Item I.
|
Financial Statements
|
AZZ incorporated
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
08/31/07
|
|
|
02/28/07
|
|
|
|
(UNAUDITED)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
CASH AND CASH EQUIVALENTS
|
|
$
|
1,864,385
|
|
|
$
|
1,703,092
|
|
ACCOUNTS RECEIVABLE (NET OF ALLOWANCE FOR DOUBTFUL ACCOUNTS)
|
|
|
43,709,002
|
|
|
|
50,277,554
|
|
INVENTORIES
|
|
|
|
|
|
|
|
|
RAW MATERIAL
|
|
|
32,010,119
|
|
|
|
31,723,816
|
|
WORK-IN-PROCESS
|
|
|
14,607,697
|
|
|
|
11,457,856
|
|
FINISHED GOODS
|
|
|
2,690,312
|
|
|
|
2,305,594
|
|
COSTS AND ESTIMATED EARNINGS IN EXCESS OF BILLINGS ON UNCOMPLETED CONTRACTS
|
|
|
12,350,691
|
|
|
|
8,286,324
|
|
DEFERRED INCOME TAXES
|
|
|
3,988,644
|
|
|
|
4,224,294
|
|
PREPAID EXPENSES AND OTHER
|
|
|
1,289,765
|
|
|
|
1,988,834
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT ASSETS
|
|
|
112,510,615
|
|
|
|
111,967,364
|
|
|
|
|
PROPERTY, PLANT AND EQUIPMENT, NET
|
|
|
48,680,801
|
|
|
|
46,628,319
|
|
GOODWILL
|
|
|
40,962,104
|
|
|
|
40,962,104
|
|
OTHER ASSETS
|
|
|
1,259,072
|
|
|
|
1,349,791
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203,412,592
|
|
|
$
|
200,907,578
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
ACCOUNTS PAYABLE
|
|
$
|
21,956,953
|
|
|
$
|
25,316,165
|
|
INCOME TAX PAYABLE
|
|
|
1,698,125
|
|
|
|
688,000
|
|
ACCRUED SALARIES AND WAGES
|
|
|
3,833,572
|
|
|
|
5,025,508
|
|
OTHER ACCRUED LIABILITIES
|
|
|
12,993,291
|
|
|
|
13,716,603
|
|
CUSTOMER ADVANCE PAYMENT
|
|
|
3,353,930
|
|
|
|
2,900,702
|
|
BILLINGS IN EXCESS OF COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
|
|
|
4,815,198
|
|
|
|
2,067,945
|
|
|
|
|
|
|
|
|
|
|
TOTAL CURRENT LIABILITIES
|
|
|
48,651,069
|
|
|
|
49,714,923
|
|
|
|
|
LONG-TERM DEBT DUE AFTER ONE YEAR
|
|
|
20,000,000
|
|
|
|
35,200,000
|
|
DEFERRED INCOME TAXES
|
|
|
4,463,819
|
|
|
|
4,844,405
|
|
|
|
|
SHAREHOLDERS' EQUITY:
|
|
|
|
|
|
|
|
|
COMMON STOCK, $1 PAR VALUE
|
|
|
|
|
|
|
|
|
SHARES AUTHORIZED-25,000,000
|
|
|
|
|
|
|
|
|
SHARES ISSUED 12,609,160
|
|
|
12,609,160
|
|
|
|
12,609,160
|
|
CAPITAL IN EXCESS OF PAR VALUE
|
|
|
15,787,025
|
|
|
|
11,086,703
|
|
CUMULATIVE OTHER COMPRENSIVE INCOME
|
|
|
14,310
|
|
|
|
28,621
|
|
RETAINED EARNINGS
|
|
|
104,129,816
|
|
|
|
91,861,526
|
|
LESS COMMON STOCK HELD IN TREASURY, AT COST (511,411 SHARES AT AUGUST 31, 2007 AND 954,996 SHARES AT FEBRUARY 28, 2007)
|
|
|
(2,242,607
|
)
|
|
|
(4,437,760
|
)
|
|
|
|
|
|
|
|
|
|
TOTAL SHAREHOLDERS' EQUITY
|
|
|
130,297,704
|
|
|
|
111,148,250
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203,412,592
|
|
|
$
|
200,907,578
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
3
PART I. FINANCIAL INFORMATION
Item I.
