EXHIBIT 13
--------------------------------------------------------------------------------
AZTEC MANUFACTURING CO.
--------------------------------------------------------------------------------
1999
XXXXXXX AZTEC R-A-L
--------------------------------------------------------------------------------
ANNUAL REPORT
--------------------------------------------------------------------------------
CORPORATE PROFILE
Aztec Manufacturing Co. markets and services industries worldwide through two
distinct segments.
The Manufactured Products Segment is made up of electrical and tubular products
operations providing products to a wide range of customers in the industrial,
power generation and petroleum industries.
The Services Segment provides hot dip galvanizing services to the steel
fabrication business through ten facilities located throughout the South and
Southwest.
PAGE 1
SELECTED FINANCIAL INFORMATION
Fiscal Year
-----------------------------------------------------------------------------------------
1999 1998(a) 1997 1996(b) 1995
-------------------- ------------------ ---------------- ----------- -----------
(In thousands, except per share amounts, percentages and ratios)
Summary of operations:
Net sales $ 80,922 $ 75,479 $ 57,703 $ 49,184 $ 44,608
Net income (c) 4,874 (d) 7,220 4,328 2,582 1,578
Earnings per share:
Basic earnings per common share (c) $ .87 (d) $ 1.21 $ .75 $ .46 $ .28
Diluted earnings per common share (c) .86 (d) 1.19 .74 .45 .27
Return on average shareholders'
equity 15.9% 23% 16.7% 11.6% 7.7%
Pretax profits to sales 9.6% 13.1% 12.4% 8.7% 5.8%
Net income to sales 6.0% 9.6% 7.5% 5.2% 3.5%
Total assets $ 58,399 $ 57,902 $ 45,995 $ 42,621 $ 40,791
Long-term debt, excluding current
portion 20,266 11,321 7,527 9,516 10,484
Total liabilities 31,514 23,582 17,421 19,461 19,415
Shareholders' equity (e) 26,885 34,320 28,573 23,160 21,376
Working capital 15,033 16,731 12,220 7,879 10,117
Shareholders' equity per share (e) 4.79 5.75 4.96 4.11 3.75
Long term debt to equity ratio .75 to 1 .33 to 1 .26 to 1 .41 to 1 .49 to 1
Current ratio 2.40 to 1 2.43 to 1 2.30 to 1 1.89 to 1 2.22 to 1
EBITDA $ 12,413 $ 13,682 $ 10,691 $ 7,407 $ 5,185
Cash provided by operations 8,774 2,698 6,821 9,103 40
Capital expenditures 6,992 3,395 2,037 3,434 4,890
EBITDA per share 2.21 2.29 1.86 1.31 .91
Cash dividends per share .12 .10 .06 .03 .02
Average shares outstanding 5,614 5,968 5,761 5,634 5,698
(a) Includes the acquisition of three subsidiaries in March 1997, December
1997, and February 1998.
(b) Includes the acquisition of a subsidiary in February 1996.
(c) Includes the a pretax charge of $914,000 (or 10 cents per share) for the
liquidation and write-down of tubular goods inventories.
(d) Includes a one time tax benefit of approximately $1,076,000 (or 18 cents
per share).
(e) Includes the repurchase of approximately 1.2 million shares of the
Company's common stock at a cost of $11.9 million.
NET SALES NET INCOME SHAREHOLDERS' EQUITY
(In millions) (In millions) (In millions)
[BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE] [BAR CHART APPEARS HERE]
PAGE 2
LETTER TO OUR SHAREHOLDERS
We are pleased to present to you the operating results of Aztec Manufacturing
Co. for the fiscal year ending February 28, 1999. Despite the economic turmoil
in much of the world and low commodity prices, Aztec had a good year.
Aztec's revenues for fiscal 1999 grew to a record level of $80.9 million, a 7
percent increase over the prior year's revenues of $75.5 million. Net income was
$4.9 million for the fiscal year ending February 28, 1999 and generated a 6
percent return on sales. This compares to $7.2 million or 9.6 percent in fiscal
1998.
The Company's operations are divided into two distinct and unique segments,
Manufactured Products and Services. An equal distribution of revenues between
the two segments has been and continues to be an integral part of the operating
and growth strategy of the Company. The Manufactured Products Segment is made
up of our electrical and tubular products, and the Services Segment is made up
of hot dip galvanizing services to the steel fabrication industry. Since the
acquisition of our first electrical products company in 1990, Aztec has
maintained a strategy to grow the Manufactured Products Segment with a
combination of internal growth and acquisition. Simultaneously there has been a
growth strategy of participating fully in the regional industry consolidation,
which is now taking place in the hot dip galvanizing industry. This growth
strategy has resulted in an increase from five galvanizing plants to ten in our
Services Segment. While market conditions and acquisitions can change the mix
from year to year, we remain committed to the strategy of growing both
simultaneously and maintaining an equal distribution between Manufactured
Products and Services.
The Manufactured Products Segment of Aztec's business accounted for 57 percent
of our revenues or $46.4 million compared to the prior year's 60 percent or
$44.9 million. While revenues were at record levels, the downturn in the
international power generation market and the deterioration in the price of oil
adversely affected profit margins in this segment. Each year sales to the
petroleum industry represents a declining portion of our total business. With
the broadening of our business and customer base, combined with entry into new
markets with our tubular products, our future operating results should more
closely track the general economic trends, rather than the price of a singular
commodity. As we look to fiscal 2000, we anticipate further growth in both
revenues and profitability will occur in the Manufactured Products Segment. New
product development and the dynamics of the deregulation of the power generation
industry will be the primary factors in the growth of this segment. We
completed the year with record backlogs and increasing quotation activity.
For the fiscal year ending February 28, 1999, growth in the Manufactured
Products Segment was favorably impacted by the expansion of our manufacturing
facilities, increased investment in machinery and equipment, new product
introductions and the full year impact of the acquisition of DRES-CO. We will
continue our emphasis on increasing market share, globalizing our marketing
efforts, and providing more products to our existing customer base, either
through acquisition or product development.
The Services Segment of our business generated 43 percent of our revenues or
$34.5 million for the year just ended compared to the prior year's 40 percent of
revenues or $30.5 million. This segment recorded record revenue levels and also
a record level of operating profits. Operating results were favorably aided by
the full year impact of acquisitions, improvement in cost control and efficiency
and stabilization of the price of zinc. Extensive reinvestment in this segment
positions us well for a continuation of growth and improvement in operating
results.
We now serve the steel fabrication industry with hot dip galvanizing services
from ten strategically located facilities. In fiscal 1999, we served over 3,500
customers, which has provided a broad economic base and one that is not tied to
a particular industry or market. This has also helped us develop a high level
of expertise and efficiency in many different types of work. A superior level
of service and support to our customers has allowed us to have a very
PAGE 3
LETTER TO OUR SHAREHOLDERS
high customer retention rate and enhanced marketing capabilities.
Future growth and expansion of the Services Segment will be through vigorous
participation in the accelerating regional industry consolidation, which is now
underway. As we have previously reported to you, Aztec is in a strong position
to capitalize on the pending consolidation wave and should emerge as a premier
industry "consolidator" for several reasons: 1) Aztec has a strong and rapidly
growing cash flow. 2) Aztec has a well-developed management team, experienced in
running a multi-plant operation. 3) The Company has a large enough presence in
its regional area to achieve high levels of synergism as it makes acquisitions.
As we continue to execute our strategy for growth and expansion, the investment
community should recognize the sustainability of our historical and anticipated
growth and this should reward our shareholders accordingly over time.
Improvement in shareholder value remains at the forefront of our goals and
objectives. Management is pleased with the results attained over the past
years, but we are disappointed that the investment community has not looked more
favorably on these results. This problem is not unique to Aztec but is
reflected in the valuation of many small cap companies. This level of pricing
of our stock combined with our excellent cash flows provided an opportunity for
the Company to repurchase a significant number of shares during the fiscal year
ending February 28, 1999. Aztec repurchased 1.2 million shares or approximately
20 percent of the outstanding common stock.
In the Review of Operations section of this report you will find more details
about the specific achievements of our individual operations and the steps being
taken to increase revenues and profits. The changes hold much significance for
the future of Aztec and we trust you will take the time to review them.
The Board of Directors, on February 16, 1999, declared a year-end cash dividend
of 12 cents per share, a 20 percent increase over the previous payment. This
dividend was paid March 26, 1999, to shareholders of record as of March 5, 1999.
The shareholders annual meeting of Aztec Manufacturing Co. will be held at 10:00
a.m. Tuesday, July 13, 1999, at the Petroleum Club in the Xxxxxxx I Room on the
39th floor of the UPR Plaza (formerly Continental Plaza), Fort Worth, Texas. We
cordially invite all shareholders to attend.
Aztec remains financially strong, alert to opportunities and looking forward to
another record year in the new millennium. It is our goal to be the best at
what we do, for the benefit and enhancement of our customers, our Company, our
employees and our shareholders. Thank you for your continuing support of our
efforts.
Sincerely,
X.X. Xxxxxx
Chairman of the Board and Chief Executive Officer
Xxxxx X. Xxxxxx
President and Chief Operating Officer
PAGE 4
A GAME PLAN FOR GROWTH - BENCHMARKS TO MEASURE PROGRESS
Aztec operates in two distinct businesses, Manufactured Products and Services.
Fiscal 1999 provided mixed results among the two businesses. Softening in the
electrical group and a severe drop in tubular products offset continued progress
in our galvanizing operations.
A portion of Rig-A-Lite sales are within the energy sector, depressing their
sales and operating margins. Xxxxxxx was impacted in the second and third
quarter by the Asian Crisis as power generating projects were stretched out or
delayed in a number of Pacific Rim countries. This was also the case to a lesser
degree in the Latin American markets. Tubular products remain depressed, but
much of the inventory has been sold and converted to cash. Whether OPEC moves to
cut production are effective and whether this leads to improved oil pricing and
increased activity is still unknown at this juncture.
EBITDA
(In millions)
[BAR CHART APPEARS HERE]
As we enter the new fiscal year, the outlook for the Manufactured Products
Segment is looking more positive. Rig-A-Lite continues to broaden both its
product line and markets served and this is beginning to offset the lower
activity in the energy markets. Xxxxxxxx completed its plant expansion last fall
and its sales growth and operating margins are showing excellent progress. Also,
after a shortage of new construction in the U.S. electrical utility industry
over the last several years, deregulation is changing the picture. Xxxxxxx saw a
significant turnaround in its business in the fourth quarter, which is
continuing into fiscal 2000. Tubular products is diversifying into new markets
by embarking on two new product offerings away from the petroleum industry. All
of these trends are discussed in more detail in the Review of Operations.
RETURN ON SALES
[BAR CHART APPEARS HERE]
ASSET TURNOVER is the ratio of sales per dollar employed during the year. It is
calculated by dividing net sales by average assets.
