UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
FORM 10-Q
ý☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended August 31, 20182019
ORor 
¨☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number number: 1-12777

 azzlogo6a03.jpg

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AZZ Inc.
(Exact name of registrant as specified in its charter)
(Exact name of registrant as specified in its charter)
TEXASTexas 75-0948250
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)
   
One Museum Place, Suite 500
3100 West 7th Street
Fort Worth, Texas 76107
 
Fort Worth,Texas76107
(Address of principal executive offices, including zip code)offices)(Zip Code)
(817) (817) 810-0095
(Registrant’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common StockAZZNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.Yesý☒    No  ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yesý☒    No ¨☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” accelerated“accelerated filer,” “smaller reporting company”company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.  (Check one): 
Large accelerated filerAccelerated Filer  ý☒  Accelerated filer ¨☐ Non-accelerated filer ¨☐
Smaller reporting company  ¨☐  Emerging growth company ¨☐    
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  ¨☐  No ý☒
IndicateAs of December 12, 2019 the number ofregistrant had outstanding 26,239,787 shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date. 
Title of each class:Outstanding at August 31, 2018:
Common Stock, $1.00 par value per share26,050,242
stock; $1.00 par value per share. 

AZZ INC.
INDEX


  
PAGE
NO.
PART I.
FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
 
 
Condensed Consolidated Balance Sheets
3
 
Condensed Consolidated Statements of Income
4
 
Condensed Consolidated Statements of Comprehensive Income
5
 
Condensed Consolidated Statements of Cash Flows
6
 
Condensed Consolidated StatementStatements of Shareholders’ Equity
7
 
Notes to Condensed Consolidated Financial Statements
8
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
1617
Item 3.
Quantitative and Qualitative Disclosures About Market Risk.
2123
Item 4.
Controls and Procedures.
2123
   
PART II.
OTHER INFORMATION
 
Item 1.
Legal Proceedings.
2224
Item 1A.
Risk Factors.
2224
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
22
Item 3.
Defaults Upon Senior Securities.
22
Item 4.
Mine Safety Disclosures.
22
Item 5.
Other Information.
2224
Item 6.
Exhibits.
2325
   
 
SIGNATURES
2426
   

PART I. FINANCIAL INFORMATION


Item 1. Financial Statements
AZZ INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
 (Unaudited)  
 August 31, 2018 February 28, 2018 August 31, 2019 February 28, 2019
Assets        
Current assets:        
Cash and cash equivalents $9,204
 $20,853
 $13,583
 $24,005
Accounts receivable (net of allowance for doubtful accounts of $2,398 as of August 31, 2018 and $569 as of February 28, 2018) 152,468
 141,488
Accounts receivable (net of allowance for doubtful accounts of $4,663 as of August 31, 2019 and $2,267 as of February 28, 2019) 154,460
 144,887
Inventories:        
Raw material 103,959
 98,475
 98,135
 94,410
Work-in-process 354
 2,544
 8,418
 19,067
Finished goods 8,565
 9,742
 3,761
 11,370
Contract assets 71,236
 51,787
 90,759
 75,561
Prepaid expenses and other 6,657
 4,265
 10,925
 9,245
Total current assets 352,443
 329,154
 380,041
 378,545
Property, plant and equipment, net 209,404
 216,855
 214,098
 210,227
Operating lease right-of-use assets 45,709
 45,870
Goodwill 324,080
 321,307
 353,516
 323,756
Intangibles and other assets, net 152,097
 160,893
 126,753
 130,172
Total assets $1,038,024
 $1,028,209
 $1,120,117
 $1,088,570
Liabilities and Shareholders’ Equity        
Current liabilities:        
Accounts payable $43,247
 $54,162
 $65,746
 $53,047
Income tax payable 2,453
 144
 6,409
 632
Accrued salaries and wages 18,725
 19,011
 23,401
 30,395
Other accrued liabilities 22,768
 19,622
 23,437
 17,631
Customer deposits 1,311
 1,816
 696
 481
Contract liabilities 23,763
 22,698
 23,658
 56,928
Debt due within one year —
 14,286
Lease liability, short-term 5,901
 5,657
Total current liabilities 112,267
 131,739
 149,248
 164,771
Debt due after one year, net 295,679
 286,609
 255,812
 240,745
Lease liability, long-term 40,990
 41,190
Other long-term liabilities 10,759
 11,696
 5,335
 1,513
Deferred income taxes 33,394
 32,962
 34,126
 36,623
Total liabilities 452,099
 463,006
 485,511
 484,842
Commitments and contingencies        
Shareholders’ equity:        
Common stock, $1 par, shares authorized 100,000; 26,050 shares issued and outstanding at August 31, 2018 and 25,959 shares issued and outstanding at February 28, 2018 26,050
 25,959
Common stock, $1 par, shares authorized 100,000; 26,221 shares issued and outstanding at August 31, 2019 and 26,115 shares issued and outstanding at February 28, 2019 26,221
 26,115
Capital in excess of par value 42,787
 38,446
 50,211
 46,141
Retained earnings 544,136
 526,018
 588,172
 560,224
Accumulated other comprehensive loss (27,048) (25,220) (29,998) (28,752)
Total shareholders’ equity 585,925
 565,203
 634,606
 603,728
Total liabilities and shareholders' equity $1,038,024
 $1,028,209
 $1,120,117
 $1,088,570
The accompanying notes are an integral part of the condensed consolidated financial statements.

AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
 
 Three Months Ended August 31, Six Months Ended August 31, Three Months Ended August 31, Six Months Ended August 31,
 2018 2017 2018 2017 2019 2018 2019 2018
                
Net sales $222,787
 $196,329
 $485,023
 $401,612
 $236,190
 $222,787
 $525,313
 $485,023
Cost of sales 175,883
 152,529
 379,414
 310,430
 183,504
 175,883
 406,520
 379,414
Gross margin 46,904
 43,800
 105,609
 91,182
 52,686
 46,904
 118,793
 105,609


                
Selling, general and administrative 29,799
 26,413
 64,808
 53,772
 30,479
 29,799
 65,612
 64,808
Operating income 17,105
 17,387
 40,801
 37,410
 22,207
 17,105
 53,181
 40,801
                
Interest expense 3,980
 3,400
 7,818
 6,760
 3,548
 3,980
 7,132
 7,818
Other (income) expense, net (857) 260
 (1,148) 75
 686
 (857) 1,110
 (1,148)
Income before income taxes 13,982
 13,727
 34,131
 30,575
 17,973
 13,982
 44,939
 34,131
Income tax expense 2,738
 3,941
 7,169
 8,727
 2,415
 2,738
 8,097
 7,169
Net income $11,244
 $9,786
 $26,962
 $21,848
 $15,558
 $11,244
 $36,842
 $26,962
Earnings per common share                
Basic earnings per share $0.43
 $0.38
 $1.04
 $0.84
 $0.59
 $0.43
 $1.41
 $1.04
Diluted earnings per share $0.43
 $0.38
 $1.03
 $0.84
 $0.59
 $0.43
 $1.40
 $1.03
                
Cash dividends declared per common share $0.17
 $0.17
 $0.34
 $0.34
 $0.17
 $0.17
 $0.34
 $0.34
The accompanying notes are an integral part of the condensed consolidated financial statements.



AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
 
 Three Months Ended August 31, Six Months Ended August 31, Three Months Ended August 31, Six Months Ended August 31,
 2018 2017 2018 2017 2019 2018 2019 2018
                
Net income $11,244
 $9,786
 $26,962
 $21,848
 $15,558
 $11,244
 $36,842
 $26,962
Other comprehensive income (loss):                
Foreign currency translation adjustments, net of income tax of $0 455
 5,326
 (1,801) 4,328
 741
 455
 (1,219) (1,801)
Interest rate swap, net of income tax of $7, $7, $15 and $15, respectively. (13) (14) (27) (27) (13) (13) (27) (27)
Other comprehensive income (loss) 442
 5,312
 (1,828) 4,301
 728
 442
 (1,246) (1,828)
Comprehensive income $11,686
 $15,098
 $25,134
 $26,149
 $16,286
 $11,686
 $35,596
 $25,134
The accompanying notes are an integral part of the condensed consolidated financial statements.



AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
 Six Months Ended August 31,
 2018 2017 Six Months Ended August 31,
     2019 2018 (1)
Cash Flows From Operating Activities        
Net income $26,962
 $21,848
 $36,842
 $26,962
Adjustments to reconcile net income to net cash provided by operating activities:        
Provision for doubtful accounts 2,050
 47
 2,177
 2,050
Amortization and depreciation 25,698
 24,984
 24,584
 25,698
Deferred income taxes 467
 850
 (3,867) 467
Net loss on property, plant and equipment due to impairment 811
 —
 —
 811
Net loss (gain) on sale of property, plant and equipment (308) 554
Net (gain) loss on sale of property, plant and equipment (306) (308)
Amortization of deferred borrowing costs 343
 303
 269
 343
Share-based compensation expense 3,659
 3,400
 3,086
 3,659
Effects of changes in assets and liabilities:    
Effects of changes in assets and liabilities, net of acquisitions:    
Accounts receivable (13,179) 939
 (9,179) (13,179)
Inventories (2,171) (13,304) 15,550
 (2,171)
Prepaid expenses and other (2,390) (4,021) (2,055) (2,390)
Other assets (1,017) (1,106) 368
 (1,017)
Net change in contract assets and liabilities (19,278) (14,197) (49,952) (19,278)
Accounts payable (10,025) (6,770) 13,009
 (10,025)
Other accrued liabilities and income taxes payable 5,845
 (10,742) 7,709
 5,072
Net cash provided by operating activities 17,467
 2,785
 38,235
 16,694
Cash Flows From Investing Activities        
Proceeds from sale of property, plant and equipment 339
 177
 332
 339
Purchase of property, plant and equipment (7,179) (16,636) (16,496) (7,179)
Acquisition of subsidiaries, net of cash acquired (8,000) (10,250) (39,924) (8,000)
Net cash used in investing activities (14,840) (26,709) (56,088) (14,840)
Cash Flows From Financing Activities        
Proceeds from issuance of common stock 1,781
 1,327
Payments for taxes related to net share settlement of equity awards (691) (554)
Proceeds from revolving loan 178,000
 209,000
 219,500
 178,000
Payments on revolving loan (169,000) (115,500) (204,500) (169,000)
Payments on long term debt (14,286) (63,504) —
 (14,286)
Purchases of treasury shares —
 (5,185)
Payments of dividends (8,844) (8,845) (8,894) (8,844)
Net cash provided by (used in) financing activities (14,130) 15,966
 7,196
 (13,357)
Effect of exchange rate changes on cash (146) 205
 235
 (146)
Net decrease in cash and cash equivalents (11,649) (7,753) (10,422) (11,649)
Cash and cash equivalents at beginning of period 20,853
 11,302
 24,005
 20,853
Cash and cash equivalents at end of period $9,204
 $3,549
 $13,583
 $9,204
        
Supplemental disclosures        
Cash paid for interest $7,838
 $7,020
 $6,819
 $7,838
Cash paid for income taxes $1,514
 $7,605
 $3,770
 $1,514
(1) Certain prior year amounts have been reclassified to conform with the current period presentation. See Note 1 for more information.
The accompanying notes are an integral part of the condensed consolidated financial statements.

AZZ INC.
CONDENSED CONSOLIDATED STATEMENTSTATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
  Six Months Ended August 31, 2019
    Capital in
Excess of
Par Value		 Retained
Earnings		 Accumulated
Other
Comprehensive
Loss		 Total
  Common Stock 
  Shares Amount 
Balance at February 28, 2019 26,115
 $26,115
 $46,141
 $560,224
 $(28,752) $603,728
Share-based compensation —
 —
 1,350
 —
 —
 1,350
Common stock issued from stock plans, net of shares withheld for employee taxes 37
 37
 (728) —
 —
 (691)
Cash dividends paid —
 —
 —
 (4,440) —
 (4,440)
Net income —
 —
 —
 21,284
 —
 21,284
Foreign currency translation —
 —
 —
 —
 (1,960) (1,960)
Interest rate swap —
 —
 —
 —
 (14) (14)
Balance at May 31, 2019 26,152
 $26,152
 $46,763
 $577,068
 $(30,726) $619,257
Share-based compensation —
 —
 1,736
 —
 —
 1,736
Common stock issued from stock plans, net of shares withheld for employee taxes 18
 18
 (18) —
 —
 —
Common stock issued under employee stock purchase plan 51
 51
 1,730
 —
 —
 1,781
Cash dividends paid —
 —
 —
 (4,454) —
 (4,454)
Net income —
 —
 —
 15,558
 
 15,558
Foreign currency translation —
 —
 —
 —
 741
 741
Interest rate swap —
 —
 —
 —
 (13) (13)
Balance at August 31, 2019 26,221
 $26,221
 $50,211
 $588,172
 $(29,998) $634,606

 Six Months Ended August 31, 2018
   
Capital in
Excess of
Par Value
 
Retained
Earnings
 
Accumulated
Other
Comprehensive
Loss
 Total   Capital in
Excess of
Par Value		 Retained
Earnings		 Accumulated
Other
Comprehensive
Loss		 Total
 Common Stock  Common Stock 
 Shares Amount  Shares Amount 
Balance at February 28, 2018 25,959
 $25,959
 $38,446
 $526,018
 $(25,220) $565,203
 25,959
 $25,959
 $38,446
 $526,018
 $(25,220) $565,203
Impact of ASC 606 adoption —
 —
 —
 716
 —
 716
Share-based compensation 15
 15
 3,644
 —
 —
 3,659
 —
 —
 1,358
 —
 —
 1,358
Restricted stock units 30
 30
 (563) —
 —
 (533)
Stock issued for SARs 9
 9
 (30) —
 —
 (21)
Employee stock purchase plan 37
 37
 1,290
 —
 —
 1,327
Common stock issued from stock plans, net of shares withheld for employee taxes 31
 31
 (549) —
 —
 (518)
Common stock issued under employee stock purchase plan 37
 37
 1,290
 —
 —
 1,327
Cash dividends paid —
 —
 —
 (4,418) —
 (4,418)
Net income —
 —
 —
 15,718
 —
 15,718
Foreign currency translation —
 —
 —
 —
 (2,256) (2,256)
Interest rate swap —
 —
 —
 —
 (14) (14)
Balance at May 31, 2018 26,027
 $26,027
 $40,545
 $538,034
 $(27,490) $577,116
Share-based compensation —
 —
 2,301
 —
 —
 2,301
Common stock issued from stock plans, net of shares withheld for employee taxes 23
 23
 (59) —
 —
 (36)
Cash dividends paid —
 —
 —
 (8,844) —
 (8,844) —
 —
 —
 (4,426) —
 (4,426)
Net income —
 —
 —
 26,962
 —
 26,962
 —
 —
 —
 11,244
 —
 11,244
Foreign currency translation —
 —
 —
 —
 (1,801) (1,801) —
 —
 —
 —
 455
 455
Interest rate swap —
 —
 —
 —
 (27) (27) —
 —
 —
 —
 (13) (13)
Balance at August 31, 2018 26,050
 $26,050
 $42,787
 $544,136
 $(27,048) $585,925
 26,050
 $26,050
 $42,787
 $544,852
 $(27,048) $586,641
The accompanying notes are an integral part of the condensed consolidated financial statements.


AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1.The Company and Basis of Presentation
AZZ Inc. (“AZZ”, the “Company”, "our" or “we”) was established in 1956 and incorporated under the laws of the state of Texas. The Company is a global provider of metal coating services,solutions, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. The Company has two distinct operating segments: the Energy segment and the Metal Coatings 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.
Presentation
The accompanying condensed consolidated balance sheet as of February 28, 2018,2019, 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, 2018,2019, 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 endedending February 28, 201929, 2020 is referred to as fiscal 2019.2020.
In the opinion of management, the accompanying unaudited condensed 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 August 31, 2018,2019, the results of its operations for the three and six months ended August 31, 20182019 and 2017,2018, and cash flows for the six months ended August 31, 20182019 and 2017.2018. These interim results are not necessarily indicative of results for a full year.
Accounting Standards Recently AdoptedReclassifications
On March 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) and the related amendments ("ASC 606") using the modified retrospective method applied to those contracts which were not completed as of February 28, 2018. Results for operating periods beginning on or after March 1, 2018 are presented under ASC 606, whileCertain prior period amounts have not been adjusted and continue to be reported in accordance with the accounting standards in effect for those periods. However, for the three and six months ended August 31, 2018, the impact of applying ASC 606 as opposed to applying legacy accounting guidance did not result in a significant change to reported revenues or costs of revenues. Accordingly, no reconciliation has been provided to show the difference between applying ASC 606 and legacy guidance for the three and six months ended August 31, 2018. In addition, there was no cumulative effect adjustment to the beginning retained earnings on March 1, 2018 related to the adoption. See Note 2 for a description of the Company's accounting policy resulting from the adoption of ASC 606.
On March 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation and classification of certain cash receipts and cash paymentsfiscal year balances in the statement of cash flows. The adoption did not have a material impact on the Company'scondensed consolidated statements of cash flows.flows have been reclassified to conform to the current fiscal year presentation. In particular, payments for employee taxes related to net share settlement of equity awards and proceeds from the issuance of shares under the Company's Employee Stock Purchase Plan have been reclassified from operating activities to financing activities. Such reclassifications were not material.
Recently Issued Accounting Pronouncements
In FebruaryJune 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-02, Leases (Topic 842). Under2016-13”), which modifies the new guidance, a lesseemeasurement of expected credit losses of certain financial instruments, including the Company's accounts receivable and contract assets. The Company will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. Thisadopt ASU will be effective for the Company2016-13 in the first quarter of its fiscal year 2020 and early adoption is permitted. The ASU requires adoption based upon a2021 utilizing the modified retrospective transition approach. The Company has not yet determined whether it will elect early adoptionmethod. Based on the composition of the Company’s accounts receivable and is currently evaluating the impact ofcontract assets, current market conditions, and historical credit loss activity, the adoption of this standardASU 2016-13 is not expected to have a material impact on its consolidated financial statementsstatements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and related disclosures. In particular,Other— Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software, in order to determine the applicable costs to capitalize and the applicable costs to expense as incurred. The Company has made progress in assessing its portfolio of leases for accounting and disclosure purposes. To address the new standard's requirements, the Company is alsowill adopt ASU 2018-15 in the processfirst quarter of assessingits fiscal 2021. The standard can be applied either prospectively to implementation costs incurred after the designdate of adoption or retrospectively to all arrangements. The Company intends to adopt ASU 2018-15 using the future lease accounting proceduresprospective approach and

related internal controls, selecting and implementing lease accounting software, and finalizing policies, including the election of any practical expedients permitted by the standard. While the Company hasadoption is not yet completed its evaluation of the financial statementexpected to have a material impact of the new lease accounting standard, the Company expects to recognize right of use assets and lease liabilities for its operating leases inon its consolidated balance sheets upon adoption and thereafter.
financial statements.

2.Summary of Significant Accounting Policies
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.
Revenue recognition
The Company determines revenue recognition through the following steps:
1)Identification of the contract with a customer,
2)Identification of the performance obligations in the contract,
3)Determination of the transaction price,
4)Allocation of the transaction price to performance obligations in the contract, and
5)Recognition of revenue when, or as, the Company satisfies a performance obligation
Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services.The amount and timing of revenue recognition varies by segment based on the nature of the goods or services provided and the terms and conditions of the customer contract.
Energy Segment
AZZ's Energy segment is a provider of specialized products and services designed to support industrial, nuclear and electrical applications. Within this segment, the contract is governed by a customer purchase order and an executed product or services agreement. The contract generally specifies the delivery of what constitutes a single performance obligation consisting of either custom built products, custom services, or off-the-shelf products. When the Company does enter into an arrangement with multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative standalone selling prices of the goods or services being provided to the customer and revenue is recognized upon the satisfaction of each performance obligation. The Company combines contracts for revenue recognition purposes that are executed with the same customer within a short timeframe from each other and that purport to be for a single commercial objective.
For custom built products, the Company recognizes revenues over time provided that the goods do not have an alternative use to the Company and the Company has an unconditional right to payment for work completed to date plus a reasonable margin. For custom services, which consist of specialized welding and other professional services, the Company recognizes revenues over time as the services are rendered due to the fact that the services enhance a customer owned asset. For off-the-shelf products, which consist of tubing and lighting products, the Company recognizes revenue at a point-in-time upon the transfer of the goods to the customer.
For services and custom built products, the Company recognizes revenues over time using a cost-to-cost input measure. This requires the Company to estimate the total contract revenues, costs and margin, which can involve significant management judgment. As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, management reviews and updates its contract related estimates regularly. The Company recognizes adjustments in estimated margin on contracts under a cumulative catch-up basis and subsequent revenues are recognized using the adjusted estimate. If the estimate of contract margin indicates an anticipated loss on the contract, the Company recognizes the total estimated loss in the period it is identified.
Due to the custom nature of the goods and services provided, contracts within the Energy segment are often modified to account for changes in contract specifications and requirements. A contract modification exists when the modification either creates new, or changes the existing, enforceable rights and obligations in the contract. For the Company, most contract modifications are related to goods or services that are not distinct from those in the original contract due to the significant interrelationship or interdependencies between the deliverables. Such modifications are accounted for as if they were part of the original contract. As a result, the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis.
In addition to fixed consideration, the Company’s contracts within its Energy segment can include variable consideration, including claims, incentive fees, liquidated damages or other penalties. The Company recognizes revenue for variable consideration

when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value or the most likely amount method, whichever is expected to better predict the amount. 
Metal Coatings Segment
AZZ’s Metal Coatings segment is a provider of hot dip galvanizing, powder coating and other metal coating applications to the steel fabrication industry. Within this segment, the contract is governed by a customer purchase order or work order. The contract generally specifies the delivery of what constitutes a single performance obligation consisting of metal coating services. The Company combines contracts for revenue recognition purposes that are executed with the same customer within a short timeframe from each other and that purport to be for a single commercial objective.
The Company recognizes revenue over time as the metal coating is applied to the customer provided material as the process enhances a customer controlled asset. Contract modifications are rare within this segment and most contracts are on a fixed price basis with no variable consideration.
Contract Assets and Liabilities
The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets (unbilled receivables), and contract liabilities (customer advances and deposits) on the consolidated balance sheet, primarily related to the Company’s Energy segment. Amounts are billed as work progresses in accordance with agreed upon contractual terms, either at periodic intervals (e.g., weekly or monthly) or upon achievement of contractual milestones. Billing can occur subsequent to revenue recognition, resulting in contract assets. In addition, the Company can receive advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheet on a contract-by-contract basis at the end of each reporting period.
For the six months ended August 31, 2018, the Company recognized $20.1 million of revenues from amounts that were included in contract liabilities at February 28, 2018. The Company did not record any revenues for the three or six months ended August 31, 2018 related to performance obligations satisfied in prior periods. The Company expects to recognize revenues of approximately $18.2 million, $4.1 million and $1.5 million in fiscal 2019, 2020 and 2021, respectively, related to the $23.8 million balance of contract liabilities as of August 31, 2018.
The increases or decreases in accounts receivable, contract assets and contract liabilities during the three and six months ended August 31, 2018 were due primarily to normal timing differences between the Company’s performance and customer payments. The Lectrus acquisition described in Note 8 had no impact on contract assets or liabilities as of the date of acquisition.
Other
No general rights of return exist for customers and the Company establishes provisions for estimated warranties. The Company generally does not sell extended warranties. Revenue is recognized net of applicable sales and other taxes. The Company does not adjust the contract price for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a good or service to a customer and when the customer pays for that good or service will be one year or less, which is generally the case. Sales commissions are deferred and recognized over the same period as the related revenues. Shipping and handling is treated as a fulfillment obligation instead of a separate performance obligation and such costs are expensed as incurred.
Disaggregated Revenue
Revenue by segment and geography is disclosed in Note 5. In addition, the following table presents disaggregated revenue by customer industry (in thousands):
  Three Months Ended August 31, Six Months Ended August 31,
  2018 2017 2018 2017
Net sales:        
Industrial - oil and gas, construction, and general* $120,305
 $115,834
 $271,613
 $228,919
Transmission and distribution* 60,152
 41,229
 126,106
 84,339
Power generation* 42,330
 39,266
 87,304
 88,354
Total net sales $222,787
 $196,329
 $485,023
 $401,612

* The Company revised its internal methodology for allocating revenues by customer industry during the three months ended August 31, 2018. All prior periods have been recast to conform to this revised methodology.


