AZZ INC. Forward Looking Statements Certain statements herein about our expectations of future events or results constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by terminology such as "may," "should," "expects," "plans," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Such forward-looking statements are based on currently available competitive, financial and economic data and management's views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. In addition, certain factors could affect the outcome of the matters described herein. This Quarterly Report on Form 10-Q may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand and response to products and services offered by AZZ, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets, and the hot dip galvanizing markets; prices and raw material cost, including zinc and natural gas which are used in the hot dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic, customer requested delays of shipments, acquisition opportunities, currency exchange rates, adequacy of financing, and availability of experienced management and employees to implement AZZ's continued growth strategy; a downturn in market conditions in any industry relating to the products we inventory or sell or the services that we provide; the continuing economic volatility in theU.S. and other markets in which we operate; acts of war or terrorism insidethe United States or abroad; natural disasters in the countries in which we operate; and other changes in economic and financial conditions. AZZ has provided additional information regarding risks associated with the business in AZZ's Annual Report on Form 10-K for the fiscal year endedFebruary 28, 2019 and other filings with theSEC , available for viewing on AZZ's website at www.azz.com and on theSEC's website at www.sec.gov. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The following discussion should be read in conjunction with management's discussion and analysis contained in our Annual Report on Form 10-K for the fiscal year endedFebruary 28, 2019 , and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. Results of Operations We have two distinct operating segments, the Energy segment and the Metal Coatings segment, as defined in our Annual Report on Form 10-K for the fiscal year endedFebruary 28, 2019 . Management believes that the most meaningful analysis of our results of operations is to analyze our performance by segment. We use revenue and operating income by segment to evaluate our segments. Segment operating income consists of net sales less cost of sales and selling, general and administrative expenses that are specifically identifiable to a segment. For a reconciliation of segment operating income to consolidated operating income, see Note 4 to our quarterly condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. Orders and Backlog Our entire backlog, which is inclusive of transaction taxes for certain foreign subsidiaries, relates to our Energy segment and was$274.5 million as ofNovember 30, 2019 , a decrease of$58.4 million , or 17.5%, as compared to$332.9 million as ofFebruary 28, 2019 . Our backlog decreased$33.3 million , or 10.8%, as compared to the same period in the prior fiscal year. For the three months endedNovember 30, 2019 , our incoming net orders increased by$52.4 million , or 24.8% when compared to same period of fiscal 2019 and our book-to-revenue ratio increased to 0.91 to 1 from 0.88 to 1. These decreases in backlog were primarily attributable to softness in net bookings during the first two quarters of fiscal 2020 due to lower overall international project bookings, but were partially offset by incrementally higher bookings of our industrial solutions during the third quarter of fiscal 2020. In addition, the decreases in backlog were due to higher overall revenues for the three and nine months endedNovember 30, 2019 related primarily to certain large international projects that were booked in the prior year and commenced revenue recognition in the first quarter of fiscal 2020 upon satisfying the revenue recognition criteria. 18
--------------------------------------------------------------------------------
Table of Contents
The table below includes the progression of backlog (in thousands):
Period Ended Period Ended
Backlog 2/28/2019 $ 332,894 2/28/2018 $ 265,417
Net bookings 256,344 295,738
Acquired backlog - 6,006
Revenues recognized (289,123 ) (262,236 )
Backlog 5/31/2019 300,115 5/31/2018 304,925
Book to revenue ratio 0.89 1.13
Net bookings 238,007 253,882
Revenues recognized (236,190 ) (222,787 )
Backlog 8/31/2019 301,932 8/31/2018 336,020
Book to revenue ratio 1.01 1.14
Net bookings 263,695 211,273
Revenues recognized (291,139 ) (239,516 )
Backlog 11/30/2019 274,488 11/30/2018 307,777
Book to revenue ratio 0.91 0.88
Segment Revenues
For the three and nine months ended November 30, 2019 , consolidated revenues
increased $51.6 million , or 21.6% and $91.9 million or 12.7%, respectively, as
compared to the same periods in fiscal 2019.
The following table reflects the breakdown of revenue by segment (in thousands):
Three Months Ended November 30,
Nine Months Ended
2019 2018 2019 2018
Net sales:
Energy $ 161,943 $ 132,025 $ 440,259 $ 385,526
Metal Coatings 129,196 107,491 376,193 339,013
Total net sales $ 291,139 $ 239,516 $ 816,452 $ 724,539
Revenues for the Energy segment increased $29.9 million or 22.7% and $54.7
million or 14.2%, respectively, for the three and nine months ended November 30,
2019 as compared to the same periods in fiscal 2019. For the three months ended
November 30, 2019 , the increase was primarily related to increased sales of our
industrial solutions on a large international refining project. For the nine
months ended November 30, 2019 , the increase was primarily attributable to a
general uptick in the sales of our electrical products during the first two
quarters, the satisfaction of the revenue recognition criteria for certain large
international electrical projects that were booked in the prior year and the
Westinghouse settlement noted further below.
