XNYS:AZZ AZZ Inc Quarterly Report 10-Q Filing - 5/31/2012

Effective Date 5/31/2012

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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 1-12777

 

 

AZZ incorporated

(Exact name of registrant as specified in its charter)

 

 

 

TEXAS   75-0948250

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

One Museum Place, Suite 500

3100 West Seventh Street

Fort Worth, Texas

  76107
(Address of principal executive offices)   (Zip Code)

(817) 810-0095

Registrant's telephone number, including area code:

NONE

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes  x            No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes  x             No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, 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   x
Non-accelerated filer   ¨    Smaller Reporting Company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨             No  x

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, 2012:
Common Stock, $1.00 par value per share    25,275,390

 

 

 


Table of Contents

AZZ incorporated

INDEX

 

         PAGE
NO.
 
PART I.  

FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Condensed Financial Statements

  
 

Consolidated Balance Sheets at May 31, 2012 and February 29, 2012

     3   
 

Consolidated Income Statements for the Three Months Ended May 31, 2012 and May 31, 2011

     4   
 

Consolidated Statements of Comprehensive Income for the Three Months Ended May 31, 2012 and May 31, 2011

     5   
 

Consolidated Statements of Cash Flows for the Three Months Ended May 31, 2012 and May 31, 2011

     6   
 

Consolidated Statement of Shareholders’ Equity for the Three Months Ended May 31, 2012

     7   
 

Notes to Condensed Consolidated Financial Statements

     8-12   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     13-21   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     22   

Item 4.

 

Controls and Procedures

     22   
PART II.  

OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     23   

Item 1A.

 

Risk Factors

     23   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     23   

Item 3.

 

Defaults Upon Senior Securities

     23   

Item 4.

 

Mine Safety Disclosures

     23   

Item 5.

 

Other Information

     23   

Item 6.

 

Exhibits

     23   
 

SIGNATURES

     24   
 

EXHIBIT INDEX

     25-26   


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED BALANCE SHEETS

 

     05/31/12     02/29/12  
     (Unaudited)        

Assets

    

Current Assets:

    

Cash and Cash Equivalents

   $ 139,317,814      $ 143,302,666   

Accounts Receivable (Net of Allowance for Doubtful Accounts of $1,000,000 at May 31, 2012 and $898,000 at February 29, 2012)

     80,053,625        74,647,303   

Inventories:

    

Raw Material

     41,693,064        44,008,243   

Work-In-Process

     19,345,483        13,860,151   

Finished Goods

     2,287,831        2,412,736   

Costs and Estimated Earnings In Excess of Billings On Uncompleted Contracts

     15,015,326        14,038,161   

Deferred Income Taxes

     7,364,138        7,654,781   

Prepaid Expenses and Other

     4,888,161        2,811,858   
  

 

 

   

 

 

 

Total Current Assets

     309,965,442        302,735,899   

Property, Plant and Equipment, Net

     131,585,146        135,826,703   

Goodwill

     120,431,145        121,383,863   

Intangibles and Other Assets

     45,264,875        46,828,100   
  

 

 

   

 

 

 
   $ 607,246,608      $ 606,774,565   
  

 

 

   

 

 

 

Liabilities and Shareholders’ Equity

    

Current Liabilities:

    

Accounts Payable

   $ 25,910,523      $ 24,401,194   

Income Tax Payable

     7,107,521        998,496   

Accrued Salaries and Wages

     5,185,736        7,988,594   

Other Accrued Liabilities

     14,907,310        18,049,283   

Customer Advance Payment

     10,286,029        11,267,525   

Long Term Debt Due Within One Year

     14,285,714        14,285,714   

Billings In Excess of Costs and Estimated Earnings On Uncompleted Contracts

     988,750        987,771   
  

 

 

   

 

 

 

Total Current Liabilities

     78,671,583        77,978,577   

Long-Term Debt Due After One Year

     196,428,571        210,714,286   

Deferred Income Taxes

     31,812,214        30,472,937   

Shareholders’ Equity:

    

Common Stock, $1 Par Value, Shares Authorized 50,000,000, Shares Issued (25,275,390 Shares at May 31, 2012 and 25,218,320 Shares at February 29, 2012)

     25,275,390        25,218,320   

Capital In Excess of Par Value

     15,838,347        14,200,811   

Retained Earnings

     259,889,619        247,059,938   

Accumulated Other Comprehensive Income (Loss)

     (669,116     1,303,974   

Less Common Stock Held In Treasury, At Cost (0 Shares at May 31, 2012 and 53,090 Shares at February 29, 2012)

     —          (174,278
  

 

 

   

 

 

 

Total Shareholders’ Equity

     300,334,240        287,608,765   
  

 

 

   

 

 

 
   $ 607,246,608      $ 606,774,565   
  

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

3


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED INCOME STATEMENTS

 

     THREE MONTHS ENDED  
     5/31/12     5/31/11  
     (Unaudited)     (Unaudited)  

Net Sales

   $ 127,142,864      $ 114,332,931   

Costs and Expenses

    

Cost of Sales

     89,277,551        83,264,145   

Selling, General and Administrative

     15,356,217        13,049,354   

Interest Expense

     3,340,166        3,470,539   

Net (Gain) Loss On Insurance Settlement or On Sale of Property, Plant and Equipment

     (5,969,081     231,009   

Other (Income) Expense

     48,309        (647,429
  

 

 

   

 

 

 
     102,053,162        99,367,618   
  

 

 

   

 

 

 

Income Before Income Taxes

     25,089,702        14,965,313   

Income Tax Expense

     9,103,762        5,500,112   
  

 

