 3, 2005   |       | Press release issued  announcing the Company’s financial results for the first quarter ended  September 30, 2005 and dividend declaration. |
|               |       |                                                                                                                                            |
| December 19, 2005  |       | Reporting on appointment  of principal officer.                                                                                                 |

 

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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 theundersigned thereunto duly authorized.

 
|   |             | International  Aluminum Corporation                                |
|--------|------------------|--------------------------------------------------------------------|
|   |             | (Registrant)                                                       |
|   |             |                                                               |
|   |             |                                                               |
| Date:  | February 7, 2006 |                                                               | MITCHELL  K. FOGELMAN |
|   |             | Mitchell K. Fogelman                                               |
|   |             | Senior Vice President –  Finance(Principal Financial Officer) |
|   |             |
|   |             |                                                               |
|   |             |                                                               |
| Date:  | February 7, 2006 |                                                               | MICHAEL J. NORRING |
|   |             | Michael J. Norring                                                 |
|   |             | Controller  (Principal Accounting Officer)                         |
|   |             |

 

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INDEXTO 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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