Revenues for the Metal Coatings segment increased $21.7 million or 20.2% and
$37.2 million or 11.0%, respectively, for the three and nine months ended
November 30, 2019 as compared to the same periods in fiscal 2019. These
increases were the result of higher selling prices and higher volumes of steel
processed. The increases in volume were due primarily to our acquisitions of
Tennessee Galvanizing, Inc. and K2 Partners, Inc. during the first quarter of
fiscal 2020 and, in addition, we processed incrementally higher volumes at our
other pre-existing galvanizing facilities. For additional information on our
recent acquisitions in the Metal Coatings segment see Note 10 to the condensed
consolidated financial statements.
19--------------------------------------------------------------------------------
Table of Contents
Segment Operating Income
The following table reflects the breakdown of operating income (loss) by segment
(in thousands):
Three Months Ended November 30 ,
Nine Months Ended
2019 2018 2018 2017
Operating income (loss):
Energy $ 17,421 $ 11,532 $ 34,231 $ 25,763
Metal Coatings 27,258 18,321 85,323 65,581
Corporate (11,251 ) (7,084 ) (32,945 ) (27,774 )
Total operating income $ 33,428 $ 22,769 $ 86,609 $ 63,570
Operating income for the Energy segment increased $5.9 million or 51.1% and $8.5
million or 32.9%, respectively, for the three and nine months ended November 30,
2019 as compared to the same periods in fiscal 2019. The increase for the three
month period was primarily related to increased sales of our industrial
solutions and improved utilization within that business, which was partially
offset by the sale of lower margin products within the electrical business. The
increase for the nine months was primarily related to the sale of higher margin
products within our electrical business during the first two quarters and by the
increased sales of our industrial solutions and improved utilization within that
business during the second and third quarters. Operating margins were 10.8% and
8.7%, for the three months ended November 30, 2019 and 2018, respectively, and
7.8% and 6.7% for the nine months ended November 30, 2019 and 2018,
respectively.
Operating income for the Metal Coatings segment increased by $8.9 million or
48.8% and $19.7 million or 30.1%, respectively, for the three and nine months
ended November 30, 2019 as compared to the same periods in fiscal 2019.
Operating margins were 21.1% and 17.0%, for the three months ended November 30,
2019 and 2018, respectively, and 22.7% and 19.3% for the nine months ended
November 30, 2019 and 2018, respectively. These increases were primarily
attributable to the increased volumes and selling prices described above and a
decline in zinc costs. In addition, the nine months ended November 30, 2018
included a charge of $1.3 million for assets impairments, employee severance and
other disposal costs related to the consolidation of two galvanizing facilities
in the Gulf Coast region of the United States . No such charges were recorded in
fiscal 2020.
Corporate Expenses
Corporate expenses increased by $4.2 million or 58.8%, and $5.2 million or
18.6%, respectively, for the three and nine months ended November 30, 2019 as
compared to the same periods in fiscal 2019. These increases were primarily
attributable to higher employee compensation costs, including stock-based
compensation, and outside services. In the prior year comparable periods, we
recorded lower share-based compensation expense as a result of certain employee
performance share unit grants that were forfeited when various vesting
conditions were not satisfied during those periods.
Interest Expense
Interest expense for the three and nine months ended November 30, 2019 was $3.3
million and $10.4 million , respectively as compared to $3.7 million and $11.5
million for the respective prior year comparable periods. These decreases were
primarily attributable to lower average outstanding debt balances and somewhat
lower interest rates on variable rate debt. Our gross debt to equity ratio was
0.39 to 1 as of November 30, 2019 , compared to 0.46 to 1 as of November 30,
2018 .
Income Taxes
The provision for income taxes reflects an effective tax rate of 28.6% and 22.3%
for the three and nine months ended November 30, 2019 , respectively, as compared
to 17.8% and 19.9% for the respective prior year comparable periods. The
increases in the effective tax rates were primarily attributable to fiscal year
2019 tax return to provision adjustments that were recorded during the three
months ended November 30, 2019 . For the nine months ended November 30, 2019 , the
increase in the effective tax rate was partially offset by a one time deferred
income tax benefit recognized in the second quarter related to errors corrected
during a deferred income tax review.
.