 

   

 

 

 

Net Income

   $ 15,985,940      $ 9,465,201   
  

 

 

   

 

 

 

Earnings Per Common Share

    

Basic Earnings Per Share

   $ 0.63      $ 0.38   
  

 

 

   

 

 

 

Diluted Earnings Per Share

   $ 0.63      $ 0.37   
  

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

4


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

     THREE MONTHS ENDED  
     5/31/12     5/31/11  
     (Unaudited)     (Unaudited)  

Net Income

   $ 15,985,940      $ 9,465,201   

Other Comprehensive Income:

    

Foreign Currency Translation Adjustments

    

Unrealized Translation Gains (Losses)

     (1,959,531 )     73,635   

Interest Rate Swap, Net of Income Tax of $7,301 and $7,301

     (13,559 )     (13,559 )
  

 

 

   

 

 

 

Other Comprehensive Income

     (1,973,090     60,076   
  

 

 

   

 

 

 

Comprehensive Income

   $ 14,012,850      $ 9,525,277   
  

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements.

 

5


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

     THREE MONTHS ENDED  
     5/31/12     5/31/11  
     (Unaudited)     (Unaudited)  

Cash Flows From Operating Activities:

    

Net Income

   $ 15,985,940      $ 9,465,201   

Adjustments To Reconcile Net Income To Net Cash Provided By Operating Activities:

    

Provision For Doubtful Accounts

     342,542        76,121   

Amortization and Depreciation

     5,814,927        5,800,067   

Deferred Income Tax (Benefit) Expense

     1,567,655        136,753   

Net (Gain) Loss On Insurance Settlement or On Sale of Property, Plant & Equipment

     (5,969,081     231,009   

Amortization of Deferred Borrowing Costs

     72,256        82,599   

Share Based Compensation Expense

     1,603,004        1,565,051   

Effects of Changes In Assets & Liabilities:

    

Accounts Receivable

     4,112,905        1,363,185   

Inventories

     (4,650,527     (1,693,757

Prepaid Expenses and Other

     (2,093,721     (2,353,552

Other Assets

     13,182        (87,417

Net Change In Billings Related To Costs and Estimated Earnings On Uncompleted Contracts

     (976,186     (638,697

Accounts Payable

     1,535,582        1,935,677   

Other Accrued Liabilities and Income Taxes Payable

     (1,134,000     (6,212,406
  

 

 

   

 

 

 

Net Cash Provided By Operating Activities

     16,224,478        9,669,834   
  

 

 

   

 

 

 

Cash Flows From (Used For) Investing Activities:

    

Proceeds From Sale Or Insurance Settlement of Property, Plant, and Equipment

     9,331        134,891   

Purchase of Property, Plant and Equipment

     (3,489,235     (4,692,469
  

 

 

   

 

 

 

Net Cash Provided by (Used In) Investing Activities

     (3,479,904     (4,557,578
  

 

 

   

 

 

 

Cash Flows From (Used For) Financing Activities:

    

Payments on Long Term Debt

     (14,285,714     —     

Excess Tax Benefits From Stock Options and SARs Exercises

     604,503        39,606   

Dividends Paid

     (3,156,259     (3,135,902
  

 

 

   

 

 

 

Net Cash Used In Financing Activities

     (16,837,470     (3,096,296
  

 

 

   

 

 

 

Effect of Exchange Rate Changes on Cash

     108,044        (5,526
  

 

 

   

 

 

 

Net (Decrease) Increase In Cash & Cash Equivalents

     (3,984,852     2,010,434   

Cash & Cash Equivalents At Beginning of Period

     143,302,666        138,389,837   
  

 

 

   

 

 

 

Cash & Cash Equivalents At End of Period

   $ 139,317,814      $ 140,400,271   
  

 

 

   

 

 

 

Supplemental Disclosures of Cash Flow Information

    

Cash Paid For Interest

   $ 3,270,394      $ 3,241,852   
  

 

 

   

 

 

 

Cash Paid For Income Taxes

   $ 718,626      $ 2,662,900   
  

 

 

   

 

 

 

Supplemental Disclosure of Non-cash Investing Activity

    

Insurance Receivable for Fixed Assets Damaged by Fire

   $ 2,503,408      $ —     
  

 

 

   

 

 

 

See Accompanying Notes to Condensed Consolidated Financial Statements

 

6


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1Financial Statements

CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(unaudited)

 

     Common Stock      Capital in
Excess of
    Retained    

Accumulated

Other
Comprehensive

    Treasury        
     Shares      Amount      Par Value     Earnings     Income (Loss)     Stock     Total  

Balance at February 29, 2012

     25,218,320       $ 25,218,320       $ 14,200,811      $ 247,059,938      $ 1,303,974      $ (174,278   $ 287,608,765   

Stock Compensation

           1,603,004              1,603,004   

Restricted Stock Units

           (516,916         103,537        (413,379

Stock Issued for SARs

     57,070        57,070         (389,029         15,362        (316,597

Employee Stock Purchase Plan

           335,974            55,379        391,353   

Federal Income Tax Deducted on Stock Options and SARs

           604,503              604,503   

Cash Dividend Paid

             (3,156,259         (3,156,259

Net Income

             15,985,940            15,985,940   

Foreign Currency Translation

               (1,959,531       (1,959,531

Interest Rate Swap, Net of $7,301 of Income Tax

               (13,559       (13,559
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance at May 31, 2012

     25,275,390       $ 25,275,390       $ 15,838,347      $ 259,889,619      $ (669,116   $ —        $ 300,334,240   
  

 

 

    

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

7


Table of Contents

AZZ incorporated

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

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 (the “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 29, 2012 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 ended February 29, 2012 is referred to as fiscal 2012.

