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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the transition period from                                 to                                     

Commission File Number 1-12777

AZZ incorporated

(Exact name of registrant as specified in its charter)

Registrant’s telephone number, including area code:  (817) 810-0095

NONE

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

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

                Yes  x              No  ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

                Yes  x              No  ¨

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practical date.

AZZ incorporated

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INDEX

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PART I. FINANCIAL INFORMATION

Item I. Financial Statements

AZZ incorporated

CONSOLIDATED CONDENSED BALANCE SHEET

See Accompanying Notes to Consolidated Condensed Financial Statements

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PART I. FINANCIAL INFORMATION

Item I. Financial Statements

AZZ incorporated

CONSOLIDATED CONDENSED INCOME STATEMENT

See Accompanying Notes to Consolidated Condensed Financial Statements

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PART I. FINANCIAL INFORMATION

Item I. Financial Statements

AZZ incorporated

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOW

See Accompanying Notes to Consolidated Condensed Financial Statements

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AZZ incorporated

NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

Summary of Significant Accounting Policies

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

Total comprehensive income for the quarter ended May 31, 2002 was $2,653,224 consisting of net income of $2,612,716 and changes in accumulated other comprehensive income of $40,508. The changes in accumulated other comprehensive income included $185,000 as the cumulative effect of adopting SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.”

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During the first quarter of fiscal 2004, the Company granted 347,904 shares of options under its 2001 Long Term Incentive Plan. Options granted vest from immediately upon issuance to ratably over a period of five years and expire at various dates through March 2013. The exercise price of the options granted range from $8.43 to $11.09 per share. During the first quarter of fiscal 2003, the Company granted 282,427 options to purchase shares of the Company’s common stock under the 2001 Long Term Incentive Plan. Options granted vest over periods ranging from immediately upon issuance to ratably over a period of five years and expire at various dates through July 2012. The exercise price of the options granted range from $16.73 to $17.60 per share.

SFAS No. 123 requires the disclosure of pro forma net income and income per share of common stock computed as if the Company had accounted for its stock options under the fair value method set forth in SFAS No. 123. The fair value of stock options granted was estimated at the date of grant using the Black-Scholes option pricing model.

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 measure of fair value for the Company’s stock options and the cost of the options as calculated pursuant to SFAS No. 123 may not be indicative of their actual cost.

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A reserve has been established to provide for the estimated future cost of warranties on a portion of the Company’s delivered products. Management periodically reviews the reserves and adjustments are made accordingly. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The following shows changes in the warranty reserves since the end of fiscal 2002:

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In June 2001, the Financial Accounting Standards Board issued SFAS No. 141 “Business Combinations”, and SFAS No. 142 “Goodwill and Other Intangible Assets” (collectively the “Statements”), effective for fiscal years beginning after December 15, 2001. Under the new rules, goodwill and certain intangible assets deemed to have indefinite lives will no longer be amortized but will be subject to annual impairment tests in accordance with the Statements.

The Company adopted the new rules on accounting for goodwill and other intangible assets as of March 1, 2002. However, as provided for under SFAS No. 142, goodwill and indefinite-lived intangible assets resulting from acquisitions completed after June 30, 2001 were not amortized in fiscal 2002. As of March 1, 2002, in accordance with the new standard the Company ceased amortization of all goodwill and indefinite lived intangible assets. Other intangible assets will continue to be amortized over their useful lives.

The Company completed its initial and annual impairment analysis of goodwill required by SFAS No. 142 and determined that there was no impairment of goodwill as of March 1, 2002 and December 31, 2002.

Other intangible assets, consisted of the following at May 31, 2003 and February 28, 2003:

Accumulated amortization related to debt issue costs, non-compete agreements, acquired backlog and other were $667,000, $177,000 $302,000 and $168,000 respectively, at May 31, 2003 and $586,000, $149,000, $302,000, and $164,000, respectively at February 28, 2003. Accumulated amortization for goodwill was $5,378,000 at the end of May 31, 2003 and February 28, 2003.