20--------------------------------------------------------------------------------
Table of Contents
Westinghouse Electric Company Bankruptcy Case We had existing contracts with subsidiaries ofWestinghouse Electric Company ("WEC"). WEC and the relevant subsidiaries (the "Debtors") filed relief under Chapter 11 of the Bankruptcy Code onMarch 29, 2017 in theUnited States Bankruptcy Court for the Southern District of New York , jointly administered as In reWestinghouse Electric Company , et al., Case No. 17-10751 (the "Bankruptcy Case"). The Company has been collecting on post-petition amounts due and owed. OnFebruary 22, 2018 , theUnited States Bankruptcy Court for the Southern District of New York approved the Debtors' Modified First Amended Disclosure Statement for the Joint Chapter 11 Plan of Reorganization. In the Disclosure Statement, the Debtors estimated a 98.9% to 100% distribution on Allowed General Unsecured Claims. We filed approximately$12.0 million of such claims with the court, which includes 100% of our pre-petition claims. InApril 2019 , for one of our plants, the Company entered into a settlement agreement with the third party bankruptcy administrator related to outstanding claims. The agreement amount of approximately$8.1 million represented 100% of those outstanding claims for such plant. The impact of the settlement noted above had no material impact on operating income for the period. During the second quarter of fiscal 2020, the Company received full and final payment of all outstanding amounts related to the bankruptcy and recorded a favorable non material income impact in the second quarter related to the final reconciliations of these accounts with our counter-parties. Liquidity and Capital Resources We have historically met our cash needs through a combination of cash flows from operating activities along with bank and bond market debt. Our cash requirements are generally for operating activities, cash dividend payments, capital improvements, debt repayment, acquisitions and share repurchases. We believe that our cash position, cash flows from operating activities and our expectation of continuing availability to draw upon our credit facilities are sufficient to meet our cash flow needs for the foreseeable future. Cash Flows The following table summarizes our cash flows by category for the periods presented (in thousands): Nine Months Ended November 30, 2019 2018 Net cash provided by operating activities $ 72,054 $
58,104
Net cash used in investing activities (82,834 ) (21,329 ) Net cash provided by (used in) financing activities 1,209
(39,274 )
For the nine month period endedNovember 30, 2019 , net cash provided by operating activities was$72.1 million , net cash used in investing activities was$82.8 million , net cash provided by financing activities was$1.2 million , and a decrease of$0.1 million from the net effect of exchange rate changes on cash resulting in a net decrease in cash and cash equivalents of$9.7 million . In comparison to the comparable period in fiscal 2019, the results in the statement of cash flows for operating activities for the nine month period endedNovember 30, 2019 , are primarily attributable to increased net income and to the positive impacts of changes in working capital. The Company's use of cash for investing activities was higher due to increased spending on acquisitions and capital expenditures. Net cash provided by (used in) financing activities was higher during the nine month period endedNovember 30, 2019 as compared to the prior year comparable period due primarily to increased net borrowings. Our working capital was$232.2 million as ofNovember 30, 2019 , as compared to$213.8 million atFebruary 28, 2019 . Financing and Capital As ofNovember 30, 2019 , the Company had$255.0 million of floating and fixed rate notes outstanding with varying maturities through fiscal 2023 and the Company was in compliance with all of the covenants related to these outstanding borrowings. As ofNovember 30, 2019 , the Company had approximately$305.3 million of additional credit available for future draws or letters of credit. For additional information on the Company's outstanding borrowings see Note 6 to the condensed consolidated financial statements and further below under Contractual Obligations. 21
--------------------------------------------------------------------------------
Table of Contents
Share Repurchase Program In January of 2012, our Board authorized the repurchase of up to ten percent of the outstanding shares of our Common Stock. The share repurchase authorization does not have an expiration date, and the amount and prices paid for any future share purchases under the authorization will be based on market conditions and other factors at the time of the purchase. Repurchases under this share repurchase authorization would be made through open market purchases or private transactions in accordance with applicable federal securities laws, including Rule 10b-18 under the Exchange Act. The Company did not make any repurchases of its common shares during the three or nine months endedNovember 30, 2019 . Other Exposures We have exposure to commodity price increases in both segments of our business, primarily copper, aluminum, steel and nickel based alloys in the Energy segment and zinc and natural gas in the Metal Coatings segment. We attempt to minimize these increases through escalation clauses in customer contracts for copper, aluminum, steel and nickel based alloys, when market conditions allow and through fixed cost contract purchases on zinc. In addition to these measures, we attempt to recover other cost increases through improvements to our manufacturing process, supply chain management, and through increases in prices where competitively feasible. Off Balance Sheet Arrangements and Contractual Obligations As ofNovember 30, 2019 , the Company did not have any off-balance sheet arrangements as defined underSEC rules. Specifically, there were no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on the financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company. The following summarizes our operating lease obligations, purchase commitments, debt principal payments, and interest payments for the remainder of the next five fiscal years and beyond (in thousands):
© Edgar Online, source
