form10-k.htm
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ý ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES
EXCHANGE ACT OF 1934
For
the fiscal year ended February 29, 2008
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: 1-12777
AZZ
incorporated
(Exact
name of registrant as specified in its charter)
TEXAS
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75-0948250
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(State
or other jurisdiction of incorporation or organization)
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(I.R.S.
Employer Identification No.)
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University
Centre I, Suite 200
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1300
South University Drive
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Fort
Worth, Texas
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76107
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(Address
of principal executive offices)
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(Zip
Code)
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(817)
810-0095
(Registrant’s
telephone number, including area code)
None
(Former
name, former address and former fiscal year, if changed since last
report)
Securities
registered pursuant to Section 12(b) of the Act:
Title
of each class
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Name
of each exchange on which registered
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Common
Stock, $1.00 par value per share
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New
York Stock Exchange
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Exchange Act.
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. T
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.
Large
accelerated filer £
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Accelerated
filer T
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Non-accelerated
filer £
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Smaller
Reporting Company £
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
As of
August 31, 2007 (the last business day of its most recently completed second
fiscal quarter), the aggregate market value of the registrant’s common stock
held by non-affiliates of the registrant was $331,321,585 based on the closing
sale price of $28.40 per share as reported on the New York Stock Exchange (For
purposes of determining the above stated amount, only the directors, executive
officers and 10% or greater shareholders of the registrant have been deemed
affiliates; however, this does not represent a conclusion by the registrant that
any or all such persons are affiliates of the registrant).
As of
February 29, 2008, there were 12,128,972 shares of the registrant’s common Stock
($1.00 par value) outstanding, after giving effect to our two-for-one stock
split, effective in the form of a share dividend on May 4, 2007.
DOCUMENTS
INCORPORATED BY REFERENCE
Document
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Parts Into Which
Incorporated
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Proxy
Statement for the 2008 Annual Meeting of Shareholders to be held July 8,
2008
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Part
III
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AZZ
incorporated
YEAR
ENDED FEBRUARY 29, 2008
PART
I
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1
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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5
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Item
1B.
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Unresolved
Staff Comments
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8
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Item
2.
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Properties
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8
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Item
3.
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Legal
Proceedings
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9
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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9
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PART
II
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9
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Item
5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
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9
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Item
6.
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11
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operation
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11
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Item
7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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22
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Item
8.
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Financial
Statements and Supplementary Data
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22
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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22
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Item
9A.
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Controls
and Procedures
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22
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Item
9B.
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Other
Information
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23
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PART
III
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23
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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23
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Item
11.
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Executive
Compensation
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24
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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24
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Item
13.
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Certain
Relationships and Related Transactions, and Directors
Independence
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25
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Item
14.
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Principal
Accountant Fees and Services
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25
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PART
IV
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25
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Item
15.
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Exhibits
and Financial Statement Schedules
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25
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SIGNATURES
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26
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Forward
Looking Statements
This
Annual Report on Form 10-K may contain “forward-looking statements” within the
meaning of Section 27A of the Securities Act of 1933, as amended, and Section
21E of the Securities Exchange Act of 1934, as amended. These
statements are generally identified by the use of words such as “anticipate,”
“expect,” “estimate,” “intend,” “should,” “may,” “believe,” and terms with
similar meanings. Although the Company believes that the current
views and expectations reflected in these forward-looking statements are
reasonable, those views and expectations, and the related statements, are
inherently subject to risks, uncertainties, and other factors, many of which are
not under the Company’s control. Those risks, uncertainties, and
other factors could cause the actual results to differ materially from those in
the forward-looking statements. Those risks, uncertainties, and
factors include, but are not limited to: the level of customer demand for and
response to products and services offered by the Company, including demand by
the power generation markets, electrical transmission and distribution markets,
the general industrial market, and the hot dip galvanizing markets; prices and
raw material cost, including the cost of zinc and natural gas, which are used in
the hot dip galvanizing process; changes in economic conditions of the various
markets the Company serves, both foreign and domestic; customer requested delays
of shipments; acquisition opportunities or lack thereof; adequacy of financing;
and availability of experienced management employees to implement the Company’s
growth strategy. The Company expressly disclaims any obligation to
release publicly any updates or revisions to these forward-looking statements to
reflect any change in its views or expectations. The Company can give no
assurances that such forward-looking statements will prove to be
correct.
PART
I
Item
1. Business
AZZ
incorporated (“AZZ”, the “Company” or “we”) was established in 1956 and
incorporated under the laws of the State of Texas. We are an electrical
equipment and components manufacturer, serving the global markets of power
generation, transmission and distribution, and the general industrial markets,
and a leading provider of hot dip galvanizing services to the steel fabrication
market nationwide. We offer products through two distinct business
segments, the Electrical and Industrial Products Segment and the Galvanizing
Services Segment.
Electrical
and Industrial Products Segment
Our
Electrical and Industrial Products Segment produces highly engineered specialty
electrical products as well as industrial lighting and tubular products, all of
which we market and sell both in domestic and international markets. Our
electrical products are designed, manufactured and configured to distribute
electrical power to and from generators, transformers, switching devices and
other electrical configurations and are supplied to the power generation,
transmission and distribution markets as well as the general industrial
market. Our industrial products include industrial lighting and
tubular products used for petro-chemical and industrial applications. We provide
lighting products to the petroleum, food processing, and to industries with
unique lighting challenges. We also provide tubular products to the
petroleum industry.
The
markets for our Electrical and Industrial Products Segment are highly
competitive and consist of a few large multi-national companies, as well as
numerous small independent companies. Competition is based primarily
on product quality, range of product line, price and service. While
some of our competitors are much larger and better financed than us, we believe
that we can compete favorably with them.
Copper,
aluminum and steel are the primary raw materials used by this segment. All of
these raw materials are currently readily available.
We sell
this segment's products through manufacturers' representatives, distributors,
agents and our internal sales force. We are not dependent on any
single customer for this segment, and the loss of any single customer would not
have a material adverse effect on our consolidated revenues or net
income.
Backlog
of orders for the Electrical and Industrial Products Segment was approximately
$134.9 million at February 29, 2008, $120.7 million at February 28, 2007, and
$73.8 million
at February 28, 2006. The majority of the backlog as of February 29, 2008 should
be delivered during the next 18 months. We believe that the contracts
and purchase orders included in the backlog are firm.
We employ
a total of 747
people in this segment as of February 29, 2008.
Galvanizing
Services Segment
The
Galvanizing Services Segment provides hot dip galvanizing to the steel
fabrication industry through facilities located throughout the South, Midwest
and Southwest United States. Hot dip galvanizing is a
metallurgical process in which molten zinc is applied to a customer's material.
The zinc bonding renders a corrosion protection to fabricated steel for extended
periods of up to 50 years. As of February 29, 2008, we operate
fourteen galvanizing plants, which are located in Texas, Louisiana, Alabama,
Mississippi, Arkansas, Arizona, Indiana and Ohio.
Galvanizing
is a highly competitive business, and we compete with other galvanizing
companies, captive galvanizing facilities operated by manufacturers, and
alternate forms of corrosion protection such as paint. Our
galvanizing market is generally limited to areas within a relatively close
proximity of our galvanizing plants due to freight cost.
Zinc, the
principal raw material used in the galvanizing process, is currently readily
available, but has volatile pricing. We manage our exposure to
commodity pricing of zinc by utilizing agreements with zinc suppliers that
include protective caps to guard against escalating commodity
prices.
We
typically serve fabricators and/or manufacturers who provide services to the
electrical and telecommunications, bridge and highway, petrochemical and general
industrial markets, as well as numerous original equipment manufacturers
(“OEMs”). We do not depend on any single customer for our galvanizing
services, and the loss of any single customer would not have a material adverse
effect on our consolidated revenues or net income.
The
backlog of galvanizing orders generally is nominal due to the short time
requirement involved in the process.
We employ
a total of 675
people in this segment as of February 29, 2008.
Recent
Developments
On March
31, 2008, AZZ incorporated entered into an Asset Purchase Agreement to acquire
substantially all of the assets AAA Industries, Inc. The purchase price of the
transaction was approximately $83,000,000, subject to adjustment as more fully
described in the Asset Purchase Agreement filed on Form 8-K on April 1, 2008.
The purchased assets included six galvanizing plants (three plants located in
Illinois, one plant located in Indiana, one plant located in Minnesota and one
plant located in Oklahoma) and related equipment and supplies.
The
purchase price will be allocated to the underlying assets and liabilities based
on their estimated fair values. The resulting goodwill from this
transaction is currently estimated at $16 million. The goodwill
estimate is preliminary, pending the results of appraisals, and audit, and
further financial analysis. For the year ended December 31, 2007, AAA
Industries, Inc. had sales of approximately $55 million.
Additionally,
on March 31, 2008, the Company entered into a Note Purchase Agreement pursuant
to which the Company issued $100,000,000 aggregate principal amount of its 6.24%
unsecured Senior Notes due March 31, 2018 through a private placement (the "Note
Offering"). Pursuant to the Note Purchase Agreement, the Company’s
payment obligations with respect to the Senior Notes may be accelerated upon any
Event of Default, as defined in the Note Purchase Agreement.
In
connection with the Note Offering, the Company entered into the Second Amendment
to Second Amended and Restated Credit Agreement, (the “Second Amendment”) with
Bank of America, N. A. (“Bank of America”), which amended the Second Amended and
Restated Credit Agreement by and among the Company, Bank of America
and
certain
other lenders (including Bank of America) dated as of May 25, 2006 (the “Credit
Agreement”). The Second Amendment contains the consent of Bank of America to the
Note Offering and amended the Credit Agreement to provide that the Note Offering
will not constitute a default under the Credit Agreement.
The
Senior Notes provide for various financial covenants of a) Minimum Consolidated
Net Worth - Maintain on a consolidated basis net worth equal to at least the sum
of $116.9 million plus 50% of future net income; b) Maximum Ratio of
Consolidated Indebtedness to Consolidated EBITDA – Maintain a ratio of
indebtedness to EBITDA (as defined in Note Purchase Agreement) not to exceed
3.25:1.00; c) Fixed Charge Coverage Ratio – Maintains on a
consolidated basis a Fixed Charge Coverage Ratio of at least 2.0:1.0; d)
Priority Indebtedness – The Company will not at any time permit aggregate amount
of all Priority Indebtedness to exceed 10% of Consolidated Net
Worth. In conjunction with Note Offering, the Credit Agreement with
Bank of America was amended to reflect the same debt covenants as presented
above.
Executive
Officers of the Registrant
Name
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Age
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Business
Experience for Past Five Years
Position or Office with Registrant or Prior
Employer
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Held Since
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David
H. Dingus
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60
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President
and Chief Executive Officer
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2001
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Dana
L. Perry
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59
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Senior
Vice President of Finance, Chief Financial Officer and
Secretary
Vice
President of Finance, Chief Financial Officer, Asst. Sec.
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2004
1992-2004
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John
V. Petro
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62
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Senior
Vice President Operations, Electrical & Industrial
Products
Vice
President Operations, Electrical & Industrial Products
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2006
2001-2006
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Clement
H. Watson
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61
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Vice
President Sales, Electrical Products
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2000
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Jim
C. Stricklen
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59
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Vice
President, Business and Manufacturing Systems
Vice
President, Assist Connectivity Technology
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2004
2001-2003
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Tim
E. Pendley
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46
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Vice
President Operations, Galvanizing Services Segment
Division
Operations Manager
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2004
1999-2004
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Richard
W. Butler
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42
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Vice
President, Corporate Controller
Corporate
Controller
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2004
1999-2004
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Robert
D. Ruffin
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67
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Vice
President, Human Resources
Corporate
Director, Human Resources
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2005
1999-2005
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Ashok
E. Kolady
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34
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Vice
President, Business Development
Operation,
Marketing, & Business Development, Eaton Corp
Process
Improvement Lead, General Motors Corporation
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2007
2004-2007
1999-2004
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Each
executive officer was elected by the Board of Directors to hold office until the
next Annual Meeting or until his successor is elected. There are no
family relationships between the Executive Officers of the Company.
Available
Information
We are
subject to the reporting requirements of the Securities Exchange Act of 1934, as
amended, and its rules and regulations. The Exchange Act requires us
to file reports, proxy statements and other information with the
SEC. Copies of these reports, proxy statements and other information
can be inspected and copied at:
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SEC
Public Reference Room
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100
F Street, N.E.
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Washington,
D.C. 20549
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You may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. You may also obtain copies of any material we
have filed with the SEC by mail at prescribed rates from:
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Public
Reference Section
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Securities
and Exchange Commission
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100
F Street N.E.
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Washington,
D.C. 20549
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You may
obtain these materials electronically by accessing the SEC’s website on the
Internet at:
In
addition, we make available, free of charge, on our internet website, our annual
report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form
8-K, and amendments to these reports filed or furnished pursuant to Section
13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we
electronically file this material with, or furnish it to, the
SEC. You may review these documents, under the heading “Investor
Relations,” subheading “SEC Filings,” on our website at:
Reports
and other information concerning our Company are available for inspection and
copying at:
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New
York Stock Exchange
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20
Broad Street
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New
York, New
York 10005
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Corporate
Governance
Our
Company’s Board of Directors (the "Board"), with the assistance of its
Nominating and Corporate Governance Committee, has adopted Corporate Governance
Guidelines that set forth the Board’s policies regarding corporate
governance.
In
connection with the Board's responsibility to oversee our legal compliance and
conduct, the Board has adopted a Code of Ethics, which applies to the Company’s
officers, directors and employees.
The Board
has adopted charters for each of its Audit Committee, Compensation Committee and
Nominating and Corporate Governance Committee. You may review the
Corporate Governance Guidelines, our Code of Ethics and our Committee charters
under the Heading “Investor Relations,” subheading “Corporate Governance,” on
our website at:
You may
also obtain a copy of these documents by mailing a request to:
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AZZ
incorporated
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Investor
Relations
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University
Centre I, Suite 200
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1300
South University Drive
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Fort
Worth, TX 76107
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Item
1A. Risk
Factors
Our
business is subject to a variety of risks, including the risks described below.
While we believe that the risks and uncertainties described below are the most
significant risks and uncertainties facing our business, they are not the only
ones facing us. Additional risks and uncertainties not known to us or not
described below may also impair our business operations. If any of the following
risks actually occur, our business, financial condition and results of
operations could be negatively impacted and our future growth could be impacted
as well.
Our
business segments operate in highly competitive markets
Many of
our competitors, primarily in our Electrical and Industrial Products Segment,
are significantly larger and have substantially more resources than we do.
Competition is based on a number of factors, including price. Certain of our
competitors may have lower cost structures and may, therefore, be able to
provide their products and services at lower rates than we are able to provide.
We cannot be certain that our competitors will not develop the expertise,
experience and resources to provide services that are superior in both price and
quality. Similarly, we cannot be certain that we will be able to maintain or
enhance our competitive position within our industries, maintain our customer
base at current levels or increase our customer base.
Our
business segments are sensitive to economic downturns
If the
general level of economic activity deteriorates from current levels, our
customers may delay or cancel new projects. If there is a reduction in demand
for our products or services, as a result of a downturn in the general economy,
there could be a material adverse effect on price levels and the quantity of
goods and services purchased, therefore adversely impacting revenues and results
from operations. A number of factors, including financing conditions and
potential bankruptcies in the industries we serve, could adversely affect our
customers and their ability or willingness to fund capital expenditures in the
future and pay for past services.
International
and political events may adversely affect our Electrical and Industrial Products
Segment
A portion
of the revenues from our Electrical and Industrial Products Segment are from
international markets. The occurrence of any of the risks described below could
have an adverse effect on our consolidated results of operations, cash flows and
financial condition:
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political
and economic instability;
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social
unrest, acts of terrorism, force majeure, war or other armed
conflict;
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currency
fluctuation, devaluations and conversion
restrictions;
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governmental
activities that limit or disrupt markets, restrict payments or limit the
movement of funds; and
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trade
restrictions and economic embargoes by the United States or other
countries.
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Fluctuations
in the price and supply of raw materials and natural gas for our business
segments may adversely affect our operations.
We
purchase a wide variety of raw materials for our Electrical and Industrial
Products Segment to manufacture our products, including steel, aluminum and
copper. Unanticipated increases in raw material requirements or price increases
could increase production costs and adversely affect profitability. In our
Galvanizing Service Segment, zinc and natural gas represent a large portion of
our cost of sales. The prices of zinc and natural gas are highly volatile. The
following factors, which are beyond our control, affect the price of raw
materials and natural gas for our business segments: supply and demand; freight
costs and transportation availability; inventory levels; trade duties and taxes;
and labor disputes. We seek to maintain operating margins by attempting to
increase the price of our products and services in response to increased costs,
but may not be successful in passing these price increases through to our
customers.
Our
dependence upon fixed-price contracts for our Electrical and Industrial Products
Segment could adversely affect our business.
We
currently generate, and expect to continue to generate, a significant portion of
our revenues under fixed price contracts. We must estimate the costs of
completing a particular project to bid for fixed-price contracts. The actual
cost of labor and materials, however, may vary from the costs we originally
estimated. Depending on the size of particular project, variations from
estimated cost could have a significant impact on our operating results for any
fiscal year.
Our
compliance with various governmental regulations and environmental risks may
increase our costs.
Our
business is subject to numerous federal, state, provincial, local and foreign
laws and regulations, including regulations, primarily in our Galvanizing
Services Segment, with respect to air emissions, storm water runoff and the
generation, handling, storage, transportation, treatment, and disposal of waste
materials. Although we believe we are substantially in compliance with all
applicable laws and regulations, legal requirements are frequently changed and
subject to interpretation, and the presently unpredictable ultimate cost of
compliance with these requirements could adversely impact our operations. We may
be required to make significant expenditures to comply with governmental laws
and regulations. Existing laws or regulations, as currently interpreted or
reinterpreted in the future, or future laws or regulations, could have a
material adverse effect on our results of operations and financial
condition.
Our
acquisition strategy involves a number of risks.
We intend
to pursue growth through the pursuit of opportunities to acquire companies or
assets that will enable us to expand our product and service
offerings. We routinely review potential
acquisitions. However, we may be unable to implement this growth
strategy if we cannot reach agreement on potential strategic acquisitions on
acceptable terms or for other reasons. Moreover, our acquisition
strategy involves certain risks, including:
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difficulties
in the integration of operations and
systems;
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the
termination of relationships by key personnel and customers of the
acquired company;
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a
failure to add additional employees to handle the increased volume of
business;
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additional
financial and accounting challenges and complexities in areas such as tax
planning, treasury management and financial
reporting;
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risks
and liabilities from our acquisitions, some of which may not be discovered
during our due diligence;
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·
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a
disruption of our ongoing business or an inability of our ongoing business
to receive sufficient management attention;
and
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·
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a
failure to realize the cost savings or other financial benefits we
anticipated.
