Search the web
Welcome, Guest
[Sign Out, My Account]
EDGAR_Online

Quotes & Info
Enter Symbol(s):
e.g. YHOO, ^DJI
Symbol Lookup | Financial Search
AZZ > SEC Filings for AZZ > Form 10-Q on 8-Jan-2014All Recent SEC Filings

Show all filings for AZZ INC

Form 10-Q for AZZ INC


8-Jan-2014

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
Certain statements herein about our expectations of future events or results constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Such forward-looking statements are based on currently available competitive, financial and economic data and management's views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. In addition, certain factors could affect the outcome of the matters described herein. This Quarterly Report on Form 10-Q may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand and response to products and services offered by AZZ, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets, and the hot dip galvanizing markets; prices and raw material cost, including zinc and natural gas which are used in the hot dip galvanizing process; changes in the economic conditions of the various markets that AZZ serves, foreign and domestic, customer requested delays of shipments, acquisition opportunities, currency exchange rates, adequacy of financing, and availability of experienced management employees to implement AZZ'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 continuing economic volatility in the U.S. and other markets in which we operate; acts of war or terrorism inside the United States or abroad; and other changes in economic and financial conditions. AZZ has provided additional information regarding risks associated with the business in AZZ's Annual Report on Form 10-K for the fiscal year ended February 28, 2013 and other filings with the SEC, available for viewing on AZZ's website at www.azz.com and on the SEC's website at www.sec.gov.
You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The following discussion should be read in conjunction with management's discussion and analysis contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 2013 and 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 fiscal year ended February 28, 2013. Management believes that the most meaningful analysis of our results of operations is to analyze our performance by segment. We use revenue and operating income by segment 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 Quarterly Report on Form 10-Q. Orders and Backlog
Our entire backlog relates to our Electrical and Industrial Products and Services Segment. Our backlog was $211.8 million as of November 30, 2013, a decrease of $9.9 million, or 5%, as compared to $221.7 million at February 28, 2013. Our book-to-ship ratio was 1.00 to 1 for the quarter ended November 30, 2013, as compared to 1.02 to 1 for the same period in the prior year. Incoming orders increased 30% for the quarter compared to the same period in fiscal 2013. The decrease in book to ship ratio for the compared period is a result of lower than normal planned outages in the domestic nuclear market for the current fiscal year . However, we expect the domestic nuclear market to recover during fiscal 2015.


Table of Contents

                                 Backlog Table
                           (in thousands)(unaudited)

                     Period Ended                Period Ended
Backlog                 2/28/2013   $ 221,714       2/29/2012   $ 138,621
Bookings                              181,092                     124,666
Shipments                             183,175                     127,143
Backlog                 5/31/2013   $ 219,631       5/31/2012   $ 136,144
Book to Ship Ratio                       0.99                        0.98
Bookings                              181,547                     151,804
Acquired Backlog                            -                      78,491
Shipments                             189,782                     153,385
Backlog                 8/31/2013   $ 211,396       8/31/2012   $ 213,054
Book to Ship Ratio                       0.96                        0.99
Bookings                              198,187                     152,421
Shipments                             197,755                     149,675
Backlog                11/30/2013   $ 211,828      11/30/2012   $ 215,800
Book to Ship Ratio                       1.00                        1.02

Segment Revenues
The following table reflects the breakdown of revenue by segment:

                                            Three Months Ended                 Nine Months Ended
                                       11/30/2013        11/30/2012       11/30/2013       11/30/2012
                                                         (In thousands)(unaudited)
Revenue:
Electrical and Industrial
Products and Services                $     112,035     $     60,421     $    312,635     $    171,633
Galvanizing Services                        85,720           89,254          258,077          258,570
Total Revenue                        $     197,755     $    149,675     $    570,712     $    430,203

