Business context and reporting period
AZZ Inc.’s unaudited Form 10-Q covers the three months ended May 31, 2012, the first quarter of fiscal 2013, and compares results with the three months ended May 31, 2011. AZZ operates Electrical and Industrial Products and Galvanizing Services segments.
Key financial metrics
Amounts are in millions of dollars except per-share data.
| Metric | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | $127.1 | $114.3 |
| Income before income taxes | $25.1 | $15.0 |
| Net income | $16.0 | $9.5 |
| Diluted EPS | $0.63 | $0.37 |
| Net cash provided by operating activities | $16.2 | $9.7 |
| Capital expenditures | $3.5 | $4.7 |
- Revenue increased 11%; net income increased about 69%. The effective tax rate was 36.3%, versus 36.8%.
- Segment operating income was $29.5 million, up 20%, and reported total segment operating margin was 23%, versus 22%. Electrical and Industrial Products operating income was $6.8 million (15% margin); Galvanizing Services was $22.6 million (27% margin).
- Cash and cash equivalents were $139.3 million at May 31, down from $143.3 million at February 29, 2012. Working capital was $231.3 million; the current ratio was 3.9 to 1.
- Total debt was $210.7 million, including $14.3 million due within one year. AZZ reported a long-term debt-to-equity ratio of 0.65 to 1 and compliance with debt covenants. Its $80 million revolving facility had no borrowings; $17.2 million of letters of credit left approximately $62.8 million available.
Material changes versus the prior comparable period
- Galvanizing Services revenue rose 25% to $82.5 million, reflecting higher processed volume and stronger demand in renewable energy, industrial and OEM markets; the Galv Metals acquisition contributed to growth. Segment operating income increased 32%.
- Electrical and Industrial Products revenue fell 7% to $44.7 million, and segment operating income declined 8%. AZZ cited petrochemical pricing competition and weaker transmission and distribution demand; management said it chose not to reduce prices to match competitors.
- Backlog was $136.1 million, down 2% from February 29, 2012, but above $114.7 million at May 31, 2011. The quarterly book-to-ship ratio was 0.98, versus 1.06 a year earlier; orders increased 3% year over year.
- Operating cash flow improved year over year. Debt repayments of $14.3 million and dividends of $3.2 million contributed to a $4.0 million decrease in cash during the quarter.
Outlook, risks, contingencies and unusual items
- Management expected the book-to-ship trend to continue into the second quarter, anticipated market improvement in the second half of fiscal 2013, and expected a full-year book-to-ship ratio of 1 to 1. These are forward-looking expectations, not guaranteed results.
- A fire on April 29, 2012 destroyed AZZ’s Joliet, Illinois galvanizing factory. The quarter included an approximately $4 million pretax asset impairment and a $6 million net gain on insurance settlement after receipt of $10 million in insurance proceeds. AZZ anticipated another $10 million to $15 million of recoveries after claim settlement; business-interruption proceeds were expected in a future quarter. A $0.6 million production loss was also recorded, with recovery dependent on insurance settlement.
- On June 1, 2012, after quarter-end, AZZ acquired substantially all assets of Nuclear Logistics Inc. for $80 million, assumed certain liabilities, and paid off $4.8 million of notes. An additional earn-out of up to $20 million may be payable; its stated fair value was $9.9 million.
- The board declared a two-for-one stock split, payable July 30, 2012. Share and per-share data in the filing were retroactively adjusted for the split.
- Key risks include customer demand and economic volatility, competition and pricing, commodity costs (including zinc, natural gas, copper, aluminum and steel), foreign-exchange movements, and the ability to pass cost increases to customers. Management stated that a hypothetical 10% change in interest rates, currency rates or commodity prices was not expected to have a significant adverse effect if cost increases could be passed through, while cautioning that this was not assured.
- Management said there were no material changes to the risk factors in the prior annual report. Routine legal matters were not expected to materially affect financial position or results. Disclosure controls were assessed as effective.
Important facts for investors to verify
- Progress and timing of the Joliet insurance claims, including recovery of business-interruption losses and final amounts received.
- Nuclear Logistics acquisition performance, financing impact and whether any earn-out payment becomes due.
- Whether Electrical and Industrial Products demand and backlog stabilize, and whether Galvanizing Services growth and margins persist.
- Availability under the revolving facility, covenant compliance and cash needs for debt service, dividends and acquisitions.