UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended AugustMay 31, 20192020
or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
Commission file number: 1-12777
AZZ Inc.
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | |
Texas | | | | 75-0948250 |
(State or other jurisdiction of incorporation or organization) | | | | (I.R.S. Employer Identification No.) |
| | | | |
Texas | | 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 |
(Address of principal executive 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:
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| | | | | | | | | | | | | |
Title of each class | | Trading Symbol | | Name of each exchange on which registered |
Common Stock | | AZZ | | New 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. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files). Yes ☒ 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 filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large Accelerated Filer | | ☒ | | 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 ☒
As of December 12, 2019June 30, 2020 the registrant had outstanding 26,239,78726,195,048 shares of common stock; $1.00 par value per share.
AZZ INC.
INDEX
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PART I. | | |
Item 1. | | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 6. | | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
AZZ INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
| | | | (Unaudited) | | | | | | | | | | | | | | | | |
| | August 31, 2019 | | February 28, 2019 | | May 31, 2020 | | February 29, 2020 |
Assets | | | | | Assets | | | | |
Current assets: | | | | | Current assets: | |
Cash and cash equivalents | | $ | 13,583 |
| | $ | 24,005 |
| Cash and cash equivalents | | $ | 26,414 | | | $ | 36,687 | |
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 |
| |
Accounts receivable (net of allowance for doubtful accounts of $4,772 as of May 31, 2020 and $4,951 as of February 29, 2020) | | Accounts receivable (net of allowance for doubtful accounts of $4,772 as of May 31, 2020 and $4,951 as of February 29, 2020) | | 130,047 | | | 139,214 | |
Inventories: | | | | | Inventories: | |
Raw material | | 98,135 |
| | 94,410 |
| Raw material | | 90,092 | | | 88,837 | |
Work-in-process | | 8,418 |
| | 19,067 |
| Work-in-process | | 8,145 | | | 5,543 | |
Finished goods | | 3,761 |
| | 11,370 |
| Finished goods | | 5,746 | | | 5,461 | |
Contract assets | | 90,759 |
| | 75,561 |
| Contract assets | | 65,044 | | | 70,093 | |
Prepaid expenses and other | | 10,925 |
| | 9,245 |
| Prepaid expenses and other | | 9,541 | | | 8,727 | |
Total current assets | | 380,041 |
| | 378,545 |
| Total current assets | | 335,029 | | | 354,562 | |
Property, plant and equipment, net | | 214,098 |
| | 210,227 |
| Property, plant and equipment, net | | 214,965 | | | 213,104 | |
Operating lease right-of-use assets | | 45,709 |
| | 45,870 |
| Operating lease right-of-use assets | | 41,767 | | | 43,208 | |
Goodwill | | 353,516 |
| | 323,756 |
| Goodwill | | 355,808 | | | 356,225 | |
Intangibles and other assets, net | | 126,753 |
| | 130,172 |
| Intangibles and other assets, net | | 103,204 | | | 106,732 | |
Total assets | | $ | 1,120,117 |
| | $ | 1,088,570 |
| Total assets | | $ | 1,050,773 | | | $ | 1,073,831 | |
Liabilities and Shareholders’ Equity | | | | | Liabilities and Shareholders’ Equity | | | | |
Current liabilities: | | | | | Current liabilities: | |
Accounts payable | | $ | 65,746 |
| | $ | 53,047 |
| Accounts payable | | $ | 45,895 | | | $ | 61,987 | |
Income tax payable | | 6,409 |
| | 632 |
| Income tax payable | | 6,239 | | | 2,876 | |
Accrued salaries and wages | | 23,401 |
| | 30,395 |
| Accrued salaries and wages | | 12,376 | | | 38,882 | |
Other accrued liabilities | | 23,437 |
| | 17,631 |
| Other accrued liabilities | | 25,778 | | | 26,868 | |
Customer deposits | | 696 |
| | 481 |
| Customer deposits | | 626 | | | 255 | |
Contract liabilities | | 23,658 |
| | 56,928 |
| Contract liabilities | | 17,365 | | | 18,418 | |
Lease liability, short-term | | 5,901 |
| | 5,657 |
| Lease liability, short-term | | 6,338 | | | 6,327 | |
Debt due within one year | | Debt due within one year | | 125,000 | | | 125,000 | |
Total current liabilities | | 149,248 |
| | 164,771 |
| Total current liabilities | | 239,617 | | | 280,613 | |
Debt due after one year, net | | 255,812 |
| | 240,745 |
| Debt due after one year, net | | 93,911 | | | 77,878 | |
Lease liability, long-term | | 40,990 |
| | 41,190 |
| Lease liability, long-term | | 38,290 | | | 38,114 | |
Other long-term liabilities | | 5,335 |
| | 1,513 |
| Other long-term liabilities | | 7,604 | | | 4,934 | |
Deferred income taxes | | 34,126 |
| | 36,623 |
| Deferred income taxes | | 35,695 | | | 37,926 | |
Total liabilities | | 485,511 |
| | 484,842 |
| Total liabilities | | 415,117 | | | 439,465 | |
Commitments and contingencies | | | | | Commitments and contingencies | | | | |
Shareholders’ equity: | | | | | Shareholders’ equity: | |
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 |
| |
Common stock, $1 par, shares authorized 100,000; 26,195 shares issued and outstanding at May 31, 2020 and 26,148 shares issued and outstanding at February 29, 2020 | | Common stock, $1 par, shares authorized 100,000; 26,195 shares issued and outstanding at May 31, 2020 and 26,148 shares issued and outstanding at February 29, 2020 | | 26,195 | | | 26,148 | |
Capital in excess of par value | | 50,211 |
| | 46,141 |
| Capital in excess of par value | | 67,883 | | | 66,703 | |
Retained earnings | | 588,172 |
| | 560,224 |
| Retained earnings | | 573,530 | | | 572,414 | |
Accumulated other comprehensive loss | | (29,998 | ) | | (28,752 | ) | Accumulated other comprehensive loss | | (31,952) | | | (30,899) | |
Total shareholders’ equity | | 634,606 |
| | 603,728 |
| Total shareholders’ equity | | 635,656 | | | 634,366 | |
Total liabilities and shareholders' equity | | $ | 1,120,117 |
| | $ | 1,088,570 |
| Total liabilities and shareholders' equity | | $ | 1,050,773 | | | $ | 1,073,831 | |