For the three and nine month periods ended November 30, 2013, consolidated revenues were $197.8 million and $570.7 million, respectively, an increase of 32% for the three month period ended November 30, 2013, and 33% for the nine month period ended November 30, 2013 as compared to the same period in fiscal 2013. The Electrical and Industrial Products and Services Segment contributed 57% and 55%, respectively, and the Galvanizing Services Segment accounted for 43% and 45%, respectively, of the Company's combined revenues for the three and nine month periods ended November 30, 2013. For the three and nine month periods ended November 30, 2012, the Electrical and Industrial Products and Services Segment contributed 40% of the Company's revenues, and the Galvanizing Services Segment accounted for 60%, for both periods, of the combined revenues. Revenues for the Electrical and Industrial Products and Services Segment increased $51.6 million, or 85%, for the three month period ended November 30, 2013 and $141.0 million or 82% for nine month period ended November 30, 2013, as compared to the same periods in fiscal 2013. This increase in revenue for the compared three month periods ended November 30, 2013 and 2012 is mainly attributable to the acquisition of Aquilex SRO on March 29, 2013 which provided $61.7 million in revenue. The increase in revenue for the compared nine month periods ended November 30, 2013 and 2012 is associated with the acquisition of Aquilex SRO and NLI. Revenues attributable to Aquilex SRO and NLI were $146.8 million and $41.2 million, respectively, for the nine month period ended November 30, 2013. The reduction in legacy revenue continues to reflect nuclear projects that have been delayed from fiscal 2014 to 2015.
Revenues in the Galvanizing Services Segment decreased $3.5 million, or 4%, for the three month period ended November 30, 2013, and remained constant for the nine month period ended November 30, 2013, as compared to the same periods in fiscal 2013. Excluding the acquisition of G3 and Galvcast, revenues declined 8% for the three month period ended November 30, 2013, as compared to the same period in fiscal 2013 and 8% for the nine month period ended November 30, 2013 when compared to the prior period. Our recently acquired operations in Canada, Galvcast and G3, provided $8.7 million and $24.6 million, respectively, in combined revenues for the three and nine month periods ended November 30, 2013. The reduction in legacy revenue is attributable to lower demand from the transmission and distribution markets and a leveling off of renewable energy projects. In


