AZZ Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2022, the three months ended November 30, 2021; year-to-date figures cover the nine months ended that date. Comparisons are with the corresponding 2020 periods. Dollar amounts are in millions unless stated otherwise.
Business context and financial performance
AZZ provides metal-coating and infrastructure solutions through its Metal Coatings and Infrastructure Solutions segments. Management is pursuing a strategy to become a predominantly metal-coatings-focused company and continued to classify one Infrastructure Solutions business and one non-operating Metal Coatings location as held for sale.
| Metric | Q3 FY2022 | Q3 FY2021 | Nine months FY2022 | Nine months FY2021 |
|---|---|---|---|---|
| Sales | $231.7 | $226.6 | $678.0 | $643.3 |
| Gross margin | $57.0 | $54.7 | $170.0 | $143.0 |
| Gross margin percentage | 24.6% | 24.1% | 25.1% | 22.2% |
| Operating income | $30.1 | $27.9 | $87.3 | $42.8 |
| Net income | $21.1 | $19.7 | $62.4 | $23.5 |
| Diluted EPS | $0.85 | $0.76 | $2.48 | $0.90 |
| Operating cash flow | Not provided separately | Not provided separately | $49.7 | $59.4 |
Q3 sales increased 2.3%; operating income rose 8.0%. Nine-month sales increased 5.4%, and operating income more than doubled. The prior-year nine-month comparison included $20.3 million of restructuring and impairment charges; there were none in the current nine-month period. Dividends declared were $0.17 per share for the quarter and $0.51 year to date, unchanged from the comparable periods.
Segments, cash flow and liquidity
- Metal Coatings: Q3 sales rose 15.4% to $133.4 million and operating income rose 14.1% to $32.7 million. For nine months, sales increased 11.1% to $390.7 million and operating income increased 38.3% to $95.9 million. Management cited improved pricing, higher processed-steel volume year to date, an acquired facility, and operating efficiencies.
- Infrastructure Solutions: Q3 sales fell 11.4% to $98.4 million, while operating income increased 5.4% to $9.2 million. Year-to-date sales declined 1.5% to $287.3 million, while operating income rose to $25.8 million from $3.4 million, helped by improved margins and prior-year restructuring and divestiture effects.
- Cash and working capital: Cash was $20.4 million at November 30, 2021, versus $14.8 million at February 28, 2021. Working capital was $230.9 million versus $189.6 million. Current assets were $349.5 million and current liabilities $118.7 million.
- Cash flows: Nine-month operating cash flow was $49.7 million, down from $59.4 million, despite higher net income; management attributed the decline primarily to working-capital movements. Investing used $16.4 million, including $19.1 million of capital expenditures. Financing used $29.2 million, including $28.9 million of share repurchases and $12.7 million of dividends, partly offset by net revolving-credit borrowings.
- Debt and credit availability: Gross debt was $192.0 million ($191.5 million net of issuance costs), including $42.0 million drawn on the revolver and $150.0 million of senior notes. AZZ reported approximately $348.2 million of additional credit available and compliance with debt covenants. The new $400 million revolving facility matures in July 2026 and includes a $200 million uncommitted accordion.
- Backlog: Infrastructure Solutions backlog was $217.7 million, up $31.6 million from February 28, 2021 and 24.8% from November 30, 2020. Q3 net bookings were $248.0 million and the book-to-sales ratio was 1.07.
Material changes, outlook and risks
Q3 growth was led by Metal Coatings. Infrastructure Solutions faced delayed material receipts, constrained labor, lower sales in China as projects neared completion, and reduced international activity. Labor-market and supply-chain pressures increased the cost and availability challenges for labor and materials. Corporate expenses rose, reflecting payroll and compensation costs and external consulting for the strategic review. Lower effective tax rates also supported year-over-year earnings: 22.0% for Q3 and 22.9% year to date, compared with 25.1% and 32.3%, respectively.
Management said cash, operating cash flows, and expected access to credit should be sufficient for foreseeable needs; the filing provides no specific earnings or revenue guidance. COVID-19 had no material adverse effect on reported-period results, but management cited uncertainty around future demand, supply chains, workforce impacts, and OSHA vaccine-or-testing requirements. Other identified risks include further labor and material-cost increases (including zinc and natural gas), vendor delays, customer postponements, commodity-price exposure, foreign-exchange movements, and market conditions.
Routine litigation includes employment, workers’ compensation, environmental, and commercial matters. Management, after consulting counsel, did not expect these matters to have a material effect, though outcomes and potential liabilities could not be predicted. A December 31, 2021 agreement to acquire Steel Creek Galvanizing Company was disclosed as a subsequent event. No current-period restructuring or impairment charges were recorded.
Important facts for investors to verify
- Whether Metal Coatings pricing, volume, and margin improvements persist, and how much reflects the acquired facility.
- Whether labor and supply-chain constraints ease or continue to affect Infrastructure Solutions sales, costs, and delivery timing.
- How much of the year-over-year earnings improvement reflects the absence of prior-year restructuring and impairment charges and lower effective taxes.
- Whether backlog converts to revenue on schedule, particularly given project completion in China and supply delays.
- Future working-capital needs, debt usage, covenant headroom, and capital allocation across dividends, repurchases, acquisitions, and investment.
- Progress on planned divestitures and the terms, closing, and expected impact of the Steel Creek acquisition.