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Future
acquisitions may require us to obtain additional equity or debt financing, which
may not be available on attractive terms.
Our
use of percentage-of-completion accounting in the Electrical and Industrial
Products Segment could result in a reduction or elimination of previously
reported profits.
As
discussed in “Management’s Discussion and Analysis of Financial Condition and
Results of Operations-Critical Accounting Policies and Estimates” and in the
notes to our consolidated financial statements, a portion of our revenues is
recognized on a percentage-of-completion method of accounting. The
percentage-of-completion accounting practice we use results in our recognizing
contract revenues and earnings ratably over the contract term in proportion to
our incurrence of contract costs. The earnings or losses recognized
on individual contracts are based on estimates of contract revenues, costs and
profitability. Contract losses are recognized in full when
determined, and contract profit estimates are adjusted based on ongoing reviews
of contract profitability. Actual collection of contract amounts or
change orders could differ from estimated amounts and could result in a
reduction or elimination of previously recognized earnings. In
certain circumstances, it is possible that such adjustments could be
significant.
We
may not be able to fully realize the revenue value reported in our backlog for
our Electrical and Industrial Products Segment.
We have a
backlog of work in our Electrical and Industrial Products Segment to be
completed on contracts. Orders included in our backlog are
represented by customer purchase orders and contracts, which we believe to be
firm. Backlog develops as a result of new business secured, which
represents the revenue value of new project commitments received by us during a
given period. Backlog consists of projects which have either (1) not
yet been started or (2) are in progress and are not yet complete. In
the latter case, the revenue value reported in backlog is the remaining value
associated with work that has not yet been completed. From time to
time, projects are cancelled that appeared to have a high certainty of going
forward at the time they were recorded as new business taken. In the
event of a project cancellation, we may be reimbursed for certain costs but
typically have no contractual right to the total revenue reflected in our
backlog. In addition to being unable to recover certain direct costs,
we may also incur additional costs resulting from underutilized assets if
projects are cancelled.
Our
operating results may vary significantly from quarter to quarter.
Our
quarterly results may be materially and adversely affected by:
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·
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the
timing and volume of work under new
agreements;
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·
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general
economic conditions;
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·
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the
budgetary spending patterns of
customers;
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·
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variations
in the margins of projects performed during any particular
quarter;
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·
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losses
experienced in our operations not otherwise covered by
insurance;
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·
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a
change in the demand or production of our products and our services caused
by severe weather conditions;
|
|
·
|
a
change in the mix of our customers, contracts and
business;
|
|
·
|
a
change in customer delivery
schedule;
|
|
·
|
increases
in design and manufacturing costs;
and
|
|
·
|
abilities
of customers to pay their invoices owed to
us.
|
Accordingly,
our operating results in any particular quarter may not be indicative of the
results that you can expect for any other quarter or for the entire
year.
We
may be unsuccessful at generating internal growth.
Our
ability to generate internal growth will be affected by, among other factors,
our ability to:
|
·
|
attract
new customers, internationally and
domestically;
|
|
·
|
increase
the number or size of projects performed for existing
customers;
|
|
·
|
hire
and retain employees; and
|
|
·
|
increase
volume utilizing our existing
facilities.
|
Many of
the factors affecting our ability to generate internal growth may be beyond our
control, and we cannot be certain that our strategies will be successful or that
we will be able to generate cash flow sufficient to fund our operations and to
support internal growth. If we are unsuccessful, we may not be able
to achieve internal growth, expand our operations or grow our
business.
The
departure of key personnel could disrupt our business.
We depend
on the continued efforts of our executive officers and senior
management. We cannot be certain that any individual will continue in
such capacity for any particular period of time. The loss of key
personnel, or the inability to hire and retain qualified employees, could
negatively impact our ability to manage our business.
Our
business requires skilled labor, and we may be unable to attract and retain
qualified employees.
Our
ability to maintain our productivity and profitability will be limited by our
ability to employ, train and retain skilled personnel necessary to meet our
requirements. We may experience shortages of qualified
personnel. We cannot be certain that we will be able to
maintain an adequately skilled labor force necessary to operate efficiently and
to support our growth strategy or that our labor expense will not increase as a
result of shortage in the supply of skilled personnel. Labor shortages or
increased labor costs could impair our ability to maintain our business or grow
our revenues.
Item
1B. Unresolved Staff Comments
There
were no unresolved staff comments as of February 29, 2008.
Item
2. Properties
The
following table sets forth information about the Company's principal facilities,
owned or leased, on February 29, 2008:
Location
|
Land/Acres
|
Buildings/Sq. Footage
|
Segment/Occupant
|
|
|
|
|
Crowley,
Texas
|
29.7
|
201,000
|
Electrical
and Industrial Products
|
Houston,
Texas
|
5.4
|
61,600
|
Electrical
and Industrial Products
|
Richland,
Mississippi
|
6.7
|
58,700
|
Electrical
and Industrial Products
|
Pittsburg,
Kansas
|
15.3
|
87,800
|
Electrical
and Industrial Products
|
Medway,
Massachusetts
|
-
|
(Leased)
80,863
|
Electrical
and Industrial Products
|
Fulton,
Missouri
|
-
|
(Leased)
82,000
|
Electrical
and Industrial Products
|
Tulsa,
Oklahoma
|
-
|
(Leased)
66,000
|
Electrical
and Industrial Products
|
Greenville,
South Carolina
|
-
|
(Leased)
51,000
|
Electrical
and Industrial Products
|
Crowley,
Texas
|
28.5
|
79,200
|
Galvanizing
Services
|
Houston,
Texas
|
25.2
|
61,800
|
Galvanizing
Services
|
Waskom,
Texas
|
10.6
|
30,400
|
Galvanizing
Services
|
Beaumont,
Texas
|
12.9
|
33,700
|
Galvanizing
Services
|
Moss
Point, Mississippi
|
13.5
|
16,000
|
Galvanizing
Services
|
Richland,
Mississippi
|
5.6
|
22,800
|
Galvanizing
Services
|
Citronelle,
Alabama
|
10.8
|
34,000
|
Galvanizing
Services
|
Goodyear,
Arizona
|
16.8
|
36,800
|
Galvanizing
Services
|
Prairie
Grove, Arkansas
|
11.5
|
34,000
|
Galvanizing
Services
|
Belle
Chasse, Louisiana
|
9.5
|
34,000
|
Galvanizing
Services
|
Port
Allen, Louisiana
|
22.2
|
48,700
|
Galvanizing
Services
|
Cincinnati,
Ohio
|
15
|
81,700
|
Galvanizing
Services
|
Muncie,
Indiana
|
6.6
|
50,200
|
Galvanizing
Services
|
Plymouth,
Indiana
|
40
|
42,900
|
Galvanizing
Services
|
Fort
Worth, Texas
|
-
|
(Leased)
18,600
|
Corporate
Offices
|
Item
3. Legal
Proceedings
Environmental
Proceedings
We are
subject to various environmental protection reviews by state and federal
government agencies. We cannot presently determine the ultimate liability, if
any, that might result from these reviews or additional clean-up and remediation
expenses. However, as a result of an internal analysis and prior
clean-up efforts, we believe that the reviews and any required remediation will
not have a material impact on the Company. In order to maintain permits to
operate certain of our facilities, we may need to make future capital
expenditures for equipment in order to meet new or existing environmental
regulations.
Other
Proceedings
We are
involved from time to time in various suits and claims arising in the normal
course of business. In management’s opinion, the ultimate resolution of these
matters will not have a material effect on our financial position or results of
operations.
Item
4. Submission
of Matters to a Vote of Security Holders
No matter
was submitted to a vote of security holders through the solicitation of proxies
or otherwise during the fourth quarter of the fiscal year ended February 29,
2008.
PART
II
Item
5.
|
Market
for Registrant's Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities.
|
Our
common stock, $1.00 par value, (“Common Stock”) is traded on the New York Stock
Exchange and under the symbol “AZZ”. The following table sets forth
the high and low sales prices of our Common Stock on the New York Stock Exchange
on a quarterly basis for each of the two fiscal years ended February 29, 2008
and February 28, 2007, all of which have been adjusted to reflect our
two-for-one stock split, effected in the form of a stock dividend on May 4,
2007.
|
|
Quarter
Ended
May
31,
|
|
|
Quarter
Ended
August
31,
|
|
|
Quarter
Ended
November
30,
|
|
|
Quarter
Ended
February
29/28,
|
|
Per
Share
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2007
|
|
|
2006
|
|
|
2008
|
|
|
2007
|
|
High
|
|
$ |
34.62 |
|
|
$ |
13.00 |
|
|
$ |
41.45 |
|
|
$ |
16.34 |
|
|
$ |
37.41 |
|
|
$ |
21.39 |
|
|
$ |
37.50 |
|
|
$ |
27.77 |
|
Low
|
|
$ |
18.325 |
|
|
$ |
10.54 |
|
|
$ |
27.14 |
|
|
$ |
10.67 |
|
|
$ |
24.41 |
|
|
$ |
14.56 |
|
|
$ |
25.85 |
|
|
$ |
19.60 |
|
Dividends
Declared
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
The
payment of dividends is within the discretion of our Board and will depend on
our earnings, capital requirements, operating and financial condition and other
factors. We expect for the foreseeable future to invest substantially
all of our earnings in the expansion of our business and reduction of
debt.
The
approximate number of holders of record of our common stock at May 12, 2008 was
483. See Item 12 of this Report for information regarding securities authorized
for issuance under equity compensation plans.
STOCK
PRICE PERFORMANCE GRAPH
The
following graph illustrates the five-year cumulative total return on investments
in our Common Stock, the CRSP Index for NYSE Stock Market (U.S. Companies) and
the CRSP Index for NYSE Stocks (SIC 5000-5099 US Companies). These
indices are prepared by the Center for Research in Security Prices of The
University of Chicago Graduate School of Business. AZZ is listed on
The New York Stock Exchange and is engaged in two industry
segments. The shareholder return shown below is not necessarily
indicative of future performance. Total return, as shown, assumes
$100 invested on February 28, 2003, in shares of AZZ common stock and each
index, all with cash dividends reinvested. The calculations exclude
trading commissions and taxes.
Comparison
of Five Year-Cumulative Total Returns
Value of
$100 Invested on February 28, 2003
For
Fiscal Year Ended on the Last Day of February
Symbol
|
CRSP Total Returns Index
for:
|
2/03
|
2/04
|
2/05
|
2/06
|
2/07
|
2/08
|
u
|
AZZ
incorporated
|
100.0
|
140.0
|
141.7
|
199.4
|
354.3
|
619.8
|
■
|
CRSP
Index for NYSE Stock Market (US Companies)
|
100.0
|
140.5
|
153.3
|
169.0
|
192.9
|
186.1
|
|
CRSP
Index for NYSE Stocks (SIC 5000-5099 US Companies)
|
100.0
|
145.3
|
165.5
|
199.9
|
203.5
|
162.3
|
|
Wholesale
trade - durable goods
|
|
|
|
|
|
|
|
|
Fiscal
Year
|
|
|
|
2008
|
|
|
2007
(a)
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
|
(In
thousands, except per share amounts)
|
|
Summary
of operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
320,193 |
|
|
$ |
260,344 |
|
|
$ |
187,184 |
|
|
$ |
152,428 |
|
|
$ |
136,201 |
|
Net
income
|
|
|
27,688 |
|
|
|
21,604 |
|
|
|
7,827 |
|
|
|
4,812 |
|
|
|
4,263 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share(b)
|
|
$ |
2.30 |
|
|
$ |
1.86 |
|
|
$ |
.70 |
|
|
$ |
.44 |
|
|
$ |
.40 |
|
Diluted
earnings per common share(b)
|
|
|
2.26 |
|
|
|
1.82 |
|
|
|
.69 |
|
|
|
.44 |
|
|
|
.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
assets
|
|
$ |
193,319 |
|
|
$ |
200,908 |
|
|
$ |
141,026 |
|
|
$ |
128,635 |
|
|
$ |
120,026 |
|
Long-term
debt
|
|
|
- |
|
|
|
35,200 |
|
|
|
14,375 |
|
|
|
23,875 |
|
|
|
25,375 |
|
Total
liabilities
|
|
|
47,163 |
|
|
|
89,759 |
|
|
|
53,758 |
|
|
|
53,316 |
|
|
|
50,729 |
|
Shareholders'
equity
|
|
|
146,157 |
|
|
|
111,148 |
|
|
|
87,269 |
|
|
|
75,319 |
|
|
|
69,298 |
|
Working
capital
|
|
|
60,299 |
|
|
|
62,252 |
|
|
|
27,917 |
|
|
|
24,839 |
|
|
|
20,209 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$ |
38,926 |
|
|
$ |
6,928 |
|
|
$ |
12,794 |
|
|
$ |
6,471 |
|
|
$ |
14,963 |
|
Capital
expenditures
|
|
|
9,926 |
|
|
|
10,659 |
|
|
|
6,602 |
|
|
|
6,649 |
|
|
|
3,645 |
|
Depreciation
& amortization
|
|
|
8,199 |
|
|
|
6,660 |
|
|
|
5,720 |
|
|
|
5,653 |
|
|
|
5,731 |
|
Cash
dividend per common share
|
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding (b)
|
|
|
12,013 |
|
|
|
11,599 |
|
|
|
11,168 |
|
|
|
10,888 |
|
|
|
10,694 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Includes
the acquisition of Witt Galvanizing, Inc. on November 1,
2006.
|
(b)
|
Adjusted
to reflect a two-for-one stock split, effective in the form of a stock
dividend on May 4, 2007.
|
Item
7.
|
Management's
Discussion and Analysis of Financial Condition and Results of
Operation.
|
Overview
We
operate two distinct business segments, the Electrical and Industrial Products
Segment and the Galvanizing Services Segment. The Electrical and
Industrial Products Segment serves the power generation, transmission and
distribution markets as well as the general industrial market. As of
February 29, 2008, the Galvanizing Services Segment consists of fourteen hot
dip-galvanizing facilities located throughout the South, Midwest and Southwest
United States that provide galvanizing services to the steel fabrication
industry. All per share data in this section have been adjusted to reflect our
two-for-one stock split effected May 4, 2007.
For the
fiscal year-ended February 29, 2008, we recorded revenues of $320.2 million
compared to the prior year’s revenues of $260.3
million. Approximately 56% of our revenues were generated from the
Electrical and Industrial Products Segment and approximately 44% were generated
from the Galvanizing Services Segment. Net income for fiscal 2008 was
$27.7 million compared to $21.6 million for fiscal 2007. Net income as a
percentage of sales was 8.6% for fiscal 2008 as compared to 8.3% for fiscal
2007. Earnings per share increased by 24% to $2.26 per share for
fiscal 2008 compared to $1.82 per share for fiscal 2007, on a diluted
basis.
Results
of Operations
Year
ended February 29, 2008 (Fiscal 2008) compared with year ended February 28, 2007
(Fiscal 2007)
Management
believes that analyzing our revenue and operating income by segment is the most
meaningful way to analyze our results of operations. Segment
operating income consists of net sales less cost of sales, specifically
identifiable selling, general and administrative expenses, and other (income)
expense items that are specifically identifiable to a segment. The
other (income) expense items included in segment operating income are generally
insignificant. For a reconciliation of segment operating income to
pretax income, see Note 11 to Notes to Consolidated Financial
Statements.
Backlog
Our
operations ended fiscal 2008 with a backlog of $134.9 million, an increase of
12% as compared to fiscal 2007 backlog of $120.7 million. All ending backlog
relates to our Electrical and Industrial Products Segment. Our book-to-bill
ratio was 1.04 to 1 for fiscal 2008 as compared to 1.18 to 1 in the prior year.
In fiscal 2008, we continued our efforts to improve our market coverage and
expand our served markets. New orders were balanced across our power generation,
transmission and distribution, and industrial markets. Incoming orders increased
8% for fiscal 2008 as compared to the same period last
year. The fourth quarter backlog
while remaining strong was down when compared to the second quarter and third
quarter of fiscal 2008.
Quotations
activity and project opportunities continue at a strong pace, however, the
timing of release of these orders, particularly large international orders has
been slower than desired and has had an adverse impact on our
backlog. Similar to the quarterly variances we have seen over the
past two years, we again believe the timing of release of these orders is a
timing issue rather than a market correction.
The
following table reflects bookings and shipments for fiscal 2008 and
2007.
Backlog
Table
(In
thousands)
|
Period
Ending
|
|
|
|
Period
Ending
|
|
|
|
Backlog
|
2/28/07
|
|
$ |
120,666 |
|
2/28/06
|
|
$ |
73,765 |
|
Bookings
|
|
|
|
334,403 |
|
|
|
|
307,245 |
|
Shipments
|
|
|
|
320,193 |
|
|
|
|
260,344 |
|
Backlog
|
2/29/08
|
|
$ |
134,876 |
|
2/28/07
|
|
$ |
120,666 |
|
Book
to Bill Ratio
|
|
|
|
1.04 |
|
|
|
|
1.18 |
|
Revenues
Our
consolidated revenues for fiscal 2008 increased by $59.8 million or 23%, as
compared to fiscal 2007.
The
following table reflects the breakdown of revenue by segment:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Revenue:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
179,181 |
|
|
$ |
150,250 |
|
Galvanizing
Services
|
|
|
141,012 |
|
|
|
110,094 |
|
Total
Revenue
|
|
$ |
320,193 |
|
|
$ |
260,344 |
|
The
Electrical and Industrial Products Segment produces highly engineered specialty
products supplied to the power generation, power transmission, power
distribution and general industrial markets as well as lighting and tubular
products to the industrial and petroleum markets. The segment recorded revenues
for fiscal 2008 of $179.2 million, an increase of 19% above fiscal 2007 results
of $150.3 million. The increased revenue were generated as a result of a
continuation of improved market demand and improved pricing, primarily from our
high voltage transmission, power generation and utility distribution market as
compared to fiscal 2007. Our challenge is to continue to succeed in our efforts
to expand our served markets and product offerings, while maintaining our strong
operating performance and management of volatile raw material
pricing.