|
Financial Statements
|
AZZ incorporated
CONSOLIDATED INCOME STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED
|
|
|
SIX MONTHS ENDED
|
|
|
|
8/31/07
|
|
|
8/31/06
|
|
|
8/31/07
|
|
|
8/31/06
|
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
|
(UNAUDITED)
|
|
NET SALES
|
|
$
|
81,606,288
|
|
|
$
|
62,881,570
|
|
|
$
|
156,983,321
|
|
|
$
|
115,334,665
|
|
|
|
|
|
|
COSTS AND EXPENSES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COST OF SALES
|
|
|
60,365,388
|
|
|
|
45,850,330
|
|
|
|
116,573,750
|
|
|
|
84,558,114
|
|
SELLING, GENERAL AND ADMINISTRATIVE
|
|
|
8,363,061
|
|
|
|
8,524,044
|
|
|
|
20,367,380
|
|
|
|
15,801,912
|
|
INTEREST EXPENSE
|
|
|
384,219
|
|
|
|
278,087
|
|
|
|
919,343
|
|
|
|
665,807
|
|
NET (GAIN) LOSS ON SALE OF PROPERTY, PLANT AND EQUIPMENT
|
|
|
(2,269
|
)
|
|
|
6,264
|
|
|
|
1,094
|
|
|
|
(437,039
|
)
|
OTHER (INCOME)
|
|
|
(361,598
|
)
|
|
|
(79,720
|
)
|
|
|
(556,371
|
)
|
|
|
(268,463
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68,748,801
|
|
|
|
54,579,005
|
|
|
|
137,305,196
|
|
|
|
100,320,331
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES AND ACCOUNTING CHANGE
|
|
|
12,857,487
|
|
|
|
8,302,565
|
|
|
|
19,678,125
|
|
|
|
15,014,334
|
|
INCOME TAX EXPENSE
|
|
|
4,735,653
|
|
|
|
3,023,591
|
|
|
|
7,409,836
|
|
|
|
5,523,891
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING PRINCIPLES
|
|
$
|
8,121,834
|
|
|
$
|
5,278,974
|
|
|
$
|
12,268,289
|
|
|
$
|
9,490,443
|
|
|
|
|
|
|
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE (NET OF TAX)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
8,121,834
|
|
|
$
|
5,278,974
|
|
|
$
|
12,268,289
|
|
|
$
|
9,405,099
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EARNINGS PER COMMON SHARE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE-BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
|
|
$
|
0.67
|
|
|
$
|
0.46
|
|
|
$
|
1.03
|
|
|
$
|
0.82
|
|
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BASIC EARNINGS PER SHARE-AFTER EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
|
|
$
|
0.67
|
|
|
$
|
0.46
|
|
|
$
|
1.03
|
|
|
$
|
0.81
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE-BEFORE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
|
|
$
|
0.66
|
|
|
$
|
0.45
|
|
|
$
|
1.01
|
|
|
$
|
0.81
|
|
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
0.01
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
DILUTED EARNINGS PER SHARE-AFTER EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
|
|
$
|
0.66
|
|
|
$
|
0.45
|
|
|
$
|
1.01
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
4
PART I. FINANCIAL INFORMATION
Item I.
|
Financial Statements
|
AZZ incorporated
CONSOLIDATED STATEMENTS OF CASH FLOW
|
|
|
|
|
|
|
|
|
|
|
SIX MONTHS ENDING
|
|
|
|
8/31/07
|
|
|
8/31/06
|
|
|
|
(Unaudited)
|
|
|
(Unaudited)
|
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
12,268,289
|
|
|
$
|
9,405,099
|
|
|
|
|
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
|
|
|
|
|
|
|
|
|
PROVIDED BY OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
PROVISION FOR DOUBTFUL ACCOUNTS
|
|
|
1,419
|
|
|
|
159,150
|
|
AMORTIZATION AND DEPRECIATION
|
|
|
4,007,035
|
|
|
|
3,078,988
|
|
DEFERRED INCOME TAX BENEFIT
|
|
|
(137,230
|
)
|
|
|
(898,130
|
)
|
NET (GAIN) LOSS ON SALE OR INSURANCE SETTLEMENT OF PROPERTY, PLANT & EQUIPMENT
|
|
|
1,094
|
|
|
|
(437,039
|
)
|
NON-CASH INTEREST EXPENSE
|
|
|
6,790
|
|
|
|
149,051
|
|
NON-CASH COMPENSATION EXPENSE
|
|
|
658,170
|
|
|
|
543,183
|
|
CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE
|
|
|
|
|
|
|
85,344
|
|
|
|
|
EFFECTS OF CHANGES IN ASSETS & LIABILITIES:
|
|
|
|
|
|
|
|
|
|
|
|
ACCOUNTS RECEIVABLE
|
|
|
6,567,134
|
|
|
|
(1,963,400
|
)
|
INVENTORIES
|
|
|
(3,820,862
|
)
|
|
|
(11,420,911
|
)
|
PREPAID EXPENSES AND OTHER
|
|
|
699,069
|
|
|
|
724,816
|
|
OTHER ASSETS
|
|
|
(38,077
|
)
|
|
|
57,858
|
|
NET CHANGE IN BILLINGS RELATED TO COSTS AND ESTIMATED EARNINGS ON UNCOMPLETED CONTRACTS
|
|
|
(1,317,114
|
)
|
|
|
(2,069,633
|
)
|
ACCOUNTS PAYABLE
|
|
|
(3,359,212
|
)
|
|
|
6,765,540
|
|
OTHER ACCRUED LIABILITIES AND INCOME TAXES
|
|
|
(451,898
|
)
|
|
|
4,287,453
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY OPERATING ACTIVITIES
|
|
|
15,084,607
|
|
|
|
8,467,369
|
|
|
|
|
CASH FLOWS USED FOR INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
PROCEEDS FROM SALE OR INSURANCE SETTLEMENT OF PROPERTY, PLANT, AND EQUIPMENT
|
|
|
122,007
|
|
|
|
454,403
|
|
PURCHASE OF PROPERTY, PLANT AND EQUIPMENT
|
|
|
(6,082,628
|
)
|
|
|
(4,096,456
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(5,960,621
|
)
|
|
|
(3,642,053
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
PROCEEDS FROM EXERCISE OF STOCK OPTIONS
|
|
|
3,364,762
|
|
|
|
932,309
|
|
EXCESS TAX BENEFITS FROM STOCK OPTIONS EXERCISES
|
|
|
2,872,545
|
|
|
|
140,897
|
|
PROCEEDS FROM REVOLVING LOAN
|
|
|
|
|
|
|
15,640,482
|
|
PAYMENTS ON LONG TERM DEBT
|
|
|
(15,200,000
|
)
|
|
|
(20,015,482
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
|
|
|
(8,962,693
|
)
|
|
|
(3,301,794
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH & CASH EQUIVALENTS
|
|
|
161,293
|
|
|
|
1,523,522
|
|
|
|
|
CASH & CASH EQUIVALENTS AT BEGINNING OF PERIOD
|
|
|
1,703,092
|
|
|
|
1,258,945
|
|
|
|
|
|
|
|
|
|
|
CASH & CASH EQUIVALENTS AT END OF PERIOD
|
|
$
|
1,864,385
|
|
|
$
|
2,782,467
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURES
|
|
|
|
|
|
|
|
|
CASH PAID FOR INTEREST
|
|
$
|
1,050,785
|
|
|
$
|
550,309
|
|
|
|
|
|
|
|
|
|
|
CASH PAID FOR INCOME TAXES
|
|
$
|
3,669,621
|
|
|
$
|
6,276,108
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements
5
AZZ incorporated
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Summary of Significant Accounting Policies
1.
