AZZ incorporated — FY2013 Form 10-K
Business context and reporting period. AZZ manufactures electrical and industrial products and provides hot-dip galvanizing services. This annual report covers the fiscal year ended February 28, 2013; the filing also reports fourth-quarter results. FY2013 included acquisitions of Nuclear Logistics (NLI), Galvcast and G3. AZZ acquired Aquilex SRO on March 29, 2013, after year-end.
Financial performance and condition
| Metric | FY2013 | FY2012 |
|---|---|---|
| Revenue | $570.6 million | $469.1 million |
| Net income | $60.5 million | $40.7 million |
| Diluted EPS | $2.37 | $1.61 |
| Cash from operations | $92.7 million | $64.1 million |
| Capital expenditures | $24.9 million | $19.8 million |
| Year-end cash | $55.6 million | $143.3 million |
| Long-term debt | $210.7 million | $225.0 million |
| Working capital | $143.5 million | $224.8 million |
- Revenue rose 22%, net income 48%, and diluted EPS 47%. Net margin increased to 10.6% from 8.7%. Gross margin was approximately 28.8%, compared with 26.6%.
- Electrical and Industrial Products and Services revenue was $233.6 million, up 23%; segment operating income was $34.2 million, with a 15% margin versus 14%. NLI contributed $45.3 million of segment revenue and $6.5 million of segment operating income.
- Galvanizing Services revenue was $337.0 million, up 20%; segment operating income rose 20% to $87.8 million and its margin was 26%, unchanged. Steel-processing volume rose 24%, while selling price fell 4%.
- Operating cash flow increased, but acquisition spending drove investing cash outflow to $150.1 million and cash declined by $87.7 million. The current ratio fell to 2.20 from 3.88.
- Debt-to-equity was 0.63. The company reported covenant compliance at year-end. It had $13.9 million in letters of credit and no borrowings on its prior revolving facility.
Material changes versus FY2012
- Growth reflected acquisitions as well as higher galvanizing volumes. NLI accounted for most of the Electrical segment’s increase; excluding NLI, that segment’s revenue was essentially flat.
- Canadian galvanizing acquisitions contributed 27% of the Galvanizing segment’s volume increase. Excluding those acquisitions, volume rose 17%, while selling price fell 4%.
- Electrical segment backlog increased 60% to $221.7 million, including $78.5 million of acquired backlog; 44% of year-end backlog was attributable to NLI. The book-to-ship ratio was 1.01, versus 1.06.
- Depreciation and amortization rose to $29.4 million from $22.6 million, including $5.1 million of NLI-related intangible amortization. Acquisition-related goodwill rose to $171.9 million from $121.4 million.
Outlook, risks and unusual items
- Management described quotation levels as only modestly improved, with orders released slowly amid a gradual economic recovery and regulatory uncertainty. Fourth-quarter book-to-ship was 1.04. The filing provides no quantified earnings or revenue guidance.
- Management believed working capital, available credit and operating cash flow would fund anticipated FY2014 operations, dividends, capital improvements, debt service and possible acquisitions. A new post-year-end credit agreement provides a $75 million term facility and a $225 million revolving facility, with a further $75 million accordion feature.
- The Joliet galvanizing plant fire caused a $3.7 million operating loss during FY2013; the company received $13.1 million of insurance proceeds and recorded a $9.1 million net gain after an asset write-off. Additional property and equipment insurance proceeds of $6–$12 million were anticipated. Rebuilding capital estimates are inconsistent in the filing, ranging from approximately $20 million to $21.8 million, with related costs expected to continue into FY2014.
- The Wheeling facility consolidation generated a $1.3 million loss. Without the Wheeling and Joliet expenses, management estimated Galvanizing segment operating margin would have been 28%, rather than the reported 26%.
- The NLI acquisition includes a potential earnout of up to $20 million; the recorded present-value liability was $8.5 million. Aquilex was acquired after year-end for $271.8 million in cash consideration, subject to adjustment; purchase accounting was still being determined.
- Principal risks include economic and project-spending weakness, competition and pricing pressure, raw-material and natural-gas volatility, fixed-price contract estimates and backlog cancellations, acquisition integration and financing, foreign currency exposure, regulatory changes, skilled-labor availability, and environmental or catastrophic-event costs. Management said ordinary-course litigation and environmental reviews were not expected to have a material effect, while noting ultimate remediation liabilities were not clear.
Investor verification points
- Check acquisition contributions and integration outcomes, particularly NLI’s results and the purchase accounting and financing impact of Aquilex.
- Track backlog conversion, cancellations, bookings and order releases against the 1.01 FY2013 book-to-ship ratio.
- Verify timing and amount of Joliet rebuilding costs and insurance recoveries; reconcile the filing’s differing capital-spending estimates.
- Monitor cash, working capital, leverage, debt-covenant headroom and the terms and use of the new credit facilities.
- Assess galvanizing pricing and volume trends and the company’s ability to pass through zinc, natural-gas and other input-cost increases.