3.Earnings Per Share
Earnings 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 per share (in thousands, expect per share data):
 
  Three Months Ended August 31, Six Months Ended August 31,
  2019 2018 2019 2018
Numerator:        
Net income for basic and diluted earnings per common share $15,558
 $11,244
 $36,842
 $26,962
Denominator:        
Denominator for basic earnings per common share–weighted average shares 26,197
 26,019
 26,161
 26,001
Effect of dilutive securities:        
Employee and director equity awards 75
 72
 72
 61
Denominator for diluted earnings per common share 26,272
 26,091
 26,233
 26,062
Earnings per share basic and diluted:        
Basic earnings per common share $0.59
 $0.43
 $1.41
 $1.04
Diluted earnings per common share $0.59
 $0.43
 $1.40
 $1.03
  Three Months Ended August 31, Six Months Ended August 31,
  2018 2017 2018 2017
Numerator:        
Net income for basic and diluted earnings per common share $11,244
 $9,786
 $26,962
 $21,848
Denominator:        
Denominator for basic earnings per common share–weighted average shares 26,019
 25,970
 26,001
 25,991
Effect of dilutive securities:        
Employee and director stock awards 72
 66
 61
 74
Denominator for diluted earnings per common share 26,091
 26,036
 26,062
 26,065
Earnings per share basic and diluted:        
Basic earnings per common share $0.43
 $0.38
 $1.04
 $0.84
Diluted earnings per common share $0.43
 $0.38
 $1.03
 $0.84


3.Revenues
Disaggregated Revenue
The following table presents disaggregated revenue by customer industry (in thousands):
  Three Months Ended August 31, Six Months Ended August 31,
  2019 2018 2019 2018
Net sales:        
Industrial - oil and gas, construction, and general $139,352
 $120,305
 $304,152
 $271,613
Transmission and distribution 56,686
 60,152
 128,967
 126,106
Power generation 40,152
 42,330
 92,194
 87,304
Total net sales $236,190
 $222,787
 $525,313
 $485,023

See Note 5 for revenue information by segment.
Contract Liabilities
The following table shows the changes in contract liabilities for the six months ended August 31, 2019 and 2018, respectively (in thousands):
  August 31, 2019 August 31, 2018
Balance at beginning of period $56,928
 $22,698
Contract liabilities added during the period 18,234
 21,166
Revenue recognized during the period (51,504) (20,101)
Balance at end of period $23,658
 $23,763


The Company did not record any revenues for the six months ended August 31, 2019 or 2018 related to performance obligations satisfied in prior periods. The increases or decreases in accounts receivable, contract assets and contract liabilities during the six months ended August 31, 2019 and 2018 were due primarily to normal timing differences between the Company’s performance and customer payments. The acquisitions described in Note 10 had no impact on contract assets or liabilities as of the date of acquisitions.
The Company expects to recognize revenues of approximately $15.4 million, $5.9 million, $1.2 million and $1.2 million in fiscal 2020, 2021, 2022 and 2023, respectively, related to the $23.7 million balance of contract liabilities as of August 31, 2019.

4.Share-based Compensation
The Company has one2 share-based compensation plan,plans, the 2014 Long Term Incentive Plan (the “Plan”"2014 Plan") and the Amended and Restated 2005 Long Term Incentive Plan (the “2005 Plan”).
The purpose2014 Plan provides for broad-based equity grants to employees, including executive officers, and members of the Plan is to promote the growth and prosperityboard of the Company by permitting the Company to grant to its employees, directors and advisors various typespermits the granting of restricted shares, restricted stock unitunits, performance awards, performance share units, stock options, and stock appreciation rights to purchase common stock of the Company.and other stock-based awards. The maximum number of shares that may be issued under the 2014 Plan is 1,500,000 shares.1.5 million shares and, as of August 31, 2019, the Company had approximately 1.3 million shares reserved for future issuance under this plan.
The 2005 Plan permitted the granting of stock appreciation rights and other equity-based awards to certain employees. This plan was terminated upon the effective date of the 2014 Plan and no future grants may be made under the 2005 Plan. However, there were stock appreciation rights that were granted under the 2005 Plan prior to its termination that remain outstanding, and if exercised, such awards will be settled from the balance of shares available for issuance under the 2005 Plan. As of August 31, 2018, the Company had approximately 1,248,7752019, there were 0.1 million shares available for future issuance under the 2005 Plan. The 2005 Plan will be formally retired when all remaining outstanding stock appreciation rights are exercised, forfeited or expire. All outstanding stock appreciation rights will expire on or before March 1, 2021.
Restricted Stock Unit Awards
Restricted stock unit ("RSU") awards are valued at the market price of our common stock on the grant date. Awards generally vest ratably over a period of three years but these awards may vest earlier in accordance with the Plan’s accelerated vesting provisions. RSU awards have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying shares vest.
A summary of the Company’s non-vested restricted stock unit award activity (including DERs) for the six month period ended August 31, 20182019 is as follows:
 
  
Restricted
Stock Units
 
Weighted Average
Grant Date Fair 
Value Per Share
Non-vested balance as of February 28, 2019 146,532
 $48.93
Granted 89,980
 43.77
Vested (52,430) 49.11
Forfeited (2,501) 47.60
Non-vested balance as of August 31, 2019 181,581
 $47.82
  
Restricted
Stock Units
 
Weighted
Average Grant
Date Fair Value
Non-vested balance as of February 28, 2018 109,777
 $56.62
Granted 82,371
 42.00
Vested (37,670) 54.63
Forfeited (7,290) 55.27
Non-vested balance as of August 31, 2018 147,188
 $49.01



Performance Share Unit Awards
PerformanceThe Company grants performance share unit ("PSU") awards are valued at the market price of our common stock on the grant date.to certain employees, which also include DERs as described above. These PSU awards have a three year performance cycle and will vest and become payable,issuable, 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.three year 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 periodthree years 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 Company estimates the fair value of PSU 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 award activity (including DERs) for the six month period ended August 31, 20182019 is as follows:
  Performance
Stock Units		 
Weighted Average
Grant Date Fair
Value Per Share
Non-vested balance as of February 28, 2019 83,125
 $50.33
Granted 49,228
 46.19
Vested —
 —
Forfeited (19,331) 57.47
Non-vested balance as of August 31, 2019 113,022
 $47.49

  Performance
Stock Units		 Weighted
Average Grant
Date Fair Value
Non-vested balance as of February 28, 2018 70,030
 $54.59
Granted 46,183
 42.00
Vested (3,378) 46.65
Forfeited (29,710) 49.51
Non-vested balance as of August 31, 2018 83,125
 $49.74
The PSU awards in the table above are presented at the face value of the respective grants. However, the number of PSU awards that may ultimately vest can vary in a range 0% to 250% of the face amount of such awards depending on the outcome of the performance or market vesting conditions.
Stock Appreciation Rights
Stock appreciation rights are granted with an exercise price equal to the market value of our common stock on the date of grant. These awards generally have a contractual term of 7 years and vest ratably over a period of three years although some may vest immediately on issuance. These awards are valued using the Black-Scholes option-pricing model.
A summary of the Company’s stock appreciation rightsright activity for the six month period ended August 31, 20182019 is as follows:
  SARs 
Weighted Average
Exercise Price
Outstanding as of February 28, 2019 98,184
 $44.46
Granted —
 —
Exercised (2,965) 44.58
Forfeited —
 —
Outstanding as of August 31, 2019 95,219
 $44.58
Exercisable as of August 31, 2019 95,219
 $44.58
  SARs 
Weighted Average
Exercise Price
Outstanding as of February 28, 2018 148,513
 $43.29
Granted —
 —
Exercised (43,928) 40.96
Forfeited —
 —
Outstanding as of August 31, 2018 104,585
 $44.27
Exercisable as of August 31, 2018 104,585
 $44.27

The average remaining contractual term for those stock appreciation rights outstanding and those stock appreciation rights that were exercisable as of August 31, 2018 is 2.332019 was 1.36 years, with an aggregate intrinsic value of $1.0 million. The average remaining contractual terms for those stock appreciation rights that are exercisable as of August 31, 2018 is 2.33 years, with an aggregate intrinsic value of $1.0less than $0.1 million.
Employee Stock Purchase Plan
The Company also has an employee stock purchase plan,Employee Stock Purchase Plan ("ESPP"), 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 ourthe Company's 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. ForThe Company issued 51,438 shares and 37,224 shares from the ESPP during the six month period ended August 31, 2019 and 2018, the Company issued 37,224 shares under the Employee Stock Purchase Plan.respectively.

