AZZ Incorporated — FY2012 Form 10-K
Reporting period: Fiscal year ended February 29, 2012. This is an annual report, not a standalone fourth-quarter filing; fourth-quarter results are included where disclosed. AZZ manufactures electrical and industrial products and provides hot-dip galvanizing services through two segments.
Financial performance and position
| Metric | FY2012 | FY2011 |
|---|---|---|
| Revenue | $469.1 million | $380.6 million |
| Net income | $40.7 million | $35.0 million |
| Diluted EPS | $3.21 | $2.77 |
| Operating cash flow | $64.1 million | $42.1 million |
| Capital expenditures | $19.8 million | $16.4 million |
| Cash and cash equivalents at year-end | $143.3 million | $138.4 million |
| Long-term debt at year-end | $225.0 million | $225.0 million |
| Working capital | $224.8 million | $225.8 million |
| Current ratio | 3.88:1 | 4.88:1 |
- Revenue increased 23%; net income rose 17%. Net income margin was 8.7%, versus 9.2% in FY2011.
- Segment operating income totaled $98.7 million, up from $84.0 million; reported consolidated operating margin was 21%, versus 22%.
- Electrical and Industrial Products revenue rose 16% to $189.2 million, while operating income declined 5% to $25.8 million. Its operating margin fell to 14% from 17%.
- Galvanizing Services revenue increased 28% to $279.9 million and operating income rose 28% to $73.0 million. Segment operating margin was 26% in both years. Growth reflected higher volumes, including acquired business.
- Fourth-quarter revenue was $123.6 million, gross profit $32.3 million, net income $11.6 million, and diluted EPS $0.92.
- Operating cash flow less capital expenditures was approximately $44.3 million. Cash from operations improved year over year, though higher receivables reduced cash generation.
- The company paid $12.6 million in dividends. Its $80 million unsecured revolving facility had no borrowings outstanding; $16.4 million of letters of credit left approximately $63.6 million available. AZZ reported compliance with debt covenants.
Material changes and significant items
- Electrical and Industrial Products backlog rose 28% to $138.6 million; FY2012 book-to-ship ratio was 1.06, compared with 1.00 in FY2011. Management reported five consecutive quarters above 1.0.
- AZZ acquired Galvan Metal’s Montreal galvanizing assets on February 1, 2012, for $29.1 million, or $27.4 million net of acquired cash. The acquisition added one galvanizing location; its contribution to FY2012 consolidated revenue and net income was reported as 0.1% and 0.4%, respectively.
- Interest expense rose 80% to $13.9 million, primarily reflecting the $125 million of 5.42% senior notes issued in January 2011. The other $100 million of senior notes carry a 6.24% coupon. Principal installments on the $100 million notes began in March 2012.
- Galvanizing growth also reflected the prior NGA acquisition: NGA contributed $83.0 million of FY2012 revenue, compared with $49.7 million for its partial-year FY2011 contribution.
Outlook, risks, and contingencies
- Management described inquiry and quotation levels in Electrical and Industrial Products as modestly improving and Galvanizing Services as experiencing modest growth. Pricing remained challenging amid competition and higher commodity costs.
- Management expected Electrical and Industrial Products margins to improve in FY2013, but not to return to FY2011 levels. The filing does not provide formal consolidated earnings or revenue guidance.
- Key risks include economic and customer-project weakness, competitive pricing, fixed-price contract cost overruns, volatile copper, aluminum, steel, zinc, and natural gas costs, and difficulty passing cost increases to customers. The company also cites labor availability, regulatory and environmental compliance, acquisition integration, and international and currency risks.
- Electrical and Industrial Products revenue recognition includes percentage-of-completion estimates for certain long-term contracts; revisions to estimated contract costs or collections could reduce previously recognized profits. Backlog orders may be canceled, and their full stated revenue value is not guaranteed.
- Environmental reviews and ordinary-course lawsuits were not expected by management to have a material financial effect. A $1.7 million warranty reserve was recorded; $16.4 million of letters of credit were outstanding, partly related to warranty and performance obligations.
- Subsequent events: AZZ agreed on April 30, 2012, to acquire substantially all assets of Nuclear Logistics, Inc. for $80 million cash, assumption of current liabilities and $4.8 million of notes payable, with possible additional consideration of up to $20 million tied to future performance. The transaction remained subject to customary closing conditions at the filing date.
- A fire on April 29, 2012, destroyed AZZ’s Joliet, Illinois galvanizing plant. AZZ reported property-replacement and business-interruption insurance and planned to transfer work to other facilities; it expected the loss to be covered, but the filing did not quantify the final loss or recovery.
- Management and the auditor reported effective internal control over financial reporting, but the assessment and audit excluded Galvan Metal because of the timing of its acquisition.
Most important facts for investors to verify
- Whether the backlog converts to shipments and revenue, and whether book-to-ship remains above 1.0.
- Whether Electrical and Industrial Products margins recover as management expected, and whether Galvanizing Services sustains volume and pricing amid zinc and other input-cost changes.
- The cash, debt, covenant, and financing implications of the proposed Nuclear Logistics acquisition, including any earnout and its eventual closing terms.
- The Joliet fire’s actual business-interruption impact, replacement timeline, insurance proceeds, and any uncovered costs.
- Whether receivables and working-capital trends continue to constrain operating cash flow, and whether debt amortization and dividends remain manageable.
- Potential integration or control issues associated with acquisitions, particularly the acquired Galvan Metal operations not included in the year-end internal-control assessment.