|
Basis of Presentation.
|
These interim unaudited
consolidated financial statements were prepared pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the SEC rules and regulations referred to above. Accordingly, these financial statements should be read in
conjunction with the audited financial statements and related notes for the fiscal year ended February 28, 2007 included in the Companys Annual Report on Form 10-K covering such period. For purposes of this report AZZ, the
Company, we, our, us or similar references means AZZ incorporated and our consolidated subsidiaries.
Our fiscal year ends on the last day of February and is identified as the fiscal year for the calendar year in which it ends. For example, the fiscal year that ended February 28, 2007 is referred to as fiscal 2007.
In the opinion of management of the Company, the accompanying unaudited consolidated condensed financial statements contain all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the financial position of the Company as of August 31, 2007, and the results of its operations for the three-month and six-month periods ended August 31, 2007 and 2006, and
cash flows for the six-month period ended August 31, 2007 and 2006.
Earnings per share is based on the
weighted average number of shares outstanding during each period, adjusted for the dilutive effect of stock awards. The shares and earnings per share have been adjusted to reflect our two-for-one stock split, effected in the form of a share dividend
on May 4, 2007.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended August 31,
|
|
Six months ended August 31,
|
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
|
(Unaudited)
|
|
|
|
(In thousands except share and per share data)
|
|
Numerator:
|
|
|
|
|
Income before cumulative effect of changes in accounting principles
|
|
$
|
8,122
|
|
$
|
5,279
|
|
$
|
12,268
|
|
$
|
9,490
|
|
Cumulative effect of accounting change
|
|
|
|
|
|
|
|
|
|
|
|
(85
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for basic and diluted earnings per common share
|
|
$
|
8,122
|
|
$
|
5,279
|
|
$
|
12,268
|
|
$
|
9,405
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share weighted average shares
|
|
|
12,042,092
|
|
|
11,595,734
|
|
|
11,913,583
|
|
|
11,562,328
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee and Director stock awards
|
|
|
234,936
|
|
|
190,580
|
|
|
237,315
|
|
|
167,686
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted earnings per common share
|
|
|
12,277,028
|
|
|
11,786,314
|
|
|
12,150,898
|
|
|
11,730,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Before cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
.67
|
|
$
|
.46
|
|
$
|
1.03
|
|
$
|
.82
|
|
Diluted earnings per common share
|
|
$
|
.66
|
|
$
|
.45
|
|
$
|
1.01
|
|
$
|
.81
|
|
After cumulative effect of change in accounting principle
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
.67
|
|
$
|
.46
|
|
$
|
1.03
|
|
$
|
.81
|
|
Diluted earnings per common share
|
|
$
|
.66
|
|
$
|
.45
|
|
$
|
1.01
|
|
$
|
.80
|
|
6
Total comprehensive income for the
quarter ended August 31, 2007, was $8,114,678 consisting of net income of $8,121,834 and net changes in accumulated other comprehensive income of ($7,156). For the six-month period ended August 31, 2007, total comprehensive income was
$12,253,978 consisting of net income of $12,268,289 and net changes in accumulated other comprehensive income of ($14,311). Changes in other comprehensive income result from changes in fair value of the Companys cash flow hedges.
Total comprehensive income for the quarter ended August 31, 2006, was $5,271,819 consisting of net income of $5,278,974 and net changes in
accumulated other comprehensive income of ($7,155). For the six-month period ended August 31, 2006, total comprehensive income was $9,403,804 consisting of net income of $9,405,099 and net changes in accumulated other comprehensive income of
($1,295).
4.
|
Stock-based compensation.
|
On April 7, 2005, the
Company implemented Stock Appreciation Rights Plans (the Plans) for its key employees and directors. The purpose of the Plans is to enable the Company to attract and retain qualified key employees and directors by offering to them the
opportunity to share in increases in the value of the Company to which they contribute. The Company made grants under the Plans in fiscal 2005 and fiscal 2006. The grants outstanding were 207,660 for fiscal 2006. The grants for fiscal 2005 were
fully vested on February 28, 2007 and were paid in cash during the second quarter ended August 31, 2007 in the amount of $4.4 million. The fiscal 2006 rights, which have not previously accelerated due to events such as death or disability
will vest on February 29, 2008. The value of each vested right will be paid in cash for rights vesting on the Companys earnings release date for the fiscal year ended February 29, 2008, and shall be equal to the excess, if any,
(i) of the average of the closing prices of a share of Common Stock on the New York Stock Exchange for those days on which it trades during the ninety calendar days immediately following the public release of financial results for the period
ended February 29, 2008, over (ii) the average of the closing prices of a share of Common Stock on the New York Stock Exchange for those days on which it trades during the ninety calendar days immediately following the Companys year
end earnings release date, which was $7.98 per share for the fiscal 2006 grants. To determine the cash payment, the excess in the average stock price will be multiplied by the number of Stock Appreciation Rights granted to each participant. The
value of rights vesting before the normal vesting date will be measured by reference to the price of the Common Stock during a period at or near the accelerated vesting date. The Company recognized $4.4 million for compensation expense related to
the Stock Appreciation Rights Plans prior to February 28, 2007. Additional compensation expense related to these Stock Appreciation Rights Plans in the amount of $4.3 million was recognized during the six month period ended August 31, 2007
in accordance with FAS 123R.
