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
May 31,
2008
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.)
|
|
|
|
University
Centre I, Suite 200
|
|
|
1300
South University Drive
|
|
|
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.
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).
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 May 31, 2008:
|
Common Stock, $1.00
par value per share
|
|
12,137,216
shares
|
AZZ
incorporated
INDEX
|
|
|
PAGE
NO.
|
PART
I.
|
|
FINANCIAL
INFORMATION
|
|
Item
1.
|
|
Condensed
Financial Statements
|
|
|
|
|
3
|
|
|
|
4
|
|
|
|
5
|
|
|
|
6-10
|
Item
2.
|
|
|
10-18
|
Item
3.
|
|
|
18
|
Item
4.
|
|
|
19
|
|
|
|
|
PART
II.
|
|
|
|
Item
1.
|
|
Legal
Proceedings
|
19
|
Item
1A.
|
|
Risk
Factors.
|
19
|
Item
2.
|
|
Unregistered
Sales of Equity Securities and Use of Proceeds.
|
19
|
Item
3.
|
|
Defaults
Upon Senior Securities.
|
19
|
Item
4.
|
|
Submission
of Matters to a Vote of Security Holders.
|
19
|
Item
5.
|
|
Other
Information.
|
19
|
Item
6.
|
|
Exhibits.
|
19
|
|
|
|
|
|
|
SIGNATURES
|
20
|
|
|
|
|
|
|
|
21
|
PART I.
FINANCIAL INFORMATION
Item
1.
Financial
Statements
|
|
05/31/08
|
|
|
02/29/08
|
|
ASSETS
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS
|
|
$
|
14,217,001
|
|
|
$
|
2,226,941
|
|
ACCOUNTS
RECEIVABLE (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS)
|
|
|
66,968,540
|
|
|
|
38,901,577
|
|
INVENTORIES
|
|
|
|
|
|
|
|
|
RAW
MATERIAL
|
|
|
35,907,291
|
|
|
|
26,554,997
|
|
WORK-IN-PROCESS
|
|
|
13,847,913
|
|
|
|
14,182,685
|
|
FINISHED
GOODS
|
|
|
1,956,455
|
|
|
|
2,688,786
|
|
COSTS
AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED
CONTRACTS
|
|
|
14,631,856
|
|
|
|
13,044,076
|
|
DEFERRED
INCOME TAXES
|
|
|
4,625,330
|
|
|
|
4,391,398
|
|
PREPAID
EXPENSES AND OTHER
|
|
|
2,999,222
|
|
|
|
1,004,383
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT ASSETS
|
|
|
155,153,608
|
|
|
|
102,994,843
|
|
|
|
|
|
|
|
|
|
|
PROPERTY,
PLANT AND EQUIPMENT, NET
|
|
|
83,170,898
|
|
|
|
48,284,910
|
|
GOODWILL
|
|
|
56,536,045
|
|
|
|
40,962,104
|
|
OTHER
ASSETS
|
|
|
18,913,514
|
|
|
|
1,077,423
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
313,774,065
|
|
|
$
|
193,319,280
|
|
LIABILITIES AND
SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
ACCOUNTS
PAYABLE
|
|
$
|
21,133,012
|
|
|
$
|
16,035,932
|
|
INCOME
TAX PAYABLE
|
|
|
5,051,044
|
|
|
|
706,966
|
|
ACCRUED
SALARIES AND WAGES
|
|
|
3,285,879
|
|
|
|
4,919,804
|
|
OTHER
ACCRUED LIABILITIES
|
|
|
14,661,652
|
|
|
|
15,119,610
|
|
CUSTOMER
ADVANCE PAYMENT
|
|
|
4,111,802
|
|
|
|
2,115,330
|
|
BILLINGS
IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED
CONTRACTS
|
|
|
3,090,635
|
|
|
|
3,798,179
|
|
|
|
|
|
|
|
|
|
|
TOTAL
CURRENT LIABILITIES
|
|
|
51,334,024
|
|
|
|
42,695,821
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM
DEBT DUE AFTER ONE YEAR
|
|
|
100,000,000
|
|
|
|
-
|
|
DEFERRED
INCOME TAXES
|
|
|
5,314,254
|
|
|
|
4,466,834
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS'
EQUITY:
|
|
|
|
|
|
|
|
|
COMMON
STOCK, $1 PAR VALUE, SHARES AUTHORIZED-25,000,000, SHARES ISSUED
12,609,160
|
|
|
12,609,160
|
|
|
|
12,609,160
|
|
|
|
|
|
|
|
|
|
|
CAPITAL
IN EXCESS OF PAR VALUE
|
|
|
17,175,819
|
|
|
|
16,369,938
|
|
RETAINED
EARNINGS
|
|
|
129,671,680
|
|
|
|
119,549,115
|
|
LESS
COMMON STOCK HELD IN TREASURY, AT COST (471,944 SHARES AT MAY 31, 2008 AND
480,188 SHARES AT FEBRUARY 29, 2008)
|
|
|
(2,330,872
|
)
|
|
|
(2,371,588
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL
SHAREHOLDERS' EQUITY
|
|
|
157,125,787
|
|
|
|
146,156,625
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
313,774,065
|
|
|
$
|
193,319,280
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
PART I.