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, 2012, and the results of its operations and cash flows for the three-month periods ended May 31, 2012 and 2011.

 

2. Earnings per share.

Earnings per share is based on the weighted average number of shares outstanding during each period, adjusted for the dilutive effect of stock awards. 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 approved by the Board of Directors on June 28, 2012, all share data has been retroactively restated.

The following table sets forth the computation of basic and diluted earnings per share:

 

     Three months ended May 31,  
     2012      2011  
     (Unaudited)  
    

(in thousands except share

and per share data)

 

Numerator:

     

Net income for basic and diluted earnings per common share

   $ 15,986       $ 9,465   
  

 

 

    

 

 

 

Denominator:

     

Denominator for basic earnings per common share –weighted average shares

     25,244         25,078   

Effect of dilutive securities:

     

Stock options/Equity SARs and Restricted Stock

     210         212   
  

 

 

    

 

 

 

Denominator for diluted earnings per common share

     25,454         25,290   
  

 

 

    

 

 

 

Earnings per share basic and diluted:

     

Basic earnings per common share

   $ 0.63       $ 0.38   
  

 

 

    

 

 

 

Diluted earnings per common share

   $ 0.63       $ 0.37   
  

 

 

    

 

 

 

 

8


Table of Contents
3. Stock-based Compensation.

The Company has two share-based compensation plans (the “Plan” or “Plans”). The purpose of both Plans is to promote the growth and prosperity of the Company by permitting the Company to grant to its employees, directors and advisors various types of restricted stock unit awards, stock appreciation rights and options to purchase common stock of the Company. The maximum number of shares that may be issued under the Plans is 5,000,000 shares. As of May 31, 2012, the Company has approximately 1,165,672 shares available for future issuance under the Plans.

Restricted Stock Unit Awards

Restricted stock unit awards are valued at the market price of our common stock on the grant date. These awards generally have a three year cliff vesting schedule but may vest early in accordance with the applicable Plan’s accelerated vesting provisions.

Activity in our non-vested restricted stock unit awards for the period ended May 31, 2012 is as follows:

 

     Restricted
Stock Units
    Weighted
Average Grant
Date Fair Value
 

Non-Vested Balance as of February 29, 2012

     122,450      $ 13.89   

Granted

     40,792        25.67   

Vested

     (56,664     9.06   

Forfeited

     —          —     
  

 

 

   

Non-Vested Balance for the period ended May 31, 2012

     106,578      $ 20.82   
  

 

 

   

Stock Appreciation Rights and Option Awards

Stock appreciation rights and option awards are granted with an exercise price equal to the market value of our common stock on the date of grant. These awards generally have a contractual term of 7 years and vest ratably over a period of three years although some may vest immediately on issuance. These awards are valued using the Black-Scholes option pricing model.

A summary of the Company’s stock appreciation rights and option awards activity for the three month period ended May 31, 2012 is as follows:

 

     Options/ SAR’s     Weighted Average
Exercise Price
 

Outstanding as of February 29, 2012

     573,000      $ 15.46   

Granted

     116,114        25.67   

Exercised

     (109,000     12.23   

Forfeited

     —          —     
  

 

 

   

Outstanding at end of the period ended May 31, 2012

     580,114      $ 18.11   
  

 

 

   

Exercisable at end of period ended May 31, 2012

     258,104      $ 14.21   
  

 

 

   

Weighted average fair value of options and SARs granted during the period ended May 31, 2012

     $ 8.79   

 

9


Table of Contents

The average remaining contractual term for those options/ stock appreciation rights outstanding at May 31, 2012, is 5.24 years, with an aggregate intrinsic value of $5.1 million. The average remaining contractual terms for those options/ stock appreciation rights that are exercisable as of May 31, 2012 is 4.51 years, with an aggregate intrinsic value of $3.3 million.

Employee Stock Purchase Plan

The Company also has an employee stock purchase plan which allows employees of the Company to purchase common stock of the Company through accumulated payroll deductions. Offerings under this plan have a duration of 24 months. On the first day of an offering period (the enrollment date) the participant is granted the option to purchase shares on each exercise date at the lower of 85% of the market value of a share of our common stock on the enrollment date or the exercise date. The participant’s right to purchase common stock under the plan is restricted to no more than $25,000 per calendar year and the participant may not purchase more than 10,000 shares during any offering period. Participants may terminate their interest in a given offering or a given exercise period by withdrawing all of their accumulated payroll deductions at any time prior to the end of the offering period. The fair value of the estimated number of shares to be issued under each offering is determined using the Black-Scholes option pricing model. We estimate that 12,786 shares of common stock will be issued in accordance with the plan to those enrollees in the March 5, 2012 plan.

Share-based compensation expense and related income tax benefits related to all the plans listed above were as follows:

 

For the period ended May 31,    2012      2011  

Compensation Expense

   $ 1,603,004       $ 1,565,051   

Income tax benefits

   $ 561,051       $ 547,768   

Unrecognized compensation cost related to all the above at May 31, 2012 totals $1,806,935.

The Company’s policy is to issue shares required under these Plans from the Company’s authorized but unissued shares and treasury.

 

10


Table of Contents
4. Segments.

