AZZ INC 10-Q Summary: Quarter Ended November 30, 2005
Business Context and Reporting Period
This is a Quarterly Report (Form 10-Q) for AZZ INC, an accelerated filer incorporated in Texas. The report covers the three and nine-month periods ended November 30, 2005 (Fiscal Year 2006). The company operates in two primary segments: Electrical and Industrial Products and Galvanizing Services. The fiscal year ends on the last day of February.
Key Financial Metrics
| Metric | Three Months Ended 11/30/05 | Nine Months Ended 11/30/05 |
|---|---|---|
| Net Sales | $44.32 million | $136.91 million |
| Net Income | $1.73 million | $5.23 million |
| Earnings Per Share (Diluted) | $0.30 | $0.93 |
| Operating Cash Flow (9 months) | $9.19 million | |
| Total Debt Outstanding | $23.3 million ($13.8M Term / $9.5M Revolver) | |
| Cash and Equivalents | $1.41 million | |
| Working Capital | $26.6 million | |
| Debt-to-Equity Ratio | 0.21 to 1 |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 16% for the quarter and 20% for the nine-month period compared to the prior year. The Electrical and Industrial Products segment grew 15% (quarter) and 18% (nine months), driven by demand in high-voltage transmission and petroleum sectors. The Galvanizing Services segment grew 17% (quarter) and 22% (nine months) due to volume increases and price hikes offsetting zinc costs.
- Profitability: Net income rose 45% for the quarter and 56% for the nine-month period. Segment operating income increased 33% (quarter) and 34% (nine months). Operating margins improved in the Electrical segment (9.3% vs 6.9% for the quarter) and remained stable in Galvanizing (18.0% vs 18.1% for the quarter).
- Backlog: The backlog for the Electrical and Industrial Products segment increased 38% to $83.1 million from $60.1 million a year ago.
- Debt Reduction: Total outstanding bank debt decreased by $6.1 million to $23.3 million compared to the end of the prior fiscal year.
Outlook, Risks, and Unusual Items
- Hurricane Impact: Eight galvanizing and two electrical facilities were impacted by Hurricanes Katrina and Rita, resulting in production losses of 2 to 25 days. All facilities are back to full production. The company recorded a $43,000 gain from property damage insurance settlements and a $345,000 business interruption settlement for Katrina. Rita business interruption claims are pending for the fourth quarter.
- Cost Pressures: Management notes that while pricing has improved, it has not fully recovered material cost increases (steel, aluminum, copper, zinc, natural gas) incurred over the past 18 months. Competitive pricing pressures persist due to unused industry capacity.
- Future Demand: Management anticipates increased demand for galvanizing services in the second quarter of fiscal 2007 due to infrastructure rebuilding efforts in the Gulf Coast region.
- Compliance Costs: General corporate expenses increased due to Sarbanes-Oxley compliance costs ($1.1 million for the nine months) and Stock Appreciation Rights compensation ($307,000).
- Accounting Changes: The company is evaluating the impact of FAS 123R (Share-Based Payment) and FAS 151 (Inventory Costs), effective in fiscal 2007.
Investor Verification Checklist
- Verify the timing and amount of remaining business interruption insurance proceeds related to Hurricane Rita.
- Monitor the ability to pass through rising raw material costs (zinc, steel, copper) to customers given competitive pricing pressures.
- Review the backlog conversion rate for the Electrical and Industrial Products segment to ensure the $83.1 million backlog translates to future revenue.
- Assess the impact of the upcoming adoption of FAS 123R on reported net income and EPS in fiscal 2007.
- Confirm continued compliance with debt covenants (Minimum Net Worth, Leverage Ratio, Fixed Charge Coverage) as debt levels fluctuate.