(In thousands)
Fiscal 1995 Sales = $44,608 =1.19
----- -------
Avg. Assets 37,425
Fiscal 1996 Sales = $49,184 =1.18
----- -------
Avg. Assets 41,706
Fiscal 1997 Sales = $57,703 =1.30
----- -------
Avg. Assets 44,308
Fiscal 1998 Sales = $75,479 =1.45
----- -------
Avg. Assets 51,948
Fiscal 1999 Sales = $80,922 =1.39
----- -------
Avg. Assets 58,150
PAGE 5
A GAME PLAN FOR GROWTH - BENCHMARKS TO MEASURE PROGRESS
The Services Segment successfully integrated the acquisition made in December
1997 of International Galvanizers in Beaumont, Texas. The improvements made at
this facility coupled with the upgrading of the kettle at Xxxxxx Galvanizing
have us well positioned for the upcoming projects in the coastal area. The
current year outlook holds much promise. The recently enacted $217 billion
national highway xxxx should open more construction activity. Material costs
(zinc) are currently stable and expected to remain so for the balance of the
year.
RETURN ON ASSETS
[BAR CHART APPEARS HERE]
PRETAX RETURN ON AVERAGE ASSETS is earnings before taxes and extraordinary items
divided by average assets.
(In thousands)
Fiscal 1995 Pretax Earnings = $2,608 = 7.0%
--------------- ------
Avg. Assets 37,425
Fiscal 1996 Pretax Earnings = $4,267 = 10.2%
--------------- ------
Avg. Assets 41,706
Fiscal 1997 Pretax Earnings = $7,153 = 16.1%
--------------- ------
Avg. Assets 44,308
Fiscal 1998 Pretax Earnings = $9,909 = 19.1%
--------------- ------
Avg. Assets 51,948
Fiscal 1999 Pretax Earnings = $7,800 = 13.4%
--------------- ------
Avg. Assets 58,150
SALES PER AVERAGE EMPLOYEE is sales divided by average number of employees.
(In thousands)
Fiscal 1995 Sales = $44,608 = $106
----- -------
Avg. Employees 419
Fiscal 1996 Sales = $49,184 = $105
----- -------
Avg. Employees 469
Fiscal 1997 Sales = $57,703 = $110
----- -------
Avg. Employees 524
Fiscal 1998 Sales = $75,479 = $120
----- -------
Avg. Employee 627
Fiscal 1999 Sales = $80,922 = $118
----- -------
Avg. Employees 688
PRETAX INCOME PER AVERAGE EMPLOYEE is earnings before taxes and extraordinary
items divided by average employees.
(In thousands)
Fiscal 1995 Pretax Earnings = $2,608 = $6
--------------- ------
Avg. Employees 419
Fiscal 1996 Pretax Earnings = $4,267 = $9
--------------- ------
Avg. Employees 469
Fiscal 1997 Pretax Earnings = $7,153 = $14
--------------- ------
Avg. Employees 524
Fiscal 1998 Pretax Earnings = $9,909 = $16
--------------- ------
Avg. Employees 627
Fiscal 1999 Pretax Earnings = $7,800 = $11
--------------- ------
Avg. Employees 688
RETURN ON EQUITY - The definitive measure of profitability for our shareholders
is calculated by dividing net income by the average equity capital employed
during the year to achieve the earnings.
(In thousands)
Fiscal 1995 $1,578 = 7.7%
------
20,462
Fiscal 1996 $2,582 = 11.6%
------
22,268
Fiscal 1997 $4,328 = 16.7%
------
25,867
Fiscal 1998 $7,220 = 23.0%
------
31,447
Fiscal 1999 $4,874 = 15.9%
------
30,603
PAGE 6
A GAME PLAN FOR GROWTH - BENCHMARKS TO MEASURE PROGRESS
In summary, our productivity and performance measurements, while all still at
acceptable levels, declined last year but should post a meaningful recovery in
fiscal 2000. As we pointed out in last years' report the trend over multiple
years is what is relevant.
Of particular importance as we go forward, asset turnover and sales per employee
remained near historical highs - we were able to adjust reasonably quickly.
This leads directly into the topic of cash flow and reinvestment. While earnings
declined in fiscal 1999, cash flow from operations increased primarily because
of good gains in operating income from our galvanizing business and the
liquidation of tubular products inventories. As shown in the accompanying graph,
cash flow from operations was $8.8 million compared to $2.7 million in fiscal
1998. The chart plots the cash flow from operations in millions of dollars each
year since fiscal 1995 and superimposes after tax earnings for the same years.
(IN MILLIONS)
[BAR CHART APPEARS HERE]
Pursuing a policy that stresses maximization of cash flow logically should
result in an improving earnings trend for Aztec because it allows an
acceleration of our expansion and acquisition programs. Of course maximizing the
cash flow and reinvesting it through accelerating our expansion programs is a
sound approach only if acceptable rates of return are achieved.
STANDARD & POORS 500 XXX
[BAR CHART APPEARS HERE]
AZTEC'S XXX
[BAR CHART APPEARS HERE]
The monitoring of the various performance measurements help us make better cash
flow reinvestment decisions. Based on our expectations of our business going
forward, and given the depressed valuation of our common stock and for that
matter small cap stocks in general, we used available cash to repurchase
approximately 20% of Aztec's outstanding common stock in the latter half of the
fiscal year. With depressed prices recently prevailing, the expected rate of
return for the common shareholder appeared to be potentially higher through the
repurchase of common stock rather than the investment in available acquisition
candidates during fiscal 1999.
This does not mean that your management has stopped pursuing growth either
internally or by acquisition. Quite the contrary, we are merely reinvesting cash
for the long-term benefit of all our shareholders.
PAGE 7
REVIEW OF OPERATIONS
Aztec's volume for fiscal 1999 grew to $80.9 million, a 7% increase over the
prior year. Manufactured Products sales accounted for 57% of our volume, while
Services represented 43%. This compares to a mix in fiscal 1998 of 60%
Manufactured Products and 40% Services. Our Manufactured Products consist of
our electrical and tubular products operations, while our Services consist of
hot dip galvanizing, primarily to steel fabricators.
The distribution of revenue between Manufactured Products and Services has been
an integral part of the growth strategy of the Company. Since the acquisition
of the first electrical company in 1990, Aztec has maintained a strategy to grow
the Manufactured Products with a combination of internal growth and
acquisitions. Simultaneous with the strategy of growth in Manufactured
Products, our growth strategy has seen the Services Segment increase from five
galvanizing plants to ten. This has been accomplished by acquisitions and the
building of a new facility. While market conditions and acquisitions can change
the mix from year to year, we remain committed to the strategy of growing both
simultaneously.
A discussion of the operating results by segment and operations within that
segment is presented below.
MANUFACTURED PRODUCTS
The Manufactured Products Segment of Aztec generated over 57% of total revenues
and 37% of operating income. This segment is one of the core strengths of the
Company and is one we believe is well positioned for continued growth and
expansion. Sales increased by 3% over the prior year. While this appears to be
a low growth rate, this segment was negatively impacted by the economic crisis
in many of our international markets and further impacted by the severe downturn
in the petroleum markets. We were able to offset these factors with a full year
operating results of DRES-CO, which was acquired in February 1998, combined with
continued expansion of our served markets, and broadening of our customer base
and product offerings. Operating margins were below that of the prior year as a
result of the unexpected downturn in some of our markets and increased spending
levels on product development and marketing as we redirected our business to a
broader customer base and continued our investment in the future of this core
segment.
Return on assets employed exceeded 15% and operating income exceeded 9%. While
this is down from the prior year due to the conditions stated above, it remains
a very profitable segment and one that should continue to be a significant
contributor to the overall performance of the Company.
All of our products enjoy world-class status, with excellent name recognition
and customer acceptance. Our strategy is to continue to grow our global
customer base, offering them an integrated and innovative, one-stop total
solution to their needs. We will look to continued product development and
complimentary acquisitions to supplement our growth in this segment in order to
take more products to our existing customer base.
Aztec's Manufactured Products Segment is made up of five operating entities:
Xxxxxxxx Industries, Inc. ("Xxxxxxxx"), Rig-A-Lite Partnership, Ltd. ("R-A-L"),
The Xxxxxxx Company ("Xxxxxxx"), tubular products, and Drilling Rig Electrical
Systems Partnership, Ltd., ("DRES-CO"). An individual discussion of each of
these entities is provided below.
XXXXXXXX INDUSTRIES, INC. - PITTSBURG, KANSAS
Xxxxxxxx is a leading manufacturer of custom engineered factory fabricated
modular power distribution enclosures. Xxxxxxxx has been involved in this
business for approximately twenty years, and has been one of the primary agents
in promoting the acceptance of the factory fabricated modular enclosure concept
across a broad spectrum of industries and applications. This concept has moved
beyond the original application of providing environmentally controlled
protection for
PAGE 8
REVIEW OF OPERATIONS
Manufactured Products
(In thousands)
==============================================================================================================
1995 1996 1997 1998 1999
--------------------------------------------------------------------------------------------------------------
Sales $31,847 $32,264 $34,057 $44,940 $46,400
--------------------------------------------------------------------------------------------------------------
% Change 2%- 1% 6% 32% 3%
--------------------------------------------------------------------------------------------------------------
OP Income $ 2,442 $ 3,836 $ 5,261 $ 6,904 $ 4,380
--------------------------------------------------------------------------------------------------------------
% Change <47%> 57% 37% 31% <37%>
--------------------------------------------------------------------------------------------------------------
OP Margin Return on Sales 8% 12% 15% 15% 9%
--------------------------------------------------------------------------------------------------------------
Avg. Assets Employed $22,296 $21,683 $19,884 $24,830 $29,436
--------------------------------------------------------------------------------------------------------------
Return on Assets 11% 18% 26% 28% 15%
==============================================================================================================
power distribution equipment in hazardous areas such as refineries, to encompass
applications in the chemical, paper, automotive, steel, telecommunications and
petroleum industries, as well as general industry, utilities, and
municipalities.
Xxxxxxxx has continued to emphasize its "turnkey" capabilities in providing
packages that include instrumentation, analyzing equipment, programmable logic
controllers, and other applications involving microprocessor based equipment.
This is in addition to the more traditional applications composed of power
distribution equipment packages. The "turnkey" package provides the end user
with a modular structure that is ready to operate at a lower installed cost than
is available by procuring and coordinating all of the individual pieces of the
package. This concept reduces the end user procurement and coordination efforts,
while reducing project lead times and field installation cost.
We have long enjoyed a reputation of providing a high quality distinctly
constructed modular enclosure package. This reputation has been maintained as
we have expanded the company to become a more significant force in the industry.
Growth of the company has come from expansion of this type of application across
a wider base of markets served. These efforts resulted in Xxxxxxxx realizing
another record year in orders, sales, and operating income for fiscal 1999.
Sales for fiscal 1999 grew by approximately 12% while operating income grew by a
rate of 47%. In addition to recording record levels of orders, sales, and
profitability, fiscal 1999 saw the successful completion of the expansion of our
production facilities. This addition more than doubled our manufacturing
capacity. The expansion was completed without significant production
interruptions, and allowed us to take advantage of opportunities to meet
increasing customer demand for our product. The new capacity has allowed us to
be more responsive to our customers by reducing the lead times associated with
our products. As we enter the new fiscal year, we believe that the expanded and
improved facilities will lead to increased responsiveness to our customer's
requirements, greater efficiency, and higher operating margins.
RIG-A-LITE PARTNERSHIP, LTD. - HOUSTON TEXAS
R-A-L is a leading manufacturer of highly engineered hazardous and severe
environment lighting fixtures primarily operating in three distinct markets with
a fourth being introduced at the end of fiscal 1999 as described below.