During fiscal 2006, the Company adopted the AZZ incorporated 2005 Long-Term Incentive Plan (2005
Plan). The purpose of the 2005 Plan is to promote the growth and prosperity of the Company by permitting the Company to grant to its employees and directors restricted stock, performance awards, stock appreciation rights (SARs) or
Stock Appreciation Rights and options to purchase Common Stock of the Company. The maximum number of shares that may be issued under the 2005 Plan is 500,000 shares. On June 1, 2006, 234,160 Stock Appreciations Rights were issued
under the 2005 Plan with an exercise price of $11.55. These awards qualify for equity treatment in accordance with FAS 123R. These stock
7
appreciation rights have a three year cliff vesting schedule, but may vest early if accelerated vesting provisions in the plan are met. The weighted average
fair value of SARs granted on June 1, 2006 was determined to be $2.915 based on the following assumptions: risk-free interest rate of 5%, dividend yield of 0.0%, expected volatility of 27.81% and expected life of 3 years. During the second
quarter ended August 31, 2007, 22,720 Stock Appreciation Rights accelerated vesting due to the retirement of two directors and one employee. Compensation expense related to the June 1, 2006 grant was $392,000 for fiscal 2007. Additional
compensation in the amount of $76,000 was recognized during the six month period ended August 31, 2007. As of August 31, 2007, we had unrecognized cost of $215,000 related to the June 1, 2006 SAR grants.
On March 1, 2007, 147,740 Stock Appreciation Rights were issued under the 2005 Plan with an exercise price of $19.88. These Stock Appreciation Rights
have a three year cliff vesting schedule, but may vest early if accelerated vesting provisions in the plan are met. The weighted average fair value of SARs granted on March 1, 2007, was determined to be $5.535 based on the following
assumptions: risk-free interest rate of 5%, dividend yield of 0.0%, expected volatility of 29.52% and expected life of 3 years. During the second quarter ended August 31, 2007, 5,920 Stock Appreciation Rights accelerated vesting due to the
retirement of two of the Companys directors. Compensation expense in the amount of $401,000 was recognized during the six month period ended August 31, 2007. We had unrecognized cost of $417,000 related to the March 1, 2007 SAR
grants.
During the six month period ended August 31, 2007, 382,818 of stock options under the 2001 Long Term Incentive Plan and 40,000
of stock options under the 1997 Non-Statutory Stock Option grants were exercised resulting in proceeds to the Company of $3.4 million. These options were satisfied with treasury shares. Federal income tax deduction was taken by the Company on these
stock options in the amount of $2.9 million.
We have two operating segments as defined in
our Annual Report on Form 10-K for the year ended February 28, 2007. Information regarding operations and assets by segment is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
Six Months Ended August 31,
|
|
|
2007
|
|
2006
|
|
2007
|
|
2006
|
|
|
(Unaudited)
($ In thousands)
|
Net Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical and Industrial Products
|
|
$
|
45,150
|
|
$
|
36,520
|
|
$
|
86,023
|
|
$
|
68,026
|
Galvanizing Services
|
|
|
36,456
|
|
|
26,362
|
|
|
70,960
|
|
|
47,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
81,606
|
|
$
|
62,882
|
|
$
|
156,983
|
|
$
|
115,335
|
|
|
|
|
|
Operating Income (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical and Industrial Products
|
|
$
|
7,942
|
|
$
|
5,148
|
|
$
|
14,286
|
|
$
|
9,228
|
Galvanizing Services
|
|
|
9,230
|
|
|
8,515
|
|
|
17,841
|
|
|
15,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
17,172
|
|
$
|
13,663
|
|
$
|
32,127
|
|
$
|
24,248
|
|
|
|
|
|
General Corporate Expense (b)
|
|
$
|
3,925
|
|
$
|
5,061
|
|
$
|
11,517
|
|
$
|
8,531
|
Interest Expense
|
|
|
384
|
|
|
278
|
|
|
919
|
|
|
666
|
Other (Income) Expense, Net (c)
|
|
|
6
|
|
|
21
|
|
|
13
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
4,315
|
|
$
|
5,360
|
|
$
|
12,449
|
|
$
|
9,234
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes and Accounting Changes
|
|
$
|
12,857
|
|
$
|
8,303
|
|
$
|
19,678
|
|
$
|
15,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical and Industrial Products
|
|
$
|
117,574
|
|
$
|
90,146
|
|
$
|
117,574
|
|
$
|
90,146
|
Galvanizing Services
|
|
|
79,035
|
|
|
60,669
|
|
|
79,035
|
|
|
60,669
|
Corporate
|
|
|
6,803
|
|
|
8,120
|
|
|
6,803
|
|
|
8,120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
203,412
|
|
$
|
158,935
|
|
$
|
203,412
|
|
$
|
158,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8
(a)
|
Segment operating income consists of net sales less cost of sales, specifically identifiable selling, general and administrative expenses, and other income and expense items that
are specifically identifiable to a segment.