Our
Galvanizing Services Segment, which is made up of fourteen hot dip galvanizing
facilities as of February 29, 2008, generated revenues of $141 million, a 28%
increase from the prior year’s revenues of $110 million. The
increased revenue resulted from a 10% improvement in pricing and 18% increase in
the pounds of steel produced in fiscal 2008 as compared to fiscal
2007. Our acquisition of Witt Galvanizing, Inc. on November 1, 2006,
accounted for 68% of the increase in the pounds of steel produced. The remaining
32% increase in volume resulted from increased project work, which was spread
across all of our served markets. Historically, revenues for this segment have
followed closely the condition of the industrial sector of the general
economy.
Segment
Operating Income
The
following table reflects the breakdown of total operating income by
segment:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Segment
Operating Income:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
29,158 |
|
|
$ |
21,301 |
|
Galvanizing
Services
|
|
|
35,087 |
|
|
|
31,945 |
|
Total
Segment Operating Income
|
|
$ |
64,245 |
|
|
$ |
53,246 |
|
Total
segment operating income (see Note 11 to Notes to Consolidated Financial
Statements) increased $11 million to $64.2 million in fiscal 2008 as compared to
$53.2 million in fiscal 2007. Consolidated operating margins as a percentage of
sales were 20% for each of fiscal 2008 and fiscal 2007. The Electrical and
Industrial Products Segment generated 45% of the operating income for fiscal
2008, while the Galvanizing Services Segment produced the remaining
55%.
Our
continuous improvement programs, combined with aggressive marketing programs,
have had a positive impact on our operating results for fiscal
2008. We believe that these efforts, and the leverage gained from
additional volumes have positively impacted our results.
Operating
income for the Electrical and Industrial Products Segment increased $7.9 million
or 37% for fiscal 2008, to $29.2 million as compared to $21.3 million for fiscal
2007. Operating margins for this segment were 16% for fiscal 2008 as compared to
14% for fiscal 2007. Operating margins and profit improvement are attributable
to the leverage gained from increased volumes and pricing actions as a result of
favorable market conditions.
Operating
income for the Galvanizing Service Segment increased $3.1 million for fiscal
2008, to $35.1 million as compared to $31.9 million for the prior
year. The improved operating results reflect improved market
conditions, which generated higher revenues. Operating margins were 25% for
fiscal 2008 as compared to 29% for fiscal 2007. Operating margins were lower
during fiscal 2008 due to higher FIFO inventory costs of zinc as compared to
fiscal 2007. Due to our First In First Out ("FIFO") cost basis on our
zinc inventory, the higher cost for zinc purchased in fiscal 2007 was recognized
in fiscal 2008. While margins were lower for fiscal 2008 as compared
to fiscal 2007, favorable market conditions allowed us to maintain margins at
levels above our historical margins of 18% to 22%. Increased volatility in
future zinc prices could have an effect on future revenues and
earnings. Margins could be negatively impacted by a reduction in
pricing if market demand decreases for galvanizing services.
General
Corporate Expense
General
corporate expenses were $18.9 million for fiscal 2008 and $17.2 million for
fiscal 2007. As a percentage of sales, general corporate expenses were 5.9% for
fiscal 2008 as compared to 6.6% in fiscal 2007. The increased general corporate
expense for fiscal 2008 resulted from increased compensation expense and
employee profit sharing expense. Compensation expense increased approximately
$1.3 million, as compared to the same period in fiscal 2007, related primarily
to our stock appreciation rights program. Profit sharing expense increased $.4
million in fiscal 2008 as compared to same period in the prior
year.
Interest
Interest
expense for fiscal 2008 was $1.5 million, which is relatively unchanged as
compared to February 28, 2007. Total obligations under the Credit Agreement were
paid in full as of February 29, 2008, a decrease of $35.2 million as compared to
fiscal 2007.
Other
(Income) Expense
For
fiscal 2008 and 2007, the amounts in other (income) expense (see Note 11 of
Notes to Consolidated Financial Statements) were insignificant.
Provision
For Income Taxes
The
provision for income taxes reflects an effective tax rate of 37% for fiscal 2008
and fiscal 2007. Increased benefits in our effective tax rate from
the American Jobs Creation Act of 2005 were offset by compensation expense that
will not be deductible due to the limitations on deductibility established under
Section 162(m) of the Internal Revenue Code.
Year
ended February 28, 2007 (Fiscal 2007) compared with year ended February 28, 2006
(Fiscal 2006)
Management
believes that analyzing our revenue and operating income by segment is the most
meaningful way to analyze our results of operations. Segment
operating income consists of net sales less cost of sales, specifically
identifiable selling, general and administrative expenses, and other (income)
expense items that are specifically identifiable to a segment. The
other (income) expense items included in segment operating income are generally
insignificant. For a reconciliation of segment operating income to
pretax income, see Note 11 to Notes to Consolidated Financial
Statements.
Backlog
Our
operations ended fiscal 2007 with a backlog of $120.7 million, an increase of
64% as compared to fiscal 2006 backlog of $73.8 million. All of our backlog data
relate to our Electrical and Industrial Products Segment. Our book-to-bill ratio
was 1.18 to 1 for fiscal 2007 as compared to 1.05 to 1 in the prior year. In
fiscal 2007, we continued our efforts to improve our market coverage and expand
our served markets. The increased backlog reflects improvements in all of our
served markets domestically and internationally, particularly in our high
voltage transmission products.
The
following table reflects bookings and shipments for fiscal 2007 and
2006.
Backlog
Table
(In
thousands)
|
Period
Ending
|
|
|
|
Period
Ending
|
|
|
|
Backlog
|
2/28/06
|
|
$ |
73,765 |
|
2/28/05
|
|
$ |
64,769 |
|
Bookings
|
|
|
|
307,245 |
|
|
|
|
196,180 |
|
Shipments
|
|
|
|
260,344 |
|
|
|
|
187,184 |
|
Backlog
|
2/28/07
|
|
$ |
120,666 |
|
2/28/06
|
|
$ |
73,765 |
|
Book
to Bill Ratio
|
|
|
|
1.18 |
|
|
|
|
1.05 |
|
Revenues
The
following table reflects the breakdown of revenue by segment:
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Revenue:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
150,250 |
|
|
$ |
123,736 |
|
Galvanizing
Services
|
|
|
110,094 |
|
|
|
63,448 |
|
Total
Revenue
|
|
$ |
260,344 |
|
|
$ |
187,184 |
|
Our
consolidated net revenues for fiscal 2007 increased by $73.2 million or 39%, as
compared to fiscal 2006.
The
Electrical and Industrial Products Segment recorded revenues for fiscal 2007 of
$150.3 million, an increase of 21% above fiscal 2006 results of $123.7 million.
The increased revenue was generated from continued strong market demand,
primarily our high voltage transmission and petroleum markets, and improved
market conditions from the power generation market, which had been stagnant for
several years. In addition to the improved market conditions, several quick turn
projects were completed during the third and fourth quarters of fiscal 2007,
which generated increased revenues. The passage of the energy legislation had a
positive impact on this segment.
Our
Galvanizing Services Segment generated revenues of $110 million, a 74% increase
from the prior year’s revenues of $63.4 million. The increased
revenue resulted from a 54% improvement in pricing and a 20% increase in the
pounds of steel produced in fiscal 2007 as compared to fiscal
2006. Our acquisition of Witt Galvanizing, Inc. on November 1, 2006,
accounted for 33% of the increase in the pounds of steel produced. The remaining
67% increase in volume resulted from improvements in all of our
markets. The increase in selling price was the result of price
increases implemented to offset the rising commodity cost of zinc. Historically,
revenues for this segment have followed closely the condition of the industrial
sector of the general economy.
Segment
Operating Income
The
following table reflects the breakdown of total operating income by
segment:
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Segment
Operating Income:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
21,301 |
|
|
$ |
11,357 |
|
Galvanizing
Services
|
|
|
31,945 |
|
|
|
12,676 |
|
Total
Segment Operating Income
|
|
$ |
53,246 |
|
|
$ |
24,033 |
|
Total
segment operating income (see Note 11 to Notes to Consolidated Financial
Statements) increased 122% to $53.2 million in fiscal 2007 as compared to $24
million in fiscal 2006. Consolidated operating margins as a percentage of sales
improved to 20% for fiscal 2007 as compared to 13% for fiscal 2006. The
improvement resulted primarily from leverage obtained from increased revenues
and improved pricing levels. The Electrical and Industrial Products
Segment generated 40% of the operating income for fiscal 2007, while the
Galvanizing Services Segment produced the remaining 60%.
Operating
income for the Electrical and Industrial Products Segment increased $9.9 million
or 87% for fiscal 2007, to $21.3 million as compared to $11.4 million for fiscal
2006. Operating margins for this segment were 14% for fiscal 2007 as compared to
9% for fiscal 2006. Operating margins and profit resulted from leverage obtained
through increased revenues and improved market conditions, which allowed for
more aggressive pricing to recover material cost increases for copper, aluminum
and steel that occurred over the past two years. We were also able to
capitalize on quick turn jobs that carried increased margins during fiscal
2007.
Operating
income for the Galvanizing Service Segment increased $19.2 million for fiscal
2007, to $31.9 million as compared to $12.7 million for the prior
year. The improved operating results reflect improved market
conditions, which generated higher revenues, and improved price realization
required to offset the rising cost of zinc. Operating margins improved to 29%
for fiscal 2007 as compared to 20% for fiscal 2006. Operating profit and margins
benefited from insurance gains in the amount of $700,000 related to Hurricanes
Katrina and Rita. The carrying value of these affected assets was written off
during fiscal 2006 when the damage was incurred.
General
Corporate Expense
General
corporate expenses were $17.1 million for fiscal 2007 and $10.2 million for
fiscal 2006. As a percentage of sales, general corporate expenses were 6.6% for
fiscal 2007 as compared to 5.5% in fiscal 2006. The increased general corporate
expense for fiscal 2007 resulted from increased compensation expense and
employee profit sharing expense. The increased compensation expense of
approximately $3.5 million as compared to the same period in fiscal 2006,
related primarily to our stock appreciation rights program and the adoption of
FASB Statement No. 123R. Our profit sharing program, which covers
substantially all our employees, was reinstated for fiscal 2007 to enhance our
ability to hire and retain qualified personnel. As a result of reinstating this
program, costs increased $2.4 million for fiscal 2007 as compared to fiscal
2006.
Interest
Interest
expense for fiscal 2007 was $1.5 million, a decrease of 11% as compared to $1.7
million in fiscal 2006. The decrease in interest expense resulted from
significantly reduced levels of debt for the majority of fiscal
2007. Additional debt of approximately $13.4 million was added in
November 1, 2006, to fund the acquisition of Witt Galvanizing,
Inc. Our total outstanding bank debt was $35.2 million at the
end of fiscal 2007, an increase of $15.3 million as compared to $19.9 million at
the end of fiscal 2006. In addition to the acquisition of Witt Galvanizing Inc.,
additional borrowing was required to fund our working capital requirements due
to increased business levels. As a result, our long-term debt to
equity ratio was .32 to 1 for fiscal 2007 as compared to .16 to 1 for fiscal
2006.
Other
(Income) Expense
For
fiscal 2007 and 2006, the amounts in other (income) expense (see Note 11 of
Notes to Consolidated Financial Statements) were insignificant.
Provision
For Income Taxes
The
provision for income taxes reflects an effective tax rate of 37% for fiscal 2007
and 35% for fiscal 2006. Benefits in our effective tax rate from the American
Jobs Creation Act of 2005 were offset by the higher statutory tax rate of 35%
for the current period as compared to 34% in the prior year due to increased
income levels, higher state income taxes due to differences in the mix of
profits generated from our operating facilities located in varying tax
jurisdictions, and an allowance in fiscal 2007 for deferred compensation that we
currently believe will not be deductible in future years due to the limitations
on deductibility established under Section 162(m) of the Internal Revenue
Code.
Liquidity
and Capital Resources
We have
historically met our cash needs through a combination of cash flows from
operating activities and bank borrowings. Our cash requirements are generally
for operating activities, capital improvements, debt repayment and acquisitions.
We believe that working capital, borrowing capabilities, and funds generated
from operations should be sufficient to finance anticipated operational
activities, capital improvements, and payment of debt and possible future
acquisitions.
Our
operating activities generated cash flows of approximately $38.9 million, $6.9
million, and $12.8 million during fiscal 2008, 2007, and 2006,
respectively. Cash flow from operations in fiscal 2008 included net
income in the amount of $27.7 million, depreciation and amortization in the
amount of $8.2 million, and other adjustments to reconcile net income to net
cash in the amount of a $.5 million. Included in other adjustments to
reconcile net income to net cash was provision for bad debt, deferred income
taxes, gain or loss on the sale of assets and non-cash adjustments. Positive
cash flow was recognized due to decreased accounts receivables, inventories,
prepaid expenses and increased accrued liabilities in the amount of $11.3
million, $2.1 million, $1 million and $.5 million, respectively. Accounts
receivable days outstanding improved with average days outstanding of 49 days
for fiscal 2008, as compared to 51 days at fiscal 2007. These positive cash flow
items were offset by decreased accounts payable balances and increased revenue
in excess of billings in the amount of $9.3 million and $3 million,
respectively. The accounts payable reduction decrease is due to less
advantageous payment terms from some of our critical material
vendors.
Our
working capital was $60.3 million at February 29, 2008, as compared to $62.3
million at February 28, 2007.
During
fiscal 2008, capital improvements were made in the amount of $9.9 million. The
breakdown of capital spending by segment for fiscal 2008, 2007, and 2006 can be
found in Note 11 of the Notes to Consolidated Financial Statements.
For
fiscal 2008, long-term debt decreased by $35.2 million resulting in no
outstanding debt as of February 29, 2008.
We
received proceeds from the sale of property and equipment in the amount of $.2
million and proceeds from the exercise of stock options and related tax benefits
in the amount of $6.5 million. There were no cash dividends declared or paid in
fiscal 2008, and no resumption of a cash dividend is currently
anticipated.
On May
25, 2006, we entered into the Second Amended and Restated Credit Agreement (the
“Credit Agreement”), which replaced our Amended and Restated Revolving and Term
Credit Agreement dated as of November 1, 2001.
The
Credit Agreement provides for a $60 million revolving line of credit with one
lender, Bank of America, N.A., maturing on May 25, 2011. This is an unsecured
revolving credit facility, which refinanced outstanding borrowings and is used
to provide for working capital needs, capital improvements, future acquisitions,
and letter of credit needs. At February 29, 2008, we had no outstanding debt
borrowed against the revolving credit facility. However, we had
letters of credit outstanding in the amount of $10.5 million, which left
approximately $49.5 million of additional credit available under the revolving
credit facility.
The
Credit Agreement provides for various financial covenants consisting of a)
Minimum Consolidated Net Worth – maintain on a consolidated basis net worth
equal to at least the sum of $69.8 million, representing 80% of net worth at
February 28, 2006 plus 75% of future net income, b) Maximum Leverage Ratio-
maintain on a consolidated basis a Leverage Ratio (as defined in the Credit
Agreement) not to exceed 3.0:1.0, c) Fixed Charge Coverage Ratio- maintain on a
consolidated basis a Fixed Charge Coverage Ratio of at least 1.5:1.0 and d)
Capital Expenditures- not to make Capital Expenditures on a consolidated basis
in an amount in excess of $14 million during any fiscal year.
The
Credit Agreement provides for an applicable margin ranging from .75% to 1.25%
over the Eurodollar Rate and Commitment Fees ranging from .175% to .25%
depending on our Leverage Ratio.
On March
31, 2008, the Company entered into a Note Purchase Agreement pursuant to which
the Company issued $100,000,000 aggregate principal amount of its 6.24%
unsecured Senior Notes (the "Notes") due March 31, 2018 through a private
placement (the "Note Offering"). Pursuant to the Note Purchase
Agreement, the Company’s payment obligations with respect to the Notes may be
accelerated upon any Event of Default, as defined in the Note Purchase
Agreement.
In
connection with the Note Offering, the Company entered into the Second Amendment
to Second Amended and Restated Credit Agreement, (the “Second Amendment”) with
Bank of America, N. A. (“Bank of America”), which amended the Second Amended and
Restated Credit Agreement by and among the Company, Bank of America and certain
other lenders (including Bank of America) dated as of May 25, 2006 (the “Credit
Agreement”). The Second Amendment contains the consent of Bank of America to the
Note Offering and amended the Credit Agreement to provide that the Note Offering
will not constitute a default under the Credit Agreement.
The
Senior Notes provide for various financial covenants of a) Minimum Consolidated
Net Worth - Maintain on a consolidated basis net worth equal to at least the sum
of $116.9 million plus 50% of future net income; b) Maximum Ratio of
Consolidated Indebtedness to Consolidated EBITDA – Maintain a ratio of
indebtedness to EBITDA (as defined in Note Purchase Agreement) not to exceed
3.25:1.00; c) Fixed Charge Coverage Ratio – Maintains on a
consolidated basis a Fixed Charge Coverage Ratio of at least 2.0:1.0; d)
Priority Indebtedness – The Company will not at any time permit aggregate amount
of all Priority Indebtedness to exceed 10% of Consolidated Net
Worth. In conjunction with Note Offering, the Credit Agreement with
Bank of America was amended to reflect the same debt covenants as presented
above.
Our
current ratio (current assets/current liabilities) was 2.41 to 1 at the end of
fiscal 2008, as compared to 2.25 to 1 at the end of fiscal
2007. Shareholder equity grew 31% during fiscal 2008 to $146.2
million. Long-term debt as a percentage of shareholders’ equity ratio was 0 to 1
at the end of fiscal 2008 as compared to .32 to 1 at the end of fiscal
2007.
We have
not experienced significant impacts on our operations from increases in general
inflation other than for specific commodities and employee health care
costs. We have exposure to commodity price increases in both segments
of our business, primarily copper, aluminum and steel in the Electrical and
Industrial Products Segment, and zinc and natural gas in the Galvanizing
Services Segment. We attempt to minimize these increases through
escalation clauses in customer contracts for copper, aluminum and steel, when
market conditions allow and protective caps purchased on zinc. In
addition to these measures, we attempt to recover other cost increases through
improvements to our manufacturing process and through increases in prices where
competitively feasible.
Off
Balance Sheet Transactions and Related Matters
There are
no off-balance sheet transactions, arrangements, obligations (including
contingent obligations), or other relationships of the Company with
unconsolidated entities or other persons that have, or may have, a material
effect on our financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or capital
resources.
