Overview

We are a leading manufacturer of security products, precision ball bearing slides, and ergonomic computer support systems used in the office furniture, transportation, tool storage and a variety of other industries. We are also a leading manufacturer of stainless steel exhaust systems, gauges and throttle controls for the performance marine industry.

We reported an operating loss of $937,000 in the first quarter of 2009 compared to operating income of $3.5 million for the first quarter of 2008. Our operating income decreased quarter over quarter primarily due to the effects of lower order rates from our customers relating to unfavorable economic conditions in North America partially offset by the positive effects of cost reductions implemented in response to lower sales and the impact of relative changes in foreign currency exchange rates.

Results of Operations

                                            Three months ended
                                                 March 31,
                                 2008          %          2009          %
                                          (Dollars in thousands)

Net sales                      $ 40,520       100.0 %   $ 28,476       100.0 %
Cost of goods sold               30,578        75.5       23,703        83.2

 Gross margin                     9,942        24.5        4,773        16.8

Operating costs and expenses      6,411        15.8        5,710        20.1

 Operating income (loss)       $  3,531         8.7 %   $   (937 )      (3.3 %)

Net sales. Net sales decreased $12.0 million, or 30%, to $28.5 million in the first quarter of 2009 as compared to $40.5 million in the first quarter of 2008. Net sales decreased due to lower order rates from our customers resulting from unfavorable economic conditions in North America.

Cost of goods sold and gross margin. Cost of goods sold as a percentage of sales increased by 8% in the first quarter of 2009 compared to 2008. As a result, gross margin decreased over the same period. The resulting decline in gross margin is primarily due to reduced coverage of overhead and fixed manufacturing costs from lower sales volume and the related under utilization of capacity partially offset by cost reductions implemented in response to lower sales.

Operating costs and expenses. Operating costs and expenses consist primarily of salaries, commissions and advertising expenses directly related to product sales, as well as, gains and losses on plant, property and equipment and currency transaction gains and losses. As a percentage of net sales, operating costs and expenses increased 4% in the first quarter of 2009 compared to 2008 primarily due to reduced coverage of selling and general administrative costs as a result of lower sales volumes.

Operating income (loss). Operating income (loss) in the first quarter of 2009 decreased to a loss of $937,000 compared to income of $3.5 million for the first quarter of 2008. As a percentage of net sales, operating income (loss) decreased for the first quarter of 2009 compared to the first quarter of 2008 due to the impact of lower gross margin discussed above.

Currency. Our Furniture Components segment has substantial operations and assets located outside the United States (in Canada and Taiwan). The majority of sales generated from our non-U.S. operations are denominated in the U.S. dollar, with the remainder denominated in foreign currencies, principally the Canadian dollar and the New Taiwan dollar. Most raw materials, labor and other production costs for our non-U.S. operations are denominated primarily in local currencies. Consequently, the translated U.S. dollar values of our non-U.S. sales and operating results are subject to currency exchange rate fluctuations which may favorably or unfavorably impact reported earnings and may affect comparability of period-to-period operating results. Our Furniture Component segment's net sales were negatively impacted while its operating income was positively impacted by currency exchange rates in the following amounts as compared to the currency exchange rates in effect during the corresponding period in the prior year:

                                              Increase (decrease)
                                              Three months ended
                                                March 31, 2009
                                                    vs. 2008
                                                (In thousands)

                Impact on net sales          $                (593 )

                Impact on operating income                     688

The negative impact on sales relates to sales denominated in non-U.S. dollar currencies translated into lower U.S. dollar sales due to a weakening of the local currency in relation to the U.S. dollar. The positive impact on operating income results from the U.S. dollar denominated sales of non-U.S. operations converted into higher local currency amounts due to the strengthening of the U.S. dollar. This positively impacted our gross margin as it results in more local currency generated from sales to cover the costs of non-U.S. operations which are denominated in local currency.

Interest expense. Interest expense decreased approximately $439,000 for the period ending March 31, 2009 compared to the same period ending March 31, 2008. The decrease in interest expense is the result of a decrease in interest rates on the outstanding principal amount of our note payable to affiliate (5.7% at March 31, 2008 as compared to 2.4% at March 31, 2009) and the approximately $7.0 million less of principal outstanding in the first quarter of 2009 as compared to the first quarter of 2008.

