Attached files
file | filename |
---|---|
EX-31.2 - CERT 31.2 PERRY CFO - AZZ INC | ex312perry.htm |
EX-32.2 - EX 32.2 PERRY CFO - AZZ INC | ex322perry.htm |
EX-31.1 - CERT 31.1 DINGUS CEO - AZZ INC | ex311dingus.htm |
EX-32.1 - EX 32.1 DINGUS CEO - AZZ INC | ex321dingus.htm |
UNITED
STATES SECURITIES AND EXCHANGE COMMISSION
Washington,
D.C. 20549
FORM
10-Q
T
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended November
30, 2009
OR
o
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
|
Commission
file number 1-12777
AZZ
incorporated
(Exact
name of registrant as specified in its charter)
TEXAS
|
75-0948250
|
|
(State
or other jurisdiction of incorporation or organization)
|
(I.R.S.
Employer Identification No.)
|
|
One
Museum Place, Suite 500
|
||
3100
West 7th
Street
|
||
Fort
Worth, Texas
|
76107
|
|
(Address
of principal executive offices)
|
(Zip
Code)
|
(817)
810-0095
Registrant's
telephone number, including area code:
NONE
(Former
name, former address and former fiscal year, if changed since last
report)
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
T
|
No
£
|
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding
12 months (or for such shorter period that the registrant was required to submit
and post such files).
Yes
£
|
No
£
|
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer or a smaller reporting company.
See definitions of "large accelerated filer", accelerated filer" and "smaller
reporting company" in Rule 12b-2 of the Exchange Act. (Check
one):
Large
accelerated filer £
|
Accelerated
filer T
|
Non-accelerated
filer £
|
Smaller
Reporting Company £
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
Yes
£
|
No T
|
Indicate
the number of shares outstanding of each of the issuer's classes of common
stock, as of the latest practicable date.
Title
of each class:
|
Outstanding
at November 30, 2009:
|
|
Common Stock, $1.00 par value per
share
|
12,356,522
|
AZZ
incorporated
INDEX
PAGE
NO.
|
|||||
PART
I.
|
FINANCIAL INFORMATION
|
||||
Item
1.
|
Unaudited
Condensed Financial Statements
|
||||
Consolidated Balance Sheets at November 30, 2009 and
February 28, 2009
|
3 | ||||
Consolidated Income Statements for the Three and Nine
Months Ended November 30, 2009 and November 30, 2008
|
4 | ||||
Consolidated Statements of Cash Flows for the Nine Months
Ended November 30, 2009 and November 30, 2008
|
5 | ||||
6-11 | |||||
Item
2.
|
Management's Discussion and Analysis of Financial Condition
and Results of Operations.
|
11-20 | |||
Item
3.
|
Quantitative and Qualitative Disclosures About Market
Risk.
|
20 | |||
Item
4.
|
21 | ||||
PART
II.
|
OTHER INFORMATION
|
||||
Item
1.
|
21 | ||||
Item
1A.
|
22 | ||||
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
22 | |||
Item
3.
|
Defaults
Upon Senior Securities.
|
22 | |||
Item
4.
|
Submission
of Matters to a Vote of Security Holders.
|
22 | |||
Item
5.
|
Other
Information.
|
22 | |||
Item
6.
|
Exhibits.
|
22 | |||
22 | |||||
23 |
2
PART I.
FINANCIAL INFORMATION
Item
1. Financial
Statements
11/30/09
|
02/28/09
|
|||||||
Assets
|
(Unaudited)
|
|
||||||
Current
Assets
|
||||||||
Cash
And Cash Equivalents
|
$ | 98,433,494 | $ | 47,557,711 | ||||
Accounts
Receivable
|
50,254,637 | 65,663,982 | ||||||
Allowance
for Doubtful Accounts
|
(845,000 | ) | (900,000 | ) | ||||
Inventories
|
||||||||
Raw
Material
|
23,531,627 | 27,274,833 | ||||||
Work-In-Process
|
16,096,582 | 23,037,364 | ||||||
Finished
Goods
|
5,343,387 | 3,463,603 | ||||||
Costs
And Estimated Earnings In Excess Of Billings On Uncompleted
Contracts
|
6,955,941 | 11,328,287 | ||||||
Deferred
Income Taxes
|
5,480,691 | 3,588,267 | ||||||
Prepaid
Expenses And Other
|
1,947,910 | 1,009,477 | ||||||
Total
Current Assets
|
207,199,269 | 182,023,524 | ||||||
Property,
Plant And Equipment, Net
|
89,686,130 | 87,666,693 | ||||||
Goodwill
|
69,367,928 | 66,157,000 | ||||||
Intangibles
and Other Assets
|
18,169,912 | 18,868,230 | ||||||
$ | 384,423,239 | $ | 354,715,447 | |||||
Liabilities And Shareholders'
Equity
|
||||||||
Current
Liabilities:
|
||||||||
Accounts
Payable
|
$ | 15,149,292 | $ | 17,853,171 | ||||
Income
Tax Payable
|
370,134 | 259,734 | ||||||
Accrued
Salaries And Wages
|
4,894,823 | 5,509,197 | ||||||
Other
Accrued Liabilities
|
15,862,211 | 18,363,073 | ||||||
Customer
Advance Payment
|
12,245,025 | 13,632,734 | ||||||
Billings
In Excess Of Costs And Estimated Earnings On Uncompleted
Contracts
|
2,514,295 | 2,753,532 | ||||||
Total
Current Liabilities
|
51,035,780 | 58,371,441 | ||||||
Long-Term
Debt
|
100,000,000 | 100,000,000 | ||||||
Deferred
Income Taxes
|
10,639,928 | 9,232,302 | ||||||
Shareholders'
Equity:
|
||||||||
Common
Stock, $1 Par Value, Shares Authorized, 50,000,000
|
||||||||
Shares
Issued 12,609,160
|
12,609,160 | 12,609,160 | ||||||
Capital
In Excess Of Par Value
|
20,605,664 | 18,241,664 | ||||||
Retained
Earnings
|
191,517,131 | 161,755,340 | ||||||
Accumulated
Other Comprehensive Loss
|
(736,660 | ) | (3,198,159 | ) | ||||
Less
Common Stock Held In Treasury, At Cost (252,638 And 464,944 Shares At
November 30, 2009 And February 28, 2009, Respectively)
|
(1,247,764 | ) | (2,296,301 | ) | ||||
Total
Shareholders' Equity
|
222,747,531 | 187,111,704 | ||||||
$ | 384,423,239 | $ | 354,715,447 |
3
PART I.
FINANCIAL INFORMATION
Item
1. Financial
Statements
THREE
MONTHS ENDED
|
NINE
MONTHS ENDED
|
|||||||||||||||
11/30/09
|
11/30/08
|
11/30/09
|
11/30/08
|
|||||||||||||
(UNAUDITED)
|
(UNAUDITED)
|
(UNAUDITED)
|
(UNAUDITED)
|
|||||||||||||
Net
Sales
|
$ | 81,518,198 | $ | 108,860,233 | $ | 272,167,391 | $ | 312,077,957 | ||||||||
Costs
And Expenses
|
||||||||||||||||
Cost
Of Sales
|
55,804,749 | 79,372,838 | 186,151,862 | 226,844,620 | ||||||||||||
Selling,
General and Administrative
|
10,238,451 | 11,316,621 | 33,751,428 | 32,545,198 | ||||||||||||
Interest
Expense
|
1,728,621 | 1,681,641 | 5,146,184 | 4,484,091 | ||||||||||||
Net
(Gain) Loss On Sale of Property, Plant and Equipment, and Insurance
Proceeds
|
(47,688 | ) | 9,351 | (118,171 | ) | (1,135,868 | ) | |||||||||
Other
Income
|
(82,108 | ) | (314,904 | ) | (463,439 | ) | (1,378,144 | ) | ||||||||
67,642,025 | 92,065,547 | 224,467,864 | 261,359,897 | |||||||||||||
Income
Before Income Taxes
|
13,876,173 | 16,794,686 | 47,699,527 | 50,718,060 | ||||||||||||
Income
Tax Expense
|
5,133,442 | 5,981,668 | 17,937,736 | 18,478,836 | ||||||||||||
Net
Income
|
$ | 8,742,731 | $ | 10,813,018 | $ | 29,761,791 | $ | 32,239,224 | ||||||||
Earnings
Per Common Share
|
||||||||||||||||
Basic
Earnings Per Share
|
$ | 0.71 | $ | 0.89 | $ | 2.43 | $ | 2.66 | ||||||||
Diluted
Earnings Per Share
|
$ | 0.70 | $ | 0.88 | $ | 2.39 | $ | 2.62 | ||||||||
4
PART I.