Contractual
Commitments
Leases
The
Company leases various facilities under non-cancelable operating leases with an
initial term in excess of one year. As of February 29, 2008, the future minimum
payments required under these operating leases are summarized
below. Rental expense for real estate and personal property was
approximately $3,132,000, $2,517,000, and $2,211,000 for fiscal years ended
2008, 2007 and 2006, respectively, and includes all short-term as well as
long-term rental agreements.
The
following summarizes the Company’s operating leases for the next five years and
thereafter.
|
|
Operating
Leases
|
|
|
|
|
|
2009
|
|
$ |
2,203 |
|
2010
|
|
|
2,579 |
|
2011
|
|
|
2,541 |
|
2012
|
|
|
2,296 |
|
2013
|
|
|
2,070 |
|
Thereafter
|
|
|
13,526 |
|
Total
|
|
$ |
25,215 |
|
Commodity
pricing
The
Company manages its exposures to commodity prices through the use of the
following:
In the
Electrical and Industrial Products Segment, the Company has exposure to
commodity pricing for copper, aluminum, and steel. Because the Electrical and
Industrial Products Segment does not commit contractually to minimum volumes,
increases in price for these items are normally managed through escalation
clauses to the customer’s contracts, although during difficult market conditions
these escalation clauses may be difficult to obtain.
In the
Galvanizing Services Segment, the Company utilizes contracts with its zinc
suppliers that include protective caps to guard against escalating commodity
prices. The Company also secures firm pricing for natural gas supplies with
individual utilities when possible. There are no contracted volume
purchase commitments associated with our zinc or natural gas
agreements. Management believes these contractual agreements ensure
adequate supplies and partially offset exposure to commodity price
swings.
There are
no contracted purchase commitments for any other commodity items including
steel, aluminum, natural gas, copper, zinc or any other commodity.
Other
At
February 29, 2008, the Company had outstanding letters of credit in the amount
of $10.5 million. These letters of credit are issued to a portion of
the Company’s customers to cover any potential warranty costs that the customer
might incur and are in lieu of performance and bid bonds. In
addition, as of February 29, 2008, a warranty reserve in the amount of $1.7
million has been established to offset any future warranty claims.
The
Company has been named as a defendant in certain lawsuits in the normal course
in business. It is the policy of management to disclose the amount or
range of reasonably possible losses in excess of recorded amounts. In
the opinion of management, after consulting with legal counsel, the liabilities,
if any, resulting from these matters should not have a material effect on our
financial position or results of operations.
Critical
Accounting Policies and Estimates
The
preparation of the consolidated financial statements requires us to make
estimates that affect the reported value of assets, liabilities, revenues and
expenses. Our estimates are based on historical experience and various other
factors that we believe are reasonable under the circumstances, and form the
basis for our conclusions. We continually evaluate the information used to make
these estimates as business and economic conditions change. Accounting policies
and estimates considered most critical are allowances for doubtful accounts,
accruals for contingent liabilities, revenue recognition, impairment of
long-lived assets, identifiable intangible assets and goodwill, accounting for
income taxes, and stock options and stock appreciation rights. Actual results
may differ from these estimates under different assumptions or
conditions. The development and selection of the critical accounting
policies and the related disclosures below have been reviewed with the Audit
Committee of the Board of Directors. More information regarding significant
accounting policies can be found in Note 1 of the Notes to Consolidated
Financial Statements.
Allowance for Doubtful
Accounts- The carrying value of our accounts receivable is continually
evaluated based on the likelihood of collection. An allowance is maintained for
estimated losses resulting from our customer’s inability to make required
payments. The allowance is determined by historical experience of uncollected
accounts, the level of past due accounts, overall level of outstanding accounts
receivable, information about specific customers with respect of their inability
to make payments and future expectations of conditions that might impact the
collectibility of accounts receivable. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
Accruals for Contingent
Liabilities - The amounts we record for estimated claims, such as self
insurance programs, warranty, environmental, and other contingent liabilities,
requires us to make judgments regarding the amount of expenses that will
ultimately be incurred. We use past history and experience, as well as other
specific circumstances surrounding these claims in evaluating the amount of
liability that should be recorded. Actual results may be different than what we
estimate.
Revenue Recognition
–Revenue is recognized for the Electrical and Industrial Products Segment upon
transfer of title and risk to customers, or based upon the percentage of
completion method of accounting for electrical products built to customer
specifications under long term contracts. We recognize revenue for
the Galvanizing Services Segment upon completion of the galvanizing process
performed on the customers’ material or shipment of this material. Revenue for
the Galvanizing Service Segment is typically recognized at completion of the
service unless we specifically agree with the customer to hold its material for
a predetermined period of time after the completion of the galvanizing process
and, in that circumstance, we invoice and recognize revenue upon
shipment. Customer advanced payments presented in the
balance sheet arise from advanced payments received from our customers prior to
shipment of the product and are not related to revenue recognized under the
percentage of completion method. The extent of progress for revenue
recognized using the percentage of completion method is measured by the ratio of
contract costs incurred to date to total estimated contract costs at
completion. Contract costs include direct labor and material, and
certain indirect costs. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses, if
any, on uncompleted contracts are made in the period in which such losses are
able to be determined. The assumptions made in determining the
estimated cost could differ from actual performance resulting in a different
outcome for profits or losses than anticipated.
Impairment of Long-Lived
Assets, Identifiable Intangible Assets and Goodwill– We record impairment
losses on long-lived assets, including identifiable intangible assets, when
events and circumstances indicate that the assets might be impaired and the
undiscounted projected cash flows associated with those assets are less than the
carrying amounts of those assets. In those situations, impairment losses on
long-lived assets are measured based on the excess of the carrying amount over
the asset’s fair value, generally determined based upon discounted estimates of
future cash flows. A significant change in events, circumstances or projected
cash flows could result in an impairment of long-lived assets, including
identifiable intangible assets. An annual impairment test of goodwill is
performed in the fourth quarter of each fiscal year. The test is
calculated using the anticipated future cash flows after tax from our operating
segments. Based on the present value of the future cash flows, we will determine
whether impairment may exist. A significant change in projected cash
flows or cost of capital for future years could result in an impairment of
goodwill in future years. Variables impacting future cash flows include, but are
not limited to, the level of customer demand for and
response
to products and services we offer to the power generation market, the electrical
transmission and distribution markets, the general industrial market and the hot
dip galvanizing market; changes in economic conditions of these various markets;
raw material and natural gas costs; and availability of experienced labor and
management to implement our growth strategies.
Accounting for Income
Taxes - We account for income taxes under the provisions of SFAS No. 109,
"Accounting For Income Taxes" ("SFAS No. 109"). The objectives of
accounting for income taxes are to recognize the amount of taxes payable or
refundable for the current year and deferred tax liabilities and assets for the
future tax consequences of events that have been recognized in our financial
statements or tax returns. SFAS No. 109 also requires that deferred
tax assets be reduced by a valuation allowance if it is more likely than not
that some portion or all of the deferred tax asset will not be realized.
Developing our provision for income taxes requires significant judgment and
expertise in deferral and state income tax laws, regulations and strategies,
including the determination of deferred tax assets and liabilities and, if
necessary, any valuation allowances that may be required for deferred tax
assets. Our judgments and tax strategies are subject to audit by
various taxing authorities.
Stock Options and Stock
Appreciation Rights - Our employees and directors are periodically
granted stock options or Stock Appreciation Rights by the Compensation Committee
of the Board of Directors. In fiscal 2007, we adopted the provisions of SFAS No.
123R, Share-Based
Payment. Under the provisions of SFAS No. 123R, the
compensation cost of all employee stock-based compensation awards is measured
based on the grant-date fair value of those awards and that cost is recorded as
compensation expense over the period during which the employee is required to
perform service in exchange for the award (generally over the vesting period of
the award). The
valuation of stock based compensation awards is complex in that there are a
number of variables included in the calculation of the value of the
award:
|
·
|
Volatility
of our stock price
|
|
·
|
Expected
term of the option
|
|
·
|
Expected
dividend yield
|
|
·
|
Risk-free
interest rate over the expected
term
|
|
·
|
Expected
number of options that will not
vest
|
We have
elected to use a Black-Scholes pricing model in the valuation of our stock
options and stock appreciation rights.
These
variables are developed using a combination of our internal data with respect to
stock price volatility and exercise behavior of option holders and information
from outside sources. The development of each of these variables
requires a significant amount of judgment. Changes in the values of
the above variables will result in different option valuations and, therefore,
different amounts of compensation cost.
Recent
Accounting Pronouncements
In
December 2007, the Financial Accounting Standard board ("FASB") issued SFAS No.
141, (revised 2007), "Business Combinations" ("SFAS No. 141(R)"), which
continues the evolution toward fair value reporting and significantly changes
the accounting for acquisitions that close beginning in 2009, both at the
acquisition date and in subsequent periods. SFAS No. 141(R)
introduces new accounting concepts and valuation complexities, and many of the
changes have the potential to generate greater earnings volatility after an
acquisition. SFAS No. 141(R) applies to acquisitions on or after
March 1, 2009 and will impact the Company's reporting prospectively
only.
In
December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Statements – an amendment of ARB No. 51" ("SFAS No. 160"), which
requires companies to measure an acquisition of noncontrolling (minority)
interest at fair value in the equity section of the acquiring entity's balance
sheet. The objective of SFAS No. 160 is to improve the comparability
and transparency of financial data as well as to help prevent manipulation of
earnings. The changes introduced by the new standards are likely to
affect the planning and execution, as well as the accounting and disclosure, of
merger transactions. The effective date to adopt SFAS
No.
160 for
us is March 1, 2009 and we do not expect the adoption to have a material effect
on our results of operations and financial position.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). This standard permits an entity
to choose to measure many financial instruments and certain items at fair value.
Most of the provisions in SFAS No. 159 are elective; however, the amendment to
FASB SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities:, applies to all entities with available –for-sale and trading
securities. The provisions of SFAS No. 159 are effective as of the
beginning of an entity's first fiscal year that begins after November 15,
2007. We do not expect the adoption of SFAS No. 159 to have a
significant impact on our consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
No. 157"), which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The provisions of SFAS No.
157 are effective for financial statements issued for fiscal years beginning
after November 15, 2007. In February of 2008, the FASB issued FASB
Staff position No. 157-2 which delays the effective date of SFAS No. 157 for
non-financial assets and liabilities which are not measured at fair value on a
recurring basis (at least annually) until fiscal years beginning after November
15, 2008. We are currently in the process of evaluating the impact of the
adoption of SFAS no. 157 on our consolidated financial statements.
Item
7A. Quantitative
and Qualitative Disclosures About Market Risk.
Market
risk affecting our operations results primarily from changes in interest rates
and commodity prices. We have only limited involvement with derivative financial
instruments and are not a party to any leveraged derivatives.
In the
Electrical and Industrial Products Segment, we have exposure to commodity
pricing for copper, aluminum, and steel. Increases in price for these
items are normally managed through escalation clauses in our customer’s
contracts, although during difficult market conditions these escalation clauses
may not be readily obtainable. We manage our exposures to commodity
prices, primarily zinc used in its Galvanizing Services Segment, by utilizing
agreements with zinc suppliers that include protective caps to guard against
escalating commodity prices. We believe these agreements ensure
adequate supplies and partially offset exposure to commodity price
swings.
We do not
believe that a hypothetical change of 10% of the interest rate currently in
effect or a change of 10% of commodity prices would have a significantly adverse
effect on our results of operations, financial position, or cash flows as long
as we are able to pass along the increases in commodity prices to our customers.
To date, we have been successful in passing along the rising cost of zinc
without an adverse effect on our results of operations. However, there can be no
assurance that either interest rates or commodity prices will not change in
excess of the 10% hypothetical amount, which could have an adverse effect on our
results of operations, financial position, and cash flows if we are unable to
pass along these increases to our customers.
Item
8. Financial
Statements and Supplementary Data.
The Index
to our Consolidated Financial Statements is found on page 27. Our
Financial Statements and Notes to these Consolidated Financial Statements follow
the index.
Item
9. Changes
In and Disagreements With Accountants on Accounting and Financial
Disclosure.
None
Item
9A. Controls and Procedures.
Evaluation
of Disclosure Controls and Procedures
As
required by Exchange Act Rules 13a-15 and 15d-15, an evaluation was conducted
under the supervision and with the participation of management, including our
Chief Executive Officer and Chief Financial Officer, of the effectiveness of the
design and operation of our disclosure controls and procedures to ensure that
information
required
to be disclosed by us in our reports filed or submitted under the Exchange Act
is (a) accumulated and communicated to our management, including our principal
executive and financial officers, as appropriate to allow timely
decisions regarding required disclosure and (b) recorded, processed, summarized
and reported within the time periods specified in the SEC’s rules and
forms. Based upon that evaluation, our Chief Executive Officer and
Chief Financial Officer have concluded that these disclosure controls and
procedures were effective as of the end of the period covered by this Annual
Report on Form 10-K to ensure that information required to be disclosed by us in
the reports that we file or submit under the Exchange Act is (x) accumulated and
communicated to management, including our principal executive and financial
officers, as appropriate to show timely decisions regarding required disclosure
and (y) recorded, processed, summarized and reported within the time periods
specified by the SEC’s rules and forms.
Internal
Controls Over Financial Reporting
While the
Company believes that its existing disclosure controls and procedures have been
effective to accomplish their objectives, the Company intends to continue to
examine, refine and document its disclosure controls and procedures and to
monitor ongoing developments in this area.
(a)
Report of Management Regarding Internal Control Over Financial
Reporting
See
management’s report on page 28.
(b) BDO
Seidman LLP, our independent public accounting firm, has issued an audit report
on our internal control over financial reporting which is included in page
29.
(c)
Changes in Internal Controls Over Financial Reporting
There has
not been any change in our internal control over financial reporting during the
period covered by this report that has materially affected, or is reasonably
likely to materially affect, our internal control over financial
reporting.
Item
9B. Other
Information
None
PART
III
Item
10. Directors,
Executive Officers and Corporate Governance.
The
information required by this item with regard to executive officers is included
in Part I, Item 1 of this report under the heading "Executive Officers of the
Registrant."
Information
regarding directors of AZZ required by this Item is incorporated by reference to
the section entitled “Election of Directors” set forth in the Proxy Statement
for our 2008 Annual Meeting of Shareholders.
The
information regarding compliance with Section 16(a) of the Securities Exchange
Act of 1934 required by this Item is incorporated by reference to the section
entitled “Section 16(a) Beneficial Ownership Reporting Compliance” set forth in
the Proxy Statement for our 2008 Annual Meeting of Shareholders.
Information
regarding our audit committee financial experts and code of ethics and business
conduct required by this item is incorporated by reference to the section
entitled “Matters Relating to Corporate Governance, Board Structure, Director
Compensation and Stock Ownership” set forth in the Proxy Statement for our 2008
Annual Meeting of Shareholders.
No
director or nominee for director has any family relationship with any other
director or nominee or with any executive officer of our company.
Item
11. Executive
Compensation
The
information required by this Item is incorporated herein by reference to the
section entitled “Executive Compensation” and the section entitled “Matters
Relating to Corporate Governance, Board Structure, Director Compensation and
Stock Ownership – Fees Paid to Directors” set forth in our Proxy Statement for
our 2008 Annual Meeting of Shareholders.
Item
12. Security
Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
The
information required by this Item is incorporated herein by reference to the
section entitled “Executive Compensation” and the section entitled “Matters
Relating to Corporate Governance, Board Structure, Director Compensation and
Stock Ownership – Security Ownership of Management” set forth in the Proxy
Statement for our 2008 Annual Meeting of Shareholders.
Equity
Compensation Plans
The
following table provides a summary of information as of February 29, 2008,
relating to our equity compensation plans in which our common stock is
authorized for issuance. All shares and price data have been adjusted to reflect
our two-for-one stock split, effected in the form of a share dividend on May 4,
2007.
Equity
Compensation Plan Information:
|
|
(a)
Number
of securities to be issued upon exercise of outstanding options, warrants
and rights
|
|
|
(b)
Weighted
average exercise price of outstanding options, warrants and
rights
|
|
|
(c)
Number
of securities remaining available for future issuance under equity
compensation plans (excluding shares reflected in column
(a))
|
|
Equity
compensation plans approved by shareholders (1)
|
|
|
485,292 |
(3) |
|
$ |
12.78 |
|
|
|
334,447 |
(2) |
Total
|
|
|
485,292 |
|
|
$ |
12.78 |
|
|
|
334,447 |
|
|
(1)
|
Consists
of the 2005 Long-Term Incentive Plan, 2001 Long-Term Incentive Plan, the
1998 Incentive Stock Option Plan, the 1997 Non-Statutory Stock Option
Grants, and the 1991 Non Statutory Stock Option Plan. See Note
9, “Stock Options and Other Shareholder Matters” to our “Notes to
Consolidated Financial Statements” for further
information.
|
|
(2)
|
Consists
of shares remaining available for future issuance under the 2005 Long-Term
Incentive Plan of 102,114 shares, 2001 Long-Term Incentive Plan of 211,144
shares and the 1997 Non Statutory Stock Option Grants of 18,219
shares.
|
|
(3)
|
The
average term of outstanding options and stock appreciation rights is 2.3
years.
|
Description
of Other Plans for the Grant of Equity Compensation
The
following are plans under which shares of our Common Stock have been reserved
for issuance as compensation to our Independent Directors and Advisory
Directors. The shares covered by those plans are not included in the
table above on equity compensation plans because they do not provide for
options, warrants or rights. All shares and price data have been adjusted to
reflect our two-for-one stock split, effected in the form of a share dividend on
May 4, 2007.
1999
Independent Director Share Ownership Plan
On
January 19, 1999, the Board of Directors established the 1999 Independent
Director Share Ownership Plan (as amended, the “Independent Director
Plan”). Each independent Director was granted 1,000 shares of our
Common Stock after each annual meeting of the shareholders, after which the
director continued in office, beginning with the 1999 Annual Meeting and
continuing until the 2005 Annual Meeting, at which time the number of shares
granted increased to 2,000 shares. At the 2007 Annual Meeting the
number of shares granted was determined to be the equivalent of $25,000 of
stock, based on the stock price at the close of business on the Annual Meeting
date, which equated to 683 shares per director. A total of 100,000
shares were covered by the Plan, of which 5,219 shares remain available under
the Plan at February 29, 2008.
