AZZ Inc. — Form 10-Q Summary
Business and period: AZZ provides galvanizing and other metal-coating services, welding solutions, specialty electrical equipment, and engineered services through its Energy and Metal Coatings segments. This filing covers the second quarter and six months of fiscal 2018, ended August 31, 2017; comparisons are with the corresponding fiscal 2017 periods. Amounts below are in U.S. dollars.
Financial performance
| Metric | Three months ended August 31, 2017 | Six months ended August 31, 2017 |
|---|---|---|
| Revenue | $190.4 million, down 2.4% | $399.0 million, down 8.9% |
| Gross profit / margin | $41.5 million / 21.8% (prior-year margin 21.5%) | $90.7 million / 22.7% (prior-year margin 24.0%) |
| Operating income / margin | $15.1 million / 7.9% (prior-year margin 7.6%) | $37.0 million / 9.3% (prior-year margin 11.3%) |
| Net income | $8.3 million, versus $10.0 million | $21.6 million, versus $31.1 million |
| Diluted EPS | $0.32, versus $0.38 | $0.83, versus $1.19 |
- Segments: Second-quarter Energy revenue declined 6.4% to $91.4 million, while operating income fell to $0.03 million from $8.2 million. Metal Coatings revenue increased 1.6% to $99.0 million and operating income rose to $23.4 million from $15.0 million. The prior-year Metal Coatings quarter included $7.3 million in realignment charges. For the six months, Energy revenue and operating income declined 11.8% and 68.0%, respectively; Metal Coatings revenue declined 5.4% and operating income increased 13.5%.
- Cash flow: Six-month operating cash flow was $2.8 million, down from $50.0 million. Investing used $26.7 million, including $16.6 million of capital expenditures and $10.3 million for acquisitions. Financing provided $16.0 million. Cash declined $7.8 million to $3.5 million.
- Liquidity and debt: Working capital was $198.7 million. Gross debt was $302.3 million ($14.3 million due within one year); debt was $272.3 million at February 28, 2017. The company had $163.0 million drawn on its revolving facility and reported approximately $263.8 million of additional availability after letters of credit. AZZ reported compliance with debt covenants.
Changes, outlook, and risks
- Management attributed Energy weakness to fewer U.S. refinery turnarounds, softness in petrochemicals, project delays, and the Westinghouse bankruptcy’s effect on nuclear-related work. Management said work continued on the Vogtle project, while work at VC Summer had been halted by its owner. AZZ estimated approximately $7.2 million of mostly pre-petition exposure to Westinghouse as of March 29, 2017, and said it had been collecting post-petition amounts.
- Energy backlog was $331.2 million at August 31, down 4.4% from February 28 and 6.1% from the prior-year comparable date. Second-quarter book-to-bill was 1.00. Management attributed the backlog decline to softer first-half market conditions.
- AZZ completed its acquisition of Enhanced Powder Coating on June 30, 2017. On September 6, after quarter-end, it acquired Powergrid Solutions, expanding its switchgear offerings.
- A new credit agreement extended facility maturity to March 2022 and provides a $450 million revolving facility, with a $150 million accordion. The agreement includes financial covenants and restrictions on certain investments and payments.
- Management said cash, operating cash flow, and expected credit-facility availability should meet foreseeable cash needs. No specific earnings or revenue guidance was provided.
- Risks noted include demand and project timing, commodity costs (including zinc, natural gas, metals and alloys), foreign exchange, and the ability to pass cost increases to customers. Management reported routine legal proceedings not expected to have a material effect. No material risk-factor changes from the prior Form 10-K were reported.
- The six-month effective tax rate was 28.4%, versus 26.0% a year earlier; management cited accounting adoption and the timing of stock-compensation awards. The filing also notes that new revenue-recognition rules, expected to be adopted in fiscal 2019, may affect timing for contracts with multiple performance obligations; the impact remained under review.
Important facts for investors to verify
- Whether Energy orders, project releases, refinery turnarounds, and segment margins recover; monitor backlog and book-to-bill.
- Actual collection and ultimate recovery of the estimated Westinghouse exposure, and developments at Vogtle and VC Summer.
- Operating cash conversion and working-capital requirements, particularly inventory and contract-related balances.
- Debt levels, covenant headroom, revolver availability, and the financing and integration effects of the acquisitions.
- The eventual impact of revenue-recognition adoption and whether commodity cost increases can be passed through to customers.