AZZ Incorporated — FY2014 Form 10-K Summary
Reporting period: Fiscal year ended February 28, 2014. This is an annual report, not a standalone fourth-quarter filing; it includes unaudited fourth-quarter results. Amounts are in U.S. dollars.
Business context
AZZ operates two segments: Electrical and Industrial Products and Services, serving power, nuclear, refining and industrial markets; and Galvanizing Services, operating hot-dip galvanizing plants in the U.S. and Canada. During FY2014, AZZ acquired Aquilex SRO for $275.7 million, expanding its global repair, overhaul and weld-overlay services.
Financial performance and liquidity
| Metric | FY2014 | FY2013 |
|---|---|---|
| Revenue | $751.7 million | $570.6 million |
| Net income | $59.6 million | $60.5 million |
| Diluted EPS | $2.32 | $2.37 |
| Operating cash flow | $107.3 million | $92.7 million |
| Capital expenditures for property and equipment | $43.5 million | $24.9 million |
| Cash and cash equivalents at year-end | $27.6 million | $55.6 million |
| Working capital | $152.2 million | $143.5 million |
| Long-term debt | $405.6 million | $210.7 million |
Revenue increased 31.7%, while net income fell 1.4%; net margin declined to 7.9% from 10.6%. Net income includes $34.3 million of income-tax expense, and the effective tax rate was 36.5%. Operating cash flow rose about 15.7%. Investing activities used $311.0 million, including $275.7 million for Aquilex; financing activities provided $176.3 million. AZZ paid $14.3 million in dividends.
At year-end, current assets were $296.2 million and current liabilities $144.0 million. The company had $137.0 million drawn on its revolving facility and reported approximately $69.5 million of additional availability after outstanding letters of credit. It said it complied with debt covenants. Debt includes fixed-rate senior notes and borrowings under a credit agreement maturing in 2018; scheduled debt payments include a significant $198.2 million in FY2019.
Changes versus the prior year
- Electrical and Industrial Products and Services revenue rose 78.2% to $416.1 million, primarily due to acquisitions. Aquilex contributed $200.6 million of segment revenue and $16.0 million of segment operating income; NLI contributed $51.5 million of revenue.
- Electrical segment operating margin declined to 11.0% from 14.7%, which management attributed in part to lower margins in acquired service businesses and acquisition-related intangible amortization. Excluding that amortization, management reported a 14.1% margin.
- Galvanizing revenue edged down 0.4% to $335.6 million. Steel-processing volume fell 3.3%, while average selling price increased 3.3%; management cited weaker utility and bridge-and-highway activity. Segment operating margin improved to 27.4% from 26.1%, including a $4.2 million legal settlement; management said the margin would have been 26.2% without it.
- General corporate expense increased to $32.6 million from $23.7 million, including $5.4 million of Aquilex acquisition costs. Interest expense increased 40.8% to $18.4 million as borrowing rose.
- Reported Electrical-segment backlog, excluding Aquilex, was $229.9 million, up 3.7%. Aquilex backlog was separately reported at $95.1 million. The legacy-business book-to-ship ratio was 1.01 for the year and 1.10 in the fourth quarter.
Fourth-quarter results and outlook
For the quarter ended February 28, 2014, AZZ reported revenue of $181.0 million, segment operating income of $29.0 million and net income of $10.2 million. Management described quotation activity as improving, particularly in the second half, but said orders were being released slowly amid a gradual economic recovery, project delays and regulatory uncertainty. The filing gives no specific full-year FY2015 revenue or earnings guidance.
Management expected to continue paying quarterly dividends, subject to Board discretion and a $20.0 million annual debt-covenant limit. The company stated that cash, operating cash flows and access to credit were expected to meet foreseeable needs. It also noted that remaining insurance claims related to the Joliet facility fire were still under negotiation and that further proceeds were not assured.
Risks, contingencies and unusual items
- Key risks include economic and customer-project delays, competition, fixed-price contract cost overruns, raw-material and energy-price volatility, skilled-labor availability, international and currency exposure, and integration of acquisitions. Backlog orders may be delayed or cancelled and are not a guarantee of revenue.
- AZZ recorded $8.1 million of insurance-related proceeds as a gain during FY2014 and received $2.8 million for business-interruption reimbursement. Additional fire-related claims remained unsettled. Rebuilding the Joliet facility involved $18.6 million of FY2014 capital expenditures.
- The NLI acquisition may require a future earn-out of up to $20.0 million; AZZ estimated $10.0 million based on current performance and recorded a $9.1 million present-value liability.
- Management said environmental reviews and ordinary-course lawsuits were not expected to materially affect the company, but ultimate outcomes were uncertain. Potential future environmental-compliance capital expenditures could not be quantified.
- Management and the auditor concluded internal control over financial reporting was effective, but their assessment did not include Aquilex, which represented 31.4% of year-end assets and 26.7% of FY2014 revenue.
- Leadership changed during the period: Thomas Ferguson became CEO after former CEO David Dingus’s death; CFO Dana Perry announced retirement effective May 31, 2014, with Paul Fehlman designated as successor.
Important facts for investors to verify
- How much FY2014 growth and earnings depended on Aquilex and other acquisitions, versus performance of the legacy businesses, and how acquisition integration affects future margins and cash generation.
- Whether backlog converts to shipments on schedule, particularly given the separate presentation of Aquilex backlog and management’s comments on slow order releases.
- Debt repayment capacity, covenant headroom, available revolver capacity and the large FY2019 debt maturity.
- The final value and timing of Joliet fire-insurance recoveries, and the NLI earn-out obligation.
- The impact of acquisition-related amortization, acquisition costs and the $4.2 million legal settlement on the sustainability of reported segment earnings.
- That Aquilex’s internal controls were outside the FY2014 management and auditor assessments, despite its material size.