AZZ Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended February 28, 2022 (not a standalone calendar fourth-quarter report). AZZ supplies metal-coating services and infrastructure products and services through its Metal Coatings and Infrastructure Solutions segments.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Revenue | $902.7 million | $838.9 million |
| Gross profit / margin | $225.2 million / 25.0% | $188.7 million / 22.5% |
| Operating income / margin | $113.3 million / 12.6% | $61.6 million / 7.3% |
| Net income / margin | $84.0 million / 9.3% | $39.6 million / 4.7% |
| Diluted EPS | $3.35 | $1.52 |
| Operating cash flow | $86.0 million | $92.0 million |
- Revenue rose 7.6%. Metal Coatings revenue increased 13.4% to $519.0 million; Infrastructure Solutions revenue edged up 0.7% to $383.7 million.
- Metal Coatings operating income grew 32.7% to $127.3 million, with a 24.5% margin versus 21.0%. Infrastructure Solutions operating income rose to $35.5 million from $6.5 million, with a 9.3% margin versus 1.7%.
- Operating cash flow declined to $86.0 million, mainly reflecting working-capital outflows, including higher receivables and inventories. Investing cash outflow was $86.8 million, including $61.2 million for acquisitions; capital expenditures were $28.4 million. Approximate operating cash flow less capital expenditures was $57.6 million.
- Year-end cash was $15.1 million. Gross debt was $227.0 million, up from $179.0 million: $77.0 million drawn on the revolver and $150.0 million in senior notes. The company reported approximately $313.3 million of additional revolver availability and compliance with debt covenants.
- Current assets were $386.5 million and current liabilities $150.5 million. Dividends paid totaled $16.9 million; share repurchases totaled $30.8 million for 602,000 shares.
Changes, outlook and key risks
- Infrastructure Solutions backlog increased 63.6% to $304.5 million; net bookings were $1.02 billion and the book-to-sales ratio was 1.13, compared with 0.94 in FY2021. The filing attributes the backlog increase mainly to strong Electrical-platform orders.
- FY2022 included a $1.8 million reversal of previously recorded impairment charges after AZZ changed its sale plan for an Infrastructure Solutions business. FY2021 included $20.0 million of restructuring and impairment charges. These items affect comparisons. Management also presents non-GAAP adjusted net income of $83.8 million and adjusted diluted EPS of $3.34 for FY2022.
- AZZ completed the Steel Creek galvanizing acquisition and acquired DAAM Galvanizing in the fiscal-year fourth quarter, expanding Metal Coatings. After year-end, on March 7, 2022, it announced the planned $1.3 billion acquisition of Precoat Metals, expected to close in Q1 FY2023 subject to closing conditions. Financing commitments include a $1.525 billion senior secured term loan and a $400 million revolver; AZZ expected to repay its existing senior notes. Management cautions that higher borrowing costs, increased leverage, integration execution and failure or delay to close could adversely affect results.
- No quantitative earnings guidance is provided. Management said COVID-19 did not materially adversely affect FY2022 results, but labor and supply-chain challenges intensified in the third and fourth quarters, increasing labor and materials costs.
- Principal risks include inflation in zinc, natural gas and other inputs; labor availability and cost; supply-chain delays; customers’ ability to pass through costs; cyclical and competitive markets; project-margin estimates and over-time revenue recognition; and acquisition execution. The auditor identified Infrastructure Solutions revenue recognition as a critical audit matter because contract interpretation and project cost and margin estimates require significant judgment.
- AZZ had $74.0 million of non-cancelable zinc purchase contracts expiring in FY2023. Routine legal proceedings were disclosed; management did not expect them to have a material effect. Auditors gave unqualified opinions on the financial statements and internal controls, which were reported effective.
Investor facts to verify
- Precoat transaction status, final purchase price, financing terms, resulting leverage and expected interest expense.
- Whether higher labor, materials and freight costs can be passed through without eroding margins.
- Conversion of the elevated Infrastructure Solutions backlog into revenue and cash, including cancellations, delays and estimated contract profitability.
- Working-capital trends, particularly receivables and inventory, and their effect on operating cash flow.
- Final purchase-price allocations and realized performance of the Steel Creek and DAAM acquisitions.