azzform10q83108.htm
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended August
31, 2008
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 1-12777
AZZ
incorporated
(Exact
name of registrant as specified in its charter)
TEXAS
|
|
75-0948250
|
(State
or other jurisdiction of incorporation or organization)
|
|
(I.R.S.
Employer Identification No.)
|
|
|
|
University
Centre I, Suite 200
|
|
|
1300
South University Drive
|
|
|
Fort
Worth, Texas
|
|
76107
|
(Address
of principal executive offices)
|
|
(Zip
Code)
|
(817)
810-0095
Registrant's
telephone number, including area code:
NONE
(Former
name, former address and former fiscal year, if changed since last
report)
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 whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting company.
See definitions of "large accelerated filer", accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £
|
|
Accelerated
filer T
|
|
Non-accelerated
filer £
|
|
Smaller
Reporting Company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Title
of each class:
|
|
Outstanding
at August 31, 2008:
|
Common Stock, $1.00 par value per
share
|
|
12,144,216
|
AZZ
incorporated
INDEX
|
|
|
PAGE
NO.
|
PART
I.
|
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
|
Condensed
Financial Statements
|
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6-10
|
Item
2.
|
|
|
10-19
|
Item
3.
|
|
|
19
|
Item
4.
|
|
|
20
|
|
|
|
|
PART
II.
|
|
OTHER
INFORMATION
|
|
Item
1.
|
|
|
20
|
Item
1A.
|
|
|
20
|
Item
2.
|
|
|
20
|
Item
3.
|
|
|
21
|
Item
4.
|
|
|
21
|
Item
5.
|
|
|
21
|
Item
6.
|
|
|
21
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
22
|
PART I.
FINANCIAL INFORMATION
Item
1. Financial
Statements
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
|
08/31/08
|
|
|
02/29/08
|
|
Assets
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets
|
|
|
|
|
|
|
Cash
And Cash Equivalents
|
|
$ |
12,516,950 |
|
|
$ |
2,226,941 |
|
Accounts
Receivable (Net of Allowance for Doubtful Accounts)
|
|
|
65,016,205 |
|
|
|
38,901,577 |
|
Inventories
|
|
|
|
|
|
|
|
|
Raw
Material
|
|
|
34,681,301 |
|
|
|
26,554,997 |
|
Work-In-Process
|
|
|
22,490,795 |
|
|
|
14,182,685 |
|
Finished
Goods
|
|
|
1,715,453 |
|
|
|
2,688,786 |
|
Costs
And Estimated Earnings In Excess Of Billings On Uncompleted
Contracts
|
|
|
14,608,410 |
|
|
|
13,044,076 |
|
Deferred
Income Taxes
|
|
|
3,208,030 |
|
|
|
4,391,398 |
|
Prepaid
Expenses And Other
|
|
|
3,144,161 |
|
|
|
1,004,383 |
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
157,381,305 |
|
|
|
102,994,843 |
|
|
|
|
|
|
|
|
|
|
Property,
Plant And Equipment, Net
|
|
|
83,830,598 |
|
|
|
48,284,910 |
|
Goodwill
|
|
|
68,134,550 |
|
|
|
40,962,104 |
|
Intangibles
|
|
|
18,204,764 |
|
|
|
986,869 |
|
Other
Assets
|
|
|
2,021,300 |
|
|
|
90,554 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
329,572,517 |
|
|
$ |
193,319,280 |
|
Liabilities And
Shareholders' Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$ |
25,065,137 |
|
|
$ |
16,035,932 |
|
Income
Tax Payable
|
|
|
1,388,279 |
|
|
|
706,966 |
|
Accrued
Salaries And Wages
|
|
|
3,967,420 |
|
|
|
4,919,804 |
|
Other
Accrued Liabilities
|
|
|
13,815,043 |
|
|
|
15,119,610 |
|
Customer
Advance Payment
|
|
|
9,917,334 |
|
|
|
2,115,330 |
|
Billings
In Excess Of Costs And Estimated Earnings On Uncompleted
Contracts
|
|
|
961,244 |
|
|
|
3,798,179 |
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
55,114,457 |
|
|
|
42,695,821 |
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt
|
|
|
100,000,000 |
|
|
|
- |
|
Deferred
Income Taxes
|
|
|
6,208,365 |
|
|
|
4,466,834 |
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock, $1 Par Value
|
|
|
|
|
|
|
|
|
Shares
Authorized, 25,000,000
|
|
|
|
|
|
|
|
|
Shares
Issued and Outstanding, 12,609,160
|
|
|
12,609,160 |
|
|
|
12,609,160 |
|
Capital
In Excess Of Par Value
|
|
|
17,707,215 |
|
|
|
16,369,938 |
|
Accumulated
Other Comprehensive Loss
|
|
|
(745,700 |
) |
|
|
- |
|
Retained
Earnings
|
|
|
140,975,321 |
|
|
|
119,549,115 |
|
Less
Common Stock Held In Treasury, At Cost (464,944 And 480,188 Shares At
August 31, 2008 And February 29, 2008, Respectively)
|
|
|
(2,296,301 |
) |
|
|
(2,371,588 |
) |
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
168,249,695 |
|
|
|
146,156,625 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
329,572,517 |
|
|
$ |
193,319,280 |
|
PART I.