Share-based Compensation Expense
Share-based compensation expense and related income tax benefits related to all the plans listed above were as follows (in thousands):
 
  Six Months Ended August 31,

 2019 2018
Compensation expense $3,086
 $3,659
Income tax benefits $648
 $823
  Six Months Ended August 31,

 2018 2017
Compensation expense $3,659
 $3,400
Income tax benefits $823
 $1,088

Unrecognized compensation cost related to restricted stock units, performance share unit awards, stock appreciation rights, and the Company's employee stock purchase planequity grants at August 31, 20182019 totals $8.8 million.$10.1 million and is expected to be recognized over a period of 2.67 years.
The Company’s policy is to issue shares required under these plans from the Company’s authorized but unissued shares.


5.Segments
Segment Information
Net sales and operating income (loss) by segment for each period were as follows (in thousands):
 
  Three Months Ended August 31, Six Months Ended August 31,
  2019 2018 2019 2018
Net sales:        
Energy $111,347
 $106,515
 $278,316
 $253,501
Metal Coatings 124,843
 116,272
 246,997
 231,522
Total net sales $236,190
 $222,787
 $525,313
 $485,023
         
Operating income (loss):        
Energy $4,239
 $4,273
 $16,810
 $14,231
Metal Coatings 28,673
 22,076
 58,065
 47,260
Corporate (10,705) (9,244) (21,694) (20,690)
Total operating income $22,207
 $17,105
 $53,181
 $40,801

  Three Months Ended August 31, Six Months Ended August 31,
  2018 2017 2018 2017
Net sales:        
Energy $106,515
 $97,299
 $253,501
 $210,504
Metal Coatings 116,272
 99,030
 231,522
 191,108
Total net sales $222,787
 $196,329
 $485,023
 $401,612
         
Operating income (loss):        
Energy $4,273
 $2,363
 $14,231
 $9,074
Metal Coatings 22,076
 23,409
 47,260
 44,651
Corporate (9,244) (8,385) (20,690) (16,315)
Total operating income $17,105
 $17,387
 $40,801
 $37,410


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


  August 31, 2019 February 28, 2019
Total assets:    
Energy $612,018
 $630,134
Metal Coatings 489,305
 440,090
Corporate 18,794
 18,346
Total $1,120,117
 $1,088,570
  August 31, 2018 February 28, 2018
Total assets:    
Energy $574,230
 $554,866
Metal Coatings 453,821
 460,575
Corporate 9,973
 12,768
Total $1,038,024
 $1,028,209


For the three and six months ended August 31, 2018, the Company recognized impairment charges of $0.8 million, which were classified within cost of sales in the consolidated statement of income and were related to property, plant and equipment in the Metal Coatings segment that was vacated or abandoned upon the consolidation of two galvanizing facilities in the Gulf Coast region of the United States. As part of the consolidation of facilities, the Company also recognized $0.5 million in employee severance and other disposal costs for the three and six months ended August 31, 2018, which were also classified within cost of sales in the consolidated statement of income.

No such charges were recorded during the three and six months ended August 31, 2019.

Financial Information About Geographical Areas
The following table presents revenues by geographic region for each period (in thousands):
  Three Months Ended August 31, Six Months Ended August 31,
  2019 2018 2019 2018
Net sales:        
United States $210,668
 $188,278
 $441,005
 $401,834
International 25,522
 34,509
 84,308
 83,189
Total $236,190
 $222,787
 $525,313
 $485,023
  Three Months Ended August 31, Six Months Ended August 31,
  2018 2017 2018 2017
Net sales:        
United States $188,278
 $162,490
 $401,834
 $329,219
International 34,509
 33,839
 83,189
 72,393
Total $222,787
 $196,329
 $485,023
 $401,612

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


  August 31, 2019 February 28, 2019
Property, plant and equipment, net: 

 

United States $192,537
 $189,281
Canada 17,181
 16,961
Other countries 4,380
 3,985
          Total $214,098
 $210,227
  August 31, 2018 February 28, 2018
Property, plant and equipment, net: 

 

United States $187,983
 $194,418
Canada 17,410
 18,254
Other countries 4,011
 4,183
          Total $209,404
 $216,855




6.Warranty Reserves
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 condensed consolidated balance 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 for the six month period ended August 31, 20182019 (in thousands):
 
 Warranty Reserve
Balance at February 28, 2019$1,751
Warranty costs incurred(1,745)
Additions charged to income3,615
Balance at August 31, 2019$3,621
 Warranty Reserve
Balance at February 28, 2018$2,013
Warranty costs incurred(1,179)
Additions charged to income1,221
Balance at August 31, 2018$2,055

7.Debt
The Company's debt consisted of the following for each of the periods presented (in thousands):
 August 31, 2019 February 28, 2019
2017 Revolving Credit Facility$131,000
 $116,000
2011 Senior Notes125,000
 125,000
Total debt, gross256,000
 241,000
Unamortized debt issuance costs(188) (255)
Total debt, net$255,812
 $240,745
 August 31, 2018 February 28, 2018
2011 Senior Notes$125,000
 $125,000
2008 Senior Notes—
 14,286
2017 Revolving Credit Facility171,000
 162,000
Total debt296,000
 301,286
Unamortized debt issuance costs for Senior Notes(321) (391)
Total debt, net295,679
 300,895
Less amount due within one year—
 (14,286)
Debt due after one year, net$295,679
 $286,609
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.

8.Leases
The Company is a lessee under various operating leases for facilities and equipment. Supplemental information related to the Company's portfolio of operating leases was as follows (in thousands, except years and percentages):
  Three Months Ended August 31, Six Months Ended August 31,
  2019 2018 2019 2018
Operating lease cost $4,648
 $4,042
 $8,914
 $7,972
Operating cash flows from operating leases included in lease liabilities 2,131
 1,943
 4,406
 3,853
ROU assets obtained in exchange for new operating lease liabilities 643
 120
 3,149
 4,166
  August 31, 2019 February 28, 2019
Weighted-average remaining lease term - operating leases 8.70 years
 9.23 years
Weighted-average discount rate - operating leases 5.10% 5.13%

As of August 31, 2019, maturities of the Company's lease liabilities were as follows (in thousands):
Fiscal year:Operating Leases
2020 (remaining 6 months)$4,166
20217,805
20227,438
20236,968
20246,181
Thereafter25,545
Total lease payments58,103
Less imputed interest(11,212)
Total$46,891

9.Income Taxes
The Company’s quarterly provision for income taxes is measured using an estimated annual effective tax rate, adjusted for discrete items that occur within the quarter. The following table presents income tax related items for the periods (in thousands, except percentages):
  Three Months Ended August 31, Six Months Ended August 31,
  2019 2018 2019 2018
Income tax expense $2,415
 $2,738
 $8,097
 $7,169
Effective tax rate 13.4% 19.6% 18.0% 21.0%

The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company's global operations. Generally accepted accounting principles in the United States of America ("GAAP") states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company may (1) record unrecognized tax benefits as liabilities in accordance with GAAP and (2) adjust these liabilities when the Company's judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.

