AZZ Incorporated — Form 10-Q Summary
Business context and reporting period. AZZ provides galvanizing services, welding solutions, specialty electrical equipment and engineered services through its Energy and Galvanizing Services segments. This unaudited filing covers the third quarter and first nine months of fiscal 2015, ended November 30, 2014, compared with the same periods in fiscal 2014.
Financial performance
| Metric | Quarter ended Nov. 30, 2014 | Prior-year quarter | Nine months ended Nov. 30, 2014 | Prior-year nine months |
|---|---|---|---|---|
| Revenue | $224.8 million | $197.8 million | $634.4 million | $570.7 million |
| Gross profit / margin | $60.8 million / 27.0% | $53.4 million / 27.0% | $158.3 million / 24.9% | $160.0 million / 28.0% |
| Operating income / margin | $32.9 million / 14.6% | $25.2 million / 12.8% | $83.7 million / 13.2% | $79.0 million / 13.8% |
| Net income | $20.0 million | $18.4 million | $48.7 million | $49.4 million |
| Diluted EPS | $0.77 | $0.72 | $1.89 | $1.92 |
- Cash flow: Nine-month operating cash flow was $82.9 million, versus $94.6 million a year earlier. Investing used $29.0 million, including $19.9 million of capital expenditures and $10.5 million for the Zalk Steel acquisition. Financing used $37.8 million. Cash increased $16.4 million to $44.0 million.
- Liquidity: Working capital was $167.2 million, compared with $177.9 million at November 30, 2013. The filing reports $84.7 million of additional revolving-credit availability after $128.0 million of revolver borrowings and $12.3 million of letters of credit.
- Debt: Total debt was $378.6 million, including $22.8 million due within one year. Management reported a debt-to-equity ratio of 0.91:1, down from 1.17:1 at November 30, 2013, and compliance with all debt covenants.
Material changes and segment results
- Quarterly revenue rose 13.7%; nine-month revenue rose 11.2%. Energy quarterly revenue increased 16.1%, and Galvanizing Services revenue increased 10.6%. Management attributed growth to Energy shipments from backlog and, in galvanizing, higher volume, improved pricing mix, the Joliet facility’s return to service, demand in petrochemical and transmission markets, and the Zalk Steel acquisition.
- Quarterly segment operating income increased in both Energy ($16.7 million versus $11.9 million) and Galvanizing Services ($23.7 million versus $21.3 million). For the nine months, Energy segment operating income fell 17.4% to $29.4 million and Galvanizing Services fell 0.5% to $68.7 million.
- Nine-month Energy results were affected by $3.4 million of customer-requested shipping delays, $2.7 million of realignment charges and $5.2 million of project cost overruns, partly offset by $5.1 million of higher-volume-related margin. Nine-month gross margin declined to 24.9% from 28.0%.
- Energy backlog was $300.3 million at November 30, 2014, down from $325.0 million at February 28, 2014, but above $290.0 million at November 30, 2013. Quarterly book-to-ship was 0.87:1 versus 0.98:1 a year earlier; incoming orders increased $2.4 million year over year.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management stated that cash, operating cash flow and expected availability under credit agreements should meet foreseeable cash needs.
- Risks highlighted include customer demand and shipment delays, economic and political conditions, competition, commodity costs (including zinc, natural gas, copper, aluminum, steel and nickel alloys), foreign-exchange movements, financing availability, and access to experienced employees. Cost pass-through may not always be achievable.
- AZZ estimated total fiscal 2015 realignment costs at $4.0 million, including $1.3 million of severance and $2.7 million of fixed-asset write-offs; $0.6 million remained accrued at November 30.
- A $9.1 million contingent liability related to the NLI acquisition was reversed after management concluded an additional payment was no longer probable. The agreement could have required up to $20.0 million based on future performance.
- Quarterly other expense included foreign-exchange losses. Prior-year comparisons included significant Joliet fire insurance proceeds and a favorable lawsuit settlement, which affect comparability. Management expected additional insurance recoveries related to an Arizona plant fire.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. Ordinary-course legal proceedings were not expected by management to have a material adverse effect. No material risk-factor changes from the prior annual report were reported.
Most important facts for investors to verify
- Whether Energy bookings and backlog recover after the quarter’s 0.87:1 book-to-ship ratio, and how quickly delayed customer shipments convert to revenue.
- Whether project cost overruns and realignment expenses are contained, and whether segment margins stabilize.
- Whether the expected Arizona fire insurance recoveries are received and how they affect reported results.
- Whether cash conversion and working capital improve, particularly given receivables and unbilled contract costs, while the company services $378.6 million of debt.
- Whether commodity-cost increases and foreign-exchange movements can be passed through or otherwise managed without further margin pressure.