2000
Advisory Director Share Ownership Plan
On March
28, 2000, the Board of Directors established the 2000 Advisory Director Share
Ownership Plan (the “Advisory Director Plan”). Under that Plan,
Advisory Directors receive a grant of 1,000 shares of Common Stock of the
Company after each annual shareholders meeting after which they continue to
serve as an Advisory Director until they receive a total of 10,000 shares,
including shares received while serving as an active member of the Board of
Directors. A total of 20,000 shares were covered by the Plan, of
which, 13,000 shares remain available under the Plan at February 29, 2008. The
Board has no Advisory Directors at the present time and has no current plans to
add Advisory Directors in the future.
Item
13. Certain
Relationships and Related Transactions, and Director Independence
The
information required by this Item is incorporated by reference to the section
entitled “Certain Relationships and Related Party Transactions” and “Director
Independence” set forth in the Proxy Statement for our 2008 Annual Meeting of
Shareholders.
PART
IV
Item
14. Principal Accountant Fees and Services
Information
required by this Item is incorporated by reference to the sections entitled
“Other Business – Independent Auditor Fees” and “Other Business – Pre-approval
of Non-audit Fees” set forth in our Proxy Statement for our 2008 Annual Meeting
of Shareholders.
Item
15. Exhibits and Financial Statement Schedules.
|
1.
|
The
financial statements filed as a part of this report are listed in the
“Index to Consolidated Financial Statements” on page
27.
|
|
2.
|
Financial
Statements Schedules
|
Schedule
II – Valuation and Qualifying Accounts and Reserves filed as a part of this
report is listed in the “Index to Consolidated Financial Statements” on page
27.
Schedules
and compliance information other than those referred to above have been omitted
since the required information is not present or is not present in amounts
sufficient to require submission of the schedule, or because the information
required is included in the consolidated financial statements and the notes
thereto.
|
B.
|
Exhibits
Required by Item 601 of Regulation
S-K
|
A list of
the exhibits required by Item 601 of Regulation S-K and filed as part of this
report is set forth in the Index to Exhibits beginning on page 54, which
immediately precedes such exhibits.
SIGNATURES
Pursuant
to the requirements of Section 13 or 15(d) 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.
|
AZZ
incorporated
|
|
|
(Registrant)
|
|
Date: 5/9/2008
|
|
By: /s/ David H.
Dingus
|
|
|
David
H. Dingus, Principal Executive Officer and
Director
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of AZZ and in the capacities and
on the dates indicated.
/s/David H.
Dingus
|
|
/s/ Dana L.
Perry
|
|
David
H. Dingus, Principal Executive Officer and Director
|
|
Dana
L. Perry, Principal Financial Officer and Director
|
|
|
|
|
|
|
|
|
|
/s/Daniel R.
Feehan
|
|
/s/ Richard
Butler
|
|
Daniel
R. Feehan, Director
|
|
Richard
Butler, Vice President and Controller, Principal Accounting
Officer
|
|
|
|
|
|
|
|
|
|
/s/Martin C.
Bowen
|
|
/s/Peter A.
Hegedus
|
|
Martin
C. Bowen, Director
|
|
Peter
A. Hegedus, Director
|
|
|
|
|
|
|
|
|
|
/s/Daniel E.
Berce
|
|
/s/Dr. H. Kirk
Downey
|
|
Daniel
E. Berce, Director
|
|
Dr.
H. Kirk Downey, Chairman of the Board and Director
|
|
|
|
|
|
|
|
|
|
/s/Sam
Rosen
|
|
/s/Kevern R.
Joyce
|
|
Sam
Rosen, Director
|
|
Kevern
R. Joyce, Director
|
|
|
|
|
|
Index to Consolidated Financial Statements and
Schedules
|
|
|
|
Page
|
1
|
|
Consolidated
Financial Statements
|
|
|
|
|
|
|
|
|
|
Management’s
Report on Internal Controls Over Financial Reporting
|
|
28
|
|
|
|
|
|
|
|
Report
of Independent Registered Public Accounting Firm
|
|
29-31
|
|
|
|
|
|
|
|
|
|
32
|
|
|
|
|
|
|
|
|
|
33-34
|
|
|
|
|
|
|
|
|
|
35-36
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
38-52
|
|
|
|
|
|
|
|
|
|
|
2.
|
|
Consolidated
Financial Statements Schedule
|
|
|
|
|
|
|
|
|
|
|
|
53
|
Management’s
Report on Internal Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management
including our Chief Executive Officer and Chief Financial Officer, we conducted
an evaluation of the effectiveness of our internal control over financial
reporting based on the framework in “Internal Control- Integrated Framework”
issued by the Committee of Sponsoring Organizations of the Treadway Commission,
"COSO". Based on our evaluation under the framework in COSO, our management
concluded that our internal control over financial reporting was effective as of
February 29, 2008. BDO Seidman, LLP, our independent registered
public accounting firm, has issued an audit report on our internal control over
financial reporting which is in included at page 29.
Report
of Independent Registered Public Accounting
Firm
|
Board
of Directors and Shareholders
AZZ
incorporated
Fort
Worth, Texas
We have
audited the accompanying consolidated balance sheets of AZZ incorporated as of
February 29, 2008 and February 28, 2007 and the related consolidated
statements of income, shareholders’ equity, and cash flows for each of the years
in the two year period ended February 29, 2008. Our audits also included
the financial statement schedule listed in Item 15 of this Form 10-K.
We have also audited AZZ incorporated's internal control over financial
reporting as of February 29, 2008, based on criteria established in Internal Control – Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO criteria). AZZ incorporated’s management is
responsible for these financial statements, financial statement schedule,
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in the accompanying Management’s Report on Internal Control Over
Financial Reporting. Our responsibility is to express an opinion on
these financial statements, financial statement schedule and express an opinion
on the company’s internal control over financial reporting based on our
audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements and the schedule are free of material misstatement and
whether effective internal control over financial reporting was maintained in
all material respects. Our audits of the financial statements included
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
made only in accordance with authorizations of management and directors of the
company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of AZZ incorporated as of
February 29, 2008 and February 28, 2007 and the results of its operations
and its cash flows for each of the years in the two year period ended
February 29, 2008, in conformity with accounting principles generally
accepted in the United States of America. Also, in our opinion, AZZ
incorporated maintained, in all material respects, effective internal control
over financial reporting as of February 29, 2008, based on the COSO
criteria.
In
addition, in our opinion, the financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly, in all material respects, the information set forth
therein.
As
discussed in Note 1 to the consolidated financial statements, the Company has
adopted Financial Accounting Standards Board (FASB) Interpretation No. 48, Accounting for Uncertainty in Income
Taxes – An Interpretation of FASB Statement No. 109 effective March 1,
2007. In addition, the Company changed its method of accounting for share-based
payment arrangements in accordance with the provisions of Statement of Financial
Accounting Standards No. 123(R), Share-based Payment,
effective March 1, 2006.
/s/ BDO
Seidman, LLP
Dallas,
Texas
May 9,
2008
Report
of Independent Registered Public Accounting
Firm
|
Board
of Directors and Shareholders
AZZ
incorporated
Fort
Worth, Texas
We have audited the accompanying
consolidated statements of income, shareholders' equity, and cash flows of AZZ
incorporated for the year ended February 28, 2006. Our audit also
included the financial statement schedule listed in the Index at Item 15A.2 for
the year ended February 28, 2006. These financial statements and
financial statement schedule are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our
audit.
We conducted our audit in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
In our opinion, the financial
statements referred to above present fairly, in all material respects, the
consolidated results of operations of AZZ incorporated and its cash flows for
the year ended February 28, 2006, in conformity with U.S. generally accepted
accounting principles. Also, in our opinion, the financial statement
schedule for the year ended February 28, 2006, referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth
therein.
/s/ Ernst
& Young, LLP
Fort
Worth, Texas
April 14,
2006
AZZ
incorporated
CONSOLIDATED
STATEMENTS OF INCOME
Years ended February 29, 2008, February 28, 2007 and February 28,
2006
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
320,193,104 |
|
|
$ |
260,343,667 |
|
|
$ |
187,184,093 |
|
Costs
and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
239,651,058 |
|
|
|
193,411,001 |
|
|
|
149,855,108 |
|
Selling,
general, and administrative
|
|
|
36,261,642 |
|
|
|
31,948,452 |
|
|
|
23,898,755 |
|
Net
(gain) loss from sale of or insurance settlement on property, plant and
equipment
|
|
|
32,211 |
|
|
|
(586,001 |
) |
|
|
22,208 |
|
Interest
expense
|
|
|
1,494,731 |
|
|
|
1,495,442 |
|
|
|
1,689,169 |
|
Other
income
|
|
|
(1,079,431 |
) |
|
|
(524,973 |
) |
|
|
(312,346 |
) |
|
|
|
276,360,211 |
|
|
|
225,743,921 |
|
|
|
175,152,894 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before income taxes and accounting changes
|
|
|
43,832,893 |
|
|
|
34,599,746 |
|
|
|
12,031,199 |
|
Income
tax expense
|
|
|
16,145,304 |
|
|
|
12,910,182 |
|
|
|
4,204,312 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
before cumulative effect of changes in accounting
principles
|
|
$ |
27,687,589 |
|
|
$ |
21,689,564 |
|
|
$ |
7,826,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative
effect of change in accounting principles (net of tax of
$50,667)
|
|
|
- |
|
|
|
(
85,344 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
27,687,589 |
|
|
$ |
21,604,220 |
|
|
$ |
7,826,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per share before effect of change in accounting
|
|
$ |
2.30 |
|
|
$ |
1.87 |
|
|
$ |
.70 |
|
Cumulative
effect of change in accounting
|
|
|
- |
|
|
$ |
(
.01 |
) |
|
|
- |
|
Basic
earnings per share after effect of change in accounting
|
|
$ |
2.30 |
|
|
$ |
1.86 |
|
|
$ |
.70 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
per share before effect of change in accounting
|
|
$ |
2.26 |
|
|
$ |
1.83 |
|
|
$ |
.69 |
|
Cumulative
effect of change in accounting
|
|
|
- |
|
|
$ |
(
.01 |
) |
|
|
- |
|
Diluted earnings
per share after effect of change in accounting
|
|
$ |
2.26 |
|
|
$ |
1.82 |
|
|
$ |
.69 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number common shares
|
|
|
12,012,789 |
|
|
|
11,599,428 |
|
|
|
11,168,156 |
|
Weighted
average number common shares and potentially dilutive common
shares
|
|
|
12,227,212 |
|
|
|
11,838,612 |
|
|
|
11,316,084 |
|
See
accompanying notes to the consolidated financial statements.
AZZ
incorporated
CONSOLIDATED
BALANCE SHEETS
Assets
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
2,226,941 |
|
|
$ |
1,703,092 |
|
Accounts
receivable, net of allowance for doubtful accounts of $630,000 in 2008 and
$670,000 in 2007
|
|
|
38,901,577 |
|
|
|
50,277,554 |
|
Inventories
|
|
|
43,426,468 |
|
|
|
45,487,266 |
|
Costs
and estimated earnings in excess of billings on
uncompleted
contracts
|
|
|
13,044,076 |
|
|
|
8,286,324 |
|
Deferred
income tax assets
|
|
|
4,391,398 |
|
|
|
4,224,294 |
|
Prepaid
expenses and other
|
|
|
1,004,383 |
|
|
|
1,988,834 |
|
Total
current assets
|
|
|
102,994,843 |
|
|
|
111,967,364 |
|
|
|
|
|
|
|
|
|
|
Property,
plant, and equipment, at cost:
|
|
|
|
|
|
|
|
|
Land
|
|
|
2,992,863 |
|
|
|
2,992,863 |
|
Buildings
and structures
|
|
|
36,763,402 |
|
|
|
31,981,329 |
|
Machinery
and equipment
|
|
|
46,783,600 |
|
|
|
43,183,977 |
|
Furniture,
fixtures, software and computers
|
|
|
8,548,747 |
|
|
|
8,395,328 |
|
Automotive
equipment
|
|
|
1,871,116 |
|
|
|
1,927,445 |
|
Construction
in progress
|
|
|
2,936,578 |
|
|
|
4,790,693 |
|
|
|
|
99,896,306 |
|
|
|
93,271,635 |
|
Less
accumulated depreciation
|
|
|
(51,611,396 |
) |
|
|
(46,643,316 |
) |
Net
property, plant, and equipment
|
|
|
48,284,910 |
|
|
|
46,628,319 |
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
40,962,104 |
|
|
|
40,962,104 |
|
Other
assets
|
|
|
1,077,423 |
|
|
|
1,349,791 |
|
|
|
|
|
|
|
|
|
|
Total
Assets
|
|
$ |
193,319,280 |
|
|
$ |
200,907,578 |
|
See
accompanying notes to the consolidated financial statements.
AZZ
incorporated
CONSOLIDATED
BALANCE SHEETS
February
29, 2008 and February 28, 2007
Liabilities and Shareholders'
Equity
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
16,035,932 |
|
|
$ |
25,316,165 |
|
Income
tax payable
|
|
|
706,966 |
|
|
|
688,000 |
|
Accrued
salaries and wages
|
|
|
4,919,804 |
|
|
|
5,025,508 |
|
Other
accrued liabilities
|
|
|
10,285,285 |
|
|
|
9,298,370 |
|
Customer
advance payment
|
|
|
2,115,330 |
|
|
|
2,900,702 |
|
Billings
in excess of costs and estimated earnings on
uncompleted
contracts
|
|
|
3,798,179 |
|
|
|
2,067,945 |
|
Compensation
expense related to stock appreciation rights
|
|
|
4,834,325 |
|
|
|
4,418,233 |
|
Total
current liabilities
|
|
|
42,695,821 |
|
|
|
49,714,923 |
|
|
|
|
|
|
|
|
|
|
Long-term
debt due after one year
|
|
|
- |
|
|
|
35,200,000 |
|
|
|
|
|
|
|
|
|
|
Deferred
income taxes
|
|
|
4,466,834 |
|
|
|
4,844,405 |
|
|
|
|
|
|
|
|
|
|
Commitments
and Contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
equity:
|
|
|
|
|
|
|
|
|
Common
stock, $1 par value; 25,000,000 shares authorized; 12,609,160 shares
issued at February 29, 2008 and February 28, 2007
|
|
|
12,609,160 |
|
|
|
12,609,160 |
|
Capital
in excess of par value
|
|
|
16,369,938 |
|
|
|
11,086,703 |
|
Retained
earnings
|
|
|
119,549,115 |
|
|
|
91,861,526 |
|
Cumulative
other comprehensive income
|
|
|
- |
|
|
|
28,621 |
|
Less
common stock held in treasury, at cost (480,188 shares
in
2008 and 954,996 shares in 2007)
|
|
|
(2,371,588 |
) |
|
|
(4,437,760 |
) |
Total
shareholders' equity
|
|
|
146,156,625 |
|
|
|
111,148,250 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
193,319,280 |
|
|
$ |
200,907,578 |
|
See
accompanying notes to the consolidated financial statements.
AZZ
incorporated
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
income
|
|
$ |
27,687,589 |
|
|
$ |
21,604,220 |
|
|
$ |
7,826,887 |
|
Adjustments
to reconcile net income to net cash provided by operating
activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
7,998,899 |
|
|
|
6,478,441 |
|
|
|
5,535,362 |
|
Amortization
|
|
|
199,981 |
|
|
|
181,203 |
|
|
|
184,304 |
|
Non-cash
compensation expense
|
|
|
845,346 |
|
|
|
763,957 |
|
|
|
141,200 |
|
Non-cash
interest expense
|
|
|
13,580 |
|
|
|
155,841 |
|
|
|
166,696 |
|
Provision
for doubtful accounts
|
|
|
111,171 |
|
|
|
450,796 |
|
|
|
(596,205 |
) |
Deferred
income tax expense (benefit)
|
|
|
(529,264 |
) |
|
|
(1,127,389 |
) |
|
|
477,126 |
|
Cumulative
effect of change in accounting principle
|
|
|
- |
|
|
|
85,344 |
|
|
|
- |
|
Net
(gain) loss on insurance settlement or sale of property, plant and
equipment
|
|
|
50,914 |
|
|
|
(586,001 |
) |
|
|
22,208 |
|
Effects
of changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
11,264,808 |
|
|
|
(16,126,028 |
) |
|
|
(5,471,524 |
) |
Inventories
|
|
|
2,060,797 |
|
|
|
(17,413,761 |
) |
|
|
(4,531,439 |
) |
Prepaid
expenses and other assets
|
|
|
999,226 |
|
|
|
(402,038 |
) |
|
|
(798,315 |
) |
Net
change in billings related to costs and estimated earnings on uncompleted
contracts
|
|
|
(3,027,519 |
) |
|
|
(6,118,020 |
) |
|
|
2,233,416 |
|
Accounts
payable
|
|
|
(9,280,234 |
) |
|
|
8,686,064 |
|
|
|
3,352,880 |
|
Other
accrued liabilities and income taxes
|
|
|
530,896 |
|
|
|
10,294,892 |
|
|
|
4,251,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by operating activities
|
|
|
38,926,190 |
|
|
|
6,927,521 |
|
|
|
12,793,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale or insurance settlement of property, plant and
equipment
|
|
|
219,795 |
|
|
|
749,118 |
|
|
|
658,480 |
|
Acquisition
of subsidiaries, net of cash acquired
|
|
|
- |
|
|
|
(13,425,967 |
) |
|
|
- |
|
Purchases
of property, plant and equipment
|
|
|
(9,926,198 |
) |
|
|
(10,658,561 |
) |
|
|
(6,601,824 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash used in investing activities
|
|
|
(9,706,403 |
) |
|
|
(23,335,410 |
) |
|
|
(5,943,344 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
AZZ
incorporated
CONSOLIDATED
STATEMENTS OF CASH FLOWS (Continued)
Years
ended February 29, 2008, February 28, 2007 and February 28, 2006
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Payments
on revolving loan
|
|
|
(35,200,000 |
) |
|
|
(11,640,482 |
) |
|
|
(15,000,000 |
) |
Proceeds
from exercise of stock options
|
|
|
3,450,413 |
|
|
|
1,260,940 |
|
|
|
3,391,691 |
|
Tax
benefits from stock options exercised
|
|
|
3,053,649 |
|
|
|
266,096 |
|
|
|
- |
|
Payments
on long-term debt
|
|
|
- |
|
|
|
(12,375,000 |
) |
|
|
(5,500,000 |
) |
Proceeds
from revolving loan
|
|
|
- |
|
|
|
39,340,482 |
|
|
|
11,000,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) financing activities
|
|
|
(28,695,938 |
) |
|
|
16,852,036 |
|
|
|
(6,108,309 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash and cash equivalents
|
|
|
523,849 |
|
|
|
444,147 |
|
|
|
742,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at beginning of year
|
|
|
1,703,092 |
|
|
|
1,258,945 |
|
|
|
516,828 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents at end of year
|
|
$ |
2,226,941 |
|
|
$ |
$ 1,703,092 |
|
|
$ |
$ 1,258,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental
disclosures of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
|
|
$ |
1,672,214 |
|
|
$ |
$ 1,310,138 |
|
|
$ |
$ 1,460,495 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
taxes
|
|
$ |
13,726,926 |
|
|
$ |
13,849,408 |
|
|
$ |
$ 2,468,057 |
|
See
accompanying notes to the consolidated financial statements.