A reconciliation of the beginning and ending balance of total unrecognized tax benefits for the six months ended August 31, 2019 is as follows (in thousands):
  August 31, 2019
Balance at beginning of period $—
Tax positions taken in current period: 

Gross increases 3,899
Balance at end of period $3,899

After a review of its deferred tax balances during six months ended August 31, 2019, the Company recorded unrecognized tax benefits of $3.9 million within other long-term liabilities related to the amortization of goodwill and certain book reserve balances incorrectly deducted in prior years. The amortization relates to the Company deducting more expense than permitted for tax purposes. The total unrecognized tax benefits, if recognized, would reduce income tax expense and the Company’s effective tax rate. Additionally, as a part of this review of its deferred tax balances, the Company corrected other current and deferred income tax expense amounts related to prior periods which netted to $1.4 million and were recorded as a tax benefit in the three months ended August 31, 2019.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in the income tax expense. The balance in the non-current income tax payable related to penalties and interest for prior periods was $1.0 million for the three and six months ended August 31, 2019.
Certain prior year tax returns are currently being examined by taxing authorities in the United States. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. As the outcome of the tax audits cannot be predicted with certainty, if any issues addressed in the Company's tax audits are resolved in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future.
The Company has operations and taxable presence in multiple jurisdictions in the U.S. and outside of the U.S. in Canada, the Netherlands, China, and Brazil. The tax positions of the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions around the world. The Company currently considers U.S. federal and state and Canada, to be major tax jurisdictions. The Company’s U.S. federal and state tax returns since February 28, 2016 remain open to examination. With some exceptions, tax years prior to fiscal 2016 in jurisdictions outside of U.S. are generally closed. The statute of limitations for fiscal year end 2016 will expire in November 2019. The Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits up to approximately $1.4 million may occur in the next 12 months, as the applicable statutes of limitations lapse.

10.Acquisitions
On March 22, 2018,In April 2019, the Company purchased certaincompleted the acquisition of all the outstanding shares of K2 Partners, Inc. (“K2”) and Tennessee Galvanizing, Inc. ("Tennessee Galvanizing"), two privately held companies. K2 provides powder coating and electroplating solutions to customers in the Midwest and Southeast from locations in Texas and Florida. Tennessee Galvanizing provides galvanizing solutions to customers throughout the United States. These acquisitions expand the Company's geographical reach in metal coating solutions and broaden its offerings in strategic markets. The goodwill arising from these acquisitions was allocated to the Metal Coatings segment and is not deductible for income tax purposes.
In August 2019, the Company completed the acquisition of the assets throughof NuZinc, LLC, a bankruptcy sales process from Lectrus Corporation, a privately-held corporation basedprivately held plating company in Chattanooga, Tennessee. Lectrus designs and manufactures custom metal enclosures and provides electrical and mechanical integration.the Dallas-Fort Worth area. The acquisition will complement AZZ's current metal enclosure and switchgear businesses.
Thisincrease the Company's footprint in electroplating solutions within its Metal Coatings segment. The goodwill arising from this acquisition was allocated to the Metal Coatings segment and is deductible for income tax purposes.
The fair values of the net assets acquired, including property, plant and equipment, intangibles and goodwill may be subject to change as additional information is received and finalized. Accordingly, the provisional measurements of fair value for these items are subject to change. The Company expects to finalize the valuation as soon as practicable, but not significant.later than one year from the acquisition dates.
The Company paid approximately $39.9 million for these acquisitions, net of cash acquired. These acquisitions were not significant individually or in the aggregate. Accordingly, disclosures of the preliminary purchase price allocationallocations and unaudited pro forma results of operations have not been provided.

11.Subsequent Events
In September 2019, the Company completed the acquisition of all the assets of Preferred Industries, Ltd. ("Preferred"), a privately held company based in the Dallas-Fort Worth area. Preferred provides powder and e-coating solutions to the automotive, HVAC, marine, transportation, medical, industrial, and plastics industries. The acquisition will broaden the Company's offerings and expand its network of surface technology plants. This acquisition will be included in the Metal Coatings segment.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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 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, 20182019 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, 2018,2019, and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
Adoption of Revenue Recognition Standard
On March 1, 2018, we adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) and the related amendments ("ASC 606") using the modified retrospective method applied to those contracts which were not completed as of February 28, 2018. Results for operating periods beginning on or after March 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the accounting standards in effect for those periods. However, for the three and six months ended August 31, 2018, the impact of applying ASC 606 as opposed to applying legacy accounting guidance did not result in a significant change to reported revenues or costs of revenues. Accordingly, no reconciliation has been provided to show the difference between applying ASC 606 and legacy guidance for the three and six months ended August 31, 2018. In addition, there was no cumulative effect adjustment to the beginning retained earnings on March 1, 2018 related to the adoption. See Note 2 to the condensed consolidated financial statements included herein for a description of our accounting policy resulting from the adoption of ASC 606.
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 ended February 28, 2018.2019. 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 5 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 Segmentsegment and was $336.0$301.9 million as of August 31, 2018, an increase2019, a decrease of $70.6$31.0 million, or 26.6%9.3%, as compared to $265.4$332.9 million as of February 28, 2018.2019. Our backlog increased $35.9decreased $34.1 million, or 12.0%10.1%, as compared to the same period in the prior fiscal year. Both of these increases were primarily the result of several large international orders, higher overall activity within the Energy Segment and incremental business generated from our acquisitions completed during the previous twelve months. For the three months ended August 31, 2018,2019, our book-to-revenue ratio increased to 1.14 to 1 from 0.97 to 1incoming net orders decreased by $15.9 million, or 6.3% when compared to same period of fiscal 20182019 and our incomingbook-to-revenue ratio decreased to 1.01 to 1 from 1.14 to 1. These decreases were primarily attributable to softness in net orders increased by $63.8 million, or 33.6%.bookings due to lower overall international project bookings. The decreases in backlog were also due to higher overall revenues for the three and six months ended August 31, 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.

The table below includes the progression of the backlog (in thousands):
  Period Ended   Period Ended  
Backlog 2/28/2018 $265,417
 2/28/2017 $317,922
Net bookings*   295,738
   193,754
Acquired backlog   6,006
   —
Revenues recognized   (262,236)   (205,283)
Backlog* 5/31/2018 304,925
 5/31/2017 306,393
Book to revenue ratio   1.13
   0.94
Net bookings   253,882
   190,055
Revenues recognized   (222,787)   (196,329)
Backlog 8/31/2018 336,020
 8/31/2017 300,119
Book to revenue ratio   1.14
   0.97
* Previously reported amounts have been revised to reflect the impact of system conversion changes.
  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
Segment Revenues
For the three and six months ended August 31, 2018,2019, consolidated revenues increased $26.5$13.4 million, or 13.5%,6.0% and $83.4$40.3 million or 20.8%8.3%, respectively, as compared to the same periods in fiscal 2018.2019.
The following table reflects the breakdown of revenue by segment (in thousands):
 
 Three Months Ended August 31, Six Months Ended August 31, Three Months Ended August 31, Six Months Ended August 31,
 2018 2017 2018 2017 2019 2018 2019 2018
Net sales:                
Energy $106,515
 $97,299
 $253,501
 $210,504
 $111,347
 $106,515
 $278,316
 $253,501
Metal Coatings 116,272
 99,030
 231,522
 191,108
 124,843
 116,272
 246,997
 231,522
Total net sales $222,787
 $196,329
 $485,023
 $401,612
 $236,190
 $222,787
 $525,313
 $485,023
Revenues for the Energy segment increased $9.2$4.8 million or 9.5%,4.5% and $43.0$24.8 million or 20.4%9.8%, respectively, for the three and six months ended August 31, 20182019 as compared to the same periods in fiscal 2018. These increases in revenues were caused by several positive factors including improved turnarounds in the U.S. refinery market, increased international projects and an uptick in our electrical business.2019. These increases were alsoprimarily attributable to incremental revenues froma general uptick in the sales of our acquisitions completed duringelectrical products, the past twelve monthssatisfaction 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. These increases were partially offset by continued softnessa decline in revenues for our industrial solutions, which was driven by lower international revenues resulting from a large refining project recorded in the nuclear market, which is due in part to the Westinghouse Bankruptcy discussed below.prior year comparable period.
Revenues for the Metal Coatings segment increased $17.2$8.6 million or 17.4%,7.4% and $40.4$15.5 million or 21.1%6.7%, respectively, for the three and six months ended August 31, 20182019 as compared to the same periods in fiscal 2018.2019. These increases were athe result of higher selling prices and higher volumes of steel processedprocessed. The increases in volume were due primarily to our acquisitions of Tennessee Galvanizing, Inc. and K2 Partners, Inc. during the periods driven primarily by improvementsfirst quarter of fiscal 2020. For additional information on our recent acquisitions in various markets. These increases were also attributablethe Metal Coatings segment see Note 10 to incremental revenues from our acquisitions completed during the past twelve months.condensed consolidated financial statements.

