AZZ Inc. — Form 10-Q Summary
Reporting period: Third quarter and nine months ended November 30, 2015 (fiscal 2016). AZZ provides galvanizing services and energy-related products and services through its Energy and Galvanizing Services segments. Figures below are unaudited; dollar amounts are in millions unless otherwise stated.
Financial results
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Revenue | $242.4 | $224.8 | $685.6 | $634.4 |
| Gross profit | $62.4 | $60.8 | $175.3 | $158.3 |
| Operating income | $36.4 | $32.9 | $95.7 | $83.7 |
| Net income | $23.5 | $20.0 | $60.7 | $48.7 |
| Diluted EPS | $0.91 | $0.77 | $2.34 | $1.89 |
| Operating cash flow | Not separately provided | Not separately provided | $104.2 | $82.9 |
- Q3 revenue rose 7.8%; operating income rose 10.6% and net income rose 17.9%. Nine-month revenue increased 8.1%, operating income 14.3% and net income 24.8%.
- Calculated gross margin was approximately 25.8% for Q3 versus 27.0% a year earlier; nine-month gross margin was approximately 25.6% versus 24.9%. Calculated operating margin was approximately 15.0% versus 14.6% in Q3 and 14.0% versus 13.2% for nine months.
- Q3 Energy revenue was $136.0 million and segment operating income $18.8 million; Galvanizing Services revenue was $106.4 million and segment operating income $24.3 million. Nine-month segment revenue was $383.8 million for Energy and $301.8 million for Galvanizing Services.
- Nine-month capital expenditures were $32.2 million and acquisition spending was $49.8 million. Investing cash outflow was $80.9 million; financing cash outflow was $27.1 million. Cash declined $4.9 million to $17.6 million.
- At November 30, cash was $17.6 million, current assets $320.3 million and current liabilities $176.1 million. Working capital was $144.2 million, compared with $167.2 million at November 30, 2014.
- Total debt was $321.9 million, including $22.7 million due within one year. Debt-to-equity was 0.69:1, versus 0.91:1 at November 30, 2014. Revolver borrowings were $94.0 million; after $14.5 million of letters of credit, approximately $116.5 million remained available under the credit agreement. AZZ reported compliance with its debt covenants.
Material changes and management commentary
- Energy revenue grew 4.6% in Q3 and 6.3% for nine months, supported by specialty welding services for petroleum refining, expanded project scope and new technology. Nine-month segment operating income increased 58.5%; management said growth excluding prior-year project overruns and realignment charges was 26.9%.
- Galvanizing Services revenue grew 12.3% in Q3 and 10.4% for nine months, primarily from higher processed-steel volumes following the June 2015 acquisition of US Galvanizing, plus activity in solar, petrochemical and OEM markets. Higher zinc costs partially offset the volume-related operating-income gains.
- The US Galvanizing acquisition added six galvanizing facilities and Texas Welded Wire. AZZ also entered a long-term supply and service agreement to be the primary galvanizing provider for Meyer Steel Structures.
- Corporate expenses were nearly unchanged in Q3 but rose $8.4 million for nine months year over year. The prior-year period included a $9.1 million reversal of a Nuclear Logistics acquisition contingent liability; excluding that and realignment items, management said nine-month corporate expenses were flat.
- Interest expense declined year over year, which management attributed to lower average debt balances. The effective tax rate was 28.0% for Q3 and 27.5% for nine months, down from 30.4% and 31.6%, respectively, primarily due to state tax benefits.
- Energy backlog was $324.4 million at November 30, down 2.5% from February 28, 2015 but above $300.3 million a year earlier. Q3 book-to-ship ratio was 0.94, compared with 0.87 in the prior-year quarter; quarterly incoming orders increased 16.6% year over year.
Outlook, risks and unusual items
- The filing provides no specific numerical earnings or revenue guidance. Management stated that cash, operating cash flows and expected access to credit were sufficient for foreseeable needs.
- Risks identified include customer demand and shipment delays, economic and political conditions, commodity prices (including zinc, natural gas, copper, aluminum, steel and nickel alloys), foreign exchange, financing availability and execution of acquisitions and growth plans. Cost pass-through may be limited by customer resistance or competitive conditions.
- AZZ recorded an estimated $0.9 million of Energy capacity-consolidation costs in fiscal 2016, including severance and fixed-asset disposition/write-offs. The nine-month results also included a $0.5 million net gain from insurance proceeds and sale of the St. Catharines property.
- Routine lawsuits include labor, employment, intellectual-property, workers’ compensation and environmental matters; management did not expect them to have a material effect. The filing reported no material change in previously disclosed risk factors, no subsequent events and effective disclosure controls.
Important facts for investors to verify
- Whether Energy bookings and backlog continue to support shipments, given the Q3 book-to-ship ratio below 1.0.
- How the US Galvanizing acquisition contributes to revenue, margins, cash generation and debt needs.
- Whether higher zinc and other input costs can be passed through or mitigated, and whether segment margins hold up.
- Debt maturity and covenant capacity, including revolver availability, letters of credit and the scheduled principal payments disclosed in the filing.
- The cash-flow impact of working-capital movements, capital spending, dividends and any further acquisitions.