AZZ Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2021, ended August 31, 2020. Results are unaudited. AZZ provides metal coating, infrastructure, electrical and welding solutions through its Metal Coatings and Infrastructure Solutions segments.
Key financial results
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Sales | $203.4 million | $236.2 million | $416.7 million | $525.3 million |
| Gross margin | $46.1 million (22.7%) | $52.7 million (22.3%) | $88.3 million (21.2%) | $118.8 million (22.6%) |
| Operating income | $0.7 million | $22.2 million | $15.0 million | $53.2 million |
| Net income (loss) | $(1.8) million | $15.6 million | $3.8 million | $36.8 million |
| Diluted EPS | $(0.07) | $0.59 | $0.14 | $1.40 |
| Operating cash flow | Not provided by quarter | Not provided by quarter | $32.2 million | $38.2 million |
Q2 included $18.7 million in restructuring and impairment charges, including write-downs, costs related to assets held for sale, and a $1.2 million loss on the Galvabar sale. Interest expense fell to $2.5 million for the quarter and $5.1 million year to date, primarily reflecting lower average debt and variable borrowing rates. Dividends declared were $0.17 per share in Q2 and $0.34 per share year to date, unchanged from the comparable periods.
Liquidity, debt and cash flow
- At August 31, cash was $14.0 million, total assets $1.00 billion, and working capital $70.1 million. Cash was down from $36.7 million at February 29, 2020.
- Total debt was $172.0 million gross ($171.9 million net), including $125.0 million of senior notes due January 2021. The company reported $393.0 million of additional credit availability and compliance with debt covenants. Gross debt-to-equity was 0.27.
- Six-month operating cash flow was $32.2 million; investing used $10.5 million and financing used $45.1 million. Cash declined by $22.7 million. Investing included $19.3 million of capital spending and $8.3 million in net proceeds from a subsidiary sale. Financing included $31.0 million net repayments on the revolver, $8.9 million of dividends and $6.4 million of share repurchases.
- On October 9, 2020, after quarter-end, AZZ arranged $150.0 million of senior unsecured notes: $70.0 million at 2.77% for seven years and $80.0 million at 3.17% for 12 years. Proceeds were scheduled to fund in December 2020 and January 2021, principally to refinance the $125.0 million notes due in January 2021, with remaining proceeds available for general purposes.
Material changes and operating trends
- Quarterly sales declined 13.9% year over year; six-month sales declined 20.7%. Metal Coatings sales fell 6.3% for the quarter, while Infrastructure Solutions sales fell 22.5%. For the six-month period, the segment declines were 4.4% and 35.1%, respectively.
- Infrastructure Solutions reported operating losses of $4.3 million for Q2 and $5.4 million year to date, versus prior-year operating income. Metal Coatings operating income also declined, to $15.6 million for Q2 and $40.7 million year to date.
- Industrial demand weakened amid COVID-19 and pressure in oil and gas/refining markets. Infrastructure work was affected by restricted customer-site access, delayed project orders and lower demand; some prior-period large international electrical project sales did not recur. Transmission and distribution sales rose to $97.6 million in Q2 from $56.7 million a year earlier, partially offsetting declines elsewhere.
- Infrastructure backlog was $210.6 million at August 31, down 30.2% year over year but up 2.6% from May 31. Q2 incoming net orders declined 12.3% year over year; the book-to-sales ratio was 1.03.
- Management continued a strategy to focus on core businesses, completed the Galvabar sale and classified other businesses as held for sale. The held-for-sale businesses were not significant enough to be reported as discontinued operations. AZZ also planned to close certain underperforming Metal Coatings locations.
Outlook, risks and controls
AZZ provided no specific financial guidance in the supplied filing text. Management said the duration and ultimate financial impact of COVID-19 could not be reasonably estimated. The company remained operational, but identified risks including weaker demand, customer delays and restricted site access, supply-chain disruption, uncollectible receivables and further asset impairments. Management expected Infrastructure Solutions to be more affected than Metal Coatings.
Management reported that disclosure controls were ineffective at period-end because of a material weakness in income-tax accounting controls. Remediation efforts included enhanced management review and oversight and additional employee training; the weakness had not yet been stated as remediated. Routine legal proceedings were not expected by management to have a material effect. The filing reported no material changes to other market-risk disclosures.
Most important facts for investors to verify
- Whether the new note proceeds funded as scheduled and refinanced the January 2021 maturity on the stated terms.
- Whether COVID-19-related access restrictions, demand weakness and delayed orders persist, and how backlog converts into sales and cash flow.
- The cash and earnings effects of planned divestitures, location closures and restructuring, including any additional impairment charges.
- Progress in remediating the material weakness in income-tax accounting controls and the status of the company’s related tax estimates.
- Whether operating cash flow and available credit remain sufficient to support debt service, capital spending and dividends.