AZZ
incorporated
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Common
Stock
|
|
|
Capital
in
|
|
|
Retained
|
|
|
Cumulative
Other
|
|
|
Treasury
|
|
|
Total
|
|
|
|
|
|
|
excess
of
|
|
|
earnings
|
|
|
Comprehensive
|
|
|
Stock
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
par
value
|
|
|
|
|
|
Income
(Loss)
|
|
|
|
|
|
|
|
Balance
at February 29, 2005
|
|
|
12,609,160 |
|
|
$ |
12,609,160 |
|
|
$ |
7,809,573 |
|
|
$ |
62,430,418 |
|
|
$ |
(55,485 |
) |
|
$ |
(7,474,489 |
) |
|
$ |
75,319,177 |
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
1,241,758 |
|
|
|
|
|
|
|
|
|
|
|
2,149,933 |
|
|
|
3,391,691 |
|
Stock
compensation
|
|
|
|
|
|
|
|
|
|
|
66,720 |
|
|
|
|
|
|
|
|
|
|
|
74,480 |
|
|
|
141,200 |
|
Federal
income tax deducted on stock options
|
|
|
|
|
|
|
|
|
|
|
489,975 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
489,975 |
|
Comprehensive
income:
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,826,887 |
|
|
|
|
|
|
|
|
|
|
|
7,826,887 |
|
Other
comprehensive income, net of tax:
Unrealized
gain on market value of interest rate swaps, net of $56,401 of
income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,711 |
|
|
|
|
|
|
|
99,711 |
|
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,926,598 |
|
Balance
at February 28, 2006
|
|
|
12,609,160 |
|
|
$ |
12,609,160 |
|
|
$ |
9,608,026 |
|
|
$ |
70,257,305 |
|
|
$ |
44,226 |
|
|
$ |
(5,250,076 |
) |
|
$ |
87,268,641 |
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
523,105 |
|
|
|
|
|
|
|
|
|
|
|
737,836 |
|
|
|
1,260,941 |
|
Stock
compensation
|
|
|
|
|
|
|
|
|
|
|
689,477 |
|
|
|
|
|
|
|
|
|
|
|
74,480 |
|
|
|
763,957 |
|
Federal
income tax deducted on stock options
|
|
|
|
|
|
|
|
|
|
|
266,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
266,095 |
|
Comprehensive
income:
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,604,221 |
|
|
|
|
|
|
|
|
|
|
|
21,604,221 |
|
Other
comprehensive income, net of tax:
Unrealized
gain (loss) on market value of interest rate swaps,
net of ($8,403) of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(15,605 |
) |
|
|
|
|
|
|
(15,605 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,588,616 |
|
Balance
at February 28, 2007
|
|
|
12,609,160 |
|
|
$ |
12,609,160 |
|
|
$ |
11,086,703 |
|
|
$ |
91,861,526 |
|
|
$ |
28,621 |
|
|
$ |
(4,437,760 |
) |
|
$ |
111,148,250 |
|
Exercise
of stock options
|
|
|
|
|
|
|
|
|
|
|
1,384,240 |
|
|
|
|
|
|
|
|
|
|
|
2,066,172 |
|
|
|
3,450,412 |
|
Stock
compensation
|
|
|
|
|
|
|
|
|
|
|
845,346 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
845,346 |
|
Federal
income tax deducted on stock options
|
|
|
|
|
|
|
|
|
|
|
3,053,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,053,649 |
|
Comprehensive
income:
Net
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,687,589 |
|
|
|
|
|
|
|
|
|
|
|
27,687,589 |
|
Other
comprehensive income, net of tax:
Unrealized
gain (loss) on market value of interest rate swaps,
net of ($15,411) of income tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(28,621 |
) |
|
|
|
|
|
|
(28,621 |
) |
Comprehensive
income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,658,968 |
|
Balance
at February 29, 2008
|
|
|
12,609,160 |
|
|
$ |
12,609,160 |
|
|
$ |
16,369,938 |
|
|
$ |
119,549,115 |
|
|
|
- |
|
|
$ |
(2,371,588 |
) |
|
$ |
146,156,625 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See
accompanying notes to the consolidated financial statements.
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1. Summary of significant accounting policies
Organization—AZZ
incorporated (the “Company”) operates primarily in the United States of America.
Information about the Company’s operations by segment is included in Note 11 to
the consolidated financial statements.
Basis of
consolidation—The consolidated financial statements include the accounts
of AZZ incorporated and its wholly owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in
consolidation.
Capital Structure—On
April 5, 2007, our Board of Directors authorized a two-for-one split of common
stock, to be effected in the form of a share dividend of one share of Common
Stock for every one share of Common Stock outstanding. The dividend was paid on
May 4, 2007 to shareholders of record on April 20, 2007. All share and per share
data provided herein give effect to this stock split, applied
retroactively.
Use of estimates—The
preparation of the financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those
estimates.
Concentrations of credit
risk—Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash and cash
equivalents and trade accounts receivable.
The
Company maintains cash and cash equivalents with various financial institutions.
These financial institutions are located throughout the United States and
Company policy is designed to limit exposure to any one institution. The Company
performs periodic evaluations of the relative credit standing of those financial
institutions that are considered in the Company’s banking relationships. The
Company has not experienced any losses in such accounts and believes it is not
exposed to any significant credit risk related to cash and cash
equivalents.
Concentrations
of credit risk with respect to trade accounts receivable are limited due to the
Company’s diversity by virtue of two operating segments, the number of
customers, and the absence of a concentration of trade accounts receivable in a
small number of customers. The Company performs continual evaluations of the
collectibility of trade accounts receivable and allowance for doubtful accounts
based upon historical losses, economic conditions and customer specific
events. After all collection efforts are exhausted and the account is
deemed uncollectible, it is written off against the allowance for doubtful
accounts. The Company’s net credit losses in 2008, 2007 and 2006 were
approximately $151,000, $181,000 and $366,000, respectively. Collateral is
usually not required from customers as a condition of sale.
Revenue
recognition—The Company recognizes revenue for the Electrical and
Industrial Products Segment upon transfer of title and risk to
customer, or based upon the percentage-of-completion method of accounting for
electrical products built to customer specifications under long-term contracts.
We recognize revenue for the Galvanizing Services Segment upon completion of the
galvanizing process performed on the customers’ material or shipment of this
material. Revenue for the Galvanizing Service Segment is typically recognized at
completion of the service unless we specifically agree with the customer to hold
its material for a predetermined period of time after the completion of the
galvanizing process and, in that circumstance, we invoice and recognize revenue
upon shipment. Customer advanced payments presented in the balance
sheet arise from advanced payments received from our customers prior to shipment
of the product and are not related to revenue recognized under the percentage of
completion method. The extent of progress for revenue recognized
using the percentage of completion method is measured by the ratio of contract
costs incurred to date to total estimated contract costs at
completion. Contract costs include direct labor and material, and
certain indirect costs. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses, if
any, on uncompleted contracts are made in the period in which such
losses
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
are able
to be determined. The assumptions made in determining the estimated
cost could differ from actual performance resulting in a different outcome for
profits or losses than anticipated
Cash and cash
equivalents—For purposes of reporting cash flows, cash and cash
equivalents include cash on hand, deposits with banks and all highly liquid
investments with an original maturity of three months or less.
Shipping and handling
cost – The shipping and handling cost are shown net (gross collection
less actual cost) within net sales on the Consolidated Statements of
Income.
Inventories— Cost is
determined principally using a weighted-average method for the Electrical and
Industrial Products Segment and the first-in-first-out (FIFO) method for the
Galvanizing Services Segment.
Property, plant and
equipment — For financial reporting purposes, depreciation is computed
using the straight-line method over the estimated useful lives of the related
assets as follows:
Buildings
and structures
|
10-25
years
|
Machinery
and equipment
|
3-15
years
|
Furniture
and fixtures
|
3-15
years
|
Automotive
equipment
|
3
years
|
Maintenance
and repairs are charged to expense as incurred; renewals and betterments that
significantly extend the useful life of the asset are capitalized.
Long-lived assets,
intangible assets and goodwill — Purchased intangible assets included on
the balance sheet as other assets are comprised of customer lists, backlogs and
non-compete agreements. Such intangible assets are being amortized using the
straight-line method over the estimated useful lives of the assets ranging from
two to fifteen years. The Company records impairment losses on
long-lived assets, including identifiable intangible assets, when events and
circumstances indicate that the assets might be impaired and the undiscounted
projected cash flows associated with those assets are less than the carrying
amounts of those assets. In those situations, impairment loss on a
long-lived asset is measured based on the excess of the carrying amount of the
asset over the asset's fair value, generally determined based upon discounted
estimates of future cash flows. For goodwill, the Company performs an
annual impairment test in the fourth quarter of each year or as indicators are
present.
Debt issue costs -
Debt issue costs, included in other assets, are expensed using the effective
interest rate method over the term of the debt.
Income taxes — Income
tax expense is based on the liability method. Under this method of accounting,
deferred tax assets and liabilities are recognized based on differences between
financial accounting and income tax basis of assets and liabilities using
presently enacted tax rates and laws.
Stock-based
compensation — The Company has granted stock options or stock
appreciation rights for a fixed number of shares to employees and
directors.
Prior to
March 1, 2006, we accounted for stock options granted to our employees and
directors under the recognition and measurement provisions of APB Opinion 25,
“Accounting for Stock Issued to Employees” and related Interpretations, as
permitted by FASB statement No. 123, “Accounting for Stock-Based Compensation.”
For our stock options, no stock based compensation expense was recognized in our
financial statements prior to March 1, 2006, as all stock options granted had an
exercise price equal to the market value of the underlying common stock at the
date of grant. Effective March 1, 2006, we adopted the fair value recognition
provisions of FASB Statement No. 123R, “Share-Based Payment,” using the modified
prospective transition method. Under this method, compensation cost recognized
for fiscal 2007 and fiscal 2008 includes compensation cost of $145,000 and
$6,000, respectively, for share-based payments granted prior to, but not yet
vested as of, February 28, 2006, based on the grant date fair value estimated
in
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
accordance
with the original provisions of Statement 123. As of February 29,
2008, all shares had vested and related compensation cost has been
recognized.
We also
began granting stock appreciation rights, or SARs, in the first quarter of
fiscal 2005 as part of our stock-based compensation plans. The SARs granted in
fiscal 2005 and fiscal 2006 will be settled in cash. Prior to March
1, 2006, we accounted for these SAR grants under the recognition and measurement
provisions of APB Opinion No. 25, which required expense to be recognized equal
to the amount by which the quoted market value exceeded the original grant price
on a mark-to-market basis. Therefore, we recognized $757,000 of compensation
expense prior to February 28, 2006. On March 1, 2006, as required
under the provisions of Statement 123R, those SARs granted prior to, but not yet
vested as of, February 28, 2006, were recorded at their fair value estimated in
accordance with Statement 123R, and a cumulative effect of change in accounting
principle was recorded in the amount of $85,300, net of tax. Additional
compensation expense for these SARs in the amount of $4.8 million for fiscal
2008 and $3.5 million was recorded for fiscal 2007 based on their fair value in
accordance with Statement 123R. To date $9.2 million of compensation expense has
been recognized for these SARs. The grants for fiscal 2005 were fully vested on
February 28, 2007 and were paid in cash during the second quarter ended August
31, 2007 in the amount of $4.4 million.
The
following table illustrates the effect on net income and earnings per share if
we had applied the fair value recognition provisions of Statement No. 123R to
options and SARs granted under our stock-based compensation plans for fiscal
2006. For the purpose of this pro forma disclosure, the value is estimated using
a Black-Scholes option-pricing formula and amortized to expense over the
option’s vesting periods.
|
|
2006
|
|
|
|
|
|
Reported
net income
|
|
$ |
7,827 |
|
Recognized
Compensation, net of tax
|
|
|
570 |
|
Compensation
expense per SFAS No.123R, net of tax
|
|
|
(981 |
) |
Pro
forma net income for SFAS No. 123R
|
|
$ |
7,417 |
|
|
|
|
|
|
Reported
earnings per common share:
|
|
|
|
|
Basic
|
|
$ |
.70 |
|
Diluted
|
|
$ |
.69 |
|
|
|
|
|
|
Compensation
expense per SFAS No 123R:
|
|
|
|
|
Basic
|
|
$ |
(.04 |
) |
Diluted
|
|
$ |
(.03 |
) |
|
|
|
|
|
Pro
forma earnings per common share:
|
|
|
|
|
Basic
|
|
$ |
.66 |
|
Diluted
|
|
$ |
.66 |
|
On June
1, 2006, we granted 234,160 SARs to be settled in stock. These Stock
Appreciation Rights have a three year cliff vesting schedule, but may vest early
if accelerated vesting provisions in the plan are met. These qualify
for equity treatment under SFAS 123R. The weighted average fair value
of SARs granted on June 1, 2006 was determined to be $2.92 based on the
following assumptions: risk-free interest rate of 5%, dividend yield of 0.0%,
expected volatility of 27.81% and expected life of 3 years. Compensation expense
related to the June 1, 2006 grant was $392,000 for fiscal 2007 and $152,000 for
fiscal 2008. As of February 29, 2008, we had unrecognized cost of $139,000
related to June 1, 2006 SARs grants.
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March
1, 2007, we granted 147,740 SARs to be settled in stock. These Stock
Appreciation Rights have a three year cliff vesting schedule, but may vest early
if accelerated vesting provisions in the plan are met and qualify for equity
treatment under SFAS 123R. The weighted average fair value of SARs granted on
March 1, 2007, was determined to be $5.535 based on the following assumptions:
risk-free interest rate of 5%, dividend yield of 0.0%, expected volatility of
29.52% and expected life of 3 years. During the second quarter ended August 31,
2007, the vesting date of 5,920 Stock Appreciation Rights was accelerated due to
the retirement of two of the Company’s directors. Compensation
expense in the amount of $512,000 was recognized during fiscal 2008. We had
unrecognized cost of $306,000 related to the March 1, 2007 SARs grants. See Note
9, stock options and other shareholder matters for additional information on
stock based compensation plans.
Financial instruments
— The Company’s financial instruments consist of cash and cash equivalents,
accounts receivable, accounts payable and long-term debt. The fair values of
financial instruments approximate the amount of their carrying
value.
Derivative financial
instruments— From time to time, the Company uses derivatives to manage
interest rate risk. The Company’s policy is to use derivatives for risk
management purposes only, which includes maintaining the ratio between the
Company’s fixed and floating rate debt obligations that management deems
appropriate, and prohibits entering into such contracts for trading purposes.
The Company enters into derivatives only with counterparties (primarily
financial institutions) which have substantial financial wherewithal to minimize
credit risk. The amount of gains or losses from the use of derivative financial
instruments has not been and is not expected to be material to the Company’s
consolidated financial statements. As of February 29, 2008, the Company had no
derivative financial instruments.
Warranty reserves –
Within other accrued liabilities, a reserve has been established to provide for
the estimated future cost of warranties on a portion of the Company’s delivered
products. Management periodically reviews the reserves, and
adjustments are made accordingly. A provision for warranty on products is made
on the basis of the Company’s historical experience and identified warranty
issues. Warranties cover such factors as non-conformance to specifications and
defects in material and workmanship. The following is a roll-forward of amounts
accrued for warranty reserves:
|
|
Warranty
Reserve
(in
thousands)
|
|
Balance
at February 28, 2005
|
|
$ |
1,005 |
|
Warranty
costs incurred
|
|
|
(1,050 |
) |
Additions
charged to income
|
|
|
1,147 |
|
Balance
at February 28, 2006
|
|
$ |
1,102 |
|
Warranty
costs incurred
|
|
|
(888 |
) |
Additions
charged to income
|
|
|
1,364 |
|
Balance
at February 28, 2007
|
|
$ |
1,578 |
|
Warranty
costs incurred
|
|
|
(1,034 |
) |
Additions
charged to income
|
|
|
1,188 |
|
Balance
at February 29, 2008
|
|
$ |
1,732 |
|
Recent Accounting
Pronouncements
In
December 2007, the Financial Accounting Standard board ("FASB") issued SFAS No.
141, (revised 2007), "Business Combinations" ("SFAS No. 141(R)"), which
continues the evolution toward fair value reporting and significantly changes
the accounting for acquisitions that close beginning in 2009, both at the
acquisition date and in subsequent periods. SFAS No. 141(R)
introduces new accounting concepts and valuation complexities, and many of the
changes have the potential to generate greater earnings volatility after an
acquisition. SFAS No. 141(R) applies to acquisitions on or after
March 1, 2009 and will impact the Company's reporting prospectively
only.
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
December 2007, FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Statements – an amendment of ARB No. 51" ("SFAS No. 160"), which
requires companies to measure an acquisition of noncontrolling (minority)
interest at fair value in the equity section of the acquiring entity's balance
sheet. The objective of SFAS No. 160 is to improve the comparability
and transparency of financial data as well as to help prevent manipulation of
earnings. The changes introduced by the new standards are likely to
affect the planning and execution, as well as the accounting and disclosure, of
merger transactions. The effective date to adopt SFAS No. 160 for us
in March 1, 2009 and we do not expect the adoption to have a material effect on
our results of operations and financial position.
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). This standard permits an entity
to choose to measure many financial instruments and certain items at fair value.
Most of the provisions in SFAS No. 159 are elective; however, the amendment to
FASB SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities":, applies to all entities with available –for-sale and trading
securities. The provisions of SFAS No. 159 are effective as of the
beginning of an entity's first fiscal year that begins after November 15, 2007.
