form10q1stqtrfy10.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 May 31,
2009
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.)
|
|
|
|
One
Museum Place, Suite 500
|
|
|
3100
West Seventh Street
|
|
|
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 has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
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 May 31, 2009:
|
Common Stock, $1.00 par value per
share
|
|
12,175,445
shares
|
AZZ
incorporated
INDEX
|
|
|
PAGE
NO.
|
|
PART
I.
|
FINANCIAL INFORMATION
|
|
|
|
Item
1.
|
Financial
Statements.
|
|
|
|
|
Condensed
Financial Statements
|
|
|
|
|
|
|
|
3 |
|
|
|
|
|
4 |
|
|
|
|
|
5 |
|
|
|
|
|
6-9 |
|
Item
2.
|
|
|
|
9-16 |
|
Item
3.
|
|
|
|
16 |
|
Item
4.
|
|
|
|
17 |
|
|
|
|
|
|
|
PART
II.
|
|
|
|
|
|
Item
1.
|
Legal
Proceedings
|
|
|
17 |
|
Item
1A.
|
Risk
Factors.
|
|
|
17 |
|
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
|
|
17 |
|
Item
3.
|
Defaults
Upon Senior Securities.
|
|
|
17 |
|
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
|
|
17 |
|
Item
5.
|
Other
Information.
|
|
|
17 |
|
Item
6.
|
Exhibits.
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
19 |
|
PART I.
FINANCIAL INFORMATION
Item
1. Financial
Statements
|
|
05/31/09
|
|
|
02/28/09
|
|
Assets
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Current
Assets:
|
|
|
|
|
|
|
Cash
and Cash Equivalents
|
|
$
|
57,688,730
|
|
|
$
|
47,557,711
|
|
Accounts
Receivable
|
|
|
59,630,684
|
|
|
|
65,663,982
|
|
Allowance
for Doubtful Accounts
|
|
|
(900,000
|
)
|
|
|
(900,000
|
)
|
Inventories:
|
|
|
|
|
|
|
|
|
Raw
Material
|
|
|
24,261,518
|
|
|
|
27,274,833
|
|
Work-In-Process
|
|
|
20,626,076
|
|
|
|
23,037,364
|
|
Finished
Goods
|
|
|
5,098,407
|
|
|
|
3,463,603
|
|
Costs
and Estimated Earnings In Excess of Billings On Uncompleted
Contracts
|
|
|
12,022,325
|
|
|
|
11,328,287
|
|
Deferred
Income Taxes
|
|
|
4,327,346
|
|
|
|
3,588,267
|
|
Prepaid
Expenses and Other
|
|
|
3,182,759
|
|
|
|
1,009,477
|
|
|
|
|
|
|
|
|
|
|
Total
Current Assets
|
|
|
185,937,845
|
|
|
|
182,023,524
|
|
|
|
|
|
|
|
|
|
|
Property,
Plant and Equipment, Net
|
|
|
87,961,605
|
|
|
|
87,666,693
|
|
Goodwill
|
|
|
67,681,824
|
|
|
|
66,157,000
|
|
Other
Assets
|
|
|
18,483,554
|
|
|
|
18,868,230
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
360,064,828
|
|
|
$
|
354,715,447
|
|
Liabilities
and
Shareholders'
Equity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Payable
|
|
$
|
16,464,354
|
|
|
$
|
17,853,171
|
|
Income
Tax Payable
|
|
|
4,826,534
|
|
|
|
259,734
|
|
Accrued
Salaries and Wages
|
|
|
3,523,867
|
|
|
|
5,509,197
|
|
Other
Accrued Liabilities
|
|
|
11,675,222
|
|
|
|
18,363,073
|
|
Customer
Advance Payment
|
|
|
12,000,462
|
|
|
|
13,632,734
|
|
Billings
In Excess of Costs and Estimated Earnings On Uncompleted
Contracts
|
|
|
746,966
|
|
|
|
2,753,532
|
|
|
|
|
|
|
|
|
|
|
Total
Current Liabilities
|
|
|
49,237,405
|
|
|
|
58,371,441
|
|
|
|
|
|
|
|
|
|
|
Long-Term
Debt Due After One Year
|
|
|
100,000,000
|
|
|
|
100,000,000
|
|
Deferred
Income Taxes
|
|
|
10,139,553
|
|
|
|
9,232,302
|
|
|
|
|
|
|
|
|
|
|
Shareholders'
Equity:
|
|
|
|
|
|
|
|
|
Common
Stock, $1 Par Value, Shares Authorized-25,000,000, Shares Issued
12,609,160
|
|
|
12,609,160
|
|
|
|
12,609,160
|
|
|
|
|
|
|
|
|
|
|
Capital
In Excess of Par Value
|
|
|
19,757,117
|
|
|
|
18,241,664
|
|
Retained
Earnings
|
|
|
171,655,500
|
|
|
|
161,755,340
|
|
Accumulated
Other Comprehensive Income (Loss)
|
|
|
(1,191,840
|
)
|
|
|
(3,198,159
|
)
|
Less
Common Stock Held In Treasury, At Cost (433,715 Shares At May 31, 2009 and
464,944 Shares At February 28, 2009)
|
|
|
(2,142,067
|
)
|
|
|
(2,296,301
|
)
|
|
|
|
|
|
|
|
|
|
Total
Shareholders' Equity
|
|
|
200,687,870
|
|
|
|
187,111,704
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
360,064,828
|
|
|
$
|
354,715,447
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
PART I.