Table of Contents

addition, petrochemical projects continue to be pushed back due to engineering and permit delays. We expect a gradual and steady recovery of the petrochemical market over the next three years. Historically, revenues for this segment have closely followed the condition of the industrial sector of the general economy. Segment Operating Income
Segment operating income in the Electrical and Industrial Products and Services Segment increased 32% and 42% for the three and nine month periods ended November 30, 2013, to $11.9 million and $35.6 million, respectively, as compared to $9.0 million and $25.1 million, respectively, for the same periods in fiscal 2013. Operating margins were 11% for both the three and nine month periods ended November 30, 2013 and 15% for both the three and nine month compared periods in fiscal 2013. This increase in operating income for the compared three month periods ended November 30, 2013 and 2012 is mainly attributable to the acquisition of Aquilex SRO on March 29, 2013 which provided $6.5 million in operating income. The increase in operating income for the compared nine month periods ended November 30, 2013 and 2012 is associated with the acquisition of Aquilex SRO and NLI. Operating income attributable to Aquilex SRO and NLI was $11.0 million and $5.3 million, respectively, for the nine month period ended November 30, 2013. Excluding these acquisitions, for the three month period ended November 30, 2013, operating income decreased $4.2 million as compared to the same period in fiscal 2013, and decreased $5.7 million for the nine month period ended November 30, 2013 when compared to the prior year period. Operating margins without the acquisition of NLI and Aquilex SRO would have been 12% and 16%, respectively, for the three and nine month periods ended November 30, 2013. Without the amortization of intangibles resulting from the acquisitions of NLI and Aquilex SRO, the operating margin would have been 14% for both the three and nine month periods ended November 30, 2013. The acquisition of NLI and Aquilex SRO resulted in the amortization of intangibles of $3.4 million for the three month period ended November 30, 2013 and $9.6 million for the nine month period ended November 30, 2013. Amortization will decrease in fiscal 2015 as a result of fully amortizing the acquired backlog at NLI.
In the Galvanizing Services Segment, operating income decreased 13% and increased 4%, respectively, for the three and nine month periods ended November 30, 2013, to $21.3 million and $73.3 million, respectively, as compared to $24.4 million and $70.6 million, respectively, for the same period in fiscal 2013. Operating margins were 25% and 28%, respectively for the three and nine month periods ended November 30, 2013 compared to 27% for the same periods in fiscal 2013. Our recently acquired operations in Canada consisting of Galvcast and G3 contributed $2.0 million and $5.9 million, respectively, in operating income for the three and nine month periods ended November 30, 2013. During the nine month period ended November 30, 2013 a payment of $2.7 million was received for business interruption insurance resulting from the loss of production due to a fire at our Joliet, Illinois facility in April 2012. During the nine month period ended November 30, 2013 losses were recorded in conjunction with the fire in the amount of $3.0 million. Any future losses incurred at the Joliet facility are expected to continue to be offset with insurance proceeds for business interruption in future quarters as the claims are settled. In addition, during the first quarter of fiscal 2014, a gain was recorded in the amount of $4.2 million as a result of a favorable lawsuit settlement. Without these non-recurring items and the losses incurred in the current and prior year, operating income would have been $22.7 million and $69.3 million, respectively for the three and nine month periods ended November 30, 2013 and $25.5 million and $73.3 million, respectively for the same periods in fiscal 2013. Operating margins without these non-recurring items would have been 26% for the three month period ended November 30, 2013 and 27% for the nine month periods ended November 30, 2013 and 29% and 28%, respectively, for the same periods in fiscal 2013. Operating income is continued to be effected by the continued delay in petrochemical projects.
General Corporate Expenses
General corporate expenses, (see Note 4 to the condensed consolidated financial statements) not specifically identifiable to a segment, for the three-month period ended November 30, 2013 were $8.0 million compared to $5.7 million for the same period in fiscal 2013. For the nine month period ended November 30, 2013 general corporate expenses were $25.7 million as compared to $17.8 million in the prior fiscal year. As a percentage of sales, general corporate expenses were 4% for both the three month period ended November 30, 2013 and 2012. For the nine month period ended November 30, 2013, general corporate expenses as a percentage of sales were 4% for both fiscal 2014 and 2013. The Company incurred $4.3 million in acquisition costs in fiscal 2014 as a result of the acquisition of Aquilex SRO. (see Note 6 to the condensed consolidated financial statements).

Interest
Net interest expense for the three and nine month periods ended November 30, 2013 was $4.6 million and $13.7 million, respectively, as compared to $3.2 million and $9.8 million, respectively, for the same periods in fiscal 2013. As of November 30, 2013, we had outstanding debt of $436.6 million, compared to $210.7 million at the same date last year. Our long-term debt to equity ratio was 1.17 to 1 at November 30, 2013, as compared to .60 to 1 at November 30, 2012. The increase in interest expense is a result of the increased debt acquired to fund the acquisition of Aquilex SRO.


