AZZ Inc. — Q3 Fiscal 2013 Form 10-Q
Reporting period: Three and nine months ended November 30, 2012. Financial statements are unaudited. AZZ operates Electrical and Industrial Products and Galvanizing Services businesses.
Financial performance
| Metric | Three months ended Nov. 30 | Nine months ended Nov. 30 |
|---|---|---|
| Net sales | $149.7 million, up 29% | $430.2 million, up 25% |
| Net income | $15.4 million, versus $10.0 million | $47.2 million, versus $29.1 million |
| Diluted EPS | $0.60, versus $0.39 | $1.85, versus $1.15 |
| Net interest expense | $3.2 million, versus $3.5 million | $9.8 million, versus $10.5 million |
| Operating cash flow | $66.6 million for nine months, versus $46.8 million |
Consolidated gross margin was approximately 30.1% for the quarter and 29.3% year to date, versus 26.4% and 26.7%, respectively, in the prior-year periods. Segment operating margins were 15% in Electrical and Industrial Products and 27% in Galvanizing Services for both the quarter and nine months; prior-year margins were 13% and 26%, respectively.
Quarterly segment sales were $60.4 million in Electrical and Industrial Products and $89.3 million in Galvanizing Services. Segment operating income was $9.0 million and $24.4 million, respectively. For nine months, segment sales were $171.6 million and $258.6 million, and segment operating income was $25.1 million and $70.6 million.
Cash, debt and liquidity
- Cash was $49.5 million at November 30, down from $143.3 million at February 29, 2012. Nine-month investing cash outflow was $133.6 million, including $122.6 million for acquisitions; financing cash outflow was $26.8 million.
- Working capital was $142.6 million; the current ratio was 2.3, compared with 4.2 at November 30, 2011. Management attributed the working-capital decline primarily to the NLI and Galvcast acquisitions.
- Total debt was $210.7 million, including $14.3 million due within one year. AZZ reported no borrowings on its $125 million revolver, $16.9 million of letters of credit, and approximately $108.1 million of additional availability. The company was in compliance with debt covenants.
- Nine-month capital expenditures were $19.6 million and dividends paid were $9.9 million.
Changes, acquisitions and unusual items
- Growth reflected acquisitions as well as stronger underlying demand. NLI contributed $16.4 million of quarterly and $27.8 million of nine-month sales; excluding NLI, Electrical and Industrial Products revenue was flat for the quarter and up 5% year to date. Galvanizing Services cited improved demand from renewable energy, industrial and OEM markets.
- NLI was acquired June 1 for $77.0 million net of cash acquired, with certain liabilities assumed and $3.8 million of notes paid off at closing. A performance-based payment of up to $20 million is possible; its recorded fair value was $8.7 million. Galvcast was acquired October 1 for $45.6 million plus approximately $0.9 million of assumed liabilities. AZZ acquired G3 Galvanizing on January 2, 2013, after quarter-end.
- A fire destroyed the Joliet, Illinois galvanizing facility in April 2012. AZZ recorded an approximately $4 million pretax impairment charge and a roughly $6 million net insurance gain after receiving $10 million. The Joliet location recorded operating losses of $1.0 million for the quarter and $2.7 million for nine months; management expected business-interruption proceeds in a future quarter and anticipated another $10–15 million of insurance proceeds when claims were settled.
- Backlog, which relates entirely to Electrical and Industrial Products, was $215.8 million at November 30, up 56% from February 29 and from $132.1 million a year earlier. The quarter’s book-to-ship ratio was 1.02, versus 1.08 a year earlier; incoming orders rose 22%, with NLI contributing 18 percentage points of that increase.
Outlook, risks and other disclosures
No specific numerical earnings or revenue guidance was provided. Management stated that working capital, operating cash generation and available credit should fund anticipated operations, capital improvements, debt payments, dividends and potential acquisitions. Its stated strategy includes expansion in served markets and geographic growth in galvanizing.
Risks identified include demand and economic conditions in served markets, raw-material and energy prices (including zinc, natural gas, copper, aluminum and steel), customer shipment delays, foreign exchange, acquisition execution, financing availability and access to experienced personnel. Commodity escalation clauses and supplier pricing arrangements may not fully protect margins. Management reported no material change to the risk factors in its latest Form 10-K. Legal matters arising in the ordinary course were not expected by management to materially affect results or financial position. Disclosure controls were reported effective.
Important facts for investors to verify
- How much reported growth and backlog conversion is recurring organic demand versus acquired business, particularly NLI.
- The timing and final amount of Joliet insurance recoveries, facility rebuilding costs and the effect of interruption losses.
- NLI’s performance against earnout terms, integration progress and the impact of acquisition-related intangible amortization.
- Whether cash generation, working capital and revolver availability remain adequate as acquisition spending and debt obligations continue.
- Whether AZZ can pass through commodity-cost increases and sustain segment margins amid changing market conditions.