FINANCIAL INFORMATION
Item
1.
Financial
Statements
|
|
THREE
MONTHS ENDED
|
|
|
|
5/31/08
|
|
|
5/31/07
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
|
|
|
|
|
|
NET
SALES
|
|
$
|
99,958,257
|
|
|
$
|
75,377,033
|
|
|
|
|
|
|
|
|
|
|
COSTS
AND EXPENSES
|
|
|
|
|
|
|
|
|
COST
OF SALES
|
|
|
73,689,403
|
|
|
|
56,208,362
|
|
SELLING,
GENERAL AND ADMINISTRATIVE
|
|
|
9,856,521
|
|
|
|
12,004,319
|
|
INTEREST
EXPENSE
|
|
|
1,120,788
|
|
|
|
535,124
|
|
NET
(GAIN) LOSS ON SALE OR
INSURANCE SETTLEMENT
OF
PROPERTY, PLANT AND EQUIPMENT
|
|
|
2,607
|
|
|
|
3,363
|
|
OTHER
EXPENSE (INCOME)
|
|
|
(483,767
|
)
|
|
|
(194,773
|
)
|
|
|
|
84,185,552
|
|
|
|
68,556,395
|
|
|
|
|
|
|
|
|
|
|
INCOME
BEFORE INCOME TAXES
|
|
|
15,772,705
|
|
|
|
6,820,638
|
|
INCOME
TAX EXPENSE
|
|
|
5,650,140
|
|
|
|
2,674,183
|
|
|
|
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
10,122,565
|
|
|
$
|
4,146,455
|
|
|
|
|
|
|
|
|
|
|
EARNINGS
PER COMMON SHARE
|
|
|
|
|
|
|
|
|
BASIC
EARNINGS PER SHARE
|
|
$
|
0.83
|
|
|
$
|
0.35
|
|
|
|
|
|
|
|
|
|
|
DILUTED
EARNINGS PER SHARE
|
|
$
|
0.82
|
|
|
$
|
0.34
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
PART I.
FINANCIAL INFORMATION
Item
I.
Financial
Statements
.
|
|
THREE
MONTHS ENDED
|
|
|
|
5/31/08
|
|
|
5/31/07
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
NET
INCOME
|
|
$
|
10,122,565
|
|
|
$
|
4,146,455
|
|
|
|
|
|
|
|
|
|
|
ADJUSTMENTS
TO RECONCILE NET INCOME TO NET CASH
|
|
|
|
|
|
|
|
|
PROVIDED
BY OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
PROVISION
FOR DOUBTFUL ACCOUNTS
|
|
|
97,330
|
|
|
|
(48,671
|
)
|
AMORTIZATION
AND DEPRECIATION
|
|
|
3,038,930
|
|
|
|
1,946,882
|
|
DEFERRED
INCOME TAX BENEFIT
|
|
|
613,488
|
|
|
|
(172,089
|
)
|
NET
(GAIN) LOSS ON SALE OR INSURANCE SETTLEMENT OF PROPERTY, PLANT &
EQUIPMENT
|
|
|
2,607
|
|
|
|
3,363
|
|
NON-CASH
COMPENSATION EXPENSE
|
|
|
752,637
|
|
|
|
389,723
|
|
|
|
|
|
|
|
|
|
|
EFFECTS
OF CHANGES IN ASSETS & LIABILITIES:
|
|
|
|
|
|
|
|
|
ACCOUNTS
RECEIVABLE
|
|
|
(20,204,960
|
)
|
|
|
7,682,689
|
|
INVENTORIES
|
|
|
1,741,741
|
|
|
|
(1,039,924
|
)
|
PREPAID
EXPENSES AND OTHER
|
|
|
(1,895,232
|
)
|
|
|
280,597
|
|
OTHER
ASSETS
|
|
|
(2,010,886
|
)
|
|
|
(39,007
|
)
|
NET
CHANGE IN BILLINGS RELATED TO COSTS AND ESTIMATED
EARNINGS
ON UNCOMPLETED CONTRACTS
|
|
|
(2,295,322
|
)
|
|
|
(2,145,064
|
)
|
ACCOUNTS
PAYABLE
|
|
|
4,543,599
|
|
|
|
(6,425,471
|
)
|
OTHER
ACCRUED LIABILITIES AND INCOME TAXES
|
|
|
3,609,295
|
|
|
|
3,088,211
|
|
|
|
|
|
|
|
|
|
|
NET
CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES
|
|
|
(1,884,208
|
)
|
|
|
7,667,694
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS USED FOR INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
PROCEEDS
FROM SALE OR INSURANCE SETTLEMENT OF PROPERTY, PLANT, AND
EQUIPMENT
|
|
|
4,453
|
|
|
|
90,453
|
|
PURCHASE
OF PROPERTY, PLANT AND EQUIPMENT
|
|
|
(4,753,304
|
)
|
|
|
(2,774,722
|
)
|
ACQUISITION
OF SUBSIDIARIES, NET OF CASH ACQUIRED
|
|
|
(81,470,840
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(86,219,691
|
)
|
|
|
(2,684,269
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
PROCEEDS
FROM EXERCISE OF STOCK OPTIONS
|
|
|
21,506
|
|
|
|
2,980,648
|
|
EXCESS
TAX BENEFITS FROM STOCK OPTIONS EXERCISES
|
|
|
72,453
|
|
|
|
1,909,460
|
|
PAYMENTS
ON REVOLVING LOAN
|
|
|
-
|
|
|
|
(7,500,000
|
)
|
PROCEEDS
FROM LONG TERM DEBT
|
|
|
100,000,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
100,093,959
|
|
|
|
(2,609,892
|
)
|
|
|
|
|
|
|
|
|
|
NET
INCREASE IN CASH & CASH EQUIVALENTS
|
|
|
11,990,060
|
|
|
|
2,373,533
|
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
2,226,941
|
|
|
|
1,703,092
|
|
|
|
|
|
|
|
|
|
|
CASH
& CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
14,217,001
|
|
|
$
|
4,076,625
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURES
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INTEREST
|
|
$
|
62,728
|
|
|
$
|
654,455
|
|
|
|
|
|
|
|
|
|
|
CASH
PAID FOR INCOME TAXES
|
|
$
|
540,802
|
|
|
$
|
686,058
|
|
|
|
|
|
|
|
|
|
|
See