|
(b)
|
General Corporate Expense consists of selling, general and administrative expenses that are not specifically identifiable to a segment.
|
(c)
|
Other (income) expense, net includes gains and losses on sale of property, plant and equipment and other (income) expenses not specifically identifiable to a segment.
|
A reserve has been established to
provide for the estimated future cost of warranties on a portion of the Companys delivered products and is classified within accrued liabilities on the consolidated balance sheet. Management periodically reviews the reserves and adjustments
are made accordingly. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The following shows changes in the warranty reserves since the end of fiscal 2006:
|
|
|
|
|
|
|
Warranty
Reserve
|
|
|
|
(Unaudited)
($ In thousands)
|
|
Balance at February 28, 2006
|
|
$
|
1,102
|
|
Warranty costs incurred
|
|
|
(888
|
)
|
Additions charged to income
|
|
|
1,364
|
|
|
|
|
|
|
Balance at February 28, 2007
|
|
$
|
1,578
|
|
Warranty costs incurred
|
|
|
(520
|
)
|
Additions charged to income
|
|
|
787
|
|
|
|
|
|
|
Balance at August 31, 2007
|
|
$
|
1,845
|
|
|
|
|
|
|
In July 2006, the FASB issued FASB
Interpretation 48, Accounting for Uncertainty in Income Taxes: an interpretation of FASB Statement No. 109 (FIN 48). FIN 48 clarifies Statement 109, Accounting for Income Taxes, to indicate the criteria that
an individual tax position would have to meet for some or all of the benefit of that position to be recognized in an entitys financial statements. We adopted FIN 48 as of March 1, 2007. Adoption on March 1, 2007, did not have a
material effect on the Company.
8.
|
Recent Accounting Pronouncements.
|
In September 2006, the
FASB issued Statement 157 (SFAS 157),
Fair Value Measurements
. This Statement establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements.
While SFAS 157 does not require any new value measurements, it may change the application of fair value measurements embodied in other accounting standards. SFAS 157 will be effective at the beginning of the Companys 2009 fiscal year. The
Company is currently assessing the effect of this pronouncement, but we do not expect the impact on our consolidated financial statements to be material.
9
Item 2.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations.
|
FORWARD LOOKING STATEMENTS
This Quarterly Report on Form 10-Q may contain
forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally identified by the use of
words such as anticipate, expect, estimate, intend, should, may, believe, and terms with similar meanings. Although we believe that the current views and
expectations reflected in those forward-looking statements are reasonable, those views and expectations, and the related statements, are inherently subject to risks, uncertainties, and other factors, many of which are not under our control. Those
risks, uncertainties, and other factors could cause the actual results to differ materially from these in the forward-looking statements. Those risks, uncertainties, and factors include, but are not limited to: the level of customer demand for and
response to products and services offered by the Company, including demand by the power generation markets, electrical transmission and distribution markets, the general industrial market, and the hot dip galvanizing markets; raw material and
utility costs, including cost of zinc and natural gas, which are used in the hot dip galvanizing process; changes in economic conditions of the various markets we serve, foreign and domestic; customer requested delays of shipments; acquisition
opportunities, adequacy of financing, our ability to integrate our new management information system and availability of experienced management employees to implement our growth strategy. We expressly disclaim any obligation to release publicly any
updates or revisions to these forward-looking statements to reflect any change in our views or expectations. We can give no assurances that such forward-looking statements will prove to be correct.
The following discussion should be read in conjunction with managements discussion and analysis contained in our 2007 Annual Report on Form 10-K, as
well as with the consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
RESULTS OF
OPERATIONS
We have two operating segments as defined in our Annual Report on Form 10-K for the fiscal year-ended February 28,
2007. 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 6 to our quarterly consolidated financial statements included in this report.
Revenues
Our backlog was $149.2
million as of August 31, 2007, as compared to $144.8 million at May 31, 2007. As of August 31, 2007, backlog had improved 51% from the $98.7 million reported as of August 31, 2006. All of our backlog data relates to our
Electrical and Industrial Products Segment. Our book-to-ship ratio was 1.05 to 1 for the second quarter ended August 31, 2007, as compared to 1.10 to 1 for the same period in the prior year. Incoming orders increased 24% over the same period a
year ago. The increase in incoming orders during the second quarter of fiscal 2008 over the same quarter in fiscal 2007 was due to increased domestic and international orders for our high voltage equipment and increased order activity from the
utility power generation, and distribution markets. Orders included in the backlog are represented by contracts and purchase orders that we believe to be firm. The following table reflects our bookings and shipments on a quarterly basis for the
period ended August 31, 2007, as compared to the same period in the prior fiscal year.