Operating results for the current fiscal year reflect a downturn from the prior
fiscal year. This is the first year since the acquisition in 1990 that we have
not shown a substantial growth above the prior year. The primary cause of the
downturn was the severe decline experienced in the petroleum sector and the
unfavorable impact on our international business brought on by the economic
crisis in many of our served geographic markets. The three industry markets
served are Commercial/Industrial, Food Processing and Petrochemical. Our newest
market entry is Retail Outdoor Lighting.
Approximately 43% of R-A-L's revenues are generated in the Commercial/Industrial
lighting
PAGE 9
REVIEW OF OPERATIONS
fixture market. Development and implementation of proactive sales programs and
enhanced product development are the key factors in increasing the independent
agent specification selling capability, a critical factor to continued growth.
Intense field training has increased the agent knowledge and has increased the
success rate with large project specifications, not only within the U.S. but
also large industrial projects around the world. Further product development and
the introduction of an intrinsically safe fiber optic hazardous product line
should continue R-A-L's technological leadership position in this market.
The Food Processing lighting fixture market, primarily fresh poultry and red
meat products, continues to be driven by new building projects. This market was
pioneered by R-A-L a number of years ago with a product specifically designed
and manufactured for this application. The new generation, state of the art,
energy efficient products were successfully introduced in fiscal 1999. These
products were specified for use in new building projects as well as re-lighting
of older R-A-L installations. This trend of re-lighting and new projects will
continue through the coming fiscal year.
The Petrochemical market that R-A-L serves went through a difficult year. The
steep decline in crude oil prices reduced demand for drilling, especially for
land based rigs. Because of this decline in the new or refurbished land based
rig markets, greater emphasis was placed on offshore rigs, production platforms
and service related barge projects to gain a larger share of a declining market.
Our reliance on this market for growth has diminished over the past few years as
we have expanded our participation in other markets. We will continue our
strategy to increase market share by concentrating on larger project
specifications and offshore project business.
We are excited about our latest market entry, that being the Retail Outdoor
Lighting market. We anticipate that this will represent approximately 10% of R-
A-L's business in the coming fiscal year. We have completed the majority of our
product development for this market and have identified and signed leading
independent sales agents to work with distributors in order to penetrate this
market. Our initial emphasis will be in the growth of the retail outlets that
provide the customer with a combination of services, such as the retail
petroleum, convenience store, and fast food outlet combinations. This is a
growing market and one that should facilitate penetration. We will also
aggressively pursue the auto service, car washes, and retail auto providers as
they increase their emphasis on upgrading their lighting to enhance appearance
and customer acceptance.
While R-A-L incurred a downturn in fiscal 1999, we are encouraged about the
outlook for this entity as we continue to broaden our customer base and expand
our product offerings. Continued product development, further expansion of
agent and distribution networks, and increased emphasis on specification should
facilitate a return to growth and help restore our historical pattern of year
over year increased revenues and profits.
THE XXXXXXX COMPANY - RICHLAND, MISSISSIPPI
Xxxxxxx is a leading manufacturer of custom designed electrical distribution
systems in the fields of isolated phase bus, segregated and non-segregated phase
bar bus, cable bus, grounding cubicles and installation services. The markets
served are Original Equipment Manufacturers (OEM), architectural engineering
design firms, investor owned utilities, independent power producers and
industrial companies.
Total revenues and profits were down due to a weak second and third quarter of
this fiscal year. The primary contributing factor was the turmoil in the Asian
and Latin American markets, combined with the fact that the Independent Power
Producers (IPP's) were not yet in a position to solicit bids for new plant
construction. The IPP market has been brought about by the deregulation of the
electricity industry. As deregulation moves into the electricity market, the
changes promise to be dramatic. The new power structure is made up of 1) power
producers which are deregulated, 2) middlemen or a new class of power
PAGE 10
REVIEW OF OPERATIONS
marketers which are deregulated, 3) delivery systems which remain regulated and
4) billing and metering which has also been deregulated. We are the most
influenced by the deregulation in the power producers as they address the
critical need for more power production capacity in the United States.
While the fourth quarter of fiscal 1999 was a record setting quarter in terms of
revenues and incoming orders, the sales increase was not sufficient to offset
the downturn in the second and third quarter. The fourth quarter increase was
due primarily to a more stabilized foreign market and the dynamic domestic
market conditions created by deregulation and the resulting business from the
IPP's. The incoming orders for our primary products were supplemented by the
selection of Xxxxxxx to be a major supplier of general terminal enclosures to an
OEM. We anticipate that these market conditions will continue for the next
three years. The continuation of these conditions should facilitate further
growth and expansion of our business.
Operating income was unfavorably impacted by the same factors that impacted our
volume in the second and third quarter. The downturn that occurred did not
provide for sufficient near term backlog to effectively and efficiently operate
our facility and cover the fixed overhead and expense structure at the same
margin percent as we have historically enjoyed. This was addressed in the
fourth quarter and the continuation of the operating income level achieved in
the fourth quarter should position this entity to achieve operating income at
record levels in fiscal 2000.
Emphasis on product development was increased in fiscal 1999 and will continue
into the new fiscal year. Keeping abreast of changing market conditions will be
a key focal point for Xxxxxxx. With years of service to the industry, every
effort will be made to ensure that we maintain a leadership position and better
serve our changing markets. This will be combined with increased emphasis on
the segment of the international market we serve so as to position the company
for maximum long-term growth. We are utilizing government agencies such as the
Local Trade Commission and the Federal Trade Commission to assist us in
identifying opportunities with NAFTA partners.
Xxxxxxx Installation Services (CIS) and parts sales continue to be brisk. As
our bus business grows, so do the opportunities for CIS and spare parts. This
combined with efforts of utility companies to downsize their support staffs in
the cost cutting environment of deregulation have resulted in an increased usage
of outside subcontractors for maintenance and repair, thus adding to the
potential of CIS.
We enter fiscal 2000 with the highest backlog in the history of Xxxxxxx.
Domestic sales should account for approximately 70% of its business in the
coming fiscal year. In fiscal 1999 and 1998 approximately 80% of Xxxxxxx
projects were shipped overseas. We anticipate that the growth trend experienced
in the fourth quarter will continue into next year. This is supported by the
fact that generator manufacturers are backlogged 1-2 years and their backlog is
increasing. It is anticipated that these factors will continue and favorably
impact the growth and operating results.
TUBULAR PRODUCTS
Tubular products is a small component of our Manufactured Products Segment, and
one that is in a state of change. Fiscal 1999 was a disappointing year and
clearly demonstrates the volatility that occurs when operating results are tied
to a singular market or commodity. With the petroleum industry as tubular
products primary source of revenues, our results clearly reflect the impact on
this segment by wide fluctuations in the price of oil. Operating results for the
current year when compared to the operating results of fiscal 1998, when more
favorable marketing conditions prevailed, demonstrates the need for a change in
nature and direction of this product. Your management has responded to this and
has begun to put in place strategies that will lessen the dependence on a
singular market.
This downturn in oil pricing and the resultant impact it has had on our
operations required us to continually adjust our operating cost structure to
minimize the adverse impact on the
PAGE 11
REVIEW OF OPERATIONS
Company. Of particular significance is the downward pressure on our product
pricing which resulted in substantial write-downs of inventory and liquidation
of products well below our inventory carrying costs. This charge amounted to
$914,000 in fiscal 1999. We anticipate that without further pricing
deterioration, this should be behind us and our products currently in inventory
should be sold at carried cost or a slight margin. This situation occurred
primarily in our larger diameter pipe.
During the course of the year as business declined, we took steps to maintain
our market share in the small diameter sizes of pipe (macaroni). This is
currently our core competency and is the product that we will have to
concentrate on in the climate we are now experiencing. We do not anticipate any
major favorable change in the marketing condition for the balance of calendar
1999. The other core competency is pup joints. As we endeavored to maintain
acceptable pricing levels during fiscal 1999, we did lose some market share. As
we look to the current year, our strategy for these two products is to maintain
our market share at acceptable pricing levels. In each of these areas, we do
compete from a position of strength.
The key to our long-term success is to diversify into markets that will not
fluctuate as greatly as the oil industry and markets that can be entered based
upon current capabilities and facilities. To that end we have embarked on two
new product offerings. The first is a new product that fits perfectly into our
capabilities and does not require additional capital investment. This product
is for an automotive application, to be supplied to a tier one manufacturer. We
believe that a product such as this will give us constant sales volumes on a
month to month basis.
The second part will be a drill pipe offering to serve the underground
construction and utility industry. This product will have to go through an
acceptance period and will take some time to be widely used in the industry.
Additionally, market distribution channels must be established.
It is imperative that we develop new areas of business to insulate the Company
from the wide fluctuations of the oil industry. Initial steps have been taken
and further investigation will be done. Short-term improvement in our operating
results will need to come from improved oil pricing. However, sustainable
improvement must come from diversification and broadening of our customer base.
Your management is dedicated to minimizing the adverse impact on the Company
from falling oil prices.
DRILLING RIG ELECTRICAL SYSTEM PARTNERSHIP, LTD., (DRES-CO) - HOUSTON, TEXAS
Formed in 1977, DRES-CO's product offering consists of designing and installing
of electrical systems primarily on land based drilling rigs. Over the years,
DRES-CO has established itself as a leader of quality design, workmanship and
service. Aztec acquired DRES-CO in February of 1998 and fiscal 1999 results
reflect the first full year of operation.
Being a provider of design and installation services to primarily land based
drilling rigs, DRES-CO was severely impacted by the decline in crude oil prices
and the resultant deterioration of its primary market segment. In an effort to
offset this unfavorable trend, renewed management effort brought about a
diversification to provide for a business level that would not only offset the
downturn but also provide a means for growth and expansion. This
diversification was to shift the company from strictly a domestic land rig
electrical installation company to a wider range of opportunities that includes
offshore/marine rigs and power load distribution systems designed for other
industries, including but not limited to petroleum, mining and petrochemical.
Despite the severe downturn in the market, DRES-CO made a positive contribution
to the operating income of the Manufactured Products Segment. The
diversification that has been put in place combined with new sales and marketing
emphasis, and managerial structure should lead to an improvement in the coming
year despite the current status of the domestic oil market.
PAGE 12
REVIEW OF OPERATIONS
SERVICES SEGMENT
(In thousands)
======================================================================================================================
1995 1996 1997 1998 1999
----------------------------------------------------------------------------------------------------------------------
Sales $12,761 $16,920 $23,646 $30,539 $34,522
----------------------------------------------------------------------------------------------------------------------
% Change 35% 33% 40% 29% 13%
----------------------------------------------------------------------------------------------------------------------
OP Income $ 3,056 $ 4,270 $ 5,930 $ 6,543 $ 7,474
----------------------------------------------------------------------------------------------------------------------
% Change 54% 40% 39% 10% 14%
----------------------------------------------------------------------------------------------------------------------
OP Margin Return on Sales 24% 25% 25% 21% 22%
----------------------------------------------------------------------------------------------------------------------
Avg. Assets Employed $11,267 $16,594 $19,313 $22,522 $26,576
----------------------------------------------------------------------------------------------------------------------
Return on Assets 27% 26% 31% 29% 28%
======================================================================================================================
SERVICES
The Services Segment of Aztec generated 43% of total revenues and 63% of
operating income. This segment, which provides hot dip galvanizing services to
the steel fabrication industry, is the second of the core strengths of the
Company, and like Manufactured Products, is one we believe is well positioned
for continued growth and expansion. Sales increased by 13% over the prior year
while operating income increased 14% over fiscal 1998. On a same store basis,
the growth was 4% and the favorable impact of a full year of operation of
International Galvanizers in Beaumont Texas, acquired in December 1997,
accounted for the balance of the increase. In fiscal 1999, Aztec provided long
term, cost effective corrosion protection for more than 110,000 tons of steel.
