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 November 30, 2020May 31, 2021
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.) |
| | |
One Museum Place, Suite 500 | | |
3100 West 7th Street | | |
Fort Worth, | Texas | | 76107 |
(Address of principal executive offices) | | (Zip Code) |
(817) 810-0095
(Registrant’s telephone number, including area code)
NONE
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
Title of each 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 31, 2020June 30, 2021 the registrant had outstanding 25,364,05225,071,582 shares of common stock; $1.00 par value per share.
AZZ INC.
INDEX
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PART I. | | |
Item 1. | Financial Statements (Unaudited) | |
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Item 2. | | |
Item 3. | | |
Item 4. | | |
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PART II. | | |
Item 1. | | |
Item 1A. | | |
Item 2. | | |
Item 5 | | |
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)
| | | November 30, 2020 | | February 29, 2020 | | May 31, 2021 | | February 28, 2021 |
Assets | Assets | | | | | Assets | | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 19,195 | | | $ | 36,687 | | Cash and cash equivalents | | $ | 12,403 | | | $ | 14,837 | |
Accounts receivable (net of allowance for doubtful accounts of $5,234 as of November 30, 2020 and $4,951 as of February 29, 2020) | | 127,501 | | | 139,214 | | |
Accounts receivable (net of allowance for credit losses of $5,362 as of May 31, 2021 and $5,713 as of February 28, 2021) | | Accounts receivable (net of allowance for credit losses of $5,362 as of May 31, 2021 and $5,713 as of February 28, 2021) | | 134,531 | | | 128,127 | |
Inventories: | Inventories: | | Inventories: | |
Raw material | Raw material | | 84,600 | | | 88,837 | | Raw material | | 92,283 | | | 86,913 | |
Work-in-process | Work-in-process | | 7,475 | | | 5,543 | | Work-in-process | | 6,214 | | | 4,453 | |
Finished goods | Finished goods | | 1,683 | | | 5,461 | | Finished goods | | 1,453 | | | 1,546 | |
Contract assets | Contract assets | | 74,712 | | | 70,093 | | Contract assets | | 71,185 | | | 58,056 | |
Prepaid expenses and other | Prepaid expenses and other | | 6,366 | | | 8,727 | | Prepaid expenses and other | | 11,211 | | | 5,876 | |
Assets held for sale | Assets held for sale | | 3,178 | | | 0 | | Assets held for sale | | 5,628 | | | 3,684 | |
Total current assets | Total current assets | | 324,710 | | | 354,562 | | Total current assets | | 334,908 | | | 303,492 | |
Property, plant and equipment, net | Property, plant and equipment, net | | 201,178 | | | 213,104 | | Property, plant and equipment, net | | 207,689 | | | 205,909 | |
Operating lease right-of-use assets | Operating lease right-of-use assets | | 38,474 | | | 43,208 | | Operating lease right-of-use assets | | 48,698 | | | 37,801 | |
Goodwill | Goodwill | | 351,830 | | | 356,225 | | Goodwill | | 354,839 | | | 353,881 | |
Intangibles and other assets, net | Intangibles and other assets, net | | 93,677 | | | 106,732 | | Intangibles and other assets, net | | 93,105 | | | 95,359 | |
Total assets | Total assets | | $ | 1,009,869 | | | $ | 1,073,831 | | Total assets | | $ | 1,039,239 | | | $ | 996,442 | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | Liabilities and Shareholders’ Equity | | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 53,715 | | | $ | 61,987 | | Accounts payable | | $ | 48,831 | | | $ | 41,034 | |
Income tax payable | Income tax payable | | 0 | | | 2,876 | | Income tax payable | | 4,778 | | | 0 | |
Accrued salaries and wages | Accrued salaries and wages | | 21,883 | | | 38,882 | | Accrued salaries and wages | | 16,614 | | | 22,606 | |