FINANCIAL INFORMATION
Item
1. Financial
Statements
CONDENSED
CONSOLIDATED INCOME STATEMENTS
|
|
THREE
MONTHS ENDED
|
|
|
SIX
MONTHS ENDED
|
|
|
|
8/31/08
|
|
|
8/31/07
|
|
|
8/31/08
|
|
|
8/31/07
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
103,259,467 |
|
|
$ |
81,606,288 |
|
|
$ |
203,217,724 |
|
|
$ |
156,983,321 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs
And Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
Of Sales
|
|
|
73,782,379 |
|
|
|
60,365,388 |
|
|
|
147,471,782 |
|
|
|
116,573,750 |
|
Selling,
General and Administrative
|
|
|
11,372,056 |
|
|
|
8,363,061 |
|
|
|
21,228,577 |
|
|
|
20,367,380 |
|
Interest
Expense
|
|
|
1,681,662 |
|
|
|
384,219 |
|
|
|
2,802,450 |
|
|
|
919,343 |
|
Net
(Gain) Loss On Sale of Property, Plant and Equipment, and Insurance
Proceeds
|
|
|
(1,147,826 |
) |
|
|
(2,269 |
) |
|
|
(1,145,219 |
) |
|
|
1,094 |
|
Other
(Income)
|
|
|
(579,473 |
) |
|
|
(361,598 |
) |
|
|
(1,063,240 |
) |
|
|
(556,371 |
) |
|
|
|
85,108,798 |
|
|
|
68,748,801 |
|
|
|
169,294,350 |
|
|
|
137,305,196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
18,150,669 |
|
|
|
12,857,487 |
|
|
|
33,923,374 |
|
|
|
19,678,125 |
|
Income
Tax Expense
|
|
|
6,847,028 |
|
|
|
4,735,653 |
|
|
|
12,497,168 |
|
|
|
7,409,836 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$ |
11,303,641 |
|
|
$ |
8,121,834 |
|
|
$ |
21,426,206 |
|
|
$ |
12,268,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
0.93 |
|
|
$ |
0.67 |
|
|
$ |
1.77 |
|
|
$ |
1.03 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$ |
0.92 |
|
|
$ |
0.66 |
|
|
$ |
1.74 |
|
|
$ |
1.01 |
|
PART I.
FINANCIAL INFORMATION
Item
I. Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
SIX
MONTHS ENDED
|
|
|
|
8/31/08
|
|
|
8/31/07
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
Income
|
|
$ |
21,426,206 |
|
|
$ |
12,268,289 |
|
|
|
|
|
|
|
|
|
|
Adjustments
To Reconcile Net Income To Net Cash
|
|
|
|
|
|
|
|
|
Provided
By Operating Activities:
|
|
|
|
|
|
|
|
|
Provision
For Doubtful Accounts
|
|
|
220,738 |
|
|
|
1,419 |
|
Amortization
And Depreciation
|
|
|
6,865,017 |
|
|
|
4,007,035 |
|
Deferred
Income Tax Expense (Benefit)
|
|
|
2,924,470 |
|
|
|
(137,230 |
) |
Net
(Gain) Loss On Sale Or Insurance Settlement Of Property, Plant &
Equipment
|
|
|
(1,145,219 |
) |
|
|
1,094 |
|
Non-Cash
Compensation Expense
|
|
|
1,308,869 |
|
|
|
658,170 |
|
|
|
|
|
|
|
|
|
|
Effects
Of Changes In Assets & Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
(15,694,021 |
) |
|
|
6,567,134 |
|
Inventories
|
|
|
(2,667,984 |
) |
|
|
(3,820,862 |
) |
Prepaid
Expenses And Other
|
|
|
(2,046,516 |
) |
|
|
699,069 |
|
Other
Assets
|
|
|
(2,052,225 |
) |
|
|
(31,287 |
) |
Net
Change In Billings Related To Costs And Estimated Earnings On Uncompleted
Contracts
|
|
|
(4,401,268 |
) |
|
|
(1,317,114 |
) |
Accounts
Payable
|
|
|
7,713,797 |
|
|
|
(3,359,212 |
) |
Other
Accrued Liabilities And Income Taxes
|
|
|
141,013 |
|
|
|
(451,898 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Provided By Operating Activities
|
|
|
12,592,877 |
|
|
|
15,084,607 |
|
|
|
|
|
|
|
|
|
|
Cash
Flows Used For Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
From Sale Or Insurance Settlement Of Property, Plant, And
Equipment
|
|
|
2,495,210 |
|
|
|
122,007 |
|
Purchase
Of Property, Plant And Equipment
|
|
|
(9,440,690 |
) |
|
|
(6,082,628 |
) |
Acquisition
Of Subsidiaries, Net Of Cash Acquired
|
|
|
(95,418,784 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Investing Activities
|
|
|
(102,364,264 |
) |
|
|
(5,960,621 |
) |
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
From Exercise Of Stock Options
|
|
|
31,242 |
|
|
|
3,364,762 |
|
Excess
Tax Benefits From Stock Options Exercises
|
|
|
72,453 |
|
|
|
2,872,545 |
|
Proceeds
From Long-Term Debt
|
|
|
100,000,000 |
|
|
|
- |
|
Payments
On Long Term Debt
|
|
|
- |
|
|
|
(15,200,000 |
) |
|
|
|
|
|
|
|
|
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
100,103,695 |
|
|
|
(8,962,693 |
) |
|
|
|
|
|
|
|
|
|
Effect
Of Exchange Rate Changes On Cash
|
|
|
(42,299 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Net
Increase In Cash & Cash Equivalents
|
|
|
10,290,009 |
|
|
|
161,293 |
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents At Beginning Of Period
|
|
|
2,226,941 |
|
|
|
1,703,092 |
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents At End Of Period
|
|
$ |
12,516,950 |
|
|
$ |
1,864,385 |
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Cash
Paid For Interest
|
|
$ |
74,070 |
|
|
$ |
1,050,785 |
|
|
|
|
|
|
|
|
|
|
Cash
Paid For Income Taxes
|
|
$ |
8,929,166 |
|
|
$ |
3,669,621 |
|
AZZ
incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summary
of Significant Accounting Policies
1.
