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: August 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 August 31, 2001 Common Stock, $1.00 Par Value 5,123,031 ----------------------------- ----------------------- Class Number of Shares
AZZ incorporated INDEX ----- <TABLE> <CAPTION> Page No. -------- <S> <C> PART I. Financial Information --------------------- Item 1. Financial Statements Consolidated Condensed Balance Sheets at August 31, 2001 and February 28, 2001 3 Consolidated Condensed Statements of Income for the Periods Ended August 31, 2001 and August 31, 2000 4 Consolidated Condensed Statements of Cash Flow for the Periods Ended August 31, 2001 and August 31, 2000 5 Notes to Consolidated Condensed Financial Statements 6-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 9-11 PART II. Other Information ----------------- Item 6. Exhibits and Reports on Form 8-K 11 SIGNATURES 11 </TABLE> 2
PART I. Financial Information ITEM 1. Financial Statements AZZ incorporated Consolidated Condensed Income Statement <TABLE> <CAPTION> 08/31/01 02/28/01 ASSETS (UNAUDITED) (AUDITED) ------ ------------- ----------- <S> <C> <C> CURRENT ASSETS CASH AND CASH EQUIVALENTS $ 1,444,712 $ 1,446,502 ACCOUNTS RECEIVABLE (NET OF ALLOWANCE) 21,386,782 21,576,988 INVENTORIES RAW MATERIAL 9,484,720 9,307,210 WORK-IN-PROCESS 2,451,068 2,562,201 FINISHED GOODS 1,583,423 1,509,960 REVENUE IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS 397,100 2,432,765 DEFERRED INCOME TAXES 789,247 789,247 PREPAID EXPENSES AND OTHER 315,586 416,710 ------------------ ---------------- TOTAL CURRENT ASSETS 37,852,638 40,041,583 PROPERTY,PLANT AND EQUIPMENT, NET 31,836,733 28,750,429 INTANGIBLE ASSETS, NET 18,518,897 19,120,158 OTHER ASSETS 483,427 455,475 ---------------- -------------- TOTAL ASSETS $ 88,691,695 $ 88,367,645 ================== ================ LIABILITIES AND SHAREHOLDERS' EQUITY ------------------------------------ CURRENT LIABILITIES: LONG TERM DEBT DUE WITHIN ONE YEAR $ 4,345,284 $ 4,345,284 ACCOUNTS PAYABLE 7,921,559 9,221,135 BILLINGS IN EXCESS OF REVENUE ON UNCOMPLETED CONTRACTS 101,695 60,093 ACCRUED LIABILITIES 7,247,572 7,683,096 ------------------ ---------------- TOTAL CURRENT LIABILITIES 19,616,110 21,309,608 LONG TERM DEBT DUE AFTER ONE YEAR 20,294,445 22,947,087 DEFERRED INCOME TAX 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 12,141,938 11,777,305 ACCUMULATED OTHER COMPRENSIVE INCOME (351,165) 0 RETAINED EARNINGS 40,947,304 37,731,715 LESS COMMON STOCK HELD IN TREASURY ( 1,181,549 AND 1,336,343 SHARES AT COST RESPECTIVELY) (10,992,458) (12,433,591) ------------------ ---------------- TOTAL SHAREHOLDERS' EQUITY 48,050,199 43,380,009 ------------------ ---------------- TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 88,691,695 $ 88,367,645 ================== ================ </TABLE> See Accompanying Notes to Consolidated Condensed Financial Statements 3
PART I. Financial Information ITEM 1. Financial Statements AZZ incorporated Consolidated Condensed Balance Sheet <TABLE> <CAPTION> THREE MONTHS ENDED SIX MONTHS ENDED 08/31/01 08/31/00 08/31/01 08/31/00 (UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED) ----------------- ---------------- ----------------- ----------------- <S> <C> <C> <C> <C> NET SALES $ 32,873,513 $ 30,473,979 $ 67,179,155 $ 58,418,430 COSTS AND EXPENSES COST OF SALES 25,480,688 22,728,101 51,725,945 43,472,794 SELLING/G & A EXPENSES 3,917,506 3,766,848 7,931,123 7,280,366 INTEREST EXPENSE 437,981 612,465 903,484 1,240,590 OTHER EXPENSE 71,982 73,410 143,666 137,886 -------------------- ------------------- -------------------- ------------------- 29,908,157 27,180,824 60,704,218 52,131,636 -------------------- ------------------- -------------------- ------------------- INCOME BEFORE INCOME TAXES 2,965,356 3,293,155 6,474,937 6,286,794 PROVISION FOR INCOME TAXES 1,129,786 1,240,807 2,463,586 2,363,720 -------------------- ------------------- -------------------- ------------------- NET INCOME $ 1,835,570 $ 2,052,348 $ 4,011,351 $ 3,923,074 ==================== =================== ==================== =================== INCOME PER SHARE (BASIC) $ 0.36 $ 0.42 $ 0.80 $ 0.81 (DILUTED) $ 0.36 $ 0.41 $ 0.78 $ 0.79 CASH DIVIDEND PER SHARE DECLARED $ 0.00 $ 0.00 $ 0.16 $ 0.00 </TABLE> See Accompanying Notes to Consolidated Condensed Financial Statements 4