The Company recorded amortization expenses for the three-months ending May 31, 2003 in the amount of $113,000. The following table projects the estimated amortization expense for the five succeeding fiscal years.

Item 2.    Management’s Discussion and Analysis of Financial Condition and Results of Operations

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FORWARD LOOKING STATEMENTS

This Report may contain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These statements are generally identified by the use of words such as “anticipate,” “expect,” “estimate,” “intend,” “should,” “may,” “believe,” and terms with similar meanings. Although 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: the level of customer demand for and response to products and services offered by the Company, including demand by the power generation markets, electrical transmission and distribution markets, the general industrial market, and the hot dip galvanizing markets; prices and raw material cost, including cost of zinc and natural gas which are used in the hot dip galvanizing process; changes in economic conditions of the various markets the Company serves, foreign and domestic, customer requested delays of shipments, acquisition opportunities, adequacy of financing, and availability of experienced management employees to implement the Company’s growth strategy. 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. The Company can give no assurances that such forward-looking statements will prove to be correct.

RESULTS OF OPERATIONS

For the three-month period ended May 31, 2003, consolidated net revenues decreased 27% to $36.3 million as compared to $49.7 million for the same period in fiscal 2003. The Electrical and Industrial Segment produced 67% of the Company’s revenues, while the Galvanizing Services Segment accounted for the remaining 33%.

Revenues for the Electrical and Industrial Products Segment decreased $12.8 million or 35% for the three-month period ended May 31, 2003, as compared to the same periods in fiscal 2003. The decrease in revenues was due to the dramatic reduction in power generation projects, continued delays in upgrades to the transmission grid, and a reduction in industrial and factory automation projects. During the first quarter of fiscal 2003, this segment benefited from backlogs that were built up during the later part of fiscal 2002 due to the increased demand for these products in the power generation market. The Company has aggressively attempted to offset the downturn in the power generation market with an increased presence in the electrical power distribution and transmission, international and industrial markets, but has been hindered by sharp reductions in capital spending, deferred projects, prolonged customer purchasing cycles, the effect of over capacity, as well as intense competition in all markets served.

The Electrical and Industrial Products Segment’s backlog was $45.7 million as of May 31, 2003, as compared to $77.7 million at the same date in fiscal 2003. Backlog declined 7% from the $49.1 million reported as of February 28, 2003. The Company’s book-to-ship ratio for the quarter ended May 31, 2003 improved to 91% as compared to 73% for the quarter ended February 28, 2003 and 87% for the quarter ended November 30, 2002. The book-to-ship ratio seems to indicate some stabilization in the markets served, but the slow recovery in the industrial sector of the economy continues to hamper the Company’s ability to improve the backlog.

Revenues in the Galvanizing Services Segment decreased $524,000 or 4% for the three-month period ended May 31, 2003, to $12.1 million as compared to $12.7 million for the same period in fiscal 2003. The continuation of the slow and uneven economic recovery of the general economy coupled with continued pricing pressures on this segment in order to maintain market share has prevented it from maintaining the prior period revenue levels.

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Consolidated operating income (net sales less operating expenses) decreased $3.5 million or 50% for the three-month period ended May 31, 2003 to $3.5 million as compared to $7.1 million for the same period in fiscal 2003. The Electrical and Industrial Products generated 43% of the operating income for the first quarter of fiscal 2004, while the Galvanizing Services Segment produced the remaining 57%.

Operating income in the Electrical and Industrial Products Segment decreased $3 million or 66% for the three-month period ended May 31, 2003, to $1.5 million as compared to $4.6 million for the same period in fiscal 2003. The dramatic reductions in revenues combined with pricing pressures in all of the markets in which this segment’s products participate, contributed to the deterioration in operating income and margins. The Company continues to implement cost containments, but has been unable to offset the 35% reduction in revenue for the compared periods. With the significant reductions in this segment’s cost structure, any significant market recovery should have a dramatic impact on operating income and margins.

