AZZ Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2023 (AZZ fiscal 2024 first quarter). Amounts below are in U.S. dollars; financial statement amounts are converted to millions unless otherwise noted.
Business context and reporting period
AZZ provides metal-coating and galvanizing services, principally in North America, through AZZ Metal Coatings and AZZ Precoat Metals. Its Infrastructure Solutions segment reflects its 40% equity-method interest in the AVAIL joint venture. AZZ acquired Precoat Metals in May 2022 and sold a 60% interest in AVAIL in September 2022, changing the business mix and limiting direct comparability with the prior-year quarter.
Key financial metrics
| Metric | Q1 FY2024 | Prior-year quarter |
|---|---|---|
| Sales | $390.9 million | $207.1 million |
| Gross profit / margin | $97.0 million / 24.8% | $60.1 million / 29.0% |
| Operating income / margin | $65.5 million / 16.8% | $27.9 million / 13.5% |
| Continuing-operations net income | $28.5 million | $15.4 million |
| Net income available to common shareholders | $24.9 million | $24.1 million, including $8.7 million from discontinued operations |
| Diluted EPS | $0.98 | $0.96 total; $0.62 from continuing operations |
| Adjusted EBITDA from continuing operations (non-GAAP) | $85.4 million | $52.5 million |
| Operating cash flow from continuing operations | $46.9 million | $21.7 million |
| Capital expenditures | $17.0 million | $6.5 million |
Cash and equivalents were $3.9 million at May 31, 2023. Total debt was $1,105.3 million gross ($1,040.8 million net of issuance costs), versus $1,125.3 million gross at February 28, 2023. The company reported $307.1 million of additional credit availability and $17.9 million of outstanding letters of credit. Current assets were $408.5 million and current liabilities $180.1 million. The quarterly common dividend declared was $0.17 per share.
Interest expense rose to $28.7 million from $7.5 million, primarily reflecting acquisition-related debt and higher borrowing rates. The effective debt rate was 9.07% at quarter-end. A swap fixed the rate on approximately half of variable-rate debt at a total 8.627% through September 2025.
Material changes versus the prior comparable period
- Sales increased 88.7%, largely because the current quarter includes a full quarter of Precoat Metals, compared with only the period from May 13 to May 31 in the prior-year quarter. Precoat contributed $222.1 million of sales and $37.7 million of operating income.
- Metal Coatings sales rose 3.3% to $168.8 million, which management attributed primarily to improved price realization. Segment operating income was nearly flat at $45.5 million; higher zinc and labor costs offset sales gains.
- Gross margin percentage declined to 24.8% from 29.0%, while operating margin increased to 16.8% from 13.5%. The acquisition-driven mix shift affects comparison.
- Prior-year results included $107.3 million of sales and $8.7 million of net income from Infrastructure Solutions, reported as discontinued operations after the AVAIL transaction. Current results include $1.4 million of equity-method earnings from AZZ’s retained AVAIL interest.
- Preferred-stock dividends of $3.6 million reduced current-quarter income available to common shareholders. The 6% Series A preferred shares could convert into approximately 4.1 million common shares.
- Cash from operations increased to $46.9 million. Investing cash use was $17.0 million, compared with $1.305 billion in the prior-year quarter, which included the Precoat acquisition. Financing used $29.5 million, versus $1.369 billion of financing inflows in the prior year, which included acquisition-related debt proceeds.
Outlook, commentary, risks and unusual items
AZZ provided no specific quarterly or full-year earnings guidance in the supplied filing text. Management said cash, operating cash flow and expected access to credit facilities should meet cash needs for the foreseeable future. The company was in compliance with debt covenants; the maximum permitted net leverage ratio for May 31, 2023 was 5.5, but the filing text does not provide the actual ratio.
Management cited risks including changes in customer demand, inflation and economic volatility, labor and raw-material cost increases (including zinc and natural gas), supply-chain delays, customer delivery delays, and debt leverage and interest-rate exposure. Environmental liabilities assumed with Precoat totaled $23.2 million, including $3.1 million current; management said additional remediation costs could affect results but were not expected to have a material adverse effect on financial position, results or cash flows. Routine legal matters were not expected to be material. No material changes to previously disclosed risk factors or market-risk disclosures were reported.
The interest-rate swap generated a $4.6 million unrealized loss, net of tax, in other comprehensive income during the quarter; $0.5 million was reclassified to earnings. The company did not repurchase shares and had $84.0 million remaining under its authorization. Disclosure controls were deemed effective, and no significant change in internal control over financial reporting was reported.
Important facts for investors to verify
- How much of reported sales and operating-income growth reflects Precoat’s full-quarter inclusion versus underlying organic performance.
- Actual covenant leverage, debt repayment plans, interest-rate sensitivity and the cash impact of the 9.07% effective debt rate.
- Precoat integration and segment margins, including trends in zinc, labor, natural gas and other input costs.
- Potential dilution and cash obligations from the convertible preferred stock, including accrued dividends and possible conversion.
- Environmental remediation estimates and any revisions to the $23.2 million reserve.