We have two operating segments as defined in our Annual Report on Form 10-K for the year ended February 29, 2012. Information regarding operations and assets by segment is as follows:

 

     Three Months Ended May 31,  
     2012     2011  
     (unaudited)  
     (in thousands)  

Net Sales:

    

Electrical and Industrial Products

   $ 44,682      $ 48,266   

Galvanizing Services

     82,461        66,067   
  

 

 

   

 

 

 
   $ 127,143      $ 114,333   
  

 

 

   

 

 

 

Segment Operating Income (a):

    

Electrical and Industrial Products

   $ 6,838      $ 7,414   

Galvanizing Services

     22,633        17,121   
  

 

 

   

 

 

 

Total Segment Operating Income

   $ 29,471      $ 24,535   
  

 

 

   

 

 

 

General Corporate Expense (b)

   $ 6,774      $ 6,233   

Interest Expense

     3,340        3,471   

Net (Gain) on Insurance Settlement

     (5,960     —     

Other (Income) Expense, Net (c)

     227        (134 )
  

 

 

   

 

 

 
   $ 4,381      $ 9,570   
  

 

 

   

 

 

 

Income Before Taxes

   $ 25,090      $ 14,965   
  

 

 

   

 

 

 

Total Assets:

    

Electrical and Industrial Products

   $ 143,205      $ 135,797   

Galvanizing Services

     313,813        278,761   

Corporate

     150,229        156,020   
  

 

 

   

 

 

 
   $ 607,247      $ 570,578   
  

 

 

   

 

 

 

 

(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 other (income) expenses not specifically identifiable to a segment.

 

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Table of Contents
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 2012:

 

     Warranty Reserve  
    

(unaudited)

(in thousands)

 

Balance at February 29, 2012

   $ 1,670   

Warranty costs incurred

     (754

Additions charged to income

     355   
  

 

 

 

Balance at May 31, 2012

   $ 1,271   
  

 

 

 

 

6. Subsequent Events

On June 1, 2012, we completed the acquisition of substantially all of the assets of Nuclear Logistics Inc. (“NLI”), pursuant to the terms of the Asset Purchase Agreement dated April 27, 2012 between NLI, certain shareholders of NLI identified therein, the Company and an indirect wholly-owned subsidiary of the Company formed for the sole purpose of the acquisition (the “Purchase Agreement”). The purchase price paid in connection with the asset purchase was $80 million, along with the assumption of certain liabilities and the payoff of $4.8 million of notes payable at closing. In accordance with the Purchase Agreement, we may be obligated to make an additional payment of up to $20 million based on the future financial performance of the NLI assets. The fair value of the earn out agreement is $9.9 million.

On June 28, 2012, the Board declared a two for one stock split of the Company’s Common Stock in the form of a 100% stock dividend, payable on July 30, 2012 to shareholders of record as of July 16, 2012, with a broker’s cut-off date of July 23, 2012. The stock dividend entitles each shareholder of record as of July 16, 2012 to receive one additional share of common stock for each share then owned. As of February 29, 2012, the most recent fiscal year end, the company had outstanding, approximately 12.6 million shares. Upon completion of the stock dividend, the outstanding shares of AZZ incorporated will be approximately 25.3 million. All share data disclosed has been retroactively restated to reflect the two for one stock split.

 

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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; and acts of war or terrorism inside the United States or abroad. 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 29, 2012 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 year ended February 29, 2012 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 year ended February 29, 2012. 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 Quarterly Report on Form 10-Q.

Orders and Backlog

Our entire backlog relates to our Electrical and Industrial Products Segment. Our backlog was $136.1 million as of May 31, 2012, a decrease of $2.5 million, or 2%, as compared to $138.6 million at February 29, 2012. Our book-to-ship ratio was .98 to 1 for the quarter ended May 31, 2012, as compared to 1.06 to 1 for the same period in the prior year. Orders for the first quarter increased 3%, as compared to the same period in the prior year. The book to ship

 

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ratio decreased as a result of our strategy to maintain price versus accepting new orders with minimal or no margins as a result of market conditions. We expect this trend to continue in the second quarter, but anticipate that markets will improve in the second half of fiscal 2013. We anticipate ending the current fiscal year with a book to ship ratio of 1 to 1.

Backlog Table

(in thousands)(unaudited)

 

     Period Ended           Period Ended       

Backlog

   2/29/12    $ 138,621       2/28/11    $ 108,379   

Bookings

        124,666            120,697   

Shipments

        127,143            114,333   

Backlog

   5/31/12    $ 136,144       5/31/11    $ 114,743   

Book to Ship Ratio

        0.98            1.06   

Segment Revenues

The following table reflects the breakdown of revenue by segment:

 

     Three Months Ended  
     5/31/2012      5/31/2011  
     (in thousands)(unaudited)  

Revenue:

     

Electrical and Industrial Products

   $ 44,682       $ 48,266   

Galvanizing Services

     82,461         66,067   
  

 

 

    

 

 

 

Total Revenue

   $ 127,143       $ 114,333   
  

 

 

    

 

 

 

For the three-month period ended May 31, 2012, consolidated revenues were $127.1 million, an 11% increase as compared to the same period in fiscal 2012. For the quarter ended May 31, 2012, the Electrical and Industrial Products Segment contributed 35% of the Company’s revenues and the Galvanizing Services Segment accounted for the remaining 65% of the combined revenues. For the three month period ended May 31, 2011, the Electrical and Industrial Products Segment contributed 42% of the Company’s revenues and the Galvanizing Services Segment contributed 58% of the combined revenues.

Revenues for the Electrical and Industrial Products Segment decreased $3.6 million, or 7%, for the three-month period ended May 31, 2012, as compared to the same period in fiscal 2012. The decreased revenues were the result of lower revenues from the petrochemical market for the compared periods due to competitive pricing pressure, and our unwillingness to lower prices to our competitor’s levels. In addition, lower demand from the transmission and distribution markets contributed to lower revenues, due to the utilities lower energy demands as a result of lingering economic concerns.