This is a 16% increase over the prior year and exceeded our forecast for the
year.
Return on assets employed exceeded 28% and operating income as a percent of
sales at 22% was slightly ahead of last year. Despite a slight decrease in
average selling price, operating efficiency improvements combined with stability
in zinc pricing more than offset this decrease.
The galvanizing services industry typically serves fabricators and/or
manufacturers involved in the highway construction, power generation,
transportation, water treatment, agriculture, petrochemical and chemical, pulp
and paper, and numerous OEM industries. The market in general is broken into
two major categories, being large structural steel projects and custom
fabrication.
Aztec now operates ten galvanizing plants. Each plant serves a broad base of
customers in a relatively defined geographic market. Most of the customer base
is located within a 150-mile radius of the plant and we compete primarily with
respective galvanizing facilities contiguous to the area. A key strategy of our
Services Segment has been to serve a broader base of customers to better ensure
that we move more in concert with the general economy rather than a specific
market. While a particular customer or market may impact an individual plant,
in total we believe that we have achieved the desired balance. This strategy
not only helps insulate the Company from wide fluctuations in a particular
market, but also helps us achieve a higher average selling price. In general,
the structural steel projects have a lower average selling price than custom
fabrication. In fiscal 1999, we served over 3,500 customers, a key indicator to
us. Additionally, serving a wide customer basis allows us to develop a high
level of expertise and efficiency in handling of essentially every type of work.
A superior level of service and support to our customers has allowed us to have
a very high retention rate and enhanced our marketing abilities.
Since 1966 Aztec has been providing long-term, cost effective corrosion
protection with quality galvanizing and superior service, combined with strict
quality control at each of the plants. The ten galvanizing plants of Aztec are
in the south and southwest with locations in Texas, Louisiana, Alabama,
Mississippi, Arkansas and Arizona. With our multi-plant operations we have the
ability to coordinate and manage the largest projects or smaller single loads.
Through the experience gained from many years of operations, we are able to
PAGE 13
REVIEW OF OPERATIONS
provide the customer with 1) consistent high quality, 2) excellent customer
service, 3) competitive pricing and 4) on-time delivery.
Responding to industry issues is a key to Aztec's success. An example is the
galvanizing industry has been aware of the adverse effects that silicon killed
steel can have on the galvanized coating. Most steel produced today is made
using continuous casting technology rather than the old method of casting
ingots. Silicon is widely used to deoxidize these steels and significant
concentrations of silicon can remain in the finished product. This results in
very reactive steel, sometimes producing very thick and discolored coatings.
GALVXTRA, Aztec's nickel-zinc alloying process, has had much success in limiting
the adverse effects of reactive steel. GALVXTRA improves the aesthetic appeal
of the galvanized coating and reduces the frequency of developing irregular
thickness. We continue to search for the best methods of serving our customer's
needs.
Since many application designs entail very large fabricated steel parts that
minimize field erection requirements, the galvanizing industry has been
challenged to build longer, wider and deeper kettles. Many of the new plants
and the latest expansions of existing plants have involved installations of
larger kettles. In keeping with this industry trend, Aztec made capital
investments in fiscal 1999 to provide longer, deeper, and wider kettles. We
will continue this trend to ensure that our capabilities match changing
requirements of our customers. In general, Aztec has undertaken an aggressive
reinvestment program in our galvanizing plants to ensure that they address the
needs of our customers, and operate at the highest efficiency level. We believe
that this has been a key success in achievement of the growth and high margin
levels of this segment.
In calendar year 1998, carbon steel production in the United States was 94.3
million tons, a slight decrease from the 1997 level. Of that, 3.2 million tons
were hot dip galvanized. This represents a 10.5% increase over the previous
year. The American Galvanizing Association reports there has been an average
increase of 8.5% over the past five years.
Because of the regional nature of the business, the galvanizing industry is
highly fragmented with over 125 job shop type galvanizing plants in the United
States. However, there is a growing trend toward industry consolidation. Aztec
is one of the leading providers of galvanizing services and is considered to be
an industry consolidator. Even though we are one of the leading providers, our
tonnage of processed steel only represents slightly more than 3% of total
industry shipments. We believe that this provides for excellent opportunities
for growth and your management remains ever vigilant and proactive in pursuing
acquisition opportunities. As one of our core strengths, we will look to the
Services Segment for major expansion of the Company.
PAGE 14
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Aztec Manufacturing Co. (the "Company") is organized into two distinct segments,
Manufactured Products and Services. The Manufactured Products Segment consists
of our electrical and tubular products and the Services Segment consist of our
hot dip galvanizing services.
The Company adopted Statement of Financial Accounting Standards ("SFAS") 131,
"Disclosure About Segments of an Enterprise and Related Information," in fiscal
1999. This discussion and analysis has been prepared on the basis of these two
business segments, which are primarily in the United States. Prior year
information has been reclassified to the current year basis of presentation. In
prior years and throughout fiscal 1999, for quarterly reporting purposes, the
Company disclosed the following three segments. The first was the Electrical
Products Segment, which manufactures lighting products, electrical bus ducts and
power distribution enclosures. The second segment was the Galvanizing Segment
which provides hot dip galvanizing services to the steel fabrication industry.
The third segment was the Tubular Products Segment which provides oil field
tubular products to the petroleum industry.
Management believes that the following commentary appropriately discusses and
analyzes the comparative results of operations and the financial conditions of
the Company for the periods covered.
GENERAL
The Company reported sales of $80.9 million for fiscal 1999 compared with $75.5
million in the previous year. Net income for fiscal 1999 was $4.9 million or
$.86 cents per share compared with $7.2 million or $1.19 per share in fiscal
1998 on a diluted basis. Net income for fiscal 1999 was negatively impacted by a
pretax charge of $914,000 associated with liquidations of tubular inventories
and inventory write-downs. Prior fiscal year 1998 results included a one-time
tax benefit of $1.1 million. Excluding these unusual items, net income per share
for the fiscal year ended 1999 would have been $.96 cents per share versus $1.01
per share in 1998 on a diluted basis. A discussion concerning effects of new
accounting standards can be found in Note 1 of Notes to Consolidated Financial
Statements.
RESULTS OF OPERATIONS
YEAR ENDED FEBRUARY 28, 1999 (1999) COMPARED WITH YEAR ENDED FEBRUARY 28, 1998
(1998)
Aztec's consolidated net sales for 1999 grew by $5.4 million or 7% over 1998.
Revenues from the Company's Manufactured Products Segment, which is made up of
Xxxxxxxx, R-A-L, Xxxxxxx, tubular products and DRES-CO, were up $1.5 million or
3% for 1999 as compared to 1998. Total backlog for this segment was $18.2
million at the end of fiscal 1999 compared to $19.9 million in 1998. Backlog in
the segment's four electrical companies was up $3.5 million or 25% in 1999 as
compared to 1998. Backlog in the tubular product portion of this segment was
down $5.2 million in 1999 from 1998. Revenues at Xxxxxxxx were up 12% in 1999 as
compared to 1998. This increase came primarily from their core business, the
manufacture of factory fabricated module power distribution enclosures. With the
successful completion of the expansion of their production facility, Xxxxxxxx
should show further revenue increases. Revenues at R-A-L were down 10% in 1999
as compared to 1998. R-A-L's down turn was attributed to the severe decline
experienced in the petroleum related sector of their business and the
unfavorable impact on their international business brought on by the economic
crisis in their served geographic markets. With the introduction of new products
discussed in the Review of Operations, R-A-L should be positioned for future
growth. Revenues at Xxxxxxx were down 7% in 1999 as compared to 1998. The down
turn experienced during Xxxxxxx'x second half of fiscal 1999 is a direct result
of the turmoil in the Asian and Latin American markets they serve. Over 80% of
Xxxxxxx'x revenues for 1999 and 1998 were generated from these overseas markets.
Fiscal 2000 should see a significant shift in orders towards the domestic market
due to deregulation
Page 15
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
in the U.S. electrical market. Backlog at Xxxxxxx was at a record level at the
end of fiscal 1999. Revenues generated from tubular products were up 8% or
$700,000 for 1999 as compared to 1998. This portion of the Manufactured Products
Segment has been severely impacted by the volatility in the petroleum industry.
Due to deteriorating oil prices, the Company liquidated a significant portion of
its inventories of tubular products in the last half of fiscal 1999. These
inventory liquidations increased revenues for the year, but were sold at deep
discounts. New products are being developed to move away from the petroleum
industry, but it will take time to bring them to market. It is not anticipated
there will be any major favorable change in the market conditions for the coming
year. Tubular products continue to represent a diminishing portion of
Manufactured Products Segment revenues. DRES-CO, acquired in February 1998,
completed its first year as a contributor to the Company's Manufactured Products
Segment, generating $1.5 million in revenues for fiscal 1999. DRES-CO is a
provider of electrical systems primarily on land based rigs. This portion of the
Manufactured Products Segment has been negatively impacted by the volatility in
the petroleum industry. To offset a portion of this downturn, DRES-CO is
diversifying its business to serve not only land based drilling rigs but also
serve offshore marine rigs. This diversification should lead to an improvement
in DRES-CO's performance in fiscal 2000.
Revenues in the Services Segment, which is made up of the Company's ten hot dip
galvanizing facilities, were up 13% or $4 million in fiscal 1999 as compared to
1998, due to a 4% increase in revenues at the segments existing nine facilities
and the acquisition of International Galvanizers in late fiscal 1998.
International Galvanizers contributed $3.4 million in revenues for the first
full year of operations with the segment.
Aztec's consolidated operating income (see Note 10 of Notes to Consolidated
Financial Statements) decreased $1.6 million or 12% in fiscal 1999 as compared
to 1998. Consolidated operating income in fiscal 1999 was negatively impacted by
a pretax charge of $914,000 associated with liquidations of tubular inventories
and inventory write-downs in the Company's Manufactured Products Segment.
Operating income in the Manufactured Products Segment was down 37% or $2.5
million in fiscal 1999 as compared to 1998. Xxxxxxxx'x operating income was up
47%, which corresponded with increased revenues for the year as well as
reflecting increased efficiencies associated with its plant expansion. R-A-L's
operating income in fiscal 1999 was down 29% from 1998. This down turn was due
to competitive pricing pressures in the markets it serves. Xxxxxxx'x operating
income was down 55% in fiscal 1999 as compared to 1998. Again, this down turn
was due to competitive pricing pressures associated with the turmoil in the
Asian and Latin American markets it serves. Margins at Xxxxxxx should improve in
fiscal 2000 as its production shifts to higher margin domestic projects. Tubular
products showed a loss for fiscal 1999 of $961,000 as compared to an operating
income of $724,000 in 1998. This loss was primarily associated with the down
turn in the petroleum markets it serves leading to the liquidation and
write-down of inventories. DRES-CO showed an operating income of $125,000 for
its first full year of operations in the Manufactured Products Segment.
