AZZ Inc. (“AZZ”, the “Company”, "our" or “we”) was established in 1956 and incorporated under the laws of the state of Texas. We areThe Company is a global provider of metal coating services, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. We haveThe Company has two distinct operating segments: the Energy Segmentsegment and the Metal Coatings Segment.segment. 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. 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.

The accompanying condensed consolidated balance sheet as of February 28, 2018, which was derived from audited financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended February 28, 2018, included in the Company’s Annual Report on Form 10-K covering such period. 

Our fiscal year ends on the last day of February and is identified as the fiscal year for the calendar year in which it ends. For example, the fiscal year ended February 28, 2019 is referred to as fiscal 2019.

In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position of the Company as of May 31,November 30, 2018, the results of its operations for the three and nine months ended May 31,November 30, 2018 and 2017, and cash flows for the threenine months ended May 31,November 30, 2018 and 2017. These interim results are not necessarily indicative of results for a full year.

The Company expects to early adopt this standard in the fourth quarter of fiscal year 2019, which will be effective forretrospectively applied to the Companybeginning of fiscal year 2019. The standard, as subsequently amended, does not require full retrospective adoption,

In preparing for the adoption of this standard, onthe Company is substantially complete in assessing its portfolio of leases for accounting and disclosure purposes. The Company is also progressing with the design of the future lease accounting procedures, policies and related internal controls and with the implementation of lease accounting software. While the Company has not yet completed its evaluation of the financial statement impact of the new lease accounting standard, the Company expects that the adoption will result in a significant increase in assets and liabilities related to operating leases in its consolidated financial statements and related disclosures.balance sheets. However, the Company does not expect to record a significant cumulative effect adjustment as a result of adopting the standard.

The Company’s significant accounting policies are detailed in Note 1 of its Annual Report on Form 10-K for the year ended February 28, 2018. The following section includes revised accounting policies related to the adoption of ASC 606.

The Company determines revenue recognition through the following steps:

Earnings (loss) per share is based on the weighted average number of shares outstanding during each period, adjusted for the dilutive effect of stock awards.

The following table sets forth the computation of basic and diluted earnings (loss) per share (in thousands, expect per share data):

The Company has one share-based compensation plan, the 2014 Long Term Incentive Plan (the “Plan”). The purpose of the Plan is to promote the growth and prosperity of the Company by permitting the Company to grant to its employees, directors and advisors various types of restricted stock unit awards, performance share units, stock options, and stock appreciation rights to purchase common stock of the Company. The maximum number of shares that may be issued under the Plan is 1,500,000 shares. As of May 31,November 30, 2018, the Company hashad approximately 1,264,2991,248,775 shares available for future issuance under the Plan.

Restricted stock unit awards are valued at the market price of our common stock on the grant date. Awards issued prior to fiscal 2015 generally have a three year cliff vesting schedule and awards issued subsequent to fiscal 2015 generally vest ratably over a period of three years but these awards may vest earlyearlier in accordance with the Plan’s accelerated vesting provisions.

PerformanceThe Company also grants performance share unitunits ("PSU") awards are valued at the market price of our common stock on the grant date.to certain employees. These PSU awards have a three year performance cycle and will vest and become payable, if at all, on the third anniversary of the award date. The PSU awards are subject to the Company’s degree of achievement of a target annual average adjusted return on assets during these three-year periods.periods and, in certain circumstances, vesting is based on the relative performance of a predetermined group of peer companies. In addition, a multiplierthese PSU awards may be applied to the total awards grantedhave vesting conditions or certain vesting multipliers, which isare based on the Company’s total shareholder return during such three-year period in comparison to a defined specific industry peer group as set forth ingroup. The Company estimates the plan.fair value of PSU awards with performance and service conditions using the value of the Company's common stock on the date of grant. The activityCompany estimates the fair value of ourPSU awards with market conditions using a Monte Carlo simulation model on the date of grant.

A summary of the Company’ non-vested performance share unit awardsaward activity for the three monthsnine month period ended May 31,November 30, 2018 is as follows:

The Company also has an employee stock purchase plan,Employee Stock Purchase Plan, which allows employees of the Company to purchase common stock of the Company through accumulated payroll deductions. Offerings under this plan have a duration of 24 months (the "offering period"). On the first day of an offering period (the “enrollment date”) the participant is granted the option to purchase shares on each exercise date at the lower of 85% of the market value of a share of our common stock on the enrollment date or the exercise date. The participant’s right to purchase common stock under the plan is restricted to no more than $25,000 per calendar year and the participant may not purchase more than 5,000 shares during any offering period. Participants may terminate their interest in a given offering or a given exercise period by withdrawing all of their accumulated payroll deductions at any time prior to the end of the offering period. The fair value of the estimated number of shares to be issued under each offering is determined using the Black-Scholes option-pricing model. For the three monthsnine month period ended May 31,November 30, 2018, the Company issued 37,22473,702 shares under the Company's Employee Stock Purchase Plan.

