AZZ Inc. — Form 10-Q Summary
Reporting period: Three and nine months ended November 30, 2017 (fiscal 2018). AZZ provides energy-sector electrical and engineered products and services, and metal-coating services, including galvanizing. Comparative 2016 results below are restated.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 restated | Nine months FY2018 | Nine months FY2017 restated |
|---|---|---|---|---|
| Net sales | $208.2 million | $228.1 million | $609.8 million | $679.3 million |
| Gross margin | $31.1 million; 15.0% | $51.3 million; 22.5% | $122.3 million; 20.1% | $158.5 million; 23.3% |
| Operating income | $1.6 million | $26.2 million | $39.0 million | $77.6 million |
| Net income (loss) | $(0.2) million | $16.6 million | $21.7 million | $49.0 million |
| Diluted EPS | $(0.01) | $0.64 | $0.83 | $1.88 |
| Operating cash flow | Not presented quarterly | Not presented quarterly | $38.7 million | $57.3 million |
Revenue declined 8.7% in Q3 and 10.2% for the nine-month period year over year. Q3 operating margin was approximately 0.7% (11.5% prior year); nine-month operating margin was approximately 6.4% (11.4% prior year). Q3 declared dividends of $0.17 per share; nine-month dividends were $0.51 per share.
Segments and material changes
- Energy: Revenue fell 21.4% in Q3 to $107.0 million and 17.6% for nine months to $317.5 million. The segment posted operating losses of $12.1 million for Q3 and $3.0 million for nine months, versus income of $12.9 million and $41.8 million, respectively, in the restated prior-year periods. Management cited fewer U.S. refinery turnarounds, petrochemical-market softness, hurricane effects, delayed or cancelled projects, weaker margins on large projects, and Westinghouse-related impacts.
- Metal Coatings: Q3 revenue rose 10.0% to $101.1 million, supported by higher prices and processed volumes; operating income increased 1.6% to $21.7 million. Nine-month revenue was down 0.6% to $292.2 million, while operating income rose 9.3% to $66.3 million. Management noted higher zinc prices and lower first-half volumes.
- Energy backlog was $283.2 million at November 30, down 10.9% from February 28, 2017 and 8.5% year over year. Q3 book-to-bill was 0.86, versus 0.97 a year earlier. Backlog fell in part due to an $11.0 million Westinghouse VC Summer de-booking.
- Q3 and nine-month results included an $8.3 million Energy property impairment and a $2.9 million doubtful-account provision following an adverse court decision. These charges were not recorded in the comparable prior-year periods.
Cash, debt, and liquidity
- At November 30, cash was $10.7 million; working capital was $199.0 million. Current assets were $335.1 million and current liabilities $136.2 million.
- Gross debt was $307.3 million, including $168.0 million drawn on the revolving facility; debt net of cash was approximately $296.6 million. Gross debt-to-equity was 0.57. AZZ reported compliance with debt covenants.
- The $450 million revolving credit facility, with a $150 million accordion, matures March 2022. After $23.7 million of letters of credit under the facility, approximately $258.3 million remained available. Covenants require leverage no greater than 3.25:1 and interest coverage of at least 3.00:1.
- Nine-month investing cash use was $54.2 million, including $32.8 million for acquisitions and $21.5 million for capital expenditures. Financing provided $14.2 million; cash decreased $0.7 million over the period.
Outlook, risks, contingencies, and unusual items
- No specific forward financial guidance is provided in the filing. Management said available cash, operating cash flows, and expected access to the credit facility should meet foreseeable cash needs.
- Management identified demand and project timing, commodity prices (including zinc and natural gas), foreign exchange, economic conditions, and execution of its growth strategy as risks. Cost pass-through may not always be achievable.
- The Westinghouse bankruptcy affected Energy projects. AZZ reported approximately $12 million of filed unsecured claims; the debtors’ disclosure statement estimated a 98.9%–100% distribution on allowed general unsecured claims. The filing also says cancellation of the Vogtle Bridge project reduced expected second-half sales by about $6.1 million and margin by about $1.2 million.
- AZZ restated prior-period financial statements after determining that certain Energy contracts should have used percentage-of-completion revenue recognition. The correction materially changed previously reported results; for the nine months ended November 30, 2016, restated net income was $49.0 million, $0.3 million below the amount originally reported.
- Management concluded disclosure controls were ineffective due to a material weakness in revenue-recognition controls. Remediation plans include revised policy-review and transaction controls and additional training. A securities class action filed in January 2018 alleges misleading disclosures related to revenue recognition; AZZ denies the allegations and says it cannot predict the outcome.
- After the quarter, the Tax Cuts and Jobs Act produced a provisional $23.2 million tax benefit recorded in fiscal Q4, including a $25.0 million deferred-tax remeasurement benefit and $1.8 million expense for deemed repatriation. It is not a Q3 result. Subsequent events also include acquisitions of Rogers Brothers and Lectrus, and the March 2018 final $14.3 million payment on the 2008 Senior Notes.
Important facts for investors to verify
- Whether revenue-recognition remediation is complete and the material weakness has been resolved; review subsequent filings for any further restatements.
- Energy segment margins, project execution, bookings, and backlog trends, including Westinghouse claim recoveries and cancellation impacts.
- Collectibility of receivables and the basis for the $2.9 million doubtful-account provision.
- Debt, covenant headroom, acquisition funding, and integration results; distinguish the Q3 tax results from the substantial fiscal Q4 tax-law benefit.
- Developments and potential exposure in the securities class action; the filing does not provide a clear estimate of possible damages.