10
Backlog Table
(Electrical and Industrial Products Segment)
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ending
|
|
|
|
Period Ending
|
|
|
Backlog
|
|
2/28/07
|
|
$
|
120,666
|
|
2/28/06
|
|
$
|
73,765
|
Bookings
|
|
|
|
|
99,483
|
|
|
|
|
70,782
|
Shipments
|
|
|
|
|
75,377
|
|
|
|
|
52,453
|
Backlog
|
|
5/31/07
|
|
$
|
144,772
|
|
5/31/06
|
|
$
|
92,094
|
Book to Ship Ratio
|
|
|
|
|
1.32
|
|
|
|
|
1.35
|
Bookings
|
|
|
|
|
86,030
|
|
|
|
|
69,450
|
Shipments
|
|
|
|
|
81,606
|
|
|
|
|
62,882
|
Backlog
|
|
8/31/07
|
|
|
149,196
|
|
8/31/06
|
|
$
|
98,662
|
Book to Ship Ratio
|
|
|
|
|
1.05
|
|
|
|
|
1.10
|
The following table reflects the breakdown of revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
8/31/2007
|
|
8/31/2006
|
|
8/31/2007
|
|
8/31/2006
|
|
|
(In thousands)
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical and Industrial Products
|
|
$
|
45,150
|
|
$
|
36,520
|
|
$
|
86,023
|
|
$
|
68,026
|
Galvanizing Services
|
|
|
36,456
|
|
|
26,362
|
|
|
70,960
|
|
|
47,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue
|
|
$
|
81,606
|
|
$
|
62,882
|
|
$
|
156,983
|
|
$
|
115,335
|
For the three and six-month periods ended August 31, 2007, consolidated net revenues increased
30% and 36%, respectively, as compared to the same periods in fiscal 2007, to $81.6 million for the three-month period and $157 million for the six-month period. For the three and six month periods ended August 31, 2007, the Electrical and
Industrial Products Segment contributed 55% of the Companys revenues and the Galvanizing Services Segment accounted for the remaining 45% of the combined revenues.
Revenues for the Electrical and Industrial Products Segment increased $8.6 million or 24% for the three-month period ended August 31, 2007, and increased $18 million or 26% for the six-month period ended
August 31, 2007, as compared to the same periods in fiscal 2007. The increased revenues were generated as a result of a continuation of improving market demand and improving pricing. The largest improvement has come from the high voltage
transmission market, the power generation market, and the utility distribution market as compared to the same period of a year ago.
Revenues in the Galvanizing Services Segment increased $10.1 million or 38% for the three-month period ended August 31, 2007, as compared to the same period in fiscal 2007 and increased $23.7 million or 50% for the six-month period
ended August 31, 2007, as compared to the same period in fiscal 2007. Volume for the three and six-month periods ended August 31, 2007, increased 22% and 25%, respectively, as compared to the same periods in fiscal 2007, while price
increased 16% and 25% for the three and six months, respectively, over the comparable periods. The increase in selling price was the result of price increases that were implemented to offset rising cost, primarily zinc. The increased volume resulted
from the acquisition of Witt Galvanizing Inc. in November 2006, and increased project work related to the electrical & telecommunication and petrochemical market. The acquisition of Witt Galvanizing Inc. accounted for 76% of the increased
volume for the six-month period ended August 31, 2007.
11
Segment Operating Income
The following table reflects the breakdown of total operating income by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
8/31/2007
|
|
8/31/2006
|
|
8/31/2007
|
|
8/31/2006
|
|
|
(In thousands)
|
Segment Operating Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Electrical and Industrial Products
|
|
$
|
7,942
|
|
$
|
5,148
|
|
$
|
14,286
|
|
$
|
9,228
|
Galvanizing Services
|
|
|
9,230
|
|
|
8,515
|
|
|
17,841
|
|
|
15,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Segment Operating Income
|
|
$
|
17,172
|
|
$
|
13,663
|
|
$
|
32,127
|
|
$
|
24,248
|
Our total segment operating income increased 26% and 32% for the three and six-month periods ended
August 31, 2007, to $17.2 million and $32.1 million, respectively, as compared to $13.7 million and $24.3 million for the same periods in fiscal 2007.
Segment operating income in the Electrical and Industrial Products Segment increased 54% and 55% for the three and six-month periods ended August 31, 2007, to $7.9 million and $14.3 million, respectively, as
compared to $5.1 million and $9.2 million for the same periods in fiscal 2007. Operating margins were 18% for the three and 17% for the six-month periods ended August 31, 2007, as compared to 14% for the comparable periods in fiscal 2007.
Operating margins and profit improvement are attributable to the leverage gained from increased volumes, quick turn jobs, and pricing actions. Management continues to focus on cost escalation recovery through pricing actions, expansion of served
markets both domestically and internationally and seeking out new product opportunities to further enhance our strategic position.
In the
Galvanizing Services Segment, operating income increased 8% and 19% for the three and six-month periods ended August 31, 2007, to $9.2 million and $17.8 million, respectively, as compared to $8.5 million and $15 million for the same periods in
fiscal 2007. Operating margins were 25% for the three and six-month periods ended August 31, 2007, as compared to 32% for the comparable periods in fiscal 2007. The increased operating income during the three and six month periods ended
August 31, 2007, as compared to the same period last year was a result of strong market demand. The strong market demand allowed us to continue our pricing action to offset increased zinc costs and generated increased volumes. Subsequent to the
end of the second quarter ended August 31, 2007, zinc prices began to decline and, as a result, pricing pressure could begin to occur in the third and/or fourth quarter, which ultimately could result in margins returning to historical levels of
18% to 22 %.
General Corporate Expenses
General corporate expenses, (see Note 6 to consolidated condensed financial statements) not specifically identifiable to a segment, for the three-month period ended August 31, 2007, were $3.9 million compared to
$5.1 million for the same period in fiscal 2007. For the six-month period ended August 31, 2007, general corporate expenses were $11.5 million as compared to $8.5 million. As a percentage of sales, general corporate expenses were 5% and 7% for
the three and six-month periods ended August 31, 2007, as compared to 8% and 7% for the same period in fiscal 2007. Corporate expenses were higher for the six month period ended August 31, 2007, due to increased compensation expenses
related to our cash based Stock Appreciation Rights due to stock appreciation during the first quarter of fiscal 2008. Compensation expense related to these cash based Stock Appreciation Rights was recognized in the amount of $4.3 million during the
six month period ended August 31, 2007, with the majority of the expense being recorded in the first quarter of the current year. Corporate expense was lower for the three-month period ended August 31, 2007, as compared to the same period
in fiscal 2007, due to lower Stock Appreciation Rights expense for the compared periods.