PART I. Financial Information ITEM 1. Financial Statements AZZ incorporated Consolidated Condensed Statements of Cash Flows (Unaudited) <TABLE> <CAPTION> SIX MONTHS ENDING 08/31/01 08/31/00 ---------------- ----------------- <S> <C> <C> CASH FLOWS PROVIDED BY OPERATIONS: NET INCOME $ 4,011,351 $ 3,923,074 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES: PROVISION FOR BAD DEBTS 157,417 90,100 AMORTIZATION AND DEPRECIATION 3,039,638 2,840,055 NET GAIN ON SALE OF PROPERTY,PLANT & EQUIPMENT (7,779) 1,421 OTHER 93,572 264,735 INCREASE (DECREASE) FROM CHANGES IN ASSETS & LIABILITIES ACCOUNTS RECEIVABLE (338,825) 544,853 INVENTORIES (139,840) (1,630,737) PREPAID EXPENSES AND OTHER 101,124 22,354 OTHER ASSETS (34,765) 85,074 NET CHANGE IN BILLINGS RELATED TO COSTS AND ESTIMATED 2,077,267 (899,871) EARNINGS ON UNCOMPLETED CONTRACTS ACCOUNTS PAYABLE (1,299,576) 992,164 ACCRUED LIABILITIES (786,689) (334,324) ------------------- ------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 6,872,895 5,898,898 CASH FLOWS USED FOR INVESTING ACTIVITIES: PROCEEDS FROM SALE OF EQUIPMENT 31,951 55,488 PURCHASE OF PROPERTY PLANT AND EQUIPMENT (5,542,041) (2,229,767) PROCEEDS FROM THE SALE OF LONG TERM INVESTMENTS - 200,000 ACQUISTION OF SUBSIDIARY, PURCHASE PRICE ADJUSTMENT 371,615 - ------------------- ------------------- NET CASH USED IN INVESTING ACTIVITIES (5,138,475) (1,974,279) ------------------- ------------------- CASH FLOWS FROM FINANCING ACTIVITIES: PROCEEDS FROM EXERCISE OF STOCK OPTIONS 1,712,194 906,557 PAYMENTS ON LONG TERM DEBT (2,652,642) (4,757,990) CASH DIVIDENDS PAID (795,762) (770,318) ------------------- ------------------- NET CASH USED IN FINANCING ACTIVITIES (1,736,210) (4,621,751) ------------------- ------------------- NET DECREASE IN CASH & CASH EQUIVALENTS (1,790) (697,132) CASH & CASH EQUIVALENTS , BEGINNING OF PERIOD 1,446,502 1,328,139 ------------------- ------------------- CASH & CASH EQUIVALENTS, END OF PERIOD $ 1,444,712 $ 631,007 =================== =================== </TABLE> See Accompanying Notes to Consolidated 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 accruals) necessary to present fairly the financial position of the Company as of August 31, 2001, and the results of its operations and cash flows for the periods ended August 31, 2001 and 2000. 3. Earnings per share is based on the month-end 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) (in 000's except shares) <TABLE> <CAPTION> Three months ending August 31, Six months ending August 31, 2001 2000 2001 2000 ------------------ ------------------ ----------------- -------------- <S> <C> <C> <C> Numerator: Net income for basic and diluted earnings per common share $ 1,836 $ $ 2,052 $ 4,011 $ 3,923 Denominator: Denominator for basic earnings per common share -weighted average shares 5,081,419 4,878,307 5,031,105 4,848,083 Effect of dilutive securities: Employee and Director stock options 85,056 131,472 97,299 115,027 ------------------ ------------------ ----------------- -------------- Denominator for diluted earnings per common share -adjusted weighted- average shares and assumed conversions 5,166,475 5,009,779 5,128,404 4,963,110 ================== ================== ================= ============== Basic earnings per common share $ .36 $ .42 $ .80 $ .81 ================== ================== ================= ============== Diluted earnings per common share $ .36 $ .41 $ .78 $ .79 ================== ================== ================= ============== </TABLE> 6
4. A summary discussion of the Company's operating segments is contained on page 28 and 29 of the 2001 Annual Shareholders' Report. Information regarding operations and assets by segment in thousands is as follows: (unaudited) <TABLE> <CAPTION> Three Months Ended Aug 31, Six Months Ended Aug 31, 2001 2000 2001 2000 --------------- ------------------ ----------------- ----------------- <S> <C> <C> <C> <C> Net Sales: Electrical and Industrial Products $ 19,940 $ 16,410 $ 40,870 $ 31,263 Galvanizing Services 12,934 14,064 26,309 27,155 --------------- ------------------ ----------------- ----------------- $ 32,874 $ 30,474 $ 67,179 $ 58,418 Operating Income (a): Electrical and Industrial Products $ 3,083 $ 2,510 $ 6,633 $ 4,534 Galvanizing Services 1,734 2,847 3,587 5,644 --------------- ------------------ ----------------- ----------------- $ 4,817 $ 5,357 $ 