FINANCIAL INFORMATION
Item
1. Financial
Statements
|
|
THREE
MONTHS ENDED
|
|
|
|
5/31/09
|
|
|
5/31/08
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
95,492,001
|
|
|
$
|
99,958,257
|
|
|
|
|
|
|
|
|
|
|
Costs
and Expenses
|
|
|
|
|
|
|
|
|
Cost
of Sales
|
|
|
65,803,751
|
|
|
|
73,689,403
|
|
Selling,
General and Administrative
|
|
|
12,123,549
|
|
|
|
9,856,521
|
|
Interest
Expense
|
|
|
1,686,557
|
|
|
|
1,120,788
|
|
Net
(Gain) Loss On Sale Or Insurance Settlement of Property, Plant and
Equipment
|
|
|
(5,031
|
)
|
|
|
2,607
|
|
Other
Expense (Income)
|
|
|
(80,644
|
)
|
|
|
(483,767
|
)
|
|
|
|
79,528,182
|
|
|
|
84,185,552
|
|
|
|
|
|
|
|
|
|
|
Income
Before Income Taxes
|
|
|
15,963,819
|
|
|
|
15,772,705
|
|
Income
Tax Expense
|
|
|
6,063,659
|
|
|
|
5,650,140
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
$
|
9,900,160
|
|
|
$
|
10,122,565
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
$
|
0.81
|
|
|
$
|
0.83
|
|
|
|
|
|
|
|
|
|
|
Diluted
Earnings Per Share
|
|
$
|
0.80
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
PART I.
FINANCIAL INFORMATION
Item
I. Financial
Statements.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
THREE
MONTHS ENDED
|
|
|
|
5/31/09
|
|
|
5/31/08
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
Cash
Flows From Operating Activities:
|
|
|
|
|
|
|
Net
Income
|
|
$
|
9,900,160
|
|
|
$
|
10,122,565
|
|
|
|
|
|
|
|
|
|
|
Adjustments
To Reconcile Net Income To Net Cash Provided By Operating
Activities:
|
|
|
|
|
|
|
|
|
Provision
For Doubtful Accounts
|
|
|
4,944
|
|
|
|
97,330
|
|
Amortization
and Depreciation
|
|
|
4,152,782
|
|
|
|
3,038,930
|
|
Deferred
Income Tax Benefit
|
|
|
183,252
|
|
|
|
613,488
|
|
Net
(Gain) Loss On Sale Or Insurance Settlement of Property, Plant &
Equipment
|
|
|
(5,031
|
)
|
|
|
2,607
|
|
Amortization
of Deferred Borrowing Costs
|
|
|
76,349
|
|
|
|
-
|
|
Share
Based Compensation Expense
|
|
|
1,348,638
|
|
|
|
752,637
|
|
|
|
|
|
|
|
|
|
|
Effects
of Changes In Assets & Liabilities:
|
|
|
|
|
|
|
|
|
Accounts
Receivable
|
|
|
6,401,471
|
|
|
|
(20,204,960
|
)
|
Inventories
|
|
|
4,166,208
|
|
|
|
1,741,741
|
|
Prepaid
Expenses and Other
|
|
|
(2,162,640
|
)
|
|
|
(1,895,232
|
)
|
Other
Assets
|
|
|
12,038
|
|
|
|
(2,010,886
|
)
|
Net
Change In Billings Related To Costs and Estimated Earnings On Uncompleted
Contracts
|
|
|
(2,700,604
|
)
|
|
|
(2,295,322
|
)
|
Accounts
Payable
|
|
|
(1,438,759
|
)
|
|
|
4,543,599
|
|
Other
Accrued Liabilities and Income Taxes
|
|
|
(6,198,969
|
)
|
|
|
3,609,295
|
|
|
|
|
|
|
|
|
|
|
Net
Cash (Used In) Provided By Operating Activities
|
|
|
13,739,839
|
|
|
|
(1,884,208
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows Used For Investing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
From Sale Or Insurance Settlement of Property, Plant, and
Equipment
|
|
|
8,800
|
|
|
|
4,453
|
|
Purchase
of Property, Plant and Equipment
|
|
|
(3,709,174
|
)
|
|
|
(4,753,304
|
)
|
Acquisition
of Subsidiaries, Net of Cash Acquired
|
|
|
-
|
|
|
|
(81,470,840
|
)
|
|
|
|
|
|
|
|
|
|
Net
Cash Used In Investing Activities
|
|
|
(3,700,374
|
)
|
|
|
(86,219,691
|
)
|
|
|
|
|
|
|
|
|
|
Cash
Flows From Financing Activities:
|
|
|
|
|
|
|
|
|
Proceeds
From Exercise of Stock Options
|
|
|
16,675
|
|
|
|
21,506
|
|
Excess
Tax Benefits From Stock Options Exercises
|
|
|
48,889
|
|
|
|
72,453
|
|
Proceeds
From Long Term Debt
|
|
|
-
|
|
|
|
100,000,000
|
|
|
|
|
|
|
|
|
|
|
Net
Cash Provided By (Used In) Financing Activities
|
|
|
65,564
|
|
|
|
100,093,959
|
|
|
|
|
|
|
|
|
|
|
Effect
of Exchange Rate Changes on Cash
|
|
|
25,990
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net
Increase In Cash & Cash Equivalents
|
|
|
10,131,019
|
|
|
|
11,990,060
|
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents At Beginning of Period
|
|
|
47,557,711
|
|
|
|
2,226,941
|
|
|
|
|
|
|
|
|
|
|
Cash
& Cash Equivalents At End of Period
|
|
$
|
57,688,730
|
|
|
$
|
14,217,001
|
|
|
|
|
|
|
|
|
|
|
Supplemental
Disclosures
|
|
|
|
|
|
|
|
|
Cash
Paid For Interest
|
|
$
|
3,170,208
|
|
|
$
|
62,728
|
|
|
|
|
|
|
|
|
|
|
Cash
Paid For Income Taxes
|
|
$
|
303,147
|
|
|
$
|
540,802
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
AZZ
incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1.
