AZZ Inc. — Form 10-Q Summary
Business and period: AZZ provides metal-coating, welding, specialty electrical equipment and engineered services through its Energy and Metal Coatings segments. This report covers the quarter and six months ended August 31, 2019 (fiscal 2020); comparisons are with the corresponding fiscal 2019 periods.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $236.2 million, up 6.0% | $525.3 million, up 8.3% |
| Gross margin | $52.7 million; 22.3% of sales, versus 21.1% | $118.8 million; 22.6%, versus 21.8% |
| Operating income | $22.2 million, versus $17.1 million | $53.2 million, versus $40.8 million |
| Net income | $15.6 million, versus $11.2 million | $36.8 million, versus $27.0 million |
| Diluted EPS | $0.59, versus $0.43 | $1.40, versus $1.03 |
| Operating cash flow | $38.2 million for six months, versus $16.7 million |
Quarterly operating margin was 9.4%, compared with 7.7%; six-month operating margin was 10.1%, compared with 8.4%. Six-month dividends declared were $0.34 per share, unchanged year over year.
Segments and material changes
- Energy: Sales rose 4.5% for the quarter and 9.8% for six months. Segment operating income was nearly flat in the quarter at $4.2 million, but increased 18.1% for six months to $16.8 million. Management cited electrical-product sales and large international projects; industrial solutions were weaker.
- Metal Coatings: Sales rose 7.4% for the quarter and 6.7% for six months. Operating income increased 29.9% and 22.9%, respectively, to $28.7 million and $58.1 million. Management cited higher selling prices and volumes, lower zinc costs, acquisitions, and the absence of prior-year facility-consolidation charges.
- Energy backlog was $301.9 million at August 31, down 9.3% from February 28 and 10.1% from a year earlier. Quarterly incoming net orders declined 6.3% year over year; the book-to-revenue ratio was 1.01, down from 1.14. Management attributed weaker bookings primarily to lower international project activity.
- Acquisitions completed in the period cost approximately $39.9 million net of cash acquired and expanded Metal Coatings. AZZ also acquired Preferred Industries in September 2019, after quarter-end.
Cash, debt and liquidity
Cash was $13.6 million at August 31, 2019, down from $24.0 million at fiscal year-end. Gross debt was $256.0 million—$131.0 million under the revolving facility and $125.0 million of senior notes—versus $241.0 million at February 28. Working capital was $230.8 million. The company reported $301.1 million of additional credit availability and compliance with debt covenants. Management said cash, operating cash flow and expected access to credit were sufficient for foreseeable needs.
Six-month investing cash outflow was $56.1 million, including $39.9 million for acquisitions and $16.5 million of capital expenditures. Financing provided $7.2 million, primarily reflecting net revolver borrowings. No share repurchases were made during the quarter.
Outlook, risks and unusual items
- The filing provides no specific revenue or earnings guidance. Management’s outlook is subject to demand, commodity prices (including zinc and natural gas), project timing, economic conditions, currency movements, and acquisition and financing risks.
- The six-month effective tax rate was 18.0%, versus 21.0%; the quarterly rate was 13.4%, versus 19.6%. Management cited a one-time tax benefit from correcting prior-period tax accounting errors. The company recorded $3.9 million of unrecognized tax benefits and disclosed ongoing tax examinations.
- AZZ reported material weaknesses in internal controls over revenue reconciliations and income-tax accounting. Management described remediation plans; disclosure controls were deemed ineffective at period-end.
- A securities class action was filed November 4, 2019, alleging failures to disclose control and revenue-recognition issues. AZZ denies the allegations and says it intends to defend the case; the outcome cannot be predicted.
- In April 2019, AZZ settled certain Westinghouse bankruptcy claims for approximately $8.1 million. It later received final payment of remaining amounts and recorded a favorable, non-material income impact.
Important facts for investors to verify
- Whether Energy bookings and backlog stabilize, particularly for international projects.
- Whether Metal Coatings’ margin gains persist as acquisition impacts and input costs evolve.
- Progress and independent evidence of remediation of the revenue and tax control material weaknesses.
- Potential financial or disclosure effects of the tax examinations and securities litigation.
- Liquidity and debt maturities, including senior-note principal due in fiscal 2021 and revolver debt due in fiscal 2023.