Other accrued liabilities | Other accrued liabilities | | 29,639 | | | 26,868 | | Other accrued liabilities | | 36,278 | | | 27,136 | |
Customer deposits | Customer deposits | | 436 | | | 255 | | Customer deposits | | 421 | | | 348 | |
Contract liabilities | Contract liabilities | | 11,521 | | | 18,418 | | Contract liabilities | | 17,098 | | | 16,138 | |
Lease liability, short-term | Lease liability, short-term | | 6,261 | | | 6,327 | | Lease liability, short-term | | 7,174 | | | 6,588 | |
Debt due within one year | | 0 | | | 125,000 | | |
| | Total current liabilities | Total current liabilities | | 123,455 | | | 280,613 | | Total current liabilities | | 131,194 | | | 113,850 | |
Debt due after one year, net | Debt due after one year, net | | 181,978 | | | 77,878 | | Debt due after one year, net | | 185,435 | | | 178,419 | |
Lease liability, long-term | Lease liability, long-term | | 33,323 | | | 38,114 | | Lease liability, long-term | | 40,702 | | | 32,629 | |
Deferred income taxes | Deferred income taxes | | 33,073 | | | 37,926 | | Deferred income taxes | | 38,467 | | | 39,283 | |
Other long-term liabilities | Other long-term liabilities | | 13,962 | | | 4,934 | | Other long-term liabilities | | 6,030 | | | 8,969 | |
Total liabilities | Total liabilities | | 385,791 | | | 439,465 | | Total liabilities | | 401,828 | | | 373,150 | |
Commitments and contingencies | Commitments and contingencies | | 0 | | 0 | Commitments and contingencies | | 0 | | 0 |
Shareholders’ equity: | Shareholders’ equity: | | Shareholders’ equity: | |
Common stock, $1 par, shares authorized 100,000; 25,430 shares issued and outstanding at November 30, 2020 and 26,148 shares issued and outstanding at February 29, 2020 | | 25,430 | | | 26,148 | | |
Common stock, $1 par, shares authorized 100,000; 25,071 shares issued and outstanding at May 31, 2021 and 25,108 shares issued and outstanding at February 28, 2021 | | Common stock, $1 par, shares authorized 100,000; 25,071 shares issued and outstanding at May 31, 2021 and 25,108 shares issued and outstanding at February 28, 2021 | | 25,071 | | | 25,108 | |
Capital in excess of par value | Capital in excess of par value | | 73,390 | | | 66,703 | | Capital in excess of par value | | 75,600 | | | 75,979 | |
Retained earnings | Retained earnings | | 552,443 | | | 572,414 | | Retained earnings | | 559,173 | | | 547,289 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (27,185) | | | (30,899) | | Accumulated other comprehensive loss | | (22,433) | | | (25,084) | |
Total shareholders’ equity | Total shareholders’ equity | | 624,078 | | | 634,366 | | Total shareholders’ equity | | 637,411 | | | 623,292 | |
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | | $ | 1,009,869 | | | $ | 1,073,831 | | Total liabilities and shareholders' equity | | $ | 1,039,239 | | | $ | 996,442 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share data)
(Unaudited)
| | | | Three Months Ended November 30, | | Nine Months Ended November 30, | | | Three Months Ended May 31, | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
| Sales | Sales | | $ | 226,623 | | | $ | 291,139 | | | $ | 643,287 | | | $ | 816,452 | | Sales | | $ | 229,826 | | | $ | 213,293 | | |
Cost of sales | Cost of sales | | 171,948 | | | 223,808 | | | 500,311 | | | 630,328 | | Cost of sales | | 171,899 | | | 171,085 | | |
Gross margin | Gross margin | | 54,675 | | | 67,331 | | | 142,976 | | | 186,124 | | Gross margin | | 57,927 | | | 42,208 | | |
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| | |
Selling, general and administrative | Selling, general and administrative | | 25,228 | | | 33,903 | | | 79,867 | | | 99,515 | | Selling, general and administrative | | 27,215 | | | 27,890 | | |