The Services Segment's consolidated operating income increased 14% during 1999
compared to 1998. Operating income in this segment's nine existing facilities
was up 12% due to increased volumes and production efficiencies. International
Galvanizers contributed $268,000 in operating income in fiscal 1999.
General corporate expenses for 1999 decreased by 6% from 1998 due to lower
profit sharing expenses associated with lower profits for the year.
Interest expense in 1999, as compared to 1998, was up 33% or $245,000. This
increase was due to larger outstanding loan balances during the last half of
fiscal 1999 associated with the repurchase of 1.2 million shares of the
Company's common stock at a cost of $11.9 million.
Page 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Other income and expense was made up of scrap sales and other (income) expense
items not specifically identifiable to a segment.
YEAR ENDED FEBRUARY 28, 1998 (1998) COMPARED WITH YEAR ENDED FEBRUARY 28, 1997
(1997)
Aztec's consolidated net sales for 1998 grew by $17.8 million or 31% over 1997.
Revenues from the Company's Manufactured Products Segment were up $10.9 million
or 32% in 1998 as compared to 1997. Total backlog in the Manufactured Products
Segment was $19.9 million at the end of fiscal 1998 compared to $10.9 million in
1997. Revenues at Xxxxxxxx were up 18% in 1998 as compared to 1997. Sales of
Xxxxxxxx'x factory fabricated power centers, which represented 91% of Xxxxxxxx'x
revenues, were up 24% over 1997. Rig-A-Lite's revenues were up 7% in 1998.
Rig-A-Lite's revenue increase was a direct result of an improved petroleum
industry. Xxxxxxx'x revenues were up 43% in 1998 compared to 1997, due to
continued market penetration in international markets, which represents 80% of
Xxxxxxx'x revenues, and Xxxxxxx'x domestic customer installation service
business was up 11% in the year. Tubular products generated 19% of the segment's
consolidated revenues in 1998. Revenues generated from this segment were up $4.8
million or 127% for 1998 from 1997. Tubular products' backlog increased to $5.9
million at the end of fiscal 1998 compared to $630,000 in 1997. The increased
revenues in 1998 were a direct result of Aztec's strategy to become a direct
supplier of oil field tubular goods in fiscal 1997. DRES-CO, acquired on
February 23, 1998, designs and installs electrical systems on drilling rigs.
DRES-CO did not contribute to fiscal 1998 revenues.
Revenues in the Services Segment were up $6.9 million or 29% for 1998 as
compared to 1997, due to a 3% increase in revenues at the Company's existing
eight facilities and two acquisitions during fiscal 1998. Xxxxxx Galvanizing
acquired in March 1997 and International Galvanizers acquired in December 1997
contributed a combined total of $6.3 million in revenues or 21% of the segment's
revenues in fiscal 1998.
Aztec's consolidated operating income (see Note 10 of Notes to Consolidated
Financial Statements) increased $2.3 million or 20% for fiscal 1998, as compared
to 1997.
Operating income in the Manufactured Products Segment was up 31% in fiscal 1998
compared to 1997. Xxxxxxxx'x operating income was up 14% compared to 1997 due to
improved operating margins. Rig-A-Lite's operating income in 1998 was up 7% from
1997, which corresponded with the increase in revenues for the year. Xxxxxxx'x
operating income was up 52% in 1998 compared to 1997, due to increased volumes
as well as higher margin jobs. Tubular products showed a $724,000 operating
income for 1998 as compared to the $56,000 loss in 1997. The operating loss in
1997 included carrying cost of $115,000 for the segment's idle facility in
Houston, which was sold in 1997. The improvement in operating income in this
segment is attributable to the increased volumes of tubular goods processed and
sold during fiscal 1998.
The Services Segment total operating income increased 10% during 1998 compared
to 1997. Income in this segment was negatively impacted by a write-down of zinc
inventory to market price in the amount of $482,000 at the end of fiscal 1998.
Operating income in the segment's eight existing facilities was down 5% due to a
7% reduction in the volume of steel processed in 1998. Xxxxxx Galvanizing and
International Galvanizers, which were acquired in 1997, contributed 14% of the
Service Segment's operating income or $936,000 in combined income.
General corporate expenses in 1998 increased by 13% over 1997 due to higher
employee benefits and profit sharing expenses, and increased selling expenses.
The increased expenses are attributed to higher consolidated sales volumes and
the Services Segment's acquisitions.
Page 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Interest expense in 1998, as compared to 1997, was down due to a lower average
outstanding loan balance through the course of the year.
Other (income) expense was made up of scrap sales and other (income) expense
items not specifically identifiable to a segment. This amount included the
reduction in various corporate reserves during 1998 that were no longer needed.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources for the Company's liquidity and capital resources are cash
flow from operating activities and bank debt. The Company's cash requirements
are generally for operating activities, acquisitions, debt repayment, treasury
stock purchases and dividend payouts. The Company believes that working capital,
borrowing capabilities, and the funds generated from operations should be
sufficient to finance anticipated operational requirements, internal growth, and
possible future acquisitions.
The Company's operating activities generated cash flow of approximately $8.8
million, $2.7 million, and $6.8 million during fiscal 1999, 1998, and 1997,
respectively. Operating cash flow was provided by net income, depreciation and
amortization, and other non-cash items.
Additional cash was generated during the year through reduction in inventories.
Tubular product inventories were liquidated during the last half of the fiscal
year by $2.1 million and all other inventories were reduced during the year by
$930,000.
The Company made $7 million in various capital improvements during the year,
which were funded from cash flow and bank debt. In the Manufactured Products
Segment, Xxxxxxxx doubled its capacity at a cost of $1.9 million. New product
tooling and other capital investments in the amount of $1.7 million were also
expended in the Manufactured Products Segment over the course of the year.
Capital improvements in the amount of $3.3 million were made in the Services
Segment. The Company's excellent cash flows and low stock valuation afforded the
Company an opportunity to repurchase 1.2 million shares of the Company's common
stock at a cost of $11.9 million. Other major uses of cash during 1999 included
repayment of long term debt and payment of cash dividends.
The Company has a credit facility with a bank, which provides for a $15 million
revolving line of credit, a $10 million Term Note A and a $10 million Term Note
B. At the end of fiscal 1999, the Company had $7.8 million outstanding under
their revolving line of credit and $15.4 million outstanding under the term
facilities. Availability under the revolving line of credit at year-end was $7.2
million.
ENVIRONMENTAL MATTERS
In the course of its galvanizing operations, the Company is subject to
occasional governmental proceedings and orders pertaining to noise, air
emissions and water discharges into the environment. As part of its continuing
environmental program, the Company has complied with such proceedings and orders
without any materially adverse effect on its business.
The Company provides for costs related to contingencies when a loss is probable
and the amount is reasonably determinable. It is the opinion of management,
based on past experience, that the ultimate resolution of these contingencies,
to the extent not previously provided for, will not have a materially adverse
effect on the Company.
YEAR 2000 COMPLIANCE
The year 2000 issue is the result of computer programs being written to use two
digits rather four digits to define the applicable year. Any computer program
that has date sensitive software may recognize a date using "00" as the year
1900 rather than the year 2000. This could result in a temporary inability to
process transactions or engage in normal manufacturing or other business
activities.
Page 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The Company has completed its initial review of the impact of the
year 2000 issue on the Company's financial accounting software, information
systems and support systems, including hardware and software used in the
manufacture of its products. Based on the Company's assessment and subsequent
modifications of its systems, the Company does not believe that any additional
modifications to or replacement of its information technology or other systems
are necessary as a result of the year 2000 problem. The Company plans to
complete the testing process of all significant applications by September 30,
1999. If some of these systems are not year 2000 capable by September 30, 1999,
there are a number of alternate systems available in the market place which have
been designed to be year 2000 capable.
The Company has communicated with others with whom it does significant business
to determine their year 2000 readiness and the extent to which the Company may
be vulnerable to third-party year 2000 problems. However, there can be no
guarantee that the systems of other companies will be converted timely, or that
a failure to convert by another company will not have a material adverse effect
on the Company.
The total cost to the Company of the year 2000 compliance activities has not
been and is not anticipated to be material to its financial position or results
of operations in any given year. These costs and the date on which the Company
plans to complete the year 2000 modifications and testing are based on
management's best estimates, which were derived using numerous assumptions about
future events, including the continued availability of certain resources,
third-party modification plans and other factors. However, there can be no
guarantee that these estimates will be achieved, and actual results could differ
from those plans.
FORWARD LOOKING STATEMENTS
This Report contains, and from time to time the Company or certain of its
representatives may make, "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended. These statements are generally
identified by the use of words such as "anticipate," "expect," "estimate,"
"intend," "should," "may," "believe," and terms with similar meanings. Although
the Company believes that the current views and expectations reflected in these
forward-looking statements are reasonable, those views and expectations, and the
related statements, are inherently subject to risks, uncertainties, and other
factors, many of which are not under the Company's control. Those risks,
uncertainties, and other factors could cause the actual results to differ
materially from these in the forward-looking statements. Those risks,
uncertainties, and factors include, but are not limited to, many of the matters
described in this Report: change in demand, prices and raw material cost,
including zinc which is used in the hot dip galvanizing process; changes in the
economic conditions of the various markets the Company serves, foreign and
domestic, including the market price for oil and natural gas; acquisition
opportunities, adequacy of financing, and availability of experienced management
employees to implement the Company's growth strategy; and customer demand and
response to products and services offered by the Company. The Company expressly
disclaims any obligations to release publicly any updates or revisions to these
forward-looking statements to reflect any change in its views or expectations.
PAGE 19
CONSOLIDATED BALANCE SHEET
February 28, 1999 and 1998
Assets 1999 1998
------ ---------------- ---------------
Current assets:
Cash and cash equivalents $ 800,183 $ 765,912
Accounts receivable, net of allowance for doubtful accounts of $428,300 in 1999
and $422,700 in 1998 13,465,633 13,068,684
Income taxes receivable 7,004 106,120
Inventories 11,191,363 14,228,741
Prepaid expenses and other 323,176 250,736
---------------- ---------------
Total current assets 25,787,359 28,420,193
Long-term investments 200,000 300,000
Property, plant and equipment, at cost:
Land 1,827,431 1,827,431
Buildings and structures 17,194,254 14,337,446
Machinery and equipment 17,795,993 14,225,780
Furniture and fixtures 1,609,601 1,450,062
Automotive equipment 1,207,593 889,868
Construction in progress 225,179 1,056,705
---------------- ---------------
39,860,051 33,787,292
Less accumulated depreciation 16,781,171 14,519,423
---------------- ---------------
Net property, plant and equipment 23,078,880 19,267,869
Intangible assets, less accumulated amortization of $1,405,000 in 1999 and
$1,336,000 in 1998 160,653 230,334
Costs in excess of fair value of assets purchased, less accumulated amortization of
$2,028,000 in 1999 and $1,482,000 in 1998 8,828,920 9,369,602
Other assets 343,149 313,652
---------------- ---------------
$ 58,398,961 $57,901,650
================ ===============
Liabilities and Shareholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 3,826,238 $ 5,312,191
Accrued salaries and wages 903,145 1,085,680
Other accrued liabilities 2,889,451 3,534,301
Long-term debt due within one year 3,135,238 1,756,666
---------------- ---------------
Total current liabilities 10,754,072 11,688,838
Long-term debt due after one year 20,266,266 11,320,553
Net deferred income tax liability 493,173 572,479
Shareholders' equity:
Common stock, $1 par value; 25,000,000 shares authorized; 6,304,580 shares issued
and outstanding 6,304,580 6,304,580
Capital in excess of par value 11,422,536 11,402,961
Retained earnings 23,736,974 19,429,451
Less common stock held in treasury, at cost (1,569,822 shares in 1999 and
382,362 shares in 1998) (14,578,640) (2,817,212)
---------------- ---------------
Total shareholders' equity 26,885,450 34,319,780
---------------- ---------------
$ 58,398,961 $57,901,650
================ ===============
See accompanying notes.
