AZTEC MANUFACTURING CO. (AZZ INC) - 10-Q Summary
Business Context and Reporting Period
This Form 10-Q covers the quarterly period ended August 31, 1999, and the six-month period ended on the same date. The registrant, Aztec Manufacturing Co., operates in two primary segments: Manufactured Products (electrical and tubular products) and Services (galvanizing). The company recently announced the acquisition of ABB's Compressed Gas Insulation Transmission Bus Duct division, effective September 1, 1999, for approximately $9.9 million.
Key Financial Metrics
| Metric | Three Months Ended 8/31/99 | Six Months Ended 8/31/99 | Six Months Ended 8/31/98 |
|---|---|---|---|
| Net Sales | $20,986,466 | $41,657,087 | $41,449,445 |
| Net Income | $1,567,318 | $2,978,117 | $3,021,104 |
| Diluted EPS | $0.33 | $0.63 | $0.51 |
| Operating Income | $3,776,000 | $7,324,000 | $6,934,000 |
| Cash from Operations | N/A | $7,560,379 | $3,898,925 |
| Cash & Equivalents (End) | $412,168 | $412,168 | $510,329 |
| Total Debt (Current + Long Term) | $16,853,884 | $16,853,884 | $23,401,504 |
Note: Operating Income figures are derived from segment data in thousands. Total Debt is the sum of current and long-term debt from the balance sheet.
Material Changes vs. Prior Period
- Revenue: Consolidated net sales increased 1% year-over-year for both the three-month and six-month periods. This growth was driven by the Services segment, which saw a 14% (quarterly) and 15% (six-month) increase due to higher volume (17.5% increase in steel processed). Conversely, the Manufactured Products segment declined 8% and 10% respectively, primarily due to a 42-48% drop in tubular product sales.
- Profitability: Net income decreased slightly on a six-month basis ($2.98M vs $3.02M), but Diluted EPS increased significantly ($0.63 vs $0.51) due to a reduction in shares outstanding from stock repurchases.
- Segment Performance: Operating income in the Services segment rose 25% (quarterly) and 23% (six-month). The Manufactured Products segment saw flat operating income for the quarter but a 16% decline for the six-month period, with tubular products reporting losses compared to profits in the prior year.
- Liquidity & Debt: The company aggressively reduced debt, repaying $6.5 million in long-term notes during the six-month period. Total debt decreased from approximately $23.4 million to $16.9 million. Cash from operations surged to $7.6 million (vs $3.9 million prior year), largely due to inventory reductions and working capital improvements.
Outlook, Risks, and Management Commentary
- Backlog: Backlog for electrical products increased 55% due to industry deregulation and power generation needs. However, tubular product backlog collapsed to $102,000 from $3.35 million the prior year.
- Acquisition: The company acquired assets from ABB for $9.9 million, resulting in $6.9 million in goodwill. This new entity will be known as CGIT Westboro, Inc.
- Capital Resources: Management believes current credit facilities (two $10M term notes and a $15M revolving line with $11.8M available) and operating cash flow are sufficient for operations and growth.
- Risks: Key risks include volatility in raw material costs (specifically zinc), economic conditions affecting oil and natural gas markets (impacting tubular products), and Year 2000 compliance uncertainties regarding vendor systems.
- Unusual Items: Interest expense increased due to higher loan balances associated with stock repurchases. The tubular products division incurred losses of $120,000 (quarterly) and $385,000 (six-month) compared to profits in the prior year.
Investor Verification Checklist
- Verify the sustainability of the Services segment growth given the flat average selling price.
- Monitor the recovery of the tubular products backlog and its impact on future margins.
- Confirm the integration progress and financial impact of the new CGIT Westboro, Inc. acquisition.
- Assess the company's exposure to zinc price fluctuations and oil/gas market volatility.
- Review the status of Year 2000 compliance for critical vendor systems.