AZZ Inc. — Form 10-K Summary
Reporting period: Fiscal year ended February 29, 2016. Although the request identifies 2015 Q4, this filing covers fiscal 2016; it also reports the quarter ended February 29, 2016. Figures are in U.S. dollars.
Business context and reporting period
AZZ provides galvanizing, welding, specialty electrical equipment and engineered services to energy, industrial and steel-fabrication markets. It operates through Energy and Galvanizing segments. Fiscal 2016 included the acquisitions of US Galvanizing (June 2015) and Alpha Galvanizing (February 2016); the company operated 43 galvanizing plants at year-end.
Financial performance and position
| Metric | FY2016 | FY2015 |
|---|---|---|
| Revenue | $903.2 million | $816.7 million |
| Gross profit | $230.1 million | $205.7 million |
| Operating income | $122.3 million | $106.8 million |
| Net income | $76.8 million | $64.9 million |
| Diluted EPS | $2.96 | $2.52 |
| Cash from operations | $143.6 million | $118.2 million |
| Capital expenditures | $39.9 million | $29.4 million |
| Total debt at year-end | $327.0 million | $337.8 million |
- Revenue rose 10.6%; net income increased 18.2%, and diluted EPS increased 17.5%. Net margin was 8.5%, versus 8.0% in FY2015. Gross margin was approximately 25.5%, compared with 25.2%.
- Energy revenue grew 9.3% to $500.8 million; operating income rose 51.1% to $58.5 million, with segment operating margin improving to 11.7% from 8.4%.
- Galvanizing revenue increased 12.3% to $402.4 million, while segment operating income rose 7.0% to $94.8 million. Its margin narrowed to 23.6% from 24.7%, partly due to higher zinc costs. Acquisitions and stronger steel-processing volumes contributed to growth.
- Cash and cash equivalents were $40.2 million; working capital was $160.9 million. Current assets were $309.3 million and current liabilities $148.4 million. The company reported approximately $102.1 million of additional availability under its revolving credit facility after outstanding borrowings and letters of credit.
- Debt-to-equity was 0.68:1, down from 0.80:1. AZZ reported compliance with all debt covenants at year-end. Operating cash flow increased, while investing cash use rose to $99.3 million, primarily reflecting acquisitions and investment in a Reno galvanizing plant.
- Dividends paid were $15.5 million, or $0.60 per share for the year. The board retained discretion over future dividends; lender covenants cap annual dividend payments at $20 million.
Material changes, outlook and risks
- Energy results improved with higher sales, better pricing and execution. Prior-year Energy results were affected by realignment costs and project cost overruns. Galvanizing growth was acquisition-supported, but higher zinc costs pressured margins.
- Corporate expense increased to $30.9 million from $20.4 million. FY2016 included higher legal and acquisition-related costs and fourth-quarter charges to correct prior-year employee benefit-plan matching payments. FY2015 benefited from a $9.1 million reversal of a contingent NLI acquisition liability.
- Energy backlog was $334.5 million at year-end, slightly above $332.6 million a year earlier; book-to-ship was 1.00 versus 1.01. Backlog is not guaranteed revenue and may be affected by cancellations, delays or cost-estimate changes.
- Management stated that cash, operating cash flow and expected access to credit were sufficient for foreseeable needs. No quantified earnings or revenue guidance is provided. Management said it expected to continue quarterly dividends, subject to board approval.
- Key disclosed risks include economic and customer-project downturns; competition; fixed-price project cost overruns and percentage-of-completion estimates; volatile zinc, natural-gas and other raw-material costs; acquisition integration and financing; debt covenants; foreign exchange; regulatory changes; skilled-labor availability; and weather, cyber and other operational disruptions.
- Routine legal matters were not expected by management to materially affect financial condition, results or cash flows. A commercial lawsuit settled in the fourth quarter and contributed to other expense. Letters of credit totaled $21.9 million, and the warranty reserve was $2.9 million.
- Auditors and management concluded internal control over financial reporting was effective, but the assessment excluded US Galvanizing and Alpha Galvanizing because of acquisition timing. Goodwill impairment testing identified no impairment.
Most important facts to verify
- How much of revenue and profit growth came from acquired businesses versus organic growth, particularly in Galvanizing.
- Whether the improved Energy margin and near-1.0 book-to-ship ratio are sustainable, and the quality and timing of the reported backlog.
- Whether zinc and other input-cost increases can be passed through, given Galvanizing’s margin decline.
- Debt maturity and refinancing exposure, covenant headroom, and availability under the revolving facility after letters of credit.
- The amount, recurrence and resolution of the employee benefit-plan correction charges, commercial litigation costs and other unusual items.
- Integration progress and financial contribution of the recent acquisitions, and the status of internal controls at the acquired businesses.