AZZ Incorporated — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended November 30, 2011; fiscal year ends in February. Results are unaudited. AZZ operates Electrical and Industrial Products and Galvanizing Services segments.
Financial results
| Metric | Three months ended Nov. 30, 2011 | Year-over-year | Nine months ended Nov. 30, 2011 | Year-over-year |
|---|---|---|---|---|
| Revenue | $116.5 million | +13% | $345.5 million | +23% |
| Net income | $10.0 million | +3% | $29.1 million | +13% |
| Diluted EPS | $0.79 | vs. $0.77 | $2.30 | vs. $2.04 |
| Gross margin | Approximately 26.4% | vs. 26.9% | Approximately 26.7% | vs. 28.7% |
Segment performance: Third-quarter revenue was $43.8 million in Electrical and Industrial Products (+7%) and $72.6 million in Galvanizing Services (+17%). Segment operating income was $5.7 million and $18.6 million, respectively. Electrical and Industrial Products operating margin was 13%, down from 15%; management cited competitive pricing. Galvanizing Services margin was 26%, compared with 25%, with efficiency and utilization gains partly offset by higher zinc costs. For the nine months, segment operating income was $18.2 million for Electrical and Industrial Products (down 10%) and $54.4 million for Galvanizing Services (up 29%).
Cash flow and investment: Nine-month operating cash flow was $46.8 million, up from $25.5 million. Capital expenditures were $16.3 million and dividends paid were $9.4 million. Cash increased $21.7 million during the period to $160.1 million. Working-capital movements included cash uses from receivables ($3.7 million), inventory ($5.3 million) and prepaid expenses ($1.2 million).
Liquidity and debt: At November 30, cash was $160.1 million and current assets were $313.0 million against current liabilities of $74.9 million; reported current ratio was 4.18. Total long-term debt was $225.0 million, including $14.3 million due within one year; debt-to-equity was 0.76, versus 0.40 a year earlier. Interest expense for the nine months rose to $10.5 million from $5.2 million, primarily reflecting the $125 million of 5.42% notes issued in January 2011. The $80 million revolver had no borrowings; $14.9 million of letters of credit left approximately $65.1 million available. AZZ reported compliance with all debt covenants.
Material changes and outlook
- Electrical and Industrial Products orders increased 28% in the quarter and 36% over nine months versus the prior-year periods. Backlog reached $132.1 million, up 22% from February 28, 2011; quarterly book-to-ship was 1.08, the fourth consecutive quarter above 1.0. Management reported stronger orders across served markets, particularly power generation.
- Galvanizing Services growth included contributions from the NGA acquisition: $21.2 million of segment revenue and $4.6 million of segment operating income in the quarter. The filing attributes much of the year-to-date segment growth to NGA, as well as higher processed volume.
- Management said working capital, operating cash generation and available credit should be sufficient for anticipated operations, capital improvements, debt payments, possible dividends and acquisitions through the end of fiscal 2012. The filing provides no specific revenue or earnings guidance.
- AZZ entered an agreement in October 2011 that permits issuance of up to $100 million of additional senior notes, at rates to be agreed at issuance; the filing does not report an issuance under that agreement.
Risks, contingencies and other disclosures
- Key exposures include customer demand and economic conditions, competitive pricing, and copper, aluminum, steel, zinc and natural-gas costs. Price-escalation clauses, supplier pricing arrangements and zinc caps provide only partial protection; cost recovery may be difficult in competitive markets.
- Management noted a valuation allowance for Canadian net operating loss carryforwards increased the effective tax rate to 38% in both the quarter and nine-month period. Changes in utilization estimates could affect future results.
- Letters of credit totaled $14.9 million, primarily for customer performance and bid-bond requirements; the warranty reserve was $2.0 million. The company reported no material off-balance-sheet arrangements other than operating leases and no material change to previously disclosed risk factors.
- Management concluded disclosure controls were effective and reported no significant change in internal control over financial reporting. The filing reported no legal proceedings.
Investor facts to verify
- Whether order growth and the $132.1 million backlog convert to shipments and sustained margins, particularly given more competitive pricing in Electrical and Industrial Products.
- How much Galvanizing Services growth and profit depend on NGA versus underlying volume, pricing and plant utilization.
- Whether increased commodity costs can be passed through to customers, and how zinc and natural-gas costs affect galvanizing margins.
- Debt repayment schedule, interest burden, covenant headroom and any future use of the $100 million private shelf facility.
- Cash conversion and working-capital trends, including the growth in receivables and work-in-process inventory.