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 May 31, | |
| | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | |
| | | | | | | | | | | | | |
Net sales | | $ | 236,190 |
| | $ | 222,787 |
| | $ | 525,313 |
| | $ | 485,023 |
| Net sales | | $ | 213,293 | | | $ | 289,123 | | |
Cost of sales | | 183,504 |
| | 175,883 |
| | 406,520 |
| | 379,414 |
| Cost of sales | | 171,085 | | | 223,016 | | |
Gross margin | | 52,686 |
| | 46,904 |
| | 118,793 |
| | 105,609 |
| Gross margin | | 42,208 | | | 66,107 | | |
| | | | | | | | |
| | |
Selling, general and administrative | | 30,479 |
| | 29,799 |
| | 65,612 |
| | 64,808 |
| Selling, general and administrative | | 27,890 | | | 35,133 | | |
Operating income | | 22,207 |
| | 17,105 |
| | 53,181 |
| | 40,801 |
| Operating income | | 14,318 | | | 30,974 | | |
| | | | | | | | | | |
Interest expense | | 3,548 |
| | 3,980 |
| | 7,132 |
| | 7,818 |
| Interest expense | | 2,634 | | | 3,584 | | |
Other (income) expense, net | | 686 |
| | (857 | ) | | 1,110 |
| | (1,148 | ) | |
| Other expense, net | | Other expense, net | | 1,456 | | | 424 | | |
Income before income taxes | | 17,973 |
| | 13,982 |
| | 44,939 |
| | 34,131 |
| Income before income taxes | | 10,228 | | | 26,966 | | |
Income tax expense | | 2,415 |
| | 2,738 |
| | 8,097 |
| | 7,169 |
| Income tax expense | | 4,687 | | | 5,682 | | |
Net income | | $ | 15,558 |
| | $ | 11,244 |
| | $ | 36,842 |
| | $ | 26,962 |
| Net income | | $ | 5,541 | | | $ | 21,284 | | |
Earnings per common share | | | | | | | | | Earnings per common share | | | | | |
Basic earnings per share | | $ | 0.59 |
| | $ | 0.43 |
| | $ | 1.41 |
| | $ | 1.04 |
| Basic earnings per share | | $ | 0.21 | | | $ | 0.81 | | |
Diluted earnings per share | | $ | 0.59 |
| | $ | 0.43 |
| | $ | 1.40 |
| | $ | 1.03 |
| Diluted earnings per share | | $ | 0.21 | | | $ | 0.81 | | |
| | | | | | | | | | | | | |
Cash dividends declared per common share | | $ | 0.17 |
| | $ | 0.17 |
| | $ | 0.34 |
| | $ | 0.34 |
| Cash dividends declared per common share | | $ | 0.17 | | | $ | 0.17 | | |
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 May 31, | | | |
| | 2019 | | 2018 | | 2019 | | 2018 | | | 2020 | | 2019 | | |
| | | | | | | | | | | | | | |
Net income | | $ | 15,558 |
| | $ | 11,244 |
| | $ | 36,842 |
| | $ | 26,962 |
| Net income | | $ | 5,541 | | | $ | 21,284 | | | |
Other comprehensive income (loss): | | | | | | | | | Other comprehensive income (loss): | | |
Foreign currency translation adjustments, net of income tax of $0 | | 741 |
| | 455 |
| | (1,219 | ) | | (1,801 | ) | Foreign currency translation adjustments, net of income tax of $0 | | (1,039) | | | (1,960) | | | |
Interest rate swap, net of income tax of $7, $7, $15 and $15, respectively. | | (13 | ) | | (13 | ) | | (27 | ) | | (27 | ) | |
Other comprehensive income (loss) | | 728 |
| | 442 |
| | (1,246 | ) | | (1,828 | ) | |
Interest rate swap, net of income tax of $7 and $7, respectively. | | Interest rate swap, net of income tax of $7 and $7, respectively. | | (14) | | | (14) | | | |
Other comprehensive loss | | Other comprehensive loss | | (1,053) | | | (1,974) | | | |
Comprehensive income | | $ | 16,286 |
| | $ | 11,686 |
| | $ | 35,596 |
| | $ | 25,134 |
| Comprehensive income | | $ | 4,488 | | | $ | 19,310 | | | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
| | | | | | | | |
| | Six Months Ended August 31, |
| | 2019 | | 2018 (1) |
Cash Flows From Operating Activities | | | | |
Net income | | $ | 36,842 |
| | $ | 26,962 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | | |
Provision for doubtful accounts | | 2,177 |
| | 2,050 |
|
Amortization and depreciation | | 24,584 |
| | 25,698 |
|
Deferred income taxes | | (3,867 | ) | | 467 |
|
Net loss on property, plant and equipment due to impairment | | — |
| | 811 |
|
Net (gain) loss on sale of property, plant and equipment | | (306 | ) | | (308 | ) |
Amortization of deferred borrowing costs | | 269 |
| | 343 |
|
Share-based compensation expense | | 3,086 |
| | 3,659 |
|
Effects of changes in assets and liabilities, net of acquisitions: | | | | |
Accounts receivable | | (9,179 | ) | | (13,179 | ) |
Inventories | | 15,550 |
| | (2,171 | ) |
Prepaid expenses and other | | (2,055 | ) | | (2,390 | ) |
Other assets | | 368 |
| | (1,017 | ) |
Net change in contract assets and liabilities | | (49,952 | ) | | (19,278 | ) |
Accounts payable | | 13,009 |
| | (10,025 | ) |
Other accrued liabilities and income taxes payable | | 7,709 |
| | 5,072 |
|
Net cash provided by operating activities | | 38,235 |
| | 16,694 |
|
Cash Flows From Investing Activities | | | | |
Proceeds from sale of property, plant and equipment | | 332 |
| | 339 |
|
Purchase of property, plant and equipment | | (16,496 | ) | | (7,179 | ) |
Acquisition of subsidiaries, net of cash acquired | | (39,924 | ) | | (8,000 | ) |
Net cash used in investing activities | | (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 | | 219,500 |
| | 178,000 |
|
Payments on revolving loan | | (204,500 | ) | | (169,000 | ) |
Payments on long term debt | | — |
| | (14,286 | ) |
Payments of dividends | | (8,894 | ) | | (8,844 | ) |
Net cash provided by (used in) financing activities | | 7,196 |
| | (13,357 | ) |
Effect of exchange rate changes on cash | | 235 |
| | (146 | ) |
Net decrease in cash and cash equivalents | | (10,422 | ) | | (11,649 | ) |
Cash and cash equivalents at beginning of period | | 24,005 |
| | 20,853 |
|
Cash and cash equivalents at end of period | | $ | 13,583 |
| | $ | 9,204 |
|
| | | | |
Supplemental disclosures | | | | |
Cash paid for interest | | $ | 6,819 |
| | $ | 7,838 |
|
Cash paid for income taxes | | $ | 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. | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | |
| | 2020 | | 2019 |
Cash Flows From Operating Activities | | | | |
Net income | | $ | 5,541 | | | $ | 21,284 | |
Adjustments to reconcile net income to net cash used in operating activities: | | | | |
Provision for doubtful accounts | | 129 | | | 2,616 | |