FINANCIAL INFORMATION
Item
1. Financial
Statements.
NINE
MONTHS ENDED
|
||||||||
11/30/09
|
11/30/08
|
|||||||
(Unaudited)
|
(Unaudited)
|
|||||||
Cash
Flows From Operating Activities:
|
|
|
||||||
Net
Income
|
$ | 29,761,791 | $ | 32,239,224 | ||||
Adjustments
To Reconcile Net Income To Net Cash
|
||||||||
Provided
By Operating Activities:
|
||||||||
Provision
For Doubtful Accounts
|
65,932 | 360,604 | ||||||
Amortization
And Depreciation
|
12,985,567 | 10,558,716 | ||||||
Deferred
Income Tax Expense
|
(464,849 | ) | 3,778,372 | |||||
Net
Gain On Sale Or Insurance Settlement Of Property, Plant &
Equipment
|
(118,171 | ) | (1,135,868 | ) | ||||
Amortization
of Deferred Borrowing Costs
|
229,046 | 204,728 | ||||||
Share-Based
Compensation Expense
|
2,060,335 | 1,597,901 | ||||||
Effects
Of Changes In Assets & Liabilities:
|
||||||||
Accounts
Receivable
|
16,809,276 | (23,322,405 | ) | |||||
Inventories
|
9,809,027 | (3,066,270 | ) | |||||
Prepaid Expenses And Other
|
(923,974 | ) | (448,842 | ) | ||||
Other
Assets
|
21,064 | (94,926 | ) | |||||
Net Change In Billings Related To Costs And Estimated Earnings On
Uncompleted Contracts
|
4,133,108 | (5,528,544 | ) | |||||
Accounts
Payable
|
(2,766,720 | ) | 2,793,946 | |||||
Other Accrued Liabilities And Income Taxes
|
(6,105,709 | ) | 3,444,266 | |||||
Net
Cash Provided By Operating Activities
|
65,495,723 | 21,380,902 | ||||||
Cash
Flows From Investing Activities:
|
||||||||
Proceeds
From Sale Or Insurance Settlement Of Property, Plant, And
Equipment
|
410,445 | 2,489,414 | ||||||
Purchase
Of Property, Plant And Equipment
|
(10,226,133 | ) | (14,631,353 | ) | ||||
Acquisition
Of Subsidiaries, Net Of Cash Acquired
|
(6,899,561 | ) | (95,450,673 | ) | ||||
Net
Cash Used In Investing Activities
|
(16,715,249 | ) | (107,592,612 | ) | ||||
Cash
Flows From Financing Activities:
|
||||||||
Proceeds
From Exercise Of Stock Options and Stock Appreciation
Rights
|
466,117 | 31,242 | ||||||
Tax
Benefits From Exercise of Stock Options and Stock Appreciation
Rights
|
1,677,418 | 72,453 | ||||||
Proceeds
From Long-Term Debt
|
- | 98,000,000 | ||||||
Net
Cash Provided By Financing Activities
|
2,143,535 | 98,103,695 | ||||||
Effect
Of Exchange Rate Changes On Cash
|
(48,226 | ) | (210,935 | ) | ||||
Net
Increase In Cash & Cash Equivalents
|
50,875,783 | 11,681,050 | ||||||
Cash
& Cash Equivalents At Beginning Of Period
|
47,557,711 | 2,226,941 | ||||||
Cash
& Cash Equivalents At End Of Period
|
$ | 98,433,494 | $ | 13,907,991 | ||||
Supplemental
Disclosures
|
||||||||
Cash
Paid For Interest
|
$ | 6,477,139 | $ | 3,273,333 | ||||
Cash
Paid For Income Taxes
|
$ | 15,952,943 | $ | 15,526,438 |
5
AZZ
incorporated
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Summary
of Significant Accounting Policies
1.
|
Basis
of presentation.
|
|
These
interim unaudited condensed consolidated financial statements were
prepared pursuant to the rules and regulations of the Securities and
Exchange Commission (“SEC”). Certain information and footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United
States of America have been condensed or omitted pursuant to the SEC rules
and regulations referred to above. Accordingly, these financial
statements should be read in conjunction with the audited financial
statements and related notes for the fiscal year ended February 28, 2009,
included in the Company’s Annual Report on Form 10-K covering such
period. For purposes of this report, “AZZ”, the “Company”,
“we”, “our”, “us” or similar reference means AZZ incorporated and our
consolidated subsidiaries.
|
|
Our
fiscal year ends on the last day of February and is identified as the
fiscal year for the calendar year in which it ends. For
example, the fiscal year that ended February 28, 2009 is referred to as
fiscal 2009.
|
|
In
the opinion of management of the Company, the accompanying unaudited
consolidated financial statements contain all adjustments (consisting only
of normal recurring adjustments) necessary to present fairly the financial
position of the Company as of November 30, 2009, and the results of its
operations for the three-month and nine-month periods ended November 30,
2009 and 2008, respectively, and cash flows for the nine-month periods
ended November 30, 2009 and 2008. Operating results for the
three and nine months ending November 30, 2009, are not necessarily
indicative of the results that may be expected for the year ending
February 28, 2010.
|
|
In
May 2009 the Financial Accounting Standards Board (“FASB”) issued
Accounting Standard Codification (“ASC”) 855-10 (formerly Statement of
Financial Accounting Standards (SFAS) No. 165), “Subsequent Events,”
which established general accounting standards and disclosure for
subsequent events. We adopted ASC 855-10 during the second
quarter of fiscal 2010. In accordance with ASC 855-10, we have
evaluated subsequent events through the date and time these financial
statements were issued on January 8,
2010.
|
2.
|
Earnings
per share.
|
|
Earnings
per share is based on the weighted average number of shares outstanding
during each period, adjusted for the dilutive effect of stock
awards.
|
6
|
The
following table sets forth the computation of basic and diluted earnings
per share:
|
Three
months ended November 30,
|
Nine
months ended November 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
||||||||||||||||
(In
thousands except share and per share data)
|
||||||||||||||||
Numerator:
Net
income for basic and diluted earnings per common
share
|
$ | 8,743 | $ | 10,813 | $ | 29,762 | $ | 32,239 | ||||||||
Denominator:
Denominator
for basic earnings per common
share –weighted average shares
|
12,333,472 | 12,144,216 | 12,258,716 | 12,138,797 | ||||||||||||
Effect
of dilutive securities:
Employee
and Director stock awards
|
187,762 | 150,776 | 210,026 | 170,997 | ||||||||||||
Denominator
for diluted earnings per common
share
|
12,521,234 | 12,294,992 | 12,468,742 | 12,309,794 | ||||||||||||
Earnings
per share basic and diluted:
|
||||||||||||||||
Basic
earnings per common share
|
$ | .71 | $ | .89 | $ | 2.43 | $ | 2.66 | ||||||||
Diluted
earnings per common share
|
$ | .70 | $ | .88 | $ | 2.39 | $ | 2.62 |
3. Stock-based
Compensation.
During
fiscal 2006, the Company adopted the AZZ incorporated 2005 Long-Term Incentive
Plan (“2005 Plan”). The purpose of the 2005 Plan is to promote the growth and
prosperity of the Company by permitting the Company to grant to its employees
and directors restricted stock, performance awards, stock appreciation rights
(“SARs” or “Stock Appreciation Rights”) and options to purchase Common Stock of
the Company. The 2005 Plan was amended on July 8, 2008. The maximum number of
shares that may be issued under the 2005 Plan is 1 million shares.
On June
1, 2006, 234,160 SARs were issued under the 2005 Plan with an exercise price of
$11.55. As of November 30, 2009, all of these SARs were vested and
exercised. These awards qualified for equity treatment. The weighted
average fair value of SARs granted on June 1, 2006 was determined to be $2.915
based on the following assumptions: risk-free interest rate of 5%, dividend
yield of 0.0%, expected volatility of 27.81% and expected life of 3
years. Compensation expenses related to the June 1, 2006 grants of
$19,000 and $101,000 were recognized during the nine month periods ended
November 30, 2009 and 2008, respectively. As of November 30, 2009, we
had no unrecognized cost related to the June 1, 2006 SAR grants.
