AZZ Inc. (AZZ, Financial), the $1.23 billion Fort Worth, Texas-based diversified industrial company, reported a (-)14% year-over-year revenue decline to $208.6 million and a (-)37% profit drop to $13.24 million in its first quarter of 2018, resulting in a 6.3% margin compared to 8.7% a year earlier.
"First-quarter financial performance reflected continued delays and smaller-than-expected scopes in refinery turnarounds and maintenance projects in our Energy segment. We experienced some margin pressure in our Electrical platform as we continued to feel the effects of soft markets in the oil and gas sector and the uncertainty and delays related to the Westinghouse nuclear projects. We did, however, see improving performance in some of the other markets served by our Energy segment. Overall on a sequential basis, we had improved top and bottom line financial performance with 7.6% and 14.3% growth, compared to the fourth quarter of fiscal year 2017.
"Although the Metal Coatings segment revenue was down versus the first quarter of last year, on a sequential basis, it was up 12.8% compared to the last quarter of fiscal year 2017 and performed as expected. There are still headwinds in the galvanizing market; however, I continue to believe that the second half of the fiscal year will strengthen as infrastructure spend improves. Our Metal Coatings segment is well positioned for new revenue streams with our new powder coating facility in Crowley, Texas that is now open and the recent acquisition of Enhanced Powder Coating. In addition, our new operation for AZZ's GalvaBar™ corrosion-resistant galvanized rebar is now open for business. We expect all of these businesses to be important contributors in the coming years, and we have changed the name of the Galvanizing segment to the Metal Coatings segment to reflect the impact and importance of our expanded metal coating product offerings.
"Despite the current market conditions, we are cautiously optimistic that fiscal year 2018 will benefit from improved infrastructure project spending during the second half of the year. We are committed and focused on delivering organic growth and driving operational efficiencies, by investing in new organic growth initiatives, including additional metal coatings offerings to drive future sales and maintaining an active M&A program to support our strategic growth initiatives. Looking forward, we are reaffirming our previously issued fiscal 2018 guidance of earnings per share in the range of $2.60 to $3.10 per diluted share and annual sales in the range of $880 million to $950 million. We expect to be even better positioned when overall market conditions improve." – Tom Ferguson, president and chief executive officer of AZZ Inc.
Â
Valuations
At a one-year low in terms of its share price, AZZ trades at par with its peers. According to GuruFocus data, the company had a trailing price-earnings (P/E) ratio of 23.3 times vs. the industry median of 23.1 times, a price-book (P/B) ratio of 2.3 times vs. 1.87 times and a price-sales (P/S) ratio of 1.51 times vs. 1.27 times.
The company also had a 1.42% trailing dividend yield with a 33% payout ratio.
Average fiscal 2018 revenue and earnings-per-share estimates indicated forward multiples of 1.4 times and 18.2 times.
Total returns
AZZ has performed poorly so far this year having generated (-)25.1% total losses vs. the Standard & Poor's 500 index’s 9.96%.
AZZ Inc.
According to filings, AZZ was established in 1956 and incorporated under the laws of Texas.
It is a global provider of galvanizing services, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets.
In 2016, AZZ generated 81.7% of its revenue in the U.S.
The company has two distinct operating segments: the Energy Segment and Metal Coatings Segment formerly known as Galvanizing (1).
AZZ Energy
AZZ Energy is dedicated to delivering safe and reliable transmission of power from generation sources to end customers, and automated weld overlay solutions for corrosion and erosion mitigation to critical infrastructure in the energy markets worldwide.
In the first quarter, revenue in the energy segment fell (-)15.7% year over year to $116.5 million (56% of unadjusted sales) and delivered an operating margin of 7.4% compared to 13.6% a year earlier.
According to filings, the decline in business revenue during the quarter was caused by several factors including reduced turnarounds in the U.S. refinery market, continued softness in the petrochemical market and delays in the release of several large projects in the U.S. and overseas.
AZZ Metal Coatings
AZZ Metal Coatings is a leading provider of metal finishing solutions for corrosion protection, including hot dip galvanizing to the North American steel fabrication industry.
In the recent quarter, revenue in the metal coatings business fell (-)11.9% year over year to $92.1 million and had a margin of 23% compared to 23.2% a year earlier.
Sales and profits
In the past three years, AZZ recorded average revenue growth of 4.5%, profit growth of 0.74% and profit margin average of 7.85%.
Cash, debt and book value
As of May, AZZ had $6.3 million in cash and cash equivalents and $299.8 million in debt with debt-equity ratio 0.56 times compared to 0.65 times a year earlier. Overall equity increased $33.5 million while debt declined by $24.8 million year over year.
Of AZZ’s $1 billion assets 44.7%Â were identified as goodwill and intangibles while book value increased by 6.7% year over year to $536.4 million.
Cash flow
In the first quarter, AZZ recorded cash outflow from operations of $15.8 million resulting from lower profits and higher cash outflow in relation to the company’s billings related to costs and estimated earnings on uncompleted contracts, accounts payable, and other accrued liabilities and income taxes payable.