|
Basis
of presentation.
|
|
These
interim unaudited condensed consolidated financial statements were
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to the SEC rules
and regulations referred to above. Accordingly, these financial
statements should be read in conjunction with the audited financial
statements and related notes for the fiscal year ended February 29, 2008
included in the Company’s Annual Report on Form 10-K covering such
period. For purposes of the report, “AZZ”, the “Company”, “we”,
“our”, “us” or similar reference means AZZ incorporated and our
consolidated subsidiaries.
|
|
Our
fiscal year ends on the last day of February and is identified as the
fiscal year for the calendar year in which it ends. For
example, the fiscal year that ended February 29, 2008 is referred to as
fiscal 2008.
|
|
In
the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the financial
position of the Company as of August 31, 2008, and the results of its
operations for the three-month and six-month periods ended August 31, 2008
and 2007, and cash flows for the six-month periods ended August 31, 2008
and 2007. Operating results for the three and six months ending
August 31, 2008 are not necessarily indicative of the results that may be
expected for the year ending February 28,
2009.
|
|
Earnings
per share is based on the weighted average number of shares outstanding
during each period, adjusted for the dilutive effect of stock
awards. 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:
|
|
|
Three
months ended August 31,
|
|
|
Six
months ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands except share and per share data)
|
|
Numerator:
Net income for basic and diluted earnings per common
share
|
|
$ |
11,304 |
|
|
$ |
8,122 |
|
|
$ |
21,426 |
|
|
$ |
12,268 |
|
Denominator:
Denominator
for basic earnings per common
share –weighted average shares
|
|
|
12,137,327 |
|
|
|
12,042,092 |
|
|
|
12,136,087 |
|
|
|
11,913,583 |
|
Effect
of dilutive securities:
Employee
and Director stock awards
|
|
|
207,389 |
|
|
|
234,936 |
|
|
|
181,107 |
|
|
|
237,315 |
|
Denominator
for diluted earnings per common
share
|
|
|
12,344,716 |
|
|
|
12,277,028 |
|
|
|
12,317,194 |
|
|
|
12,150,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$ |
.93 |
|
|
$ |
.67 |
|
|
$ |
1.77 |
|
|
$ |
1.03 |
|
Diluted
earnings per common share
|
|
$ |
.92 |
|
|
$ |
.66 |
|
|
$ |
1.74 |
|
|
$ |
1.01 |
|
3. Stock-based
Compensation.
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 awards under the Plans in fiscal 2006.
There were 207,660 fiscal 2006 awards granted. The awards for fiscal 2006 were
fully vested on February 29, 2008 and were paid in cash during the second
quarter ended August 31, 2008 in the amount of $4.8
million. The Company recognized $4.8 million for compensation
expense related to the fiscal 2006 Stock Appreciation Rights Plan prior to
February 29, 2008. There was no additional compensation expense
recorded for these Stock Appreciation Rights during the six-month period ended
August 31, 2008.
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
(“SARs” or “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 1 million shares. On June 1, 2006, 234,160 SARs were issued under the 2005
Plan with an exercise price of $11.55. As of August 31, 2008, 209,920 SARs were
outstanding due to the accelerated vesting of 24,240 SARs as a result of the
retirement of two directors and two employees. These awards qualify
for equity treatment in accordance with FAS 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. Compensation expense related to the June 1, 2006 grant was
$392,000 and $152,000 for fiscal 2007 and fiscal 2008, respectively. Additional
compensation in the amount of $76,000 was recognized during the six month period
ended August 31, 2008. As of August 31, 2008, we had unrecognized cost of
$63,000 related to the June 1, 2006 SAR grants.
On March
1, 2007, 147,740 Stock Appreciation Rights were awarded 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. As of August 31, 2008, 140,840 SARs were outstanding due to
the accelerated vesting of 6,900 SARs as a result of the retirement of two
directors and one employee. Compensation expense in the amount of $512,000 was
recognized during fiscal 2008. Additional compensation expense in the amount of
$111,000 was recognized in the six month period ended August 31, 2008. We had
unrecognized cost of $195,000 related to the March 1, 2007 SAR grants as of
August 31, 2008.
On March
1, 2008, 129,800 Stock Appreciation Rights were awarded under the 2005 Plan with
an exercise price of $35.88. 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 awarded on March 1, 2008, was determined to be $11.80
based on the following assumptions: risk-free interest rate of 5%, dividend
yield of 0.0%, expected volatility of 41.81% and expected life of 3
years. Compensation expense in the amount of $824,000 was recognized
in the six month period ended August 31, 2008. We had unrecognized cost of
$708,000 related to the March 1, 2008 SAR grants as of August 31,
2008.