Provision for income taxes. A tabular reconciliation between our effective income tax rates and the U.S. federal statutory income tax rate of 35% is included in Note 5 to the Condensed Consolidated Financial Statements. Our income tax rates vary by jurisdiction (country and/or state), and relative changes in the geographic mix of our pre-tax earnings can result in fluctuations in the effective income tax rate. Generally, the effective tax rate on income derived from our U.S. operations, including the effect of U.S. state income taxes, is lower than the effective tax rate on income derived from our non-U.S. operations, in part due to the U.S. deferred tax or benefit on our foreign earnings that are not permanently reinvested and an election to not claim a credit with respect to foreign income taxes paid but instead to claim a tax deduction, consistent with the election made by Contran, the parent of our consolidated U.S. federal income tax group. Our geographic mix of pre-tax earnings and the U.S. deferred tax or benefit related to our foreign earnings that are not permanently reinvested without offset by foreign tax credits where available are the primary reasons our effective income tax rate in 2008 and 2009 is higher than the 35% U.S. federal statutory income tax rate. Our effective income tax rate for the first quarter of 2009 increased 7 percentage points from the same period in 2008 primarily due to a higher percentage of our earnings being sourced from Canada. We currently expect our effective income tax rate for the remainder of 2009 will approximate our effective income tax rate for the three months ended March 31, 2009.

Segment Results

The key performance indicator for our segments is operating income.

                                   Three months ended
                                        March 31,               %
                                    2008          2009        Change
                                     (In thousands)

Net sales:
 Security Products               $   19,076     $ 15,283        (19.9 %)
 Furniture Components                17,753       11,895        (33.0 %)
 Marine Components                    3,691        1,298        (64.8 %)

  Total net sales                $   40,520     $ 28,476        (29.7 %)

Gross margin:
 Security Products               $    5,542     $  3,750        (32.3 %)
 Furniture Components                 3,434        1,532        (55.4 %)
 Marine Components                      966         (509 )       n.m.

  Total gross margin             $    9,942     $  4,773        (52.0 %)

Operating income (loss):
 Security Products               $    3,239     $  1,576        (51.3 %)
 Furniture Components                 1,426          (22 )       n.m.
 Marine Components                      103       (1,150 )       n.m.
 Corporate operating expenses        (1,237 )     (1,341 )        8.4 %

  Total operating income         $    3,531     $   (937 )     (126.5 %)

n.m. percentage not meaningful

Security Products. Security Products net sales decreased 20% to $15.3 million in the first quarter of 2009 compared to $19.1 million in the same period last year. The decrease in sales is primarily due to lower customer order rates resulting from unfavorable economic conditions in North America. Gross margin percentage decreased from 29% in the first quarter of 2008 to 25% in the same period in 2009 primarily due to reduced fixed cost coverage from lower sales and the related under utilization of capacity, partially offset by cost reductions implemented in response to lower sales. As a result, operating income percentage for the Security Products segment decreased from 17% for the first quarter of 2008 to 10% for the first quarter of 2009.

Furniture Components. Furniture Components net sales declined 33% to $11.9 million in the first quarter of 2009 compared to $17.8 million in the first quarter of 2008 primarily due to lower order rates from our customers resulting from unfavorable economic conditions in North America. Gross margin percentage decreased from 19% in the first three months of 2008 to 13% in the first three months of 2009 due to reduced coverage of fixed costs from lower sales volume and the related under utilization of capacity offset in part by cost reductions implemented in response to lower sales. As a result, operating income decreased from $1.4 million in the first quarter of 2008 to a loss of $22,000 in the first quarter of 2009.

Marine Components. Marine Components net sales decreased 65% during the first quarter of 2009 as compared to 2008 primarily due to a dramatic overall downturn in the marine industry. As a result, gross margin decreased from $1.0 million in the first quarter of 2008 to a loss of $509,000 in the first quarter of 2009, and operating income decreased from $103,000 to a loss of $1.2 million in the first three months of 2009 compared to the same period in 2008.

Outlook. Demand for our products continues to slow as customers react to the condition of the overall economy. While changes in market demand are not within our control, we are focused on the areas we can impact. Staffing levels are continuously being evaluated in relation to sales order rates resulting in headcount adjustments, to the extent possible, to match staffing levels with demand. We expect our lean manufacturing and cost improvement initiatives to continue to positively impact our productivity and result in a more efficient infrastructure that we can leverage when demand growth returns. Additionally, we continue to seek opportunities to gain market share in markets we currently serve, expand into new markets and develop new product features in order to mitigate the impact of reduced demand as well as broaden our sales base.