|
Summary
of Significant Accounting
Policies.
|
Basis of
Presentation.
These
interim unaudited condensed consolidated financial statements were
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (the “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 28, 2009
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 28, 2009 is referred to as
fiscal 2009.
|
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 May 31, 2009, and the results of its
operations for the three-month periods ended May 31, 2009 and 2008, and
cash flows for the three-month periods ended May 31, 2009 and
2008.
|
2. Earnings
per Share.
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
following table sets forth the computation of basic and diluted earnings per
share:
|
|
Three
months ended May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(Unaudited)
|
|
|
|
($
in thousands except share
and
per share data)
|
|
Numerator:
Net
income for basic and diluted earnings per common share
|
|
$
|
9,900
|
|
|
$
|
10,123
|
|
|
|
|
|
|
|
|
|
|
Denominator:
Denominator
for basic earnings per common share –weighted
average shares
|
|
|
12,169
|
|
|
|
12,135
|
|
Effect
of dilutive securities:
Stock options/Equity SARs and Restricted Stock
|
|
|
241
|
|
|
|
155
|
|
Denominator
for diluted earnings per common share
|
|
|
12,410
|
|
|
|
12.290
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share basic and diluted:
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
.81
|
|
|
$
|
.83
|
|
Diluted
earnings per common share
|
|
$
|
.80
|
|
|
$
|
.82
|
|
3. Stock-based
Compensation.
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
(“SARs” or “Stock Appreciation Rights”) and options to purchase Common Stock of
the Company. This plan was amended on July 8, 2008. 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 May 31, 2009, 196,440 SARs were outstanding due to the accelerated
vesting of 37,720 SARs as a result of the retirement of two directors and three
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 expenses related to the June 1, 2006 grants
of $19,000 and $38,000 were recognized during the period ended May 31, 2009 and
2008 respectively. As of May 31, 2009, we had no unrecognized cost 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 May 31, 2009, 132,200 SARs were outstanding due to the
accelerated vesting of 15,540 SARs as a result of the retirement of two
directors and two employees. Compensation expense related to the March 1, 2007
grants of $26,000 and $56,000 were recognized during the period ended May 31,
2009 and 2008 respectively. We had unrecognized cost of $78,000
related to the March 1, 2007 SAR grants as of May 31, 2009.
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. As of
May 31, 2009, 123,060 SARs were outstanding due to the forfeiture of 6,740
SARs. Compensation expense related to the March 1, 2008 grants of
$59,000 and $659,000 were recognized during the period ended May 31, 2009 and
2008 respectively. We had unrecognized cost of $412,000 related to the March 1,
2008 SAR grants as of May 31, 2009.
On
September 1, 2008, we implemented the AZZ incorporated Employee Stock Purchase
Plan (the “Plan”). The purpose of the Plan is to allow employees of the Company
to purchase common stock of the Company through accumulated payroll deductions.
Offerings under the Plan have a duration of 24 months. On the first
day of an offering period (the Enrollment Date), the participant is granted the
option to purchase shares on each exercise date during the offering period up to
10% of the participant’s compensation at the lower of 85% of the fair market
value of a share of stock on the Enrollment Date or 85% of the fair market value
of a share of stock on the Exercise Date. The participant’s right to
purchase stock in the Plan is restricted to no more than $25,000 per calendar
year. Participants may terminate their interest in a given offering,
or a given exercise period, by withdrawing all, but not less than all, of the
accumulated payroll deductions of the account at any time prior to the end of
the offering period. The estimated shares to be issued on the first
enrollment are 36,100 shares after estimated forfeitures. The weighted average
fair value of these shares was determined to be $14.69 based on the following
assumptions: risk-free interest rate of 2%, dividend yield of 0.0%,
expected volatility of 50.40% and expected life of 2
years. Compensation expenses in the amount of $66,000 and none were
recognized during the period ended May 31, 2009 and 2008
respectively. We had unrecognized cost of $331,000 related to the
employee stock purchase plan as of May 31, 2009. In accordance with the plan
20,822 shares were issued on March 1, 2009 to the enrolled
employees. On March 1, 2009, the date of the second Offering, the
estimated shares to be issued were 14,019 after estimated forfeitures. The
weighted average fair value of these shares was determined to be $7.33 based on
the following assumptions: risk-free interest rate of 2%, dividend
yield of 0.0%, expected volatility of 50.40% and expected life of 2
years. Compensation expense in the amount of $13,000 was recognized
during the period ended May 31, 2009. We had unrecognized costs of
$90,000 related to the second issue of the employee stock purchase plan as of
May 31, 2009.
