AZZ INC 10-Q Summary: Quarter Ended August 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended August 31, 2009, and the six-month period ended on the same date. AZZ INC operates in two primary segments: Electrical and Industrial Products and Galvanizing Services. The company reported 12,301,482 shares of common stock outstanding as of August 31, 2009.
Key Financial Metrics
| Metric | Three Months Ended 8/31/09 | Six Months Ended 8/31/09 |
|---|---|---|
| Net Sales | $95.16 million | $190.65 million |
| Net Income | $11.12 million | $21.02 million |
| Diluted EPS | $0.89 | $1.69 |
| Operating Cash Flow | N/A | $36.90 million |
| Cash & Equivalents | $71.95 million | $71.95 million |
| Long-Term Debt | $100.00 million | $100.00 million |
| Working Capital | $144.33 million | $144.33 million |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 8% ($95.2M vs. $103.3M) for the quarter and 6% ($190.6M vs. $203.2M) for the six months compared to the prior year.
- Segment Performance:
- Electrical and Industrial Products: Revenues increased 7% due to shipments from a record backlog in the prior fiscal year.
- Galvanizing Services: Revenues decreased 23% for the quarter and 20% for the six months, driven by lower demand and decreased selling prices.
- Profitability: Net income remained relatively stable, decreasing slightly by 1.6% for the quarter and 1.9% for the six months. Segment operating income for Electrical and Industrial Products increased 23% for the quarter, while Galvanizing Services operating income decreased 21%.
- Backlog: Total backlog decreased 20% to $139.4 million from $174.8 million at the end of the prior fiscal year. The book-to-ship ratio was 0.89 to 1 for the quarter.
- Cash Flow: Operating cash flow improved significantly to $36.9 million for the six months ended August 31, 2009, compared to $12.6 million in the prior year period, aided by reductions in accounts receivable and inventory.
Guidance, Outlook, and Risks
- Outlook: Management anticipates a slow and selective release of orders continuing into the third quarter. A rebuilding of the backlog is not expected until the first quarter of fiscal 2011.
- Acquisitions: On July 31, 2009, AZZ acquired Pilot Galvanizing, Inc. and Zinc Partners, LLC for $7 million. The acquisition is expected to be accretive to earnings and add $6 to $8 million in annualized revenues.
- Liquidity: The company maintains a $60 million revolving credit facility with $41.2 million available (after $18.8 million in letters of credit). Long-term debt consists of $100 million in 6.24% Senior Notes due 2018.
- Risks: Key risks include continued economic recession, sluggish demand in power generation and industrial markets, and volatility in commodity prices (zinc, natural gas, copper, aluminum, steel). The company utilizes escalation clauses and protective caps to mitigate commodity risks.
Investor Verification Checklist
- Verify the sustainability of the 20% backlog reduction and the timeline for order recovery in the Electrical and Industrial segment.
- Monitor the integration and revenue contribution of the July 2009 acquisitions (Pilot Galvanizing and Zinc Partners).
- Assess the impact of commodity price fluctuations on the Galvanizing Services segment margins, given the 23% revenue decline.
- Review the company's ability to maintain debt covenants, specifically the Fixed Charge Coverage Ratio and Indebtedness to EBITDA ratio, amidst potential future earnings volatility.
- Confirm the effectiveness of cost-cutting measures and operating efficiencies in offsetting the revenue decline in the Galvanizing segment.