In the Galvanizing Services Segment, operating income decreased $469,000 or 19% for the three-month period ended May 31, 2003, to $2 million as compared to $2.5 million for the same period in fiscal 2003. The continuation of downward pressures on selling price due to market and competitive conditions, combined with higher natural gas cost, adversely impacted operating profits. A 29% or $225,000 increase in utility cost is attributable to increased gas prices during the months of March and April. Gas contracts have been negotiated for the majority of our facilities and should result in stable prices for the remainder of the fiscal year.

Consolidated general and administrative, and selling expenses (selling, general and administrative expense, and other (income) expense) for the three-month period ended May 31, 2003, decreased $1.6 million or 28% as compared to the same periods in fiscal 2003. As a percent of sales, consolidated general and administrative, and selling expenses were 11.6% for the three-month periods ended May 31, 2003, as compared to 11.8% for the same period in fiscal 2003.

Net interest expense for the three-month period ended May 31, 2003, was $673,000 a decline of 42% compared to the same periods in fiscal 2003. As of May 31, 2003, the Company had outstanding debt of $40.1 million, a decrease of 34% or $21 million as compared to $61.1 million for the same period in fiscal 2003. This reduction in outstanding bank debt in addition to lower variable interest rates accounted for the decrease in interest expense for the compared periods.

LIQUIDITY AND CAPITAL RESOURCES

Net cash provided by operations was $3.8 million for the three-month period ended May 31, 2003, as compared to $3.3 million for the same period in fiscal 2003. Net cash provided by operations was generated from $883,000 in net income, $1.6 million in depreciation and amortization of intangibles and debt issue costs, and $1.3 million of net changes in operating assets and liabilities and other adjustments to reconcile net income to net cash. Decreases in outstanding accounts receivable balances and inventory levels, partially offset by decreases in outstanding accounts payable balances as a result of lower working capital requirements to support current business levels, accounted for the majority of the $1.3 million in other increases in cash flow. During the three-month period ended May 31, 2003, capital improvements were made in the amount of $633,000 and long-term debt was repaid in the amount of $4.5 million. The Company received proceeds from the sale of property and equipment in the amount of $192,000 and proceeds from the exercise of stock options in the amount of $90,000.

On November 1, 2001 the Company entered a new syndicated credit facility, which replaced the previous term notes and revolving line of credit. This agreement included a $40 million term facility and a $45 million revolving credit facility. The availability under the revolving credit facility is contingent on asset-based collateral of inventories and accounts receivables. The remaining balance outstanding on the term-loan is payable in quarterly installments of $1.375 million though November 2006, with the any remaining

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balance due December 2006. At May 31, 2003, the Company had $27.5 million outstanding under the term note and $12.5 million outstanding under the revolving credit facility. At May 31, 2003, the Company had approximately $6.6 million available under the revolving line of credit. On March 7, 2003, the Company amended its credit facility, which amended certain terms and provisions of the credit agreement by reducing the amortization of the term note to $5.5 million annually from $10 million annually, extending the maturity of the term note and the revolving note by one year, and revising the provisions of various financial covenants including the rolling ninety day EBITDA covenant as of December 31, 2002 which brought the Company back into compliance with the covenant. Until the Company’s markets begin to recover, the Company will continue to monitor its debt covenant compliance closely, and if necessary, it will approach the lenders regarding additional amendments to the debt covenant levels.

Interest on borrowings under the term note and revolving line of credit bear interest at a rate per annum equal to the lesser of the base rate plus the applicable margin for the base rate borrowings for the applicable facility, or the adjusted eurodollar rate plus the applicable margin for eurodollar rate borrowings for the applicable facility. The applicable margin range is based on the leverage ratio, which was 2% at May 31, 2003 and correlated to an interest rate of 5.63% on the term note and 3.32% on the revolving line of credit at May 31, 2003. Additionally, the Company is obligated to pay a commitment fee based on the leverage ratio at a rate ranging from .25% to .5% on the unused revolving credit facility.

