Business Overview and History

AZZ Inc. (AZZ) is a diversified provider of hot-dip galvanizing and coil coating solutions, serving a broad range of end-markets primarily in North America. The company operates through three distinct segments: AZZ Metal Coatings, AZZ Precoat Metals, and AZZ Infrastructure Solutions.

AZZ was established in 1956 and incorporated in the state of Texas. The company started as a provider of hot-dip galvanizing services to protect steel from corrosion. Over the years, AZZ expanded its metal finishing solutions to include coil coating, powder coating, anodizing, and plating. In 2022, AZZ made a strategic acquisition by purchasing Precoat Metals, a leading provider of aesthetic and corrosion protective coatings for steel and aluminum coil. This expanded AZZ's capabilities in the coil coating market and strengthened its position as a provider of comprehensive metal finishing solutions.

The company has faced some challenges over the years. In 2017, AZZ was involved in a legal dispute with a previous customer of its AIS business, which was retained following the disposition of that division. The case went to trial in 2023 and resulted in a judgment against AZZ. However, the company believes it has strong grounds for an appeal, which is expected to take two years.

Prior to the Precoat acquisition in 2022, AZZ also had to navigate the sale of its AIS business in 2022. This was a strategic move to focus the company on its core metal coatings and precoat metals segments. Through these transitions, AZZ has maintained its position as a leading independent provider of hot-dip galvanizing and coil coating solutions in North America, serving a diverse set of end markets.

The AZZ Metal Coatings segment is a leading provider of metal finishing solutions, including hot-dip galvanizing, spin galvanizing, powder coating, anodizing, and plating, serving the North American steel fabrication industry and other sectors. Hot-dip galvanizing is a metallurgical manufacturing process in which molten zinc reacts with steel, providing corrosion protection and extending the lifecycle of fabricated steel for several decades.

The AZZ Precoat Metals segment provides aesthetic and corrosion-protective coatings and related value-added services for steel and aluminum coil, primarily serving the construction, HVAC, container, transportation, and other end markets in North America. The coil coating process emphasizes sustainability and enhanced product lifecycles. It involves cleaning, treating, painting, and curing metal coils as a flat material before they are cut, formed, and fabricated into finished products.

The AZZ Infrastructure Solutions segment represents the company's 40% non-controlling interest in the AVAIL joint venture, a global provider of specialized services and technologies for the power generation, transmission, distribution, oil and gas, and industrial markets. This segment is primarily 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 markets worldwide.

Financial Performance and Ratios

As of the latest fiscal year ended February 29, 2024, AZZ reported total revenue of $1.54 billion and net income of $101.61 million. The company's gross profit margin stood at 23.9%, while its EBITDA margin was 20.5%. AZZ's current ratio was 1.85, indicating a healthy liquidity position, and its debt-to-equity ratio was 0.92, suggesting a moderately leveraged capital structure. The company generated operating cash flow (OCF) of $244.47 million and free cash flow (FCF) of $149.35 million for the fiscal year.

In the most recent quarter ended August 31, 2024, AZZ reported sales of $409.01 million, a 2.6% increase from the prior-year quarter. The company's gross profit margin improved to 25.3%, up 90 basis points from the same period last year. Operating income increased to $67.6 million, or 16.5% of sales, compared to $61 million, or 15.3% of sales, in the prior-year quarter. AZZ's net income for the quarter was $35.42 million, up from $28.3 million in the same quarter of the previous year. The company generated operating cash flow of $47.49 million and free cash flow of $15.38 million for the quarter.

AZZ's liquidity position remains strong, with $2.15 million in cash as of the most recent quarter. The company has a $400 million senior secured Revolving Credit Facility, of which $310.70 million was available. The current ratio stands at 1.85, and the quick ratio is 1.32, further indicating a healthy liquidity position.

Segment Performance

AZZ's Metal Coatings segment reported a 1% increase in sales in the second quarter, driven by higher volumes and improved pricing. The segment's EBITDA margin exceeded the prior year and the company's target range, reaching 31.7%, reflecting the operational efficiency and pricing discipline within this business. For the three months ended August 31, 2024, the AZZ Metal Coatings segment had sales of $171.5 million and operating income of $47.7 million.

The Precoat Metals segment delivered a strong 3.8% sales increase, attributable to higher coil coating volumes. The segment's EBITDA margin improved to 21.1%, supported by the increased volumes, improved operational performance, and favorable product mix. For the three months ended August 31, 2024, the AZZ Precoat Metals segment had sales of $237.5 million and operating income of $42.5 million.

The Infrastructure Solutions segment, represented by AZZ's 40% stake in the AVAIL joint venture, contributed $1.5 million in equity earnings during the second quarter, an increase from $1.0 million in the prior-year period. The AVAIL business continues to perform well, particularly in its enclosure offerings.

Outlook and Guidance

For the fiscal year 2025, AZZ is maintaining its revenue guidance of $1.525 billion to $1.625 billion. The company has narrowed its adjusted EBITDA guidance to $320 million to $360 million and increased its adjusted earnings per share guidance to $4.70 to $5.10. The updated guidance reflects the strong first-half performance, lower interest costs, and an annualized effective tax rate of 24%.

Capital expenditures for the current fiscal year are expected to remain unchanged at $100 million to $120 million, including approximately $63 million related to the new greenfield plant. Debt pay-down is now expected to exceed $100 million, an increase from the previous range of $60 million to $90 million.

The company is optimistic about the continued growth opportunities in its end markets, particularly in the construction, utilities, and transportation sectors. AZZ remains focused on executing its strategic initiatives, which include driving revenue growth, improving operational efficiency, and maintaining a disciplined capital allocation strategy.

Risks and Challenges

AZZ faces risks related to fluctuations in commodity prices, particularly zinc and natural gas, which are used in its hot-dip galvanizing and coil coating processes. The company attempts to mitigate these risks through supplier agreements and pricing adjustments. Additionally, the company's business is subject to the cyclical nature of the construction and industrial markets, which can impact demand for its products and services.

Other potential risks include labor availability, supply chain disruptions, and the potential impact of macroeconomic conditions, such as inflation and changes in interest rates, on its customer base and operations. AZZ closely monitors these factors and implements strategies to adapt to market conditions and maintain its competitive edge.

Geographic Performance

AZZ operates primarily in North America, with the majority of its sales in the United States. The company does not have a significant international presence, which may limit its exposure to global market fluctuations but also constrains its potential for international growth.

Conclusion

AZZ's diversified business model, focus on operational excellence, and strategic investments in growth initiatives position the company well to navigate the evolving market landscape. The company's strong financial performance, segment-level successes, and optimistic outlook suggest that AZZ continues to be a leading provider of corrosion protection and aesthetic coatings solutions in North America. With a solid balance sheet, improving margins, and a clear strategic direction, AZZ appears well-positioned to capitalize on opportunities in its core markets and deliver value to its shareholders.