On March
2, 2009, 163,233 Stock Appreciation Rights were awarded under the 2005 Plan with
an exercise price of $18.12. These Stock Appreciation Rights have a three year
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, 2009, was determined to be $8.08
based on the following assumptions: risk-free interest rate of 3%, dividend
yield of 0.0%, expected volatility of 46.89% and expected life of 5
years. Compensation expense in the amount of $812,000 was recognized
during the three month period ended May 31, 2009. We had unrecognized
cost of $507,000 related to the March 1, 2009 SAR grants as of May 31,
2009.
On March
2, 2009, 31,666 shares of Restricted Stock were issued to our key employees. The
Restricted Stock awards have a three year cliff vesting schedule, but may vest
early under accelerated vesting provisions in the 2005 Plan. The market value of
a share of our stock was $18.12 on the date of grant. Compensation expense in
the amount of $354,000 was recognized during the three month period ended May
31, 2009. The amount of unrecognized cost at May 31, 2009 was
$220,000.
We have
two operating segments as defined in our Annual Report on Form 10-K for the year
ended February 28, 2009. Information regarding operations and assets
by segment is as follows:
|
|
Three
Months Ended May 31,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
(unaudited)
|
|
|
|
($
in thousands)
|
|
Net
Sales:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
55,386
|
|
|
$
|
52,006
|
|
Galvanizing
Services
|
|
|
40,106
|
|
|
|
47,952
|
|
|
|
$
|
95,492
|
|
|
$
|
99,958
|
|
|
|
|
|
|
|
|
|
|
Segment
Operating Income (a):
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
10,512
|
|
|
$
|
7,932
|
|
Galvanizing
Services
|
|
|
12,793
|
|
|
|
13,358
|
|
Total
Segment Operating Income
|
|
$
|
23,305
|
|
|
$
|
21,290
|
|
|
|
|
|
|
|
|
|
|
General
Corporate Expense (b)
|
|
$
|
5,684
|
|
|
$
|
4,558
|
|
Interest
Expense
|
|
|
1,687
|
|
|
|
1,121
|
|
Other
(Income) Expense, Net (c)
|
|
|
(30
|
)
|
|
|
(162
|
)
|
|
|
$
|
7,341
|
|
|
$
|
5,517
|
|
|
|
|
|
|
|
|
|
|
Income
Before Taxes
|
|
$
|
15,964
|
|
|
$
|
15,773
|
|
|
|
|
|
|
|
|
|
|
Total
Assets:
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
159,785
|
|
|
$
|
135,565
|
|
Galvanizing
Services
|
|
|
133,998
|
|
|
|
154,341
|
|
Corporate
|
|
|
66,282
|
|
|
|
23,868
|
|
|
|
$
|
360,065
|
|
|
$
|
313,774
|
|
(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 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
2008:
|
|
Warranty
Reserve
|
|
|
|
(Unaudited)
|
|
|
|
($
In thousands)
|
|
|
|
|
|
Balance
at February 29, 2008
|
|
$
|
1,732
|
|
Warranty
costs incurred
|
|
|
(1,454
|
)
|
Additions
charged to income
|
|
|
1,737
|
|
Balance
at February 28, 2009
|
|
$
|
2,015
|
|
Warranty
costs incurred
|
|
|
(1,049
|
)
|
Additions
charged to income
|
|
|
816
|
|
Balance
at May 31, 2009
|
|
$
|
1,782
|
|
6. Acquisition.
On March
31, 2008, AZZ incorporated entered into an Asset Purchase Agreement to acquire
substantially all of the assets of AAA Industries, Inc.
The
following pro forma information is based on the assumption the acquisition took
place on March 1, 2008 for the income statement for the three month period ended
May 31, 2009 and 2008:
|
|
Unaudited
5/31/09
|
|
|
Unaudited
5/31/08
|
|
|
( $
in thousands except per share data)
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
95,492
|
|
|
$
|
104,508
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
9,900
|
|
|
|
10,153
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
|
0.81
|
|
|
|
0.84
|
|
Diluted
Earnings Per Share
|
|
|
0.80
|
|
|
|
0.83
|
|
We
consider the Canadian dollar to be the functional currency of Blenkhorn and
Sawle (“B&S”), our Canadian subsidiary, 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
months ended May 31, 2009 was $11,906,479. Comprehensive income for
the three months ended May 31, 2008 fiscal was equal to net income.
Item 2. Management's Discussion and
Analysis of Financial Condition and Results of Operations
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 (the "Exchange
Act"). 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; currency exchange rates, adequacy of financing; and
availability of experienced management employees to implement the Company’s
growth strategy; a downturn in market conditions in any industry relating to the
products we inventory or sell or the services that we provide; the effects of
existing or continued deterioration in economic conditions in the U.S. or the
markets in which we operate; and acts of war or terrorism inside the United
States or abroad. 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.