12
Other (Income) Expense
For the three-month and six-month periods ended August 31, 2007, the amounts in other (income) expense not specifically identifiable with a segment
(see Note 6 to consolidated financial statements) were insignificant.
Interest
Net interest expense for the three and six-month periods ended August 31, 2007, increased 38% as compared to the same periods in fiscal 2007.
Interest expense increased due to higher levels of debt and increased interest rates for the compared periods. As of August 31, 2007, we had outstanding bank debt of $20 million, an increase of $4.5 million, as compared to $15.5 million at the
end of the same period in fiscal 2007. The increase in debt resulted from the acquisition of Witt Galvanizing Inc. in the third quarter of fiscal 2007. Our long-term debt to equity ratio was .15 to 1 at August 31, 2007, as compared to .16 to 1
at August 31, 2006.
Income Taxes
The provision for income taxes reflects an effective tax rate of 36% for the three-month period and 38% for the six-month period ended August 31, 2007, and 36% for the three-month period and 37% for the six-month
period ended August 31, 2006. Higher state income taxes from various taxing jurisdictions accounted for the majority of the increase for the six month period ended August 31, 2007.
LIQUIDITY AND CAPITAL RESOURCES
We have historically met our liquidity and
capital needs through a combination of cash flows from operating activities and bank borrowings. Our cash requirements are generally for operating activities, capital improvements, debt repayment and acquisitions. Management believes that working
capital, borrowing capabilities, and funds generated from operations should be sufficient to finance anticipated operational activities, capital improvements, scheduled debt payments and possible future acquisitions for the remainder of fiscal 2008.
Net cash provided by operations was $15.1 million for the six-month period ended August 31, 2007, as compared to $8.5 million for the
same period in the prior fiscal year. Net cash provided by operations for the six-month period ended August 31, 2007, was generated from $12.3 million in net income, $4 million in depreciation and amortization, and net changes in operating
assets and liabilities and other adjustments to reconcile net income to net cash of a negative $1.2 million. Positive cash flow was recognized due to decreased accounts receivable and prepaid balances in the amount of $6.6 million and $.7 million,
respectively. These positive cash flows were offset by increases in inventory and revenues in excess of billings in the amount of $3.8 million and $1.3 million, respectively, and decreased account payable balances and accrued liabilities in the
amount of $3.4 million and $.5 million. Working capital increased to $63.9 million as of August 31, 2007, as compared to $62.3 million at February 28, 2007.
For the six-month period ended August 31, 2007, capital improvements were made in the amount of $6.1 million and long-term debt was repaid in the amount of $15.2 million. We received proceeds from the sale of
property and equipment in the amount of $.1 million and proceeds from the exercise of stock options and tax benefits from the exercise of stock options in the amount of $3.4 million and $2.9 million, respectively.
On May 25, 2006, we entered into the Second Amended and Restated Credit Agreement (the Credit Agreement), which replaced our Amended and
Restated Revolving and Term Credit Agreement dated as of November 2001.
13
The Credit Agreement provides for a $60 million revolving line of credit with one lender, Bank of
America, N.A., maturing on May 25, 2011. This is an unsecured revolving credit facility to be used to refinance current outstanding borrowings, provide for working capital needs, capital improvements, future acquisitions, and letter of credit
needs. At August 31, 2007, we had $20 million borrowed against the revolving credit facility and letters of credit outstanding in the amount of $7.3 million, which left approximately $32.7 million of additional credit available under the
revolving credit facility.
The Credit Agreement provides for various financial covenants consisting of a) Minimum Consolidated Net Worth
maintain on a consolidated basis net worth equal to at least the sum of $69.8 million, representing 80% of net worth at February 28, 2007 plus 75% of future net income, b) Maximum Leverage Ratio- maintain on a consolidated basis a
Leverage Ratio not to exceed 3.0:1.0, c) Fixed Charge Coverage Ratio- maintain on a consolidated basis a Fixed Charge Coverage Ratio of at least 1.5:1.0 and d) Capital Expenditures- not to make Capital Expenditures on a consolidated basis in an
amount in excess of $14 million during any fiscal year.
The Credit Agreement provides for an applicable margin ranging from .75% to 1.25%
in addition to the Eurodollar Rate and Commitment Fees ranging from .175% to .25% depending on our Leverage Ratio (as defined in the Credit Agreement). The applicable margin was .75% at August 31, 2007. The variable interest rate including the
applicable margin was 6.26% as of August 31, 2007.
We utilize interest rate protection agreements to moderate the effects of
increases, if any, in interest rates by modifying the characteristics of interest obligations on long-term debt from a variable rate to a fixed rate. Presently, we have one outstanding interest rate swap. On March 31, 2006, we entered into an
interest rate protection agreement (the 2006 Swap Agreement) which matures in March 2008, whereby we pay a fixed rate of 5.20% in exchange for a variable 30-day LIBOR rate plus .75% (6.315% at August 31, 2007). At August 31,
2007, the remaining notional amount is $4,125,000. Prior to May 2006, this swap was treated as a cash flow hedge of our variable interest rate exposure. However, we refinanced our credit agreement in May 2006 and chose to cease the hedge designation
for the 2006 Swap Agreement, while not terminating the swap agreement. Since that time, we began recognizing changes in fair value of this hedge directly into earnings, while amortizing the pretax amount included in accumulated other comprehensive
income as additional interest income. At August 31, 2007, the fair value of the 2006 Swap Agreement was an asset of $11,000, and a gain of $14,000, net of tax, remains in accumulated other comprehensive income to be amortized as additional
interest income. Given the maturity date of this interest rate swap, all amounts related to accumulated other comprehensive income are expected to flow through earnings by March 31, 2008.
