AZZ Incorporated — Form 10-Q Summary
Reporting period: Quarter and six months ended August 31, 2011 (fiscal 2012). The unaudited filing reports two segments: Electrical and Industrial Products and Galvanizing Services.
Financial performance
| Metric | Quarter ended Aug. 31, 2011 | Prior-year quarter | Six months ended Aug. 31, 2011 | Prior-year six months |
|---|---|---|---|---|
| Net sales | $114.7 million | $99.6 million | $229.0 million | $177.1 million |
| Net income | $9.6 million | $9.6 million | $19.1 million | $16.0 million |
| Diluted EPS | $0.76 | $0.77 | $1.51 | $1.27 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $27.0 million | $8.0 million |
- Quarterly sales increased 15%, while net income was essentially flat. Six-month sales increased 29% and net income increased 19% on a reported basis.
- Gross margin was approximately 26.5% for the quarter and 26.8% for the six months, down from approximately 29.3% and 29.7%, respectively, in the comparable periods. Net margin was approximately 8.4% for the quarter and 8.3% for the six months.
- Quarterly segment operating income was $23.8 million, up 5%; six-month segment operating income was $48.4 million, up 18%. Electrical and Industrial Products segment income declined 33% for the quarter and 12% for the six months, reflecting lower-margin projects amid more competitive conditions. Galvanizing Services segment income rose 23% and 34%, respectively.
- Cash and cash equivalents were $149.1 million at August 31, 2011, versus $138.4 million at February 28, 2011. Six-month capital expenditures were $10.5 million; dividends paid were $6.3 million.
- Total debt was $225.0 million ($14.3 million current and $210.7 million long term), compared with $225.0 million at February 28, 2011. The company had no revolver borrowings and approximately $66.6 million of additional availability after letters of credit. Current ratio was 4.07:1; long-term debt-to-equity was 0.78:1. The company reported compliance with debt covenants.
Changes, outlook and risks
- Galvanizing Services benefited from higher volume and pricing and from the North American Galvanizing & Coatings (NGA) acquisition. NGA contributed $21.2 million of segment sales in the quarter and $39.5 million for the six months. Because NGA was acquired in June 2010, reported prior-year comparisons include it for only part of the six-month period.
- On a pro forma basis assuming NGA was acquired at the start of the prior-year periods, six-month 2011 sales were $229.0 million versus $196.0 million, but net income was $19.1 million versus $19.7 million. This contrasts with the increase in reported net income.
- Electrical and Industrial Products backlog was $123.2 million at August 31, up 14% from February 28 and above $106.5 million a year earlier. Quarterly book-to-ship was 1.07, and orders rose 30% year over year. Management cited market stabilization and expected modest backlog improvement for the remainder of fiscal 2012; no quantified earnings or revenue guidance was provided.
- Management said operating cash flow improved to $27.0 million, with working-capital movements including increased receivables and inventories. It believed cash, working capital, operating cash generation and available credit were sufficient for anticipated needs, capital improvements, debt service, dividends and possible acquisitions.
- Key exposures include demand and economic conditions in served markets, competitive pricing, and copper, aluminum, steel, zinc and natural-gas costs. Contract escalation clauses, supplier pricing arrangements and protective caps partially mitigate commodity exposure, but passing through higher costs is not assured. Foreign-currency exposure relates to Canadian operations.
- The filing describes settlement terms for litigation challenging the NGA transaction, including $500,000 in plaintiffs’ attorneys’ fees, subject to court approval. Management said ordinary-course claims were not expected to materially affect results or financial position. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether backlog growth and book-to-ship above 1.0 continue, and whether backlog converts to revenue at expected margins.
- How Electrical and Industrial Products margins respond to competitive pricing and the mix of projects shipped.
- The contribution of NGA to Galvanizing Services results and the distinction between reported and pro forma year-over-year earnings.
- Cash conversion and working-capital trends, particularly inventory and receivables, alongside capital spending and dividend payments.
- Debt maturities, covenant compliance, remaining credit availability and the status of court approval for the NGA litigation settlement.