The
following discussion should be read in conjunction with management’s discussion
and analysis contained in our 2009 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 28, 2009. 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
entire backlog relates to our Electrical and Industrial Products Segment. Our
backlog was $150.1 million as of May 31, 2009, a decrease of $24.7 million or
14%, as compared to $174.8 million at February 28, 2009. Our
book-to-ship ratio was .74 to 1 for the first quarter ended May 31, 2009, as
compared to 1.07 to 1 for the same period in the prior year. Incoming
orders decreased 34% over the same period a year ago. While our quotation levels
have increased during the first quarter ended May 31, 2009 when compared to the
fourth quarter of last year, we have not seen a corresponding increase in our
incoming order rate. Despite the improvement in our quotation levels, we
anticipate a further deterioration of our backlog in the second quarter of 10%
to 15%. If market conditions improve, as well as expansion of infrastructure
projects, we are well positioned to capitalize on these
improvements. We anticipate the backlog will level off by the
second quarter of the current fiscal year and will show a modest improvement in
the third and fourth quarter. The decrease in orders during the first quarter
was anticipated due to delayed orders in the industrial market and increased
competition on international orders. The delayed orders in the industrial market
resulted from increased customer deliberation on the release of new orders
pertaining to projects that are in process as well as those in the planning
stage.
Backlog
Table
($
in thousands)
|
Period
Ending
|
|
|
|
Period
Ending
|
|
|
|
Backlog
|
2/28/09
|
|
$
|
174,831
|
|
2/29/08
|
|
$
|
134,876
|
|
Bookings
|
|
|
|
70,719
|
|
|
|
|
106,834
|
|
Shipments
|
|
|
|
95,492
|
|
|
|
|
99,958
|
|
Backlog
|
5/31/09
|
|
$
|
150,058
|
|
5/31/08
|
|
$
|
141,752
|
|
Book
to Ship Ratio
|
|
|
|
.74
|
|
|
|
|
1.07
|
|
The
following table reflects the breakdown of revenue by segment:
|
|
Three
Months Ended
|
|
|
|
5/31/2009
|
|
|
5/31/2008
|
|
|
|
($
in thousands)
|
|
Revenue:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
55,386
|
|
|
$
|
52,006
|
|
Galvanizing
Services
|
|
|
40,106
|
|
|
|
47,952
|
|
Total
Revenue
|
|
$
|
95,492
|
|
|
$
|
99,958
|
|
For the
three-month period ended May 31, 2009, consolidated revenues were $95.5 million,
a 5% decrease as compared to the same period in fiscal 2009. For the quarter
ended May 31, 2009, the Electrical and Industrial Products Segment contributed
58% of the Company’s revenues, and the Galvanizing Services Segment accounted
for the remaining 42% of the combined revenues. For the three month period ended
May 31, 2008, the Electrical and Industrial Products Segment contributed 52% of
the Company’s revenues, and the Galvanizing Services Segment accounted for the
remaining 48% of the combined revenues.
Revenues
for the Electrical and Industrial Products Segment increased $3.4 million or 7%
for the three-month period ended May 31, 2009, as compared to the same period in
fiscal 2009. The increased revenues were generated as a result of increased
shipments from the record backlog recorded in the third and fourth quarter of
fiscal 2009 and revenue generated from Blenkhorn and Sawle LTD., which was
acquired in July of the prior year.
Revenues
in the Galvanizing Services Segment decreased $7.8 million or 16% for the
three-month period ended May 31, 2009, as compared to the same period in fiscal
2009. Revenues for the first quarter were negatively impacted by a
reduction in volume in the amount of 12% and selling price in the amount of 3%.
The remaining 1% decrease in revenue was from the sale of bi-products, which was
adversely impacted as well by lower volumes. Historically, revenues for this
segment have followed closely the condition of the industrial sector of the
general economy.
Segment
Operating Income
The
following table reflects the breakdown of total operating income by
segment:
|
|
Three
Months Ended
|
|
|
|
5/31/2009
|
|
|
5/31/2008
|
|
|
|
($
in thousands)
|
|
Segment
Operating Income:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
10,512
|
|
|
$
|
7,932
|
|
Galvanizing
Services
|
|
|
12,793
|
|
|
|
13,358
|
|
Total
Operating Income
|
|
$
|
23,305
|
|
|
$
|
21,290
|
|
Our total
operating income increased 10% for the three-month period ended May 31, 2009, to
$23.3 million as compared to $21.3 million for the same period in fiscal 2009.
Total operating margins improved to 24% for the three month period as compared
to 21% for the same period in fiscal 2009. The improved margins were the result
of lower commodity costs in both segments. The Electrical and Industrial
Products Segment generated 45% of the operating income for the three months
ended May 31, 2009, while the Galvanizing Services Segment produced the
remaining 55%.
Segment
operating income in the Electrical and Industrial Products Segment increased 33%
for the three-month period ended May 31, 2009, to $10.5 million as compared to
$7.9 million for the same period in fiscal 2009. Increased operating profit
resulted from higher volumes combined with favorable commodity pricing.
Operating margins were 19% as compared to 15% for the same period in
fiscal 2009.
In the
Galvanizing Services Segment, operating income decreased 4% for the three-month
period ended May 31, 2009, to $12.8 million as compared to $13.4 million for the
same period in fiscal 2009. The reduction in income was the result of lower
revenues. Operating margins increased to 32% for the three-month period ended
May 31, 2009, as compared to 28% for the same period in fiscal 2009. The
improvement in operating margin during the first quarter ended May 31, 2009, as
compared to the same period last year resulted from cost reductions implemented
and lower costs for zinc. Margins in future quarters could be negatively
impacted by a reduction in pricing if market demand decreases further 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 May 31,
2009, were $5.7 million compared to $4.6 million for the same period in fiscal
2009. As a percentage of sales, General Corporate expenses were 6%
for the three-month period ended May 31, 2009, as compared to 5% for the same
period in fiscal 2009. General Corporate expenses were higher due primarily to
increased stock based compensation expenses related to our stock appreciation
rights and restricted stock award plans. Compensation expense related
to these plans was $.8 million higher for the three month period ended May 31,
2009, as compared to the same period in fiscal 2009.