10,220 $ 10,178 General Corporate Expense $ 1,353 $ 1,436 $ 2,761 $ 2,648 Interest Expense 438 613 904 1,241 Other (Income) Exp., Net (b) 61 15 80 2 --------------- ------------------ ----------------- ----------------- $ 1,852 $ 2,064 $ 3,745 $ 3,891 Income Before Income Taxes $ 2,965 $ 3,293 $ 6,475 $ 6,287 =============== ================== ================= ================= Total Assets: Electrical and Industrial Products $ 45,462 $ 43,901 $ 45,462 $ 43,901 Galvanizing Services 40,577 39,593 40,577 39,593 Corporate 2,653 1,503 2,653 1,503 --------------- ------------------ ----------------- ----------------- $ 88,692 $ 84,997 $ 88,692 $ 84,997 =============== ================== ================= ================= </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. Impact of Recently Issued Accounting Standards 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 7
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. 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 first six month of fiscal 2002, an additional $55,000 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. In June 2001, the Financial Accounting Standards Board issued Statements of Accounting Standards No. 141, Business Combinations, and No. 142, Goodwill and Other Intangible Assets, effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill [and intangible assets deemed to have indefinite lives] will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements. Other intangible assets will continue to be amortized over their useful lives. The Company will apply the new rules on accounting for goodwill and other intangible assets beginning the first quarter of fiscal 2003. Application of the non-amortization provision of the Statement is expected to result in an increase in net income after taxes of $970,000 or 19 cents per share on an annual basis. During 2003, the Company will perform the first of the required impairment tests of goodwill and indefinite lived intangible assets as of March 1,2002 and has not yet determined what the effect of these tests will be on earnings and financial position of the Company. 6. On July 31, 2001, AZZ incorporated signed a letter of intent to acquire Central Electric Company, headquartered in Fulton, Missouri. Central Electric is made up of three operations consisting of the metal clad switchgear in Fulton, Missouri, the power center operation in Tulsa, Oklahoma, and relay panels and non-segmented bus duct in Nashville, Tennessee. The consolidated revenues of Central Electric are approximately $50 million and a backlog that approximates $45 million. The estimated cost of the acquisition is $28 million excluding 8
transaction costs. The acquisition will be paid for with approximately $17 million of cash; approximately $1.8 million in AZZ incorporated stock and the assumption of liabilities in the amount of approximately $9 million. Item 2. Management's Discussion and Analysis of Financial Condition and -------------------------------------------------------------------------- Results of operations --------------------- RESULTS OF OPERATIONS ---------------------- For the three-month and six-month periods ended August 31, 2001, consolidated net sales increased 8% and 15%, respectively, as compared to the same periods in fiscal 2001. Net sales in the Electrical and Industrial Products Segment increased $3.5 million or 22% for the three-month period ended August 31, 2001, and $9.6 million or 31% for the six-month period ended August 31, 2001, as compared to the same periods in fiscal 2001. Revenues for this segments electrical products increased 18.9% to $13.3 million for the three-month period ended August 31, 2001 and 32.1% to $27.9 million for the six-month period ended August 31, 2001, as compared to the same periods in fiscal 2001. These products continue to see dramatic growth in the electrical markets served brought on by the deregulation of the power industry and the increased need for reliable electricity. Revenues for this segments industrial products increased 27.1% to $6.7 million for the three-month period ended August 31, 2001 and 27.9% to $13 million for the six-month period ended August 31, 2001, as compared to the same periods in fiscal 2001. Backlog for the Electrical and Industrial Products Segment at the end of August 31, 2001, was $56.7 million compared to $38.2 million at the