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 are summarized in the table below.
14
Commodity pricing
We manage our exposure to commodity prices through various methods. In the Galvanizing Services Segment, we utilize contracts with our zinc suppliers that include protective caps to guard against rising commodity
prices. These contracts are normally negotiated in December of each year and normally are for a twelve-month period of time. We also secure firm pricing for natural gas supplies with individual utilities when possible. There is no contracted volume
purchase commitments associated with the natural gas or zinc agreements. Management believes these contractual agreements ensure adequate supplies and partially offset exposure to commodity price swings.
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 the customers contracts, although during difficult market conditions these
escalation clauses may not be obtainable.
We have no contracted volume commitments for any other commodities.
Other
At August 31, 2007, we
had outstanding letters of credit in the amount of $7.3 million. These letters of credit are issued to a portion of our customers to cover any potential warranty costs that the customer might incur. In addition, as of August 31, 2007, a
warranty reserve in the amount of $1.8 million has been established to offset any future warranty claims.
The following summarizes our
operating leases, and long-term debt and interest expense for the next five fiscal years.
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Fiscal Year
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Operating
Leases
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Long-Term
Debt
|
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Interest on Long
Term Debt
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Total
|
|
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(In thousands)
|
|
|
2008
|
|
$
|
745
|
|
$
|
0
|
|
$
|
621
|
|
$
|
1,366
|
2009
|
|
|
1,131
|
|
|
0
|
|
|
1,269
|
|
|
2,400
|
2010
|
|
|
1,301
|
|
|
0
|
|
|
1,269
|
|
|
2,570
|
2011
|
|
|
1,361
|
|
|
0
|
|
|
1,269
|
|
|
2,630
|
2012
|
|
|
1,287
|
|
|
20,000
|
|
|
299
|
|
|
2,586
|
Thereafter
|
|
|
3,208
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|
|
0
|
|
|
0
|
|
|
3,208
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|
|
|
|
|
|
|
|
|
|
|
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Total
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$
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9,033
|
|
$
|
20,000
|
|
$
|
4,727
|
|
$
|
33,760
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|
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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. Management estimates are based on historical experience and various other factors that management believes reasonable under the circumstances, and form the basis for managements conclusions. Management continually evaluates 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 and
impairment of long-lived assets, identifiable intangible assets and goodwill, accounting for income taxes, and stock options and stock appreciation rights. Actual results may differ from these estimates under different assumptions or conditions. The
development and selection of the critical accounting policies and the related disclosures below have been reviewed with the Audit Committee of the Board of Directors. More information regarding significant accounting policies can be found in Note 1
of the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the fiscal year ended February 28, 2007.
15
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 collectibility of
accounts receivables. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.
Accruals for Contingent Liabilities The amounts we record for estimated claims, such as self insurance programs, warranty and other contingent
liabilities, requires us to make judgments regarding the amount of expenses that will ultimately be incurred. Management uses past history and experience, as well as other specific circumstances surrounding these claims in evaluating the amount of
liability that should be recorded. Actual results may be different than management estimates.
Revenue Recognition We recognize
revenue for the Galvanizing Services Segment upon completion of the galvanizing process performed on our customers material or shipment of their material. Revenue is recognized in 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. Deferred revenue presented in the balance sheet under accrued
liabilities arises from advanced payments received from our customers prior to shipment of the product and is 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 assets fair
value. 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 flow, we will determine whether impairment may exist. A significant change in
projected cash flows or cost of capital for future years could result in an impairment of goodwill in future years. Variables impacting future cash flows include, but are not limited to, the level of customer demand for and response to products and
services we offer to the power generation market, the electrical transmission and distribution markets, the general industrial market and the hot dip galvanizing market; changes in economic conditions of these various markets; raw material and
natural gas costs; and availability of experienced labor and management to implement our growth strategies.
Accounting for Income Taxes
We account for income taxes under the asset and liability method. This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of temporary differences between the carrying amounts and
the tax basis of assets and liabilities. Developing our provision for income taxes requires significant judgment and expertise in deferral and state income tax laws, regulations and strategies, including the determination of deferred tax assets and
liabilities and, if necessary, any valuation allowances that may be required for deferred tax assets. Our judgments and tax strategies are subject to audit by various taxing authorities.
16
Stock Options and Stock Appreciation Rights Our employees are periodically granted stock options
or Stock Appreciation Rights by the Compensation Committee of the Board of Directors. In fiscal 2007, we adopted the provisions of SFAS No. 123R, Share-Based Payment. Under the provisions of SFAS No. 123R, the compensation cost of all
employee stock-based compensation awards is measured based on the grant-date fair value of those awards and that cost is recorded as compensation expense over the period during which the employee is required to perform service in exchange for the
award (generally over the vesting period of the award). The valuation of stock based compensation awards is complex in that there are a number of variables included in the calculation of the value of the award:
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Volatility of our stock price
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Expected term of the option
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Expected dividend yield
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Risk-free interest rate over the expected term
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Expected number of options that will not vest.
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We have elected to use a Black-Scholes pricing model in the valuation of our stock options and stock appreciation rights.
These variables are developed using a combination of our internal data with respect to stock price volatility and exercise behavior of option holders and information from outside sources. The development of each of
these variables requires a significant amount of judgment. Changes in the values of the above variables will result in different option valuations and, therefore, different amounts of compensation cost.