Restructuring and impairment charges | | 1,576 | | | 0 | | | 20,269 | | | 0 | | |
| Operating income | Operating income | | 27,871 | | | 33,428 | | | 42,840 | | | 86,609 | | Operating income | | 30,712 | | | 14,318 | | |
| Interest expense | Interest expense | | 2,272 | | | 3,301 | | | 7,376 | | | 10,433 | | Interest expense | | 1,697 | | | 2,634 | | |
| Other (income) expense, net | Other (income) expense, net | | (724) | | | (743) | | | 823 | | | 367 | | Other (income) expense, net | | (969) | | | 1,456 | | |
Income before income taxes | Income before income taxes | | 26,323 | | | 30,870 | | | 34,641 | | | 75,809 | | Income before income taxes | | 29,984 | | | 10,228 | | |
Income tax expense | Income tax expense | | 6,620 | | | 8,835 | | | 11,187 | | | 16,932 | | Income tax expense | | 7,647 | | | 4,687 | | |
Net income | Net income | | $ | 19,703 | | | $ | 22,035 | | | $ | 23,454 | | | $ | 58,877 | | Net income | | $ | 22,337 | | | $ | 5,541 | | |
Earnings per common share | Earnings per common share | | | | | | | | | Earnings per common share | | | | | |
Basic earnings per share | Basic earnings per share | | $ | 0.76 | | | $ | 0.84 | | | $ | 0.90 | | | $ | 2.25 | | Basic earnings per share | | $ | 0.89 | | | $ | 0.21 | | |
Diluted earnings per share | Diluted earnings per share | | $ | 0.76 | | | $ | 0.84 | | | $ | 0.90 | | | $ | 2.24 | | Diluted earnings per share | | $ | 0.88 | | | $ | 0.21 | | |
| Cash dividends declared per common share | Cash dividends declared per common share | | $ | 0.17 | | | $ | 0.17 | | | $ | 0.51 | | | $ | 0.51 | | 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 November 30, | | Nine Months Ended November 30, | | | Three Months Ended May 31, | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
| Net income | Net income | | $ | 19,703 | | | $ | 22,035 | | | $ | 23,454 | | | $ | 58,877 | | Net income | | $ | 22,337 | | | $ | 5,541 | | |
Other comprehensive income (loss): | Other comprehensive income (loss): | | Other comprehensive income (loss): | | |
Foreign currency translation adjustments, net of income tax of $0 | Foreign currency translation adjustments, net of income tax of $0 | | 255 | | | (215) | | | 3,756 | | | (1,434) | | Foreign currency translation adjustments, net of income tax of $0 | | 2,581 | | | (1,039) | | |
Interest rate swap, net of income tax of $7, $7, $21, and $22, respectively | | (14) | | | (14) | | | (42) | | | (41) | | |
Interest rate swap, net of income tax of $0 and $7, respectively | | Interest rate swap, net of income tax of $0 and $7, respectively | | 0 | | | (14) | | |
Other comprehensive income (loss) | Other comprehensive income (loss) | | 241 | | | (229) | | | 3,714 | | | (1,475) | | Other comprehensive income (loss) | | 2,581 | | | (1,053) | | |
Comprehensive income | Comprehensive income | | $ | 19,944 | | | $ | 21,806 | | | $ | 27,168 | | | $ | 57,402 | | Comprehensive income | | $ | 24,918 | | | $ | 4,488 | | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
| | | | Nine Months Ended November 30, | | | Three Months Ended May 31, |
| | | 2020 | | 2019 | | | 2021 | | 2020 |
Cash Flows From Operating Activities | Cash Flows From Operating Activities | | | | | Cash Flows From Operating Activities | | | | |
Net income | Net income | | $ | 23,454 | | | $ | 58,877 | | Net income | | $ | 22,337 | | | $ | 5,541 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
Provision for doubtful accounts | | 233 | | | 2,316 | | |
Adjustments to reconcile net income to net cash provided by (used in) operating activities: | | Adjustments to reconcile net income to net cash provided by (used in) operating activities: | |
