AZZ Inc. — Form 10-Q Summary
Business context and period: AZZ provides metal-coating, welding, specialty electrical equipment and engineered services through its Energy and Metal Coatings segments. This filing covers the third quarter and first nine months of fiscal 2020, ended November 30, 2019; comparisons are with the corresponding fiscal 2019 periods. Amounts below are in millions except per-share data.
Financial performance
| Metric | Three months ended Nov. 30, 2019 | Three months ended Nov. 30, 2018 | Nine months ended Nov. 30, 2019 | Nine months ended Nov. 30, 2018 |
|---|---|---|---|---|
| Revenue | $291.1 | $239.5 | $816.5 | $724.5 |
| Gross margin | $67.3; 23.1% | $49.8; 20.8% | $186.1; 22.8% | $155.4; 21.4% |
| Operating income | $33.4; 11.5% margin | $22.8; 9.5% margin | $86.6; 10.6% margin | $63.6; 8.8% margin |
| Net income | $22.0 | $15.4 | $58.9 | $42.4 |
| Diluted EPS | $0.84 | $0.59 | $2.24 | $1.62 |
| Operating cash flow | Not provided for quarter | Not provided for quarter | $72.1 | $58.1 |
- Quarterly revenue rose 21.6% and nine-month revenue rose 12.7%. Quarterly net income increased 43.1%; nine-month net income increased 39.0%.
- Quarterly Energy revenue was $161.9 million, up 22.7%; Metal Coatings revenue was $129.2 million, up 20.2%. For nine months, segment operating income was $34.2 million for Energy and $85.3 million for Metal Coatings.
- Nine-month investing cash outflow was $82.8 million, including $60.6 million for acquisitions and $22.5 million of capital expenditures. Financing cash flow was positive $1.2 million. Cash declined $9.7 million to $14.3 million.
- At November 30, gross debt was $255.0 million ($254.8 million net of issuance costs), versus $241.0 million at February 28. Debt consisted of $130.0 million on the revolving facility and $125.0 million of senior notes. Management reported a gross-debt-to-equity ratio of 0.39 and compliance with debt covenants.
- Working capital was $232.2 million. The company reported $305.3 million of additional credit availability and $36.9 million of outstanding letters of credit. Management said cash, operating cash flow and expected access to credit facilities should cover foreseeable needs.
Changes, outlook and notable items
- Metal Coatings growth reflected higher selling prices and processed volumes, including acquired businesses; lower zinc costs also supported segment margins. Energy growth included industrial solutions sales on a large international refining project and higher electrical-product sales earlier in the year.
- AZZ acquired K2 Partners, Tennessee Galvanizing, NuZinc and Preferred Industries during fiscal 2020. Aggregate net cash consideration was $60.6 million; purchase accounting remained provisional. K2 also has contingent consideration of up to $2.0 million tied to operating results.
- Energy backlog was $274.5 million at November 30, down 17.5% from February 28 and 10.8% year over year. Management cited softer international project bookings in the first two quarters, partly offset by higher industrial bookings in the third quarter. Third-quarter book-to-revenue ratio was 0.91.
- No formal earnings or revenue guidance is provided in the supplied filing text. Management’s stated outlook is that liquidity is adequate for foreseeable needs. Risks cited include demand changes across served markets, commodity costs, economic and political conditions, customer shipment delays, foreign exchange, acquisition execution and financing availability.
- Tax expense included effects of a deferred-tax review: the company recorded a $1.4 million net tax benefit for corrections relating to prior periods during the nine months, and disclosed $2.351 million of unrecognized tax benefits at November 30. A further decrease of up to approximately $1.1 million was considered reasonably possible within 12 months. Tax audits are ongoing.
- Management concluded disclosure controls were ineffective because of material weaknesses involving revenue-recognition reconciliations and income-tax accounting and compliance controls. Remediation was underway. A securities class action was voluntarily dismissed without prejudice in December 2019; routine lawsuits were not expected by management to have a material effect. No material change in previously disclosed risk factors was reported.
Important facts for investors to verify
- Whether revenue-control and income-tax-control remediation is completed and independently validated.
- Energy bookings, backlog conversion and the mix of international versus industrial projects.
- Acquisition integration, realized returns and final purchase-price allocations, including contingent consideration.
- Working-capital requirements—especially receivables and contract assets—and cash generation relative to acquisition and capital spending.
- Debt maturities, variable-rate exposure, covenant headroom and developments in tax examinations or unrecognized tax positions.