The Company utilizes interest rate swap agreements to protect against volatile interest rates and manage interest expense. At May 31, 2003, the Company had a $3.9 million interest rate swap agreement entered into in February 1999 at a fixed rate of 6.8%. On November 1, 2001 the Company entered into an interest rate swap agreement covering an additional $40 million of term debt at a fixed rate of 5.63%. At May 31, 2003, the notional amount of this swap was $25 million. In conjunction with the Company’s financing agreement the Company discontinued hedge accounting for the February 1999 interest rate swap effective November 1, 2001. The Company continues to amortize the amount that was in other comprehensive income as of November 1, 2001. Subsequent changes in fair value have been recognized in earnings. At May 31, 2003 the fair value of the February 1999 swap was a liability of $232,000. The November 2001 interest rate swap, which was designated as a hedge of the Company’s variable rate interest, was a liability of $780,000 as of May 31, 2003. The accumulated balance in other comprehensive income is $605,000, net of tax of $371,000, as of May 31, 2003. This amount will be charged to interest expense over the respective terms of the two swaps.

CONTRACTUAL COMMITMENTS

Leases

The Company leases various facilities under non-cancelable operating leases with an initial term in excess of one year. As of May 31, 2003, the future minimum payments required under these operating leases are summarized as follows:

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Long term debt and letters of credit

As of May 31, 2003 the Company had outstanding debt in the amount of $40.1 million, which consisted of a $27.5 million term note and $12.6 million outstanding under the revolving credit facility. The Company utilizes interest rate protection agreements to modify its characteristics from variable rate to a fixed rate. For further information regarding the Company’s long-term debt obligations and interest rate protection agreement see footnote 10 of the Notes to the Consolidated Financial Statements found on page 42 of the Company’s 2003 Annual Report.

Maturities of long-term debt are as follows:

At May 31, 2003, the Company had outstanding letters of credit in the amount of $2.2 million. These letters of credit are issued to a portion of the Company’s customers to cover any potential warranty costs that the customer might incur. In addition, a warranty reserve in the amount of $1 million has been established to offset any future warranty claims.

Commodity pricing

The Company manages its exposures to commodity prices, primarily zinc used in its Galvanizing Services Segment, by utilizing contracts with its zinc suppliers that include protective caps to guard against rising commodity prices. Management believes these contractual agreements ensure adequate supplies and partial offset against exposure to commodity price swings.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the consolidated financial statements requires the Company to make estimates that affect the reported value of assets, liabilities, revenues and expenses. The Company’s estimates are based on historical experience and various other factors that are believed to be reasonable under the circumstances, and form the basis for the Company’s conclusions. The Company continually evaluates the information used to make these estimates as the business and the economic conditions change. Accounting policies and estimates considered most critical are allowances for doubtful accounts, accruals for

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contingent liabilities, revenue recognition and goodwill impairment. More information regarding significant accounting policies can be found in Note 1 of the Notes to Consolidated Financial Statements in the Annual Report on form 10-K.

Allowance for Doubtful Accounts—The carrying value of the accounts receivables is continually evaluated based on the likelihood of collection. An allowance is maintained for estimated losses resulting from our customer’s inability to make required payments. The allowance is determined by historical experience of uncollected accounts, the level of past due accounts, overall level of outstanding accounts receivables, information about specific customers with respect of their inability to make payments and future expectations of conditions that might impact the collectibility of accounts receivables. If the financial condition of the Company’s customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

Accruals for Contingent Liabilities—The amounts the Company records for estimated claims such as self insurance programs, warranty and other contingent liabilities requires the Company to make judgments regarding the amount of expenses that will ultimately be incurred. The Company uses past history and experience, as well as other specific circumstances surrounding these claims in evaluating the amount of liability that should be recorded. Actual results may be different than the Company’s estimates.

Revenue Recognition—Revenue is recognized for the Galvanizing Services Segment upon completion of the galvanizing services or shipment of product. Revenue is recognized for the Electrical and Industrial Products Segment upon transfer of title and risk to customers, or based upon the percentage of completion method of accounting as contract services are performed. The extent of progress for revenue recognized using the percentage of completion method is measured by the ratio of contract costs incurred to date to estimated total contract costs at completion. Contract costs include direct labor and material, and certain indirect costs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses, if any, on uncompleted contracts are made in the period in which such losses are able to be determined. The assumptions made in determining the estimated cost could differ from actual performance resulting in a different outcome for profits or losses than anticipated.

