AZZ INC 10-Q Summary: Period Ended August 31, 2002
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended August 31, 2002, and the six-month period ended August 31, 2002, for AZZ Incorporated. The company operates in two primary segments: Electrical and Industrial Products and Galvanizing Services. The financial statements are unaudited and reflect the adoption of SFAS No. 142, which ceased the amortization of goodwill effective March 1, 2002.
Key Financial Metrics
| Metric | Six Months Ended 8/31/02 | Six Months Ended 8/31/01 | Three Months Ended 8/31/02 | Three Months Ended 8/31/01 |
|---|---|---|---|---|
| Net Sales | $98.46 million | $67.18 million | $48.77 million | $32.87 million |
| Net Income | $5.23 million | $4.01 million | $2.62 million | $1.84 million |
| Diluted EPS | $0.99 | $0.78 | $0.49 | $0.36 |
| Operating Cash Flow | $8.27 million | $6.87 million | N/A | N/A |
| Total Debt (Current + Long-Term) | $57.10 million | N/A | $57.10 million | N/A |
| Cash and Equivalents | $1.68 million | N/A | $1.68 million | N/A |
Segment Performance (Six Months Ended 8/31/02):
- Electrical and Industrial Products: Net Sales of $73.33 million; Operating Income of $8.71 million.
- Galvanizing Services: Net Sales of $25.13 million; Operating Income of $4.95 million.
Material Changes vs. Prior Period
- Revenue Growth: Consolidated net sales increased 47% year-over-year for the six-month period. This growth was driven primarily by acquisitions (Central Electric Company and Carter & Crawley Inc.) completed in November 2001. Excluding acquisitions, revenues decreased 2% for the six-month period.
- Profitability: Net income increased 30% year-over-year. Operating income increased 34% for the six-month period, aided significantly by the elimination of goodwill amortization ($602,000 benefit) under SFAS No. 142.
- Interest Expense: Interest expense rose 144% year-over-year to $2.21 million due to additional debt incurred to fund recent acquisitions.
- Segment Dynamics: The Electrical Products component saw a 129% revenue increase due to backlog shipments from prior deregulation efforts. Conversely, the Industrial Products component revenue fell 28% due to economic slowdown and the loss of an automotive customer.
Outlook, Risks, and Unusual Items
- Facility Closure: Management decided to cease operations at Clark Control, Inc. (Nashville, TN) and consolidate operations. This will result in an impairment charge of approximately $300,000 for leasehold improvements and potential lease termination costs ranging from $0 to $500,000, to be recognized in the third and fourth quarters of fiscal 2002.
- Backlog: Total backlog was $65.7 million as of August 31, 2002. While total backlog increased, the backlog excluding acquisitions decreased 44% due to the Enron bankruptcy and reduced access to capital for Independent Power Producers.
- Liquidity: The company maintains a $40 million term facility and a $45 million revolving credit facility. As of August 31, 2002, $57.1 million was outstanding, with approximately $6 million available under the revolving line.
- Market Risks: The company faces risks related to commodity prices (zinc, natural gas) and interest rate fluctuations. It utilizes interest rate swaps to hedge $45 million of debt and contracts with suppliers to cap zinc costs.
Investor Verification Checklist
- Verify the sustainability of revenue growth in the Electrical Products segment once the pre-Enron backlog is fully shipped.
- Monitor the impact of the Clark Control, Inc. closure on Q3 and Q4 operating margins and the final cost of lease termination.
- Assess the company's ability to service its increased debt load ($57.1 million) given the 144% rise in interest expense.
- Review the "organic" revenue performance (excluding acquisitions), which showed a 2% decline for the six-month period, to gauge underlying business health.
- Confirm the status of the automotive customer loss and whether new industrial contracts are being secured to offset the 28% revenue drop in that component.