PAGE 20
CONSOLIDATED STATEMENTS OF INCOME
Years ended February 28, 1999, February 28, 1998 and February 28, 1997
1999 1998 1997
--------------- --------------- ---------------
Net sales $80,922,415 $75,479,456 $57,703,287
Costs and expenses:
Cost of sales 62,525,479 55,993,665 41,305,269
Selling, general, and administrative 9,709,627 9,570,337 8,089,434
Net (gain) loss on sale of property, plant and equipment (2,161) 35,469 1,310
Interest expense 982,275 737,391 874,209
Other (income) expense, net (93,200) (766,850) 280,065
--------------- --------------- ---------------
73,122,020 65,570,012 50,550,287
--------------- --------------- ---------------
Income before income taxes 7,800,395 9,909,444 7,153,000
Income taxes:
Current expense 3,005,306 2,609,861 3,391,740
Deferred (benefit) expense (79,306) 79,791 (566,305)
--------------- --------------- ---------------
2,926,000 2,689,652 2,825,435
--------------- --------------- ---------------
Net income $ 4,874,395 $ 7,219,792 $ 4,327,565
=============== =============== ===============
Earnings per common share:
Basic $.87 $1.21 $.75
===== ====== =====
Diluted $.86 $1.19 $.74
===== ====== =====
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Years ended February 28, 1999, February 28, 1998 and February 28, 1997
Common stock Capital in
----------------------------
excess of Retained Treasury
Shares Amount par value earnings Stock
------------- ------------- ------------- ------------- -------------
Balance at February 29, 1996 5,772,895 $5,772,895 $ 9,283,268 $ 8,830,213 $ (726,131)
Exercise of stock options 372,114 372,114 1,068,255 - -
Cash dividends declared - - - (354,847) -
Net income - - - 4,327,565 -
------------- ------------- ------------- ------------- -------------
Balance at February 28, 1997 6,145,009 6,145,009 10,351,523 12,802,931 (726,131)
Exercise of stock options 159,571 159,571 1,051,438 - -
Purchase of treasury stock
(150,000 shares) - - - - (2,091,081)
Cash dividends declared - - - (593,272) -
Net income - - - 7,219,792 -
------------- ------------- ------------- ------------- -------------
Balance at February 28, 1998 6,304,580 6,304,580 11,402,961 19,429,451 (2,817,212)
Exercise of stock options - - 19,575 - 98,364
Purchase of treasury stock -
(1,200,030 shares) - - - - (11,859,792)
Cash dividends declared - - - (566,872) -
Net income - - - 4,874,395 -
------------- ------------- ------------- ------------- -------------
Balance at February 28, 1999 6,304,580 $6,304,580 $11,422,536 $ 23,736,974 $(14,578,640)
============= ============= ============= ============= =============
See accompanying notes.
PAGE 21
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years ended February 28, 1999, February 28, 1998 and February 28, 1997
1999 1998 1997
---------------- ---------------- ----------------
Cash flows from operating activities:
Net income $ 4,874,395 $ 7,219,792 $ 4,327,565
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation 3,014,359 2,449,906 2,231,547
Amortization 615,891 585,389 432,655
Provision for doubtful accounts 132,107 138,883 309,717
Deferred income tax expense (benefit) (79,306) 79,791 (566,305)
Net (gain) loss on sale of property, plant and equipment (2,161) 35,469 1,310
---------------- ---------------- ----------------
8,555,285 10,509,230 6,736,489
Effect of changes in operating assets and liabilities, net
of acquisition of subsidiaries in 1998:
Accounts receivable (529,056) (2,475,504) (356,358)
Inventories 3,037,378 (7,186,887) 357,856
Prepaid expenses and other (72,440) (37,037) (855)
Other assets (29,497) (33,507) (45,805)
Accounts payable (1,485,953) 2,472,083 (1,237,646)
Accrued salaries and wages (182,535) 225,059 145,812
Other accrued liabilities and income taxes (519,334) (775,843) 1,221,385
---------------- ---------------- ----------------
Net cash provided by operating activities 8,773,848 2,697,594 6,820,878
Cash flows from investing activities:
Proceeds from the sale of property, plant and equipment and
property held for sale 168,854 104,979 1,200,853
Purchases of property, plant and equipment (6,992,063) (3,395,402) (2,036,877)
Acquisition of subsidiaries, net of cash acquired (5,528) (6,783,392) -
Purchase of long-term investments - - (300,000)
Proceeds from the sale of long-term investments 100,000 - -
---------------- ---------------- ----------------
Net cash used in investing activities (6,728,737) (10,073,815) (1,136,024)
Cash flows from financing activities:
Proceeds from revolving loan $ 12,200,000 $ 5,550,000 $ 17,863,736
Proceeds from long-term debt 10,000,000 - 10,000,000
Payments on revolving loan (10,000,000) - (24,441,764)
Payments on long-term debt (1,875,715) (1,756,668) (5,213,483)
Cash dividends paid (593,272) (354,847) (166,215)
Proceeds from exercise of stock options 117,939 1,211,009 1,440,369
Purchase of treasury stock (11,859,792) (2,091,081) -
---------------- ---------------- ----------------
Net cash provided by (used in) financing activities (2,010,840) 2,558,413 (517,357)
---------------- ---------------- ----------------
Net increase (decrease) in cash and cash equivalents 34,271 (4,817,808) 5,167,497
Cash and cash equivalents at beginning of year 765,912 5,583,720 416,223
---------------- ---------------- ----------------
Cash and cash equivalents at end of year $ 800,183 $ 765,912 $ 5,583,720
================ ================ ================
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $ 940,588 $ 733,796 $ 866,565
================ ================ ================
Income taxes $ 2,910,713 $ 3,766,345 $ 2,926,265
================ ================ ================
See accompanying notes.
PAGE 22
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Organization--Aztec Manufacturing Co. (the "Company") operates primarily in
------------
the United States. Information on the Company's operations by segment are
included in Note 10 to the consolidated financial statements.
Basis of consolidation--The consolidated financial statements include the
----------------------
accounts of Aztec Manufacturing Co. and its wholly-owned subsidiaries and
partnerships. All significant inter-company accounts and transactions have
been eliminated in consolidation.
Use of estimates--The preparation of the financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the amounts reported in the financial
statements and accompanying notes. The primary areas of estimation affecting
the consolidated financial statements include the determination of the
allowance for doubtful accounts receivable, inventory reserves and warranty
and environmental accruals. Actual results could differ from those estimates
and assumptions.
Concentrations of credit risk--Financial instruments that potentially subject
-----------------------------
the Company to significant concentrations of credit risk consist principally
of cash, investments and trade accounts receivable.
The Company maintains cash and cash equivalents with various financial
institutions. These financial institutions are located throughout the country
and Company policy is designed to limit exposure to any one institution. The
Company performs periodic evaluations of the relative credit standing of
those financial institutions that are considered in the Company's banking
relationships.
Concentrations of credit risk with respect to trade accounts receivable are
limited due to the diversity of operating segments. The Company's net credit
losses in 1999, 1998 and 1997 were approximately $127,000, $102,000 and
$124,000, respectively. Collateral is usually not required from customers as
a condition of sale.
Revenue recognition--The Company recognizes revenue from product sales upon
-------------------
shipment.
Inventories--Inventories are stated at the lower of cost (primarily first-in,
-----------
first-out) or market. Provisions for obsolete and slow-moving inventories are
recorded.
Property, plant and equipment--For financial reporting purposes, depreciation
-----------------------------
is computed by the straight-line method using rates based on the estimated
useful lives of the related assets as follows:
Buildings and structures 10-25 years
Machinery and equipment 3-15 years
Furniture and fixtures 3-15 years
Automotive equipment 3 years
Maintenance and repairs are charged to expense as incurred; renewals and
betterments are capitalized. When units of property are retired or otherwise
disposed of, their cost and related accumulated depreciation are removed from
the accounts, and any resulting gain or loss is credited or charged to
income.
PAGE 23
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
The Company reviews its long-term assets for impairment in accordance with
the guidelines of Statement of Financial Accounting Standards No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets
to be Disposed of," (SFAS 121). SFAS 121 requires that, when changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable, the Company should determine if impairment of value exists.
Impairment is measured as the amount by which the carrying amount of the
asset exceeds the expected future undiscounted cash flows from the use and
eventual disposal of the assets under review. Any write-downs are treated as
a permanent reduction in the carrying value of the assets.
Cash equivalents--For purposes of reporting cash flows, the Company considers
----------------
all highly liquid debt instruments purchased with an original maturity of
three months or less to be cash equivalents.
Intangible assets and costs in excess of fair value of assets purchased--
-----------------------------------------------------------------------
Intangible assets include purchased intangibles (customer lists, engineering
drawings, noncompete agreements, and sales backlog). Such intangible assets
and costs in excess of fair value of assets purchased are being amortized
over the estimated useful lives of the assets ranging from 5 to 40 years.
Income taxes--Deferred income taxes are recognized using the liability
------------
method. Under this method of accounting, deferred income taxes are recorded
for the difference between the financial reporting and income tax bases of
assets and liabilities using enacted tax rates and laws.
Stock-based compensation--The Company generally grants stock options for a
------------------------
fixed number of shares to employees and directors with an exercise price
equal to the fair value of the shares at the date of grant. The Company
accounts for stock option grants in accordance with Accounting Principles
Board Opinion No. 25, "Accounting for Stock Issued to Employees," and
accordingly, recognizes no compensation expense for the stock option grants
in which the exercise price is equal to the fair value of the shares granted.
Earnings per share--Effective February 28, 1998, the Company adopted
------------------
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share," which established new standards for computing and disclosing earnings
per share. SFAS No. 128 requires dual presentation of "basic" and "diluted"
earnings per share, each as defined therein, which replaced primary and fully
diluted earnings per share, respectively, required under previous guidance.
The new standard had no effect on previously reported earnings per share
amounts.
Fair value of financial investments--The following methods and assumptions
-----------------------------------
were used by the Company in estimating its fair value disclosures for
financial instruments as of February 28, 1999:
Cash and cash equivalents: The carrying amount reported in the
consolidated balance sheet for cash and cash equivalents approximates fair
value.
Accounts receivable and accounts payable: The recorded amounts of the
Company's accounts receivable and accounts payable approximate fair value.
Long-term investments: The carrying value of long-term investments in the
consolidated balance sheet approximates fair value.
PAGE 24
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies (continued)
Long-term debt: The reported amounts of the Company's long-term debt
approximate fair value since interest rates for substantially all of the
debt approximate current rates of interest.