Amortization and depreciation | | 11,668 | | | 12,326 | |
Deferred income taxes | | (2,147) | | | 668 | |
| | | | |
Net (gain) loss on sale of property, plant and equipment | | 40 | | | (200) | |
Amortization of deferred borrowing costs | | 135 | | | 136 | |
Share-based compensation expense | | 1,766 | | | 1,350 | |
Effects of changes in assets and liabilities, net of acquisitions: | | | | |
Accounts receivable | | 8,721 | | | (14,228) | |
Inventories | | (4,449) | | | 7,681 | |
Prepaid expenses and other | | (941) | | | (1,240) | |
Other assets | | 123 | | | 185 | |
Net change in contract assets and liabilities | | 3,168 | | | (55,088) | |
Accounts payable | | (15,328) | | | 7,068 | |
Other accrued liabilities and income taxes payable | | (19,610) | | | (454) | |
Net cash used in operating activities | | (11,184) | | | (17,896) | |
Cash Flows From Investing Activities | | | | |
Proceeds from sale of property, plant and equipment | | — | | | 210 | |
Purchase of property, plant and equipment | | (10,847) | | | (4,686) | |
Acquisition of subsidiaries, net of cash acquired | | — | | | (38,993) | |
Net cash used in investing activities | | (10,847) | | | (43,469) | |
Cash Flows From Financing Activities | | | | |
| | | | |
Payments for taxes related to net share settlement of equity awards | | (539) | | | (691) | |
Proceeds from revolving loan | | 76,000 | | | 187,000 | |
Payments on revolving loan | | (60,000) | | | (131,000) | |
| | | | |
| | | | |
| | | | |
| | | | |
Payments of dividends | | (4,425) | | | (4,440) | |
Net cash provided by financing activities | | 11,036 | | | 50,869 | |
Effect of exchange rate changes on cash | | 722 | | | 77 | |
Net decrease in cash and cash equivalents | | (10,273) | | | (10,419) | |
Cash and cash equivalents at beginning of period | | 36,687 | | | 24,005 | |
Cash and cash equivalents at end of period | | $ | 26,414 | | | $ | 13,586 | |
| | | | |
Supplemental disclosures | | | | |
Cash paid for interest | | $ | 869 | | | $ | 1,600 | |
Cash paid for income taxes | | $ | 11 | | | $ | 567 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2020 | | | | | | | | | | |
| | | | | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | Common Stock | | | | | | | | | | |
| | Shares | | Amount | | | | | | | | |
Balance at February 29, 2020 | | 26,148 | | | $ | 26,148 | | | $ | 66,703 | | | $ | 572,414 | | | $ | (30,899) | | | $ | 634,366 | |
Share-based compensation | | — | | | — | | | 1,766 | | | — | | | — | | | 1,766 | |
Common stock issued from stock plans, net of shares withheld for employee taxes | | 47 | | | 47 | | | (586) | | | — | | | — | | | (539) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Cash dividends paid | | — | | | — | | | — | | | (4,425) | | | — | | | (4,425) | |
Net income | | — | | | — | | | — | | | 5,541 | | | — | | | 5,541 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | (1,039) | | | (1,039) | |
Interest rate swap | | — | | | — | | | — | | | — | | | (14) | | | (14) | |
Balance at May 31, 2020 | | 26,195 | | | $ | 26,195 | | | $ | 67,883 | | | $ | 573,530 | | | $ | (31,952) | | | $ | 635,656 | |
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| | 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 |
|
| | | | Three Months Ended May 31, 2019 | |
| | | | | | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | | | Common Stock | | | |
| | | | Shares | | Amount | | |
Balance at February 28, 2019 | | Balance at February 28, 2019 | | 26,115 | | | $ | 26,115 | | | $ | 46,141 | | | $ | 560,224 | | | $ | (28,752) | | | $ | 603,728 | |
Share-based compensation | | Share-based compensation | | — | | | — | | | 1,350 | | | — | | | — | | | 1,350 | |
Common stock issued from stock plans, net of shares withheld for employee taxes | | Common stock issued from stock plans, net of shares withheld for employee taxes | | 37 | | | 37 | | | (728) | | | — | | | — | | | (691) | |
| Cash dividends paid | | Cash dividends paid | | — | | | — | | | — | | | (4,440) | | | — | | | (4,440) | |
Net income | | Net income | | — | | | — | | | — | | | 21,284 | | | — | | | 21,284 | |
Foreign currency translation | | Foreign currency translation | | — | | | — | | | — | | | — | | | (1,960) | | | (1,960) | |
Interest rate swap | | Interest rate swap | | — | | | — | | | — | | | — | | | (14) | | | (14) | |
Balance at May 31, 2019 | | Balance at May 31, 2019 | | 26,152 | | | $ | 26,152 | | | $ | 46,763 | | | $ | 577,068 | | | $ | (30,726) | | | $ | 619,257 | |
| | | | Six Months Ended August 31, 2018 | |
| | | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total | |
| | Common Stock | | |
| | Shares | | Amount | | |
Balance at February 28, 2018 | | 25,959 |
| | $ | 25,959 |
| | $ | 38,446 |
| | $ | 526,018 |
| | $ | (25,220 | ) | | $ | 565,203 |
| |
Impact of ASC 606 adoption | | — |
| | — |
| | — |
| | 716 |
| | — |
| | 716 |
| |
Share-based compensation | | — |
| | — |
| | 1,358 |
| | — |
| | — |
| | 1,358 |
| |
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 | | — |
| | — |
| | — |
| | (4,426 | ) | | — |
| | (4,426 | ) | |
Net income | | — |
| | — |
| | — |
| | 11,244 |
| | — |
| | 11,244 |
| |
Foreign currency translation | | — |
| | — |
| | — |
| | — |
| | 455 |
| | 455 |
| |
Interest rate swap | | — |
| | — |
| | — |
| | — |
| | (13 | ) | | (13 | ) | |
Balance at August 31, 2018 | | 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 |
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 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 EnergyMetal Coatings segment and the Energy segment. AZZ Metal Coatings segment.provides hot dip galvanizing, powder coating, anodizing and plating, and other metal coating applications to the steel fabrication and other industries through facilities located throughout the United States and Canada. 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, 2019,29, 2020, 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, 2019,29, 2020, 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 ending February 29, 202028, 2021 is referred to as fiscal 2020.2021.
