SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the Quarterly Period Ended: May 31, 2001 ( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the transition period from _________________ to____________________ Commission File Number 1-12777 AZZ incorporated (Exact name of registrant as specified in its charter) TEXAS 75-0948250 - -------------------------------------------------------------------------------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 400 North Tarrant, Crowley, Texas 76036 - -------------------------------------------------------------------------------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (817) 297-4361 ----------------------------- 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 X NO _____ ----- Indicate the number of outstanding of each of the issuer's classes of common stock, as of the close of the period covered by this report. Outstanding at May 31, 2001 Common Stock, $1.00 Par Value 5,036,135 ----------------------------- --------- Class Number of Shares
AZZ incorporated INDEX ----- PART I. Financial Information Page No. --------------------- -------- Item 1. Financial Statements Consolidated Condensed Balance Sheets at May 31, 2001 and February 28, 2001 3 Consolidated Condensed Statements of Income for the Periods Ended May 31, 2001 and May 31, 2000 4 Consolidated Condensed Statements of Cash Flow for the Periods Ended May 31, 2001 and May 31, 2000 5 Notes to Consolidated Condensed Financial Statements 6-8 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 8-10 PART II. Other Information ----------------- Item 4. Submissions of Matters to a Vote of Security Holders 10 Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 11 2
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS AZZ incorporated Consolidated Condensed Balance Sheet <TABLE> <CAPTION> 05/31/01 02/28/01 ASSETS UNAUDITED AUDITED - ------ ------------- ------------- <S> <C> <C> CURRENT ASSETS CASH AND CASH EQUIVALENTS $1,084,816 $1,446,502 ACCOUNTS RECEIVABLE(NET OF ALLOWANCE) 22,916,871 21,576,988 INVENTORIES RAW MATERIAL 9,085,459 9,307,210 WORK-IN-PROCESS 2,944,737 2,562,201 FINISHED GOODS 1,638,821 1,509,960 REVENUE IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS 393,121 2,432,765 DEFERRED INCOME TAXES 789,247 789,247 PREPAID EXPENSES AND OTHER 408,433 416,710 ------------- ------------- TOTAL CURRENT ASSETS 39,261,505 40,041,583 PROPERTY,PLANT AND EQUIPMENT, NET 29,954,668 28,750,429 INTANGIBLE ASSETS, NET 18,838,108 19,120,158 OTHER ASSETS 452,121 455,475 ------------- ------------- TOTAL ASSETS $88,506,402 $88,367,645 ============= ============= LIABILITIES AND SHAREHOLDERS' EQUITY - ------------------------------------ CURRENT LIABILITIES: LONG TERM DEBT DUE WITHIN ONE YEAR $4,345,284 $4,345,284 ACCOUNTS PAYABLE 6,952,761 9,221,135 BILLINGS IN EXCESS OF REVENUE ON UNCOMPLETED CONTRACTS 1,192,293 60,093 ACCRUED LIABILITIES 8,326,688 7,683,096 ------------- ------------- TOTAL CURRENT LIABILITIES 20,817,026 21,309,608 LONG TERM DEBT DUE AFTER ONE YEAR 21,870,767 22,947,087 DEFFERRED INCOME TAXES 730,941 730,941 SHAREHOLDERS' EQUITY: COMMON STOCK,$1 PAR VALUE SHARES AUTHORIZED-25,000,000 SHARES ISSUED 6,304,580 6,304,580 6,304,580 CAPITAL IN EXCESS OF PAR VALUE 11,797,205 11,777,305 ACCUMULATED OTHER COMPREHENSIVE INCOME (324,391) 0 RETAINED EARNINGS 39,111,734 37,731,715 LESS COMMON STOCK HELD IN TREASURY ( 1,268,445 AND 1,336,343 SHARES AT COST RESPECTIVELY) (11,801,460) (12,433,591) ------------- ------------- TOTAL SHAREHOLDERS' EQUITY 45,087,668 43,380,009 ------------- ------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $88,506,402 $88,367,645 ============= ============= </TABLE> See Accompaning Notes to Consolidate Condensed Financial Statements 3
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS AZZ incorporated Conslidated Condensed Income Statement <TABLE> <CAPTION> THREE MONTHS ENDED 05/31/01 05/31/00 UNAUDITED UNAUDITED ------------- ------------- <S> <C> <C> NET SALES $34,305,642 $27,944,451 COSTS AND EXPENSES COST OF SALES 26,245,257 20,744,693 SELLING/G & A EXPENSES 4,013,617 3,513,518 INTEREST EXPENSE 465,504 628,125 OTHER EXPENSE 71,683 64,476 ------------- ------------- 30,796,061 24,950,812 ------------- ------------- INCOME BEFORE INCOME TAXES 3,509,581 2,993,639 PROVISION FOR INCOME TAXES 1,333,800 1,122,913 ------------- ------------- NET INCOME $ 2,175,781 $ 1,870,726 ============= ============= EARNINGS PER SHARE (BASIC) $0.44 $0.39 (DILUTED) $0.43 $0.38 CASH DIVIDEND PER SHARE DECLARED $0.16 $0.00 </TABLE> See Accompaning Notes to Consolidate Condensed Financial Statements 4
