AZZ Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 28, 2019. The filing also reports the fourth quarter ended February 28, 2019; the supplied “2018 Q4” metadata does not match the fiscal year covered by this 10-K.
Business context
AZZ provides electrical equipment, welding and engineered services, and metal-coating services. Its two segments are Energy and Metal Coatings. At year-end, Metal Coatings operated 42 plants in the United States and Canada. AZZ acquired certain Lectrus assets in March 2018; after year-end, it acquired K2 Partners and Tennessee Galvanizing in April 2019.
Financial performance and liquidity
| Metric | FY2019 | FY2018 |
|---|---|---|
| Net sales | $927.1 million | $810.4 million |
| Gross profit / gross margin | $198.6 million / 21.4% | $160.3 million / 19.8% |
| Operating income / margin | $77.0 million / 8.3% | $48.2 million / 6.0% |
| Net income / net margin | $51.2 million / 5.5% | $45.2 million / 5.6% |
| Diluted EPS | $1.96 | $1.73 |
| Cash from operations | $114.7 million | $78.9 million |
| Capital expenditures | $25.6 million | $29.6 million |
| Cash and cash equivalents at year-end | $24.0 million | $20.9 million |
| Total debt at year-end | $241.0 million | $301.3 million |
| Working capital | $213.8 million | $197.4 million |
Energy sales grew 15.6% to $486.8 million; segment operating income was $31.3 million versus a $1.8 million loss. Metal Coatings sales rose 13.1% to $440.3 million, while operating income declined 0.9% to $83.6 million and margin contracted to 19.0% from 21.7%. Energy backlog reached $332.9 million, up 25.4%; its book-to-revenue ratio improved to 1.07 from 0.92.
Fourth-quarter net sales were $202.5 million, gross profit $43.3 million, net income $8.9 million, and diluted EPS $0.34. The filing provides no separate quarterly cash-flow or debt figures.
Revolving-credit borrowings were $116.0 million, with a 4.06% effective rate; approximately $315.3 million of additional credit was available under the facility. AZZ reported covenant compliance. It paid $17.7 million in dividends during FY2019, or $0.68 per share.
Changes, outlook and management commentary
- Total sales increased 14.4%, supported by acquisitions, higher Metal Coatings prices and volumes, stronger refinery turnaround activity, more international Energy projects, and improved electrical business.
- Energy performance also reflected improved project margins and the absence of FY2018 charges, including a $10.5 million asset impairment and $2.9 million provision for doubtful accounts. Nuclear-market softness continued.
- Metal Coatings faced higher zinc and labor costs that were not fully offset by pricing. A $1.3 million charge related to consolidation of two Gulf Coast galvanizing facilities.
- Operating cash flow improved year over year, partly due to higher earnings and favorable working-capital changes. Net investing cash outflow fell to $32.1 million, mainly because of lower acquisition spending and capital expenditures.
- No quantified forward guidance is provided. Management said cash, operating cash flows, and expected access to credit should meet foreseeable needs; future results remain subject to market, project, commodity, labor, financing, and other risks.
Unusual items, accounting and contingencies
- AZZ adopted ASC 606 and ASC 842 in FY2019. ASC 606 adoption included a fourth-quarter out-of-period adjustment that increased sales by $3.5 million and net income by $1.0 million; management said the adjustment was not material to previously issued periods. Prior-year results were not recast, limiting comparability.
- The auditor issued an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. A material weakness involved preparation and review of revenue reconciliations, including errors primarily related to ASC 606 adoption. Management was implementing new controls and training; remediation was not yet complete.
- Westinghouse-related claims totaled approximately $12 million. In April 2019, AZZ reached an approximately $8.1 million settlement representing full payment of claims for one plant; other claims remained outstanding.
- The shareholder class action concerning alleged revenue-recognition disclosures was dismissed without prejudice in January 2019 and was no longer pending. Management did not expect routine legal matters to have a material financial effect.
- Key risks include Energy project-estimate and fixed-price contract exposure, cancellations and backlog conversion, volatile zinc and natural-gas costs, variable-rate debt, economic and customer-demand conditions, acquisition integration, and potential pension-plan withdrawal liabilities. The Boilermaker-Blacksmith pension plan was expected to enter critical status in 2019.
Important facts for investors to verify
- Progress and testing evidence for remediation of the revenue-reconciliation material weakness, and whether subsequent filings report effective controls.
- Conversion and margin quality of the $332.9 million Energy backlog, including cancellation exposure and contract-estimate revisions.
- Collection of the remaining Westinghouse claims and any related financial-statement effects.
- Whether Energy growth and Metal Coatings pricing can offset nuclear-market softness, labor expenses, and zinc and natural-gas cost volatility.
- Debt repayment capacity and covenant headroom, particularly the $125 million senior-note maturity in 2021 and variable-rate revolving borrowings.
- Integration and financial contribution of Lectrus and the post-year-end K2 Partners and Tennessee Galvanizing acquisitions.