Accompanying Notes to Condensed Consolidated Financial
Statements
|
|
|
|
|
|
|
|
|
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, 2008
included in the Company’s Annual Report on Form 10-K covering such
period. For purposes of the 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 29, 2008 is referred to as
fiscal 2008.
|
|
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 May 31, 2008, and the results of its
operations for the three-month periods ended May 31, 2008 and 2007, and
cash flows for the three-month periods ended May 31, 2008 and
2007.
|
|
Earnings
per share is based on the weighted average number of shares outstanding
during each period, adjusted for the dilutive effect of stock
awards. The shares and earnings per share have been adjusted to
reflect our two-for-one stock split, effected in the form of a share
dividend on May 4, 2007.
|
|
The
following table sets forth the computation of basic and diluted earnings
per share:
|
|
|
Three
months ended May 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(Unaudited)
|
|
|
|
(In
thousands except share and per share data)
|
|
Numerator:
Net
income for basic and diluted earnings per common share
|
|
$
|
10,123
|
|
|
$
|
4,146
|
|
|
|
|
|
|
|
|
|
|
Denominator:
Denominator
for basic earnings per common share –weighted average
shares
|
|
|
12,134,848
|
|
|
|
11,785,073
|
|
Effect
of dilutive securities:
Employee
and Director stock options
|
|
|
154,825
|
|
|
|
239,693
|
|
Denominator
for diluted earnings per common share
|
|
|
12,289,673
|
|
|
|
12,024,766
|
|
|
|
|
|
|
|
|
|
|
Earnings
per share basic and diluted:
|
|
|
|
|
|
|
|
|
Basic
earnings per common share
|
|
$
|
.83
|
|
|
$
|
.35
|
|
Diluted
earnings per common share
|
|
$
|
.82
|
|
|
$
|
.34
|
|
3. Stock-based
Compensation.
On April
7, 2005, the Company implemented Stock Appreciation Rights Plans (the “Plans”)
for its key employees and directors. The purpose of the Plans is to enable the
Company to attract and retain qualified key employees and directors by offering
to them the opportunity to share in increases in the value of the Company to
which they contribute. The Company made grants under the Plans in fiscal 2006.
There were 207,660 fiscal 2006 grants outstanding as of May 31, 2008. The grants
for fiscal 2006 were fully vested on February 29, 2008 and will be paid in cash
during the second quarter ended August 31, 2008. The value of
each vested right will be paid in cash for rights vesting on the Company’s
earnings release date for the fiscal year ended February 29, 2008, and shall be
equal to the excess, if any, (i) of the average of the closing prices of a share
of Common Stock on the New York Stock Exchange for those days on which it trades
during the ninety calendar days immediately following the public release of
financial results for the period ended February 29, 2008, over (ii) the average
of the closing prices of a share of Common Stock on the New York Stock Exchange
for those days on which it trades during the ninety calendar days immediately
following the Company’s year end earnings release date, which was $7.98 per
share for the fiscal 2006 grants. To determine the cash payment, the
excess in the average stock price will be multiplied by the number of Stock
Appreciation Rights granted to each participant. The value of rights vesting
before the normal vesting date will be measured by reference to the price of the
Common Stock during a period at or near the accelerated vesting date. The
Company recognized $4.8 million for compensation expense related to the fiscal
2006 Stock Appreciation Rights Plan prior to February 28, 2008. A
reduction in compensation expense related to the fiscal 2006 Stock Appreciation
Rights Plan in the amount of $.2 million was recognized during the three month
period ended May 31, 2008 in accordance with FAS 123R as these stock
appreciation rights qualify for liability treatment and are marked to market
each reporting period. To date $4.6 million of compensation expense has been
recognized for these Stock Appreciation Rights.
