AZZ Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2018, the three months ended May 31, 2017. AZZ provides galvanizing and other metal-finishing services, welding solutions, and specialty electrical equipment through its Energy and Metal Coatings segments. Unless otherwise noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Net sales | $208.6 million | $242.7 million |
| Gross profit / margin | $49.3 million / 23.6% | $63.3 million / 26.1% |
| Operating income / margin | $21.9 million / 10.5% | $34.5 million / 14.2% |
| Net income | $13.2 million | $21.1 million |
| Diluted EPS | $0.51 | $0.81 |
| Operating cash flow | $(15.8) million | $9.9 million |
| Capital expenditures | $10.1 million | $10.5 million |
Cash and equivalents were $6.3 million at May 31, down from $11.3 million at February 28, 2017. Working capital was $195.0 million. Gross debt was $300.3 million, including $161.0 million outstanding on the revolver; debt due within one year was $14.3 million. AZZ reported $266.9 million of additional credit availability, net of $22.1 million of letters of credit, and stated it was compliant with debt covenants. Gross debt-to-equity was 0.56:1.
Changes and operating trends
- Sales fell 14.1% year over year. Energy sales declined 15.7% to $116.5 million; segment operating income fell 54.2% to $8.6 million. Management cited fewer U.S. refinery turnarounds, petrochemical-market softness, and delays to large projects; fewer turnarounds and lower-margin work pressured profitability.
- Metal Coatings sales declined 11.9% to $92.1 million and operating income fell 12.6% to $21.2 million. Lower processed-steel volumes in solar, petrochemical, and oil-and-gas markets outweighed higher pricing.
- Energy backlog was $331.6 million, down 4.3% from February 28 and 6.4% from the comparable prior-year date. Book-to-ship was 0.93 versus 1.03; incoming orders declined 22.6% year over year.
- Operating cash flow turned negative, primarily reflecting lower earnings and less favorable working-capital movements, including increased receivables, inventories, and contract-related balances. Financing provided $20.9 million, including net revolver borrowings.
Liquidity, outlook, risks, and notable items
- On March 21, 2017, AZZ amended its credit agreement, extending maturity to March 21, 2022 and establishing a $450 million revolving facility, with a $150 million accordion. Financial covenants include maximum leverage of 3.25:1 and minimum interest coverage of 3.00:1.
- Management said cash, operating cash flows, and expected access to credit facilities should meet foreseeable cash needs. The filing provides no specific earnings or revenue guidance.
- AZZ estimated approximately $7.2 million of exposure to Westinghouse Electric Company and subsidiaries, mostly pre-petition, following their March 2017 bankruptcy filing. AZZ subsidiaries continued performing contracts and collecting post-petition amounts; contract assumption or rejection remained unresolved.
- On June 30, 2017, after quarter-end, AZZ acquired the assets of Enhanced Powder Coating Ltd. to expand Metal Coatings. Purchase price and expected financial impact are not provided in the filing text.
- Risks cited include demand and project delays, commodity costs (including zinc, natural gas, copper, aluminum, steel, and nickel-based alloys), foreign exchange and interest-rate movements, and customers’ willingness to accept price escalators. Management noted that passing through commodity increases is not assured.
- AZZ repurchased 47,200 shares at an average $56.84 per share during the quarter and paid $4.4 million in dividends. Routine legal matters were not expected by management to have a material effect; no material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether Energy orders and backlog stabilize, and whether delayed projects and refinery turnaround activity recover.
- Whether continued weak volumes or pricing affect Metal Coatings margins and how the EPC acquisition contributes after closing.
- Whether working-capital demands and negative operating cash flow persist, and how AZZ uses its credit availability while managing debt and covenant headroom.
- Collections, contract decisions, and ultimate exposure related to Westinghouse’s bankruptcy.
- The future impact of the new revenue-recognition standard on percentage-of-completion contracts; management was still assessing the effect.