AZZ Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2016 (AZZ fiscal 2017 first quarter). AZZ provides galvanizing services, welding solutions, specialty electrical equipment and engineered services through its Energy and Galvanizing segments. Financial statements are unaudited.
Financial performance
| Metric | Q1 FY2017 | Q1 FY2016 |
|---|---|---|
| Net sales | $242.7 million | $228.9 million |
| Gross margin | $63.3 million (26.1%) | $59.3 million (25.9%) |
| Operating income | $34.5 million (14.2%) | $32.9 million (14.4%) |
| Net income | $21.1 million | $19.9 million |
| Diluted EPS | $0.81 | $0.77 |
| Operating cash flow | $9.6 million | $4.7 million |
Sales grew 6.0% year over year. Energy revenue rose less than 1% to $138.1 million; Galvanizing revenue increased 13.8% to $104.6 million. Operating income rose 4.4% in Energy and 10.0% in Galvanizing, while corporate expense increased 19.3% to $8.5 million. The effective tax rate was 31.6%, versus 31.7%.
Cash, debt and liquidity
- Cash and equivalents were $12.1 million at May 31, down from $40.2 million at February 29. Operating cash flow was $9.6 million; investing used $33.1 million, including $22.7 million for the PEI acquisition and $10.5 million of capital expenditures. Financing used $4.8 million.
- Gross debt was approximately $325.8 million, versus $367.1 million at May 31, 2015; gross debt-to-equity was 0.65, compared with 0.84 a year earlier. Interest expense was $3.9 million, broadly unchanged.
- Working capital was $162.0 million, compared with $196.3 million at May 31, 2015. The company reported $116.0 million drawn on its revolving facility, $23.5 million in letters of credit and approximately $85.5 million of additional credit availability. AZZ stated it was in compliance with debt covenants and believed cash, operating cash flows and credit access would meet foreseeable needs.
Material changes, outlook and risks
- AZZ acquired Power Electronics, Inc. (PEI) on March 1, 2016; the acquisition added $11.9 million of backlog. Recent acquisitions also contributed to Galvanizing growth. Management said PEI’s historical results were not significant enough to require pro forma results.
- Energy results faced weakness in industrial, nuclear and refining markets, partly offset by PEI. Galvanizing growth primarily reflected higher volumes and the acquisitions of US Galvanizing and Alpha Galvanizing.
- Energy backlog was $354.2 million at May 31, up 5.9% from February 29 and 11.1% from the prior-year comparable date. Book-to-ship was 1.03, versus 0.94; quarterly incoming orders increased 16.4% year over year.
- The filing provides no specific earnings or revenue guidance. Management cited demand and economic conditions, commodity costs (including zinc and natural gas), customer shipment delays, foreign exchange, acquisition execution and financing availability as risks. Commodity pass-through clauses and supplier arrangements may not fully offset cost increases.
- AZZ adopted debt-issuance-cost presentation guidance retrospectively, reducing reported debt and assets at February 29, 2016 by $1.4 million. Management reported effective disclosure controls and no significant internal-control changes. Routine lawsuits were not expected to have a material effect; no material risk-factor changes were reported.
Important facts for investors to verify
- Whether backlog and higher bookings convert into shipments and sustainable segment earnings, particularly given weakness in certain Energy end markets.
- PEI integration, acquisition-related costs and the contribution of acquired businesses to reported growth.
- Cash conversion and working-capital trends, including receivables, inventory and contract billings, alongside capital spending and debt repayment needs.
- Revolver availability, upcoming debt maturities and continued compliance with lending covenants.
- Whether AZZ can pass through commodity-cost increases and manage foreign-exchange and customer-demand risks.