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 AugustMay 31, 2019,2020, the results of its operations for the three and six months ended AugustMay 31, 20192020 and 2018,2019, and cash flows for the sixthree months ended AugustMay 31, 20192020 and 2018.2019. These interim results are not necessarily indicative of results for a full year.
ReclassificationsCoronavirus (COVID-19)
Certain prior fiscal year balancesIn March 2020, the World Health Organization declared the viral strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. The spread of COVID-19 and the resulting economic contraction has resulted in increased business uncertainty. The consequences of a prolonged economic decline could include, but are not limited to, reduced revenues, increased instances of uncollectible customer receivables, and increased asset impairments in future periods. Accordingly, the condensedCompany cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may materially impact its consolidated balance sheet, statements of income or statements of cash flows have been reclassified to conform to the currentfor 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.2021.
Recently IssuedAdopted Accounting Pronouncements
In June 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 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments, including the Company's accounts receivable and contract assets. The Company will adoptadopted ASU 2016-13 in the first quarter of its fiscal 2021 utilizing the modified retrospective transition method. Based on the composition of the Company’s accounts receivable and contract assets, current market conditions, and historical credit loss activity, theThe adoption of ASU 2016-13 isdid not expected to have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and 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 will adoptadopted ASU 2018-15 in the first quarter of its fiscal 2021. The standard can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company intends to adopt ASU 2018-15 using the prospective approach2021 and the adoption isdid not expected to have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. This standard is intended to simplify the accounting and disclosure requirements for income taxes by eliminating various exceptions in accounting for income taxes as well as clarifying and amending existing guidance to improve consistency in the application of ASC 740. The standard will be effective for the Company in the first quarter of its fiscal 2022 and early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
2.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 Company 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 May 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Numerator: | | | | | | | | |
Net income for basic and diluted earnings per common share | | $ | 5,541 | | | $ | 21,284 | | | | | |
Denominator: | | | | | | | | |
Denominator for basic earnings per common share–weighted average shares | | 26,157 | | | 26,124 | | | | | |
Effect of dilutive securities: | | | | | | | | |
Employee and director equity awards | | 35 | | | 69 | | | | | |
Denominator for diluted earnings per common share | | 26,192 | | | 26,193 | | | | | |
Earnings per share basic and diluted: | | | | | | | | |
Basic earnings per common share | | $ | 0.21 | | | $ | 0.81 | | | | | |
Diluted earnings per common share | | $ | 0.21 | | | $ | 0.81 | | | | | |
| | | | | | | | |
| | | | | | | | |
|
| | | | | | | | | | | | | | | | |
| | 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 |
|
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 |
|
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Net sales: | | | | | | | | |
Industrial - oil and gas, construction, and general | | $ | 130,109 | | | $ | 164,800 | | | | | |
Transmission and distribution | | 49,057 | | | 72,281 | | | | | |
Power generation | | 34,127 | | | 52,042 | | | | | |
Total net sales | | $ | 213,293 | | | $ | 289,123 | | | | | |
See Note 54 for revenue information by segment.
Contract Liabilities
The following table shows the changes in contract liabilities for the sixthree months ended AugustMay 31, 20192020 and 2018,2019, 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 |
|
| | | | | | | | | | | | | | |
| | May 31, 2020 | | May 31, 2019 |
Balance at beginning of period | | $ | 18,418 | | | $ | 56,928 | |
Contract liabilities added during the period | | 4,796 | | | 10,970 | |
Revenue recognized during the period | | (5,849) | | | (45,579) | |
Balance at end of period | | $ | 17,365 | | | $ | 22,319 | |
The Company did not record any revenues for the sixthree months ended AugustMay 31, 20192020 or 20182019 related to performance obligations satisfied in prior periods. The increases or decreases in accounts receivable, contract assets, and contract liabilities during the sixthree months ended AugustMay 31, 20192020 and 20182019 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$10.3 million, $5.9$4.6 million, $1.2$2.3 million and $1.2$0.2 million in fiscal 2020, 2021, 2022, 2023 and 2023,2024, respectively, related to the $23.7$17.4 million balance of contract liabilities as of AugustMay 31, 2019.2020.
4.Segments
Segment Information
Net sales and operating income (loss) by segment for each period were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Net sales: | | | | | | | | |
Metal Coatings | | $ | 118,991 | | | $ | 122,154 | | | | | |
Energy | | 94,302 | | | 166,969 | | | | | |
Total net sales | | $ | 213,293 | | | $ | 289,123 | | | | | |
| | | | | | | | |
Operating income (loss): | | | | | | | | |
Metal Coatings | | $ | 25,085 | | | $ | 29,392 | | | | | |
Energy | | (1,048) | | | 12,571 | | | | | |
Corporate | | (9,719) | | | (10,989) | | | | | |
Total operating income | | $ | 14,318 | | | $ | 30,974 | | | | | |
Asset balances by segment for each period were as follows (in thousands):
| | | | | | | | | | | | | | |
| | May 31, 2020 | | February 29, 2020 |
Total assets: | | | | |
Metal Coatings | | $ | 497,742 | | | $ | 504,632 | |
Energy | | 525,125 | | | 548,032 | |
Corporate | | 27,906 | | | 21,167 | |
Total | | $ | 1,050,773 | | | $ | 1,073,831 | |
Financial Information About Geographical Areas
The following table presents revenues by geographic region for each period (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Net sales: | | | | | | | | |
United States | | $ | 190,842 | | | $ | 230,337 | | | | | |
International | | 22,451 | | | 58,786 | | | | | |
Total | | $ | 213,293 | | | $ | 289,123 | | | | | |
The following table presents fixed assets by geographic region for each period (in thousands):
| | | | | | | | | | | | | | |
| | May 31, 2020 | | February 29, 2020 |
Property, plant and equipment, net: | | | | | | |
United States | | $ | 194,012 | | | $ | 190,365 | |
Canada | | 15,647 | | | 16,385 | |
Other countries | | 5,306 | | | 6,354 | |
Total | | $ | 214,965 | | | $ | 213,104 | |
5.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 established reserves and makes adjustments based upon the progression of activities with our customers. Warranties typically cover non-conformance to specifications and defects in material and workmanship.