We have
two operating segments as defined in our Annual Report on Form 10-K for the year
ended February 29, 2008. Information regarding operations and assets
by segment is as follows:
|
|
Three
Months Ended August 31,
|
|
|
Six
Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
($
In thousands)
|
|
Net
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
51,959 |
|
|
$ |
45,150 |
|
|
$ |
103,965 |
|
|
$ |
86,023 |
|
Galvanizing
Services
|
|
|
51,301 |
|
|
|
36,456 |
|
|
|
99,253 |
|
|
|
70,960 |
|
|
|
$ |
103,260 |
|
|
$ |
81,606 |
|
|
$ |
203,218 |
|
|
$ |
156,983 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Income (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
9,797 |
|
|
$ |
7,942 |
|
|
$ |
17,729 |
|
|
$ |
14,286 |
|
Galvanizing
Services
|
|
|
15,478 |
|
|
|
9,230 |
|
|
|
28,836 |
|
|
|
17,841 |
|
|
|
$ |
25,275 |
|
|
$ |
17,172 |
|
|
$ |
46,565 |
|
|
$ |
32,127 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General
Corporate Expense (b)
|
|
$ |
5,551 |
|
|
$ |
3,925 |
|
|
$ |
10,109 |
|
|
$ |
11,517 |
|
Interest
Expense
|
|
|
1,682 |
|
|
|
384 |
|
|
|
2,803 |
|
|
|
919 |
|
Other
(Income) Expense, Net (c)
|
|
|
(108 |
) |
|
|
6 |
|
|
|
(270 |
) |
|
|
13 |
|
|
|
$ |
7,125 |
|
|
$ |
4,315 |
|
|
$ |
12,642 |
|
|
$ |
12,449 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
$ |
18,150 |
|
|
$ |
12,857 |
|
|
$ |
33,923 |
|
|
$ |
19,678 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
157,739 |
|
|
$ |
117,574 |
|
|
$ |
157,739 |
|
|
$ |
117,574 |
|
Galvanizing
Services
|
|
|
150,237 |
|
|
|
79,035 |
|
|
|
150,237 |
|
|
|
79,035 |
|
Corporate
|
|
|
21,596 |
|
|
|
6,803 |
|
|
|
21,596 |
|
|
|
6,803 |
|
|
|
$ |
329,572 |
|
|
$ |
203,412 |
|
|
$ |
329,572 |
|
|
$ |
203,412 |
|
(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.
|
5. Warranty
reserves.
A reserve
has been established to provide for the estimated future cost of warranties on a
portion of the Company’s delivered products for our Electrical and Industrial
Segment and is classified within accrued liabilities on the consolidated balance
sheet. Management periodically reviews the reserves and makes
adjustments accordingly. Warranties cover such factors as
non-conformance to specifications and defects in material and
workmanship. The following table shows changes in the warranty
reserves since the end of fiscal 2007:
|
|
Warranty
Reserve
|
|
|
|
(Unaudited)
|
|
|
|
($
In thousands)
|
|
|
|
|
|
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 |
|
Warranty
costs incurred
|
|
|
(607 |
) |
Additions
charged to income
|
|
|
641 |
|
Balance
at August 31, 2008
|
|
$ |
1,766 |
|
On March
31, 2008, AZZ incorporated entered into an Asset Purchase Agreement to acquire
substantially all of the assets of AAA Industries, Inc. The purchase price of
the transaction was approximately $81,600,000, subject to adjustment as more
fully described in the Asset Purchase Agreement filed on our Current Report on
Form 8-K on April 2, 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
following table summarizes the preliminary purchase price allocation as of the
date of acquisition:
Current
Assets
|
|
$ |
18,064 |
|
Property
and Equipment
|
|
$ |
32,934 |
|
Intangible
Assets
|
|
$ |
16,070 |
|
Goodwill
|
|
$ |
15,716 |
|
Total
Assets
|
|
$ |
82,784 |
|
Current
Liabilities
|
|
$ |
(1,187 |
) |
Cost
of Acquisition, Net of Cash Received
|
|
$ |
81,597 |
|
Of the
$16.1 million of intangible assets acquired, $1.8 million, $1.2 million and
$13.1 million was assigned to non-compete agreements, trade names and customer
relationships, respectively. These intangible assets are being amortized and
have a weighted average life of 13.8 years. Goodwill of $15.7 million arising
from the acquisition has been allocated to the Galvanizing Services Segment and
will be deductible for income tax purposes.
The
following pro forma information is based on the assumption the acquisition took
place on March 1, 2007 for the income statement for the three month and six
month period ended August 31, 2008 and 2007.
|
|
Three
Months Ended August 31,
|
|
|
Six
Months Ended August 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
2008
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$ |
103,259,467 |
|
|
$ |
98,781,918 |
|
|
$ |
207,767,630 |
|
|
$ |
187,961,745 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
11,303,641 |
|
|
|
8,287,204 |
|
|
|
21,456,592 |
|
|
|
13,391,080 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$ |
0.93 |
|
|
$ |
0.69 |
|
|
$ |
1.77 |
|
|
$ |
1.12 |
|
Diluted
Earnings Per Share
|
|
$ |
0.92 |
|
|
$ |
0.68 |
|
|
$ |
1.75 |
|
|
$ |
1.10 |
|
On June
26, 2008, we announced the signing of an asset purchase agreement with Chriscot
Holdings, Ltd, a privately held company, to acquire substantially all of the
assets related to Blenkhorn and Sawle, Ltd., headquartered in St. Catharines,
Ontario, Canada. The acquisition closed on June 30,
2008. The purchase price was approximately $13.8 million in
cash plus assumption of certain current liabilities. Blenkhorn and Sawle has
been a premier supplier of electrical equipment since 1948. As a
custom turn-key solutions provider and certified professional engineering house
they have supplied products to the major utility companies, oil and gas, mining,
industrial as well as nuclear power industry.