end of August 31, 2000. The electrical products backlog increased $16.2 million to $51.1 million while the industrial products backlog increased $2.2 million to $5.5 million. Net revenues in the Galvanizing Services Segment decreased $1.1 million or 8% and $846,000 or 3% for the three and six-month periods ended August 31, 2001, as compared to the same periods in fiscal 2001. The severe downturn in the steel fabrication and telecommunication market negatively impacted revenues for this segment for the periods ended August 31, 2001. Consolidated operating income (net sales less operating expenses) decreased 10% for the three-month period ended August 31,2001 and were flat for the six-month period ended August 31, 2001, as compared to the same periods in fiscal 2001. Operating income in the Electrical and Industrial Products Segment increased $573,000 or 23% and $2.1 million or 46% for the three and six-month periods ended August 31, 2001 as compared to the same periods in fiscal 2001. Increases in operating income were experienced in all of this segments product lines for the three and six-month periods ended August 31, 2001 as compared to the same periods in fiscal 2001. The significant percentage increase that was achieved in operating income is reflective of the continued leverage that is being achieved with volume increases. In the Galvanizing Services Segment, operating income decreased $1.1 million or 39% and $2.1 million or 36% for the three and six- month periods ended August 31, 2001 as compared to the same periods in fiscal 2001. The severe downturn of the steel fabrication and telecommunication market created pricing pressures to maintain market share. In addition increases in inflationary costs such as depreciation and employee benefits couldn't be passed along through price increases due the pricing pressures in the markets served. This segment was also negatively impacted by the flood in the Houston area causing the plant to close a portion of the month of June. General corporate expenses (selling, general and administrative expense, and other (income) expense) for the three and six-month periods ended August 31, 2001, increased $149,000 or 4% and $657,000 or 9% as compared to the same periods in fiscal 2001. As a percent of sales, general corporate 9
expenses were 12.1% and 12% for the three and six-month periods ended August 31, 2001, as compared to 12.6% and 12.7% to the same periods in fiscal 2001. Net interest expense for the three and six-month periods ended August 31, 2001, was $438,000 and $903,000, a decrease of 28% and 27%, respectively, compared to the same periods in fiscal 2001. The decrease is due to the reduction of outstanding debt balances and reduced interest rates on our variable rate debt. LIQUIDITY AND CAPITAL RESOURCES ------------------------------- Net cash provided by operations was $6.9 million for the six-month period that ended August 31, 2001, compared to $5.9 million for the same period in fiscal 2001. Net cash provided by operations was generated from $4 million in net income and $3 million in depreciation and amortization, offset by net changes in operating assets and liabilities and other of $100,000. During the six-month period ended August 31, 2001, capital improvements were made in the amount of $5.5 million, long-term debt was repaid in the amount of $2.7 million, and cash dividends of $796,000 were paid. Proceeds from the exercise of stock options generated $1.7 million. 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 August 31, 2001, the Company had $5.3 million outstanding under the revolving line of credit and $19.3 million outstanding under the two term facilities. At August 31, 2001, the Company had approximately $14.2 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. 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 10
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 6. Exhibits and Reports on Form 8-K ----------------------------------------- (A) Exhibits - There were no exhibits files with this 10-Q for the three months ended August 31, 2001. (B) Reports on Form 8-K - No reports on Form 8-K were filed during the three months ended August 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: 10/12/01 /s/ Dana Perry -------- -------------------------------------- Dana Perry, Vice President for Finance Chief Financial Officer 11