The following table shows the changes in the warranty reserves for the three months ended May 31, 2020 (in thousands):
| | | | | |
Beginning of period | $ | 3,702 | |
Warranty costs incurred | (509) | |
Additions charged to income | 327 | |
End of period | $ | 3,520 | |
| |
4. | Share-based Compensation |
| |
| |
| |
| |
6.Debt
The Company's debt consisted of the following for each of the periods presented (in thousands):
| | | | | | | | | | | |
| May 31, 2020 | | February 29, 2020 |
2017 Revolving Credit Facility | $ | 94,000 | | | $ | 78,000 | |
| | | |
| | | |
2011 Senior Notes | 125,000 | | | 125,000 | |
Total debt, gross | 219,000 | | | 203,000 | |
Unamortized debt issuance costs | (89) | | | (122) | |
Total debt, net | 218,911 | | | 202,878 | |
Less amount due within one year | (125,000) | | | (125,000) | |
Debt due after one year, net | $ | 93,911 | | | $ | 77,878 | |
| | | |
| | | |
7.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 May 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Operating lease cost | | $ | 4,474 | | | $ | 4,266 | | | | | |
Operating cash flows from operating leases included in lease liabilities | | 2,119 | | | 2,275 | | | | | |
ROU assets obtained in exchange for new operating lease liabilities | | 204 | | | 2,506 | | | | | |
| | | | | | | | | | | | | | |
| | May 31, 2020 | | February 29, 2020 |
Weighted-average remaining lease term - operating leases | | 7.59 years | | 7.94 years |
Weighted-average discount rate - operating leases | | 4.95 | % | | 4.89 | % |
As of May 31, 2020, maturities of the Company's lease liabilities were as follows (in thousands):
| | | | | |
Fiscal year: | |
2021 (remaining 9 months) | $ | 6,224 | |
2022 | 8,037 | |
2023 | 7,553 | |
2024 | 6,725 | |
2025 | 5,776 | |
Thereafter | 17,493 | |
Total lease payments | 51,808 | |
Less imputed interest | (8,789) | |
Total | $ | 43,019 | |
8.Income Taxes
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures include deferring the due dates of tax payments and other changes to their income and non-income-based tax laws as well as providing direct government assistance through grants and forgivable loans. The CARES Act, which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. With respect to the CARES Act, the Company currently expects to benefit from the deferral of certain payroll taxes through the end of calendar year 2020 and the technical correction with respect to qualified improvement property.
The provision for income taxes reflects an effective tax rate of 45.8% for the three months ended May 31, 2020 as compared to 21.1% for the respective prior year comparable period. The increase in the effective tax rate is primarily attributable to losses in foreign jurisdictions for which the Company does not anticipate being able to recognize the benefit and additional uncertain tax positions that were recorded in the quarter related to research and development tax credits.
9.Share-based Compensation
The Company has 2 share-based compensation plans, the 2014 Long Term Incentive Plan (the "2014 Plan") and the Amended and Restated 2005 Long Term Incentive Plan (the “2005 Plan”).
The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and members of the board of directors and permits the granting of restricted shares, restricted stock units, performance awards, stock appreciation rights and other stock-based awards. The maximum number of shares that may be issued under the 2014 Plan is 1.5 million shares and, as of AugustMay 31, 2019,2020, the Company had approximately 1.31.2 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, thereThere 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 AugustMay 31, 2019,2020, there were 0.1 million shares available for 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 sharesawards vest.
A summary of the Company’s non-vested restricted stock unit award activity (including DERs) for the six month periodthree months ended AugustMay 31, 20192020 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 Per Share |
Outstanding at beginning of period | | 194,946 | | | $ | 44.34 | |
Granted | | 125,770 | | | 28.61 | |
Vested | | (63,292) | | | 45.94 | |
Forfeited | | (7,128) | | | 42.98 | |
Outstanding at end of period | | 250,296 | | | $ | 35.98 | |
Performance Share Unit Awards
The Company grants performance share unit ("PSU") awards to certain employees, which also include DERs as described above. These PSU awards have a three year performance cycle and will vest and become issuable, if at all, on the third anniversary of the award date. Thegrant date subject to various vesting conditions. Certain PSU awards are subject tohave vesting conditions based on the Company’s degree of achievement of a target annual average adjusted return on assets during these three year periods and, in certain circumstances, vesting is based onrelative to the relative performance of a predetermined group of peer companies. In addition, these PSU awards may have vesting conditions or certain vesting multipliers, which are based on the Company’s total shareholder return during such three years in comparison to a defined specific industry peer group. The Company estimates the 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 periodthree months ended AugustMay 31, 20192020 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 Per Share |
Outstanding at the beginning of the period | | 109,936 | | | $ | 47.75 | |
Granted | | 69,955 | | | 33.22 | |
Vested | | — | | | — | |
Forfeited | | (32,111) | | | 54.00 | |
Outstanding at the end of the period | | 147,780 | | | $ | 39.35 | |
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('SARs") were 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 generally vest ratably over a period of three years from the date of grant 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 rightSARs activity for the six month periodthree months ended AugustMay 31, 20192020 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 at beginning of period | | 94,826 | | | $ | 44.58 | |
Granted | | — | | | — | |
Exercised | | — | | | — | |
Forfeited | | (1,362) | | | 45.36 | |
Outstanding at end of the period | | 93,464 | | | $ | 44.57 | |
Exercisable at the ending of the period | | 93,464 | | | $ | 44.57 | |
| | | | |
The average remaining contractual term for those stock appreciation rightsSARs outstanding and those stock appreciation rightsSARs that were exercisable as of AugustMay 31, 20192020 was 1.360.62 years with an aggregateand such awards had no intrinsic value of less than $0.1 million.value.
Employee Stock Purchase Plan
The Company also has an 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 planthe ESPP have a duration of 24 months (the "offering period"). and commence on each January 1 and July 1, and ending on June 30 and December 31, respectively. 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 the 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. The Company issued 51,438 shares and 37,224did not issue any shares from the ESPP during the six month periodthree months ended AugustMay 31, 2020 and 2019, and 2018, 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 |
|
| | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | |
| | 2020 | | 2019 |
Compensation expense | | $ | 1,766 | | | $ | 1,350 | |
Income tax benefits | | $ | 390 | | | $ | 284 | |
Unrecognized compensation cost related to the Company's employee equity grants at AugustMay 31, 20192020 totals $10.1$13.4 million and is expected to be recognized over a period of 2.672.25 years.
The Company’s policy is to issue shares required under these plans from the Company’s authorized but unissued shares.