Capital expenditures were $10.1 million leaving AZZ with free cash outflow of (-)$25.95 million compared to (-)$635,000 a year earlier. Despite the outflows, the company provided $7.1 million in dividends and treasury repurchases.
AZZ also took in $29 million in loan net repayments.
The cash flow summary
In the past three years, AZZ allocated $110 million in capital expenditures, reduced overall debt by $133 million, generated $263 million in free cash flow and provided $52 million in dividends and repurchases at an average free cash flow payout ratio of 20.9%.
Conclusion
The first-quarter results provided an indication that AZZ is still struggling to recover from the recent turmoil the energy market has recently suffered brought by lower oil price. Filings revealed that the company said the slow turnaround in the refinery market and continued softness in the petro industry helped pull down the company’s business generation in the quarter.
Nonetheless, AZZ expects this current fiscal year to deliver higher overall revenue and profits compared to last year.
Further, AZZ appeared to have a leveraged balance sheet at 0.56 times debt-equity ratio accompanied by good amounts of blue sky elements (such as goodwill and intangibles) at 44.7% of assets. The company also has provided limited payouts to its shareholders.
Average analysts have a hold recommendation on AZZ shares with a target price of $56 vs. $47.35 at the time of writing. Using average revenue estimates for this fiscal year multiplied with three-year P/S average and 25% margin indicated a per share figure of $42.8.
In summary, AZZ is a pass despite its 52-week low share price.
Notes
- Company filings
Energy segment
AZZ's Energy segment is a leading provider of specialized products and services designed to support industrial, nuclear and electrical applications. Our product offerings include customswitchgear, electrical enclosures, mediumand high voltage bus ducts, explosion proof and hazardous duty lighting, nuclear safety-related equipment and tubular products. In addition to our product offerings, AZZ's Energy segment focuses on extension of life cycle for the power generation, refining and industrial infrastructure, through automated weld overlay solutions forcorrosion and erosion mitigation. The markets for our Energy segment are highly competitive and consist of large multinational companies, along with numerous small independent companies. Competition is based primarily on product quality, range of product line, price and service. While some of our competitors are much larger than us, our Energy segment offers some of the most technologically advanced solutions and engineering resources developed from a legacy of proven, reliable product options, allowing AZZ Energy to be ideally positioned to meet the most challenging application-specific demands.
Copper, aluminum, steel and nickel based alloys are the primary raw materials used by this segment. We do not foresee any availability issues for these materials. We do not contractually commit to minimum volumes and increases in price for these items are normally managed through escalation clauses to the customer’s contracts, which the customers may not accept. In addition, we seek to get firm pricing contracts from our vendors on these materials at the time we receive orders from our customers in order to minimize risk.
We sell Energy Segment products through manufacturers’ representatives, distributors, agents and our internal sales force. We are not dependent on any single customer for this segment, and the loss of any single customer would not have a material adverse effect on our consolidated revenues or net income.
On March 1, 2016, we completed an acquisition of the equity securities of Power Electronics Inc., a Millington, Maryland-based manufacturer and integrator of electrical enclosure systems. The acquisition of PEI will enhance our capacity to serve existing and new customers in a diverse set of industries along the Eastern seaboard of the U.S.
Galvanizing segment
The Galvanizing segment provides hot dip galvanizing to the steel fabrication industry through facilities located throughout the U.S. and Canada. Hot dip galvanizing is a metallurgical process in which molten zinc is applied to steel. The zinc alloying renders corrosion protection to fabricated steel for extended periods of up to 50 years. As of Feb. 28, we operated forty-one galvanizing plants, which are located in Alabama, Arkansas, Arizona, Colorado, Indiana, Illinois, Louisiana, Kentucky, Minnesota, Mississippi, Missouri, Nebraska, Nevada, Ohio, Oklahoma, Tennessee, Texas, Virginia and West Virginia in the U.S. and Ontario, Quebec and Nova Scotia in Canada.
Galvanizing is a highly competitive business, and we compete with other galvanizing companies, captive galvanizing facilities operated by manufacturers, and alternate forms of corrosion protection such as material selection (stainless steel or aluminum) or barrier protections such as powder coating, paint, and weathering steel. Our galvanizing markets are generally limited to areas within relatively close proximity to our galvanizing plants due to freight cost.
Zinc, the principal raw material used in the galvanizing process, is currently readily available but is subject to volatile pricing. We manage our exposure to commodity pricing of zinc by utilizing agreements with zinc suppliers that include fixed-costs contracts to guard against escalating commodity prices. We also secure firm pricing for natural gas supplies with individual utilities when possible. We may or may not continue to use these or other strategies to manage risk in the future.
We typically serve fabricators or manufacturers that provide services to the electrical and telecommunications, bridge and highway, petrochemical and general industrial markets, and numerous originalequipment manufacturers. We do not depend on any single customer for a significant amount of our sales, and the loss of any single customer would not have a material adverse effect on our consolidated revenues or net income.
Disclosure: I do not have shares in any of the companies mentioned.