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 maximum number of shares that may be issued under the 2005 Plan
is 500,000 shares. On June 1, 2006, 234,160 SARs were issued under the 2005 Plan
with an exercise price of $11.55. As of May 31, 2008, 209,920 SARs were
outstanding due to the accelerated vesting of 24,240 SARs as a result of the
retirement of two directors and two employees. These awards qualify
for equity treatment in accordance with FAS 123R. These stock appreciation
rights have a three year cliff vesting schedule, but may vest early if
accelerated vesting provisions in the plan are met. 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 expense related to the June 1, 2006 grant was
$392,000 and $152,000 for fiscal 2007 and fiscal 2008, respectively. Additional
compensation in the amount of $38,000 was recognized during the three month
period ended May 31, 2008. As of May 31, 2008, we had unrecognized cost of
$101,000 related to the June 1, 2006 SAR grants.
On March
1, 2007, 147,740 Stock Appreciation Rights were issued 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 plan are met and qualify for equity treatment under SFAS 123R. 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 May 31, 2008, 140,840 SARs were outstanding due to the accelerated vesting
of 6,900 SARs as a result of the retirement of two directors and one employee.
Compensation expense in the amount of $512,000 was recognized during fiscal
2008. Additional compensation expense in the amount of $56,000 was recognized in
the three month period ended May 31, 2008. We had unrecognized cost of $250,000
related to the March 1, 2007 SAR grants as of May 31, 2008.
On March
1, 2008, 129,800 Stock Appreciation Rights were issued 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 plan are met and qualify for equity treatment under SFAS 123R. The weighted
average fair value of SARs granted 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. Compensation expense in the amount of $659,000 was recognized
in the three month period ended May 31, 2008. We had unrecognized cost of
$873,000 related to the March 1, 2008 SAR grants as of May 31,
2008.
We have
two operating segments as defined in our Annual Report on Form 10-K for the year
ended February 29, 2008. Information regarding operations and assets
by segment is as follows:
|
|
Three
Months Ended May 31,
|
|
|
|
2008
|
|
|
2007
|
|
|
|
(unaudited)
|
|
|
|
(In
thousands)
|
|
Net
Sales:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
52,006
|
|
|
$
|
40,873
|
|
Galvanizing
Services
|
|
|
47,952
|
|
|
|
34,504
|
|
|
|
$
|
99,958
|
|
|
$
|
75,377
|
|
|
|
|
|
|
|
|
|
|
Segment
Operating Income (a):
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
7,932
|
|
|
$
|
6,344
|
|
Galvanizing
Services
|
|
|
13,358
|
|
|
|
8,611
|
|
Total
Segment Operating Income
|
|
$
|
21,290
|
|
|
$
|
14,955
|
|
|
|
|
|
|
|
|
|
|
General
Corporate Expense (b)
|
|
$
|
4,558
|
|
|
$
|
7,592
|
|
Interest
Expense
|
|
|
1,121
|
|
|
|
535
|
|
Other
(Income) Expense, Net (c)
|
|
|
(162
|
)
|
|
|
7
|
|
|
|
$
|
5,517
|
|
|
$
|
8,134
|
|
|
|
|
|
|
|
|
|
|
Income
Before Taxes
|
|
$
|
15,773
|
|
|
$
|
6,821
|
|
|
|
|
|
|
|
|
|
|
Total
Assets:
|
|
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
135,565
|
|
|
$
|
111,173
|
|
Galvanizing
Services
|
|
|
154,341
|
|
|
|
79,186
|
|
Corporate
|
|
|
23,868
|
|
|
|
9,228
|
|
|
|
$
|
313,774
|
|
|
$
|
199,587
|
|
|
(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 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
2007:
|
|
Warranty
Reserve
|
|
|
|
(Unaudited)
|
|
|
|
($
In thousands)
|
|
|
|
|
|
Balance
at February 28, 2007
|
|
$
|
1,578
|
|
Warranty
costs incurred
|
|
|
(1,034
|
)
|
Additions
charged to income
|
|
|
1,188
|
|
Balance
at February 29, 2008
|
|
$
|
1,732
|
|
Warranty
costs incurred
|
|
|
(179
|
)
|
Additions
charged to income
|
|
|
209
|
|
Balance
at May 31, 2008
|
|
$
|
1,762
|
|
On March
31, 2008, AZZ incorporated entered into an Asset Purchase Agreement to acquire
substantially all of the assets of AAA Industries, Inc. The purchase price of
the transaction was approximately $81,500,000, subject to adjustment as more
fully described in the Asset Purchase Agreement filed on our current report on
Form 8-K on April 2, 2008. The purchased assets included six galvanizing plants
(three plants located in Illinois, one plant located in Indiana, one plant
located in Minnesota and one plant located in Oklahoma) and related equipment
and supplies.