In addition to challenges with overall demand, volatility in the cost of raw materials is ongoing. While the cost of commodity raw materials declined from the fourth quarter of 2008, we currently expect these costs to continue to be volatile in 2009. If raw material prices increase, we may not be able to fully recover the cost by passing them on to our customers through price increases due to the competitive nature of the markets we serve and the depressed economic conditions

As discussed in Note 7 to the Condensed Consolidated Financial Statements, certain competitors have filed claims against us for patent infringement. We have denied the allegations of patent infringement and are seeking to have the claims dismissed. While we currently believe the disposition of these claims should not have a material adverse effect on our consolidated financial condition, results of operations or liquidity, we could incur costs defending against such claims that could be material.

Liquidity and Capital Resources

Consolidated Cash Flows -

Operating activities. Trends in cash flows from operating activities, excluding changes in assets and liabilities have generally been similar to the trends in operating earnings. Changes in assets and liabilities result primarily from the timing of production, sales and purchases. Changes in assets and liabilities generally tend to even out over time. However, period-to-period relative changes in assets and liabilities can significantly affect the comparability of cash flows from operating activities. Our cash provided by operating activities for the first three months of 2009 decreased by $2.7 million as compared to the first three months of 2008 due primarily to the net effects of:

· Lower operating income in 2009 of approximately $4.5 million;

· Higher net cash provided by relative changes in our inventories, receivables, payables and non-tax related accruals of $1.9 million in 2009; and

· Higher cash paid for income taxes in 2009 of approximately $400,000 due to the timing of taxes paid on non-U.S. earnings.

Relative changes in working capital can have a significant effect on cash flows from operating activities. As shown below, our average days sales' outstanding increased from December 31, 2008 to March 31, 2009. The increase is primarily due to the timing of collections on a lower accounts receivable balance as of March 31, 2009. As shown below, our average number of days in inventory increased from December 31, 2008 to March 31, 2009. The increase in days in inventory is primarily due to lower sales in the first quarter of 2009 which impacted the days in inventory. In absolute terms, however, we reduced inventory by $1.8 million in the first quarter of 2009 as compared to December 31, 2008. For comparative purposes, we have provided comparable prior year numbers below.

                               December 31, March 31, December 31, March 31,
                                   2007       2008        2008       2009

       Days' Sales Outstanding   44 days     43 days    41 days     44 days
       Days in Inventory         63 days     75 days    70 days     80 days

Investing activities. Net cash used by investing activities totaled $1.2 million in the first quarter of 2008 compared to net cash used by investing activities of $333,000 in the first quarter of 2009 due primarily to lower planned capital expenditures in 2009.

Financing activities. Net cash used by financing activities was comparable at $2.1 million in the first quarter of 2008 and $1.9 million in the first quarter of 2009. We paid quarterly dividends of $1.6 million and $1.5 million, or $.125 per share, in the first quarter of 2008 and 2009, respectively.

Debt obligations. Provisions contained in our $37.5 million revolving credit facility could result in the acceleration of any outstanding indebtedness prior to its stated maturity for reasons other than defaults from failing to comply with typical financial covenants. For example, our revolving credit facility allows the lender to accelerate the maturity of the indebtedness upon a change of control (as defined) of the borrower. The terms of our revolving credit facility could result in the acceleration of all or a portion of the indebtedness following a sale of assets outside of the ordinary course of business. There are no amounts outstanding under our revolving credit facility. Although there are no current expectations to borrow on the revolving credit facility, lower future operating results would likely reduce our amount available to borrow.

Future Cash Requirements -

Liquidity. Our primary source of liquidity on an ongoing basis is cash flow from operating activities, which is generally used to (i) fund capital expenditures,
(ii) repay short-term indebtedness incurred primarily for working capital or capital expenditure purposes and (iii) provide for the payment of dividends (if declared). From time-to-time, we will incur indebtedness, primarily for short-term working capital needs or to fund capital expenditures. From time-to-time, we may also sell assets outside the ordinary course of business, the proceeds of which are generally used to repay indebtedness (including indebtedness which may have been collateralized by the assets sold) or to fund capital expenditures or business acquisitions.

