AZZ INC 10-Q Summary: Quarter Ended May 31, 2011
Business Context and Reporting Period
This Form 10-Q covers the three-month period ended May 31, 2011 (First Quarter of Fiscal 2012). AZZ INC operates in two primary segments: Electrical and Industrial Products and Galvanizing Services. The company provides corrosion protection solutions and electrical products. The reporting period includes the full impact of the North American Galvanizing & Coatings, Inc. (NGA) acquisition completed in June 2010.
Key Financial Metrics
| Metric | Q1 2012 (May 31, 2011) | Q1 2011 (May 31, 2010) |
|---|---|---|
| Net Sales | $114.33 million | $77.47 million |
| Net Income | $9.47 million | $6.37 million |
| Earnings Per Share (Diluted) | $0.75 | $0.51 |
| Operating Cash Flow | $9.67 million | $4.17 million |
| Cash and Equivalents | $140.40 million | $110.17 million |
| Total Debt | $225.00 million | $100.00 million |
| Working Capital | $220.50 million | $170.90 million |
| Current Ratio | 4.2 to 1 | 4.93 to 1 |
Material Changes vs. Prior Period
- Revenue Growth: Consolidated revenues increased 48% year-over-year. The Galvanizing Services segment drove this growth with a 64% increase ($66.1M vs $40.3M), largely due to the NGA acquisition and a 16% volume increase excluding the acquisition. The Electrical and Industrial Products segment grew 30% ($48.3M vs $37.2M).
- Profitability: Net income rose 49% to $9.47 million. Total operating income increased 36% to $24.5 million. However, total operating margins decreased slightly from 23% to 22% due to lower margin projects in the Electrical segment and higher material costs in Galvanizing Services.
- Debt Structure: Total debt increased significantly from $100 million to $225 million following the issuance of $125 million in 5.42% unsecured Senior Notes in January 2011. Consequently, interest expense more than doubled to $3.47 million.
- Backlog: Backlog for the Electrical and Industrial Products segment increased 6% to $114.7 million. The book-to-ship ratio improved to 1.06, indicating incoming orders exceeded shipments for the second consecutive quarter.
Outlook, Risks, and Management Commentary
- Outlook: Management expects modest improvements in backlog for the remainder of fiscal 2012, citing market stabilization. The company anticipates using proceeds from the 2011 Note Offering for acquisitions, working capital, and capital improvements.
- Commodity Risks: The company faces exposure to copper, aluminum, steel, zinc, and natural gas prices. While escalation clauses and fixed contracts mitigate some risk, management notes that higher material costs in the Galvanizing segment compressed margins as price increases could not fully offset costs.
- Liquidity: The company maintains strong liquidity with $140.4 million in cash and $68 million available under its revolving credit facility. It remains in compliance with all debt covenants, including leverage and fixed charge coverage ratios.
- Legal Proceedings: Litigation challenging the NGA acquisition was settled in June 2010 for $500,000 in legal fees. Management believes other routine legal matters will not materially affect financial results.
Investor Verification Checklist
- Verify the sustainability of the 64% revenue growth in Galvanizing Services, distinguishing between organic volume growth and the impact of the NGA acquisition.
- Monitor the ability to pass through rising commodity costs (zinc, natural gas, steel) to customers to protect operating margins.
- Review the impact of the new $125 million debt issuance on future interest expenses and cash flow availability.
- Assess the backlog conversion rate in the Electrical and Industrial Products segment to confirm the 1.06 book-to-ship ratio translates into future revenue.
- Confirm compliance with debt covenants, specifically the Leverage Ratio (max 3.25:1) and Fixed Charge Coverage Ratio (min 1.75:1), given the increased debt load.