On March
1, 2007, 147,740 Stock Appreciation Rights were awarded under the 2005 Plan with
an exercise price of $19.88. These Stock Appreciation Rights have a three year
cliff vesting schedule, but may vest early if accelerated vesting provisions in
the 2005 Plan are met and qualify for equity treatment. The weighted average
fair value of SARs granted on March 1, 2007, was determined to be $5.535 based
on the following assumptions: risk-free interest rate of 5%, dividend yield of
0.0%, expected volatility of 29.52% and expected life of 3 years. As
of November 30, 2009, 129,780 SARs were outstanding due to the accelerated
vesting of 17,960 SARs as a result of the retirement of two directors and three
employees. Compensation expense related to the March 1, 2007 grants of $78,000
and $167,000 were recognized during the nine month periods ended November 30,
2009 and 2008, respectively. As of November 30, 2009, we had
unrecognized cost of $26,000 related to the March 1, 2007 SAR
grants.
7
On March
1, 2008, 129,800 Stock Appreciation Rights were awarded under the 2005 Plan with
an exercise price of $35.88. These Stock Appreciation Rights have a three year
cliff vesting schedule, but may vest early if accelerated vesting provisions in
the 2005 Plan are met and qualify for equity treatment under SFAS 123R. The
weighted average fair value of SARs awarded on March 1, 2008, was determined to
be $11.80 based on the following assumptions: risk-free interest rate of
5%, dividend yield of 0.0%, expected volatility of 41.81% and expected life of 3
years. As of November 30, 2009, 121,170 SARs were outstanding due to the
forfeiture of 6,740 SARs and the exercise of 1,890 SARs due to the accelerated
vesting of a retired employee. Compensation expense related to the
March 1, 2008 grants of $169,000 and $989,000 were recognized during the nine
month periods ended November 30, 2009 and 2008 respectively. As of November 30,
2009, we had unrecognized cost of $281,000 related to the March 1, 2008 SAR
grants.
On
September 1, 2008, we implemented the AZZ incorporated Employee Stock Purchase
Plan (the “Plan”). The purpose of the Plan is to allow employees of the Company
to purchase common stock of the Company through accumulated payroll deductions.
Offerings under the Plan have a duration of 24 months. On the first day of an
offering period (the “Enrollment Date”), the participant is granted the option
to purchase shares on each exercise date during the offering period up to 10% of
the participant’s compensation at the lower of 85% of the fair market value of a
share of stock on the Enrollment Date or 85% of the fair market value of a share
of stock on the exercise date. The participant’s right to purchase
stock in the Plan is restricted to no more than $25,000 per calendar
year. Participants may terminate their interest in a given offering,
or a given exercise period, by withdrawing all, but not less than all, of the
accumulated payroll deductions of the account at any time prior to the end of
the offering period. We estimate the shares to be issued on the first
enrollment to be 36,100 shares after estimated forfeitures. The weighted average
fair value of these shares was determined to be $14.69 based on the following
assumptions: risk-free interest rate of 2%, dividend yield of 0.0%,
expected volatility of 50.40% and expected life of 2
years. Compensation expenses in the amount of $199,000 and $37,000
were recognized during the nine month period ended November 30, 2009, and 2008
respectively. As of November 30, 2009, we had unrecognized cost of
$199,000 related to the Plan. In accordance with the Plan, 20,822 and 9,097
shares were issued on March 1, 2009 and September 1, 2009, respectively, to the
enrolled employees. On March 1, 2009, the date of the second
offering, the estimated shares to be issued were 14,019 after estimated
forfeitures. The weighted average fair value of these shares was determined to
be $7.33 based on the following assumptions: risk-free interest rate
of 3%, dividend yield of 0.0%, expected volatility of 50.40% and expected life
of 2 years. Compensation expense in the amount of $39,000 was recognized during
the nine month period ended November 30, 2009. In accordance with the Plan,
5,943 shares were issue on September 1, 2009. As of November 30,
2009, we had unrecognized costs of $64,000 related to the second issue of the
Plan. On September 1, 2009, the date of the third offering, the
estimated shares to be issued were 3,523 after estimated forfeitures. The
weighted average fair value of these shares was determined to be $15.31 based on
the following assumptions: risk-free interest rate of 3.25%, dividend
yield of 0.0%, expected volatility of 54.52% and expected life of 2
years. Compensation expense in the amount of $7,000 was recognized
during the nine month period ended November 30, 2009. As of November 30, 2009,
we had unrecognized costs of $47,000 related to the third issue of the
Plan.
On March
1, 2009, 31,666 shares of Restricted Stock were issued to our key employees
under the 2005 Plan. The Restricted Stock awards have a three year cliff vesting
schedule, but may vest early under accelerated vesting provisions in the 2005
Plan. The market value of a share of our stock was $18.12 on the date of grant.
Compensation expense in the amount of $400,000 was recognized during the nine
month period ended November 30, 2009. The amount of unrecognized cost at
November 30, 2009 was $174,000.
On March
2, 2009, 163,233 Stock Appreciation Rights were awarded under the 2005 Plan with
an exercise price of $18.12. These Stock Appreciation Rights have a three year
vesting schedule, but may vest early if accelerated vesting provisions in the
2005 Plan are met and qualify for equity treatment. The weighted average fair
value of SARs awarded on March 1, 2009, was determined to be $8.08 based on the
following assumptions: risk-free interest rate of 3%, dividend yield of 0.0%,
expected volatility of 46.89% and expected life of 5
years. Compensation expense in the amount of $917,000 was recognized
during the nine month period ended November 30, 2009. As of November
30, 2009, we had unrecognized cost of $402,000 related to the March 1, 2009 SAR
grants.
8
4.
|
Segments.
|
We have
two operating segments as defined in our Annual Report on Form 10-K for the year
ended February 28, 2009. Information regarding operations and assets
by segment is as follows:
Three
Months Ended November 30,
|
Nine
Months Ended November 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited)
|
||||||||||||||||
($
In thousands)
|
||||||||||||||||
Net
Sales:
|
||||||||||||||||
Electrical
and Industrial Products
|
$ | 43,622 | $ | 61,960 | $ | 154,576 | $ | 165,925 | ||||||||
Galvanizing
Services
|
37,896 | 46,900 | 117,591 | 146,153 | ||||||||||||
81,518 | 108,860 | 272,167 | 312,078 | |||||||||||||
Operating
Income (a):
|
||||||||||||||||
Electrical
and Industrial Products
|
9,109 | 10,411 | 31,715 | 28,140 | ||||||||||||
Galvanizing
Services
|
10,537 | 13,125 | 35,634 | 41,961 | ||||||||||||
19,646 | 23,536 | 67,349 | 70,101 | |||||||||||||
General
Corporate Expense (b)
|
4,033 | 5,183 | 14,535 | 15,292 | ||||||||||||
Interest
Expense
|
1,728 | 1,681 | 5,146 | 4,484 | ||||||||||||
Other
(Income) Expense, Net (c)
|
9 | (123 | ) | (32 | ) | (393 | ) | |||||||||
5,770 | 6,741 | 19,649 | 19,383 | |||||||||||||
Income
Before Income Taxes
|
$ | 13,876 | $ | 16,795 | $ | 47,700 | $ | 50,718 | ||||||||
Total
Assets:
|
||||||||||||||||
Electrical
and Industrial Products
|
$ | 133,724 | $ | 170,861 | $ | 133,724 | $ | 170,861 | ||||||||
Galvanizing
Services
|
139,255 | 144,785 | 139,255 | 144,785 | ||||||||||||
Corporate
|
111,444 | 21,637 | 111,444 | 21,637 | ||||||||||||
$ | 384,423 | $ | 337,283 | $ | 384,423 | $ | 337,283 |
(a)
|
Segment
operating income consists of net sales, less cost of sales, specifically
identifiable selling, general and administrative expenses, and other
income and expense items that are specifically identifiable to a
segment.
|
(b)
|
General
Corporate Expense consists of selling, general and administrative expenses
that are not specifically identifiable to a
segment.
|
(c)
|
Other
(income) expense, net includes gains and losses on sale of property, plant
and equipment and other (income) expenses not specifically identifiable to
a segment.
|
5. Warranty
reserves.