Reclassifications--Certain prior year amounts have been reclassified to
-----------------
conform to the 1999 presentation.
Impact of Recently Issued Accounting Standards
----------------------------------------------
In June, 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive
Income," and SFAS No. 131, "Disclosures about Segments of an Enterprise and
Related Information." SFAS No. 130 requires that an enterprise report, by
major component and as a single total, the change in its equity during the
period from nonowner sources, and SFAS No. 131 establishes annual and interim
reporting requirements for an enterprise's operating segments, and related
disclosures about its products and services, geographical areas in which it
operates, and major customers. Both statements were effective for fiscal
years beginning after December 15, 1997, with earlier application permitted.
The Company adopted both of these statements in the first quarter of fiscal
1999 and the impact of adoption did not materially impact the Company's
consolidated financial position or statements of income, shareholder's
equity, and cash flows. The effects of adoption were primarily limited to
form and content of the Company's disclosures.
2. Inventories
Inventories consist of the following:
1999 1998
----------- -----------
(In thousands)
Raw materials $ 7,491 $10,297
Work-in-process 1,001 1,510
Finished goods 2,884 2,568
----------- -----------
11,376 14,375
Less reserve for obsolete and slow-moving inventory 185 146
----------- -----------
$11,191 $14,229
=========== ===========
3. Long-term investments
The Company's long-term investments represent investments in tax-free
municipal bonds maturing in 2001 and carrying interest at rates ranging from
5.1% to 5.5%. The investments were purchased and are being held to secure the
Company's outstanding letters of credit with a bank.
4. Employee benefit plans
The Company has a trustee profit sharing plan covering substantially all of
its employees. Under the provisions of the plan, the Company contributes
amounts as authorized by the Board of Directors. Contributions to the profit
sharing plan amounted to $784,000 for 1999, $992,000 for 1998 and $715,000
for 1997.
PAGE 25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. Income taxes
Deferred federal and state income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax
purposes. Significant components of the Company's net deferred income tax
liability as of February 28, 1999 and 1998 are as follows:
1999 1998
----------- -----------
(In thousands)
Deferred tax liabilities:
Depreciation methods and property basis differences $ 944 $1,003
Other assets 155 180
----------- -----------
Total deferred income tax liabilities 1,099 1,183
Deferred tax assets:
Employee related items 199 190
Reserve for environmental liabilities 65 77
Reserve for slow-moving inventory 14 14
Reserve for doubtful accounts 167 165
Other 161 165
----------- -----------
Total deferred tax assets 606 611
----------- -----------
Net deferred tax liability $ 493 $ 572
=========== ===========
Current income tax expense consists of:
1999 1998 1997
----------- ----------- -----------
(In thousands)
Federal $2,679 $2,229 $3,065
State 326 381 327
----------- ----------- -----------
$3,005 $2,610 $3,392
=========== =========== ===========
A reconciliation from the federal statutory tax rate to the effective tax
rate for the years 1999, 1998 and 1997 is as follows:
1999 1998 1997
----------- ----------- -----------
Statutory tax rate 34.0% 34.0% 34.0%
Expenses not deductible for tax purposes 1.3 1.1 1.5
State income taxes, net of federal income tax benefit 2.8 2.5 3.0
Stock options exercised 0 (7.5) 0
Other (0.6) (3.0) 1.0
----------- ----------- -----------
Effective tax rate 37.5% 27.1% 39.5%
=========== =========== ===========
PAGE 26
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Earnings per share
Earnings per share is based on the month-end average number of shares
outstanding during each year, adjusted for the dilutive effect of stock
options. Cash dividends paid (or declared) per share are $.12 in 1999,
$.10 in 1998 and $.06 in 1997.
The following table sets forth the computation of basic and diluted
earnings per share:
1999 1998 1997
---------------- -------------- ---------------
(In thousands, except share and per share amounts)
Numerator:
Net income for basic and diluted
earnings per common share $ 4,874 $ 7,220 $ 4,328
================ ============== ===============
Denominator:
Denominator for basic earnings per
common share - weighted -
average shares 5,614,026 5,967,610 5,761,080
Effect of dilutive securities:
Employee and Director stock options 37,298 124,634 120,441
---------------- -------------- ---------------
Denominator for diluted earnings per
common share - adjusted
weighted-average shares and
assumed conversions 5,651,324 6,092,244 5,881,521
================ ============== ===============
Basic earnings per common share $ .87 $ 1.21 $ .75
================ ============== ===============
Diluted earnings per common share $ .86 $ 1.19 $ .74
================ ============== ===============
7. Stock options
The Company has three Incentive Stock Option Plans for its employees. The
maximum number of shares that may be issued under each of the plans is
750,000, 322,977 and 525,000 shares respectively. At February 28, 1999,
options outstanding under these plans amounted to 235,417 of which 225,417
options are exercisable at prices (equal to the market price at the date
of grant) ranging from $4.44 to $11.13 per share. These options expire
February 2000 through December 2003. Included in these outstanding options
are 10,000 options granted in fiscal 1999 with an exercise price of
$8.875, which vest ratably over a five year period and expire in December
2003. During fiscal 1999, employees exercised 12,570 options at prices
ranging from $4.44 to $11.13 per share and 5,050 options were forfeited.
The Company also has three Nonstatutory Stock Option Plans for the
independent directors of the Company. Under the plans, options are
generally granted at 100 percent of the fair value of the shares at the
grant date. The maximum number of shares that may be issued under each of
the plans is 250,000, 115,762 and 157,500 shares. At February 28, 1999,
options granted and outstanding under these plans amounted to 134,036 of
which 65,436 options are vested and exercisable at prices ranging from
$3.69 to $16.88 per share. Options under these plans vest ratably over a
five year period and expire at various dates through July 2008. Included
in these outstanding options are 70,000 options granted in 1999 with an
exercise price of $11.13, which expire in July 2008. During fiscal 1999,
none of the options under the plans were exercised and none were
forfeited.
PAGE 27
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Stock options (continued)
A summary of the Company's stock option activity and related information
is as follows:
1999 1998 1997
-------------------------- -------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------- ----------- --------- ------------ ---------- ----------
Outstanding at beginning
of year 307,073 $ 8.90 200,420 $ 4.42 565,496 $ 4.04
Granted 80,000 10.84 266,224 11.48 10,500 5.25
Exercised (12,570) 9.38 (159,571) 7.59 (372,094) 3.87
Forfeited (5,050) 17.74 - - (3,482) 4.44
--------- ----------- --------- ----------- ---------- -----------
Outstanding at end of year 369,453 $ 9.18 307,073 $ 8.90 200,420 $ 4.42
========= =========== ========= =========== ========== ===========
Exercisable at end of year 304,853 $ 8.76 288,173 $ 8.72 187,820 $ 4.39
========= =========== ========= =========== ========== ===========
Weighted average fair
value of options granted
during the year $ 4.80 $ 3.21 $ 2.33
=========== =========== ===========
Weighted average
remaining contractual
life in years
4.21 3.94 3.36
========== ========== ==========
Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting
for Stock Based Compensation," requires the disclosure of pro forma net
income and income per share of common stock information computed as if the
Company had accounted for its stock options granted subsequent to February
28, 1995 under the fair value method set forth in SFAS 123. The fair value
for these options was estimated at the date of grant using the Black-
Scholes option pricing model with the following weighted average
assumptions: a risk-free interest rate ranging from 5.8% to 6.5%, a
dividend yield of 1% and a volatility factor ranging from .458 to .498. In
addition, the fair value of these options was estimated based on an
expected life ranging from 1 1/2 years to 5 years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions, including the
expected stock price volatility. Because the Company's stock options have
characteristics significantly different from those described above, and
because changes in the subjective input assumptions can materially affect
the fair value estimate, in management's opinion the existing models do
not necessarily provide a reliable single measure of fair value for the
Company's stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense on a straight-line basis over the option's
vesting period as adjusted for estimated forfeitures. The pro forma effect
in fiscal 1999 and 1997 options granted is not material to the operations
of the Company for fiscal 1999 and 1997. The Company's pro forma
information for fiscal 1998 is as follows:
1998
--------------
(In thousands except per share amount)
Pro forma net income $6,445
Pro forma earnings per common share:
Basic earnings per common share $ 1.08
Diluted earnings per common share $ 1.06
PAGE 28
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Stock options (continued)
Effective January 7, 1999, the Board of Directors approved a stock rights
plan, which authorized and declared a dividend distribution of one right
for each share of common stock outstanding at the close of business on
February 4, 1999. The rights are exercisable at an initial exercise price
of $60, subject to certain adjustments as defined in the agreement, if a
person or group acquires 15% or more of the Company's common stock or
announces a tender offer that would result in ownership of 15% or more of
the common stock. Alternatively, the rights may be redeemed at one cent
per right at any time before a 15% position has been acquired. The rights
expire on January 7, 2009.
8. Long-term debt
The Company has a credit facility with a bank which provides for a $15
million revolving line of credit, a $10 million Term Note A and a $10
million Term Note B.
Long-term debt consists of the following:
1999 1998
--------- -----------
(In thousands)
Term Note A payable to bank, due in monthly installments of
$138,889 through July 2002, with any remaining balance
payable on July 1, 2002 (interest at 7.86 percent on
February 28, 1999) $ 5,555 $ 7,223
Term Note B payable to bank, due in monthly installments of
$119,048 through February 2006, (interest at a fixed rate of
6.80 percent for the term of the note) 9,881 -
Revolving line of credit with bank, due July 2001 (interest at 5.84
percent on February 28, 1998) 7,750 5,550
Industrial Revenue Bonds, due in July 1998 (interest at 7.9
percent on February 28, 1998) - 55
Industrial Revenue Bonds, due in December 2003, payable in
monthly installments (interest at 5.75 percent on February 28,
1999) 215 250
---------- -----------
23,401 13,078
Less amount due within one year 3,135 1,757
---------- -----------
$20,266 $11,321
========== ===========
The Company's credit facility and industrial revenue bonds are subject to
loan agreements which require the Company to comply with various financial
covenants including minimum requirements with regard to working capital,
debt-to-net worth ratio, dividend payments, capital expenditures and cash
flows. The Company was in compliance or obtained waivers for events of
non-compliance with these covenants as of February 28, 1999. The Company's
long-term debt is secured by receivables, inventory, equipment, and
fixtures. Under the terms of the loan agreement, borrowing's on the
revolving line of credit are subject to a borrowing base calculation which
is limited to 80% of certain trade accounts receivable and a range of 50%
to 60% of certain raw materials and finished good inventories and is
reduced by the balance of outstanding letters of credit, which amounted to
$548,000 at February 28, 1999.
In February 1999, the Company entered into an interest rate protection
agreement with the bank (the Swap Agreement) to modify the interest
characteristics of the $10 million Term Note B from a variable rate to a
fixed rate. The Swap Agreement involves the exchange of interest
obligations over the life of the Term
PAGE 29
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. Long-term debt (continued)
Note B whereby the Company receives a fixed rate of 6.8% in exchange for a
variable 30-day LIBOR rate plus 1.25% (6.2% at February 28, 1999) which is
the stated interest rate under the Term Note B agreement.