The
following table summarizes the preliminary purchase price allocation as of the
date of acquisition:
Current
Assets
|
|
$
|
18,086
|
|
Property
and Equipment
|
|
$
|
32,934
|
|
Intangible
Assets
|
|
$
|
16,070
|
|
Goodwill
|
|
$
|
15,574
|
|
Total
Assets
|
|
$
|
82,664
|
|
Current
Liabilities
|
|
$
|
(1,193
|
)
|
Cost
of Acquisition, Net of Cash Received
|
|
$
|
81,471
|
|
Of the
$16.1 million of intangible assets acquired, $1.8 million, $1.2 million and
$13.1 million was assigned to non-compete agreements, trade names and customer
relationships, respectively. These intangible assets are being amortized and
have a weighted average life of 13.8 years. Goodwill of $15.6 million arising
from the acquisition will be allocated to the Galvanizing Services Segment and
will be deductible for income tax purposes.
The
following pro forma information is based on the assumption the acquisition took
place on March 1, 2007 for the income statement for the three month period ended
May 31, 2007 and 2008.
|
|
Unaudited
5/31/08
|
|
|
Unaudited
5/31/07
|
|
|
|
|
|
|
|
|
Net
Sales
|
|
$
|
104,508,163
|
|
|
$
|
89,179,827
|
|
|
|
|
|
|
|
|
|
|
Net
Income
|
|
|
10,152,950
|
|
|
|
5,103,876
|
|
|
|
|
|
|
|
|
|
|
Earnings
Per Common Share
|
|
|
|
|
|
|
|
|
Basic
Earnings Per Share
|
|
|
0.84
|
|
|
|
0.43
|
|
Diluted
Earnings Per Share
|
|
|
0.83
|
|
|
|
0.42
|
|
7.
Subsequent events.
On June
26, 2008, we announced the signing of an asset purchase agreement with Chriscot
Holdings, Ltd, a privately held company, to acquire substantially all of the
assets related to Blenkhorn and Sawle, Ltd., headquartered in St. Catharines,
Ontario, Canada. The acquisition is effective July 1,
2008. The purchase price is approximately $14 million in cash
plus assumption of certain current liabilities. Blenkhorn and Sawle has been a
premier supplier of electrical equipment since 1948. As a custom
turn-key solutions provider and certified professional engineering house they
have supplied products to the major utility companies, oil and gas, mining,
industrial as well as nuclear power industry. The acquisition will
compliment AZZ’s current product offering and expand served markets. This
acquisition should provide additional potential for continued growth and
expansion of the Electrical and Industrial Products Segment of AZZ
incorporated.
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. 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 we believe that the current views and
expectations reflected in those 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 our
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; raw material and utility
costs, including cost of zinc and natural gas which are used in the hot dip
galvanizing process; changes in economic conditions of the various markets we
serve, both foreign and domestic; customer requested delays of shipments;
acquisition opportunities, adequacy of financing and availability of experienced
management employees to implement our growth strategy. We expressly
disclaim any obligation to release publicly any updates or revisions to these
forward-looking statements to reflect any change in our views or expectations.
We 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 2008 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.
RESULTS
OF OPERATIONS
We have
two operating segments as defined in our Annual Report on Form 10-K for the
year-ended February 29, 2008. 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 $141.8 million as of May 31, 2008, an increase of $6.9 million or
5%, as compared to $134.9 million at February 29, 2008. All of our
backlog data relates to our Electrical and Industrial Products Segment. Our
book-to-ship ratio was 1.07 to 1 for the first quarter ended May 31, 2008, as
compared to 1.32 to 1 for the same period in the prior year. Incoming
orders increased 7% over the same period a year ago. The increase in incoming
orders during the first quarter of fiscal 2009 over the same quarter in fiscal
2008 was due to increased domestic orders from primarily the utility power
generation and distribution markets. 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
three-month period ended May 31, 2008, as compared to the same period in the
prior fiscal year.
Backlog
Table
(In
thousands)
|
Period
Ending
|
|
|
|
Period
Ending
|
|
|
|
Backlog
|
2/29/08
|
|
$
|
134,876
|
|
2/28/07
|
|
$
|
120,666
|
|
Bookings
|
|
|
|
106,834
|
|
|
|
|
99,483
|
|
Shipments
|
|
|
|
99,958
|
|
|
|
|
75,377
|
|
Backlog
|
5/31/08
|
|
$
|
141,752
|
|
5/31/07
|
|
$
|
144,772
|
|
Book
to Ship Ratio
|
|
|
|
1.07
|
|
|
|
|
1.32
|
|
The
following table reflects the breakdown of revenue by segment:
|
|
Three
Months Ended
|
|
|
|
5/31/2008
|
|
|
5/31/2007
|
|
|
|
(In
thousands)
|
|
Revenue:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
52,006
|
|
|
$
|
40,873
|
|
Galvanizing
Services
|
|
|
47,952
|
|
|
|
34,504
|
|
Total
Revenue
|
|
$
|
99,958
|
|
|
$
|
75,377
|
|
For the
three-month period ended May 31, 2008, consolidated net revenues were $100
million, a 33% increase as compared to the same period in fiscal 2008. For the
quarter ended May 31, 2008, the Electrical and Industrial Products Segment
contributed 52% of the Company’s revenues, and the Galvanizing Services Segment
accounted for the remaining 48% of the combined revenues. The Electrical and
Industrial Products Segment contributed 54% of the Company’s revenues, and the
Galvanizing Services Segment accounted for the remaining 46% of the combined
revenues for the three month period ended May 31, 2007.