A reserve
has been established to provide for the estimated future cost of warranties on a
portion of the Company’s delivered products for our Electrical and Industrial
Segment and is classified within accrued liabilities on the consolidated balance
sheet. Management periodically reviews the reserves and makes
adjustments accordingly. Warranties cover such factors as
non-conformance to specifications and defects in material and
workmanship. The following table shows changes in the warranty
reserves since the end of fiscal 2008:
9
Warranty
Reserve
|
||||
(Unaudited)
|
||||
($
In thousands)
|
||||
Balance
at February 29, 2008
|
$ | 1,732 | ||
Warranty
costs incurred
|
(1,454 | ) | ||
Additions
charged to income
|
1,737 | |||
Balance
at February 28, 2009
|
2,015 | |||
Warranty
costs incurred
|
(1,898 | ) | ||
Additions
charged to income
|
2,667 | |||
Balance
at November 30, 2009
|
$ | 2,784 |
6.
|
Acquisition.
|
On July
31, 2009, AZZ
acquired substantially all of the assets related to Pilot Galvanizing, Inc. in
Poca, West Virginia, and Zinc Partners, LLC in Bristol, Virginia. The
acquisition is a part of the stated AZZ strategy to continue the geographic
expansion of our served market that should provide a basis for continued growth
of the Galvanizing Services Segment of the Company. AZZ has
effectively doubled its network of plants in the last 3 years and continues to
seek out additional expansion opportunities.
On April
1, 2008, AZZ incorporated entered into an Asset Purchase Agreement to acquire
substantially all of the assets of AAA Industries, Inc.
The
following pro forma information is based on the assumption the acquisition of
AAA Industries, Inc. took place on March 1, 2008 for the income statement for
the three month and nine month periods ended November 30, 2009 and
2008.
Three
Months Ended November 30,
|
Nine
Months Ended November 30,
|
|||||||||||||||
2009
|
2008
|
2009
|
2008
|
|||||||||||||
(Unaudited,
$ in Thousands)
|
||||||||||||||||
Net
Sales
|
$ | 81,518 | $ | 108,860 | $ | 272,167 | $ | 316,628 | ||||||||
Net
Income
|
$ | 8,743 | $ | 10,813 | $ | 29,762 | $ | 32,270 | ||||||||
Earnings
Per Common Share:
|
||||||||||||||||
Basic
Earnings Per Share
|
$ | .71 | $ | 0.89 | $ | 2.43 | $ | 2.66 | ||||||||
Diluted
Earnings Per Share
|
$ | .70 | $ | 0.88 | $ | 2.39 | $ | 2.62 |
10
7.
|
Comprehensive
Income.
|
We
consider the Canadian dollar to be the functional currency of our Canadian
subsidiary, Blenkhorn and Sawle (B&S), because it conducts substantially all
of its business in Canadian currency. Canadian assets and liabilities
are translated into United States dollars at exchange rates existing at the
balance sheet date, revenue and expense are translated at weighted average
exchange rates and shareholders' equity and intercompany balances are translated
at historical exchange rates. The foreign currency translation
adjustment is recorded as a separate component of shareholders’ equity and is
included in accumulated other comprehensive income (loss).
Generally
accepted accounting principles require the reporting of comprehensive income in
addition to net income. Comprehensive income is a more inclusive financial
reporting methodology that includes disclosure of certain financial information
that historically has not been recognized in the calculation of net
income. The Company's comprehensive income includes net income and
foreign currency translation adjustments. Comprehensive income for
the three and nine month periods ended November 30, 2009 was $9,233,247 and
$32,223,289, respectively. Comprehensive income was $8,727,560 and
$29,408,066 for the three and nine month periods ended November 30,
2008.
Item
2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
FORWARD LOOKING STATEMENTS
This
Quarterly Report on Form 10-Q may contain “forward-looking statements” within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"). These statements are generally identified by the use of words
such as “anticipate,” “expect,” “estimate,” “intend,” “should,” “may,”
“believe,” and terms with similar meanings. Although the Company
believes that the current views and expectations reflected in these
forward-looking statements are reasonable, those views and expectations, and the
related statements, are inherently subject to risks, uncertainties, and other
factors, many of which are not under the Company’s control. Those
risks, uncertainties, and other factors could cause the actual results to differ
materially from those in the forward-looking statements. Those risks,
uncertainties, and factors include, but are not limited to: the level of
customer demand for and response to products and services offered by the
Company, including demand by the power generation markets, electrical
transmission and distribution markets, the general industrial market, and the
hot dip galvanizing markets; prices and raw material cost, including the cost of
zinc and natural gas, which are used in the hot dip galvanizing process; changes
in economic conditions of the various markets the Company serves, both foreign
and domestic; customer requested delays of shipments; acquisition opportunities
or lack thereof; currency exchange rates, adequacy of financing; availability of
experienced management employees to implement the Company’s growth strategy; a
downturn in market conditions in any industry relating to the products we
inventory or sell or the services that we provide; the effects and duration of
continuing economic recession in the U.S. and other markets in which we operate;
and acts of war or terrorism inside the United States or abroad. The
Company expressly disclaims any obligation to release publicly any updates or
revisions to these forward-looking statements to reflect any change in its views
or expectations. The Company can give no assurances that such forward-looking
statements will prove to be correct.
The
following discussion should be read in conjunction with management’s discussion
and analysis contained in our 2009 Annual Report on Form 10-K, as well as with
the condensed consolidated financial statements and notes thereto included in
this Quarterly Report on Form 10-Q.
11
RESULTS
OF OPERATIONS
We have
two operating segments as defined in our Annual Report on Form 10-K for the year
ended February 28, 2009. Management believes that the most meaningful analysis
of our results of operations is to analyze our performance by
segment. We use revenue by segment and segment operating income to
evaluate our segments. Segment operating income consists of net sales
less cost of sales, specifically identifiable selling, general and
administrative expenses, and other (income) expense items that are specifically
identifiable to a segment. The other (income) expense items included
in segment operating income are generally insignificant. For a
reconciliation of segment operating income to pretax income, see Note 4 to our
quarterly consolidated financial statements included in this
report.
Revenues
Our
backlog was $131.8 million as of November 30, 2009, a decrease of $43.0 million
or 25%, as compared to $174.8 million at February 28, 2009. Our
entire backlog relates to our Electrical and Industrial Products Segment. Our
book-to-ship ratio was .91 to 1 for the third quarter ended November 30, 2009,
as compared to 1.04 to 1 for the same period in the prior
year. Incoming orders for the three and nine month periods ended
November 30, 2009 decreased 35% and 36%, respectively, over the same periods a
year ago. Orders for new and existing projects remained sluggish,
particularly for the domestic market. Many of our customers continue to
delay the start of new capital projects or to complete those projects in
progress. We believe these delays have resulted from reduced demand for
energy, uncertainty in the economy and financial markets, as well as uncertainty
related to potential regulatory changes and the resulting impact on our
customers’ businesses. Growth in demand for our products is expected to
continue over the long-term. Infrastructure investments related to
petrochemical, power generation, power transmission and distribution, bridge and
highway, aging of all municipal and public services, as well as the need to
address environmental concerns, should lead to business
opportunities. International opportunities, while reduced, have not been
as severely impacted as domestic opportunities. Competition has increased
on international opportunities. The timing of these future projects is difficult
to predict. Orders included in the backlog are represented by
contracts and purchase orders that we believe to be firm. The following table
reflects our bookings and shipments on a quarterly basis for the period ended
November 30, 2009, as compared to the same period in the prior fiscal
year.