We
consider the Canadian dollar to be the functional currency of Blenkhorn and
Sawle (B&S) because it conducts substantially all of its business in
Canadian currency. B&S's assets and liabilities are translated
into United States dollars at exchange rates existing at the balance sheet date,
revenue and expense are translated at weighted average exchange rates and
shareholders' equity and intercompany balances are translated at historical
exchange rates. The foreign currency translation adjustment is
recorded as a separate component of shareholders equity and is included in
accumulated other comprehensive income (loss).
Statement
of Financial Accounting Standards No. 130 Reporting Comprehensive Income (SFAS
130), requires the reporting of comprehensive income in addition to net
income. Comprehensive income is a more inclusive financial reporting
methodology that includes disclosure of certain financial information that
historically has not been recognized in the calculation of net
income. The Company's comprehensive income includes net income and
foreign translation adjustments. Comprehensive income for the three
and six month periods ended August 31, 2008 was $10,557,941 and $20,680,506,
respectively. Comprehensive income for fiscal 2008 was equal to net
income.
Item
2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
FORWARD LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q 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 we believe that the current views and
expectations reflected in those 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 our
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; raw material and utility
costs, including cost of zinc and natural gas which are used in the hot dip
galvanizing process and steel, aluminum and copper costs which are used in
the Electrical and Industrial Segment; changes in economic conditions of the
various markets we serve, both foreign and domestic; customer requested delays
of shipments; acquisition opportunities, adequacy of financing and availability
of experienced management employees to implement our growth
strategy. We expressly disclaim any obligation to release publicly
any updates or revisions to these forward-looking statements to reflect any
change in our views or expectations. We can give no assurances that such
forward-looking statements will prove to be correct.
The
following discussion should be read in conjunction with management’s discussion
and analysis contained in our 2008 Annual Report on Form 10-K, as well as with
the condensed consolidated financial statements and notes thereto included in
this Quarterly Report on Form 10-Q.
RESULTS
OF OPERATIONS
We have
two operating segments as defined in our Annual Report on Form 10-K for the
year-ended February 29, 2008. Management believes that the most meaningful
analysis of our results of operations is to analyze our performance by
segment. We use revenue by segment and segment operating income to
evaluate our segments. 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 4 to our
quarterly consolidated financial statements included in this
report.
Revenues
Our
backlog was $190.8 million as of August 31, 2008, an increase of $55.9 million
or 41%, as compared to $134.9 million at February 29, 2008. All of
our backlog relates to our Electrical and Industrial Products Segment. Our
book-to-ship ratio was 1.35 to 1 for the second quarter ended August 31, 2008,
as compared to 1.05 to 1 for the same period in the prior
year. Incoming orders for the three and six month periods increased
61% and 33%, respectively, over the same period a year ago. The increase in
incoming orders during the second quarter of fiscal 2009 over the same quarter
in fiscal 2008 was due to increased domestic and international
orders. The utility power generation and distribution markets
continued to expand and our industrial markets remained strong. Our backlog for
the quarter was favorably impacted by the backlog associated with the Blenkhorn
and Sawle acquisition in Canada in the amount of approximately $13.2
million. Orders included in the backlog are represented by contracts
and purchase orders that we believe to be firm. The following table reflects our
bookings and shipments on a quarterly basis for the period ended August 31,
2008, as compared to the same period in the prior fiscal year.
Backlog
Table
(In
thousands)
|
Period
Ending
|
|
|
|
Period
Ending
|
|
|
|
Backlog
|
2/29/08
|
|
$ |
134,876 |
|
2/28/07
|
|
$ |
120,666 |
|
Bookings
|
|
|
|
106,834 |
|
|
|
|
99,483 |
|
Shipments
|
|
|
|
99,958 |
|
|
|
|
75,377 |
|
Backlog
|
5/31/08
|
|
$ |
141,752 |
|
5/31/07
|
|
$ |
144,772 |
|
Book
to Ship Ratio
|
|
|
|
1.07 |
|
|
|
|
1.32 |
|
Bookings
|
|
|
|
139,084 |
|
|
|
|
86,030 |
|
Acquired
Backlog
|
|
|
|
13,244 |
|
|
|
|
|
|
Shipments
|
|
|
|
103,260 |
|
|
|
|
81,606 |
|
Backlog
|
8/31/08
|
|
|
190,820 |
|
8/31/07
|
|
|
149,196 |
|
Book
to Ship Ratio
|
|
|
|
1.35 |
|
|
|
|
1.05 |
|
The
following table reflects the breakdown of revenue by segment:
|
|
Three
Months Ended
|
|
|
Six
Months Ended
|
|
|
|
8/31/2008
|
|
|
8/31/2007
|
|
|
8/31/2008
|
|
|
8/31/2007
|
|
|
|
(In
thousands)
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
51,959 |
|
|
$ |
45,150 |
|
|
$ |
103,965 |
|
|
$ |
86,023 |
|
Galvanizing
Services
|
|
|
51,301 |
|
|
|
36,456 |
|
|
|
99,253 |
|
|
|
70,960 |
|
Total
Revenue
|
|
$ |
103,260 |
|
|
$ |
81,606 |
|
|
$ |
203,218 |
|
|
$ |
156,983 |
|
For the
three and six-month periods ended August 31, 2008, consolidated net revenues
were $103 million and $203 million, a 27% and 29% increase, respectively as
compared to the same period in fiscal 2008. For the quarter ended August 31,
2008, the Electrical and Industrial Products Segment contributed 50% of the
Company’s revenues, and the Galvanizing Services Segment accounted for the
remaining 50% of the combined revenues. The Electrical and Industrial Products
Segment contributed 51% of the Company’s revenues, and the Galvanizing Services
Segment accounted for the remaining 49% of the combined revenues for the
six-month period ended August 31, 2008.