We do not expect the adoption of SFAS No. 159 to have a significant impact on
our consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
No. 157"), which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The provisions of SFAS No.
157 are effective for financial statements issued for fiscal years beginning
after November 15, 2007. In February of 2008, the FASB issued FASB
Staff position No. 157-2 which delays the effective date of SFAS No. 157 for
non-financial assets and liabilities which are not measured at fair value on a
recurring basis (at least annually) until fiscal years beginning after November
15, 2008. We are currently in the process of evaluating the impact of the
adoption of SFAS no. 157 on our consolidated financial statements.
Inventories
consist of the following:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Raw
materials
|
|
$ |
26,555 |
|
|
$ |
31,724 |
|
Work-in-process
|
|
|
14,182 |
|
|
|
11,458 |
|
Finished
goods
|
|
|
2,689 |
|
|
|
2,305 |
|
|
|
$ |
43,426 |
|
|
$ |
45,487 |
|
3.
|
Costs
and estimated earnings on uncompleted
contracts
|
Costs and
estimated earnings on uncompleted contracts consist of the
following:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Costs
incurred on uncompleted contracts
|
|
$ |
47,469 |
|
|
$ |
27,593 |
|
Estimated
earnings
|
|
|
19,195 |
|
|
|
12,497 |
|
|
|
|
66,664 |
|
|
|
40,090 |
|
Less
billings to date
|
|
|
57,418 |
|
|
|
33,872 |
|
|
|
$ |
9,246 |
|
|
$ |
6,218 |
|
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
amounts noted above are included in the accompanying consolidated balance sheet
under the following captions:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Cost
and estimated earnings in excess of billings
on
uncompleted contracts
|
|
$ |
13,044 |
|
|
$ |
8,286 |
|
Billings
in excess of costs and estimated earnings
on
uncompleted contracts
|
|
|
(3,798 |
) |
|
|
(2,068 |
) |
|
|
$ |
9,246 |
|
|
$ |
6,218 |
|
4.
|
Other
accrued liabilities
|
Other
accrued liabilities consist of the following:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Accrued
warranty
|
|
$ |
1,732 |
|
|
$ |
1,578 |
|
Group
medical insurance
|
|
|
550 |
|
|
|
780 |
|
Profit
sharing
|
|
|
3,900 |
|
|
|
3,105 |
|
Commissions
|
|
|
1,251 |
|
|
|
922 |
|
Other
|
|
|
2,852 |
|
|
|
2,913 |
|
|
|
$ |
10,285 |
|
|
$ |
9,298 |
|
5.
|
Employee
benefit plans
|
The
Company has a trustee profit sharing plan and 401(k) plan covering substantially
all of its employees. Under the provisions of the plan, the Company contributes
amounts as authorized by the Board of Directors. Total contributions to the
profit sharing plan, which included the Company’s 401(k) matching, were
$4,871,000 for 2008, $3,832,000 for 2007, and $528,000 for 2006.
Deferred
federal and state income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
accounting purposes and the amounts used for income tax purposes. Significant
components of the Company’s net deferred income tax liability are as
follows:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Deferred
income tax assets:
|
|
|
|
|
|
|
Employee
related items
|
|
|
2,606 |
|
|
|
2,245 |
|
Inventories
|
|
|
182 |
|
|
|
226 |
|
Accrued
warranty
|
|
|
650 |
|
|
|
592 |
|
Accounts
receivable
|
|
|
236 |
|
|
|
251 |
|
Other
|
|
|
717 |
|
|
|
910 |
|
Total
deferred income tax assets
|
|
|
4,391 |
|
|
|
4,224 |
|
|
|
|
|
|
|
|
|
|
Deferred
income tax liabilities:
|
|
|
|
|
|
|
|
|
Depreciation
methods and property basis differences
|
|
|
(1,458 |
) |
|
|
(1,744 |
) |
Other
assets and goodwill
|
|
|
(3,008 |
) |
|
|
(3,100 |
) |
Total
deferred income tax liabilities
|
|
|
(4,466 |
) |
|
|
(4,844 |
) |
Net
deferred income tax liabilities
|
|
$ |
(75 |
) |
|
$ |
(620 |
) |
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
The
provision for income taxes, including tax effect of change in accounting
principle, consists of:
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
(In
thousands)
|
|
Federal:
|
|
|
|
|
|
|
|
|
|
Current
|
|
$ |
15,171 |
|
|
$ |
12,536 |
|
|
$ |
3,467 |
|
Deferred
|
|
|
(486 |
) |
|
|
(1,062 |
) |
|
|
484 |
|
State:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
|
|
|
1,503 |
|
|
|
1,451 |
|
|
|
260 |
|
Deferred
|
|
|
(43 |
) |
|
|
(65 |
) |
|
|
(7 |
) |
|
|
$ |
16,145 |
|
|
$ |
12,860 |
|
|
$ |
4,204 |
|
A
reconciliation from the federal statutory income tax rate to the effective
income tax rate is as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
Statutory
federal income tax rate
|
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
34.0 |
% |
Expenses
not deductible for tax purposes
|
|
|
.2 |
|
|
|
.3 |
|
|
|
.6 |
|
State
income taxes, net of federal income tax benefit
|
|
|
2.1 |
|
|
|
2.5 |
|
|
|
1.8 |
|
Benefit
of section 199, manufacturing deduction
|
|
|
(1.7 |
) |
|
|
(1.1 |
) |
|
|
(.8 |
) |
Other
|
|
|
1.2 |
|
|
|
.6 |
|
|
|
(.6 |
) |
Effective
income tax rate
|
|
|
36.8 |
% |
|
|
37.3 |
% |
|
|
35.0 |
% |
7.
|
Intangible
assets and goodwill
|
Goodwill
and intangible assets with indefinite lives are not amortized but are subject to
annual impairment tests. Other intangible assets with finite lives
continue to be amortized over their useful lives.
The
Company completed its annual impairment analysis of goodwill on December 31st of each
year. As a result the Company determined that there was no impairment
of goodwill.
In addition to other miscellaneous
assets, the Company classifies its intangible assets other than goodwill in
other assets on the consolidated balance sheet.
Intangible
assets consisted of the following:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
Customer
related intangibles
|
|
$ |
765 |
|
|
$ |
765 |
|
Non-compete
agreements
|
|
|
1,183 |
|
|
|
1,183 |
|
|
|
|
1,948 |
|
|
|
1,948 |
|
Less
accumulated amortization
|
|
|
961 |
|
|
|
761 |
|
|
|
$ |
987 |
|
|
$ |
1,187 |
|
|
Accumulated
amortization related to customer related intangibles and non-compete
agreements were $118,000 and $843,000 respectively, at February 29, 2008
and $30,000 and $731,000, respectively, at February 28,
2007.
|
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
The
Company recorded amortization expenses for Fiscal 2008, 2007 and 2006 in
the amount of $200,000, $181,000 and $184,000,
respectively. The following table projects the estimated
amortization expense for the five succeeding fiscal years and
thereafter.
|
(In
thousands)
|
|
2009
|
|
$ |
200 |
|
2010
|
|
|
151 |
|
2011
|
|
|
98 |
|
2012
|
|
|
98 |
|
2013
|
|
|
98 |
|
Thereafter
|
|
|
342 |
|
Total
|
|
$ |
987 |
|
Basic
earning per share is based on the weighted average number of shares outstanding
during each year. Diluted earnings per share were similarly computed but have
been adjusted for the dilutive effect of the weighted average number of stock
options and equity stock appreciation rights outstanding. The shares
and earnings per share have been adjusted to reflect our two-for-one stock
split, effected in the form of a share dividend on May 4, 2007.
The
following table sets forth the computation of basic and diluted earnings per
share:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
|
(In
thousands, except share and per share amounts)
|
Numerator:
|
|
|
|
|
|
|
|
Income
before cumulative effect of changes in accounting
principles
|
|
$ |
27,688 |
|
|
$ |
21,689 |
|
|
$ |
7,827 |
|
Cumulative
effect of accounting change
|
|
|
- |
|
|
|
(85 |
) |
|
|
- |
|
Net
income for basic and diluted
earnings
per common share
|
|
$ |
27,688 |
|
|
$ |
21,604 |
|
|
$ |
7,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for basic earnings per
common
share - weighted-average shares
|
|
|
12,012,789 |
|
|
|
11,599,428 |
|
|
|
11,168,156 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock
options/Equity SARs
|
|
|
214,423 |
|
|
|
239,184 |
|
|
|
147,928 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator
for diluted earnings per
common
share - adjusted weighted-
average
shares
|
|
|
12,227,212 |
|
|
|
11,838,612 |
|
|
|
11,316,084 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before
cumulative effect of change in accounting principles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
2.30 |
|
|
$ |
1.87 |
|
|
$ |
.70 |
|
Diluted
earnings per common share
|
|
$ |
2.26 |
|
|
$ |
1.83 |
|
|
$ |
.69 |
|
After
cumulative effect of change in accounting principles
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
2.30 |
|
|
$ |
1.86 |
|
|
$ |
.70 |
|
Diluted
earnings per common share
|
|
$ |
2.26 |
|
|
$ |
1.82 |
|
|
$ |
.69 |
|
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Stock
options for which the exercise price was greater than the average market price
of common shares were not included in the computation of diluted earnings per
share as the effect would be anti-dilutive. At the end of fiscal years 2008,
2007 and 2006, there were none, none, and 588,456, stock options, respectively,
outstanding with exercise prices greater than the average market price of common
shares.
9.
|
Stock
options and other shareholder
matters
|
During
fiscal 2006, the Company adopted the AZZ incorporated 2005 Long-Term Incentive
Plan (“2005 Plan”). The purpose of the 2005 Plan is to promote the growth and
prosperity of the Company by permitting the Company to grant to its employees
and directors restricted stock, performance awards, stock appreciation rights
and options to purchase common stock of the Company. The maximum number of
shares that may be issued under the 2005 Plan is 500,000 shares. On June 1,
2006, 234,160 SARs were issued under the 2005 Plan with an exercise price of
$11.55. These awards qualify for equity treatment in accordance with SFAS 123R.
These stock appreciation rights have a three year cliff vesting schedule, but
may vest early if accelerated vesting provisions in
the plan are met. The weighted average fair value of SARs granted on June 1,
2006 was determined to be $2.915 based on the following assumptions: risk-free
interest rate of 5%, dividend yield of 0.0%, expected volatility of 27.81% and
expected life of 3 years. During the second quarter ended August 31, 2007, the
vesting date of 22,720 Stock Appreciation Rights was accelerated due to the
retirement of two
directors and one employee. Compensation expense related to the
June 1, 2006 grant was $392,000 for fiscal 2007. Additional compensation in the
amount of $152,000 was recognized during fiscal 2008. As of February 29, 2008,
we had unrecognized cost of $139,000 related to the June 1, 2006 SAR
grants.
On March
1, 2007, 147,740 Stock Appreciation Rights were issued under the 2005 Plan with
an exercise price of $19.88. These Stock Appreciation Rights have a three year
cliff vesting schedule, but may vest early if accelerated vesting provisions in
the plan are met and qualify for equity treatment under SFAS 123R. The weighted
average fair value of SARs granted on March 1, 2007, was determined to be $5.535
based on the following assumptions: risk-free interest rate of 5%, dividend
yield of 0.0%, expected volatility of 29.52% and expected life of 3 years.
During the second quarter ended August 31, 2007, the vesting date of 5,920 Stock
Appreciation Rights was accelerated due to the retirement of two of the
Company’s directors. Compensation expense in the amount of $512,000
was recognized during fiscal 2008. As of February 29, 2008, we had unrecognized
cost of $306,000 related to the March 1, 2007 SAR grants.
During
fiscal 2002, the Company adopted the AZZ incorporated 2001 Long-Term Incentive
Plan (“2001 Plan”). The purpose of the 2001 Plan is to promote the
growth and prosperity of the Company by permitting the Company to grant to its
employees, directors and advisors restricted stock and options to purchase
common stock of the Company. The maximum number of shares that may be issued
under the 2001 Plan is 1.5 million shares. In conjunction with the adoption of
the 2001 Plan, all options still available for issuance under pre-existing
option plans were terminated. At February 29, 2008, 132,032 vested options were
outstanding under the 2001 Plan and exercisable at prices ranging from $4.215 to
$12.125 per share. Options under the 2001 Plan vest from immediately upon
issuance to ratably over a period of three to five years and expire at various
dates through March 2013. There were no new options or Stock Appreciation Rights
granted under the 2001 plan during fiscal 2008.
During
fiscal 2008, 2007 and 2006, the Company granted its directors and advisory
directors 4,781, 16,000 and 16,000 shares of the Company’s common stock for each
of the fiscal years, respectively. Stock compensation expense was
recognized with regard to these grants in the amount of $175,000 for fiscal
2008, $227,000 for fiscal 2007, and $141,000 for fiscal 2006.
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On April
7, 2005, the Company implemented Stock Appreciation Rights Plans (the “Plans”)
for its key employees and directors. The purpose of the Plans is to enable the
Company to attract and retain qualified key employees and directors by offering
to them the opportunity to share in increases in the value of the Company to
which they contribute. The Company made grants under the Plans in fiscal 2005
and fiscal 2006. The grants outstanding were 207,660 for fiscal 2006 grants as
of February 29, 2008. The grants for fiscal 2005 were fully vested on February
28, 2007 and were paid in cash during the second quarter ended August 31, 2007
in the amount of $4.4 million. The fiscal 2006 rights fully vested on
February 29, 2008. The value of each vested right will be paid in
cash for rights vesting on the Company’s earnings release date for the fiscal
year ended February 29, 2008, and shall be equal to the excess, if any, (i) of
the average of the closing prices of a share of Common Stock on the New York
Stock Exchange for those days on which it trades during the ninety calendar days
immediately following the public release of financial results for the period
ended February 29, 2008, over (ii) the average of the closing prices of a share
of Common Stock on the New York Stock Exchange for those days on which it trades
during the ninety calendar days immediately following the Company’s year end
earnings release date, which was $7.98 per share for the fiscal 2006
grants. To determine the cash payment, the excess in the average
stock price will be multiplied by the number of Stock Appreciation Rights
granted to each participant. The value of rights vesting before the normal
vesting date will be measured by reference to the price of the Common Stock
during a period at or near the accelerated vesting date. The Company recognized
$4.4 million for compensation expense related to the Stock Appreciation Rights
Plans prior to February 28, 2007. Additional compensation expense
related to these Stock Appreciation Rights Plans in the amount of $4.8 million
was recognized during fiscal 2008 in accordance with FAS 123R. To
date $9.2 million of compensation expense has been recognized for these Stock
Appreciation Rights.
A summary
of the Company’s stock option and equity settled Stock Appreciation Rights
activity and related information is as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
|
|
Options/
SAR’s
|
|
|
Weighted
Average Exercise Price
|
|
|
Options/
SAR’s
|
|
|
Weighted
Average Exercise Price
|
|
|
Options
|
|
|
Weighted
Average Exercise Price
|
|
Outstanding
at beginning of year
|
|
|
825,590 |
|
|
$ |
8.92 |
|
|
|
754,776 |
|
|
$ |
7.90 |
|
|
|
1,368,178 |
|
|
$ |
7.77 |
|
Granted
|
|
|
147,740 |
|
|
|
19.885 |
|
|
|
234,160 |
|
|
|
11.55 |
|
|
|
- |
|
|
|
- |
|
Exercised
|
|
|
(488,038 |
) |
|
|
8.41 |
|
|
|
(158,504 |
) |
|
|
7.96 |
|
|
|
(461,858 |
) |
|
|
7.35 |
|
Forfeited
|
|
|
0 |
|
|
|
N/A |
|
|
|
(4,842 |
) |
|
|
8.80 |
|
|
|
(151,544 |
) |
|
|
8.34 |
|
Outstanding
at end of year
|
|
|
485,292 |
|
|
$ |
12.78 |
|
|
|
825,590 |
|
|
$ |
8.92 |
|
|
|
754,776 |
|
|
$ |
7.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
at end of year
|
|
|
248,572 |
|
|
$ |
10.68 |
|
|
|
620,834 |
|
|
$ |
8.78 |
|
|
|
588,270 |
|
|
$ |
8.57 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average fair value for the fiscal year indicated of options and SARs
granted during such year
|
|
|
|
|
|
$ |
5.534 |
|
|
|
|
|
|
$ |
2.915 |
|
|
|
|
|
|
|
N/A |
|
The
aggregate intrinsic value of the equity settled Stock Appreciation Rights and
stock options for the outstanding shares/ stock appreciation rights and
exercisable shares/ stock appreciation rights at February 29, 2008 were $11
million and $6.2 million, respectively.
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
following table summarizes additional information about stock options and stock
appreciation rights outstanding at February 29, 2008.
Range
of
Exercise
Prices
|
|
|
Total
Shares/ SAR’s
|
|
|
Weighted
Average Remaining Life
|
|
|
Weighted
Average Exercise Price
|
|
|
Shares
/ SAR’s Currently Exercisable
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$4.215
- $5.545 |
|
|
|
43,764 |
|
|
|
4.54 |
|
|
$ |
4.66 |
|
|
|
43,764 |
|
|
$ |
4.66 |
|
|
$7.70
- $8.80 |
|
|
|
87,568 |
|
|
|
4.03 |
|
|
$ |
8.32 |
|
|
|
87,568 |
|
|
$ |
8.32 |
|
|
$11.55
- $19.885 |
|
|
|
353,960 |
|
|
|
1.70 |
|
|
$ |
14.89 |
|
|
|
117,240 |
|
|
$ |
14.68 |
|
|
$4.125
- $19.885 |
|
|
|
485,292 |
|
|
|
2.38 |
|
|
$ |
12.78 |
|
|
|
248,572 |
|
|
$ |
10.68
|
|
Effective
January 7, 1999, the Board of Directors approved a stock rights plan, which
authorized and declared a dividend distribution of one right for each share of
common stock outstanding at the close of business on February 4, 1999. The
rights are exercisable at an initial exercise price of $30, subject to certain
adjustments as defined in the agreement, if a person or group acquires 15% or
more of the Company’s common stock or announces a tender offer that would result
in ownership of 15% or more of the common stock. Alternatively, the rights may
be redeemed at one cent per right at any time until ten business days following
the first public announcement of the acquisition of beneficial ownership of 15%
of the Company’s common stock. The rights expire on January 7,
2009.
