AZZ Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2022 (AZZ fiscal 2023). The quarter’s results include Precoat Metals from its May 13, 2022 acquisition. AZZ’s Infrastructure Solutions business, except AZZ Crowley Tubing, is presented as discontinued operations for all periods.
Financial performance
| Metric | Three months ended Aug. 31, 2022 | Prior-year quarter | Six months ended Aug. 31, 2022 | Prior-year six months |
|---|---|---|---|---|
| Continuing-operations sales | $406.7 million | $131.4 million | $613.8 million | $260.7 million |
| Gross margin | $101.6 million (25.0%) | $36.4 million (27.7%) | $161.6 million (26.3%) | $72.6 million (27.9%) |
| Operating income, continuing operations | $64.1 million | $20.0 million | $92.1 million | $41.4 million |
| Interest expense | $28.1 million | $1.7 million | $35.6 million | $3.4 million |
| Net income, continuing operations | $25.1 million | $14.3 million | $40.5 million | $25.9 million |
| Consolidated net income (loss) | $(57.6) million | $19.0 million | $(33.5) million | $41.3 million |
| Net cash from continuing operating activities | — | $42.0 million | $31.3 million |
Continuing-operations diluted EPS was $0.93 for the quarter and $1.57 for the six-month period, versus $0.57 and $1.03, respectively. Consolidated diluted EPS was a loss of $1.91 for the quarter and $1.13 for six months, reflecting the discontinued-operations disposal charge. AZZ declared dividends of $0.17 per common share for the quarter.
- Sales growth was acquisition-led: Precoat generated $240.9 million of quarterly sales and $36.2 million of operating income. Metal Coatings sales rose 26.2% and operating income rose 40.4% year over year in the quarter, which management attributed to improved pricing, higher galvanizing volume, and operational efficiencies.
- Liquidity and debt: At August 31, cash and cash equivalents from continuing operations were $11.3 million. Total debt was $1.324 billion gross and $1.251 billion net of debt issuance costs, including a $1.297 billion Term Loan B. The company reported $344.8 million of additional credit availability and compliance with debt covenants. Working capital was $308.2 million.
- Cash flows: Continuing-operations investing activities used $1.313 billion, primarily for the Precoat acquisition; continuing financing activities provided $1.245 billion. Continuing operating cash flow was partly offset by higher receivables, inventory, prepaid costs, and contract assets.
- Non-GAAP measure: Adjusted EBITDA was $100.5 million for the quarter and $167.3 million for six months, versus $36.6 million and $79.4 million in the prior-year periods. The adjustments include the AIS disposal loss and acquisition/transaction costs.
Material transactions and unusual items
- AZZ acquired Precoat Metals for approximately $1.3 billion, funded primarily with a new $1.3 billion Term Loan B. Purchase accounting remained preliminary; the acquisition generated $547.9 million of preliminary goodwill. AZZ also recorded $12.6 million of acquisition costs for the six-month period.
- AZZ recorded a $114.9 million estimated, non-cash pre-tax loss on the planned divestiture of AIS, or $89.4 million after tax. AIS had quarterly sales of $106.7 million and net income before the disposal charge of $6.7 million.
- The AIS joint venture closed on September 30, 2022, after quarter-end. AZZ sold a 60% controlling interest at an implied $300 million enterprise value and retained 40%. AZZ received approximately $108 million in sale proceeds, plus $120 million of debt financing raised by the joint venture; it subsequently used cash to repay $210 million of Term Loan B debt and $15 million of revolver borrowings.
- The $240 million of 6.00% convertible notes issued to fund the Precoat acquisition were exchanged on August 5 for 240,000 shares of 6.0% Series A convertible preferred stock. The preferred shares are convertible at $58.30 per common share and had accrued $1.0 million in dividends by quarter-end.
Outlook, risks, and contingencies
The filing provides no specific numerical earnings or sales guidance. Management said it expects higher interest rates to continue increasing interest expense during fiscal 2023. The Term Loan B and revolver bear interest at SOFR plus 4.25%; the reported effective rate was 6.92% at August 31. A $550 million interest-rate swap was entered into after quarter-end, fixing the SOFR component at 4.277% through September 2025.
Management cited inflation, labor shortages, supply-chain disruption, and increased costs or availability risks for skilled labor and materials. Exposure to commodity prices includes zinc and natural gas, as well as steel, aluminum, and other metals. The company assumed $22.2 million of environmental remediation liabilities in the Precoat acquisition; estimates may change. Routine legal proceedings were not expected by management to materially affect the company, though outcomes cannot be predicted. Internal-control assessment excluded Precoat, which represented about 59% of total assets and 59% of continuing-operations revenue for the quarter; integration-related control evaluation remained ongoing.
Investor facts to verify
- How Precoat performs after integration and whether its preliminary purchase-price allocation, goodwill, and assumed liabilities change.
- Debt reduction, covenant headroom, interest expense sensitivity to SOFR, and the effect of the post-quarter swap and AIS proceeds.
- The final accounting and ongoing economics of AZZ’s retained 40% AIS joint-venture interest.
- Whether labor, supply-chain, inflation, and environmental-remediation costs affect margins and cash generation.
- How reported GAAP results compare with adjusted EBITDA and adjusted earnings, particularly given the material disposal and transaction adjustments.