Revenues in the Galvanizing Services Segment increased $16.4 million, or 25%, for the three-month period ended May 31, 2012, as compared to the same period in fiscal 2012. The volume of steel processed for the three month period ended May 31, 2012 accounted for 32% of the increase in revenues while the selling price decreased 7%. The increased revenues in our Galvanizing Services Segment resulted from improved demand from the renewable energy, industrial and OEM markets. In addition to the improvements in these markets, our acquisition of Galvan Metals in the fourth quarter of fiscal 2012, contributed 20% of the increase in revenues.

 

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Segment Operating Income

The following table reflects the breakdown of total operating income by segment:

 

     Three Months Ended  
     5/31/2012      5/31/2011  
     (in thousands)(unaudited)  

Segment Operating Income:

     

Electrical and Industrial Products

   $ 6,838       $ 7,414   

Galvanizing Services

     22,633         17,121   
  

 

 

    

 

 

 

Total Operating Income

   $ 29,471       $ 24,535   
  

 

 

    

 

 

 

Our total operating income increased 20% for the three-month period ended May 31, 2012, to $29.5 million as compared to $24.5 million for the same period in fiscal 2012. Total operating margins increased to 23% for the three month period ended May 31, 2012 as compared to 22% for the same period in fiscal 2012. The Electrical and Industrial Products Segment generated 23% of the operating income for the three months ended May 31, 2012, while the Galvanizing Services Segment produced 77%.

Segment operating income in the Electrical and Industrial Products Segment decreased 8% for the three-month period ended May 31, 2012, to $6.8 million as compared to $7.4 million for the same period in fiscal 2012. Operating margins were 15% for both the three month periods ended May 31, 2012 and May 31, 2011. Operating profits were adversely impacted by lower revenues.

In the Galvanizing Services Segment, operating income increased 32% for the three-month period ended May 31, 2012, to $22.6 million as compared to $17.1 million for the same period in fiscal 2012. Operating margins increased to 27% for the three-month period ended May 31, 2012, as compared to 26% for the same period in fiscal 2012. During the first quarter of fiscal 2013, a loss was recorded in the amount of $.6 million, which resulted from the loss of production at our Joliet, Illinois facility due to a fire that resulted in a total loss of the factory. This loss will be offset with insurance proceeds for business interruption in a future quarter, once the claim is settled. Without this loss, operating margins would have been 28% for the three month period ended May 31, 2012.

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, 2012, were $6.8 million compared to $6.2 million for the same period in fiscal 2012. As a percentage of sales, General Corporate expenses were 5% for both the three-month period ended May 31, 2012, and 2011. For the first quarter of fiscal 2013, the Company has incurred expensed acquisition costs of $.6 million, related to the acquisition of Nuclear Logistics Incorporated (“NLI”), (see Note 6 to the consolidated financial statements).

Interest

Net interest expense for the three-month period ended May 31, 2012 was $3.3 million as compared to $3.5 million for the same period in fiscal 2012. As of May 31, 2012, we had outstanding debt of $210.7 million, compared to $225 million at the same date last year. Our long-term debt to equity ratio was .65 to 1 at May 31, 2012, as compared to .80 to 1 at May 31, 2011.

Net (Gain) On Insurance Settlement

For the three-month period ended May 31, 2012, the company received a portion of the insurance recovery in the amount of $10 million for the fire that occurred on April 29, 2012, at the galvanizing facility in Joliet, Illinois. Based on a preliminary estimate of the damage sustained at the Joliet facility, a pretax asset impairment charge of

 

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approximately $4 million was recorded during the first quarter of fiscal 2013. The net gain on the insurance settlement of property, plant and equipment of $6 million has been disclosed as an item under Net (Gain) Loss On Insurance Settlement or On Sale of Property, Plant and Equipment. During the same period last year the amount reflected was insignificant. We anticipate receiving additional insurance recoveries from these claims in an amount ranging from $10 million to $15 million when all claims are settled.

Other (Income) Expense

During the three-month periods ended May 31, 2012 and 2011, the amount in other (income) expense not specifically identifiable with a segment (see Note 4 to consolidated financial statements) was insignificant.

Income Taxes

The provision for income taxes reflects an effective tax rate of 36.3% for the three-month period ended May 31, 2012, as compared to 36.8% for same period in fiscal 2012.

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 and payment of debt and possible future acquisitions.

Our operating activities generated cash flows of approximately $16.2 million for the three month period ended May 31, 2012 compared to $9.7 million for the same period in the prior fiscal year. Cash flows from operations for the three month period ended May 2012 included net income in the amount of $16.0 million, depreciation and amortization in the amount of $5.8 million, and other adjustments to reconcile net income to net cash in the amount of ($2.4) million. Included in other adjustments were provisions for bad debt in the amount of $.3 million, deferred income taxes in the amount of $1.6 million, net gain on insurance settlement or on sale of property, plant and equipment of $6.0 million and non-cash adjustments in the amount of $1.7 million. Negative cash flow was recognized due to increased inventories, prepaid expenses, and revenue in excess of billings in the amount of $4.7 million, $2.1 million and $1.0 million, respectively, and decreased other accrued liabilities in the amount of $1.1 million. Positive cash flow was recognized due to increased accounts payables in the amount of $1.5 million and decreased accounts receivable and other assets in the amount of $4.1 million and $.01 million, respectively. Accounts receivable average days outstanding were 48 days for the three month period ended May 31, 2012, as compared to 48 days for the same period in the prior fiscal year.

