AZZ Incorporated — Form 10-Q Summary
Reporting period: Second quarter and six months ended August 31, 2013 (fiscal 2014). AZZ operates Electrical and Industrial Products and Services and Galvanizing Services segments. Results are unaudited.
Key financial metrics
| Metric | Three months ended Aug. 31, 2013 | Six months ended Aug. 31, 2013 |
|---|---|---|
| Revenue | $189.8 million; up 24% year over year | $373.0 million; up 33% |
| Net income | $16.4 million vs. $15.9 million | $30.9 million vs. $31.9 million |
| Diluted EPS | $0.64 vs. $0.62 | $1.20 vs. $1.25 |
| Segment operating income | $37.0 million vs. $32.9 million | $75.7 million vs. $62.3 million |
| Segment operating margin | 19% vs. 21% | 20% vs. 22% |
| Cash from operating activities | $55.2 million for six months, compared with $30.2 million |
At August 31, cash was $42.0 million, down from $55.6 million at February 28. Current assets were $318.7 million and current liabilities $139.0 million; the company reported a current ratio of 2.29 to 1. Debt totaled $452.5 million, versus $210.7 million at August 31, 2012. Shareholders’ equity was $358.3 million. Six-month capital expenditures were $23.8 million, including $13.4 million for rebuilding the Joliet facility; dividends paid were $7.1 million.
Material changes and operating trends
- Electrical and Industrial Products and Services revenue rose 57% for the quarter and 80% for six months, largely from the NLI and Aquilex SRO acquisitions. Excluding those acquisitions, segment revenue was below the prior-year period; management cited customer-requested shipment delays and reduced spending.
- Galvanizing Services revenue fell 1% for the quarter and rose 2% for six months. Excluding acquired Canadian operations, revenue declined 11% and 8%, respectively, amid softer transmission and distribution demand, leveling renewable-energy activity, and delayed petrochemical projects.
- Backlog, all in the Electrical and Industrial segment, was $211.4 million at August 31, down 5% from February 28. Quarterly book-to-ship was 0.96. Incoming orders rose 20% year over year, but management said anticipated orders—particularly in nuclear markets—were delayed and expected in fiscal Q3.
- Margins compressed despite higher segment operating income. Electrical and Industrial operating margins were 10% for the quarter and 12% for six months, versus 14% and 15%; acquired-intangible amortization was $3.4 million and $6.2 million, respectively. Galvanizing margins were 31% and 30%, versus 27% in both prior-year periods.
Acquisitions, unusual items, outlook and risks
- AZZ completed its $275.7 million cash acquisition of Aquilex SRO on March 29, 2013, funded with increased borrowings. Aquilex contributed $43.6 million of quarterly revenue and $85.1 million for six months. Acquisition-related costs were $3.2 million in the first half.
- Six-month results included a $2.7 million Joliet business-interruption insurance recovery and a $4.2 million gain from a favorable lawsuit settlement; Joliet operating losses were also recorded. Management expected additional insurance proceeds of $4 million to $7 million as claims were settled and anticipated about $9 million of additional Joliet rebuilding capital spending in the remainder of fiscal 2014.
- Management said working capital, operating cash flow, and credit availability should be sufficient for fiscal 2014 operating needs, dividends, capital improvements, debt payments, and possible acquisitions. No quantified earnings or revenue guidance was provided.
- The March 2013 credit agreement provides a $75 million term facility and a $225 million revolving facility, with a possible $75 million accordion. At quarter-end, $182.0 million was drawn on the revolver; after $17.7 million of letters of credit, approximately $25.3 million remained available. AZZ reported compliance with debt covenants.
- Key stated risks include demand and shipment timing in served markets, government regulation affecting nuclear activity, commodity costs (including zinc, natural gas, copper, aluminum, and steel), foreign exchange, economic volatility, acquisition execution, and availability of experienced personnel. Management noted commodity cost recovery is not assured. A potential NLI earn-out of up to $20 million was recorded at a $9.0 million net present value liability.
Important facts for investors to verify
- Whether delayed orders materialize in fiscal Q3 and how backlog and book-to-ship develop.
- Organic revenue and profitability trends separate from NLI, Aquilex, and Canadian acquisitions, including the effects of acquired-intangible amortization.
- Debt repayment, revolver availability, covenant headroom, and interest expense following the Aquilex acquisition.
- Timing and amount of remaining Joliet insurance recoveries versus rebuilding costs, and the outcome of the NLI earn-out.
- Whether commodity cost increases can be passed through and whether weaker end-market demand persists.