Revenues
for the Electrical and Industrial Products Segment increased $11.1 million or
27% for the three-month period ended May 31, 2008, as compared to the same
period in fiscal 2007. The increased revenues were generated as a result of a
continuation of improved market demand, primarily from our high voltage
transmission, power generation and utility distribution and energy
infrastructure market as compared to the same period in fiscal
2008.
Revenues
in the Galvanizing Services Segment increased $13.4 million or 39% for the
three-month period ended May 31, 2008, as compared to the same period in fiscal
2008. Revenues for the first quarter were
favorably
impacted with the acquisition of AAA Industries, Inc. as well as increased
production levels in our existing facilities. Of the 39% increase in revenues,
70% was attributable the acquisition of AAA Industries, Inc. and 30%
attributable increased production levels in our existing facilities. Revenues
from our acquisition of AAA Industries, Inc. on April 1, 2008, were $9.4
million. Historically, revenues for this segment have followed
closely 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
|
|
|
|
5/31/2008
|
|
|
5/31/2007
|
|
|
|
(In
thousands)
|
|
Segment
Operating Income:
|
|
|
|
|
|
|
Electrical
and Industrial Products
|
|
$
|
7,932
|
|
|
$
|
6,344
|
|
Galvanizing
Services
|
|
|
13,358
|
|
|
|
8,611
|
|
Total
Operating Income
|
|
$
|
21,290
|
|
|
$
|
14,955
|
|
Our total
operating income increased 42% for the three-month period ended May 31, 2008, to
$21.3 million as compared to $15 million for the same period in fiscal
2008.
Segment
operating income in the Electrical and Industrial Products Segment increased 25%
for the three-month period ended May 31, 2008, to $7.9 million as compared to
$6.3 million for the same period in fiscal 2008. Increased operating profit
resulted from higher volumes as a result of favorable market
conditions. Operating margins were 15.3% as compared to 15.5% for the same
period in fiscal 2008.
In the
Galvanizing Services Segment, operating income increased 55% for the three-month
period ended May 31, 2008, to $13.4 million as compared to $8.6 million for the
same period in fiscal 2008. Operating margins increased to 27.9% for the
three-month period ended May 31, 2008, as compared to 25% for the same period in
fiscal 2008. The increased operating income during the first quarter ended May
31, 2008, as compared to the same period last year resulted from higher volumes,
primarily from our acquisition of AAA Industries, Inc., and lower costs for
zinc. Margins in future quarters could be negatively impacted by a reduction in
pricing if market demand decreases for galvanizing services.
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 May 31,
2008, were $4.6 million compared to $7.6 million for the same period in fiscal
2008. As a percentage of sales, General Corporate expenses were 4.6%
for the three-month period ended May 31, 2008, as compared to 10.1% for the same
period in fiscal 2008. General Corporate expenses were lower due to decreased
compensation expenses related to our stock appreciation
rights. Compensation expense related to these Stock Appreciation
Rights Plans was $4.3 million lower for the three month period ended May 31,
2008, as compared to the same period in fiscal 2008.
Other
(Income) Expense
For the
three-month period ended May 31, 2008, 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-month period ended May 31, 2008 increased 109% as
compared to the same period in fiscal 2008 to $1.1 million. Interest expense
increased due to higher levels of debt resulting from a $100 million Note
Purchase Agreement entered into by the Company pursuant to which the Company
issued $100 million aggregate principle amount of it’s 6.24% unsecured Senior
Notes. As of May 31, 2008, we had outstanding long term debt of $100
million, an increase of $72.3 million, as compared to $27.7 million at the end
of the same period in fiscal 2008. The increase in debt resulted from the
acquisition of AAA Industries, Inc. on March 31, 2008. Our long-term
debt to equity ratio was .64 to 1 at May 31, 2008, as compared to .23 to 1 for
the same period in fiscal 2008.
Income
Taxes
The
provision for income taxes reflects an effective tax rate of 36% for the
three-month period ended May 31, 2008, as compared to an effective tax rate of
39% for the same period in fiscal 2008. The income tax rate decreased for the
first quarter of fiscal 2009 due to increased utilization of the IRS credit
related to the American Jobs Creation Act of 2005 as a result of the increased
rate of the credit for fiscal 2009.
