AZZ INC Form 10-Q Summary
Business Context and Reporting Period
This report covers the quarterly period ended November 30, 2010 (Fiscal 2011 Q3) and the nine-month period ended November 30, 2010. AZZ INC operates in two segments: Electrical and Industrial Products and Galvanizing Services. The company completed the acquisition of North American Galvanizing and Coatings, Inc. (NGA) on June 14, 2010, for a total cash purchase price of $132 million ($104 million net of cash acquired).
Key Financial Metrics
| Metric | Three Months Ended 11/30/10 | Nine Months Ended 11/30/10 | Nine Months Ended 11/30/09 |
|---|---|---|---|
| Net Sales | $102.9 million | $280.0 million | $272.2 million |
| Net Income | $9.7 million | $25.7 million | $29.8 million |
| Diluted EPS | $0.77 | $2.04 | $2.39 |
| Operating Cash Flow | N/A | $25.5 million | $65.5 million |
| Long-Term Debt | $100.0 million | $100.0 million | $100.0 million |
| Cash & Equivalents | $6.7 million | $6.7 million | $98.4 million |
| Working Capital | $98.6 million | $98.6 million | $156.2 million |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenue increased 26% for the quarter and 3% for the nine-month period compared to the prior year. This was driven primarily by the Galvanizing Services segment, which saw a 63% quarterly increase and 37% nine-month increase, largely due to the NGA acquisition (accounting for 76-77% of the increase).
- Segment Performance: The Electrical and Industrial Products segment saw revenue declines of 6% (quarterly) and 23% (nine-month) due to lower demand in petrochemical and electrical transmission markets. Operating income for this segment dropped 32% and 36% respectively.
- Profitability: While quarterly net income rose 11% to $9.7 million, nine-month net income decreased 13% to $25.7 million. This decline is attributed to lower operating income in the Electrical segment and $1.8 million in expensed acquisition costs.
- Liquidity: Cash and cash equivalents decreased significantly from $110.6 million at the start of the fiscal year to $6.7 million at period end, primarily due to the $104 million net cash outlay for the NGA acquisition and $9.3 million in dividends paid.
Guidance, Outlook, and Risks
- Backlog: Total backlog was $101.7 million as of November 30, 2010, a 7% decrease from the prior fiscal year-end. Management does not anticipate appreciable backlog increases in the current fiscal year, expecting rebuilding to begin in the first half of fiscal 2012.
- Capital Markets: The company anticipates issuing $125 million in 5.42% unsecured Senior Notes in January 2011. Proceeds will fund future acquisitions, working capital, and dividends. A treasury lock hedging transaction settled in the quarter, resulting in an $834,416 gain recorded in Other Comprehensive Income.
- Risks: Key risks include commodity price volatility (zinc, natural gas, copper, aluminum), customer demand fluctuations in the electrical and industrial sectors, and the ability to pass cost increases to customers. The company utilizes escalation clauses and protective caps to mitigate these risks.
- Dividends: Cash dividends of $9.3 million were paid during the nine-month period.
Investor Verification Checklist
- Acquisition Integration: Verify the realization of synergies and revenue contribution from the NGA acquisition, which drove the majority of recent growth.
- Backlog Trends: Monitor the Electrical and Industrial Products backlog, which has declined and is not expected to recover until fiscal 2012.
- Commodity Exposure: Assess the impact of rising zinc and natural gas costs on Galvanizing Services margins, as margins decreased slightly due to these factors.
- Debt Covenants: Confirm continued compliance with the Credit Agreement and Note Purchase Agreement covenants, specifically the Fixed Charge Coverage Ratio and Debt-to-EBITDA limits.
- Cash Position: Review the significant reduction in cash reserves ($104 million decrease) and the reliance on the upcoming $125 million note offering for liquidity.