AZZ Inc. — Form 10-K Summary
Business and period: Annual report for the fiscal year ended February 28, 2017 (FY2017); the filing also reports the quarter ended February 28, 2017. AZZ provides electrical and engineered services through its Energy segment and hot-dip galvanizing through its Galvanizing segment.
Financial performance
| Metric | FY2017 | FY2016 |
|---|---|---|
| Revenue | $858.9 million | $903.2 million |
| Gross profit / margin | $204.8 million / 23.8% | $230.1 million / 25.5% |
| Operating income / margin | $98.4 million / 11.4% | $122.3 million / 13.5% |
| Net income / net margin | $60.9 million / 7.1% | $76.8 million / 8.5% |
| Diluted EPS | $2.33 | $2.96 |
| Operating cash flow | $111.2 million | $143.6 million |
| Capital expenditures | $41.4 million | $39.9 million |
| Total debt at year-end | $272.3 million | $327.0 million |
| Cash at year-end | $11.3 million | $40.2 million |
| Working capital | $154.7 million | $160.9 million |
Revenue declined 4.9%. Energy sales fell 3.5% to $483.4 million, and segment operating income declined 11.0% to $52.0 million; management cited fewer U.S. refinery turnarounds, petrochemical softness, delayed large projects, and lower-margin project mix. Galvanizing sales fell 6.7% to $375.5 million and operating income fell 16.6% to $79.0 million, reflecting lower processed volume and a $7.3 million plant and asset realignment charge. Segment operating margins were 10.8% for Energy and 21.0% for Galvanizing, versus 11.7% and 23.6%, respectively, in FY2016.
FY2017 net cash used in investing was $63.3 million, including $22.7 million for acquisitions and $41.4 million for property and equipment. Financing activities used $76.6 million, including net debt repayments, $5.3 million of share repurchases, and $16.6 million of dividends. The company reported approximately $132.4 million of additional availability under its existing credit agreement at year-end, after outstanding borrowings and letters of credit. It was in compliance with debt covenants.
Fourth-quarter FY2017 revenue was $193.8 million, gross profit $45.7 million, net income $11.6 million, and diluted EPS $0.44. The comparable FY2016 quarter reported revenue of $217.6 million, gross profit of $54.9 million, net income of $16.1 million, and diluted EPS of $0.62.
Changes, outlook, and risks
- Energy backlog at year-end was $346.4 million, up from $334.5 million; the book-to-ship ratio was 1.00 in both years. Backlog relates only to Energy and may be reduced by cancellations or project delays.
- AZZ acquired Power Electronics, Inc. on March 1, 2016. The acquisition contributed to Energy results; PEI represented 4.0% of FY2017 revenue and 8.3% of net income. Management and the auditor excluded PEI from their internal-control assessments due to acquisition timing.
- On March 21, 2017, after year-end, AZZ entered a new revolving credit agreement providing up to $450 million, with a $150 million accordion, and extending maturity to March 2022.
- On March 29, 2017, Westinghouse Electric Company and relevant subsidiaries filed for Chapter 11 bankruptcy. AZZ estimated $7.2 million of pre-petition exposure. Recovery, contract treatment, and possible project cancellations were uncertain; management said it could not yet estimate the potential effects, but did not expect contract rejection to materially affect cash flow or operations.
- No specific earnings or revenue guidance is provided. Management said cash, operating cash flow, and expected access to credit were sufficient for foreseeable needs and expected to continue quarterly dividends, subject to board discretion and lender covenants.
- Key risks include economic and customer-demand weakness, volatile zinc, natural gas and other material costs, fixed-price project estimation and execution, acquisition integration, regulatory changes, and covenant or liquidity constraints. The company recorded $8.0 million of FY2017 realignment charges; goodwill impairment testing found no impairment.
- Routine lawsuits were disclosed; management did not expect them to have a material financial effect. The company had $23.1 million of outstanding letters of credit and a $2.1 million warranty reserve.
Investor verification points
- Assess whether demand and margins recover in both segments, especially refinery turnaround activity and Galvanizing volumes.
- Review backlog conversion, project timing, cancellations, and the potential impact of Westinghouse’s bankruptcy on the $7.2 million exposure and related contracts.
- Verify the new credit facility’s covenants, borrowing availability, upcoming debt maturities, and capacity to sustain dividends and investment.
- Track working-capital demands, particularly inventory growth, and the decline in operating cash flow and cash balances.
- Confirm the ongoing integration and control environment for PEI, which was excluded from internal-control assessments.