Backlog
Table
(In
thousands)(Unaudited)
Period
Ended
|
Period
Ended
|
|||||||||
Backlog
|
2/28/09
|
$ | 174,831 |
2/29/08
|
$ | 134,876 | ||||
Bookings
|
70,719 | 106,834 | ||||||||
Shipments
|
95,492 | 99,958 | ||||||||
Backlog
|
5/31/09
|
$ | 150,058 |
5/31/08
|
$ | 141,752 | ||||
Book
to Ship Ratio
|
.74 | 1.07 | ||||||||
Bookings
|
84,458 | 139,084 | ||||||||
Acquired
Backlog
|
- | 13,244 | ||||||||
Shipments
|
95,157 | 103,260 | ||||||||
Backlog
|
8/31/09
|
$ | 139,359 |
8/31/08
|
$ | 190,820 | ||||
Book
to Ship Ratio
|
.89 | 1.35 | ||||||||
Bookings
|
73,993 | 113,280 | ||||||||
Shipments
|
81,518 | 108,860 | ||||||||
Backlog
|
11/30/09
|
$ | 131,834 |
11/30/08
|
$ | 195,240 | ||||
Book
to Ship Ratio
|
.91 | 1.04 |
12
The
following table reflects the breakdown of revenue by segment:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
11/30/2009
|
11/30/2008
|
11/30/2009
|
11/30/2008
|
|||||||||||||
(In
thousands)(Unaudited)
|
||||||||||||||||
Revenue:
|
||||||||||||||||
Electrical
and Industrial Products
|
$ | 43,622 | $ | 61,960 | $ | 154,576 | $ | 165,925 | ||||||||
Galvanizing
Services
|
37,896 | 46,900 | 117,591 | 146,153 | ||||||||||||
Total
Revenue
|
$ | 81,518 | $ | 108,860 | $ | 272,167 | $ | 312,078 |
For the
three and nine-month periods ended November 30, 2009, consolidated revenues were
$81.5 million and $272.2 million, a 25% and 13% decrease, respectively, as
compared to the same periods in fiscal 2009. The Electrical and
Industrial Products Segment contributed 54% and 57% of the Company’s revenues,
respectively, and the Galvanizing Services Segment accounted for the remaining
46% and 43% of the combined revenues, respectively, for the three and nine-month
periods ended November 30, 2009.
Revenues
for the Electrical and Industrial Products Segment decreased $18.3 million, or
30%, for the three-month period ended November 30, 2009, and decreased $11.3
million, or 7%, for the nine-month period ended November 30, 2009, as compared
to the same periods in fiscal 2009. The decreased revenues for the three month
and nine month periods ended November 30, 2009, were the result of lower order
intake for the first and second quarter of the current fiscal year as compared
to the same periods last year.
Revenues
in the Galvanizing Services Segment decreased $9.0 million, or 19%, for the
three-month period ended November 30, 2009, as compared to the same period in
fiscal 2009 and decreased $28.6 million, or 20%, for the nine-month period ended
November 30, 2009, as compared to the same periods in fiscal
2009. Revenues for the three and nine-month periods ended November
30, 2009, were negatively impacted by lower demand levels as well as decreased
selling prices. The volume of steel processed decreased 11% and 13% for the
three and nine months periods ended November 30, 2009, respectively, as compared
to the same periods in the prior year. The average selling price for the three
and nine month periods ended November 30, 2009, decreased 9% and 6%
respectively, as compared to the same periods in the prior year. Historically,
revenues for this segment have closely followed the condition of the industrial
sector of the general economy.
Segment
Operating Income
The
following table reflects the breakdown of total operating income by
segment:
Three
Months Ended
|
Nine
Months Ended
|
|||||||||||||||
11/30/2009
|
11/30/2008
|
11/30/2009
|
11/30/2008
|
|||||||||||||
(In
thousands)(Unaudited)
|
||||||||||||||||
Segment
Operating Income:
|
||||||||||||||||
Electrical
and Industrial Products
|
$ | 9,109 | $ | 10,411 | $ | 31,715 | $ | 28,140 | ||||||||
Galvanizing
Services
|
10,537 | 13,125 | 35,634 | 41,961 | ||||||||||||
Total
Segment Operating Income
|
$ | 19,646 | $ | 23,536 | $ | 67,349 | $ | 70,101 |
Our total
segment operating income decreased 17% for the quarter ended November 30, 2009
to $19.6 million as compared to $23.5 million for the same period in fiscal
2009. For the nine-month period ended November 30, 2009, our total
segment operating income decreased 4% to $67.3 million, as compared to $70.1
million for the same period ended November 30, 2008.
Segment
operating income in the Electrical and Industrial Products Segment decreased 13%
and increased 13% for the three and nine-month periods ended November 30, 2009,
to $9.1 million and $31.7 million, respectively, as compared to $10.4 million
and $28.1 million, respectively, for the same periods in fiscal 2009.
Operating margins were 21% for the three and nine-month periods ended November
30, 2009, as compared to 17% for both the comparable periods in fiscal 2009.
Increased operating margins were achieved for the three and nine month period
ended November 30, 2009 from leverage obtained by favorable pricing, and lower
material costs of commodities.
13
In the
Galvanizing Services Segment, operating income decreased 20% and 15% for the
three and nine-month periods ended November 30, 2009, to $10.5 million and $35.6
million, respectively, as compared to $13.1 million and $42.0 million,
respectively, for the same periods in fiscal 2009. Operating margins were 28%
and 30%, respectively, for the three and nine-month periods ended November 30,
2009, as compared to 28% and 29%, respectively, for the comparable periods in
fiscal 2009.
General
Corporate Expenses
General
corporate expenses, (see Note 4 to consolidated financial statements) not
specifically identifiable to a segment, for the three-month period ended
November 30, 2009, were $4.0 million compared to $5.2 million for the same
period in fiscal 2009. For the nine-month period ended November 30,
2009, general corporate expenses were $14.5 million as compared to $15.3 million
for the comparable period last year. As a percentage of sales, general
corporate expenses were 5% and 5%, respectively, for the three and nine-month
periods ended November 30, 2009, as compared to 5% for the same periods in
fiscal 2009.
Other
(Income) Expense
For the
three-month and nine-month periods ended November 30, 2009, the amounts in other
(income) expense not specifically identifiable with a segment (see Note 4 to
consolidated financial statements) were insignificant.
Interest
Net
interest expense for the three and nine-month periods ended November 30, 2009
increased 3% and 15%, respectively, as compared to the same periods in fiscal
2009 to $1.7 million for the three months and $5.2 million for the nine months
ended November 30, 2009. Interest expense increased for the nine month period
due to higher levels of debt resulting from issuance of $100 million aggregate
principal amount of 6.24% unsecured Senior Notes. The Notes were
issued on March 31, 2008 and therefore the prior year had one less month of
interest expense relating to the Notes than the current year. We had
outstanding long term debt of $100 million as of November 30, 2009 and November
30, 2008. Our long-term debt to equity ratio was .45 to 1 as of
November 30, 2009, as compared to .56 to 1 in the same period in fiscal
2009.
Income
Taxes
The
provision for income taxes reflects an effective tax rate of 37% and 38% for the
three and nine month periods ended November 30, 2009, respectively, and 36% for
both the three and nine-month periods ended November 30, 2008.
LIQUIDITY
AND CAPITAL RESOURCES
We have
historically met our cash needs through a combination of cash flows from
operating activities and bank borrowings. Our cash requirements are generally
for operating activities, capital improvements, debt repayment, letters of
credit and acquisitions. We believe that working capital, funds available under
our credit agreement, and funds generated from operations should be sufficient
to finance anticipated operational activities, capital improvements, and payment
of debt and possible future acquisitions during fiscal 2010.
14
Our
operating activities generated cash flows of approximately $65.5 million for the
nine-month period ended November 30, 2009, and $21.4 million during the same
period in the prior fiscal year. Cash flow from operations for the
nine months ended November 30, 2009 included net income in the amount of $29.8
million, depreciation and amortization in the amount of $13.0 million, and other
adjustments to reconcile net income to net cash in the amount of a $1.8
million. Included in other adjustments were provisions for bad debt,
deferred income taxes, gain or loss on the sale of assets and non-cash
adjustments. Positive cash flow was recognized due to decreased accounts
receivable, inventories and revenues in excess of billings of $16.8 million,
$9.8 million, and $4.1 million, respectively. These positive cash
flow items were offset by decreased accounts payable and other accrued
liabilities in the amounts of $2.8 million, and $6.1 million, respectively, and
an increase in prepaid expenses of $.9 million. The significant decrease in
accrued liabilities was due to the payment of the fiscal 2009 profit sharing
payment in the amount of $6.1 million. Accounts receivable average days
outstanding were 52 days and 51 days, respectively, as of November 30, 2009 and
February 28, 2009.
Cash used
in investing activities during the nine months ended November 30, 2009, was
approximately $10.2 million related to capital improvements. On July 31,
2009, we completed the acquisitions of Zinc Partners, LLC and Pilot Galvanizing,
Inc. for $6.9 million.
Our
working capital was $156.2 million at November 30, 2009, as compared to $123.7
million at November 30, 2008.
