AZZ Incorporated — Q1 FY2014 Form 10-Q
Reporting period: Three months ended May 31, 2013. AZZ operates Electrical and Industrial Products and Services and Galvanizing Services segments. Results are unaudited and compared with the three months ended May 31, 2012 unless noted.
Financial performance
| Metric | Q1 FY2014 | Prior comparable quarter |
|---|---|---|
| Revenue | $183.2 million | $127.1 million |
| Operating income, both segments | $38.7 million; 21% margin | $29.5 million; 23% margin |
| Income before taxes | $23.4 million | $25.1 million |
| Net income | $14.5 million | $16.0 million |
| Diluted EPS | $0.57 | $0.63 |
| Operating cash flow | $39.9 million | $16.2 million |
- Revenue increased 44%, largely reflecting acquisitions. Electrical and Industrial revenue rose 116% to $96.5 million; Galvanizing revenue rose 5% to $86.7 million.
- Segment operating income increased 31%, but the combined segment margin declined to 21% from 23%. Electrical and Industrial margin was 14% versus 15%; Galvanizing margin was 30% versus 27%.
- Net income fell about 9% despite higher sales, reflecting higher interest and corporate costs, including $3.2 million in Aquilex acquisition costs. Income tax expense was $8.9 million, with a 37.8% effective rate.
- Operating cash flow improved, including a $27.9 million cash-flow benefit from lower accounts receivable. Capital spending was $11.6 million and acquisition cash outflow was $276.6 million. Cash ended the quarter at $41.6 million, down from $55.6 million at February 28, 2013.
Balance sheet, debt and liquidity
- At May 31, 2013, total assets were $982.2 million and shareholders’ equity was $346.3 million. Current assets were $317.4 million and current liabilities $149.5 million; the company reported working capital of $167.9 million and a current ratio of 2.12.
- Total debt was approximately $453.4 million, including $18.0 million due within one year; debt-to-equity was 1.31. Debt increased substantially to fund the Aquilex acquisition. Interest expense rose to $4.5 million from $3.3 million.
- A new credit agreement provides a $75 million term facility and a $225 million revolving facility, with a possible $75 million accordion. At quarter-end, $182.0 million was drawn on the revolver, $13.2 million of letters of credit was outstanding, and approximately $29.8 million of additional credit was available. AZZ reported compliance with debt covenants.
- Management said working capital, available credit and operating cash flows should be sufficient for anticipated fiscal 2014 operations, dividends, capital improvements, debt payments and possible acquisitions. The filing gives no specific earnings or revenue guidance.
Material developments, outlook and risks
- AZZ completed its $277.0 million acquisition of Aquilex Specialty Repair and Overhaul on March 29, 2013. Aquilex contributed $41.5 million in revenue and $3.3 million in operating profit for the two months included in the quarter. The acquisition added goodwill and intangible assets and increased borrowing.
- Management reported delayed customer-requested shipments and lower underlying Electrical and Industrial revenue excluding NLI and Aquilex. Galvanizing revenue excluding Canadian acquisitions declined 4.3%, with weaker renewable-energy and transmission-and-distribution demand.
- Electrical and Industrial backlog was $219.6 million at May 31, down 1% from February 28; book-to-ship was 0.99. Orders increased 45% year over year, mainly because NLI was included; excluding NLI, the increase was 3%.
- A Joliet facility fire caused a $0.8 million operating loss in the quarter. AZZ estimated $15.6 million of fiscal 2014 rebuilding capital expenditures and expected insurance reimbursement for a portion. It anticipated an additional $6 million to $12 million in insurance proceeds when claims are settled.
- A $4.2 million favorable lawsuit settlement was recorded in the quarter. The filing identifies this and the Joliet disruption as unusual items when comparing segment results.
- An NLI acquisition earn-out could require up to $20 million; its recorded net present value was $8.9 million. Key risks cited include demand and shipment timing, commodity prices, customer ability to accept price increases, foreign exchange, financing, and execution of acquisition-led growth. AZZ reported no material changes to previously disclosed risk factors and no material subsequent events.
Important facts for investors to verify
- Whether delayed shipments convert to revenue and how backlog and order trends develop, particularly excluding acquired businesses.
- Aquilex integration, operating performance and the impact of acquisition-related amortization, costs and debt service.
- Availability and timing of Joliet insurance recoveries compared with rebuilding costs and the reported settlement gain.
- Debt covenant headroom, cash needs and liquidity following the acquisition; confirm the terms and potential payout of the NLI earn-out.
- Underlying segment margins and demand trends after adjusting for acquisitions and unusual items.