AZZ Inc. — Form 10-Q Summary
Business context and reporting period. This unaudited report covers the three months ended May 31, 2022, AZZ’s first quarter of fiscal 2023. AZZ provides metal coating, coil coating and infrastructure solutions. On May 13, 2022, it acquired Precoat Metals for approximately $1.3 billion, adding a third reportable segment. Precoat’s results are included only from the acquisition date.
Key financial results
Amounts are in millions of dollars except per-share data.
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Sales | $314.4 | $229.8 |
| Gross margin | $84.5 (26.9% of sales) | $57.9 (25.2%) |
| Operating income | $39.9 (12.7% of sales) | $30.7 (13.4%) |
| Net income | $24.1 | $22.3 |
| Diluted EPS | $0.96 | $0.88 |
| Operating cash flow | $23.3 | $11.1 |
- Sales rose 36.8%. Metal Coatings sales increased 25.9% to $160.8 million; Infrastructure Solutions sales increased 7.6% to $109.9 million; Precoat contributed $43.7 million after acquisition.
- Segment operating income was $44.4 million for Metal Coatings, $6.6 million for Precoat and $12.9 million for Infrastructure Solutions. Corporate expense increased to $24.0 million from $10.5 million, primarily due to Precoat acquisition costs.
- Interest expense increased to $7.5 million from $1.7 million, mainly reflecting acquisition financing. The effective tax rate was 23.9%, versus 25.5%.
- Operating cash flow benefited from higher accounts payable, partly offset by increases in receivables, inventory and prepaid assets. Investing cash use was $1.306 billion, primarily for the Precoat acquisition; financing provided $1.369 billion.
- Cash and cash equivalents were $101.0 million at May 31, 2022. Working capital was $386.0 million. Total debt was $1.690 billion gross and $1.608 billion net of unamortized issuance costs; debt net of current maturities was $1.595 billion.
Material changes and capital structure
- The Precoat acquisition was funded mainly with a $1.3 billion secured Term Loan B and $240 million of 6.00% convertible subordinated notes due 2030. The Term Loan B bears interest at SOFR plus 4.25%, matures in 2029 and is secured by substantially all company assets. Its effective rate was 4.91% at quarter-end.
- The company also has a $400 million secured revolving facility due 2027, with no borrowings outstanding at May 31. The Term Loan B covenant sets a maximum Total Net Leverage Ratio of 6.25 through November 2022, stepping down quarterly to 4.5 by May 2024. AZZ reported compliance with its debt covenants.
- AZZ redeemed all $150 million of its 2020 Senior Notes on June 6, 2022. The convertible notes may convert into common shares at a premium; their exchange into Series A convertible preferred shares is subject to shareholder approval.
- Precoat’s preliminary purchase accounting included $534.6 million of goodwill. Valuations remain preliminary and may be adjusted during the measurement period. The acquisition also brought an estimated $22.2 million of environmental remediation liabilities and a $44.9 million pension obligation.
Outlook, risks and unusual items
- No specific revenue or earnings guidance is provided in the filing. Management said it believes cash, operating cash flow and expected access to credit facilities are sufficient for foreseeable cash needs.
- Infrastructure Solutions backlog was $307.4 million, up 65.2% year over year; quarterly net bookings were $317.3 million and the book-to-sales ratio was 1.01. Management cited strong electrical bookings and continued strong Metal Coatings sales.
- Management reported increased labor-market and supply-chain challenges, raising the cost and affecting the availability of labor and materials. Risks also include commodity costs—particularly zinc, natural gas, steel and aluminum—customer demand, supply-chain delays, COVID-19 uncertainty, foreign exchange and financing needs.
- On June 23, 2022, AZZ agreed to contribute Infrastructure Solutions to a joint venture and sell a 60% interest to Fernweh at an implied enterprise value of $300 million. Expected cash proceeds are approximately $228 million, subject to adjustments and closing conditions; the transaction was expected to close before fiscal year-end. AZZ expected a non-cash disposal loss of approximately $35–$65 million, subject to its valuation assessment, and planned to retain a 40% equity-method interest.
- Routine legal proceedings were not expected by management to have a material effect, although outcomes cannot be predicted. The company said the Precoat acquisition’s internal-control integration work was ongoing; Precoat was excluded from the quarter-end controls assessment under SEC acquisition guidance.
Important facts for investors to verify
- How final Precoat purchase-price allocations, including goodwill and acquired environmental and pension obligations, compare with the preliminary estimates.
- Whether AZZ completes the Infrastructure Solutions joint-venture transaction on the expected terms and what disposal loss and ongoing earnings contribution result.
- Post-acquisition leverage, borrowing costs, covenant headroom and the effects of the Term Loan B’s variable SOFR-based rate.
- Whether sales growth and bookings convert to cash generation amid elevated working-capital needs, labor costs and supply-chain constraints.
- The effects of the convertible notes’ potential dilution or preferred-share exchange, and the company’s progress integrating Precoat controls and operations.