PART I. FINANCIAL INFORMATION ITEM I. FINANCIAL STATEMENTS AZZ incorporated Conslidated Condensed Statements of Cash Flows <TABLE> <CAPTION> THREE MONTHS ENDING 05/31/01 05/31/00 UNAUDITED UNAUDITED ------------ ------------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME $ 2,175,781 $ 1,870,726 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: PROVISION FOR BAD DEBTS 76,917 45,199 AMORTIZATION AND DEPRECIATION 1,494,425 1,413,116 NET GAIN ON SALE OF PROPERTY, PLANT & EQUIPMENT (8,250) (4,561) OTHER 0 161,250 CHANGE IN VALUATION OF INTEREST RATE HEDGES (324,391) 0 INCREASE (DECREASE) FROM CHANGES IN ASSETS & LIABILITIES ACCOUNTS RECEIVABLE (1,788,415) 2,630,376 INVENTORIES (289,646) (1,348,718) PREPAID EXPENSES AND OTHER 8,277 106,288 OTHER ASSETS (52) 23,237 NET CHANGE IN BILLINGS RELATED TO COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS 3,171,844 (556,559) ACCOUNTS PAYABLE (2,268,374) 425,907 ACCRUED LIABILITIES 643,592 (150,709) ------------ ------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 2,891,708 4,615,552 CASH FLOWS FROM INVESTING ACTIVITIES: PROCEEDS FROM THE SALE OF EQUIPMENT 14,150 26,438 PURCHASE OF PROPERTY PLANT AND EQUIPMENT (2,419,108) (986,933) PROCEEDS FROM THE SALE OF LONG TERM INVESTMENTS 0 200,000 ACQUISITION OF SUBSIDIARY, PURCHASE PRICE ADJUSTMENT 371,615 0 ------------ ------------ NET CASH USED IN INVESTING ACTIVITIES (2,033,343) (760,495) ------------ ------------ CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM EXERCISE OF STOCK OPTIONS 652,031 252,109 PAYMENTS ON LONG TERM DEBT (1,076,320) (3,131,669) CASH DIVIDENDS PAID (795,762) (770,318) ------------ ------------ NET CASH USED IN FINANCING ACTIVITIES (1,220,051) (3,649,878) ------------ ------------ NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS (361,686) 205,179 CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,446,502 1,328,139 ------------ ------------ CASH & CASH EQUIVALENTS AT END OF PERIOD $ 1,084,816 $ 1,533,318 ============ ============ </TABLE> See Accompaning Notes to Consolidate Condensed Financial Statements 5
AZZ incorporated NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS ---------------------------------------------------- Summary of Significant Accounting Policies ------------------------------------------ 1. A summary of the Company's significant accounting policies is presented on Page 20 thru 22 of its 2001 Annual Shareholders' Report. 2. In the opinion of Management of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of only normal recurring adjustments) necessary to present fairly the financial position of the Company as of May 31, 2001, and the results of its operations and cash flows for the periods ended May 31, 2001 and 2000. 3. Earnings per share is based on the weighted average number of shares outstanding during each period, adjusted for the dilutive effect of stock options. The following table sets forth the computation of basic and diluted earnings per share: (unaudited) <TABLE> <CAPTION> Three months ended May 31, 2001 2000 ---------- ---------- <S> <C> <C> Numerator: Net income for basic and diluted earnings per common share $2,175,781 $1,870,726 ========== ========== Denominator: Denominator for basic earnings per common share -weighted average shares 4,980,791 4,817,858 Effect of dilutive securities: Employee and Director stock options 109,542 111,231 ---------- ---------- Denominator for diluted earnings per common share -adjusted weighted- average shares and assumed conversions 5,090,333 4,929,089 ========== ========== Basic earnings per common share $ .44 $ .39 ========== ========== Diluted earnings per common share $ .43 $ .38 ========== ========== </TABLE> 6
4. A summary of the Company's operating segments is defined on page 28 and 29 of its 2001 Annual Shareholders' Report. Information regarding operations and assets by segment in thousands is as follows: (unaudited) <TABLE> <CAPTION> Three Months Ended May 31, 2001 2000 ------------- ------------ <S> <C> <C> Net Sales: Electrical and Industrial Products $20,931 $14,853 Galvanizing Services 13,375 13,091 ------------- ------------ $34,306 $27,944 ============= ============ Operating Income (a): Electrical and Industrial Products $ 3,549 $ 2,024 Galvanizing Services 1,854 2,797 ------------- ------------ $ 5,403 $ 4,821 General Corporate Expense $ 1,409 $ 1,212 Interest Expense 465 628 Other (Income) Expense, Net (b) 19 (13) ------------- ------------ $ 1,893 $ 1,827 Income Before Income Taxes $ 3,510 $ 2,994 ============= ============ Total Assets: Electrical and Industrial Products $46,611 $42,053 Galvanizing Services 39,799 38,708 Corporate 2,096 2,411 ------------- ------------ $88,506 $83,172 ============= ============ </TABLE> (a) Operating income consists of net sales less cost of sales, specifically identifiable general and administrative expenses and selling expenses. (b) Other (income) expense, net includes gains and losses on sale of property, plant and equipment and other (income) expense not specifically identifiable to a segment. 5. Adoption of a New Accounting Pronouncement In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative and Hedging Activities," which was amended by SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," (collectively "SFAS 133"). As amended SFAS 133 establishes accounting and reporting standards of derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. The Statement requires the Company to recognize all derivatives on the balance sheet at fair value. Derivatives that are not hedges must be adjusted to fair value through income. If the derivative is a hedge, depending on the nature of the hedge, changes in fair value of derivatives will either be offset against the change in fair value of the hedged assets, liabilities, or firm commitments through earnings or recognized in other comprehensive income until the hedged item is recognized in earnings. The ineffective portion of a derivative's change in fair value will be immediately recognized in earnings. The Company adopted SFAS 133 on March 1, 2001 the first day of the Company's fiscal year ending February 28, 2002. The Company has evaluated its derivative instruments, consisting solely of two interest rate protection agreements, and believes these instruments qualify for hedge accounting pursuant to SFAS 133. 7