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 |
|
14
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 |
|
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 |
|
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 |
|
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, 2019 (in thousands):
|
| | | |
| Warranty Reserve |
Balance at February 28, 2019 | $ | 1,751 |
|
Warranty costs incurred | (1,745 | ) |
Additions charged to income | 3,615 |
|
Balance at August 31, 2019 | $ | 3,621 |
|
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 Notes | 125,000 |
| | 125,000 |
|
Total debt, gross | 256,000 |
| | 241,000 |
|
Unamortized debt issuance costs | (188 | ) | | (255 | ) |
Total debt, net | $ | 255,812 |
| | $ | 240,745 |
|
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 | % |
Table of ContentsAs 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 |
|
2021 | 7,805 |
|
2022 | 7,438 |
|
2023 | 6,968 |
|
2024 | 6,181 |
|
Thereafter | 25,545 |
|
Total lease payments | 58,103 |
|
Less imputed interest | (11,212 | ) |
Total | $ | 46,891 |
|
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.
In April 2019, the Company completed 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 of NuZinc, LLC, a privately held plating company in the Dallas-Fort Worth area. The acquisition will increase 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 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 allocations and unaudited pro forma results of operations have not been provided.
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 QuarterlyAnnual Report on Form 10-Q10-K may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand and response tofor the products and services offered by AZZ, including demand by the metal coatings market, power generation markets, electrical transmission and distribution markets, and the industrial markets, each of which may be impacted by the ongoing COVID-19 pandemic where our ability to assess the future and full impact on the hot dip galvanizing markets;Company, our customers and our suppliers is limited. We could also experience fluctuations in prices and raw material cost, including zinc and natural gas, which are used in theour hot dip galvanizing process;process or other potential supply-chain disruptions or customer requested delays of our products or services; changes in the political stability and economic conditions ofimpacting our business in the variousdomestic and foreign markets that AZZ serves, foreign and domestic,we serve; customer requested delays of shipments,shipments; additional acquisition opportunities,opportunities; currency exchange rates,rates; adequacy of financing, andfinancing; 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.abroad. AZZ has provided additional information regarding risks associated with the business in AZZ’sAZZ's Annual Report on Form 10-K for the fiscal year ended February 28, 201929, 2020 and other filings with the SEC, available for viewing on AZZ’sAZZ's website at www.azz.com and on the SEC’sSEC'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, 2019,29, 2020, and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
Results of Operations
Coronavirus (COVID-19)
In March 2020, the World Health Organization declared the viral strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. The spread of COVID-19 resulted in virtually all governments issuing restrictive orders, including “shelter in place” orders around the globe to assist in mitigating the spread of the virus.
Subsequently, in March 2020, the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency (CISA) department issued guidance clarifying that critical infrastructure industries have a responsibility to maintain operations while these restrictive measures are in place. The Company, based on input from the government and our customers, continued to operate under the CISA guidelines in an effort to support critical infrastructure in the areas where we are either required to do so, or where we are able.
While we continue to support our customers, there remains uncertainties regarding the duration, recurrence and, to what extent, if any, that the COVID-19 pandemic will ultimately have on the demand for our products and services or with our supply chain.
As described above the spread of COVID-19 and the resulting economic contraction has resulted in increased business uncertainty. The consequences of a prolonged economic decline could include, but are not limited to, reduced revenues, increased instances of uncollectible customer receivables, and increased asset impairments in future periods. Accordingly, we cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may materially impact our consolidated balance sheet, statements of income or statements of cash flows for fiscal year 2021.
In addition, in March 2020, the U.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 pandemic and options to defer payroll tax payments. Based on a preliminary evaluation of the CARES Act, we qualify for the deferral of payroll and other tax payments and we are continuing to evaluate certain employer payroll tax credits.
Overview
We have two distinct operating segments, the EnergyMetal Coatings segment and the Metal CoatingsEnergy segment, as defined in our Annual Report on Form 10-K for the fiscal year ended February 28, 2019.29, 2020. 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 54 to our quarterly condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
Orders and Backlog
Our entire backlog, which is inclusive of transaction taxes for certain foreign subsidiaries, relates to our Energy segment and was $301.9$205.4 million as of AugustMay 31, 2019,2020, a decrease of $31.0$38.4 million, or 9.3%15.8%, as compared to $332.9$243.8 million as of February 28, 2019.29, 2020. Our backlog decreased $34.1$94.7 million, or 10.1%31.6%, as compared to the same period in the prior fiscal year. For the three months ended AugustMay 31, 2019,2020, our incoming net orders decreased by $15.9$81.5 million, or 6.3%31.8% when compared to same period of fiscal 20192020 and our book-to-revenue ratio decreased to 1.010.82 to 1 from 1.140.89 to 1. These decreasesThe reductions in backlog were primarily attributable to softnessthe impacts on customer activities given COVID-19. Customers have been slower to release orders on project-related electrical platform work and orders were delayed in net 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.
our industrial platform.
The table below includes the progression of backlog (in thousands):
| | | | Period Ended | | | | Period Ended | | | | Period Ended | | Period Ended | |
Backlog | | 2/28/2019 | | $ | 332,894 |
| | 2/28/2018 | | $ | 265,417 |
| Backlog | | 2/29/2020 | | $ | 243,799 | | | 2/28/2019 | | $ | 332,894 | |
Net bookings | | 256,344 |
| | 295,738 |
| Net bookings | | | | 174,865 | | | | | 256,344 | |
Acquired backlog | | — |
| | 6,006 |
| |
| Revenues recognized | | (289,123 | ) | | (262,236 | ) | Revenues recognized | | (213,293) | | | (289,123) | |
Backlog | | 5/31/2019 | | 300,115 |
| | 5/31/2018 | | 304,925 |
| Backlog | | 5/31/2020 | | 205,371 | | | 5/31/2019 | | 300,115 | |
Book to revenue ratio | | 0.89 |
| | 1.13 |
| Book to revenue ratio | | | | 0.82 | | | | | 0.89 | |
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 AugustMay 31, 2019,2020, consolidated revenues increased $13.4decreased $75.8 million, or 6.0% and $40.3 million or 8.3%26.2% , respectively, as compared to the same periodsperiod in fiscal 2019.2020.
