AZZ Incorporated — Q3 FY2014 Form 10-Q
Reporting period: Quarter and nine months ended November 30, 2013. AZZ operates Electrical and Industrial Products and Services and Galvanizing Services segments. Results are unaudited.
Key financial results
| Metric | Q3 FY2014 | Q3 FY2013 | Nine months FY2014 | Nine months FY2013 |
|---|---|---|---|---|
| Revenue | $197.8 million | $149.7 million | $570.7 million | $430.2 million |
| Net income | $18.4 million | $15.4 million | $49.4 million | $47.2 million |
| Diluted EPS | $0.72 | $0.60 | $1.92 | $1.85 |
| Operating cash flow | Not presented by quarter | $94.6 million | $66.6 million |
- Revenue increased 32% for the quarter and 33% year to date; net income rose about 20% and 5%, respectively. Gross margin was approximately 27.0% for the quarter and 28.0% year to date, versus 30.1% and 29.3% in the comparable periods.
- Quarterly segment revenue was $112.0 million for Electrical and Industrial Products and Services and $85.7 million for Galvanizing Services. Segment operating income was $11.9 million and $21.3 million, respectively. Electrical segment operating margin was 11%, down from 15%; Galvanizing margin was 25%, down from 27%.
- Nine-month investing cash outflow was $309.7 million, including $275.7 million for acquisitions and $34.9 million of capital spending. Financing provided $210.5 million. Cash decreased $4.7 million from fiscal year-end to $50.9 million.
- At November 30, cash was $50.9 million, working capital $177.9 million, and current ratio 2.21. Total debt was $436.6 million, including $19.9 million due within one year; reported long-term debt-to-equity was 1.17. Debt increased substantially to fund Aquilex SRO. About $40.6 million of revolver availability remained after $17.4 million of letters of credit.
Changes, acquisitions, and unusual items
- The March 2013 Aquilex SRO acquisition for $275.7 million materially changed the business mix and drove much of the reported Electrical segment growth; Aquilex contributed $146.8 million of nine-month revenue. NLI contributed another $41.2 million. Canadian galvanizing acquisitions G3 and Galvcast contributed $24.6 million of nine-month revenue combined.
- Excluding Aquilex and NLI, Electrical segment operating income declined year over year. Acquisition-related intangible amortization was $3.4 million for the quarter and $9.6 million year to date; management said amortization would decline in FY2015 as acquired NLI backlog is fully amortized.
- On an Aquilex pro forma basis, nine-month revenue was $593.8 million versus $601.6 million and net income was $52.7 million versus $53.5 million. These figures indicate reported growth was acquisition-dependent and are adjusted pro forma measures.
- Q3 included a $7.4 million net gain on insurance settlement related to the Joliet facility fire; nine-month insurance gains were $8.2 million. Year-to-date results also included a $4.2 million favorable lawsuit settlement and $4.3 million of Aquilex acquisition costs. The filing discusses continuing Joliet-related losses and expected offsetting business-interruption insurance proceeds.
Outlook, risks, and contingencies
- Electrical backlog was $211.8 million, down 5% from February 28, 2013; quarterly book-to-ship was 1.00. Orders increased 30% year over year. Management attributed softer bookings relative to shipments partly to lower-than-normal domestic nuclear outages and expected recovery in that market during FY2015.
- Management expects gradual petrochemical-market recovery over the next three years, but cited delayed nuclear projects, weaker transmission and distribution demand, renewable-project leveling, and petrochemical engineering and permitting delays.
- Key stated risks include customer demand and shipment delays, economic conditions, commodity costs (including zinc and natural gas), foreign exchange, acquisition execution, financing availability, and access to experienced personnel. Commodity pass-through clauses and supplier pricing arrangements may not fully protect margins.
- AZZ reported compliance with debt covenants. Its credit facilities include leverage and fixed-charge coverage tests and capital-expenditure limits. An NLI earnout of up to $20 million remained possible; its recorded present value was $9.0 million. Management said working capital, operating cash flow, and credit availability should fund anticipated needs, acquisitions, dividends, and capital spending.
- No material risk-factor changes or material legal proceedings were reported; no subsequent events were identified. Management concluded disclosure controls were effective.
Important facts for investors to verify
- How much of future revenue and earnings growth is organic versus attributable to acquired businesses, and how reported results compare with acquisition pro forma results.
- Whether Electrical segment margins and backlog stabilize as nuclear outages recover, and whether Galvanizing demand improves in transmission, renewable, and petrochemical markets.
- Debt repayment, remaining revolver capacity, covenant headroom, and the cash-flow effects of acquisition financing and planned capital expenditures.
- Final insurance recoveries and costs associated with the Joliet fire, and the eventual amount, if any, payable under the NLI earnout.
- Whether commodity-cost increases can be passed through to customers and whether receivable days outstanding, which rose to 58 from 49, remain manageable.