LIQUIDITY
AND CAPITAL RESOURCES
Historically,
we have met our cash needs through a combination of cash flows from operating
activities and financial institution borrowings. Our cash
requirements are generally for operating activities, capital improvements, debt
repayment and acquisitions. Management believes that working capital,
borrowing capabilities and funds generated from operations should be sufficient
to finance anticipated operational activities, capital improvements, scheduled
debt payments and possible future acquisitions for the remainder of fiscal
2009.
Net cash
used by operations was $1.9 million for the three-month period ended May 31,
2008, as compared to $7.7 million provided from operations for the same period
in the prior fiscal year. Cash flow from operations for the quarter ended May
31, 2008, included $10.1 million in net income, $3 million in depreciation and
amortization of intangibles, and other adjustments to reconcile net income to
net cash in the amount of $1.5 million. Included in other adjustments
to reconcile net income to net cash was provision 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 inventories in the amount of $1.7
million and increased accounts payable and accrued liabilities in the amount of
$4.5 million and $3.6 million, respectively. These positive cash flow
items were offset by increases in accounts receivables, other assets, prepaid
expenses and revenues in excess of billings in the amount of $20.2 million, $2
million, $1.9 million and $2.3 million, respectively. The increase in accounts
receivables is due to the 30% increase in revenues for the quarter ended May 31,
2008, as compared to the quarter ended February 29, 2008. Accounts receivable
days outstanding improved to 46 days for the quarter ended May 31, 2008, as
compared to 49 days at February 29, 2008. Working capital increased
to $103.8 million as of May 31, 2008, as compared to $60.3 million at February
29, 2008.
For the
three-month period ended May 31, 2008, cash flow was used to make capital
improvements of $4.8 million and fund the acquisition of AAA Industries Inc. in
the amount of $81.5 million. Debt increased by $100 million from the issuance of
Senior Notes to fund the acquisition of AAA Industries Inc.
On May
25, 2006, we entered into the Second Amended and Restated Credit Agreement (the
“Credit Agreement”), which replaced our Amended and Restated Revolving and Term
Credit Agreement dated as of November 2001.
The
Credit Agreement provides for a $60 million revolving line of credit with one
lender, Bank of America, N.A., maturing on May 25, 2011. This is an unsecured
revolving credit facility to be used to provide for working capital needs,
capital improvements, future acquisitions, and letter of credit needs. At May
31, 2008, we had no outstanding debt borrowed against the revolving credit
facility. However, we had letters of credit outstanding in the amount
of $10.2 million, which left approximately $49.8 million of additional credit
available under the revolving credit facility.
On March
31, 2008, the Company entered into a Note Purchase Agreement pursuant to which
the Company issued $100,000,000 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). Deferred costs in the amount of $2 million were incurred for upfront
costs paid in connection with Note Offering. These costs will be expensed using
the imputed interest method over the life of the loan.
In
connection with the Note Offering, the Company entered into the Second Amendment
to Second Amended and Restated Credit Agreement, (the “Second Amendment”) with
Bank of America, N.A. (“Bank of America”), which amended the Second Amended and
Restated Credit Agreement by and among the Company and Bank of America dated as
of May 25, 2006 (the “Credit Agreement”). The Second Amendment contains the
consent of Bank of America to the Note Offering and amended the Credit Agreement
to provide that the Note Offering will not constitute a default under the Credit
Agreement.
The Notes
provide for various financial covenants of 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 Note Purchase Agreement) not to exceed 3.25:1.00; c)
Fixed Charge Coverage Ratio – Maintain o a consolidated basis a Fixed Charge
Coverage Ratio of at least 2.0:1.0; d) Priority Indebtedness – The Company will
not at any time permit aggregate amount of all Priority Indebtedness (as
defined) to exceed 10% of Consolidated Net Worth. In conjunction with
Note Offering, the Credit Agreement with Bank of America was amended to reflect
the same debt covenants as described above.
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 May 31, 2008 are summarized in the table under operating
leases.
Commodity
pricing
We manage
our exposure to commodity prices through the use of the following.
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 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.
We have
no contracted commitments for any other commodity items including steel,
aluminum, natural gas, copper, zinc or any other commodity.
Other
At May
31, 2008, we had outstanding letters of credit in the amount of $10.2
million. These letters of credit are issued in lieu of performance
and bid bonds, and to a portion of our customers to cover any potential warranty
costs that the customer might incur. In addition, as of May 31, 2008,
a warranty reserve in the amount of $1.8 million has been established to offset
any future warranty claims.
The
following summarizes our operating leases, and 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)
|
|
2009
|
|
$
|
1,727
|
|
|
$
|
0
|
|
|
$
|
4,680
|
|
|
$
|
6,407
|
|
2010
|
|
|
2,564
|
|
|
|
0
|
|
|
|
6,240
|
|
|
|
8,804
|
|
2011
|
|
|
2,546
|
|
|
|
0
|
|
|
|
6,240
|
|
|
|
8,786
|
|
2012
|
|
|
2,390
|
|
|
|
0
|
|
|
|
6,240
|
|
|
|
8,630
|
|
2013
|
|
|
2,352
|
|
|
|
14,286
|
|
|
|
5,423
|
|
|
|
22,061
|
|
Thereafter
|
|
|
13,550
|
|
|
|
85,714
|
|
|
|
13,817
|
|
|
|
113,081
|
|
Total
|
|
$
|
25,129
|
|
|
$
|
100,000
|
|
|
$
|
42,640
|
|
|
$
|
167,769
|
|
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 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.
