AZZ Inc. 10-Q Summary: Quarter Ended May 31, 2009
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended May 31, 2009 for AZZ Inc., a Texas-based corporation. The company operates in two primary segments: Electrical and Industrial Products and Galvanizing Services. The fiscal year ends on the last day of February; this report represents the first quarter of fiscal year 2010.
Key Financial Metrics
| Metric | Q1 2010 (Ended 5/31/09) | Q1 2009 (Ended 5/31/08) |
|---|---|---|
| Net Sales | $95.5 million | $100.0 million |
| Net Income | $9.9 million | $10.1 million |
| Diluted EPS | $0.80 | $0.82 |
| Operating Cash Flow | $13.7 million | $(1.9) million |
| Total Assets | $360.1 million | $313.8 million |
| Cash & Equivalents | $57.7 million | $14.2 million |
| Long-Term Debt | $100.0 million | $100.0 million |
| Working Capital | $136.7 million | $123.7 million |
| Current Ratio | 3.78:1 | 3.02:1 |
Material Changes vs. Prior Period
- Revenue Decline: Consolidated revenues decreased 5% year-over-year. The Galvanizing Services segment saw a 16% revenue drop due to a 12% volume reduction and 3% price decrease. Conversely, the Electrical and Industrial Products segment grew 7% due to higher shipments from a record backlog and revenue from the Blenkhorn and Sawle acquisition.
- Margin Expansion: Despite lower revenue, total operating income increased 10% to $23.3 million, and operating margins improved from 21% to 24%. This was driven by lower commodity costs (zinc, copper, aluminum) and cost reduction initiatives.
- Cash Flow Improvement: Operating cash flow turned significantly positive ($13.7 million) compared to a negative $1.9 million in the prior year, aided by reductions in accounts receivable ($6.4 million) and inventories ($4.2 million).
- Backlog Contraction: Total backlog decreased 14% to $150.1 million. The book-to-ship ratio fell to 0.74 from 1.07, with incoming orders down 34% year-over-year.
- Expense Increases: General corporate expenses rose to $5.7 million (from $4.6 million) primarily due to increased stock-based compensation. Interest expense increased 50% to $1.7 million due to the full quarter impact of the $100 million 6.24% Senior Notes issued in March 2008.
Outlook, Risks, and Management Commentary
- Guidance: Management anticipates a further deterioration of backlog by 10% to 15% in the second quarter. However, they expect the backlog to level off by the end of the second quarter with modest improvements in the third and fourth quarters, contingent on market conditions and infrastructure project expansion.
- Market Risks: The company faces exposure to commodity price fluctuations (zinc, natural gas, copper, aluminum, steel) and foreign currency exchange rates (Canadian dollar). While escalation clauses and fixed contracts mitigate some risk, difficult market conditions may limit the ability to pass costs to customers.
- Liquidity: The company maintains a strong liquidity position with $57.7 million in cash and $44 million available under its revolving credit facility (after $16 million in letters of credit). All debt covenants were met as of May 31, 2009.
- Unusual Items: No material unusual items were reported, though the company noted a significant payment of $6.1 million for fiscal 2009 profit sharing, which impacted accrued liabilities.
Investor Verification Checklist
- Verify the sustainability of the 24% operating margin given the 16% revenue decline in the Galvanizing segment.
- Monitor the backlog trend closely, as management forecasts a further 10-15% decline in Q2.
- Assess the impact of rising commodity prices if the company cannot successfully utilize escalation clauses in customer contracts.
- Review the $100 million Senior Notes (6.24% interest) and ensure continued compliance with the 3.25:1 Debt-to-EBITDA covenant.
- Confirm the collection of accounts receivable, which decreased significantly to generate cash flow, to ensure no hidden credit deterioration.