Interest
Net
interest expense for the three-month period ended May 31, 2009 increased 50% as
compared to the same period in fiscal 2009 to $1.7 million. Interest
expense increased due to higher levels of debt for the quarter 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 its 6.24%
unsecured Notes (as defined below). The Notes were issued on March
31, 2008 and therefore the prior year had one less month of interest expense
relating to the Notes than the current quarter ended May 31, 2009. As
of May 31, 2009, we had outstanding long term debt of $100 million, unchanged
from the same quarter last year. Our long-term debt to equity ratio
was .50 to 1 at May 31, 2009, as compared to .64 to 1 for the same period in
fiscal 2009.
Other
(Income) Expense
For the
three-month period ended May 31, 2009, the amounts in other (income) expense not
specifically identifiable with a segment (see Note 4 to consolidated financial
statements) were insignificant.
Income
Taxes
The
provision for income taxes reflects an effective tax rate of 38% for the
three-month period ended May 31, 2009, as compared to an effective tax rate of
36% for the same period in fiscal 2009. The income tax rate increased for the
first quarter of fiscal 2009 due to higher state income taxes due to the mix of
income from various taxing jurisdictions as compared to the same period last
year. The IRS completed its examination of fiscal 2007 and determined
there were no adjustments to be recorded.
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, letters of
credit and acquisitions. We believe that working capital, funds available under
our credit agreement, and funds generated from operations should be sufficient
to finance anticipated operational activities, capital improvements, and payment
of debt and possible future acquisitions during fiscal 2010.
Our
operating activities generated cash flows of approximately $13.7 million for the
three-month period ended May 31, 2009, and $(1.9) million during the same period
in the prior fiscal year. Cash flow from operations for the quarter
ended May 31, 2009 included net income in the amount of $9.9 million,
depreciation and amortization in the amount of $4.2 million, and other
adjustments to reconcile net income to net cash in the amount of a $1.6
million. Included in other adjustments were provisions 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 and inventories in the amount of $6.4 million and $4.2 million,
respectively. These positive cash flow items were offset by revenue
in excess of billings and prepaid expenses in the amount of $2.7 million and
$2.2 million, respectively, and decreased accrued liabilities and accounts
payable in the amounts of $6.2 million, and $1.4 million, respectively. The
significant decrease in accrued liabilities was due to the payment of the fiscal
2009 profit sharing payment in the amount of $6.1 million. Accounts receivable
average days outstanding were 52 days for the quarter ended May 31, 2009, as
compared to 51 days at February 28, 2009.
Cash used
in investing activities during the quarter ended May 31, 2009 was approximately
$3.7 million related to capital improvements.
Our
working capital was $136.7 million at May 31, 2009, as compared to $123.7
million at May 31, 2008.
On May
25, 2006, we entered into the Second Amended and Restated Credit Agreement by
and among AZZ, Bank of America, N.A. ("Bank of America") and certain other
lenders (including Bank of America) (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 we used to refinance
outstanding borrowings and is used to provide for working capital needs, capital
improvements, future acquisitions, and letter of credit needs. At May 31, 2009,
we had no outstanding debt borrowed against the revolving credit
facility. However, we had letters of credit outstanding in the amount
of $16 million, which left approximately $44 million of additional credit
available under the revolving credit facility.
See the
description below of our Note Purchase Agreement for a discussion of the
covenants contained in our Credit Agreement.
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 (the "Note Purchase
Agreement") pursuant to which the Company issued $100 million 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 an amendment to our
Credit Agreement. The Amendment contains the consent of Bank of America to the
Note Offering and amends 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 – Maintains on a consolidated basis a Fixed Charge
Coverage Ratio (as defined in the 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 in the Note Purchase Agreement)
to exceed 10% of Consolidated Net Worth (as defined in the Note Purchase
Agreement). In conjunction with the Note Offering, the Credit
Agreement was amended to reflect the same financial covenants as the Notes with
the exception of the Fixed Coverage Ratio, which remained at 1.5 to
1. In addition, the Credit Agreement maintains a maximum expenditure
for fixed assets of $20 million per fiscal year. We were in compliance at May
31, 2009 with all of our debt covenants.
Our
current ratio (current assets/current liabilities) was 3.78 to 1 at the quarter
ended May 31, 2009, as compared to 3.02 to 1 for same the period of the prior
year. Long-term debt as a percentage of shareholders’ equity ratio was .50
to 1 at the quarter ended May 31, 2009.
We have
not experienced a significant impact on our operations from increases in general
inflation. 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 and fixed contract purchases 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. Many economists predict
increased inflation in coming years due to U.S. and international monetary
policy, and there is no assurance that inflation will not impact our business in
the future.
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 May 31, 2009 are summarized in the table below under
“Other.”
Commodity
pricing
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 and a fixed cost contract to guard against rising zinc
prices. We also secure firm pricing for natural gas supplies with
individual utilities when possible. Management believes these
agreements ensure adequate supplies and partially offset exposure to commodity
price swings.
We have
no contracted commitments for any other commodity items including steel,
aluminum, natural gas, copper, zinc or any other commodity, except for those
entered into under the course of normal business.
