AZZ Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 29, 2020 (FY2020). AZZ provides metal-coating services and specialized electrical, industrial and welding products and services through its Metal Coatings and Energy segments. The filing also reports fourth-quarter FY2020 results; this is not a fiscal-year-2019 filing.
Financial performance
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $1,061.8 million | $927.1 million |
| Gross profit | $237.2 million | $198.6 million |
| Operating income | $79.3 million | $77.0 million |
| Net income | $48.2 million | $51.2 million |
| Diluted EPS | $1.84 | $1.96 |
| Cash from operating activities | $144.8 million | $111.5 million |
| Capital expenditures | $35.0 million | $25.6 million |
| Cash and cash equivalents at year-end | $36.7 million | $24.0 million |
| Total debt at year-end | $203.0 million | $241.0 million |
- Sales grew 14.5%; net income declined 5.8%, and net margin fell to 4.5% from 5.5%. Gross margin was approximately 22.3%, versus 21.4% in FY2019.
- Metal Coatings sales rose 13.3% to $499.0 million; operating income increased 29.1% to $107.9 million, and segment operating margin improved to 21.6% from 19.0%.
- Energy sales rose 15.6% to $562.8 million; operating income increased to $32.8 million from $31.3 million, but segment margin declined to 5.8% from 6.4%. A $9.2 million impairment related to exiting nuclear-certified industrial welding affected the segment.
- Operating cash flow increased, aided by non-cash charges and working-capital improvements, including lower inventory. Investing used $71.7 million, including acquisitions and capital spending, partly offset by divestiture proceeds.
- Working capital was $73.9 million, down from $213.8 million; $125 million of senior notes due January 2021 was classified as current. Total liabilities were $439.5 million and shareholders’ equity was $634.4 million.
Material changes and unusual items
- FY2020 sales growth reflected acquisitions and higher volumes and pricing in Metal Coatings, plus increased electrical and industrial project revenue in Energy.
- AZZ acquired K2 Partners and Tennessee Galvanizing in April 2019, NuZinc in August, and Preferred Industries in September. These acquisitions added $27.9 million of sales and $2.6 million of net income from acquisition dates through year-end; aggregate purchase price was $60.6 million.
- In February 2020, AZZ sold its nuclear logistics business for net cash proceeds of $23.6 million and recorded an $18.6 million loss. The business was not classified as discontinued operations.
- FY2020 included a one-time $1.9 million tax expense related to a correction in tax accounting for the nuclear logistics business acquisition. The effective tax rate was 25.7%, up from 18.7%.
- Energy backlog ended at $243.8 million, down 26.8% from $332.9 million. Book-to-revenue declined to 0.92 from 1.07, chiefly as large prior-year China orders were completed.
- Quarterly FY2020 sales were $245.4 million in the fourth quarter; AZZ reported a fourth-quarter net loss of $10.6 million, or $0.41 per diluted share, including the disposal loss and impairment charge.
Liquidity, debt and capital allocation
- AZZ reported $78.0 million drawn on its revolving credit facility and approximately $357.6 million of additional availability after facility borrowings and specified letters of credit. The facility matures in March 2022; its effective interest rate was 4.06% at year-end.
- The $125.0 million 5.42% senior notes mature in January 2021. Management said it intended to repay them using available revolver capacity, cash and operating cash flow. AZZ reported compliance with debt covenants at year-end.
- Cash dividends were $17.8 million for the year, or $0.68 per share. AZZ repurchased 130,800 shares for $5.8 million during FY2020.
- Management stated that cash, operating cash flow and expected access to credit were sufficient for foreseeable needs.
Outlook, risks and controls
- Management gave no quantified FY2021 guidance. It warned that COVID-19 could affect demand, collections, suppliers and operations; as of the filing date, facilities remained open and customer deferrals had occurred, with few cancellations. The duration and financial impact were not reasonably estimable.
- Key exposures include economic and pandemic-related disruption, customer project delays, Energy fixed-price contract estimates and backlog cancellations, labor availability, zinc and natural-gas volatility, other raw-material costs, foreign exchange, interest rates and debt covenant requirements.
- The independent auditor gave an unqualified opinion on the financial statements but an adverse opinion on internal control over financial reporting. A material weakness in income-tax accounting remained unremediated as of February 29, 2020; management said remediation was underway. The prior-year revenue-reconciliation weakness was reported as remediated.
- The filing describes routine litigation and contingencies; management did not expect them to have a material effect. Non-cancelable zinc purchase commitments were $43.2 million, and letters of credit totaled $30.5 million.
Key investor verification points
- Assess the scope, remediation progress and potential reporting implications of the income-tax control weakness, including the recorded $2.5 million of unrecognized tax benefits.
- Review the January 2021 senior-note repayment or refinancing plan, revolver availability, covenant headroom and liquidity needs.
- Monitor COVID-19-related order deferrals, collections, supply-chain conditions and any changes to FY2021 outlook.
- Track Energy backlog replenishment, margins and estimates on over-time fixed-price contracts, including possible cost overruns or cancellations.
- Evaluate acquisition integration and returns, and the strategic and financial effects of the nuclear logistics divestiture and welding-business exit.