During the three month period ended May 31, 2012, capital improvements were made in the amount of $3.5 million.

Our quarterly dividend was paid on May 3, 2012 in the amount of $3.2 million. During the quarter ended May 31, 2012, a payment of $14.3 million was made to the 2008 Notes discussed below.

Our working capital was $231.3 million at May 31, 2012, as compared to $220.5 million at May 31, 2011.

The Bank of America Credit Agreement provides for an $80 million unsecured revolving line of credit with one lender, Bank of America, maturing on May 25, 2014. The agreement is used to provide for working capital needs, capital improvements, future acquisitions and letter of credit needs.

 

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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 $182.3 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 $30 million.

The Credit Agreement also provides for an applicable margin ranging from 1.00% to 1.75% over the Eurodollar Rate and Commitment Fees ranging from .20% to .30% depending on our Leverage Ratio.

At May 31, 2012, we had no outstanding debt borrowed under the revolving credit agreement; we had letters of credit outstanding at that date in the amount of $17.2 million, which left approximately $62.8 million of additional credit available under the revolving credit facility.

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. In connection with the 2008 Note Offering, the Company obtained the consent of Bank of America to the 2008 Note Offering and the agreement of Bank of America that the 2008 Note Offering will not constitute a default under the Credit 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 Company anticipates using the proceeds from the 2011 Note Offering for possible future acquisitions, working capital needs, capital improvements and future cash dividend payments. In connection with the 2011 Note Offering, the Company obtained the consent of Bank of America to the 2011 Note Offering and the agreement of Bank of America that the 2011 Note Offering will not constitute a default under the Credit Agreement.

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).

We were in compliance at May 31, 2012 with all of our debt covenants.

Our current ratio (current assets/current liabilities) was 3.9 to 1 at May 31, 2012, as compared to 4.2 to 1 at May 31, 2011. Our ratio of long-term debt to shareholders’ equity was .65 to 1 at May 31, 2012.

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 Segment, and zinc and natural gas in the Galvanizing Services Segment. When market conditions allow we attempt to minimize these increases through escalation clauses in customer contracts for copper, aluminum and steel 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.

 

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Subsequent Events

On June 1, 2012, we completed the acquisition of substantially all of the assets of Nuclear Logistics Inc. (“NLI”), pursuant to the terms of the Asset Purchase Agreement dated April 27, 2012 between NLI, certain shareholders of NLI identified therein, the Company and an indirect wholly-owned subsidiary of the Company formed for the sole purpose of the acquisition (the “Purchase Agreement”). The purchase price paid in connection with the asset purchase was $80 million, along with the assumption of certain liabilities and the payoff of $4.8 million of notes payable at closing. In accordance with the Purchase Agreement, we may be obligated to make an additional payment of up to $20 million based on the future financial performance of the NLI assets. The fair value of the earn out agreement is $9.9 million.

On June 28, 2012, the Board declared a two for one stock split of the Company’s Common Stock in the form of a 100% stock dividend, payable on July 30, 2012 to shareholders of record as of July 16, 2012, with a broker’s cut-off date of July 23, 2012. The stock dividend entitles each shareholder of record as of July 16, 2012 to receive one additional share of common stock for each share then owned. As of February 29, 2012, the most recent fiscal year end, the company had outstanding, approximately 12.6 million shares. Upon completion of the stock dividend, the outstanding shares of AZZ incorporated will be approximately 25.3 million. All share data disclosed has been retroactively restated to reflect the two for one stock split.

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, 2012 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 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 addition, we look to get firm pricing contracts from 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.

 

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Other

At May 31, 2012, we had outstanding letters of credit in the amount of $17.2 million. These letters of credit are issued, in lieu of performance and bid bonds, to some of our customers to cover any potential warranty costs that the customer might incur. In addition, as of May 31, 2012, a warranty reserve in the amount of $1.3 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.

 

     Operating
Leases
     Long-Term
Debt
     Interest      Total  
     (In thousands)  

2013

   $ 3,037       $ —         $ 9,449       $ 12,486   

2014

     3,528         14,286         11,678         29,492   

2015

     3,336         14,286         10,786         28,408   

2016

     3,043         14,286         9,895         27,224   

2017

     2,851         14,286         9,004         26,141   

Thereafter

     7,097         153,570         28,883         189,550   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 22,892       $ 210,714       $ 79,695       $ 313,301   
  

 

 

    

 

 

    

 

 

    

 

 

 

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, and 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 to the Annual Consolidated Financial Statements filed on form 10-K.

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 customers' 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 to their inability to make payments and future expectations of conditions that might impact the collectability 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 could 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 and 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 typically recognize revenue for the Galvanizing

 

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Service Segment 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 sheets 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. Our testing concludes goodwill is not reasonably likely to be impaired.

Accounting for Income Taxes—We account for income taxes under the asset and liability method. 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. Deferred tax assets are 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. We recognize the tax benefit from an uncertain tax position only if it is more likely than not that the tax position will be sustained on examination by taxing authorities, based on the technical merits of the position. The tax benefits recognized in the financial statements from such a position should be measured based on the largest benefit that has a greater than a 50% likelihood of being realized upon ultimate settlement. Developing our provision for income taxes requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred tax assets and liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. Our judgments and tax strategies are subject to audit by various taxing authorities.

