AZZ Incorporated — Form 10-Q Summary
Business context and period: AZZ provides galvanizing services, welding solutions, specialty electrical equipment and engineered services through its Energy and Galvanizing Services segments. This report covers the three months ended May 31, 2015, the first quarter of fiscal 2016, with comparisons to the three months ended May 31, 2014. Amounts below are in U.S. dollars.
Financial and operating performance
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Net sales | $228.9 million | $216.1 million | +5.9% |
| Gross profit | $59.3 million | $55.4 million | +7.1% |
| Gross margin | 25.9% | 25.6% | +0.3 percentage points |
| Operating income | $32.9 million | $27.8 million | +18.1% |
| Operating margin | 14.4% | 12.9% | +1.5 percentage points |
| Net income | $19.9 million | $14.9 million | +33.5% |
| Diluted EPS | $0.77 | $0.58 | +$0.19 |
| Operating cash flow | $4.7 million | $12.1 million | Down $7.4 million |
Net sales increased in both segments: Energy rose 5.0% to $137.0 million and Galvanizing Services rose 7.3% to $91.9 million. Energy operating income grew 31.5% to $18.0 million; Galvanizing Services operating income was nearly flat at $22.1 million, up 0.4%. Corporate expense declined 8.4% to $7.2 million.
Cash used in investing activities was $6.2 million, including $6.5 million of capital expenditures. Financing activities provided $25.2 million, reflecting $59.5 million of revolving-credit borrowings, partly offset by $14.1 million of revolver repayments, $16.2 million of long-term debt payments and $3.9 million of dividends. Cash increased $23.2 million to $45.8 million. Cash flow from operations was pressured by working-capital movements, particularly a $20.5 million net use associated with billings and contract costs. Operating cash flow less capital expenditures was negative $1.7 million.
At May 31, 2015, total debt was $367.1 million, compared with $400.4 million at May 31, 2014; debt-to-equity was 0.84 versus 1.02. Debt comprised $22.3 million due within one year and $344.8 million due thereafter. AZZ reported $74.8 million of additional credit availability under its agreement after accounting for $135.0 million drawn on the revolver and $15.2 million in letters of credit. The company stated it was in compliance with all debt covenants. Current assets were $357.9 million and current liabilities were $161.6 million; working capital was $196.3 million, versus $171.9 million a year earlier.
Changes, outlook and risks
- Management attributed Energy growth and improved profitability to stronger welding-solutions demand, more refining field projects, higher volume, better gross margins and lower relative SG&A. Nuclear service revenue was slightly lower because of customer approval-related shipment delays.
- Galvanizing revenue benefited from higher volumes, especially in the central U.S., and the prior-year Zalk Steel acquisition. Higher zinc costs partly offset segment gains. Excluding business-interruption proceeds, segment operating income increased 10.7%; the comparable quarters included $0.3 million and $2.3 million of such proceeds, respectively.
- Backlog, which relates entirely to Energy, was $318.9 million at May 31, down 4.1% from February 28 but up 3.2% year over year. The quarter’s book-to-ship ratio was 0.94, and incoming orders increased 7.5% year over year.
- No specific earnings or revenue guidance was provided. Management said cash, operating cash flow and expected access to credit should be sufficient for foreseeable needs. Forward-looking results remain subject to demand, shipment timing, commodity costs, currency movements, economic conditions and financing availability.
- AZZ completed the acquisition of substantially all assets of US Galvanizing on June 5, 2015, after quarter-end. The acquired operations include six galvanizing facilities and Texas Welded Wire; AZZ also entered a long-term supply and service agreement with Meyer Steel Structures. The filing does not provide a clear purchase price.
- Other notable items include a $0.4 million net gain from insurance proceeds and a property sale, and $0.3 million of foreign-exchange losses. The prior fiscal-year realignment was estimated to cost $4.0 million; $0.4 million remained accrued at May 31. Management said routine legal matters were not expected to have a material effect. No material risk-factor changes were reported.
Important facts for investors to verify
- Review the acquisition’s final consideration, financing, integration costs and expected contribution, which are not quantified in this filing.
- Track conversion of Energy backlog into orders, shipments and cash, given the quarter-over-quarter backlog decline and lower operating cash flow.
- Assess whether segment margins can be sustained as zinc and other commodity costs change and customer shipment approvals affect timing.
- Monitor debt, revolving-credit availability, covenant headroom and upcoming principal obligations.
- Distinguish recurring operating performance from insurance proceeds, property-sale gains and other unusual items.