Goodwill Impairment—On March 1, 2002, the Company adopted SFAS No. 142. The Company completed its initial and annual impairment analysis for its two operating segments and determined that there was no impairment of goodwill as of March 1, 2002 and December 31, 2002. An annual impairment test will be performed in December of each future year. The test is calculated using the anticipated future cash flows from the Company’s operating segments. Based on the present value of the future cash flow, the Company will determine whether an impairment will be recorded. A significant change in projected cash flows for future years could result in an impairment of goodwill in future years.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk relating to the Company’s operations results primarily from changes in interest rates and commodity prices. The Company has only limited involvement with derivative financial instruments and is not a party to any leveraged derivatives. The Company does not believe its market risks have changed significantly since February 28, 2003.

The Company manages its exposures to changes in interest rates by optimizing the use of variable and fixed rate debt. The Company had approximately $15 million of variable rate borrowings at May 31, 2003 after its hedges. In November 2001, the Company entered into an interest rate protection agreement with its lender to modify the interest characteristics of $40 million of debt from variable rate to a fixed rate. In conjunction with the Company’s financing agreement the Company discontinued hedge accounting for the February 1999 interest rate swap effective November 1, 2001. At May 31, 2003 the fair value of the February 1999 interest rate swap was a liability of $232, 000. The November 2001 interest rate swap, which was designated, as a hedge of the Company’s variable rate interest, was a liability of $780,000 as of May 31,

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2003. The accumulated balance in other comprehensive income is $605,000 net of tax of $371,000, as of May 31, 2003. This amount will be charged to interest expense over the respective terms of the two swaps. The Company believes it has adequately protected itself from increased interest cost under these financial arrangements.

The Company manages its exposures to commodity prices, primarily zinc used in its Galvanizing Services Segment, by utilizing contracts with its zinc suppliers that include protective caps to guard against rising commodity prices. Management believes these contractual agreements ensure adequate supplies and partial offset against exposure to commodity price swings.

The Company believes that fluctuations of the interest rate currently in effect and commodity prices will not have a material near-term effect on our future earnings, financial position and cash flows.

Item 4. Controls and Procedures

On June 24, 2003 (the “Evaluation Date”), an evaluation was performed under the supervision and with the participation of the Company’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of the Company’s disclosure controls and procedures. Based on that evaluation, the Company’s management, including the CEO and CFO, concluded that the Company’s disclosure controls and procedures were effective as of June 24, 2003. There have been no significant changes in the Company’s internal controls or in other factors that could significantly affect internal controls subsequent to June 24, 2003.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings—Not applicable.

Item 2. Changes in Securities—Not applicable.

Item 3. Defaults Upon Senior Securities—Not applicable.

Item 4. Submissions of Matters to a Vote of Security Holders—Not applicable

Item 5. Other Information

Attached is Exhibit 99.9, AZZ incorporated’s Press Release reporting the Company’s unaudited earnings and other selected financial information for the first quarter ended May 31, 2003, dated June 26, 2003.

Attached is Exhibit 99.10 Unaudited Financial and Other Statistical Information for the first quarter ended May 31, 2003, and Guidance for Fiscal Year 2004, which compiles AZZ incorporated’s unaudited financial and other statistical information for the quarter ended May 31, 2003 and provides forward looking guidance for the current fiscal year ending February 29, 2004. The guidance for the current fiscal year to end February 29, 2004 consists of either a projected range or management’s estimate of most likely results. These projections involve risk and uncertainties, the outcome of which cannot be foreseen at this time and, therefore, actual results will vary from these forecasts.

Item 6. Exhibits and Reports on Form 8-K

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All other schedules and compliance information called for by the instructions for Form 10-Q have been omitted since the required information is not present or not present in amounts sufficient to require submission.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

CERTIFICATIONS

I, David H. Dingus, certify that:

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Date    June 24, 2003

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CERTIFICATIONS

I, Dana L. Perry, certify that:

Date June 24, 2003

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EXHIBIT INDEX

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