Stock Options, Stock Appreciation Rights and Restricted Stock Units—Our employees and directors are periodically granted restricted stock units, stock options or stock appreciation rights by the Compensation Committee of the Board of Directors. 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, with the exception of restricted stock units, 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

 

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• Expected term of the option

• Expected dividend yield

• Risk-free interest rate over the expected term

• Expected forfeitures

We have elected to use a Black-Scholes pricing model in the valuation of our stock options and stock appreciation rights. Restricted stock units are valued at the stock price on the date of grant.

These variables are developed using a combination of our internal data with respect to stock price volatility and exercise behavior of option holders and information from outside sources. The development of each of these variables requires a significant amount of judgment. Changes in the values of the above variables would result in different option valuations and, therefore, different amounts of compensation cost.

New Accounting Pronouncements

In May 2011, the FASB issued accounting guidance related to fair value measurement, which amends current guidance to achieve common fair value measurement and disclosure requirements in U.S. GAAP and International Financial Reporting Standards. This guidance generally represents clarification of fair value measurement standards, but also includes instances where a particular principle or requirement for measuring fair value or disclosing information about fair value measurements has changed. This guidance is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011. We adopted this guidance for our fiscal year beginning March 1, 2012. The adoption of this standard had no material impact on our consolidated financial statements.

In June 2011, the FASB issued new guidance regarding the Presentation of Comprehensive Income, which will enhance comparability between entities that report under GAAP and those that report under International Financial Reporting Standards (“IFRS”). This guidance requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of equity. This guidance is effective for the Company’s interim and annual periods beginning after December 15, 2011 and must be applied retrospectively. Early adoption is permitted. This new guidance is in regards to presentation and it had no impact on financial position or results from operations. We adopted this guidance for our fiscal year beginning March 1, 2012.

In September 2011, the FASB issued new guidance regarding the Testing Goodwill for Impairment. This update is intended to simplify goodwill impairment testing by adding an optional qualitative review step to assess whether the required quantitative impairment analysis that exists under current GAAP is necessary. Under the amended rule, a company will not be required to calculate the fair value of a reporting unit that contains recorded goodwill unless it concludes, based on the qualitative assessment, that it is more likely than not (a likelihood of more than 50 percent) that the fair value of that reporting unit is less than its book value. If such a decline in fair value is deemed more likely than not to have occurred, then the quantitative goodwill impairment test that exists under current GAAP must be completed. If not, goodwill is deemed not impaired and no further testing is required until the next annual test date, unless conditions or events before that date raise concerns of potential impairment. The amended goodwill impairment guidance does not affect the manner in which a company estimates fair value. This guidance is effective for the Company for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. We adopted this guidance for our fiscal year beginning March 1, 2012. The adoption of this standard had no material impact on our consolidated financial statements.

 

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Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk affecting our operations results primarily from changes in interest rates and commodity prices. We have only limited involvement with derivative financial instruments and are not a party to any leveraged derivatives.

In the Electrical and Industrial Products Segment, we have exposure to commodity pricing for copper, aluminum, and steel. Increases in price for these items are normally managed through escalation clauses in our customer’s contracts, although during difficult market conditions customers may resist these escalation clauses. In addition, we look to get firm pricing contracts from our vendors on material at the time we receive orders from our customers to minimize risk. We manage our exposures to commodity prices, primarily zinc, with respect to our Galvanizing Services Segment by utilizing agreements with zinc suppliers that include protective caps and fixed contracts to guard against escalating commodity prices. We also secure firm pricing for natural gas supplies with individual utilities when possible. We believe these agreements ensure adequate supplies and partially offset exposure to commodity price escalation.

The Company has exposure to foreign currency exchange related to our Canadian operations.

We do not believe that a hypothetical change of 10% of the interest rate or currency exchange rate that are currently in effect or a change of 10% of commodity prices would have a significantly adverse effect on our results of operations, financial position, or cash flows as long as we are able to pass along the increases in commodity prices to our customers. However, there can be no assurance that either interest rates or commodity prices will not change in excess of the 10% hypothetical amount or that we would be able to pass along rising costs of commodity prices to our customers, which could have an adverse effect on our results of operations, financial position, and cash flows if we are unable to pass along these increases to our customers.

Item 4. Controls and Procedures.

We performed an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date to ensure that information required to be disclosed by us in our reports filed or submitted under the Exchange Act is (a) accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely discussions regarding required disclosure and (b) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

There have been no significant changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

While we believe that our existing disclosure controls and procedures have been effective to accomplish their objectives, we intend to continue to examine, refine and document our disclosure controls and procedures and to monitor ongoing developments in this area. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

 

22


Table of Contents

PART II. OTHER INFORMATION

Item 1. Legal Proceedings.

We are involved from time to time in various suits and claims arising in the normal course of business. In management’s opinion, the ultimate resolution of these matters will not have a material effect on our financial position or results of operations.

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, 2012.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. None.

Item 3. Defaults Upon Senior Securities. None.

Item 4. Mine Safety Disclosures. 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 25, which immediately precedes such exhibits.