Segment Operating Income
The following table reflects the breakdown of operating income (loss) by segment (in thousands):
 Three Months Ended August 31, Six Months Ended August 31, Three Months Ended August 31, Six Months Ended August 31,
 2018 2017 2018 2017 2019 2018 2018 2017
Operating income (loss):                
Energy $4,273
 $2,363
 $14,231
 $9,074
 $4,239
 $4,273
 $16,810
 $14,231
Metal Coatings 22,076
 23,409
 47,260
 44,651
 28,673
 22,076
 58,065
 47,260
Corporate (9,244) (8,385) (20,690) (16,315) (10,705) (9,244) (21,694) (20,690)
Total operating income $17,105
 $17,387
 $40,801
 $37,410
 $22,207
 $17,105
 $53,181
 $40,801
Operating income for the Energy segment decreased slightly and increased by $1.9$2.6 million or 80.8%, and $5.2 million or 56.8%18.1%, respectively, for the three and six months ended August 31, 20182019 as compared to the same periods in fiscal 2018.2019. The slight decrease for the three months was attributable to lower margin projects for certain of our electrical products, partially offset by improved margins for our industrial solutions. The increase for the six months was primarily related to the increased revenues for our electrical products, offset by a decrease in revenues for our industrial solutions. Operating margins were 4.0%3.8% and 2.4%4.0%, for the three months ended August 31, 20182019 and 2017,2018, respectively, and 5.6%6.0% and 4.3%5.6% for the six months ended August 31, 2019 and 2018, and 2017, respectively. These increases were primarily attributable to the positive factors noted above and improvements in project margins.
Operating income for the Metal Coatings segment decreasedincreased by $1.3$6.6 million or 5.7%29.9% and increased $2.6$10.8 million or 5.8%22.9%, respectively, for the three and six months ended August 31, 20182019 as compared to the same periods in fiscal 2018. These changes2019. Operating margins were primarily attributable to the favorable trends in volumes23.0% and selling prices, but were negatively impacted by higher zinc costs and a one-time charge of $1.3 million during19.0%, for the three months ended August 31, 2019 and 2018, respectively, and 23.5% and 20.4% for assetthe six months ended August 31, 2019 and 2018, respectively. These increases were primarily attributable to the increased volumes and selling prices noted above and a decline in zinc costs. In addition, the prior year comparable periods 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. Operating marginsNo such charges were 19.0% and 23.6%, forrecorded in the three months ended August 31, 2018 and 2017, respectively and 20.4% and 23.4% for the six months ended August 31, 2018 and 2017, respectively. The declines were attributable to higher zinc costs, which were not fully offset by increased selling prices, and the one-time charge for the consolidation of facilities.current fiscal year.
Corporate Expenses
Corporate expenses increased by $0.9$1.5 million or 10.2%16.2%, and $4.4$1.0 million or 26.8%4.9%, respectively, for the three and six months ended August 31, 20182019 as compared to the prior year comparable periods.same periods in fiscal 2019. These increases were primarily attributable to increasedhigher employee compensation costs and outside professional services and general corporate marketing activities.services.
Interest Expense
Interest expense for the three and six months ended August 31, 20182019 was $3.5 million and $7.1 million, respectively as compared to $4.0 million and $7.8 million respectively, as compared to $3.4 million and $6.8 million for the respective prior year comparable periods. These increasesdecreases were the result of higherprimarily attributable to lower average outstanding debt balances and higherrelatively flat interest rates on variable rate debt. Our gross debt to equity ratio was 0.510.40 to 1 as of August 31, 2018,2019, compared to 0.550.50 to 1 as of August 31, 2017.2018.
Other (Income) Expense
Other income,For the three and six months ended August 31, 2019, we recorded other expense, net was $(0.9)of $0.7 million and $(1.1)$1.1 million, respectively, forwhich consisted primarily of foreign currency losses resulting from unfavorable movements in exchange rates. For the three and six months ended August 31, 2018, as comparedwe recorded other expense,income, net of $0.3$(0.9) million and $0.1$(1.1) million, for the respective prior year comparable periods. Other income, net increasedrespectfully, which was primarily as a result of a downward revision to estimated losses related to the impairment ofa bankruptcy proceeding for a non-trade note receivable that was initially recognizedultimately settled at an amount higher than originally estimated. This benefit in the fourth quarter of fiscal 2018 upon the bankruptcy declaration of the note debtor. The bankruptcy proceedings have progressed better than anticipated and the Company expects to receive amounts in excess of its initial loss estimates for the outstanding note, which originated from a non-compete litigation settlement with a competitor in a prior fiscal year. This increase in other income, netyear comparable periods was partially offset by higher foreign exchange losses that were realized during the three and six months ended August 31, 2018 as a result of unfavorable movements in exchange rates.currency losses.
Income Taxes
The provision for income taxes reflects an effective tax rate of 19.6%13.4% and 21.0%, respectively, for18.0% the three and six months ended August 31, 2018,2019, respectively, as compared to 28.7%19.6% and 28.5%21.0% for the respective prior year comparable periods. The decreases in the effective rate ischanges were primarily attributable to the Tax Cuts and Jobs Act of 2017.a one time deferred income tax benefit recognized in fiscal 2020 related to errors corrected during a deferred income tax review.
.

Westinghouse Electric Company Bankruptcy Case
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 for the Southern District of New York, jointly administered as In re Westinghouse Electric Company, et al., Case No. 17-10751 (the "Bankruptcy Case"). To date, WEC has continued to operate under a Debtor-in-Possession Financing Facility and we continue to honor their executory contracts. The Company has been collecting on post-petition amounts due and owed. On February 22, 2018, the United 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 havefiled approximately $12 million of such claims filed with the court, which includes 100% of our pre-petition claims. The total claims filed exceed the book valueIn April 2019, for one of our exposure.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. Including the above noted settlement and approximately $2.1 million of adjustments to the initial claim amounts, $1.8 million of claims remain outstanding, of which $0.6 million has been reserved. 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 quarter related to the final reconciliations of these accounts.
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):
 Six Months Ended August 31, Six Months Ended August 31,
 2018 2017 2019 2018
Net cash provided by operating activities $17,467
 $2,785
 $38,235
 $16,694
Net cash used in investing activities (14,840) (26,709) (56,088) (14,840)
Net cash provided by (used in) financing activities (14,130) 15,966
 7,196
 (13,357)
For the six month period ended August 31, 2018,2019, net cash provided by operating activities was $17.5$38.2 million, net cash used in investing activities was $14.8$56.1 million, net cash used inprovided by financing activities was $14.1$7.2 million, and a decreasean increase of $0.1$0.2 million from the net effect of exchange rate changes on cash resulting in a net decrease in cash and cash equivalents of $11.6$10.4 million. In comparison to the comparable period in fiscal 2018,2019, the results in the statement of cash flows for operating activities for the six month period ended August 31, 2018,2019, are primarily attributable to the increase in net income and more favorablepositive impacts of changes in working capital.capital and increased net income. The Company's use of cash for investing activities was lowerhigher due to decreasedincreased spending on acquisitions and capital expenditures and lower spending for acquisitions.expenditures. Net cash used inprovided by financing activities was higher during the six month period ended August 31, 20182019 as compared to the prior year comparable period due primarily to increased net payments made on outstanding borrowings.
Our working capital was $240.2$230.8 million as of August 31, 2018,2019, as compared to $197.4$213.8 million at February 28, 2018.2019.
Financing and Capital
As of August 31, 2018,2019, the Company had $296.0$256.0 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. During the first quarter of fiscal 2019, the Company repaid $14.3 million of outstanding principal related to its outstanding notes on the scheduled maturity date. As of August 31, 2018,2019, the Company had approximately $259.8$301.1 million of additional credit available for future draws or letters of credit.
For additional information on the Company's outstanding borrowings see Note 7 to the condensed consolidated financial statements and further below under Contractual Commitments.Obligations.

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 six months ended August 31, 2018.