Share-based compensation expense and related income tax benefits related to all the plans listed above were as follows (in thousands):

Unrecognized compensation cost related to restricted stock units, performance share unit awards, stock appreciation rights, and the employee stock purchase planCompany's Employee Stock Purchase Plan at May 31,November 30, 2018 totals $10.4$8.0 million.

The Company’s policy is to issue shares required under these plans from the Company’s treasury shares or from the Company’s authorized but unissued shares.

Net sales and operating income by segment for each period were as follows (in thousands):

Asset balances by segment for each period were as follows (in thousands):

The following table presents revenuerevenues by geographic region for each period (in thousands):

A reserve has been established to provide for the estimated future cost of warranties on a portion of the Company’s delivered products and is classified within other accrued liabilities on the consolidated balance sheet.sheets. Management periodically reviews the reserves and makes adjustments accordingly. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. 

The following table shows the changes in the warranty reserves sincefor the end of fiscalnine month period ended November 30, 2018 (in thousands):

The Company's debt consisted of the following for each of the periods presented (in thousands):

On March 31, 2018, the Company made the final principal payment of $14.3 million to fully settle the 2008 Senior Notes on the scheduled maturity date.

On March 22, 2018, the Company purchased certain assets through a bankruptcy sales process from Lectrus Corporation, a privately-held corporation based in Chattanooga, Tennessee. Lectrus designs and manufactures custom metal enclosures and provides electrical and mechanical integration. The acquisition will complement AZZ's current metal enclosure and switchgear businesses.

This acquisition was not significant. Accordingly, disclosures of the purchase price allocation and unaudited pro forma results of operations have not been provided.

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 the U.S. and other markets in which we operate; acts of war or terrorism inside the 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 ended February 28, 2018 and other filings with the SEC, available for viewing on AZZ’s website at www.azz.com and on the SEC’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 ended February 28, 2018, and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.

We have two distinct operating segments, the Energy Segmentsegment and the Metal Coatings Segment,segment, as defined in our Annual Report on Form 10-K for the fiscal year ended February 28, 2018. 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 5 to our quarterly consolidated financial statements included in this Quarterly Report on Form 10-Q.

Our entire backlog relates to our Energy Segment and was $329.7$307.8 million as of May 31,November 30, 2018, an increase of $64.3$42.4 million, or 24.2%16.0%, as compared to $265.4 million as of February 28, 2018. Our backlog increased $23.3$24.6 million, or 7.6%8.7%, as compared to the same period in the prior fiscal year. Both of these increases were primarily the result of several large international orders, and higher overall activity within the Energy Segment.Segment and incremental business generated from our acquisitions completed during the previous twelve months. For the three months ended May 31,November 30, 2018, our book-to-shipbook-to-revenue ratio increased slightly to 1.220.88 to 1 from 0.940.86 to 1 when compared to same period of fiscal 2018 and our incoming net orders increased by $126.8$31.5 million, or 65.4%17.5%.

The table below includes the progression of the backlog (in thousands):

For the three and nine months ended May 31,November 30, 2018, consolidated revenues increased $57.0$31.4 million, or 27.7%15.1%, and $114.8 million or 18.8%, respectively, as compared to the same periodperiods in fiscal 2018.

The following table reflects the breakdown of revenue by segment (in thousands):

Revenues for the Energy Segmentsegment increased 29.8%$25.0 million or 23.4%, and $68.0 million or 21.4%, respectively, for the three and nine months ended May 31,November 30, 2018 to $147.0 million as compared to the same periodperiods in fiscal 2018. The increaseThese increases in revenue wasrevenues were caused by several positive factors including increasedimproved turnarounds in the U.S. refinery market, increased international projects and an uptick in our electrical business. The increase wasThese increases were also attributable to incremental revenues from our acquisitions completed during the past twelve months and waswere partially offset by continued softness in the nuclear market.market, which is due in part to the Westinghouse Bankruptcy discussed below.

Revenues for the Metal Coatings Segmentsegment increased 25.2%$6.4 million or 6.3%, and $46.8 million or 16.0%, respectively, for the three and nine months ended May 31,November 30, 2018 to $115.3 million as compared to the same periodperiods in fiscal 2018. The increase wasThese increases were a result of higher selling prices and higher volumes inof steel processed during the periodperiods driven primarily by improvements in various markets. The increase wasThese increases were also attributable to incremental revenues from our acquisitions completed during the past twelve months.

