AZZ Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended November 30, 2022 (fiscal 2023). Amounts are in U.S. dollars; financial comparisons are with the corresponding 2021 periods unless stated otherwise.
Business context and material changes
AZZ acquired Precoat Metals on May 13, 2022, for approximately $1.3 billion, adding a coil-coating business and a new reportable segment. On September 30, 2022, AZZ contributed its Infrastructure Solutions business (AIS, excluding retained Crowley Tubing) to a joint venture and sold a 60% interest to Fernweh. AZZ retained 40%, now accounted for under the equity method. AIS is presented as discontinued operations.
Accordingly, the sharp increase in continuing-operations revenue largely reflects the Precoat acquisition; the periods are not directly comparable on a same-business basis.
Key financial results
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Continuing-operations sales | $373.3 million | $135.1 million | $987.1 million | $395.7 million |
| Gross margin | $73.1 million (19.6%) | $37.6 million (27.8%) | $234.7 million (23.8%) | $110.2 million (27.8%) |
| Operating income, continuing operations | $45.4 million | $21.3 million | $137.4 million | $62.7 million |
| Net income, continuing operations | $18.4 million | $13.1 million | $58.9 million | $39.0 million |
| Diluted continuing-operations EPS | $0.59 | $0.53 | $2.17 | $1.55 |
| Interest expense, continuing operations | $26.1 million | $1.6 million | $61.7 million | $5.0 million |
- Q3 Metal Coatings sales rose 17.2% to $158.3 million, attributed to improved pricing and higher steel volume; operating income was $33.5 million versus $33.1 million. Precoat contributed $215.0 million of sales and $21.1 million of operating income.
- Q3 net loss was $20.5 million, or $0.97 per diluted share, versus net income of $21.1 million, or $0.85 per share. The loss includes discontinued-operations losses, principally the AIS disposal loss.
- AIS disposal losses were $45.0 million pre-tax in Q3 and $159.9 million for the nine-month period. Nine-month net loss from discontinued operations was $112.9 million.
- Company-reported non-GAAP adjusted EBITDA was $71.2 million for Q3 versus $39.8 million, and $238.5 million for nine months versus $119.2 million. Adjusted diluted EPS was $0.88 and $3.89, respectively, versus $0.85 and $2.48. These measures include adjustments, notably for the AIS disposal and acquisition-related items.
Cash flow, debt and liquidity
- Nine-month operating cash flow from continuing operations was $68.6 million, compared with $45.9 million. Continuing-operations investing cash outflow was $1.21 billion, primarily reflecting the Precoat acquisition; capital expenditures were $35.1 million.
- Cash and cash equivalents were $3.3 million at November 30, 2022, versus $12.1 million at February 28, 2022. Working capital was $185.9 million.
- Gross debt was $1.094 billion ($1.024 billion net of unamortized debt issuance costs), including $1.084 billion of Term Loan B. The Term Loan B and revolving facility bore an 8.53% rate at period-end. AZZ reported approximately $373.3 million of additional credit availability and $16.7 million of outstanding letters of credit.
- The company reported compliance with debt covenants. The Term Loan B is secured by substantially all company assets and matures in 2029. A $550 million interest-rate swap fixes the rate on a portion of floating-rate debt at a total 8.627% through September 2025, subject to scheduled reductions in notional amount.
- The AIS transaction generated approximately $108 million of sale proceeds plus $120 million of debt financing incurred by the joint venture. AZZ used transaction cash to repay $210 million of Term Loan B, $15 million on the revolver and for working capital.
Outlook, risks and unusual items
The filing provides no specific revenue, earnings or margin guidance. Management said it expects available cash, operating cash flow and credit facilities to meet needs for the foreseeable future, while noting that higher interest rates are expected to increase expense on variable-rate debt. Management cited inflation, labor shortages and costs, supply-chain disruptions, and higher production-material costs as ongoing uncertainties that may constrain fulfillment of demand or affect results.
- Precoat purchase accounting remained preliminary; estimates and purchase-price allocations could change. The company recorded $13.2 million in acquisition costs for the nine months.
- AZZ assumed environmental liabilities in the Precoat acquisition; the reserve was $22.0 million at November 30, 2022, including $1.5 million current. Management said revisions could materially affect results in a period, though it did not expect an adverse material effect on overall financial position, results or cash flows.
- AZZ retained a 40% AIS joint-venture interest valued at $82.4 million and recorded $1.0 million of equity earnings. The reported disposal loss includes a $27.8 million foreign-currency translation adjustment and a $17.2 million net-asset adjustment.
- Disclosure-control effectiveness was assessed excluding Precoat internal controls. Precoat represented approximately 67.5% of company assets and 57.6% and 50.6% of continuing-operations revenue for the quarter and nine-month period, respectively; integration of its controls was ongoing.
- The 6% Series A preferred stock had $4.6 million of accrued dividends and could convert into approximately 4.1 million common shares. The filing also identifies routine legal matters and notes that their outcomes cannot be predicted, while management does not expect them to have a material effect.
Important facts for investors to verify
- How Precoat performs on a comparable basis, including whether its margins and cash generation hold up as integration proceeds.
- Debt repayment progress, interest costs, covenant headroom and the effect of floating rates despite the swap.
- Final Precoat purchase accounting, including goodwill and assumed environmental and pension-related liabilities.
- The final economics and valuation of AZZ’s retained AIS joint-venture interest, including future equity-method earnings.
- Potential dilution and dividend burden from the convertible preferred stock, and the extent to which reported adjusted results exclude material items.