AZZ Inc. — Q1 Fiscal 2022 10-Q Summary
Reporting period: Three months ended May 31, 2021, compared with the three months ended May 31, 2020. AZZ provides metal-coating, electrical equipment and infrastructure services through its Metal Coatings and Infrastructure Solutions segments. Amounts below are in U.S. dollars.
Financial performance and liquidity
- Sales: $229.8 million, up 7.8% from $213.3 million. Gross margin was $57.9 million (25.2% of sales), compared with $42.2 million (19.8%).
- Operating income: $30.7 million (13.4% margin), versus $14.3 million (6.7%). Net income: $22.3 million, versus $5.5 million. Diluted EPS was $0.88, versus $0.21. The declared quarterly dividend was $0.17 per share in both periods.
- Segment operating income: Metal Coatings earned $31.6 million, up 25.9%; Infrastructure Solutions earned $9.6 million, versus a $1.0 million loss. Corporate expense was $10.5 million, versus $9.7 million.
- Cash flow: Operating activities provided $11.1 million, compared with $11.2 million used in the prior-year quarter. Investing used $7.5 million, including $7.5 million in capital expenditures. Financing used $5.6 million. Cash declined $2.4 million to $12.4 million.
- Liquidity and debt: Working capital was $203.7 million at May 31, versus $189.6 million at February 28. Gross debt was $186.0 million ($185.4 million net), comprising $36.0 million drawn on the revolver and $150.0 million of senior notes. AZZ reported approximately $404 million of additional credit availability and compliance with debt covenants.
- Total assets were $1.04 billion and shareholders’ equity was $637.4 million at May 31. The quarter included $6.3 million of share repurchases (125,770 shares) and $4.2 million in dividends paid.
Changes versus the prior-year quarter
- Sales rose in both segments. Metal Coatings growth reflected improved pricing, a recent facility acquisition and stronger surface-technology performance; processed steel volume was steady. Infrastructure Solutions improved mainly with the Industrial platform’s spring turnaround season, while Electrical sales in China declined as projects neared completion.
- Management attributed the sharp operating-income improvement to higher sales, lower zinc costs and operational efficiencies in Metal Coatings, and higher sales and cost controls in Infrastructure Solutions.
- Other income was $1.0 million versus other expense of $1.5 million, primarily due to favorable foreign-exchange adjustments. Interest expense fell to $1.7 million from $2.6 million, reflecting lower-rate replacement notes. The effective tax rate declined to 25.5% from 45.8%; management said prior-year book income was more affected by discrete tax items.
- Infrastructure Solutions backlog was $186.1 million, flat from February 28, but down 9.4% year over year. Quarterly net bookings increased 31.4% year over year and the book-to-sales ratio improved to 1.00 from 0.82.
Outlook, risks and unusual items
- No numerical earnings or revenue guidance is provided. Management said it expects cash, operating cash flow and credit availability to meet foreseeable cash needs.
- AZZ continued a strategic review and plan to divest non-core businesses to become a more focused metal-coatings company. Disposal-group assets were recorded at $5.6 million after a $3.5 million impairment. The businesses were not significant enough to be classified as discontinued operations.
- COVID-19 did not materially adversely affect results in the quarter, but management cited uncertainty around customer-site access, demand, supply chains and possible future effects. It also identified risks from raw-material and energy costs, vendor delays, customer deferrals, currency movements, market conditions and financing availability.
- On July 8, 2021, after quarter-end, AZZ refinanced its revolver with a five-year unsecured facility of up to $400 million, maturing in July 2026, plus a $200 million uncommitted accordion. The agreement includes leverage and interest-coverage covenants.
- Routine lawsuits include employment, intellectual-property, workers’ compensation, environmental and commercial matters. Management does not expect them to have a material effect, while acknowledging outcomes cannot be predicted with certainty. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Whether backlog bookings convert to recognized sales, particularly given the year-over-year backlog decline and large international project timing.
- Whether margin gains persist as zinc and other input costs, pricing, volumes and supply-chain conditions change.
- Progress, timing and proceeds from the planned divestitures, and any further impairment or transaction effects.
- Terms and covenant headroom under the July 2021 credit agreement, including how AZZ uses its borrowing capacity.
- Future COVID-19 effects on customer access, orders and operations; the filing says their duration and severity cannot be reasonably estimated.