Other
At May
31, 2009, we had outstanding letters of credit in the amount of $16
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 May 31, 2009,
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)
|
|
2010
|
|
$
|
2,634
|
|
|
$
|
|
|
|
$
|
3,120
|
|
|
$
|
5,754
|
|
2011
|
|
|
3,867
|
|
|
|
|
|
|
|
6,240
|
|
|
|
10,107
|
|
2012
|
|
|
3,175
|
|
|
|
|
|
|
|
6,240
|
|
|
|
9,415
|
|
2013
|
|
|
2,654
|
|
|
|
14,286
|
|
|
|
5,794
|
|
|
|
22,734
|
|
2014
|
|
|
2,544
|
|
|
|
14,286
|
|
|
|
4,903
|
|
|
|
21,733
|
|
Thereafter
|
|
|
13,709
|
|
|
|
71,428
|
|
|
|
11,143
|
|
|
|
96,280
|
|
Total
|
|
$
|
28,583
|
|
|
$
|
100,000
|
|
|
$
|
37,440
|
|
|
$
|
166,023
|
|
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 customers' 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
collectability 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 could 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 March
1, 2007, the Company adopted FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes – an interpretation of FASB No. 109" ("FIN 48"),
which prescribes a recognition threshold and measurement attribute for recording
in the financial statements uncertain tax positions taken or expected to be
taken and provides guidance on derecognition, classification, accounting in
interim periods and disclosure requirement. There was no impact to
the Company’s operating results upon adoption.
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" ("SFAS No. 123R"). 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
|
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 would 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)"). SFAS No. 141(R) establishes principles and requirements for
how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, and the goodwill
acquired. SFAS No.141(R) also establishes disclosure requirements to
enable the evaluation of the nature and financial effects of the business
combination. SFAS No. 141(R) is effective as of the beginning of an entity’s
fiscal year that begins after December 15, 2008, and was adopted by us in the
first quarter of fiscal 2010. We are currently unable to predict the
potential impact, if any, of the adoption of SFAS No. 141(R) on future
acquisitions.
In April
2008, the FASB issued FSP No. AS 142-3, “Determination of the Useful Life of
Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3 amends the
factors that should be considered in developing renewal or extension assumptions
used for purposes of determining the useful life of a recognized intangible
asset under SFAS No.142, “Goodwill and Other Intangible Assets”
(“SFAS No.142”). FSP FAS 142-3 is intended to improve the consistency between
the useful life of a recognized intangible asset under SFAS No. 142 and the
period of expected cash flows used to measure the fair value of the asset under
SFAS No. 141R and other accounting principles generally accepted in the United
States. FSP FAS 142-3 is effective for fiscal years beginning after
December 15, 2008, and was adopted by us in the first quarter of fiscal
2010. Earlier application is not permitted. The adoption did not have
an impact on our financial results.
In
October 2008, as a result of the recent credit crisis, the FASB issued FSP No.
FAS 157-3, Determining the Fair Value of a Financial Asset in a Market That is
Not Active” (“FSP FAS 157-3”). FSP FAS 157-3 clarifies the
application of SFAS No. 157 in a market that is not active. FSPFAS 157-3
addresses how management should consider measuring fair value when relevant
observable data does not exist. FSP FAS 157-3 also provides guidance
on how observable market information in a market that is not active should be
considered when measuring fair value, as well as how the use of market quotes
should be considered when assessing the relevance of observable and unobservable
data available to measure fair value. FSPFAS 157-3 is effective upon issuance
for companies that have adopted SFAS No. 157. Revisions resulting
from a change in the valuation technique or its application shall be accounted
for as a change in accounting estimate in accordance with SFAS No. 154,
“Accounting Change and Error Corrections”. FSP FAS 157-3 was adopted
by us effective February 29, 2009, but currently has no effect on the Company’s
results of operations, cash flows or financial position.
In April
2009, the FASB issued FSP No. FAS 141(R)-1, “Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from Contingencies”
(“FSPFAS 141(R)-1”). FSP FAS 141(R)-1 amends SFAS No. 141R to clarify
the initial and subsequent recognition, subsequent accounting and disclosure of
assets acquired and liabilities arising from contingencies in a business
combination that arise from contingencies be recognized at fair value, as
determined in accordance with SFAS No. 157. If the acquisition-date fair value
of an asset or liability cannot be reasonably estimated, the asset or liability
would be measured at the amount that would be recognized in accordance with SFAS
No. 5, “Accounting for Contingencies” (“SFAS No. 5”), and FASB Interpretation
No. 14, “Reasonable Estimation of the Amount of a Loss”. FSP FAS
141(R)-1 will be applied prospectively to business combinations with an
acquisition date on or after the guidance becomes effective. The
impact to the Company cannot be determined until a transaction
occurs.
In April
2009, the FASB issued FSP No. FAS 157-4, “Determining Fair Value When the Volume
and Level of Activity for the Asset or Liability Have Significantly Decreased
and Identifying Transactions That Are Not Orderly” (“FSP FAS 157-4”), which
provides additional guidance for applying the provisions of SFAS No.