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 of August 31, 2018,2019, the Company did not have any off-balance sheet arrangements as defined under SEC 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 (based on current interest rates for variable rate debt) for the remainder of the next five fiscal years and beyond (in thousands):
 
 Operating
Leases		 Long-Term
Debt		 Interest Total Operating
Leases		 
Purchase Commitments (1)
 Long-Term
Debt		 
Interest (2)
 Total
Fiscal: 
 
2019 $4,291
 $—
 $6,898
 $11,189
2020 7,293
 —
 13,796
 21,089
 $4,166
 $33,100
 $—
 $10,097
 $47,363
2021 5,944
 125,000
 13,796
 144,740
 7,805
 —
 125,000
 12,105
 144,910
2022 5,728
 —
 7,021
 12,749
 7,438
 —
 —
 5,330
 12,768
2023 5,464
 171,000
 694
 177,158
 6,968
 —
 131,000
 570
 138,538
2024 6,181
 —
 —
 —
 6,181
Thereafter 26,343
 —
 —
 26,343
 25,545
 —
 —
 —
 25,545
Total $55,063
 $296,000
 $42,205
 $393,268
 $58,103
 $33,100
 $256,000
 $28,102
 $375,305
(1) Purchase commitments consist of non-cancelable forward contracts to purchase zinc at various volumes and prices. All such contracts expire in fiscal 2020.
(2) For variable rate debt, interest payments are calculated using current interest rates.
As of August 31, 2018, 2019, we had outstanding letters of credit in the amount of $27.6$40.0 million. These letters of credit are issued for a number of reasons, but are most commonly issued in lieu of customer retention withholding payments covering warranty or performance periods.
Critical Accounting Policies and Estimates
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 six month period ended August 31, 2018, with the exception of the adoption of ASC 606,2019, 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 606.2019.

Recent Accounting Pronouncements
See Note 1 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.



Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company’s market risk disclosures during the first six months of fiscal 2019.2020. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the year ended February 28, 2018. 2019.


Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
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 weaknessweaknesses 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.
Changes in Internal Controls Over Financial Reporting
As previously disclosed, after filing our Form 10-Q forof February 28, 2019, management concluded the quarter ended August 31, 2017, an errorCompany’s internal control over financial reporting was discovered relatedineffective due to the Company’s historical revenue recognition policies and procedures. In particular, the Company determined that for certain contracts within its Energy segment for which revenue was historically recognized upon contract completion and transfer of title, the Company instead should have applied the percentage-of-completion method in accordance with the FASB’s Accounting Standards Codification No. 605-35, Construction-Type and Production-Type Contracts. This error resulted in a material misstatement of the financial statements and required restatement of the financial statements included in the Company’s Form 10-K for the fiscal year ended February 28, 2017 and in the Company’s Form 10-Q for the quarterly periods ended May 31, 2017 and August 31, 2017. This error, which was not detected timely by management, was the result of inadequate design of controls pertaining to the Company’s review and ongoing monitoring of its revenue recognition policies.reconciliations. In particular, as part of the adoption of the new revenue recognition standard on March 1, 2018 the Company identified errors in its revenue reconciliations. These errors, which were not detected timely by management, were the result of inadequate operating effectiveness of controls pertaining to the Company’s preparation and review of its revenue reconciliations. The errors were corrected in the Company's fiscal year 2019 consolidated financial statements; however, the deficiency represents a material weakness in the Company’s internal control over financial reporting.
As of August 31, 2019, the Company identified multiple control deficiencies that constitute an additional material weakness in its internal control over financial reporting related to the Company’s accounting for income taxes. Specifically, management identified financial statement errors related to income tax accounting and deficiencies in the Company's tax compliance program. The financial statement errors impacted current and deferred income tax expense, deferred tax assets and liabilities, financial statement recognition and disclosure of uncertain tax positions, and current income taxes payable. These financial statement errors, which were not detected timely by management, were the result of ineffective design and operation of controls pertaining to the preparation of the Company's income tax provision. While these errors were not material to any prior period, and the cumulative effect of correcting these errors was not material to the current period, the deficiencies identified represent a material weakness in the Company’s internal control over financial reporting.
Management is actively engaged in the planning for, and implementation of, remediation efforts to address the material weaknesscontrol deficiencies 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 reviewing revenue reconciliations, ii) new controls over the preparation of the Company’s income tax provision and related disclosures including enhanced management review controls and oversight regarding key aspects of the income tax provision work papers and the Company’s income tax compliance program, and iii) additional training.training for impacted employees. The establishment of new controls may be supported by a combination of additional internal resources, the use of third party advisors or additional technology.
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, notmake revisions to complete, certain of theour remediation measures identified. Procedures are in place, but subsequent testing of the operational effectiveness of the new controls is necessary to validate that the material weakness is fully remediated.plan.
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.

PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On January 11, 2018, Logan Mullins,November 4, 2019, Omid Atayi, acting on behalf of himself and a putative class of persons who purchased or otherwise acquired the Company'sCompany’s securities between April 22, 2015July 3, 2018 and JanuaryOctober 8, 2018,2019 (the “Class Period”), 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 MullinsOmid Atayi v. AZZ Inc., et al., Case No. 4:18-cv-00025-Y. The19-cv-00928-A.The complaint alleges, among other things, that throughout the Company's SEC filings contained statementsClass Period, the Company failed to disclose (1) that the Company’s internal controls over financial reporting were rendered materially falsenot effective; (2) that the Company improperly implemented ASC 606 which resulted in improper revenue reconciliations; 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)(3) that, as a result of the Exchange Actforegoing, the Company’s positive statements about the Company’s business, operations, and Rule 10b-5prospects were materially misleading and (2) Section 20(a) of the Exchange Act.or lacked a reasonable basis. The plaintiffs seek an award of compensatory and punitive damages, interests, attorneys'attorneys’ fees and costs. The Company denies the allegations and believes it has strong defenses to vigorously contest them.all of the allegations. 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 potentially 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.
Item 1A. Risk Factors
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, 2018.2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 August 31, 2018.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Mine Safety Disclosures
None.
Item 5. Other Information
None.2019.

Item 6. Exhibits
3.1 
Amended and Restated Certificate of Formation of AZZ Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on July 14, 2015)
  
3.2 
Amended and Restated Bylaws of AZZ Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by the Registrant on January 23, 2017)
  
10.110.1* 
Note Purchase Agreement dated March 31, 2008, by and among AZZ incorporated and the purchasers listed therein (incorporated by reference to Exhibit 10(1) to the Current Report on Form 8-K filed by the Registrant on April 2, 2008).
10.2*
AZZ Inc. 2018 Employee Stock Purchase Plan (incorporated by reference to Appendix A to the Registrant's Definitive Proxy Statement on Form DEFA filed on May 25, 2018.).
  
10.310.2 
Note Purchase Agreement, dated as of January 20, 2011, by and among AZZ incorporated and the purchasers identified therein (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on January 21, 2011).
  
10.410.3 
Amended and Restated Credit Agreement by and between AZZ Inc. as borrower, Bank of America N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, and the other Lender's party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on March 24, 2017).
   
10.5*10.4* 
AZZ incorporated 2014 Long Term Incentive Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Form DEFA filed May 29, 2014).
   
10.6*10.5* 
First Amendment to AZZ Inc. 2014 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on January 21, 2016.
   
10.7*10.6* 
First Amendment to theSecond Amended and Restated Employment Agreement dated October 3, 2018, by and between AZZ Inc. and Mr. Tom Ferguson.  Filed Herewith.
10.8*
First Amendment to the Employment Agreement,Ferguson, dated October 3, 2018,2019 (incorporated by and between AZZ Inc. and Paul Fehlman. Filed Herewith.
10.9*
First Amendmentreference to Exhibit 10.1 to the Change In Control Agreement, datedCurrent Report on Form 8-K filed by the Registrant on October 3, 2018, by and between AZZ Inc. and Tom Ferguson.  Filed Herewith.
10.10*
First Amendment to the Change In Control Agreement, dated October 3, 2018, by and between AZZ Inc. and Paul Fehlman.  Filed Herewith.7, 2019).
   
31.1 
Certification of Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed Herewith.
   
31.2 
Certification of Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. Filed Herewith.
   
32.1 
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed Herewith.
   
32.2 
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. Filed Herewith.
   
101.INS XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.
   
101.SCH XBRL Taxonomy Extension Schema Document
   
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
   
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
   
101.LAB XBRL Taxonomy Extension Label Linkbase Document
   
101.PRE XBRL Taxonomy Extension Presentation Linkbase Document
* Management contract, compensatory plan or arrangement

SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
    
AZZ Inc.
(Registrant)
     
Date:October 9, 2018December 26, 2019 By:/s/ Paul W. Fehlman
    
Paul W. Fehlman
Senior Vice President and
Chief Financial Officer


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