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
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
- We account for income taxes under the provisions of
SFAS No. 109, "Accounting For Income Taxes" ("SFAS No. 109"). 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. SFAS No. 109 also requires
that deferred tax assets be reduced 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 deferral 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.
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. In fiscal 2007, we adopted the provisions of SFAS No. 123R,
Share-Based
Payment
. Under the provisions of SFAS No. 123R, the
compensation cost of all employee stock-based compensation awards is measured
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
number of options that will not
vest
|
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 will result in different option valuations and, therefore,
different amounts of compensation cost.
RECENT
ACCOUNTING PRONOUNCEMENTS
In
February 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities, including an amendment of FASB
Statement No. 115" ("SFAS No. 159"). This standard permits an entity
to choose to measure many financial instruments and certain items at fair value.
Most of the provisions in SFAS No. 159 are elective; however, the amendment to
FASB SFAS No. 115, "Accounting for Certain Investments in Debt and Equity
Securities:, applies to all entities with available –for-sale and trading
securities. The provisions of SFAS No. 159 are effective as of the
beginning of an entity's first fiscal year that begins after November 15,
2007. The adoption of SFAS No. 159 did not have an impact on our
consolidated financial statements.
In
September 2006, the FASB issued SFAS No. 157, "Fair Value Measurements" ("SFAS
No. 157")
,
which
defines fair value, establishes a framework for measuring fair value and expands
disclosures about fair value measurements. The provisions of SFAS No.
157 are effective for financial statements issued for fiscal years beginning
after November 15, 2007. In February of 2008, the FASB issued FASB
Staff position No. 157-2 which delays the effective date of SFAS No. 157 for
non-financial assets and liabilities which are not measured at fair value on a
recurring basis (at least annually) until fiscal years beginning after November
15, 2008. We are currently in the process of evaluating the impact of the
adoption of SFAS no. 157 on our consolidated financial statements.
Item 3.
Quantitative and Qualitative Disclosures About
Market Risk.
Market
risk relating to our operations results primarily from changes in commodity
prices. We have only limited involvement with derivative financial instruments
and we are not a party to any leveraged derivatives.
We manage
our exposure to commodity prices through various methods. In the Galvanizing
Services Segment, we utilize agreements with zinc suppliers that include
protective caps to guard against rising zinc prices. We believe these agreements
ensure adequate supplies and partially offset exposure to commodity price
swings.
In the
Electrical and Industrial Product 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 the price
for these items are normally managed through escalation clauses attached to our
customer’s contracts, although during difficult market conditions these
escalation clauses may be difficult to obtain.
Management
does not believe there has been a material change in the nature of our commodity
or interest rate commitments or risks since February 29, 2008.
We do not
believe that a hypothetical a change of 10% of commodity prices would have a
significant adverse effect on our results of operations, financial position, or
cash flows. However, there can be no assurance that either interest rates or
commodity prices will not change in excess of the 10% hypothetical amount, which
could have an adverse effect on our results of operations, financial position,
and cash flows if we are unable to pass along these increase to our
customers.
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 its 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.
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.
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 29,
2008.
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.
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 20, which immediately
precedes such exhibits.
SIGNATURES
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
(Registrant)
|
DATE:
6/27/08
|
By: /s/ Dana
Perry
|
|
Dana
Perry
Senior
Vice President for Finance
Principal
Financial Officer
|
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 August 31, 2000).
|
3.5
|
Amended
and Restated Bylaws of AZZ incorporated (incorporated by reference to the
Exhibit 3(1) to the current Report on Form 8-K filed by the Registrant on
November 27, 2007.
|
10.1
|
Note
Purchase Agreement dated March 31, 2008, by and among AZZ incorporated and
the purchasers listed therein (incorporated by reference to Exhibit 10.1
to the Current Report on Form 8-K filed by the Registrant on April 2,
2008).
|
10.2
|
Asset
Purchase Agreement dated March 31, 2008, by and among AZZ incorporated,
Arbor Crowley, Inc., AAA Industries, Inc for itself and its wholly-owned
subsidiaries identified therein, and the shareholders of AAA Industries,
Inc. identified therein (incorporated by reference to Exhibit 10.2 to the
Current Report on Form 8-K filed by the Registrant on April 2,
2008).l
|
10.3
|
Second
Amendment and Consent to Second Amended 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 to the current
report on Form 8-K filed by the Registrant on April 2,
2008).
|
|
Chief
Executive Officer Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated June 26, 2008. Field
Herewith.
|
|
Chief
Financial Officer Certificate pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002 dated June 26, 2008. 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
June 26,2008. 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 June 26,
2008. Filed Herewith.
|
21
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