As of
February 29, 2008, the Company has approximately 845,409 and 11,905,548 shares,
respectively reserved for future issuance under the stock option plans and the
shareholder rights plan.
10. Long-term
debt
Long-term
debt consists of the following:
|
|
2008
|
|
|
2007
|
|
|
|
(In
thousands)
|
|
|
|
|
|
|
|
|
Revolving
line of credit with bank, due May 25, 2011
|
|
|
- |
|
|
$ |
35,200 |
|
|
|
|
- |
|
|
|
35,200 |
|
Less
amount due within one year
|
|
|
|
|
|
|
- |
|
|
|
|
- |
|
|
$ |
35,200 |
|
On May
25, 2006, we entered into the Second Amended and Restated Credit Agreement (the
“Credit Agreement”), which replaced our Amended and Restated Revolving and Term
Credit Agreement dated as of November 1, 2001.
The
Credit Agreement provides for a $60 million revolving line of credit with one
lender, Bank of America, N.A., maturing on May 25, 2011. This is an unsecured
revolving credit facility, which refinanced outstanding borrowings and is used
to provide for working capital needs, capital improvements, future acquisitions,
and letter of credit needs. At February 29, 2008, we had no outstanding debt
borrowed against the revolving credit facility and letters of credit outstanding
in the amount of $10.5 million, which left approximately $49.5 million of
additional credit available under the revolving credit facility.
The
Credit Agreement provides for various financial covenants consisting of a)
Minimum Consolidated Net Worth – maintain on a consolidated basis net worth
equal to at least the sum of $69.8 million, representing 80% of net worth at
February 28, 2006, plus 75% of future net income, b) Maximum Leverage Ratio-
maintain on a consolidated basis a Leverage Ratio (as defined in the Credit
Agreement) not to exceed 3.0:1.0, c) Fixed Charge Coverage Ratio- maintain on a
consolidated basis a Fixed Charge Coverage Ratio of at least 1.5:1.0 and d)
Capital Expenditures- not to make Capital Expenditures on a consolidated basis
in an amount in excess of $14 million during any fiscal year.
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The
Credit Agreement provides for an applicable margin ranging from .75% to 1.25%
over the Eurodollar Rate and Commitment Fees ranging from .175% to .25%
depending on our Leverage Ratio. The applicable margin was .75% at February 29,
2008.
11. Operating
segments
The
Company has two reportable segments as defined by the FASB No. 131, Disclosures about Segments of an
Enterprise and Related Information: (1) Electrical and Industrial
Products and (2) Galvanizing Services. The Electrical and Industrial Products
Segment provides highly engineered specialty components to the power generation
transmission and distribution market, as well as products to the industrial
market. The Galvanizing Services Segment provides hot dip galvanizing services
to the steel fabrication industry through facilities located throughout the
south, midwest and southwest. Hot dip galvanizing is a metallurgical process by
which molten zinc is applied to a customer’s material. The zinc bonding renders
a corrosive resistant coating enhancing the life of the material for up to fifty
years.
Information
regarding operations and assets by segment is as follows:
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
sales:
|
|
(In
thousands)
|
|
Electrical
and Industrial Products
|
|
$ |
179,181 |
|
|
$ |
150,250 |
|
|
$ |
123,736 |
|
Galvanizing
Services
|
|
|
141,012 |
|
|
|
110,094 |
|
|
|
63,448 |
|
|
|
$ |
320,193 |
|
|
$ |
260,344 |
|
|
$ |
187,184 |
|
Segment
Operating income (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
29,158 |
|
|
$ |
21,301 |
|
|
$ |
11,357 |
|
Galvanizing
Services
|
|
|
35,087 |
|
|
|
31,945 |
|
|
|
12,676 |
|
Total
Segment Operating Income
|
|
|
64,245 |
|
|
|
53,246 |
|
|
|
24,033 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
corporate expenses (b)
|
|
|
18,890 |
|
|
|
17,074 |
|
|
|
10,218 |
|
Interest
expense
|
|
|
1,495 |
|
|
|
1,496 |
|
|
|
1,689 |
|
Other
(income) expense, net (c)
|
|
|
27 |
|
|
|
76 |
|
|
|
95 |
|
|
|
|
20,412 |
|
|
|
18,646 |
|
|
|
12,002 |
|
Income
before income taxes and accounting changes
|
|
$ |
43,833 |
|
|
$ |
34,600 |
|
|
$ |
12,031 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
2,375 |
|
|
$ |
1,826 |
|
|
$ |
1,734 |
|
Galvanizing
Services
|
|
|
5,004 |
|
|
|
4,001 |
|
|
|
3,295 |
|
Corporate
|
|
|
820 |
|
|
|
988 |
|
|
|
857 |
|
|
|
$ |
8,199 |
|
|
$ |
6,815 |
|
|
$ |
5,886 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expenditures
for acquisitions, net of cash, and property, plant and
equipment:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
4,998 |
|
|
$ |
5,425 |
|
|
$ |
1,395 |
|
Galvanizing
Services
|
|
|
4,662 |
|
|
|
17,990 |
|
|
|
2,581 |
|
Corporate
|
|
|
266 |
|
|
|
669 |
|
|
|
2,626 |
|
|
|
$ |
9,926 |
|
|
$ |
24,084 |
|
|
$ |
6,602 |
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
114,722 |
|
|
$ |
112,822 |
|
|
$ |
84,266 |
|
Galvanizing
Services
|
|
|
72,083 |
|
|
|
81,076 |
|
|
|
50,160 |
|
Corporate
|
|
|
6,514 |
|
|
|
7,010 |
|
|
|
6,600 |
|
|
|
$ |
193,319 |
|
|
$ |
200,908 |
|
|
$ |
141,026 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
30,997 |
|
|
$ |
30,997 |
|
|
$ |
30,997 |
|
Galvanizing
Services
|
|
|
9,965 |
|
|
|
9,965 |
|
|
|
9,965 |
|
|
|
$
|
40,962 |
|
|
$ |
40,962 |
|
|
$ |
40,962 |
|
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
(a)
|
Segment
operating income consists of net sales less cost of sales, specifically
identifiable selling, general and administrative expenses, and other
income and expense items that are specifically identifiable to a
segment.
|
|
(b)
|
General
Corporate Expense consists of selling, general and administrative expenses
that are not specifically identifiable to a
segment.
|
|
(c)
|
Other
(income) expense, net includes gains and losses on sale of property, plant
and equipment and other (income) expenses not specifically identifiable to
a segment.
|
12.
|
Commitments
and contingencies
|
Leases
The
Company leases various facilities under non-cancelable operating leases with an
initial term in excess of one year. As of February 29, 2008, the future minimum
payments required under these operating leases are summarized in the below
table. Rental expense for real estate and personal property was
approximately $3,132,000, $2,517,000, and $2,211,000 for fiscal years ended
2008, 2007 and 2006, respectively, and includes all short-term as well as
long-term rental agreements.
The
following summarizes the Company’s operating leases for the next five years and
thereafter.
|
|
Operating
Leases
|
|
|
|
|
|
2009
|
|
$ |
2,203 |
|
2010
|
|
|
2,579 |
|
2011
|
|
|
2,541 |
|
2012
|
|
|
2,296 |
|
2013
|
|
|
2,070 |
|
Thereafter
|
|
|
13,526 |
|
Total
|
|
$ |
25,215 |
|
Commodity
pricing
The
Company manages its exposures to commodity prices through the use of the
following.
In the
Electrical and Industrial Products Segment, the Company has exposure to
commodity pricing for copper, aluminum, and steel. Because the Electrical and
Industrial Products Segment does not commit contractually to minimum volumes,
increases in price for these items are normally managed through escalation
clauses to the customer’s contracts, although during difficult market conditions
these escalation clauses may be difficult to obtain.
In the
Galvanizing Services Segment, the Company utilizes contracts with its zinc
suppliers that include protective caps to guard against rising commodity prices.
The Company also secures firm pricing for natural gas supplies with individual
utilities when possible. There are no contracted volume purchase
commitments associated with the zinc or natural gas
agreements. Management believes these contractual agreements
partially offset exposure to commodity price swings.
There are
no contracted purchase commitments for any other commodity items including
steel, aluminum, natural gas, copper, zinc or any other commodity.
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other
At
February 29, 2008, the Company had outstanding letters of credit in the amount
of $10.5 million. These letters of credit are issued to a portion of
the Company’s customers to cover any potential warranty costs that the customer
might incur and in lieu of performance and bid bonds. In addition, as
of February 29, 2008, a warranty reserve in the amount of $1.7 million has been
established to offset any future warranty claims.
The
Company has been named as a defendant in certain lawsuits in the normal course
in business. It is the policy of management to disclose the amount or
range of reasonably possible losses in excess of recorded amounts. In
the opinion of management, after consulting with legal counsel, the liabilities,
if any, resulting from these matters should not have a material effect on our
financial position or results of operations.
13.
|
Quarterly
financial information, unaudited (in thousands, except per share
amounts)
|
|
|
Quarter
ended
|
|
|
|
May
31, 2007
|
|
|
August
31, 2007
|
|
|
November
30, 2007
|
|
|
February
29, 2008
|
|
2008
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
75,377 |
|
|
$ |
81,606 |
|
|
$ |
86,593 |
|
|
$ |
76,617 |
|
Gross
profit
|
|
|
19,169 |
|
|
|
21,241 |
|
|
|
20,224 |
|
|
|
19,908 |
|
Net
income
|
|
|
4,146 |
|
|
|
8,122 |
|
|
|
8,092 |
|
|
|
7,328 |
|
Basic
earnings per common share
|
|
|
.35 |
|
|
|
.67 |
|
|
|
.67 |
|
|
|
.60 |
|
Diluted
earnings per common share
|
|
|
.34 |
|
|
|
.66 |
|
|
|
.66 |
|
|
|
.60 |
|
|
|
|
|
|
|
Quarter
ended
|
|
|
|
May
31, 2006
|
|
|
August
31, 2006
|
|
|
November
30, 2006
|
|
|
February
28, 2007
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
sales
|
|
$ |
52,453 |
|
|
$ |
62,882 |
|
|
$ |
65,361 |
|
|
$ |
79,648 |
|
Gross
profit
|
|
|
13,745 |
|
|
|
17,031 |
|
|
|
17,115 |
|
|
|
19,042 |
|
Net
income
|
|
|
4,126 |
|
|
|
5,279 |
|
|
|
5,245 |
|
|
|
6,954 |
|
Basic
earnings per common share
|
|
|
.36 |
|
|
|
.46 |
|
|
|
.45 |
|
|
|
.60 |
|
Diluted
earnings per common share
|
|
|
.35 |
|
|
|
.45 |
|
|
|
.44 |
|
|
|
.58 |
|
14. Acquisitions
On
October 31, 2006, AZZ incorporated (the “Company”), Arbor-Crowley, Inc., a
wholly-owned subsidiary of the Company (“Subsidiary”), Witt Industries, Inc.
(“Witt”) and Marcy R. Wydman (“Wydman”), as the sole shareholder of Witt,
entered into an Asset Purchase Agreement (the “Purchase Agreement”) pursuant to
which Subsidiary purchased all, or substantially all of the assets of Witt
relating to Witt’s galvanizing division (the “Asset Purchase”). The purchase
price of the transaction was $13,400,000 in cash. The Company used its existing
bank line of credit to finance this transaction. The purchased assets included
three galvanizing plants, one plant located in Ohio and two plants located in
Indiana. Witt’s operating results are included in the financial statements from
November 1, 2006. The estimated fair values of the assets acquired and
liabilities assumed include $6.6 million of currents assets, consisting of
inventory, and accounts receivable, $6.1 million of property, plant and
equipment, $.9 million in identified intangible and other assets, and assumed
liabilities of $.2 million. The identified intangible assets consist of customer
related intangibles with a weighted average useful life of 8.7 years. Pro forma
results of operations assuming the acquisition occurred on March 1, 2006 are not
presented as they are not significantly different than the Company’s historical
results of operations.
AZZ
incorporated
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In
connection with the real property located in Muncie, Indiana, the Company,
Subsidiary, Witt Galvanizing-Muncie, Inc. and Wydman entered into an
Environmental Remediation and Assumption of Liability Agreement pursuant to
which Wydman assumed certain potential environmental liabilities with respect to
the Site and agreed to perform voluntary remediation of pre-existing pollution
conditions at the Site. Remediation of the preexisiting environmental
conditions are the responsibility and obligation of the Seller.
15.
Subsequent Events
On March
31, 2008, AZZ incorporated entered into an Asset Purchase Agreement to acquire
substantially all of the assets AAA Industries, Inc. The purchase price of the
transaction was approximately $83,000,000, subject to adjustment as more fully
described in the Asset Purchase Agreement filed with the SEC on Form 8-K on
April 1, 2008. The purchased assets included six galvanizing plants (three
plants located in Illinois, one plant located in Indiana, one plant located in
Minnesota and one plant located in Oklahoma) and related equipment and
supplies.
The
purchase price will be allocated to the underlying assets and liabilities based
on their estimated fair values. The resulting goodwill from this
transaction is currently estimated at $16 million. The goodwill
estimate is preliminary, pending the results of appraisals, and audit, and
further financial analysis. For the year ended December 31, 2007, AAA
Industries, Inc. had sales of approximately $55 million.
Additionally,
on March 31, 2008, the Company entered into a Note Purchase Agreement pursuant
to which the Company issued $100,000,000 aggregate principal amount of its 6.24%
unsecured Senior Notes due March 31, 2018 through a private placement (the "Note
Offering"). Pursuant to the Note Purchase Agreement, the Company’s
payment obligations with respect to the Senior Notes may be accelerated upon any
Event of Default, as defined in the Note Purchase Agreement.
In
connection with the Note Offering the Company entered into the Second Amendment
to Second Amended and Restated Credit Agreement, (the “Second Amendment”) with
Bank of America, N. A. (“Bank of America”), which amended the Second Amended and
Restated Credit Agreement by and among the Company, Bank of America and certain
other lenders (including Bank of America) dated as of May 25, 2006 (the “Credit
Agreement”). The Second Amendment contains the consent of Bank of America to the
Note Offering and amended the Credit Agreement to provide that the Note Offering
will not constitute a default under the Credit Agreement.
The
Senior Notes provide for various financial covenants of a) Minimum Consolidated
Net Worth - Maintain on a consolidated basis net worth equal to at least the sum
of $116.9 million plus 50% of future net income; b) Maximum Ratio of
Consolidated Indebtedness to Consolidated EBITDA – Maintain a ratio of
indebtedness to EBITDA (as defined in Note Purchase Agreement) not to exceed
3.25:1.00; c) Fixed Charge Coverage Ratio – Maintains on a
consolidated basis a Fixed Charge Coverage Ratio of at least 2.0:1.0; d)
Priority Indebtedness – The Company will not at any time permit aggregate amount
of all Priority Indebtedness to exceed 10% of Consolidated Net
Worth. In conjunction with Note Offering the Credit Agreement with
Bank of America was amended to reflect the same debt covenants as presented
above.
AZZ
incorporated
Valuation
and Qualifying Accounts and Reserves
(in
thousands)
|
|
|
|
|
Year
Ended
|
|
|
|
|
|
|
February
29, 2008
|
|
|
February
28, 2007
|
|
|
February
28, 2006 (a)
|
|
Allowance
for Doubtful Accounts
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at Beginning of year
|
|
$ |
670 |
|
|
$ |
400 |
|
|
$ |
1,362 |
|
Additions
charged or credited to income
|
|
|
111 |
|
|
|
451 |
|
|
|
(596 |
) |
Balances
written off, net of recoveries
|
|
|
(151 |
) |
|
|
(181 |
) |
|
|
(366 |
) |
Balance
at end of year
|
|
$ |
630 |
|
|
$ |
670 |
|
|
$ |
400 |
|
|
(a)
|
In
fiscal 2004 and 2005, a reserve in the amount of $888,000 was created for
a preferential payment claim from the Enron Bankruptcy. This
amount was included in the total reserve of $1,362,000 at the end of
fiscal 2005. In fiscal 2006, the claim was settled for $300,000
and the reserve was adjusted.
|
Index
to Exhibits as Required By Item 601 of Regulation S-K.
3(1)
|
Articles
of Incorporation, and all amendments thereto (incorporated by reference to
the Annual Report on Form 10-K filed by Registrant for the fiscal year
ended February 28, 1981).
|
3(2)
|
Articles
of Amendment to the Article of Incorporation of the Registrant dated June
30, 1988 (incorporated by reference to the Annual Report on
Form 10-K filed by Registrant for the fiscal year ended February 29,
2000).
|
3(3)
|
Articles
of Amendment to the Articles of Incorporation of the Registrant dated
October 25, 1999 (incorporated by reference to the Annual
Report on Form 10-K filed by Registrant for the fiscal year ended February
29, 2000).
|
3(4)
|
Articles
of Amendment to the Articles of Incorporation dated July 17, 2000
(incorporated by reference to the Quarterly Report Form 10-Q filed by
Registrant for the quarter ended August 31, 2000).
|
3(5)
|
Amended
and Restated Bylaws of AZZ incorporated (incorporated by reference to the
Exhibit 3(1) to the Current Report Form 8-K filed by the Registrant on
November 27, 2007).
|
4
|
Form
of Stock Certificate for the Company’s $1.00 par value Common Stock
(incorporated by reference to the Quarterly Report Form 10-Q filed by
Registrant August 31, 2000).
|
10(1)
|
Second
Amended and Restated Credit Agreement with Bank of America, N.A., dated
May 25, 2006 (incorporated by reference to Exhibit 10(1) of the Form 8-K
filed by the Registrant on May 26, 2006).
|
10(2)
|
First
Amendment to Second Amended and Restated Credit Agreement with Bank of
America, N.A., dated February 28, 2007 (incorporated by reference to
Exhibit 10(1) of the Form 8-K filed by the Registrant on March 1,
2007).
|
11
|
Computation
of Per Share Earnings (see Note 8 to the Consolidated Financial
Statements). Filed Herewith.
|
14
|
Code
of Ethics. The Company’s Code of Business Conduct and Ethics
may be accessed via the Company’s Website at www.azz.com.
|
21
|
|
23.1
|
|
23.2
|
|
31.1
|
|
31.2
|
|
32.1
|
Chief Executive Officer Certificate pursuant to
18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 dated May 9, 2008. Filed
Herewith.
|
32.2
|
Chief Financial Officer Certificate pursuant to 18
U.S.C. Section 1350, as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002 dated May 9, 2008. Filed
Herewith.
|