Table of Contents

Net (Gain) On Insurance Settlement
During the third quarter of fiscal 2014, the company recorded a net gain on the insurance settlement of property, plant and equipment in the amount of $7.4 million in conjunction with the the losses incurred as a result of the fire at our Joliet galvanizing facility. For the nine month period ended November 30, 2013 the company recorded a gain of $8.2 million from property insurance proceeds. During the first quarter of fiscal 2013, the Company received $10 million in insurance proceeds and incurred a pretax asset impairment charge of approximately $4 million. The net gain on the insurance settlement of property, plant and equipment has been recorded as an item under Net (Gain) Loss On Insurance Settlement or On Sale of Property, Plant and Equipment. This item is shown as Other (Income) expense in Note 4 to consolidated financial statements. Other (Income) Expense
For the three and nine month periods ended November 30, 2013 and 2012 the amounts in other (income) expense not specifically identifiable with a segment (see Note 4 to consolidated financial statements) were insignificant. Income Taxes
The provision for income taxes reflects an effective tax rate of 33.9% for the three-month period ended November 30, 2013, as compared to 36.4% for comparable period in fiscal 2013. For the nine month period ended November 30, 2013 the tax rate was 36.0% compared to 36.1% for the comparable period in fiscal 2013. The decrease in the quarterly effective tax rate is due to a higher percentage of international income, which has lower tax rates, resulting primarily from the acquisition of Aquilex SRO on March 29, 2013. The decrease in this tax rate is also due, in part, to an increase in state tax credits compared to the same period last year.
LIQUIDITY AND CAPITAL RESOURCES We have historically met our cash needs through a combination of cash flows from operating activities along with bank and long term borrowings. Our cash requirements are generally for operating activities, cash dividend payments, 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, dividends, capital improvements, payment of debt and possible future acquisitions.
Our operating activities generated cash flows of approximately $94.6 million for the nine month period ended November 30, 2013 and $66.6 million for the same period in the prior fiscal year. Cash flow from operations for the nine month period ended November 30, 2013 included net income in the amount of $49.4 million, depreciation and amortization in the amount of $32.0 million, and


Table of Contents

other adjustments to reconcile net income to net cash in the amount of $(1.3) million. Included in other adjustments were deferred income taxes in the amount of $3.0 million, gain or loss on insurance settlement or the sale of assets in the amount of $(8.3) million, and non-cash adjustments in the amount of $4.0 million. Negative cash flow was recognized due to increased inventories, prepaids, other assets and revenue in excess of billings in the amount of $4.3 million, $0.4 million, $4.2 million and $4.0 million, respectively, as well as decreased accounts payable and other accrued liabilities in the amount of $2.1 million and $0.8 million, respectively. Positive cash flow was recognized due to decreased accounts receivable of $30.3 million. Accounts receivable average days outstanding were 58 days for the nine month period ended November 30, 2013, as compared to 49 days for the nine month period ended November 30, 2012.

Our working capital was $177.9 million at November 30, 2013, as compared to $142.6 million at November 30, 2012. The change in working capital for the compared periods is mainly attributable to our acquisition activity in the first quarter of fiscal 2014 offset by the additional debt incurred as a result of the Aquilex SRO acquisition.
During the nine month period ended November 30, 2013, capital improvements were made in the amount of $34.9 million of which $18.3 million relate to the rebuilding of the Joliet facility.
During the nine month period ended November 30, 2013, dividends were paid in the amount of $10.7 million.
On March 27, 2013, we entered into a new Credit Agreement (the "Credit Agreement") with Bank of America and other lenders. The Credit Agreement replaced the our previous credit agreement with Bank of America and provides for a $75 million term facility and a $225 million revolving credit facility, subject to a $75 million "accordion" feature. The Credit Agreement is used to provide for working capital needs, capital improvements, future acquisitions and letter of credit needs. The Credit Agreement provides for an applicable margin on the revolving credit facility ranging from 1.0% to 2.0% over the Eurodollar Rate and Commitment Fees ranging from .20% to .30% depending on our Leverage Ratio (each such term as defined in the Credit Agreement). The $75 million term facility requires quarterly principal and interest payments commencing on June 30, 2013 and matures on March 27, 2018.
The Credit Agreement provides various financial covenants requiring us, among other things, to a) maintain on a consolidated basis net worth equal to at least the sum of $230 million, plus 50% of future net income, b) maintain on a consolidated basis a Leverage Ratio (as defined in the Credit Agreement) not to exceed 3.25:1.0, c) maintain on a consolidated basis a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of at least 1.75:1.0 and d) not to make Capital Expenditures (as defined in the Credit Agreement) on a consolidated basis in an amount in excess of $60 million during the fiscal year ended February 28, 2014 and $50 million during any subsequent fiscal year. At November 30, 2013, we had $167.0 million of outstanding debt borrowed through the revolving credit facility provided under the Credit Agreement. As of November 30, 2013, we had letters of credit outstanding under the Credit Agreement in the amount of $17.4 million, which left approximately $40.6 million of additional credit available under the Credit Agreement.
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 "2008 Notes") due March 31, 2018 through a private placement (the "2008 Note Offering"). Pursuant to the Note Purchase Agreement, the Company's payment obligations with respect to the 2008 Notes may be accelerated upon any Event of Default, as defined in the Note Purchase Agreement.
The Company entered into an additional Note Purchase Agreement on January 21, 2011 (the "2011 Agreement"), pursuant to which the Company issued $125 million aggregate principal amount of its 5.42% unsecured Senior Notes (the "2011 Notes"), due in January of 2021, through a private placement (the "2011 Note Offering"). Pursuant to the 2011 Agreement, the Company's payment obligations with respect to the 2011 Notes may be accelerated under certain circumstances. The 2008 Notes and the 2011 Notes each provide for various financial covenants requiring us, among other things, to a) maintain on a consolidated basis net worth equal to at least the sum of $116.9 million plus 50% of future net income;
b) maintain a ratio of indebtedness to EBITDA (as defined in Note Purchase Agreement) not to exceed 3.25:1.00; c) 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) 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). As of November 30, 2013, the Company is in compliance with all of its debt covenants.