Periodically, we evaluate liquidity requirements, alternative uses of capital, capital needs and available resources in view of, among other things, our capital expenditure requirements, dividend policy and estimated future operating cash flows. As a result of this process, we have in the past and may in the future seek to raise additional capital, refinance or restructure indebtedness, issue additional securities, modify our dividend policy or take a combination of such steps to manage our liquidity and capital resources. In the normal course of business, we may review opportunities for acquisitions, joint ventures or other business combinations in the component products industry. In the event of any such transaction, we may consider using available cash, issuing additional equity securities or increasing our indebtedness or that of our subsidiaries.

We believe that cash generated from operations and borrowing availability under our $37.5 million revolving credit facility, together with cash on hand, will be sufficient to meet our liquidity needs for working capital, capital expenditures, debt service and dividends (if declared) for at least the next 12 months. To the extent that our actual operating results or other developments differ from our expectations, our liquidity could be adversely affected.

At March 31, 2009, there were no amounts outstanding under our $37.5 million revolving credit facility that matures in January 2012. The entire balance is currently available for future borrowings, although lower future operating results would likely reduce our amount available to borrow.

Capital Expenditures. Firm purchase commitments for capital projects in process at March 31, 2009 approximated $795,000. We have lowered our planned capital expenditures in 2009 in response to the current economic conditions. We are limiting 2009 investments to those expenditures required to meet our lower expected customer demand and those required to properly maintain our facilities.

Repurchase of Common Stock. We have in the past, and may in the future, make repurchases of our common stock in market or privately-negotiated transactions. At April 29, 2009, we had approximately 678,000 shares available for repurchase of our common stock under previous authorizations.

Commitments and Contingencies. See Note 7 to the Condensed Consolidated Financial Statements for a description of certain legal proceedings.

Off balance sheet financing arrangements -

We do not have any off-balance sheet financing agreements other than the operating leases discussed in our 2008 Annual Report.

Recent accounting pronouncements -

See Note 8 to the Condensed Consolidated Financial Statements.

Critical accounting policies and estimates -

There have been no changes in the first quarter of 2009 with respect to our critical accounting policies presented in Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2008 Annual Report.

Forward-Looking Information

As provided by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, we caution that the statements in this Quarterly Report on Form 10-Q relating to matters that are not historical facts are forward-looking statements that represent our beliefs and assumptions based on currently available information. Forward-looking statements can be identified by the use of words such as "believes," "intends," "may," "should," "anticipates," "expects" or comparable terminology, or by discussions of strategies or trends. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we do not know if our expectations will prove to be correct. Such statements by their nature involve substantial risks and uncertainties that could significantly impact expected results, and actual future results could differ materially from those described in such forward-looking statements. Among the factors that could cause actual future results to differ materially are the risks and uncertainties discussed in this Quarterly Report and those described from time to time in our other filings with the Securities and Exchange Commission. While it is not possible to identify all factors, we continue to face many risks and uncertainties including, but not limited to the following:

· Future supply and demand for our products,

· Changes in our raw material and other operating costs (such as steel and energy costs),

· General global economic and political conditions (such as changes in the level of gross domestic product in various regions of the world),

· Demand for office furniture,

· Service industry employment levels,

· Demand for high performance marine components,

· Competitive products and prices, including competition from lower-cost manufacturing sources (such as China),

· Substitute products,

· Customer and competitor strategies,

· The introduction of trade barriers,

· The impact of pricing and production decisions,

· Fluctuations in the value of the U.S. dollar relative to other currencies (such as the Canadian dollar and New Taiwan dollar),

· Potential difficulties in integrating completed or future acquisitions,

· Decisions to sell operating assets other than in the ordinary course of business,

· Uncertainties associated with the development of new product features,

· Environmental matters (such as those requiring emission and discharge standards for existing and new facilities),

· Our ability to comply with covenants contained in our revolving bank credit facility,

· The ultimate outcome of income tax audits, tax settlement initiatives or other tax matters,

· The impact of current or future government regulations,

· Current and future litigation,

· Possible disruption of our business or increases in the cost of doing business resulting from terrorist activities or global conflicts, and

· Operating interruptions (including, but not limited to labor disputes, leaks, natural disasters, fires, explosions, unscheduled or unplanned downtime and transportation interruptions).