AZZ Inc. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2022, ended August 31, 2021; comparisons are with the periods ended August 31, 2020. Amounts below are in millions unless noted.
Business context and results
AZZ provides metal-coating and infrastructure products and services through its Metal Coatings and Infrastructure Solutions segments. Management is pursuing a strategy to divest certain non-core businesses and become a more focused metal-coatings company.
| Metric | Q2 FY22 | Q2 FY21 | Six months FY22 | Six months FY21 |
|---|---|---|---|---|
| Sales | $216.4 | $203.4 | $446.3 | $416.7 |
| Gross margin | $55.1 (25.5%) | $46.1 (22.7%) | $113.0 (25.3%) | $88.3 (21.2%) |
| Operating income | $26.5 (12.3%) | $0.7 (0.3%) | $57.2 (12.8%) | $15.0 (3.6%) |
| Net income (loss) | $19.0 | $(1.8) | $41.3 | $3.8 |
| Diluted EPS | $0.76 | $(0.07) | $1.64 | $0.14 |
Q2 sales increased 6.4%. Metal Coatings sales rose 10.7%, supported by improved pricing, a facility acquired in fiscal 2021, and 2.6% higher steel-processing volume. Infrastructure Solutions sales were up 0.6%; domestic electrical sales were partly offset by lower China project sales and declines in parts of the Industrial platform. By customer industry, Q2 industrial sales increased to $132.0 million from $67.1 million, while transmission and distribution sales fell to $47.6 million from $97.6 million.
Q2 segment operating income was $31.6 million for Metal Coatings and $7.0 million for Infrastructure Solutions; corporate expense was $12.1 million. Both segments improved from the prior year. The comparison was substantially affected by $18.7 million of restructuring and impairment charges in Q2 FY21 ($11.3 million Metal Coatings and $7.4 million Infrastructure Solutions); no such charges were recorded in the current six-month period. Higher current-period segment performance also reflected improved sales, operational efficiencies and cost controls. Corporate expense rose, primarily due to consulting costs for the strategic review.
Cash flow, liquidity and capital
- Six-month operating cash flow was $37.8 million, compared with $32.2 million; investing cash use was $10.6 million, and financing cash use was $26.3 million. Working-capital movements included increased uses from receivables, inventories and contract assets/liabilities.
- Cash was $15.5 million at August 31, 2021. Working capital was $210.0 million.
- Gross debt was $183.0 million ($182.5 million net of issuance costs), including $150.0 million of senior notes and $33.0 million drawn on the revolver. The filing reports approximately $357.1 million of additional credit availability. AZZ stated it was in compliance with debt covenants.
- On July 8, 2021, AZZ replaced its revolver with a five-year, unsecured facility maturing in July 2026, with commitments up to $400 million and an additional $200 million uncommitted accordion.
- AZZ repurchased 416,279 shares for $21.2 million during the six months, at an average $51.01 per share; $62.8 million remained under the $100 million authorization. Dividends declared were $0.17 per share in Q2.
Outlook, risks and unusual items
No numerical earnings or revenue guidance is provided. Management said both segments improved in Q2 and that cash, operating cash flows and expected access to credit should meet foreseeable cash needs. Infrastructure Solutions backlog was $201.5 million at August 31, up $15.4 million from February 28 but below $210.6 million a year earlier. Q2 book-to-sales was 1.07. Management attributed the year-over-year backlog decline mainly to reduced international backlog, including China, and prior divestitures.
Management cited increased labor-market constraints and costs, potential supply-chain disruption, commodity-cost exposure (including zinc and natural gas for Metal Coatings and metals for Infrastructure Solutions), customer demand uncertainty, and COVID-19 variants and proposed employee vaccination/testing requirements as risks. The company said the pandemic had not materially adversely affected Q2 results, but could not estimate future effects. Routine legal proceedings were not expected by management to have a material effect, though outcomes cannot be predicted.
Two non-core assets were classified as held for sale; the disposal group’s reported fair value was $5.8 million after a $3.5 million impairment reflected from the prior year. An agreement to sell 60% of a Chinese subsidiary was expected to close during FY22; AZZ planned to retain 40% and, after closing, account for it as an equity-method investment. The filing also reports October 2021 bylaw amendments and adoption of an executive-officer severance plan.
Important facts for investors to verify
- How much of the earnings improvement reflects recurring operating gains versus the prior-year restructuring and impairment charges.
- Whether labor availability, wages, commodity costs and supply-chain conditions affect margins or delivery schedules.
- Backlog conversion, bookings and customer demand, particularly in China and other international markets.
- Timing, proceeds and financial-statement effects of the planned divestitures, including the Chinese subsidiary transaction.
- Revolver usage, covenant headroom, share repurchases and cash needs alongside dividends and capital spending.