In order to reduce interest rate risk, the Company in February 1999 and April 2000 entered into interest rate protection agreements through the bank (the Swap Agreements) to modify the interest characteristics of the $10 million Term Note B and $10 million of the Term Note A, respectively, from a variable rate to a fixed rate. Term Note A Swap Agreement involves the exchange of interest obligations from April 2000 through April 2002 whereby the Company receives a fixed rate of 8.51% in exchange for a variable 30-day LIBOR plus 1.25%. Term Note B Swap Agreement involves the exchange of interest obligations over the life of the Term Note B whereby the Company receives a fixed rate of 6.8% in exchange for a variable 30-day LIBOR plus 1.25%. Management intends to hold the Term A and Term B Swap Agreements until their maturities of April 2002 and March 2006, respectively. In accordance with the transition provisions of SFAS 133, on March 1, 2001, the Company recognized the cumulative effect of adoption as a charge of $296,000 to accumulated other comprehensive income (equity). The offsetting fair value of the two interest rate swaps was recognized in accrued liabilities. During the quarter ended May 31, 2001, an additional $28,000 was accrued and charged to accumulated other comprehensive income related to the interest rate swaps. Management does not expect the swaps to materially affect the Company's financial position or results of operations going forward. Item 2. Management's Discussion and Analysis of Financial Condition and - -------------------------------------------------------------------------- Results of Operations --------------------- RESULTS OF OPERATIONS ---------------------- Consolidated net revenues increased 23% for the three-month period ended May 31, 2001 as compared to the same period in fiscal 2001. Revenues for the Electrical and Industrial Products Segment increased $6.1 million or 41% for the three- month period ended May 31, 2001, as compared to the same period in fiscal 2001. Revenues for this segment's electrical products increased 47% to $14.6 million for the three-month period ended May 31, 2001 as compared to $9.9 million for the same period in fiscal 2001. These products continue to benefit from the deregulation of the power industry and growing need for reliable supplies of electricity throughout the United States. Revenues for this segment's industrial products increased 29% to $6.3 million for the first quarter of fiscal 2002 as compared to $4.9 million for the same period in fiscal 2001. The growth is due to increased demand for the industrial products in the petroleum markets served. Backlog for the Electrical and Industrial Products Segment at May 31, 2001 was $36.9 million compared to $32 million at May 31, 2000. The electrical products backlog increased $2.1 million to $31.1 million while the industrial products backlog increased $2.8 million to $5.8 million. Net revenues in the Galvanizing Services Segment were flat at $13.4 million for the three-month period ended May 31, 2001 as compared to $13.1 million for the same period ended May 31, 2000. Consolidated operating income (net sales less operating expenses) increased 12% for the three-month period ended May 31, 2001 as compared to the same period in fiscal 2001. Operating income in the Electrical and Industrial Products Segment increased $1.5 million or 75% for the three-month period ended May 31, 2001 as compared to the same period in fiscal 2001. Increases in operating income were experienced in all of this segments product lines for the three-month period ended May 31, 2001 as compared to the same period in fiscal 2001. The significant percentage increase that was achieved in operating income is reflective of the continued leverage that is being achieved as volume increases. In the Galvanizing Services Segment, operating income decreased $943,000 or 34% for the three-month period ended May 31, 2001 as compared to the same period in fiscal 2001. Three main factors contributed to the 8