On October 28, 2011, the Company entered into a Private Shelf Agreement by and among the Company, Prudential Investment Management, Inc. ("Prudential") and the other purchasers identified therein (the "Private Shelf Agreement"), pursuant to which the Company may issue and sell, through one or more private placement transactions, up to $100 million aggregate principal


Table of Contents

amount of Senior Notes (the "Shelf Notes") with interest rates to be agreed upon by the Company and Prudential immediately prior to each issuance and sale of Shelf Notes (each, a "Note Offering" and together, the "Note Offerings"). Pursuant to the Private Shelf Agreement, the Company's payment obligations with respect to the Shelf Notes may be accelerated upon any Event of Default, as defined in the Private Shelf Agreement. Under the terms of the Credit Agreement, undertaking the Note Offerings will not otherwise constitute a default under the Credit Agreement. The Company has not undertaken any Note Offerings under the Private Shelf Agreement.
Our current ratio (current assets/current liabilities) was 2.21 to 1 at November 30, 2013, as compared to 2.30 to 1 at November 30, 2012. As of November 30, 2013, we had $436.6 million in long-term debt outstanding and our long-term debt as a percentage to shareholders' equity ratio was 1.17 to 1. Historically, we have not experienced a significant impact on our operations from increases in general inflation other than for specific commodities. We have exposure to commodity price increases in both segments of our business, primarily copper, aluminum and steel in the Electrical and Industrial Products and Services 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 through 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 policies, and there is no assurance that inflation will not impact our business in the future.

Subsequent Events

None.

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, 2013 are summarized in the table below under "Other."
Commodity pricing
The Company manages its exposures to commodity prices through the use of the following:
In the Electrical and Industrial Products and Services Segment, we have exposure to commodity pricing for copper, aluminum and steel. Because the Electrical and Industrial Products and Services 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 addition, we attempt to enter into firm pricing contracts with our vendors on material at the time we receive orders from our customers to minimize risk.
In the Galvanizing Services Segment, we utilize contracts with our zinc suppliers that include protective caps and fixed cost contracts to guard against rising zinc prices. We also secure firm pricing for natural gas supplies with individual utilities when possible. 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, except for those entered into under the normal course of business. Other


. . .
  Add AZZ to Portfolio     Set Alert         Email to a Friend  
Get SEC Filings for Another Symbol: Symbol Lookup
Quotes & Info for AZZ - All Recent SEC Filings
Copyright © 2014 Yahoo! Inc. All rights reserved. Privacy Policy - Terms of Service
SEC Filing data and information provided by EDGAR Online, Inc. (1-800-416-6651). All information provided "as is" for informational purposes only, not intended for trading purposes or advice. Neither Yahoo! nor any of independent providers is liable for any informational errors, incompleteness, or delays, or for any actions taken in reliance on information contained herein. By accessing the Yahoo! site, you agree not to redistribute the information found therein.