AZZ INC 10-Q Summary: Period Ended August 31, 2010
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended August 31, 2010 (Fiscal 2011 Q2) and the six-month period ended August 31, 2010. AZZ INC operates in two segments: Electrical and Industrial Products and Galvanizing Services. The reporting period includes the impact of the acquisition of North American Galvanizing & Coatings, Inc. (NGA), completed on June 14, 2010.
Key Financial Metrics
| Metric | Three Months Ended 8/31/10 | Six Months Ended 8/31/10 |
|---|---|---|
| Net Sales | $99.6 million | $177.1 million |
| Net Income | $9.6 million | $16.0 million |
| Diluted EPS | $0.77 | $1.27 |
| Operating Cash Flow | N/A | $8.0 million |
| Cash and Equivalents | $8.8 million | $8.8 million |
| Long-Term Debt | $112.0 million | $112.0 million |
| Working Capital | $102.6 million | $102.6 million |
| Backlog | $106.5 million | $106.5 million |
Material Changes vs. Prior Period
- Revenue: Consolidated revenue increased 5% year-over-year for the quarter ($99.6M vs. $95.2M) but decreased 7% for the six-month period ($177.1M vs. $190.6M).
- Electrical and Industrial Products: Revenue declined 27% (quarter) and 30% (six months) due to reduced order intake in the prior fiscal year's latter half.
- Galvanizing Services: Revenue increased 49% (quarter) and 24% (six months), driven primarily by the NGA acquisition which contributed $15.1 million in revenue for both periods.
- Profitability: Net income decreased 13% for the quarter ($9.6M vs. $11.1M) and 24% for the six months ($16.0M vs. $21.0M). Segment operating income decreased 7% for the quarter and 14% for the six months.
- Liquidity: Cash and cash equivalents dropped significantly from $110.6 million at the beginning of the period to $8.8 million at period end, primarily due to the $104 million net cash outlay for the NGA acquisition.
- Debt: Long-term debt increased to $112 million from $100 million in the prior year, reflecting a $12 million draw on the revolving credit facility to fund the acquisition.
Outlook, Risks, and Unusual Items
- Acquisition Impact: The NGA acquisition was the primary driver of growth in the Galvanizing segment. Pro forma results indicate higher sales and income if the acquisition had occurred at the start of the prior year.
- Backlog and Orders: Backlog decreased 3% to $106.5 million. Management anticipates backlog rebuilding will not begin until the first quarter of Fiscal 2012. Incoming orders increased 13% (quarter) and 12% (six months) year-over-year.
- Legal Proceedings: Several stockholder lawsuits challenging the NGA acquisition were filed in April 2010. These were settled in June 2010 for $500,000 in attorneys' fees, with defendants denying any wrongdoing.
- Risk Factors: The company faces exposure to commodity price fluctuations (zinc, natural gas, copper, aluminum, steel). While escalation clauses and fixed contracts mitigate some risk, there is no assurance these can be fully passed to customers. Inflation and economic conditions in the electrical and industrial markets remain uncertain.
Investor Verification Checklist
- Verify the integration progress and financial performance of the NGA acquisition in subsequent quarters.
- Monitor the backlog trend in the Electrical and Industrial Products segment, given the expectation of no appreciable increase until Fiscal 2012.
- Review the company's ability to maintain debt covenants (Maximum Debt/EBITDA ratio of 3.25:1) as interest expenses remain steady.
- Assess the impact of rising zinc and natural gas costs on Galvanizing Services margins, as margins decreased from 31% to 26-27% in the current period.
- Confirm the status of the $12.6 million in outstanding letters of credit and their effect on available liquidity.