decrease in this segment. The first being the downturn in general industrial market and telecommunication industry creating pricing pressures to maintain the current business levels resulting in lower margins. Higher utility costs for the compared periods also had a negative impact on the margins for this segment. In addition this segment experienced two premature kettle replacements causing the loss of 28 days of production. General corporate expenses (selling, general and administrative expense, and other (expense) for the three-month period ended May 31, 2001 increased $507,000 or 14% as compared to the same period in fiscal 2001. As a percent of sales, general corporate expenses were 11.9% for the three-month period ended May 31, 2001 compared to 12.8% for the same period ended May 31, 2000. Net interest expense for the three-month period ended May 31, 2001 was $466,000, a decrease of 26% from the same period in fiscal 2001. This decrease is the result of $6.1 million of debt reduction between May 31, 2000 and May 31, 2001. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Net cash provided by operations was $3.3 million for the three-month period ended May 31, 2001 compared to $4.6 million for the same period in fiscal 2001. Net cash provided by operations was generated from $2.2 million in net income and $1.5 million in depreciation and amortization, offset by net changes in operating assets and liabilities and other of $400,000. During the three-month period ended May 31, 2001, capital improvements were made in the amount of $2.4 million, long-term debt was repaid in the amount of $1.1 million, and cash dividends of $796,000 were paid. The Company has a credit facility with a bank that provides for a $20 million revolving line of credit, a $10 million term note, and a $17.5 million term note. At the end of May 31, 2001, the Company had $5.8 million outstanding under the revolving line of credit and $20.3 million outstanding under the two term facilities. At May 31, 2001, the Company had approximately $13.8 million available under the revolving line of credit. Management believes that it's current credit facility coupled with the Company's borrowing capacity along with cash generated from operations will be sufficient to accommodate the Company's current operations, internal growth and possible acquisitions. The Company's exposure to market risks related to its financial instruments, including its interest rate swaps has not changed significantly since February 28, 2001. 9
Forward Looking Statements - -------------------------- This Report contains, and from time to time the Company or certain of its representatives may make, "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 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 these in the forward-looking statements. Those risks, uncertainties, and factors include, but are not limited to, many of the matters described in this Report: change in demand, prices and raw material cost, including zinc which is used in the hot dip galvanizing process; changes in the economic conditions of the various markets the Company serves, foreign and domestic, including the market price for oil and natural gas; acquisition opportunities, adequacy of financing, and availability of experienced management employees to implement the Company's growth strategy; and customer demand and response to products and services offered by the Company. The Company expressly disclaims any obligations to release publicly any updates or revisions to these forward-looking statements to reflect any change in its views or expectations. PART II. OTHER INFORMATION AZZ incorporated Item 4. Submissions of Matters to a Vote of Security Holders - ---------------------------------------------------------------- Shareholders at the Annual Meeting on July 10, 2001, reelected four incumbent directors, L. C. Martin, Dr. H. Kirk Downey, Daniel R. Feehan and R. J. Schumacher. Of the 4,308,577 shares represented at the meeting, 3,986,894 shares (92.5%) were voted for Mr. Martin, 4,019,799 shares (93.3%) were voted for Dr. Downey, 3,971,022 shares (92.2%) were voted for Mr. Feehan and 4,022,131 shares (92.4%) were voted for Mr. Schumacher. Other directors continuing in office are David Dingus, Sam Rosen, Martin C. Bowen, Dana Perry, Kevern R. Joyce and Daniel Berce. Two proposals by the Board of Directors were submitted to the stockholders at the Annual Meeting, with the following vote tabulation. <TABLE> <CAPTION> Approval of the Company's 2001 Long Term Incentive Plan Approved/Failed to Approve -------------------------- <S> <C> <C> <C> Shares for: 2,028,619 66.3% Shares Against: 1,028,376 33.6% APPROVED Shares Abstained: 13,768 N/A Non-Vote 1,219,814 N/A Approval of Ratification of the Appointment of Ernst & Young LLP as Auditors. Shares for: 4,282,666 99.4% Shares Against: 16,753 .4% APPROVED Shares Abstained: 9,158 .2% </TABLE> 10
Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (A) Exhibits - There were no exhibits filed with this 10-Q for the three months ended May 31, 2001. (B) Reports on Form 8-K - There were no 8-K's filed during the three months ended May 31, 2001. All other schedules and compliance information called for by the instructions for Form 10-Q have been omitted since the required information is not present or not present in amounts sufficient to require submission. 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: 7/13/01 /s/ Dana Perry ------- --------------------------------------- Dana Perry, Vice President for Finance Chief Financial Officer 11