AZZ Inc. — Q3 Fiscal 2021 Form 10-Q
Reporting period: Three and nine months ended November 30, 2020; fiscal year ends in February. AZZ provides metal-coating, welding, specialty electrical equipment and engineered services through Metal Coatings and Infrastructure Solutions.
Financial performance
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Sales | $226.6m | $291.1m | $643.3m | $816.5m |
| Gross margin | $54.7m (24.1%) | $67.3m (23.1%) | $143.0m (22.2%) | $186.1m (22.8%) |
| Operating income | $27.9m | $33.4m | $42.8m | $86.6m |
| Net income | $19.7m | $22.0m | $23.5m | $58.9m |
| Diluted EPS | $0.76 | $0.84 | $0.90 | $2.24 |
Q3 operating margin was 12.3% versus 11.5% a year earlier; nine-month operating margin was 6.7% versus 10.6%. Q3 sales fell 22.2% year over year, while nine-month sales fell 21.2%. Q3 Metal Coatings operating income rose 5.2% to $28.7m; Infrastructure Solutions operating income declined 49.9% to $8.7m. Year-to-date segment operating income fell 18.7% and 90.2%, respectively.
- Cash flow: Nine-month operating cash flow was $59.4m versus $72.1m. Investing used $15.0m, versus $82.8m in the prior period; financing used $64.2m, versus providing $1.2m. Cash ended at $19.2m, down $17.5m from fiscal year-end.
- Liquidity and debt: Working capital was $201.3m, compared with $73.9m at February 29, 2020. Gross debt was $182.0m, versus $203.0m at fiscal year-end; total liabilities were $385.8m. The company reported $383.2m of additional credit availability and compliance with debt covenants.
- Capital allocation: Nine-month capital expenditures were $27.9m; dividends paid were $13.3m. AZZ repurchased 852,452 shares for $31.0m at an average $36.31 per share. A new $100m repurchase authorization was approved, with no purchases under it through November 30.
Material changes and unusual items
- Infrastructure Solutions sales and backlog weakened materially. Backlog was $174.4m at November 30, down 36.5% year over year; Q3 net bookings fell 27.0% year over year and book-to-sales was 0.86.
- AZZ recorded $20.3m of nine-month restructuring and impairment charges, including asset write-downs, inventory write-downs and subsidiary-sale losses. These charges reduced reported operating income.
- The company sold Galvabar and Southern Mechanical Services and classified one additional Infrastructure Solutions business and two Metal Coatings locations as held for sale. Management intends to become a more focused metal-coatings company and said it is conducting a Board-led portfolio and capital-allocation review.
- On October 9, 2020, AZZ arranged $150m of senior unsecured notes: $70m at 2.77% for seven years and $80m at 3.17% for 12 years. The $80m tranche funded December 17 and the $70m tranche was expected to fund in January 2021. Proceeds are intended in part to repay $125m of 5.42% notes due January 20, 2021.
- Subsequent to quarter-end, AZZ acquired the assets of Acme Galvanizing for $4.2m on January 4, 2021.
Outlook, risks and controls
The filing provides no numerical earnings or revenue guidance. Management said it expects available cash, operating cash flows and credit facilities to meet foreseeable cash needs, but could not estimate the duration or full financial effect of COVID-19. COVID-related customer-site access limits, slower electrical orders, operating-safety costs, customer delays, and possible supply-chain and demand disruption remain risks. Management identified Infrastructure Solutions as likely to be more significantly affected than Metal Coatings. Other cited exposures include commodity costs, notably zinc and natural gas, and market conditions in industrial, oil-and-gas, power-generation and transmission markets.
Disclosure controls were deemed ineffective at quarter-end because of a previously identified material weakness in income-tax accounting controls. Management described remediation measures and expected to continue testing, with the aim of concluding the weakness no longer existed in the FY2021 annual report if testing results supported that conclusion. Routine legal matters were not expected by management to have a material effect.
Key investor verification points
- Track Infrastructure Solutions orders, backlog, margins and any further customer or project delays.
- Assess whether lower sales and COVID-19 disruption continue to pressure cash generation and asset values.
- Verify completion and use of the new note financing and repayment of the January 2021 maturity.
- Monitor costs and execution of divestitures, closures, held-for-sale assets and the strategic portfolio review.
- Check progress on tax-control remediation and whether management later concluded the material weakness was resolved.
- Review future repurchases against liquidity needs and the $100m authorization.