 

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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: July 3, 2012       By: /s/ Dana Perry
     

Dana Perry, Senior Vice President for Finance

Principal Financial Officer

 

24


Table of Contents

EXHIBIT INDEX

 

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 Form 8-K filed by the Registrant on November 27, 2007).
3(6)   Amended and Restated Bylaws of AZZ incorporated (incorporated by reference to the Exhibit 3(1) to the Current Report Form 8-K filed by the Registrant on April 3, 2010).
4   Form of Stock Certificate for the Company’s $1.00 par value Common Stock (incorporated by reference to the Quarterly Report Form 10-Q filed by Registrant August 31, 2000).
10(1)   Second Amended and Restated Credit Agreement with Bank of America, N.A., dated May 25, 2006 (incorporated by reference to Exhibit 10(1) of the Form 8-K filed by the Registrant on May 26, 2006).
10(2)   First Amendment to Second Amended and Restated Credit Agreement with Bank of America, N.A., dated February 28, 2007 (incorporated by reference to Exhibit 10(1) of the Form 8-K filed by the Registrant on March 1, 2007).
10(3)   Second Amendment and Consent to Second Amendment and Restated Credit Agreement dated March 31, 2008, by and between AZZ incorporated and Bank of America, N.A. (incorporated by reference to Exhibit 10(3) of the Form 8-K filed by the registrant on April 2, 2008).
10(4)   Note Purchase Agreement dated March 31, 2008, by and among AZZ incorporated and the purchasers listed therein (incorporated by reference to Exhibit 10(1) of the Form 8-K filed by the registrant on April 2, 2008).
10(5)   AZZ incorporated Amended and Restated 2005 Long-Term Incentive Plan (incorporated by reference to Appendix A of the Proxy Statement for the 2008 Annual Shareholders Meeting).
10(6)   AZZ incorporated Employee Stock Purchase Plan (incorporated by reference to Appendix B of the Proxy Statement for the 2008 Annual Shareholders Meeting).
10(7)   1999 Independent Director Share Ownership Plan as Approved on January 19, 1999 and As Amended on September 22, 1999 (incorporated by reference to Exhibit 10(22) of the Annual Report on Form 10-K filed by Registrant for the fiscal year ended February 28, 2001).
10(8)   AZZ incorporated 2001 Long-Term Incentive Plan (incorporated by reference to Exhibit A of the Proxy Statement for the 2001 Annual Shareholders Meeting).
10(9)   AZZ incorporated 2003 Management Incentive Bonus Plan (incorporated by reference to Exhibit 10(20) to the Annual Report on Form 10-K filed by the registrant for the fiscal year ended February 28, 2002).
10(10)   2002 Plan for the Annual Grant of Stock Options to Independent Directors of AZZ incorporated (incorporated by reference to Exhibit 10(27) to the Quarterly Report Form 10-Q filed by the registrant for the quarter ended August 31, 2002).
10(11)   AZZ incorporated Fiscal Year 2005 Stock Appreciation Rights Plan for Directors (incorporated by reference to Exhibit 10(53) to the quarterly report Form 10-Q filed by the Registrant for the quarter ended August 31, 2004).
10(12)   AZZ incorporated Fiscal Year 2005 Stock Appreciation Rights Plan for Key Employees (incorporated by reference to Exhibit 10(54) to the quarterly report Form 10-Q filed by the Registrant for the quarter ended August 31, 2004).

 

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Table of Contents
10(13)   AZZ incorporated 2005 Independent Director Compensation Plan (incorporated by reference to Exhibit 10.2 to the current report on Form 8-K filed by the Registrant on July 14, 2005).
10(14)   Agreement and Plan of Merger by and among AZZ incorporated, Big Kettle Merger Sub, Inc. and North American Galvanizing and Coatings, Inc. dated as of March 31, 2010 (incorporated by reference to Exhibit 2(1) to the current report on Form 8-K filed by the registrant on April 1, 2010).
10(15)   Stockholders Agreement by and among AZZ incorporated, Big Kettle Merger Sub, Inc. and certain stockholders of North American Galvanizing and Coatings, Inc. dated as of March 31, 2010 (incorporated by reference to Exhibit 2(2) to the current report on Form 8-K filed by the registrant on April 1, 2010).
10(16)   Third Amendment to Second Amended and Restated Credit Agreement with Bank of America, N.A., dated December 3, 2008 (filed herewith).
10(17)   Fourth Amendment to Second Amended and Restated Credit Agreement with Bank of America, N.A., dated February 13, 2009 (filed herewith).
10(18)   Fifth Amendment to Second Amended and Restated Credit Agreement with Bank of America, N.A., dated April 29, 2010 (incorporated by reference to Exhibit 10(1) of the Form 8-K filed by the registrant on April 30, 2010).
10(19)   Sixth Amendment to Second Amended and Restated Credit Agreement with Bank of America, N.A., dated January 20, 2012 (incorporated be reference to Exhibit 10(1) of the Form 8-K filed by the registrant on January 23, 2012).
10(20)   Note Purchase Agreement, dated as of January 20, 2011, by and among AZZ incorporated and the purchasers identified therein (incorporated by reference to Exhibit 10.1 of the Current Report on Form 8-K filed by the registrant on January 31, 2011).
10(21)   Asset Purchase Agreement, dated April 27, 2012, by and among AZZ incorporated, AZZ AcqurieCo, Inc., and Nuclear Logistics Incorporated and certain shareholders thereof identified therein (incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed by the registrant on May 3, 2012).
31.1   Chief Executive Officer Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated July 3, 2012. Filed Herewith.
31.2   Chief Financial Officer Certificate pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 dated July 3, 2012. Filed Herewith.
32.1   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 July 3, 2012. Filed Herewith.
32.2   Chief Financial Officer Certificate pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 dated July 3, 2012. Filed Herewith.
*101.INS   XBRL Instance Document
*101.SCH   XBRL Taxonomy Extension Schema
*101.CAL   XBRL Taxonomy Extension Calculation Linkbase
*101.DEF   XBRL Taxonomy Definition Linkbase
*101.LAB   XBRL Taxonomy Extension Label Linkbase
*101.PRE   XBRL Taxonomy Extension Presentation Linkbase

 

26

XNYS:AZZ AZZ Inc Quarterly Report 10-Q Filling

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