Revenues
for the Electrical and Industrial Products Segment increased $6.8 million or 15%
for the three-month period ended August 31, 2008, and increased $17.9 million or
21% for the six-month period ended August 31, 2008, as compared to the same
period in fiscal 2008. The increased revenues were generated as a result of a
continuation of improved market demand, primarily from our high voltage
transmission, power generation and utility distribution, the energy
infrastructure market and the acquisition of Blenkhorn & Sawle Ltd. as
compared to the same period in fiscal 2008.
Revenues
in the Galvanizing Services Segment increased $14.8 million or 41% for the
three-month period ended August 31, 2008, as compared to the same period in
fiscal 2008 and increased $28.3 million or 40% for the six-month period
ended August 31, 2008, as compared to the same period in fiscal
2008. Revenues for the three and six-months periods ended August 31,
2008 were favorably impacted by the acquisition of AAA Industries, Inc. as well
as increased production levels in our existing facilities. Revenues from
our acquisition of AAA Industries, Inc. on March 31, 2008, were $12.4 million
and $21.8 million for the three and six months ended August 31, 2008,
respectively. Excluding the acquisition of AAA Industries, Inc., revenue
increased $2.4 million and $6.4 million for the three and six-month periods
ended August 31, 2008, respectively. The volume of steel processed in our
historical operations, excluding the acquisition of AAA Industries, Inc.,
increased 12% for the six month period ended August 31, 2008 as compared to same
period
last
year, while selling price decreased 2% for the compared
periods. 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:
|
|
Three
Months Ended
|
|
Six
Months Ended
|
|
|
|
8/31/2008
|
|
|
8/31/2007
|
|
8/31/2008
|
|
|
8/31/2007
|
|
|
|
(In
thousands)
|
|
Segment
Operating Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$ |
9,797 |
|
|
$ |
7,942 |
|
|
$ |
17,729 |
|
|
$ |
14,286 |
|
Galvanizing
Services
|
|
|
15,478 |
|
|
|
9,230 |
|
|
|
28,836 |
|
|
|
17,841 |
|
Total
Segment Operating Income
|
|
$ |
25,275 |
|
|
$ |
17,172 |
|
|
$ |
46,565 |
|
|
$ |
32,127 |
|
Our total
segment operating income increased 47% and 45% for the three and six-month
periods ended August 31, 2008, to $25.3 million and $46.6 million, respectively,
as compared to $17.2 million and $32.1 million for the same periods in fiscal
2008.
Segment
operating income in the Electrical and Industrial Products Segment increased 23%
and 24% for the three and six-month periods ended August 31, 2008, to $9.8
million and $17.7 million, respectively, as compared to $7.9 million and $14.3
million for the same periods in fiscal 2008. Operating margins were 19% for the
three month and 17% for the six-month periods ended August 31, 2008, as compared
to 18% and 17%, respectively, for the comparable periods in fiscal 2008.
Increased operating profit resulted from higher revenues as a result of
favorable market conditions.
In the
Galvanizing Services Segment, operating income increased 68% and 62% for the
three and six-month periods ended August 31, 2008, to $15.5 million and $28.8
million, respectively, as compared to $9.2 million and $17.8 million for the
same periods in fiscal 2008. Operating margins were 30% and 29% for the three
and six-month periods ended August 31, 2008, respectively, as compared to 25%
for the comparable periods in fiscal 2008. The operating income and margins
reflect the positive impact of an insurance settlement related to a fire at one
of our facilities. This resulted in a gain of $1.3 million and is included in
the operating income for the second quarter ended August 31, 2008. Without this
gain, operating margins would be 27.7% for the three-month period ended August
31, 2008 and 27.8% for the six-month period ended August 31, 2008. The
increased operating income during the second quarter ended August 31, 2008, as
compared to the same period last year resulted from higher volumes, primarily
from our acquisition of AAA Industries, Inc., and lower costs for zinc. Margins
in future quarters could be impacted by a reduction in pricing if market demand
decreases for galvanizing services.
General
Corporate Expenses
General
corporate expenses, (see Note 4 to consolidated financial statements) not
specifically identifiable to a segment, for the three-month period ended August
31, 2008, were $5.6 million compared to $3.9 million for the same period in
fiscal 2008. For the six-month period ended August 31, 2008, general
corporate expenses were $10.1 million as compared to $11.5 million for the
comparable period last year. As a percentage of sales, general corporate
expenses were 5% for the three and six-month periods ended August 31, 2008, as
compared to 5% and 7% for the same periods in fiscal 2008. General
and corporate expenses were lower for the six month period ended August 31, 2008
due to lower expense for stock appreciation rights as compared to the same
period last year.
Other
(Income) Expense
For the
three-month and six-month periods ended August 31, 2008, the amounts in other
(income) expense not specifically identifiable with a segment (see Note 4 to
consolidated financial statements) were insignificant.
Interest
Net
interest expense for the three and six-month periods ended August 31, 2008
increased 338% and 205%, respectively, as compared to the same periods in fiscal
2008 to $1.7 million for the three months and $2.8 million for the six months
ended August 31, 2008. Interest expense increased due to higher levels of debt
resulting from a $100 million Note Purchase Agreement entered into by the
Company pursuant to which the Company issued $100 million aggregate principal
amount of it’s 6.24% unsecured Senior Notes. As of August 31, 2008,
we had outstanding long term debt of $100 million, an increase of $80 million,
as compared to $20 million at the end of the same period in fiscal 2008. The
increase in debt funded the acquisition of AAA Industries, Inc. on March 31,
2008 and Blenkhorn & Sawle Ltd. on June 30, 2008. Our long-term
debt to equity ratio was .59 to 1 at August 31, 2008, as compared to .15 to 1
for the same period in fiscal 2008.
