AZZ Fails to Electrify

Electrical equipment manufacturer and galvanizing service provider AZZ (NYS: AZZ) reported flat second-quarter earnings at $9.6 million and revenue slightly below Street expectations. Rising input costs and interest expenses were responsible for the company's flat earnings. Let's take a closer look at what hurt AZZ.

Not so fly, AZZ
While revenue for the company rose 15% year over year, there was not much left to rave about, given the flat net income figures. Higher raw material costs pushed gross margins from 29.2% to 26.5%. Despite a reduction in overhead, increases in interest expenses to $3.5 million coupled with slightly higher taxes further ate into the company's bottom line.

About 60% of the company's revenues comes from its galvanizing services segment. Just in case you're curious, that's where you apply molten zinc on metal surfaces to prevent corrosion. This segment did see a series of strong quarterly figures. Revenue and operating profit have grown significantly in this division since the acquisition of North American Galvanizing back in June 2010. While second-quarter revenue from this division grew by 19% to $70.3 million from the year-ago period, operating profits grew by an impressive 23% to $18.8 million.

The company's electrical and industrial products segment, which rakes in approximately 40% of revenues, witnessed a massive decline in operating margins by 33%. Why, you ask?

It's the economy, stupid!
Competitors such as Powell Industries (NAS: POWL) and Power-One (NAS: PWER) are also facing the heat of the tumultuous economic situation that is unfolding. To add to that, competition and pricing pressures are also eating through the gross margins of these companies. However, while competition might be intensifying on the electrical side, AZZ's high-margin galvanizing business is keeping cash flows rolling.

The Foolish bottom line
After flat second-quarter earnings, margins should remain under pressure for the company due to competitive forces. Adding to all this, pricing pressures and an economic slowdown could further hurt sales for the company. For now, I'm staying cautious, but trading at 13 times cash flow with an attractive position in the galvanizing business, I'll keep AZZ placed firmly on my watchlist.

At the time thisarticle was published Keki Fatakia does not hold shares in any of the companies mentioned in this article. The Motley Fool owns shares of AZZ and Power-One. Try any of our Foolish newsletter servicesfree for 30 days. We Fools may not all hold the same opinions, but we all believe thatconsidering a diverse range of insightsmakes us better investors. The Motley Fool has adisclosure policy.

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