AZZ Inc. — Q3 FY2024 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2023. Fiscal 2024 ends February 29, 2024. AZZ provides metal finishing and coil-coating services, principally in North America. Amounts below are in U.S. dollars; financial statement amounts have been converted from thousands to millions unless noted.
Financial performance and liquidity
| Metric | Q3 FY2024 | Q3 FY2023 | Nine months FY2024 | Nine months FY2023 |
|---|---|---|---|---|
| Sales | $381.6m | $373.3m | $1,171.0m | $987.1m |
| Gross margin | $88.1m (23.1%) | $73.1m (19.6%) | $282.4m (24.1%) | $234.7m (23.8%) |
| Operating income | $52.8m (13.8%) | $45.4m (12.2%) | $179.3m (15.3%) | $137.4m (13.9%) |
| Continuing-operations net income | $26.9m | $18.4m | $83.7m | $58.9m |
| Diluted continuing-operations EPS | $0.92 | $0.59 | $2.86 | $2.17 |
| Interest expense | $25.9m | $26.1m | $82.3m | $61.7m |
| Adjusted EBITDA from continuing operations (non-GAAP) | $86.4m | $68.9m | $259.8m | $210.2m |
Q3 net income available to common shareholders was $23.3m, or $0.93 basic and $0.92 diluted per share, after $3.6m of preferred dividends. Common dividends declared were $0.17 per share in the quarter. Nine-month net income available to common shareholders was $72.9m after $10.8m of preferred dividends.
Cash flow: Nine-month continuing-operations operating cash flow was $180.9m, versus $68.6m a year earlier. Capital expenditures were $66.9m, yielding approximately $114.0m of operating cash flow less capex (a derived, non-GAAP measure). Cash increased to $7.5m from $2.8m at February 28, 2023. Reported working capital was $192.7m.
Debt and liquidity: At November 30, gross debt was $1,040.3m and debt net of issuance costs was $980.0m, compared with gross debt of $1,125.3m at February 28. The revolver balance was $10.0m; the Term Loan B balance was $1,030.3m. AZZ reported $375.5m of additional credit availability, including capacity for letters of credit, and $14.5m of outstanding letters of credit. The weighted-average debt interest rate was 8.54%. The company reported covenant compliance; the required maximum total net leverage ratio at quarter-end was 5.0, but the actual ratio is not stated in the supplied filing text.
Material changes versus the prior comparable period
- Q3 sales increased 2.2%; operating income rose 16.4%. Metal Coatings sales grew 3.1% and operating income 12.8%; Precoat Metals sales grew 1.6% and operating income 55.6%. Management cited higher selling prices, lower zinc and overhead costs, improved Precoat efficiencies and lower freight costs. Lower processed steel and coated-coil volumes partly offset sales gains.
- Nine-month sales rose 18.6%, but the comparison is affected by Precoat Metals’ acquisition on May 13, 2022: FY2024 includes a full nine months, while the prior-year period includes Precoat only from the acquisition date. Management attributed $178.4m of the segment’s $169.6m year-over-year sales increase to the longer inclusion period, partly offset by lower volume.
- Nine-month operating income rose 30.5%. Precoat operating income increased 71.2%, also benefiting from the additional period included in the comparison; Metal Coatings operating income increased 3.7%.
- The former AIS business was contributed to the AVAIL joint venture and a 60% interest sold in September 2022. AZZ now accounts for its retained 40% interest using the equity method. Prior-year AIS results and a substantial disposal loss were reported as discontinued operations, so prior-year total net loss is not directly comparable with current continuing-operations earnings.
- Interest expense increased $20.6m for the nine-month period, primarily because acquisition-related debt was outstanding for the full current period and borrowing rates were higher. Equity-method earnings from AVAIL rose to $11.1m for the nine months.
Outlook, commentary, risks and unusual items
- The filing provides no specific revenue, earnings or margin guidance. Management stated that cash, operating cash flows and expected access to credit facilities should meet cash needs for the foreseeable future.
- AZZ is building a 25-acre aluminum coil-coating facility in Washington, Missouri, expected to be operational in 2025. Estimated project payments are approximately $125.8m over two years; commitments were $48.4m at quarter-end. Approximately $71.2m was expected to be paid in FY2024, including $33.6m already paid during the nine-month period. About 75% of planned output is supported by a take-or-pay contract.
- On December 20, 2023, after quarter-end, AZZ repriced its $400m revolving facility from SOFR plus 4.25% and a 0.10% credit spread adjustment to a tiered margin of SOFR plus 2.75%–3.50%, depending on net leverage, with no spread adjustment. The Term Loan B had been repriced in August to SOFR plus 3.75%.
- Interest-rate exposure remains important: debt is floating-rate in part, and the swap fixed the rate on approximately half of variable-rate debt at a total fixed rate of 8.027% after the Term Loan repricing. The swap’s notional was $543.1m and matures September 2025.
- Legal items include a $5.75m confidential settlement payment due around January 15, 2024, accrued in FY2024, and a $4.5m jury verdict against AZZ Beaumont, accrued as the company intends to pursue appeals. The filing says the verdict estimate could change as the judgment and appeal process proceed. AZZ also disclosed a $5.2m net receivable from a former AIS customer involved in litigation; ultimate collectability is uncertain.
- Environmental remediation reserves were $22.0m, including $3.2m current, principally relating to liabilities assumed in the Precoat acquisition. Management said revisions could materially affect a quarter or year, but does not expect additional remediation costs to materially harm overall financial position, results or cash flows.
- Management identified risks including changes in construction and industrial demand, labor and raw-material costs (including zinc, natural gas, steel and aluminum), supply-chain delays, inflation and economic volatility, and variable interest rates. No material change to previously disclosed risk factors was reported. Management concluded disclosure controls were effective and reported no significant changes in internal control over financial reporting.
Non-GAAP note: Adjusted net income, adjusted EPS and adjusted EBITDA exclude specified items such as intangible amortization and certain acquisition costs or legal settlements. Review the filing’s reconciliations alongside GAAP results; these measures may not be comparable across companies.
Most important facts for investors to verify
- How much of Precoat’s sales and margin performance reflects underlying volume, pricing and efficiency versus the different acquisition-period comparison.
- Actual net leverage and covenant headroom, future interest expense, and the extent to which the revolver repricing and interest-rate swap reduce borrowing costs and rate exposure.
- Cash generation and funding needs for the Washington facility, including remaining FY2024 spending, commitments and take-or-pay contract terms.
- Developments in the Beaumont verdict and appeal, settlement payment, retained AIS litigation and $5.2m receivable collection.
- Performance of the AVAIL JV and the sustainability of equity-method earnings, which are recorded on a one-month lag.
- The impact of the 6% Series A preferred stock: $240m stated amount, $10.8m nine-month dividends and potential conversion into approximately 4.1m common shares.