The following table reflects the breakdown of operating income by segment (in thousands):

Operating income for the Energy Segmentsegment increased by $3.2$23.6 million or 48.4%195.0%, to $10.0and $28.8 million or 950.8%, respectively, for the three and nine months ended May 31,November 30, 2018 as compared to the same periodperiods in fiscal 2018. Operating margins were 6.8%8.7% and (11.3)%, for the three months ended May 31,November 30, 2018 as compared to 5.9%and 2017, respectively, and 6.7% and (1.0)% for the prior year comparable period.nine months ended November 30, 2018 and 2017, respectively. These increases were primarily attributable to the positive factors noted above and improvements in project margins. In addition, for the three and nine months ended November 30, 2017, the Company recognized an impairment charge of $8.3 million, classified within cost of sales, related to property, plant and equipment that was retired and a provision for doubtful accounts of $2.9 million, classified within selling, general and administrative, resulting from an adverse court decision related to certain outstanding accounts receivables. No such charges were recorded in the current fiscal year.

Operating income for the Metal Coatings Segment increasedsegment decreased by $3.9$3.4 million or 18.6%15.7% and $0.8 million or 1.2%, respectively, for the three and nine months ended November 30, 2018 as compared to the same periods in fiscal 2018. These decreases were primarily attributable to higher zinc and labor costs and a one-time charge of $1.3 million incurred during the second quarter of fiscal 2019 for asset impairments, employee severance and other disposal costs related to the consolidation of two galvanizing facilities in the Gulf Coast region of the United States. These unfavorable trends were partially offset by increased volumes and selling prices. Operating margins were 17.0% and 21.4%, for the three months ended May 31,November 30, 2018 as compared to the same period in fiscal 2018. Operating margins were 21.9%and 2017, respectively and 19.3% and 22.7% for the threenine months ended May 31,November 30, 2018 as comparedand 2017, respectively. These declines were attributable to 23.1%higher zinc and labor costs, which were not fully offset by increased selling prices, and the one-time charge for the prior year comparable period. The increase in operating income was primarily attributable to the higher volumes and selling prices noted above, while the decline in operating margins was a resultconsolidation of increased zinc costs.facilities.

Corporate expenses increaseddecreased by $3.5$0.9 million or 44.3% to $11.411.2%, and increased $3.4 million or 14.0%, respectively, for the three and nine months ended May 31,November 30, 2018 as compared to the prior year comparable period. The increase is primarily attributableperiods. During the three and nine months ended November 30, 2018, 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 the fiscal year. For the nine months ended November 30, 2018 as compared to the prior year comparable period, the decline in share-based compensation expense was more than offset by increased employee compensation, outside professional services and general corporate marketing activities.

Interest expense for the three and nine months ended May 31,November 30, 2018 was $3.8$3.7 million and $11.5 million, respectively, as compared to $3.4$3.5 million and $10.3 million for the three months ended May 31, 2017. The increase in interest expense in comparison to the same respective period in the prior year wascomparable periods. These increases were the result of ahigher interest rates on variable rate debt and slightly higher average outstanding debt balance. As of May 31, 2018, our gross outstanding debt was $322.5 million, compared to $300.3 million outstanding as of May 31, 2017.balances. Our gross debt to equity ratio was 0.560.46 to 1 as of May 31,November 30, 2018, compared to 0.560.57 to 1 as of May 31,November 30, 2017.

The provision for (benefit from) income taxes reflects an effective tax rate of 17.8% and (91.6)% for the three months ended November 30, 2018 and 2017, respectively, and the change was primarily attributable to the net loss incurred and various tax benefits received during the prior year period. The provision for income taxes reflects an effective tax rate of 22.0%19.9% and 24.2%, for the threenine months ended May 31,November 30, 2018 as compared to 28.4% forand 2017, respectively, and the comparable period in fiscal 2018. The decrease in the effective rate iswas primarily attributable to the Tax Cuts and Jobs Act of 2017.

We had existing contracts with subsidiaries of Westinghouse Electric Company (“WEC”). WEC and the relevant subsidiaries (the "Debtors") filed relief under Chapter 11 of the Bankruptcy Code on March 29, 2017 in the United States Bankruptcy Court

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.

For the three monthsnine month period ended May 31,November 30, 2018, net cash used inprovided by operating activities was $12.4$60.4 million, net cash used in investing activities was $10.8$21.3 million, net cash provided byused in financing activities was $16.8$41.6 million, and a decrease of $0.5$0.9 million from the net effect of exchange rate changes on cash resulting in a net decrease in cash and cash equivalents of $6.9$3.4 million. In comparison to the comparable period in fiscal 2018, the results in the statement of cash flows for operating activities for the three monthsnine month period ended May 31,November 30, 2018, are primarily attributable to the increase in net income partially offset by lessand more favorable impacts of changes in working capital. The Company's use of cash for investing activities was slightly higherlower due to increaseddecreased capital expenditures and lower spending for acquisitions year over year, partially offset by lower capital expenditures. Cash provided byacquisitions. Net cash used in financing activities was lowerhigher during the three monthsnine month period ended May 31,November 30, 2018 due primarily to decreased net payments made on outstanding borrowings.

