AZZ

AZZ INC 10-K Summary: Fiscal Year Ended February 28, 2003

Business Context and Reporting Period

This Form 10-K covers the fiscal year ended February 28, 2003. AZZ INC is an electrical equipment and components manufacturer and a provider of hot dip galvanizing services. The company operates through two segments: Electrical and Industrial Products (serving power generation, transmission, distribution, and general industrial markets) and Galvanizing Services (providing corrosion protection to the steel fabrication industry via 11 plants in the South and Southwest U.S.).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Consolidated net sales increased 20% to $183.4 million. This growth was primarily driven by the full-year impact of acquisitions made in late fiscal 2002 (Central Electric Company and Carter & Crawley, Inc.). Excluding acquisitions, organic revenues declined 3%.
• Segment Performance:
  • Electrical and Industrial Products: Revenues rose 31% to $134.9 million due to acquisitions. However, excluding acquisitions, revenues fell 4%. The segment saw a 28% revenue decline in the fourth quarter due to a slowdown in the power generation market.
  • Galvanizing Services: Revenues decreased 2% to $48.5 million, reflecting weakness in the general economy and the telecommunications industry.
• Profitability: Net income increased 10% to $8.6 million, aided by the elimination of goodwill amortization under SFAS No. 142 (saving approx. $1.2 million in pre-tax income). However, net income as a percent of sales dropped from 5.1% to 4.7% due to higher interest costs and facility closure expenses.
• Debt Reduction: The company significantly reduced its debt load, paying down $19 million in outstanding bank debt using cash flows from operations. Total debt decreased from $63.5 million to $44.5 million.
• Backlog: The backlog for the Electrical and Industrial Products Segment dropped 43% to $49.1 million, returning to pre-deregulation expansion levels.

Outlook, Risks, and Management Commentary

• Market Conditions: Management cites a "slow and uneven recovery" of the general economy and intense competition as headwinds. The power generation market, a key driver, slowed dramatically in the fourth quarter.
• Cost Management: The company implemented stringent cost controls and improved operating efficiencies to offset market softness. A Nashville facility was closed and consolidated, incurring $545,500 in one-time costs.
• Liquidity: The company maintains a syndicated credit facility with a $40 million term note and a $45 million revolving line. As of February 28, 2003, approximately $7.3 million was available under the revolving facility. No cash dividends were declared in fiscal 2003.
• Risks: Key risks include volatility in raw material costs (zinc, natural gas, copper, aluminum), customer demand fluctuations, and the potential for goodwill impairment if projected cash flows decline. Environmental liabilities are reserved at $561,000, which management believes is adequate.

Investor Verification Checklist

• Organic Growth: Verify the sustainability of revenue growth given the 3% organic decline and the heavy reliance on prior-year acquisitions.
• Backlog Trends: Monitor the 43% drop in backlog for the Electrical segment to assess future revenue visibility.
• Margin Pressure: Review the decline in operating margins (14.2% to 13.0%) to determine if cost containment measures are sufficient to counteract market competition.
• Debt Covenants: Confirm compliance with financial covenants, specifically the rolling ninety-day EBITDA covenant, which required an amendment in March 2003 to bring the company back into compliance.
• Goodwill Impairment: Assess the $41 million in goodwill on the balance sheet against future cash flow projections, as impairment charges could significantly impact earnings.