AZZ Inc. — Form 10-Q Summary
Reporting period: Fiscal 2020 first quarter, three months ended May 31, 2019. AZZ provides energy-sector electrical and welding solutions and metal-coating services. Comparisons are with the three months ended May 31, 2018 unless stated otherwise. Amounts below are in millions except per-share data.
Financial results
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Revenue | $289.1 | $262.2 |
| Gross profit / margin | $66.1 / 22.9% | $58.7 / 22.4% |
| Operating income / margin | $31.0 / 10.7% | $23.7 / 9.0% |
| Net income | $21.3 | $15.7 |
| Diluted EPS | $0.81 | $0.60 |
| Operating cash flow | $(18.6) | $(12.4) |
| Capital expenditures | $4.7 | $2.8 |
Revenue rose 10.3% and net income rose 35.4%. Energy revenue increased 13.6% to $167.0 million; Metal Coatings revenue increased 6.0% to $122.2 million. Energy operating margin improved to 7.5% from 6.8%; Metal Coatings operating margin improved to 24.1% from 21.9%. The effective tax rate was 21.1%, versus 22.0%.
Cash, liquidity and debt
Cash was $13.6 million at May 31, down $10.4 million from February 28. Investing cash outflow was $43.5 million, including $39.0 million paid, net of acquired cash, for two acquisitions; financing provided $51.6 million, mainly from net revolving-credit borrowings. Management attributed weaker operating cash flow year over year primarily to less favorable working-capital movements, including changes in contract assets and liabilities. Working capital was $258.2 million, compared with $213.8 million at February 28.
Gross debt was $297.0 million: $172.0 million drawn on the revolving facility and $125.0 million of senior notes. Debt, net of issuance costs, was $296.8 million. The company reported $259.3 million of additional credit availability and compliance with debt covenants. Lease liabilities totaled $48.0 million. Dividends declared were $0.17 per share; $4.4 million of dividends were paid.
Material changes, outlook and risks
- Backlog and orders: Energy backlog was $300.1 million, down 9.9% from February 28 and 1.6% from May 31, 2018. Net bookings declined 13.3% year over year and the book-to-revenue ratio fell to 0.89 from 1.13, primarily due to softer international project bookings. Management also cited revenue recognition on large international projects booked in the prior year as a factor in the sequential backlog decline.
- Acquisitions: AZZ acquired K2 Partners and Tennessee Galvanizing in April for approximately $39.0 million net of cash acquired. The acquisitions expand Metal Coatings offerings and geographic reach; purchase-price valuations remain provisional.
- Management commentary: Energy results benefited from electrical-product sales, prior-year international projects reaching revenue-recognition milestones, improved project margins, and a Westinghouse settlement. Metal Coatings benefited from higher prices and volumes, acquisitions, solar and telecommunications demand, and lower zinc costs. The filing provides no quantified earnings or revenue guidance.
- Westinghouse claims: An April settlement of approximately $8.1 million represented full recovery of claims for one plant and had no material operating-income impact. Approximately $1.8 million of claims remained outstanding, of which $0.6 million was reserved.
- Controls and risks: Disclosure controls were deemed ineffective because of a material weakness involving review and monitoring of revenue-recognition reconciliations. AZZ reported remediation efforts, including new controls and training; related errors had been corrected in fiscal 2019 statements. Risks include demand and project timing, commodity costs (including zinc and natural gas), foreign exchange, economic conditions, and execution of acquisitions. The company reported no material changes to previously disclosed risk factors and no material market-risk changes.
- Other: No off-balance-sheet arrangements were reported. Routine legal proceedings were not expected by management to have a material effect. No shares were repurchased during the quarter.
Key facts for investors to verify
- Whether the revenue-reconciliation control weakness is remediated and whether revenue reporting remains reliable.
- Whether Energy bookings and backlog stabilize, particularly for international projects, and how project timing affects revenue and cash conversion.
- Whether acquisition valuations are finalized and the acquired businesses deliver expected growth and returns.
- Whether working-capital requirements, operating cash flow, and debt levels remain manageable as the company funds operations, acquisitions, capital spending, and dividends.
- Whether commodity-cost exposure, Westinghouse claim collections, and other disclosed contingencies change materially.