On May
25, 2006, we entered into the Second Amended and Restated Credit Agreement by
and among AZZ, Bank of America, N.A. ("Bank of America") and certain other
lenders (including Bank of America) (the “Credit Agreement”), which replaced our
Amended and Restated Revolving and Term Credit Agreement dated as of November 1,
2001. The Credit Agreement provides for a $60 million revolving line
of credit with one lender, Bank of America, maturing on May 25, 2011. This is an
unsecured revolving credit facility, which we used to refinance outstanding
borrowings and is used to provide for working capital needs, capital
improvements, future acquisitions, and letter of credit needs. At November 30,
2009, we had no outstanding debt borrowed against the revolving credit
facility. However, we had letters of credit outstanding in the amount
of $17.2 million, which left approximately $42.8 million of additional credit
available under the revolving credit facility.
See the
description below of our Note Purchase Agreement for a discussion of the
covenants contained in our Credit Agreement.
The
Credit Agreement provides for an applicable margin ranging from .75% to 1.25%
over the Eurodollar Rate and Commitment Fees ranging from .175% to .25%
depending on our Leverage Ratio.
On March
31, 2008, the Company entered into a Note Purchase Agreement (the "Note Purchase
Agreement") pursuant to which the Company issued $100 million aggregate
principal amount of its 6.24% unsecured Senior Notes (the "Notes") due March 31,
2018 through a private placement (the "Note Offering"). Pursuant to
the Note Purchase Agreement, the Company’s payment obligations with respect to
the Notes may be accelerated upon any Event of Default, as defined in the Note
Purchase Agreement.
In
connection with the Note Offering, the Company entered into an amendment to our
Credit Agreement. The Amendment contains the consent of Bank of America to the
Note Offering and amends the Credit Agreement to provide that the Note Offering
will not constitute a default under the Credit Agreement.
15
The Notes
provide for various financial covenants which include a) Minimum Consolidated
Net Worth - Maintain on a consolidated basis net worth equal to at least the sum
of $116.9 million plus 50% of future net income; b) Maximum Ratio of
Consolidated Indebtedness to Consolidated EBITDA – Maintain a ratio of
indebtedness to EBITDA (as defined in the Note Purchase Agreement) not to exceed
3.25:1.00; c) Fixed Charge Coverage Ratio – Maintain on a
consolidated basis a Fixed Charge Coverage Ratio (as defined in the Note
Purchase Agreement) of at least 2.0:1.0; d) Priority Indebtedness – The Company
will not at any time permit the aggregate amount of all Priority Indebtedness
(as defined in the Note Purchase Agreement) to exceed 10% of Consolidated Net
Worth (as defined in the Note Purchase Agreement). In conjunction
with the Note Offering, the Credit Agreement was amended to reflect the same
financial covenants as the Notes with the exception of the Fixed Coverage Ratio,
which remained at 1.5 to 1. In addition, the Credit Agreement
maintains a maximum expenditure for fixed assets of $20 million per fiscal year.
We were in compliance at November 30, 2009, with all of our debt
covenants.
Our
current ratio (current assets/current liabilities) was 4.06 to 1 at November 30,
2009, as compared to 3.14 to 1 at November 30, 2008. Our long-term
debt as a percentage of shareholders’ equity ratio was .45 to 1 at November 30,
2009.
We have
not experienced a significant impact on our operations from increases in general
inflation. We have exposure to commodity price increases in both
segments of our business, primarily copper, aluminum and steel in the Electrical
and Industrial Products Segment, and zinc and natural gas in the Galvanizing
Services Segment. We attempt to minimize these increases through
escalation clauses in customer contracts for copper, aluminum and steel, when
market conditions allow, and protective caps and fixed contract purchases on
zinc. In addition to these measures, we attempt to recover other cost
increases through improvements to our manufacturing process and through
increases in prices where competitively feasible. Many economists predict
increased inflation in coming years due to U.S. and international monetary
policy, and there is no assurance that inflation will not impact our business in
the future.
OFF
BALANCE SHEET TRANSACTIONS AND RELATED MATTERS
Other
than operating leases discussed below, there are no off-balance sheet
transactions, arrangements, obligations (including contingent obligations), or
other relationships with unconsolidated entities or other persons that have, or
may have, a material effect on financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources of the Company.
CONTRACTUAL
COMMITMENTS
Leases
We lease
various facilities under non-cancelable operating leases with an initial term in
excess of one year. The future minimum payments required under these operating
leases as of November 30, 2009, are summarized in the table below under “Summary
of Commitments.”
Commodity
pricing
In the
Electrical and Industrial Products Segment, we have exposure to commodity
pricing for copper, aluminum and steel. Because the Electrical and Industrial
Products Segment does not commit contractually to minimum volumes, increases in
price for these items are normally managed through escalation clauses in
customer contracts, although during continuing difficult market conditions these
escalation clauses may not be obtainable.
In the
Galvanizing Services Segment, we utilize contracts with our zinc suppliers that
include protective caps to guard against rising zinc prices. We also
secure firm pricing for natural gas supplies with individual utilities when
possible. There are no contracted volume purchase commitments
associated with the natural gas or zinc agreements. Management
believes these agreements ensure adequate supplies and partially offset exposure
to commodity price swings.
16
Other
At
November 30, 2009, we had outstanding letters of credit in the amount of $17.2
million. These letters of credit are issued, in lieu of performance
and bid bonds, to a portion of our customers to cover any potential warranty
costs that the customer might incur. In addition, as of November 30,
2009, a warranty reserve in the amount of $2.8 million has been established to
offset any future warranty claims.
Summary
of Commitments
The
following summarizes our operating leases, long-term debt and interest expense
for the next five years.
Fiscal
Year
|
Operating
Leases
|
Long-Term
Debt
|
Interest
on Long- Term Debt
|
Total
|
||||||||||||
(In
thousands) (Unaudited)
|
||||||||||||||||
2010
|
$ | 791 | $ | - | $ | - | $ | 791 | ||||||||
2011
|
3,972 | - | 6,240 | 10,212 | ||||||||||||
2012
|
3,318 | - | 6,240 | 9,558 | ||||||||||||
2013
|
2,869 | 14,286 | 5,794 | 22,949 | ||||||||||||
2014
|
2,568 | 14,286 | 4,903 | 21,757 | ||||||||||||
Thereafter
|
13,647 | 71,428 | 11,143 | 96,218 | ||||||||||||
Total
|
$ | 27,165 | $ | 100,000 | $ | 34,320 | $ | 161,485 |
CRITICAL
ACCOUNTING POLICIES AND ESTIMATES
The
preparation of the consolidated financial statements requires us to make
estimates that affect the reported value of assets, liabilities, revenues and
expenses. Our estimates are based on historical experience and various other
factors that we believe are reasonable under the circumstances and form the
basis for our conclusions. We continually evaluate the information used to make
these estimates as business and economic conditions change. Accounting policies
and estimates considered most critical are allowances for doubtful accounts,
accruals for contingent liabilities, revenue recognition, impairment of
long-lived assets, identifiable intangible assets and goodwill, accounting for
income taxes, and stock options and stock appreciation rights. Actual results
may differ from these estimates under different assumptions or
conditions. The development and selection of the critical accounting
policies and the related disclosures below have been reviewed with the Audit
Committee of the Board of Directors. More information regarding significant
accounting policies can be found in Note 1 of the Notes to Annual Consolidated
Financial Statements.
Allowance for Doubtful
Accounts- The carrying value of our accounts receivable is continually
evaluated based on the likelihood of collection. An allowance is maintained for
estimated losses resulting from our customer’s inability to make required
payments. The allowance is determined by historical experience of uncollected
accounts, the level of past due accounts, overall level of outstanding accounts
receivable, information about specific customers with respect of their inability
to make payments and future expectations of conditions that might impact the
collectibility of accounts receivable. If the financial condition of our
customers were to deteriorate, resulting in an impairment of their ability to
make payments, additional allowances may be required.
17
Accruals for Contingent
Liabilities- The amounts we record for estimated claims, such as self
insurance programs, warranty, environmental, and other contingent liabilities,
requires us to make judgments regarding the amount of expenses that will
ultimately be incurred. We use past history and experience, as well as other
specific circumstances surrounding these claims in evaluating the amount of
liability that should be recorded. Actual results may be different than what we
estimate.
Revenue Recognition-
Revenue is recognized for the Electrical and Industrial Products Segment upon
transfer of title and risk to customers, or based upon the percentage of
completion method of accounting for electrical products built to customer
specifications under long term contracts. We recognize revenue for
the Galvanizing Services Segment upon completion of the galvanizing process
performed on the customers’ material or shipment of this material. Revenue for
the Galvanizing Service Segment is typically recognized at completion of the
service unless we specifically agree with the customer to hold its material for
a predetermined period of time after the completion of the galvanizing process
and, in that circumstance, we invoice and recognize revenue upon shipment.
