AZZ Inc. — Form 10-Q Summary
Reporting period: Fiscal 2024 second quarter and six months ended August 31, 2023. AZZ provides hot-dip galvanizing and coil-coating services. The comparison reflects its post-divestiture structure: Infrastructure Solutions is now primarily a 40% equity-method investment in the AVAIL joint venture (JV); the prior-year AIS results were reported as discontinued operations.
Financial performance and position
| Metric | Three months ended Aug. 31, 2023 | Six months ended Aug. 31, 2023 |
|---|---|---|
| Sales | $398.5 million, down 2.0% year over year | $789.4 million, up 28.6% |
| Gross margin | $97.2 million; 24.4% of sales, versus 25.0% | $194.3 million; 24.6%, versus 26.3% |
| Operating income | $61.0 million, down 4.9%; 15.3% margin, versus 15.8% | $126.5 million, up 37.4%; 16.0% margin, versus 15.0% |
| Continuing-operations net income | $28.3 million, versus $25.1 million | $56.9 million, versus $40.5 million |
| Net income available to common shareholders / diluted EPS | $24.7 million / $0.97 | $49.7 million / $1.95 |
| Adjusted EBITDA, continuing operations (non-GAAP) | $88.0 million, versus $88.7 million | $173.4 million, versus $141.2 million |
| Operating cash flow, continuing operations | $118.3 million for six months, versus $42.0 million | |
| Capital expenditures | $42.7 million for six months |
At August 31, 2023, cash was $2.1 million; current assets were $409.9 million and current liabilities $206.3 million. Debt was $1.065 billion gross ($1.002 billion net of issuance costs), down from $1.125 billion gross at February 28. AZZ reported an 8.56% weighted-average debt rate, $347.1 million of additional credit available, and compliance with its debt covenants. Total assets were $2.215 billion and shareholders’ equity $898.1 million. Common dividends declared were $0.17 per share for the quarter.
Material changes versus the prior comparable period
- Quarterly sales declined as Precoat Metals’ lower coil-coated volume outweighed growth in Metal Coatings. Metal Coatings sales rose 2.4%; Precoat sales fell 5.0%.
- Quarterly operating income fell 4.9%. Precoat operating income improved 7.7% on lower production costs and SG&A, while Metal Coatings income was nearly flat amid higher zinc and labor costs.
- Six-month sales and operating income rose substantially, chiefly because the current period includes six months of Precoat, acquired May 13, 2022, compared with only the post-acquisition portion in the prior-year period. Thus the year-to-date growth is not a like-for-like organic comparison.
- Six-month interest expense increased to $56.5 million from $35.6 million, reflecting acquisition-related debt outstanding for a fuller period and higher borrowing rates. Quarterly interest expense was slightly lower year over year.
- Prior-year net results included discontinued AIS operations and a large disposal loss; current-period results exclude those operations. Prior-year reported net loss is therefore not directly comparable to current net income.
Outlook, risks, contingencies and unusual items
- The filing provides no quantified earnings or revenue guidance. Management said cash, operating cash flow and expected access to credit should meet foreseeable cash needs.
- AZZ is building a new aluminum coil-coating facility in Washington, Missouri, expected to operate in 2025. The project is supported by a take-or-pay contract for approximately 75% of output. Expected project spending is approximately $109.9 million; about $50 million was committed, and approximately $70 million was expected to be paid in fiscal 2024, including $20 million paid in the first six months.
- On August 17, 2023, AZZ repriced its Term Loan B to SOFR plus 3.75%. A swap fixes the rate on approximately half of variable-rate debt; after repricing, the swap’s stated total fixed rate is 8.027%, with maturity in September 2025. Remaining exposure to variable rates is a risk.
- AZZ accrued a $5.75 million settlement expense for retained AIS-related litigation, payable around December 6, 2023; the agreement was expected to be finalized in fiscal Q3. A separate retained litigation matter was scheduled for trial in fiscal Q4. The company also reported a $5.2 million net receivable from that defendant.
- Environmental remediation reserves were $22.4 million, including $3.5 million current. Management said revisions could materially affect a quarter or year, though it did not expect additional remediation expense to materially affect overall financial position, results or cash flows.
- Risks cited include customer demand, inflation and economic volatility, labor and input costs (including zinc and natural gas), supply-chain delays, and debt leverage and interest rates. AZZ reported no material change to previously disclosed risk factors and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Whether Precoat’s volume, pricing and margins stabilize, and how results compare on a full-period basis rather than acquisition-distorted year-over-year figures.
- Cash generation, capital spending and liquidity against the low cash balance, debt service and the Missouri facility’s remaining funding needs.
- Debt-rate exposure, covenant headroom and the impact of interest costs as leverage and rates evolve.
- Finalization and payment of the $5.75 million settlement, and developments in the separate litigation and environmental liabilities.
- Performance of the AVAIL JV and the value of AZZ’s 40% investment; AZZ records its share of JV earnings on a one-month lag.