Income
Taxes
The
provision for income taxes reflects an effective tax rate of 38% for the
three-month period and 37% for the six-month period ended August 31, 2008, and
36% for the three-month period and 38% for the six-month period ended August 31,
2007.
LIQUIDITY
AND CAPITAL RESOURCES
Historically,
we have met our cash needs through a combination of cash flows from operating
activities and financial institution borrowings. Our cash
requirements are generally for operating activities, capital improvements, debt
repayment and acquisitions. Management believes that working capital,
borrowing capabilities and funds generated from operations should be sufficient
to finance anticipated operational activities, capital improvements, scheduled
debt payments and possible future acquisitions for the remainder of fiscal
2009.
Net cash
provided by operations was $12.6 million for the six-month period ended August
31, 2008, as compared to $15.1 million provided from operations for the same
period in the prior fiscal year. Cash flow from operations for the six-month
ended August 31, 2008, included $21.4 million in net income, $6.9 million in
depreciation and amortization of intangibles, and other adjustments to reconcile
net income to net cash in the amount of $3.3 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 or insurance
settlement and non-cash adjustments. Positive cash flow was recognized due to
increased accounts payable and accrued liabilities in the amount of $7.7 million
and $.1 million, respectively. These positive cash flow items were
offset by increases in accounts receivables, inventories, other assets, prepaid
expenses and revenues in excess of billings in the amount of $15.7 million, $2.7
million, $2.1 million, $2 million and $4.4 million, respectively. These
increases result from additional working capital needed to support our increased
business levels. Accounts receivable days outstanding were 50 days at
August 31, 2008, as compared to 49 days at February 29, 2008. Working
capital increased to $102.3 million as of August 31, 2008, as compared to $60.3
million at February 29, 2008.
For the
six-month period ended August 31, 2008, cash flow was used to make capital
improvements of $9.4 million of which $2.5 million was related to the fire
damage at one of our galvanizing facilities and fund the
acquisition of AAA Industries, Inc. and Blenkhorn and Sawle, Ltd. in the amount
of $95.4 million. Debt increased by $100 million from the issuance of Senior
Notes to fund these acquisitions.
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 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 to be used to provide for working capital needs,
capital improvements, future acquisitions, and letter of credit needs. At August
31, 2008, we had no outstanding debt borrowed against the revolving credit
facility. However, we had letters of credit outstanding in the amount
of $9.3 million, which left approximately $50.7 million of additional credit
available under the revolving credit facility.
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). Deferred costs in the amount of $2 million were incurred for upfront
costs paid in connection with Note Offering. These costs will be expensed using
the imputed interest method over the life of the loan.
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 and 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 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 – Maintain on a consolidated basis a Fixed Charge
Coverage Ratio (as defined in Note Purchase Agreement) of at least 2.0:1.0; d)
Priority Indebtedness – The Company will not at any time permit aggregate amount
of all Priority Indebtedness (as defined) 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 described
above.
OFF
BALANCE SHEET TRANSACTIONS AND RELATED MATTERS
Other
than operating leases discussed below, there are no off-balance sheet
transactions, arrangements, obligations (including contingent obligations), or
other relationships with unconsolidated entities or other persons that have, or
may have, a material effect on financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources of the Company.
CONTRACTUAL
COMMITMENTS
Leases
We lease
various facilities under non-cancelable operating leases with an initial term in
excess of one year. The future minimum payments required under these operating
leases as of August 31, 2008 are summarized in the table under operating
leases.
Commodity
pricing
We manage
our exposure to commodity prices through the use of the following.
In the
Electrical and Industrial Products Segment, we have 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 in
customer contracts, although during difficult market conditions these escalation
clauses may not be obtainable.
In the
Galvanizing Services Segment, we utilize contracts with our zinc suppliers that
include protective caps to guard against rising zinc prices. We also
secure firm pricing for natural gas supplies with individual utilities when
possible. There are no contracted volume purchase commitments
associated with the natural gas or zinc agreements. Management
believes these agreements ensure adequate supplies and partially offset exposure
to commodity price swings.
Other
At August
31, 2008, we had outstanding letters of credit in the amount of $9.3
million. These letters of credit are issued in lieu of performance
and bid bonds, and to a portion of our customers to cover any potential warranty
costs that the customer might incur. In addition, as of August 31,
2008, a warranty reserve in the amount of $1.8 million has been established to
offset any future warranty claims.
The
following summarizes our operating leases, and long-term debt and interest
expense for the next five years.
Fiscal
Year
|
|
Operating
Leases
|
|
|
Long-Term
Debt
|
|
|
Interest
on Long Term Debt
|
|
|
Total
|
|
(In
thousands)
|
|
2009
|
|
$ |
1,591 |
|
|
$ |
0 |
|
|
$ |
3,120 |
|
|
$ |
4,711 |
|
2010
|
|
|
3,263 |
|
|
|
0 |
|
|
|
6,240 |
|
|
|
9,503 |
|
2011
|
|
|
3,235 |
|
|
|
0 |
|
|
|
6,240 |
|
|
|
9,475 |
|
2012
|
|
|
2,513 |
|
|
|
0 |
|
|
|
6,240 |
|
|
|
8,753 |
|
2013
|
|
|
2,284 |
|
|
|
14,286 |
|
|
|
5,423 |
|
|
|
21,993 |
|
Thereafter
|
|
|
13,817 |
|
|
|
85,714 |
|
|
|
13,817 |
|
|
|
113,348 |
|
Total
|
|
$ |
26,703 |
|
|
$ |
100,000 |
|
|
$ |
41,080 |
|
|
$ |
167,783 |
|
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 Annual 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.