Customer advanced payments presented in the balance sheet arise from advanced
payments received from our customers prior to shipment of the product and are
not related to revenue recognized under the percentage of completion
method. The extent of progress for revenue recognized using the
percentage of completion method is measured by the ratio of contract costs
incurred to date to total estimated contract costs at
completion. Contract costs include direct labor and material, and
certain indirect costs. Selling, general and administrative costs are
charged to expense as incurred. Provisions for estimated losses, if any, on
uncompleted contracts are made in the period in which such losses are able to be
determined. The assumptions made in determining the estimated cost could differ
from actual performance resulting in a different outcome for profits or losses
than anticipated.
Impairment of Long-Lived
Assets, Identifiable Intangible Assets and Goodwill - We record
impairment losses on long-lived assets, including identifiable intangible
assets, when events and circumstances indicate that the assets might be impaired
and the undiscounted projected cash flows associated with those assets are less
than the carrying amounts of those assets. In those situations, impairment
losses on long-lived assets are measured based on the excess of the carrying
amount over the asset’s fair value, generally determined based upon discounted
estimates of future cash flows. A significant change in events, circumstances or
projected cash flows could result in an impairment of long-lived assets,
including identifiable intangible assets. An annual impairment test of goodwill
is performed in the fourth quarter of each fiscal year. The test is
performed based upon the December balance sheet for the current fiscal
year. The test is calculated using the anticipated future cash flows after tax
from our operating segments. Based on the present value of the future cash
flows, we will determine whether impairment may exist. A significant
change in projected cash flows or cost of capital for future years could result
in an impairment of goodwill in future years. Variables impacting future cash
flows include, but are not limited to, the level of customer demand for and
response to products and services we offer to the power generation market, the
electrical transmission and distribution markets, the general industrial market
and the hot dip galvanizing market; changes in economic conditions of these
various markets; raw material and natural gas costs; and availability of
experienced labor and management to implement our growth
strategies.
Accounting for Income Taxes
- The objectives of accounting for income taxes are to
recognize the amount of taxes payable or refundable for the current year and
deferred tax liabilities and assets for the future tax consequences of events
that have been recognized in our financial statements or tax
returns. We also reduce deferred tax assets by a valuation allowance
if it is more likely than not that some portion or all of the deferred tax asset
will not be realized. Developing our provision for income taxes requires
significant judgment and expertise in federal and state income tax laws,
regulations and strategies, including the determination of deferred tax assets
and liabilities and, if necessary, any valuation allowances that may be required
for deferred tax assets. Our judgments and tax strategies are subject
to audit by various taxing authorities.
18
Stock Options and Stock
Appreciation Rights - Our employees and directors are periodically
granted stock options or Stock Appreciation Rights by the Compensation Committee
of the Board of Directors. We measure the compensation cost of all
employee stock-based compensation awards based on the grant-date fair value of
those awards and that cost is recorded as compensation expense over the period
during which the employee is required to perform service in exchange for the
award (generally over the vesting period of the award).
The
valuation of stock based compensation awards is complex in that there are a
number of variables included in the calculation of the value of the
award:
|
·
|
Volatility
of our stock price
|
|
·
|
Expected
term of the option
|
|
·
|
Expected
dividend yield
|
|
·
|
Risk-free
interest rate over the expected
term
|
|
·
|
Expected
forfeitures
|
We have
elected to use a Black-Scholes pricing model in the valuation of our stock
options and stock appreciation rights.
These
variables are developed using a combination of our internal data with respect to
stock price volatility and exercise behavior of option holders and information
from outside sources. The development of each of these variables
requires a significant amount of judgment. Changes in the values of
the above variables would result in different option valuations and, therefore,
different amounts of compensation cost.
RECENT
ACCOUNTING PRONOUNCEMENTS
In March
2009, the Company adopted ASC 805-10 (formerly SFAS 141R), “Business Combinations” ,
which continues the evolution toward fair value reporting and significantly
changes the accounting for acquisitions that closed beginning in 2009, both at
the acquisition date and in subsequent periods. In April 2009, the FASB amended
the guidance to clarify the accounting for assets acquired and liabilities
assumed arising from contingencies. The new guidance retains the
fundamental principles of the purchase method of accounting for business
combinations; however, they require several changes in the way the assets and
liabilities are recognized in an acquisition. All assets acquired and
liabilities assumed, excluding contingent consideration, are recognized at the
acquisition-date fair value with limited exceptions. Acquisition
related costs, including due diligence fees, are required to be expensed. New
accounting concepts and valuation complexities are introduced and many of the
changes have the potential to generate greater earnings volatility after an
acquisition. We applied the new accounting requirements to our most recent
acquisition on July 31, 2009 and the impact for that acquisition was not
material. The effect of the new requirements on the Company’s results of
operations and financial condition will depend on the nature and size of future
acquisitions.
The
Company adopted the pending provisions of ASC 820 (formerly SFAS No. 157),
“Fair Value
Measurements”, in March 2009. ASC 820 defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The adoption of ASC 820 did not have a material effect
on the Company’s results of operations and financial position.
Also in
March 2009, the Company adopted the amendments to ASC 815 which require, among
other things, enhanced disclosure about the volume and nature of derivative and
hedging activities and a tabular summary showing the fair value of derivative
instruments included in the statement of financial position and statement of
operations. In addition the amendment requires expanded disclosure of
contingencies included in derivative instruments related to credit risk. The
adoption of this new guidance did not have an effect on the Company’s financial
statements.
19
In April
2009, the FASB issued new accounting guidance ASC 820-10-50 (formerly FSP 107-1 and APB 28-1,
Interim Disclosures about Fair Value of Financial Instruments) that
expands to interim periods the existing annual requirement to disclose the fair
value of financial instruments that are not reflected on the balance sheet at
fair value. The new guidance could potentially require additional disclosures in
interim periods after the Company’s fiscal year ending 2010. The Company does not
expect that this new guidance will have an impact on its financial
statements.
In April
2009, the FASB issued ASC 820-10-65, (formerly FSP FAS 157-4, Determining Fair Value When the
Volume and Level of Activity for the Asset or Liability Have Significantly
Decreased and Identifying Transactions That Are Not Orderly). ASC
820-10-65 provides additional guidance on estimating fair value when the volume
and level of transaction activity for an asset or liability have significantly
decreased in relation to normal market activity for the asset or
liability. The new guidance requires additional disclosures regarding
fair value in interim and annual reports. It is effective for interim and annual
periods ending after June 15, 2009. The adoption of this guidance did not have a
material impact on the Company’s financial statements.
In May
2009 the FASB issued ASC Topic 855, “Subsequent Events,” which
establishes general standards of accounting for and disclosure of events that
occur after the balance sheet date but before financial statements are issued or
are available to be issued. Although there is new terminology, the standard is
based on the same principles as those that currently exist in the auditing
standards. The standard, which includes a new required disclosure of the date
through which an entity has evaluated subsequent events, is effective for
interim or annual periods ending after June 15, 2009. The adoption of this new
guidance has not had a material effect on the financial reports of the Company.
See “Basis of Presentation” above.
In June
2009, the FASB issued the FASB Accounting Standards Codification
(“Codification”). The Codification is the new source of authoritative U.S.
generally accepted accounting principles (“GAAP”) and is effective for financial
statements issued for periods ending after September 15, 2009. The Codification
reorganizes current GAAP into a topical format that eliminates the previous GAAP
hierarchy. The codification superseded all existing non-SEC
accounting and reporting standards. The Company adopted this new
standard effective September 15, 2009, and it did not have a material impact on
our financial condition, results of operations or cash flows.
Item 3. Quantitative and Qualitative Disclosures About
Market Risk.
Market
risk affecting our operations results primarily from changes in interest rates
and commodity prices. We have only limited involvement with derivative financial
instruments and are not a party to any leveraged derivatives.
20
In the
Electrical and Industrial Products Segment, we have exposure to commodity
pricing for copper, aluminum, and steel. Increases in price for these
items are normally managed through escalation clauses in our customer’s
contracts, although during continuing difficult market conditions customers may
resist these escalation clauses. We manage our exposures to commodity
prices, primarily zinc used in our Galvanizing Services Segment, by utilizing
agreements with zinc suppliers that include protective caps and fixed contracts
to guard against escalating commodity prices. We believe these
agreements ensure adequate supplies and partially offset exposure to commodity
price swings.
