AZZ incorporated — Form 10-K summary
Reporting period: Fiscal year ended February 28, 2015 (fiscal 2015). The filing also reports the fourth quarter ended February 28, 2015; it is not a standalone fiscal 2014 Q4 report.
Business context
AZZ provides galvanizing services and engineered products and services for energy, electrical, industrial, and infrastructure markets. Its two segments are Energy and Galvanizing Services. Fiscal 2015 included a full year of Aquilex SRO results, acquired in March 2013, and the June 2014 acquisition of Zalk Steel.
Financial performance and liquidity
- Revenue: $816.7 million, up 8.6% from $751.7 million. Energy revenue rose 10.1% to $458.3 million; Galvanizing Services rose 6.8% to $358.3 million.
- Profit: Net income was $64.9 million, up 9.0%; diluted EPS was $2.52, up from $2.32. Gross profit was essentially flat at $205.7 million, so gross margin declined to about 25.2% from 27.4%. Net margin was about 8.0%, versus 7.9%.
- Operating results: Consolidated operating income increased to $106.8 million from $100.1 million. Energy operating income fell 13.1% to $38.7 million and margin declined to 8.4% from 10.7%, reflecting realignment charges and project cost overruns. Galvanizing operating income edged up to $88.6 million, but margin declined to 24.7% from 26.2%, partly due to higher zinc costs.
- Cash flow: Operating cash flow was $118.2 million, up from $107.3 million. Investing activities used $39.6 million; financing activities used $82.4 million. Capital expenditures were $29.4 million. Cash at year-end was $22.5 million, versus $27.6 million.
- Debt and liquidity: Total debt decreased to $337.8 million from $405.6 million; debt-to-equity fell to 0.80 from 1.08. Working capital was $149.5 million, compared with $152.2 million. Approximately $122.0 million remained available under the revolving credit facility after outstanding borrowings and letters of credit. AZZ reported compliance with its debt covenants.
- Other metrics: Year-end Energy backlog was $332.6 million, up 2.3%; book-to-ship remained 1.01. Dividends paid totaled $14.9 million, or $0.58 per share declared for the year.
Changes and notable items
- Revenue growth reflected organic growth in legacy Energy businesses, a full year of Aquilex SRO, Zalk Steel, and a full year of operations at the Joliet galvanizing plant after its prior fire-related closure.
- Lower interest expense and a lower effective tax rate (27.9% versus 36.5%) supported earnings. The filing attributes tax-rate reductions partly to research credits and releases of prior-year valuation allowances.
- Corporate expenses included a $9.1 million reversal of the NLI contingent acquisition liability; fiscal 2014 included $5.4 million of Aquilex acquisition costs. Fiscal 2015 also included approximately $4.0 million of realignment costs, including severance and fixed-asset write-offs.
- AZZ recorded $2.5 million of net gains related to property disposals and insurance proceeds, compared with $8.0 million in fiscal 2014. Facility fires and related cleanup also affected results.
- Fourth-quarter net sales were $182.3 million and net income was $16.3 million, compared with $181.0 million and $10.2 million, respectively, in the prior-year quarter.
Outlook, risks, and contingencies
The filing provides no specific numerical earnings or revenue guidance. Management stated that cash, operating cash flow, and expected access to credit were sufficient for foreseeable needs and expected to continue paying quarterly dividends, subject to Board discretion and lender restrictions.
Key risks include economic weakness and customer project delays; competitive pricing; raw-material and energy-cost volatility, especially zinc and natural gas; fixed-price project overruns and percentage-of-completion estimates; backlog cancellations; integration of acquisitions; foreign currency and geopolitical exposure; regulation affecting energy and nuclear markets; skilled-labor availability; cyber and operational-system disruptions; and debt covenants. Routine legal matters were not expected by management to have a material financial effect. AZZ had $13.0 million of letters of credit and a $2.3 million warranty reserve outstanding. No goodwill or other asset impairment was identified; the auditor and management reported effective internal controls, although Zalk Steel was excluded from the internal-control assessment due to the timing of its acquisition.
Important facts for investors to verify
- How much of Energy revenue and backlog growth reflects sustainable organic demand versus acquired businesses, and whether project margins recover after the reported overruns.
- Whether Galvanizing margins stabilize as zinc, natural gas, and other costs change, and whether cost increases can be passed through to customers.
- The sustainability of the lower effective tax rate and the effect of any future valuation-allowance changes or repatriation of foreign earnings.
- Debt maturities, covenant headroom, revolving-credit availability, and the capacity to fund dividends, capital spending, and acquisitions.
- Potential additional costs or operational disruption from facility fires, realignment, warranties, and fixed-price contracts.