The following table reflects the breakdown of revenue by segment (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 |
|
Revenues for the Energy segment increased $4.8 million or 4.5% and $24.8 million or 9.8%, respectively, for the three and six months ended August 31, 2019 as compared to the same periods in fiscal 2019. These increases were primarily attributable to a general uptick in the sales of our electrical products, the satisfaction of the revenue recognition criteria for certain large international electrical projects that were booked in the prior year and the Westinghouse settlement noted further below. These increases were partially offset by a decline in revenues for our industrial solutions, which was driven by lower international revenues resulting from a large refining project recorded in the prior year comparable period. | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Net sales: | | | | | | | | |
Metal Coatings | | $ | 118,991 | | | $ | 122,154 | | | | | |
Energy | | 94,302 | | | 166,969 | | | | | |
Total net sales | | $ | 213,293 | | | $ | 289,123 | | | | | |
Revenues for the Metal Coatings segment increased $8.6decreased $3.2 million or 7.4% and $15.5 million or 6.7%, respectively,2.6% for the three and six months ended AugustMay 31, 20192020 as compared to the same periodsperiod in fiscal 2019. These increases were the result of higher2020. The slight decrease was related to lower volumes and selling prices, and higher volumes of steel processed. The increases in volumewhich were due primarily to the slowdown in the economy as a result of COVID-19, partially offset by higher revenues in our acquisitions of Tennessee Galvanizing, Inc. and K2 Partners, Inc. duringsurface technologies platform from the first quarter of fiscal 2020. For additional information on our recent acquisitions in the Metal Coatingsprior fiscal year.
Revenues for the Energy segment see Note 10decreased $72.7 million or 43.5% for the three months ended May 31, 2020 as compared to the condensed consolidated financial statements.same period in fiscal 2020. This decrease was related to less overall demand for our electrical products and industrial solutions, which was due primarily to the slowdown in the economy as a result of COVID-19 and softness in the oil and gas markets. In addition, the prior year period included significantly higher electrical product revenues related to a large international project.
Segment Operating Income
The following table reflects the breakdown of operating income (loss) by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | | | | | |
| | 2020 | | 2019 | | | | |
Operating income (loss): | | | | | | | | |
Metal Coatings | | $ | 25,085 | | | $ | 29,392 | | | | | |
Energy | | (1,048) | | | 12,571 | | | | | |
Corporate | | (9,719) | | | (10,989) | | | | | |
Total operating income | | $ | 14,318 | | | $ | 30,974 | | | | | |
|
| | | | | | | | | | | | | | | | |
| | Three Months Ended August 31, | | Six Months Ended August 31, |
| | 2019 | | 2018 | | 2018 | | 2017 |
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 |
|
Operating income for the Metal Coatings segment decreased $4.3 million or 14.7% for the three months ended May 31, 2020 as compared to the same period in fiscal 2020. Operating margins were 21.1% and 24.1%, for the three months ended May 31, 2020 and 2019, respectively. These declines were related primarily to the lower volumes and selling prices noted above, which were partially offset by lower zinc costs.Operating income for the Energy segment decreased slightly and increased $2.6by $13.6 million or 18.1%, respectively,108.3% for the three and six months ended AugustMay 31, 20192020 as compared to the same periods in fiscal 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.2020. Operating margins were 3.8%(1.1)% and 4.0%7.5%, for the three months ended AugustMay 31, 2020 and 2019, and 2018, respectively, and 6.0% and 5.6% forrespectively. These declines were related primarily to the six months ended August 31, 2019 and 2018, respectively.lower revenues noted above.
Operating income for the Metal Coatings segment increasedCorporate Expenses
Corporate expenses decreased by $6.6$1.3 million or 29.9% and $10.8 million or 22.9%, respectively, for the three and six months ended August 31, 2019 as compared to the same periods in fiscal 2019. Operating margins were 23.0% and 19.0%11.6%, for the three months ended AugustMay 31, 2019 and 2018, respectively, and 23.5% and 20.4% for the 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. No such charges were recorded in the current fiscal year.
Corporate Expenses
Corporate expenses increased by $1.5 million or 16.2%, and $1.0 million or 4.9%, respectively, for the three and six months ended August 31, 20192020 as compared to the same periodsperiod in fiscal 2019. These increases were2020. The decrease was related primarily attributable to higherlower employee compensation costs and reduced outside services.
Other expense, net
Other expense, net for the three months ended May 31, 2020 was $1.5 million as compared to $0.4 million for the prior year comparable period. This decrease was primarily attributable to foreign currency losses as the dollar strengthened against currencies in Brazil and China.
Interest Expense
Interest expense for the three and six months ended AugustMay 31, 20192020 was $3.5$2.6 million and $7.1 million, respectively as compared to $4.0 million and $7.8$3.6 million for the respective prior year comparable periods. These decreases wereperiod. This decrease was primarily attributable to lower average outstanding debt balances and relatively flatlower interest rates on variable rate debt. Our gross debt to equity ratio was 0.400.34 to 1 as of AugustMay 31, 2019,2020, compared to 0.500.48 to 1 as of AugustMay 31, 2018.2019.
Other (Income) Expense
For the three and six months ended August 31, 2019, we recorded other expense, net of $0.7 million and $1.1 million, respectively, which consisted primarily of foreign currency losses resulting from unfavorable movements in exchange rates. For the three and six months ended August 31, 2018, we recorded other income, net of $(0.9) million and $(1.1) million, respectfully, which was primarily related to a bankruptcy proceeding for a non-trade note receivable that ultimately settled at an amount higher than originally estimated. This benefit in the prior year comparable periods was partially offset by foreign currency losses.
Income Taxes
The provision for income taxes reflects an effective tax rate of 13.4% and 18.0%45.8% for the three and six months ended AugustMay 31, 2019, respectively,2020 as compared to 19.6% and 21.0%21.1% for the respective prior year comparable periods.period. The changes wereincrease in the effective tax rate was primarily attributable to a one time deferred incomelosses in foreign jurisdictions for which we do not anticipate being able to recognize the benefitand additional uncertain 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"). 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 filed approximately $12 million of such claims with the court, which includes 100% of our pre-petition claims. In April 2019, for one of our plants, the Company entered into a settlement agreement with the third party bankruptcy administrator related to outstanding claims. The agreement amount of approximately $8.1 million represented 100% of those outstanding claims for such plant. The impact of the settlement noted above had no material impact on operating income for the period. 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 andpositions that were recorded a favorable non material income impact in the quarter related to the final reconciliationsresearch and development tax credits.