On
January 1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for
interpretation of FASB No. 109" ("FIN 49"), which prescribes a recognition that
recording in the financial statements uncertain tax positions taken or expected
to be taken in a guidance on derecognnition, classification, accounting in
interim periods and disclosure requirement.
The
Company has no unrecognized tax benefits as of August 31, 2008. The
Company expects no unrecognized tax benefits due to changes in tax positions
within one year of August 31, 2008 statement of operations.
Stock Options and Stock
Appreciation Rights- Our employees and directors are periodically awarded
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 awards
|
|
·
|
Expected
dividend yield
|
|
·
|
Risk-free
interest rate over the expected
term
|
|
·
|
Expected
number of awards 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
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. The adoption of SFAS No. 159 did not have an 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. The adoption of SFAS No. 157 did not have an impact on our
consolidated financial statements. We are still evaluating the
non-financial assets and liability provision on the consolidated financial
statement
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.
Item
3. Quantitative and Qualitative Disclosures About Market
Risk.
Market
risks relating to our operating results are primarily from changes in commodity
prices. We have only limited involvement with derivative financial instruments
and we are not a party to any leveraged derivatives.
In the
Electrical and Industrial Product Segment, we have 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 the price
for these items are normally managed through escalation clauses attached to our
customer’s contracts, although during difficult market conditions these
escalation clauses may be difficult to obtain.
We manage
our exposure to commodity prices through various methods. In the Galvanizing
Services Segment, we utilize agreements with zinc suppliers that include
protective caps to guard against rising zinc prices. We believe these agreements
ensure adequate supplies and partially offset exposure to commodity price
swings.
Management
does not believe there has been a material change in the nature of our commodity
or interest rate commitments or risks since February 29, 2008.
We do not
believe that a hypothetical change of 10% of commodity prices would have a
significant adverse effect on our results of operations, financial position, or
cash flows. 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 increase to our
customers.
We
performed an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of the end of the
period covered by this report. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of that date 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 discussions regarding required disclosure and (b) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
There
have been no significant changes in our internal control over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
While we
believe that its existing disclosure controls and procedures have been effective
to accomplish their objectives, we intend to continue to examine, refine and
document our disclosure controls and procedures and to monitor ongoing
developments in this area. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected.
PART
II. OTHER INFORMATION
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.
There
have been no material changes in the risk factors disclosed under Part I, Item
1A of our Annual Report on Form 10-K for the year ended February 29,
2008.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds. None.
Item
3. Defaults
Upon Senior Securities. None.
|
Submissions
of Matters to a Vote of Security
Holders.
|
Shareholders
at the Company’s Annual Meeting on July 8, 2008 (the “Annual Meeting”) reelected
three incumbent directors with a three-year term:
Name
|
Votes
For
|
Votes
Withheld
|
Abstentions
|
Broker
Non-Votes
|
Martin
C. Bowen
|
10,525,375
|
413,357
|
-
|
-
|
Sam
Rosen
|
10,523,415
|
415,317
|
-
|
-
|
Kevern
Joyce
|
10,149,116
|
789,616
|
-
|
-
|
Other
directors continuing in office are Dana L. Perry, Dr. H. Kirk Downey, Daniel
Feehan, Peter Hegedus, Daniel Berce, and David H. Dingus.
In
addition the Shareholders approved the following proposals at the
meeting:
The
proposal to approve the Amendments to the 2005 Long Term Incentive Plan, with
6,630,160 (60.6%) votes in favor of the plan, 2,068,654 votes against the plan,
28,483 abstaining and there were no broker non-votes and;
The
proposal to approve the Adoption of an Employee Stock Purchase Plan, with
8,199,748 (75%) votes in favor of the plan, 510,843 votes against the plan,
16,706 abstaining and there were no broker non-votes.
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 on page 20, which immediately
precedes such exhibits.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
|
AZZ
incorporated
|
|
(Registrant)
|
|
|
Date: 09/26/08
|
/s/
Dana Perry
|
|
Dana
Perry, Senior Vice President for Finance
Principal
Financial Officer
|
INDEX
EXHIBIT
NUMBER
|
DESCRIPTION OF EXHIBIT
|
|
|
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 on Form 8-K filed by the Registrant on
November 27, 2007.
|
10.1
|
Asset
Purchase Agreement dated June 26, 2008, and made effective as of June 30,
2008, by and among AZZ incorporated, AZZ Blenkhorn & Sawle Limited
wholly-owned subsidiaries and Blenkhorn and Sawle Limited and Chriscot
Holdings Limited (incorporated by reference to Exhibit 10.1 to the Current
Report on Form 8-K filed by the Registrant on July 2,
2008).
|
10.2
|
AZZ
incorporated Amended and Restated 2005 Long-Term Incentive Plan and AZZ
incorporated Employee Stock Purchase Plan (incorporated by reference to
Exhibit 10.1 and 10.2 to the current report on Form 8-K filed by the
Registrant on July 11, 2008).
|
31.1
|
Chief
Executive Officer Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated September 26, 2008. Field
Herewith.
|
31.2
|
Chief
Financial Officer Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated September 26, 2008. Filed
Herewith.
|
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
September 26, 2008. Filed Herewith.
|
32.2
|
Chief
Financial Officer Certificate pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated September
26, 2008. Filed Herewith.
|
22