As of May 31, 2018, we had $197.5 million of outstanding debt against the revolving credit facility provided and letters of credit outstanding in the amount of $23.1 million, which left approximately $229.4 million of additional credit available under the 2017 Credit Agreement.

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 experienced a significant impact on our operations from increases in general inflation other than for specific commodities. make any repurchases of its common shares during the nine months ended November 30, 2018.

We have exposure to commodity price increases in both segments of our business, primarily copper, aluminum, steel and nickel based alloys in the Energy Segmentsegment and zinc and natural gas in the Metal Coatings Segment.segment. We attempt to minimize these

Other than operating leases discussed below,As of November 30, 2018, the Company did not have any off-balance sheet arrangements as defined under SEC rules. Specifically, there arewere 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 preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. On an ongoing basis, we evaluate our estimates and assumptions. These estimates and assumptions are based on current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, revenue and expenses that are not readily apparent from other sources.

During the three monthsnine month period ended May 31,November 30, 2018, with the exception of the adoption of ASC 606, there were no significant changes to our critical accounting policies and estimates as compared to the critical accounting policies and estimates disclosed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended February 28, 2018. See Note 2 to the condensed consolidated financial statements included herein for our updated critical accounting policy and estimates related to revenue recognition upon the adoption of ASC 606.

See Note 1 The Company and Basis of Presentation, in Part I, Item 1. Financial Statements, of this Quarterly Report on Form 10-Q,to the condensed consolidated financial statements, included herein, for a full description of recent accounting pronouncements, including the actual and expected dates of adoption and estimated effects on our consolidated results of operations and financial condition, which is incorporated herein by reference.

Under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that, due to the material weakness described below, the Company's disclosure controls and procedures were not effective as of the end of the period covered by this Form 10-Q to provide reasonable assurance that information required to be disclosed by us in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and were not effective as of the end of the period covered by this Form 10-Q to provide reasonable assurance that such information is accumulated and communicated to our management, including our principal executive and financial officers, as appropriate to allow timely discussions regarding required disclosure.

Management is actively engaged in the implementation of remediation efforts to address the material weakness identified above. The remediation plan includes i) the implementation of new controls designed to evaluate the appropriateness of revenue recognition policies and procedures, ii) new controls over recording revenue transactions, and iii) additional training.

Management believes the measures described above and others that may be implemented will remediate the material weaknesses that we have identified. As management continues to evaluate and improve internal control over financial reporting, we may decide to take additional measures to address control deficiencies or determine to modify, or in appropriate circumstances not to complete, certain of the remediation measures identified.

Subject to these remediation efforts, there have been no significant changes in the Company's internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

On January 11, 2018, Logan Mullins, acting on behalf of himself and a putative class of persons who purchased or otherwise acquired the Company's securities between April 22, 2015 and January 8, 2018, filed a class action complaint in the U.S. District Court for the Northern District of Texas against the Company and two of its executive officers, Thomas E. Ferguson and Paul W. Fehlman. Logan Mullins v. AZZ, Inc., et al., Case No. 4:18-cv-00025-Y. The complaint alleges, among other things, that the Company's SEC filings contained statements that were rendered materially false and misleading by the Company's alleged failure to properly recognize revenue related to certain contracts in its Energy Segment in purported violation of (1) Section 10(b) of the Exchange Act and Rule 10b-5 and (2) Section 20(a) of the Exchange Act. The plaintiffs seek an award of compensatory and punitive damages, interests, attorneys' fees and costs. The Company denies the allegations and believes it has strong defenses to vigorously contest them. The Company cannot predict the outcome of this action nor when it will be resolved. If the plaintiffs were to prevail in this matter, the Company could be liable for damages, which could potentially be material and could adversely affect its financial condition or results of operations.

In addition, the Company and its subsidiaries are named defendants in various routine lawsuits incidental to our business.  These proceedings include labor and employment claims, use of the Company’s intellectual property, worker’s compensation and various environmental matters, all arising in the normal course of business.  Although the outcome of these lawsuits or other proceedings cannot be predicted with certainty, and the amount of any potential liability that could arise with respect to such lawsuits or other matters cannot be predicted at this time, management, after consultation with legal counsel, does not expect liabilities, if any, from these claims or proceedings, either individually or in the aggregate, to have a material effect on the Company’s financial position, results of operations or cash flows.

There have been no material changes in the risk factors disclosed under Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended February 28, 2018.

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 months ended May 31,November 30, 2018.

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