AZZ Inc. — Form 10-Q Summary
Reporting period: Three months ended May 31, 2020 (fiscal 2021 first quarter); comparisons are with the three months ended May 31, 2019. AZZ provides metal-coating, welding, specialty electrical equipment and related services through its Metal Coatings and Energy segments.
Financial performance and liquidity
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $213.3 million | $289.1 million |
| Gross margin | $42.2 million; 19.8% of sales | $66.1 million; 22.9% of sales |
| Operating income | $14.3 million; 6.7% of sales | $31.0 million; 10.7% of sales |
| Net income / diluted EPS | $5.5 million / $0.21 | $21.3 million / $0.81 |
| Operating cash flow | $(11.2) million | $(17.9) million |
- Sales fell 26.2%; net income fell approximately 74%. The quarterly dividend declared was $0.17 per share, unchanged from the prior-year quarter.
- Cash was $26.4 million at May 31, down from $36.7 million at February 29, 2020. Working capital was $95.4 million, versus $73.9 million at February 29.
- Gross debt was $219.0 million: $125.0 million of senior notes and $94.0 million drawn on the revolving facility. The balance sheet classifies $125.0 million as due within one year. AZZ reported $342.3 million of additional credit availability and compliance with debt covenants.
- Investing cash outflow was $10.8 million, principally capital expenditures of $10.8 million; financing provided $11.0 million, including net revolving-credit borrowings. Cash declined $10.3 million overall.
- Effective tax rate was 45.8%, compared with 21.1%, mainly due to foreign-jurisdiction losses for which no tax benefit was expected and uncertain research-and-development tax-credit positions.
Material changes and operating trends
- Metal Coatings revenue declined 2.6% to $119.0 million; segment operating income fell 14.7% to $25.1 million, and operating margin was 21.1% versus 24.1%. Lower volume and selling prices were partly offset by lower zinc costs and prior-year acquisitions.
- Energy revenue fell 43.5% to $94.3 million. The segment recorded an operating loss of $1.0 million versus income of $12.6 million; margin was (1.1)% versus 7.5%. AZZ cited reduced demand, oil-and-gas softness, and the prior-year comparable period’s large international electrical-project revenue.
- Energy backlog was $205.4 million, down 15.8% from February 29, 2020 and 31.6% from May 31, 2019. New orders declined 31.8% year over year, and the book-to-revenue ratio decreased to 0.82 from 0.89. Management attributed weaker bookings and backlog to COVID-related customer delays and slower project releases.
- International sales declined to $22.5 million from $58.8 million; U.S. sales were $190.8 million versus $230.3 million.
Outlook, risks and unusual matters
- AZZ provided no quantified earnings or revenue guidance in the supplied filing text. Management said it could not reasonably estimate the duration or severity of COVID-19 or its full fiscal 2021 impact. The company continued operating where required or able under critical-infrastructure guidance.
- Management warned that a prolonged downturn could reduce revenue, increase uncollectible receivables and lead to asset impairments. Other cited exposures include customer order or shipment delays, supply-chain disruption, commodity costs, foreign exchange, and demand across served markets.
- The company expected to benefit from CARES Act payroll-tax deferrals and the qualified-improvement-property tax correction; it was still evaluating certain payroll tax credits.
- Disclosure controls and procedures were deemed ineffective because of a previously identified material weakness in income-tax accounting and reporting controls. Remediation efforts included stronger review controls, oversight and employee training; the weakness was not reported as remediated as of quarter-end.
- AZZ reported routine legal proceedings and did not expect them to have a material financial effect. It reported no material off-balance-sheet arrangements. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether COVID-related demand, order delays and the Energy backlog continued to deteriorate or recovered after May 31, 2020.
- The timing and sources of funds for the $125.0 million debt classified as due within one year, alongside available revolver capacity and covenant requirements.
- Whether operating cash flow and working-capital movements improved, and whether capital spending or dividends changed.
- Progress in remediating the income-tax control material weakness and any further effects of uncertain tax positions or elevated effective tax rates.
- Whether reduced Energy profitability, foreign-exchange losses and potential credit losses or impairments became more significant in subsequent periods.