AZZ Inc. Form 10-K Summary
Reporting period: Fiscal year ended February 28, 2023 (FY2023); comparisons are with the year ended February 28, 2022 (FY2022). This filing reports full-year results, not a standalone fourth quarter.
Business context and major transactions
AZZ provides hot-dip galvanizing and coil-coating services, primarily in North America. Its continuing operations comprise Metal Coatings and Precoat Metals. AZZ acquired Precoat Metals on May 13, 2022, for approximately $1.3 billion; its results are included for part of FY2023. On September 30, 2022, AZZ contributed most of Infrastructure Solutions (AIS) to a joint venture and sold a 60% interest to Fernweh. AIS is presented as discontinued operations; AZZ retained a 40% equity-method investment. AZZ says these transactions shift its strategy toward a predominantly metal-coatings-focused business.
Financial performance
| Metric | FY2023 | FY2022 |
|---|---|---|
| Continuing-operations sales | $1,323.6 million | $525.6 million |
| Gross margin | $295.9 million (22.4% of sales) | $146.2 million (27.8%) |
| Operating income, continuing operations | $173.6 million (13.1% of sales) | $79.2 million (15.1%) |
| Net income, continuing operations | $66.3 million | $49.8 million |
| Net income (loss), including discontinued operations | $(53.0) million | $84.0 million |
| Diluted EPS from continuing operations | $2.33 | $1.99 |
| Diluted EPS, including discontinued operations | $(2.45) | $3.35 |
| Adjusted EBITDA from continuing operations (non-GAAP) | $267.4 million | $113.0 million |
Continuing-operations sales rose 151.8%, reflecting the Precoat acquisition and 21.2% growth in Metal Coatings sales, to $637.0 million. Precoat contributed $686.7 million of sales and $79.5 million of operating income from its acquisition date. Metal Coatings operating income increased 21.1% to $156.0 million; its operating margin was 24.5%, essentially flat year over year. The reported consolidated net loss chiefly reflects a $159.9 million pretax, non-cash loss on the AIS disposition. Continuing-operations diluted EPS increased even as interest expense rose sharply. Adjusted EBITDA is a company-defined non-GAAP measure and should not be treated as a substitute for GAAP results.
Cash flow, debt and liquidity
- Cash from continuing operating activities was $91.4 million, up from $60.6 million. Continuing investing activities used $1,228.9 million, mainly for the Precoat acquisition; continuing financing activities provided $1,027.3 million.
- Cash and cash equivalents were $2.8 million at year-end, versus $12.1 million a year earlier. Working capital was $230.2 million.
- Gross debt was $1,125.3 million, versus $227.0 million at FY2022 year-end; debt to equity was 1.24x versus 0.34x. Debt includes a $1,030.3 million Term Loan B and $95.0 million drawn on the revolver. Net debt was approximately $1,122.4 million using reported cash.
- The Term Loan B and revolver bear interest at SOFR plus 4.25%; the reported effective rate was 8.81% at year-end. A $550 million interest-rate swap fixed the rate on approximately half of variable-rate debt through September 2025. The filing estimates a 1 percentage-point rate increase would have added $5.8 million to FY2023 interest expense.
- AZZ reported $288.5 million of additional credit availability and compliance with debt covenants at year-end. Its leverage ratio was 5.75 against a covenant maximum that tightens over time. Management said available cash, operating cash flow and expected access to credit facilities should cover foreseeable needs.
Outlook, risks and unusual items
The filing provides no quantified revenue, earnings or cash-flow guidance. Management describes the portfolio changes as intended to focus the company on coatings and galvanizing and enhance shareholder value. Key risks include substantial debt and variable interest rates, covenant headroom, integration and realization of benefits from Precoat, customer demand and seasonality, skilled-labor availability and costs, and volatility in zinc, natural gas and other inputs. The company may not be able to pass cost increases on to customers. It had non-cancelable zinc purchase contracts of approximately $115 million expiring in FY2024.
Other items for investors to note include a $23.5 million environmental remediation reserve assumed in the Precoat acquisition, with $3.4 million classified as current; a $31.3 million underfunded frozen pension plan; and a $2.9 million warranty reserve. The AIS investment is subject to joint-venture governance and valuation risks; its reported carrying value was $84.8 million. The 6% Series A convertible preferred stock accrued $8.2 million of dividends for FY2023 and could convert into approximately 4.1 million common shares. Common dividends were $0.68 per share for the year; the company made no common-stock repurchases in FY2023 while prioritizing debt repayment.
Management and the auditor reported effective internal control over financial reporting, but the audit and management assessment excluded Precoat Metals, which represented 67.0% of consolidated assets and 51.9% of continuing-operations revenue. The financial statements received an unqualified audit opinion. The auditor identified valuation of Precoat acquired intangible assets as a critical audit matter; the purchase-price allocation was preliminary and expected to be finalized in FY2024. Management said routine litigation was not expected to have a material effect; it could not predict the outcomes with certainty.
Important facts for investors to verify
- How Precoat performs over a full fiscal year, including margins, integration progress and final purchase-price allocation.
- Debt reduction, cash generation and compliance with the progressively tighter leverage covenant; sensitivity to rates on the unhedged debt.
- The assumptions behind the $159.9 million AIS disposal loss and the recoverability and future earnings contribution of AZZ’s 40% AIS investment.
- Whether environmental remediation costs, including the $23.5 million reserve, and pension obligations remain within current estimates.
- The potential dilution and dividend burden of the preferred shares, alongside common dividends and capital-allocation priorities.