According to the terms of the Swap Agreement, the Company will make all
future interest payments on the Term Note B at the fixed rate of 6.8%. To
the extent the differences in the fixed rate and the variable rate are not
material, the fair value of the Swap Agreement and changes in the fair
value as a result of changes in the market interest rates will not be
recognized in the financial statements. In the event of the early
termination of the Term Note B, or any early termination of the Swap
Agreement, any realized gain or loss from the Swap Agreement would be
recognized as an adjustment to interest expense at that time.
Maturities of long-term debt are as follows (in thousands):
2000 $3,135
2001 3,135
2002 10,885
2003 2,029
2004 1,479
Thereafter 2,738
------------------
$23,401
==================
9. Quarterly financial information, unaudited (in thousands, except per share
amounts)
Quarters Ended
May 31, August 31, November 30, February 28,
1998 1998 1998 1999
------------ ------------- -------------- -------------
1999
-----
Net sales $20,729 $20,721 $19,414 $20,058
Gross profit 5,311 4,965 4,426 3,695
Net income 1,576 1,445 1,149 704
Basic earnings per common share .27 .25 .21 (a) .14
Diluted earnings per common share .26 .25 .21 (a) .14
Quarters Ended
May 31, August 31, November 30, February 28,
1997 1997 1997 1998
------------ ------------- -------------- -------------
1998
-----
Net sales $18,387 $18,776 $18,080 $20,236
Gross profit 5,221 4,946 4,560 4,759
Net income 1,647 1,652 1,282 2,639
Basic earnings per common share .28 .28 .21 (b) .44
Diluted earnings per common share .27 .27 .21 (b) .44
(a) Included a pretax charge of $914,000 (or 10 cents per share) for the
liquidation and write-down of tubular goods inventories.
(b) Includes a one time tax benefit of approximately $1,076,000 (or 18
cents per share).
PAGE 30
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Operating segments
Upon adoption of SFAS No. 131 in fiscal 1999, management evaluated the
operations of the Company, which are primarily in the United States, and
established two segments: (1) Manufactured Products and (2) Services. In
prior years and throughout fiscal 1999, for quarterly reporting purposes,
the Company disclosed segment information under the following three
segments: (1) Electrical Products - manufactures petroleum and industrial
lighting products, electrical bus ducts and electrical power centers; (2)
Tubular Products - provides oil field tubular products and manufactures oil
field pup joints; and (3) Galvanizing - provides hot dip galvanizing
services for industries handling fabricated metal products. Under the
provisions of SFAS 131, management has determined that it operates the
business as two segments rather than three; therefore, the electrical
products and tubular products have been combined into the Manufactured
Products Segment and galvanizing has been renamed as the Services Segment.
SFAS No. 131 modified existing standards for reporting information about
operating segments in annual financial statements and requires selected
information about operating segments in interim financial reports issued to
stockholders. Operating segments are defined as components of an enterprise
about which separate financial information is available that is evaluated
regularly by the chief operating decision maker, or decision making group,
in deciding how to allocate resources and in assessing performance.
The segments follow the same accounting policies as described in the
summary of significant accounting policies (see Note 1). Information
regarding operations and assets by segment is as follows:
1999 1998 1997
--------------- --------------- ---------------
Net sales:
Manufactured Products $46,400 $44,940 $34,057
Services 34,522 30,539 23,646
--------------- ---------------- ---------------
$80,922 $75,479 $57,703
=============== =============== ===============
Operating income (a):
Manufactured Products $ 4,380 $ 6,904 $ 5,261
Services 7,474 6,543 5,930
--------------- --------------- ---------------
11,854 13,447 11,191
General corporate expenses 3,119 3,316 2,938
Interest expense 982 737 874
Other (income) expense, net (b) (47) (515) 226
--------------- --------------- ---------------
4,054 3,538 4,038
--------------- --------------- ---------------
Income before income taxes $ 7,800 $ 9,909 $ 7,153
=============== =============== ===============
Depreciation and amortization:
Manufactured Products $ 1,152 $ 994 $ 958
Services 2,358 1,941 1,593
Corporate 120 100 113
--------------- ------------------ ---------------
$ 3,630 $ 3,035 $ 2,664
=============== ================== ===============
PAGE 31
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. Operating segments (continued)
1999 1998 1997
--------------- --------------- --------------
Additions to property, plant and equipment (including
assets of purchased subsidiaries in 1998):
Manufactured Products $ 3,550 $ 1,355 $ 649
Services 3,312 3,514 1,353
Corporate 130 56 35
--------------- --------------- ---------------
$ 6,992 $ 4,925 $ 2,037
=============== =============== ===============
Total assets:
Manufactured Products $28,994 $29,877 $19,784
Services 27,235 25,916 19,128
Corporate 2,170 2,109 7,083
--------------- --------------- ---------------
$58,399 $57,902 $45,995
=============== =============== ===============
(a) Operating income consists of net sales less cost of sales, specifically
identifiable general and administrative expenses and selling expenses.
(b) Other (income) expense, net includes gains and losses on sale of
property, plant and equipment and other (income) expense not
specifically identifiable to a segment.
11. Commitments and contingencies
The Company is subject to various environmental protection reviews by state
and federal government agencies and has been identified as a potential
responsible party in certain investigations conducted by these agencies.
The Company did not expense any significant amounts related to
environmental liabilities in 1999, 1998 or 1997. The ultimate liability, if
any, which might result from such reviews or additional clean-up and
remediation expenses cannot presently be determined; however, as a result
of an internal analysis and prior clean-up efforts, management believes the
results will not have a material impact on the Company and that the
recorded reserves for estimated losses are adequate.
In order to maintain permits to operate certain of the Company's
facilities, future capital expenditures for equipment may be required to
meet new or existing environmental regulations.
The Company is 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 the
Company's financial position or results of operations.
12. Acquisitions
In March 1997, the Company purchased substantially all of the assets of
Xxxxxx Galvanizing for approximately $3.9 million in cash. The assets
purchased were recorded at estimated fair value; the costs in excess of
fair value for this acquisition of approximately $2.8 million were recorded
as goodwill. In connection with this acquisition, the Company paid the
selling shareholders $250,000 pursuant to an agreement not to compete.
PAGE 32
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. Acquisitions (continued)
The Company purchased substantially all of the assets of International
Galvanizers, Inc. in December 1997 for approximately $1.7 million in cash.
Costs in excess of estimated fair value of this acquisition were
approximately $350,000 were recorded to goodwill. Additionally, the Company
paid the selling shareholder $50,000 pursuant to an agreement not to
compete.
In February 1998 the Company purchased substantially all of the assets of
Drilling Rig Electrical Systems Co. (DRES-CO), a company which is involved
in the design and installation of electrical systems on land based and
offshore drilling rigs, for approximately $1.2 million in cash. Costs in
excess of estimated fair value of this acquisition were approximately
$190,000 were recorded to goodwill.
All acquisitions were accounted for under the purchase method of
accounting. Operations applicable to acquired businesses, which are
immaterial to the consolidated operations of the Company, are included in
the accompanying Consolidated Statements of Income from their respective
dates of acquisition. The excess of costs over fair value for these
acquisitions is being amortized over a period of 15 years.
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors and Shareholders
Aztec Manufacturing Co.
We have audited the accompanying consolidated balance sheets of Aztec
Manufacturing Co. as of February 28, 1999 and 1998, and the related consolidated
statements of income, shareholders' equity, and cash flows for each of the three
years in the period ended February 28, 1999. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Aztec
Manufacturing Co. at February 28, 1999 and 1998, and the consolidated results
of its operations and its cash flows for each of the three years in the period
ended February 28, 1999, in conformity with generally accepted accounting
principles.
/s/ ERNST & YOUNG LLP
Fort Worth, Texas
March 29, 1999
CORPORATE INFORMATION
STOCK PRICES AND DIVIDENDS PER SHARE
Quarter Ended Quarter Ended Quarter Ended Quarter Ended
May 31, August 31, November 30, February 28,
---------------------------------------------------------------------------
Per Share 1999 1998 1999 1998 1999 1998 1999 1998
----------------------------------------------------------------------------------------------------------
High 15-1/2 12-3/8 13-7/16 19-7/8 10 24-9/16 10-5/8 18-15/16
Low 12-3/8 9-1/8 8-3/4 12-1/2 6-5/8 15-3/4 8-1/4 10-3/4
Dividends declared $ .00 $ .00 $ .00 $ .00 $ .00 $ .00 $ .12 $ .10
Stock Prices: Aztec's common stock is listed for trading on the New York Stock
Exchange and its symbol is AZZ. Prior to March 20, 1997, its common stock was
listed on the NASDAQ Stock Market. The above table sets forth the high and low
sales prices for the Company's common stock on the New York and NASDAQ Stock
Exchanges, as appropriate, on a quarterly basis.
BOARD OF DIRECTORS
X. X. XXXXXX
Chairman of the Board and Chief Executive Officer of the Company
XXXXX X. XXXXXX
President and Chief Operating Officer of the Company
XXXX X. XXXXX
Vice President of Finance, Chief Financial Officer of the Company
Assistant Secretary of the Company
XXXXXX X. XXXXX
Vice President and Chief Financial Officer of Fine Line, Inc.
X. X. XXXXXXXXXX
Vice President of Texland Petroleum, Inc.
XXXXXX X. XXXXX
President, CEO and Chairman TNP Enterprises, Inc.
X. X. XXXXXX
Management Consultant
XXX XXXXX
Partner in the Law Firm of Shannon, Gracey, Xxxxxxx & Xxxxxx, L.L.P., Secretary
of the Company
DR. H. XXXX XXXXXX
Professor of Management and Xxxx of the X.X. Xxxxxx School of Business, Texas
Christian University
XXXXXX X. XXXXXXX
CPA and Financial Consultant
ADVISORY DIRECTOR
XXXX X. XXXXXXXX
Fort Worth Investor
EXECUTIVE OFFICERS
X. X. XXXXXX
Chairman of the Board and Chief Executive Officer
XXXXX X. XXXXXX
President and Chief Operating Officer
XXXX X. XXXXXX, XX.
Senior Vice President/Services Segment
XXXX X. XXXXX
Vice President of Finance, Chief Financial Officer, Assistant Secretary
XXX XXXXX
Secretary
OTHER INFORMATION
LEGAL COUNSEL
Shannon, Gracey, Xxxxxxx & Xxxxxx, L.L.P., Fort Worth, Texas
INDEPENDENT AUDITORS
Ernst & Young LLP, Fort Worth, Texas
TRANSFER AGENT & REGISTRAR
Xxxxxx Trust and Savings Bank, Chicago, Illinois
STOCK LISTING
New York Stock Exchange, NYSE Symbol - AZZ
FORM 10-K
Shareholders may obtain a copy of the Company's Form 10-K for the year ended
February 28, 1999, as filed with the Securities and Exchange Commission by
writing Xxxx Xxxxx at the Company's Corporate Office.
ANNUAL MEETING
July 13, 1999, 10:00 a.m.
Xxxx Xxxxx Xxxxxxxxx Xxxx
Xxxx Xxxxx, Xxxxx
AZZ
----------
Listed
----------
NYSE
THE NEW YORK STOCK EXCHANGE
CORPORATE XXXXXX
000 X. Xxxxxxx
X.X. Xxx 000
Xxxxxxx, Xxxxx 00000
817/000-0000 Phone
817/000-0000 Fax