157. SFAS No. 157 defines fair value as the price that would be
received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants under current market
conditions. FSP FAS 157-4 requires an evaluation of whether there has
been a significant decrease in the volume and level of activity for the asset or
liability in relation to normal market activity for the asset or
liability. If there has, transactions or quoted prices may not be
indicative of fair value and a significant adjustment may need to be made to
those prices to estimate fair value. Additionally, an entity must
consider whether the observed transaction was orderly (that is, not distressed
or forced). If the transaction was orderly, the obtained price can be
considered a relevant observable input for determining fair value. If
the transaction is not orderly, other valuation techniques must be used when
estimating fair value. FSP FAS 157-4 must be applied prospectively
for interim periods ending after June 15, 2009, and will be adopted in the third
quarter of fiscal 2009. The Company is currently assessing the impact
that FSP FAS 157-4 may have on its financial statements.
Item 3. 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 customers may resist
these escalation clauses. We manage our exposures to commodity
prices, primarily zinc used in our Galvanizing Services Segment, by utilizing
agreements with zinc suppliers that include protective caps and fixed contracts
to guard against escalating commodity prices. We believe these
agreements ensure adequate supplies and partially offset exposure to commodity
price swings.
The
Company has exposure to foreign currency exchange related to our Canadian
operations.
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 commodities
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
4. Controls
and Procedures.
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 our 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.
Item
1. Legal
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
1A. Risk Factors.
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 28,
2009.
Item
2. Unregistered
Sales of Equity Securities and Use of Proceeds. None.
Item
3. Defaults
Upon Senior Securities. None.
Item
4. Submissions
of Matters to a Vote of Security Holders. None.
Item
5. Other
Information.
Item
6. Exhibits.
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 19, 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: 6/26/09
|
By: /s/
Dana
Perry
|
|
Dana
Perry
Senior
Vice President for Finance
Principal
Financial Officer
|
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 Form 8-K filed by the Registrant on
November 27, 2007).
|
3(6)
|
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
April 3, 2009).
|
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).
|
10(3)
|
Second
Amendment and Consent to Second Amendment and Restated Credit Agreement
dated March 31, 2008, by and between AZZ incorporated and Bank of America,
N.A. (incorporated by reference to Exhibit 10(3) of the Form 8-K filed by
the registrant on April 2, 2008).
|
10(4)
|
Note
Purchase Agreement dated March 31, 2008, by and among AZZ incorporated and
the purchasers listed therein (incorporated by reference to Exhibit 10(1)
of the Form 8-K filed by the registrant on April 2,
2008).
|
10(5)
|
Asset
Purchase Agreement dated March 31, 2008, by and among AZZ incorporated and
AAA Industries, Inc. (incorporated by reference to Exhibit 10(2) of the
Form 8-K filed by the registrant on April 2, 2008).
|
10(6)
|
Asset
Purchase Agreement executed and delivered on June 26, 2008 and made to be
effective as of June 30, 2008, by and among AZZ incorporated, AZZ
Blenkhorn & Sawle Limited, Blenkhorn and Sawle Limited, and Chriscot
Holdings Limited.
|
10(7)
|
AZZ
incorporated Amended and Restated 2005 Long-Term Incentive Plan
(incorporated by reference to Appendix A of the Proxy Statement for the
2008 Annual Shareholders Meeting).
|
10(8)
|
AZZ
incorporated Employee Stock Purchase Plan (incorporated by reference to
Appendix B of the Proxy Statement for the 2008 Annual Shareholders
Meeting).
|
10(9)
|
1999
Independent Director Share Ownership Plan as Approved on January 19, 1999
and As Amended on September 22, 1999 (incorporated by reference to Exhibit
10(22) of the Annual Report on Form 10-K filed by Registrant for the
fiscal year ended February 28, 2001).
|
10(10)
|
2000
Advisory Director Share Ownership Plan as Approved on March 28, 2000
(incorporated by reference to Exhibit 10(23) of the Annual Report on Form
10-K filed by Registrant for the fiscal year ended February 28,
2001).
|
10(11)
|
AZZ
incorporated 2001 Long-Term Incentive Plan (incorporated by reference to
Exhibit A of the Proxy Statement for the 2001 Annual Shareholders
Meeting).
|
10(12)
|
AZZ
incorporated 2005 Management Incentive Bonus Plan (incorporated by
reference to Exhibit 10(20) to the Annual Report on Form 10-K filed by the
registrant for the fiscal year ended February 28,
2002).
|
10(13)
|
2002
Plan for the Annual Grant of Stock Options to Independent Directors of AZZ
incorporated (incorporated by reference to Exhibit 10(27) to the Quarterly
Report Form 10-Q filed by the registrant for the quarter ended August 31,
2002).
|
10(14)
|
AZZ
incorporated Fiscal Year 2005 Stock Appreciation Rights Plan for Directors
(incorporated by reference to Exhibit 10(53) to the quarterly report Form
10-Q filed by the Registrant for the quarter ended August 31,
2004).
|
10(15)
|
AZZ
incorporated Fiscal Year 2005 Stock Appreciation Rights Plan for Key
Employees (incorporated by reference to Exhibit 10(54) to the quarterly
report Form 10-Q filed by the Registrant for the quarter ended August 31,
2004).
|
10(16)
|
AZZ
incorporated 2005 Independent Director Compensation Plan (incorporated by
reference to Exhibit 10.2 to the current report on Form 8-K filed by the
Registrant on July 14, 2005).
|
31.1
|
Chief
Executive Officer Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated June 26, 2009. Field
Herewith.
|
31.2
|
Chief
Financial Officer Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated June 26, 2009. 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
June 26,2009. 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 June 26,
2009. Filed Herewith.
|
19