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, |
| | 2019 | | 2018 |
Net cash provided by operating activities | | $ | 38,235 |
| | $ | 16,694 |
|
Net cash used in investing activities | | (56,088 | ) | | (14,840 | ) |
Net cash provided by (used in) financing activities | | 7,196 |
| | (13,357 | ) |
| | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | |
| | 2020 | | 2019 |
Net cash used in operating activities | | $ | (11,184) | | | $ | (17,896) | |
Net cash used in investing activities | | (10,847) | | | (43,469) | |
Net cash provided by financing activities | | 11,036 | | | 50,869 | |
For the six month periodthree months ended AugustMay 31, 2019,2020, net cash provided byused in operating activities was $38.2$11.2 million, net cash used in investing activities was $56.1$10.8 million, net cash provided by financing activities was $7.2$11.0 million, and an increasea decrease of $0.2$0.7 million from the net effect of exchange rate changes on cash resulting in a net decrease in cash and cash equivalents of $10.4$10.3 million. In comparison to the comparable period in fiscal 2019,2020, the results in the statement of cash flows for operating activities for the six month periodthree months ended AugustMay 31, 2019,2020, are primarily attributable to positiveless negative impacts of changes in working capital, and increasedpartially offset by lower net income. The Company's use of cash for investing activities was higherlower due to increaseddecreased spending on acquisitions, andpartially offset by higher capital expenditures. Net cash provided by financing activities was higherlower during the six month periodthree months ended AugustMay 31, 20192020 as compared to the prior year comparable period due primarily to increaseddecreased net borrowings.
Our working capital was $230.8$95.4 million as of AugustMay 31, 2019,2020, as compared to $213.8$73.9 million at February 28, 2019.29, 2020.
Financing and Capital
As of AugustMay 31, 2019,2020, the Company had $256.0$219.0 million of floating and fixed rate notes outstanding with varying maturities through fiscal 2023 and the Company was in compliance with all of the covenants related to these outstanding borrowings. As of AugustMay 31, 2019,2020, the Company had approximately $301.1$342.3 million of additional credit available for future draws or letters of credit.
For additional information on the Company's outstanding borrowings see Note 76 to the condensed consolidated financial statements and further below under Contractual Obligations.
Share Repurchase Program
In January of 2012, our Board authorized the repurchase of up to ten percent of the then 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 AugustMay 31, 2019.2020.
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 AugustMay 31, 2019,2020, 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 for the remainder of the next five fiscal years and beyond (in thousands):
| | | | Operating Leases | | Purchase Commitments (1) | | Long-Term Debt | | Interest (2) | | Total | | Operating Leases | | Purchase Commitments (1) | | Long-Term Debt | | Interest (2) | | Total |
Fiscal: | |
| Fiscal: | | | |
2020 | | $ | 4,166 |
| | $ | 33,100 |
| | $ | — |
| | $ | 10,097 |
| | $ | 47,363 |
| |
2021 | | 7,805 |
| | — |
| | 125,000 |
| | 12,105 |
| | 144,910 |
| 2021 | | $ | 6,224 | | | $ | 22,499 | | | $ | 125,000 | | | $ | 8,381 | | | $ | 162,104 | |
2022 | | 7,438 |
| | — |
| | — |
| | 5,330 |
| | 12,768 |
| 2022 | | 8,037 | | | — | | | — | | | 2,141 | | | 10,178 | |
2023 | | 6,968 |
| | — |
| | 131,000 |
| | 570 |
| | 138,538 |
| 2023 | | 7,553 | | | — | | | 94,000 | | | 313 | | | 101,866 | |
2024 | | 6,181 |
| | — |
| | — |
| | — |
| | 6,181 |
| 2024 | | 6,725 | | | — | | | — | | | | | | 6,725 | |
2025 | | 2025 | | 5,776 | | | — | | | — | | | — | | | 5,776 | |
Thereafter | | 25,545 |
| | — |
| | — |
| | — |
| | 25,545 |
| Thereafter | | 17,493 | | | — | | | — | | | — | | | 17,493 | |
Total | | $ | 58,103 |
| | $ | 33,100 |
| | $ | 256,000 |
| | $ | 28,102 |
| | $ | 375,305 |
| Total | | $ | 51,808 | | | $ | 22,499 | | | $ | 219,000 | | | $ | 10,835 | | | $ | 304,142 | |
(1) Purchase commitments consist of non-cancelable forward contracts to purchase zinc at various volumes and prices. All such contracts expire in fiscal 2020.2021.
(2) For variable rate debt, interest payments are calculated using current interest rates.
As of AugustMay 31, 2019,2020, we had outstanding letters of credit in the amount of $40.0$43.3 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 periodthree months ended AugustMay 31, 2019,2020, 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, 2019.29, 2020.
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 sixnine months of fiscal 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, 2019.29, 2020.
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 weaknesses 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 of February 28, 2019, management concluded the Company’s internal control over financial reporting was ineffective due to the inadequate design of controls pertaining to the Company’s review and ongoing monitoring of its revenue recognition 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 additionalconstituted a 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 and reporting 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 theseadditional errors wasis 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 control deficiencies identified above. The remediation plan includes i) 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)ii) additional 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 weaknessesweakness that we have previously 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, in appropriate circumstances, make revisions to our remediation plan.
Subject to these remediation efforts, thereThere 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 November 4, 2019, Omid Atayi, acting on behalf of himself and a putative class of persons who purchased or otherwise acquired the Company’s securities between July 3, 2018 and October 8, 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. Omid Atayi v. AZZ Inc., et al., Case No. 4:19-cv-00928-A.The complaint alleges, among other things, that throughout the Class Period, the Company failed to disclose (1) that the Company’s internal controls over financial reporting were not effective; (2) that the Company improperly implemented ASC 606 which resulted in improper revenue reconciliations; and (3) that, as a result of the foregoing, the Company’s positive statements about the Company’s business, operations, and prospects were materially misleading and or lacked a reasonable basis. The plaintiffs seek an award of compensatory and punitive damages, interests, attorneys’ fees and costs. The Company denies the allegations and believes it has strong defenses to vigorously contest 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 be material and adversely affect its financial condition or results of operations.
In addition, the Company and its subsidiaries are named defendants and plaintiffs 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, environmental matters, and various environmental matters,commercial disputes, 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 legal matters cannot be predicted at this time, management, after consultation with legal counsel believes it has strong defenses to all of these matters and 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, 2019.29, 2020.
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 then 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 AugustMay 31, 2019.2020.
Item 6. Exhibits
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32.1 | | |
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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. |
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101.SCH | | XBRL Taxonomy Extension Schema Document |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document |
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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: | July 9, 2020 | | By: | AZZ Inc.
(Registrant) /s/ Philip A. Schlom |
| | | | |
Date: | December 26, 2019 | | By: | /s/ Paul W. Fehlman |
| | | | Paul W. Fehlman
Senior Vice PresidentPhilip A. Schlom Chief Accounting Officer and
Interim Chief Financial Officer |