The
Company has exposure to foreign currency exchange related to our Canadian
operations.
We do not
believe that a hypothetical change of 10% of the interest rate currently in
effect or a change of 10% of commodity prices would have a significantly adverse
effect on our results of operations, financial position, or cash flows as long
as we are able to pass along the increases in commodity prices to our customers.
To date, we have been successful in passing along the rising cost of commodities
without an adverse effect on our results of operations. However, there can be no
assurance that either we can pass along all increases to our customers or that
interest rates or commodity prices will not change in excess of the 10%
hypothetical amount. If either event occurs, it could have an adverse effect on
our results of operations, financial position, and cash flows.
Item 4. Controls and Procedures.
We
performed an evaluation, under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief Financial Officer,
of the effectiveness of the design and operation of our disclosure controls and
procedures pursuant to Exchange Act Rules 13a-15 and 15d-15 as of the end of the
period covered by this report. Based upon that evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that our disclosure
controls and procedures were effective as of that date to ensure that
information required to be disclosed by us in our reports filed or submitted
under the Exchange Act is (a) accumulated and communicated to our management,
including our principal executive and financial officers, as appropriate to
allow timely discussions regarding required disclosure and (b) recorded,
processed, summarized and reported within the time periods specified in the
SEC’s rules and forms.
There
have been no significant changes in our internal control over financial
reporting during the period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.
While we
believe that our existing disclosure controls and procedures have been effective
to accomplish their objectives, we intend to continue to examine, refine and
document our disclosure controls and procedures and to monitor ongoing
developments in this area. Because of the inherent limitations in all control
systems, no evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within our company have been
detected.
PART
II. OTHER INFORMATION
Item 1. Legal Proceedings.
We are
involved from time to time in various suits and claims arising in the normal
course of business. In management’s opinion, the ultimate resolution
of these matters will not have a material effect on our financial position or
results of operations.
21
Item 1A. Risk Factors.
There
have been no material changes in the risk factors disclosed under Part I, Item
1A of our Annual Report on Form 10-K for the year ended February 28,
2009.
Item 2. Unregistered Sales
of Equity Securities and Use of Proceeds. None.
Item 3. Defaults Upon
Senior Securities. None.
Item 4. Submissions of
Matters to a Vote of Security
Holders. None.
Item 5. Other
Information. None.
Item
6. Exhibits.
Exhibits
Required by Item 601 of Regulation S-K.
A list of
the exhibits required by Item 601 of Regulation S-K and filed as part of this
report is set forth in the Index to Exhibits on page 23, which immediately
precedes such exhibits.
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AZZ
incorporated
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|
(Registrant)
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|
Date: 01/08/10
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/s/
Dana Perry
|
Dana
Perry, Senior Vice President for Finance
Principal
Financial Officer
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22
EXHIBIT INDEX
EXHIBIT
NUMBER
|
DESCRIPTION
OF EXHIBIT
|
3(1)
|
Articles
of Incorporation, and all amendments thereto (incorporated by reference to
the Annual Report on Form 10-K filed by Registrant for the fiscal year
ended February 28, 1981).
|
3(2)
|
Articles
of Amendment to the Article of Incorporation of the Registrant dated June
30, 1988 (incorporated by reference to the Annual Report on
Form 10-K filed by Registrant for the fiscal year ended February 29,
2000).
|
3(3)
|
Articles
of Amendment to the Articles of Incorporation of the Registrant dated
October 25, 1999 (incorporated by reference to the Annual
Report on Form 10-K filed by Registrant for the fiscal year ended February
29, 2000).
|
3(4)
|
Articles
of Amendment to the Articles of Incorporation dated July 17, 2000
(incorporated by reference to the Quarterly Report Form 10-Q filed by
Registrant for the quarter ended November 30, 2000).
|
3(5)
|
Amended
and Restated Bylaws of AZZ incorporated (incorporated by reference to the
Exhibit 3(1) to the Current Report Form 8-K filed by the Registrant on
November 27, 2007).
|
3(6)
|
Amended
and Restated Bylaws of AZZ incorporated (incorporated by reference to the
Exhibit 3(1) to the Current Report Form 8-K filed by the Registrant on
April 3, 2009).
|
3(7)
|
Articles
of Amendment to the Articles of Incorporation of the Registrant dated July
14, 2009. Filed Herewith.
|
4
|
Form
of Stock Certificate for the Company’s $1.00 par value Common Stock
(incorporated by reference to the Quarterly Report Form 10-Q filed by
Registrant November 30, 2000).
|
10(1)
|
Second
Amended and Restated Credit Agreement with Bank of America, N.A., dated
May 25, 2006 (incorporated by reference to Exhibit 10(1) of the Form 8-K
filed by the Registrant on May 26, 2006).
|
10(2)
|
First
Amendment to Second Amended and Restated Credit Agreement with Bank of
America, N.A., dated February 28, 2007 (incorporated by reference to
Exhibit 10(1) of the Form 8-K filed by the Registrant on March 1,
2007).
|
10(3)
|
Second
Amendment and Consent to Second Amendment and Restated Credit Agreement
dated March 31, 2008, by and between AZZ incorporated and Bank of America,
N.A. (incorporated by reference to Exhibit 10(3) of the Form 8-K filed by
the Registrant on April 2, 2008).
|
10(4)
|
Note
Purchase Agreement dated March 31, 2008, by and among AZZ incorporated and
the purchasers listed therein (incorporated by reference to Exhibit 10(1)
of the Form 8-K filed by the Registrant on April 2,
2008).
|
10(5)
|
AZZ
incorporated Amended and Restated 2005 Long-Term Incentive Plan
(incorporated by reference to Appendix A of the Proxy Statement for the
2008 Annual Shareholders Meeting).
|
10(6)
|
AZZ
incorporated Employee Stock Purchase Plan (incorporated by reference to
Appendix B of the Proxy Statement for the 2008 Annual Shareholders
Meeting).
|
10(7)
|
1999
Independent Director Share Ownership Plan as Approved on January 19, 1999
and As Amended on September 22, 1999 (incorporated by reference to Exhibit
10(22) of the Annual Report on Form 10-K filed by Registrant for the
fiscal year ended February 28, 2001).
|
10(8)
|
2000
Advisory Director Share Ownership Plan as Approved on March 28, 2000
(incorporated by reference to Exhibit 10(23) of the Annual Report on Form
10-K filed by Registrant for the fiscal year ended February 28,
2001).
|
10(9)
|
AZZ
incorporated 2001 Long-Term Incentive Plan (incorporated by reference to
Exhibit A of the Proxy Statement for the 2001 Annual Shareholders
Meeting).
|
10(10)
|
AZZ
incorporated 2005 Management Incentive Bonus Plan (incorporated by
reference to Exhibit 10(20) to the Annual Report on Form 10-K filed by the
Registrant for the fiscal year ended February 28,
2002).
|
10(11)
|
2002
Plan for the Annual Grant of Stock Options to Independent Directors of AZZ
incorporated (incorporated by reference to Exhibit 10(27) to the Quarterly
Report Form 10-Q filed by the Registrant for the quarter ended November
30, 2002).
|
10(12)
|
AZZ
incorporated Fiscal Year 2005 Stock Appreciation Rights Plan for Directors
(incorporated by reference to Exhibit 10(53) to the Quarterly Report Form
10-Q filed by the Registrant for the quarter ended November 30,
2004).
|
10(13)
|
AZZ
incorporated Fiscal Year 2005 Stock Appreciation Rights Plan for Key
Employees (incorporated by reference to Exhibit 10(54) to the Quarterly
Report Form 10-Q filed by the Registrant for the quarter ended November
30, 2004).
|
10(14)
|
AZZ
incorporated 2005 Independent Director Compensation Plan (incorporated by
reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the
Registrant on July 14, 2005).
|
Chief
Executive Officer Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated January 8, 2010. Filed
Herewith.
|
|
Chief
Financial Officer Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated January 8, 2010. Filed
Herewith.
|
|
Chief
Executive Officer Certificate pursuant to 18 U.S.C. Section 1350, as
adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated
January 8, 2010. Filed Herewith.
|
|
Chief
Financial Officer Certificate pursuant to 18 U.S.C. 1350, as adopted
pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated January 8,
2010. Filed Herewith.
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23