Bad debt expense | | Bad debt expense | | (218) | | | 129 | |
Amortization and depreciation | Amortization and depreciation | | 34,176 | | | 37,208 | | Amortization and depreciation | | 11,084 | | | 11,668 | |
Deferred income taxes | Deferred income taxes | | (4,660) | | | (4,486) | | Deferred income taxes | | (892) | | | (2,147) | |
Loss on disposal of business | | 3,050 | | | 0 | | |
Non-cash restructuring and impairment charges | | 17,219 | | | 0 | | |
Net gain on sale of property, plant and equipment | | 0 | | | (305) | | |
| Net (gain) loss on sale of property, plant and equipment | | Net (gain) loss on sale of property, plant and equipment | | (15) | | | 40 | |
Amortization of deferred borrowing costs | Amortization of deferred borrowing costs | | 503 | | | 404 | | Amortization of deferred borrowing costs | | 139 | | | 135 | |
Share-based compensation expense | Share-based compensation expense | | 5,773 | | | 4,904 | | Share-based compensation expense | | 1,811 | | | 1,766 | |
Effects of changes in assets and liabilities, net of acquisitions and dispositions: | Effects of changes in assets and liabilities, net of acquisitions and dispositions: | | Effects of changes in assets and liabilities, net of acquisitions and dispositions: | |
Accounts receivable | Accounts receivable | | 9,715 | | | (28,088) | | Accounts receivable | | (7,966) | | | 8,721 | |
Inventories | Inventories | | (1,763) | | | 6,245 | | Inventories | | (8,254) | | | (4,449) | |
Prepaid expenses and other | Prepaid expenses and other | | 2,327 | | | 1,491 | | Prepaid expenses and other | | (5,419) | | | (941) | |
Other assets | Other assets | | 226 | | | 286 | | Other assets | | (778) | | | 123 | |
Net change in contract assets and liabilities | Net change in contract assets and liabilities | | (15,297) | | | (54,149) | | Net change in contract assets and liabilities | | (9,839) | | | 3,168 | |
Accounts payable | Accounts payable | | (7,782) | | | 18,386 | | Accounts payable | | 6,321 | | | (15,328) | |
Other accrued liabilities and income taxes payable | Other accrued liabilities and income taxes payable | | (7,780) | | | 28,965 | | Other accrued liabilities and income taxes payable | | 2,749 | | | (19,610) | |
Net cash provided by operating activities | | 59,394 | | | 72,054 | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | 11,060 | | | (11,184) | |
Cash Flows From Investing Activities | Cash Flows From Investing Activities | | | | | Cash Flows From Investing Activities | | | | |
Proceeds from sale of property, plant and equipment | Proceeds from sale of property, plant and equipment | | 454 | | | 337 | | Proceeds from sale of property, plant and equipment | | 23 | | | 0 | |
Purchase of property, plant and equipment | Purchase of property, plant and equipment | | (27,885) | | | (22,543) | | Purchase of property, plant and equipment | | (7,489) | | | (10,847) | |
Proceeds from sale of subsidiaries, net | | 12,444 | | | 0 | | |
Acquisition of subsidiaries, net of cash acquired | | 0 | | | (60,628) | | |
| Net cash used in investing activities | Net cash used in investing activities | | (14,987) | | | (82,834) | | Net cash used in investing activities | | (7,466) | | | (10,847) | |
Cash Flows From Financing Activities | Cash Flows From Financing Activities | | | | | Cash Flows From Financing Activities | | | | |
Proceeds from issuance of common stock | | 1,694 | | | 1,781 | | |
| Payments for taxes related to net share settlement of equity awards | Payments for taxes related to net share settlement of equity awards | | (646) | | | (1,217) | | Payments for taxes related to net share settlement of equity awards | | (2,101) | | | (539) | |
Proceeds from revolving loan | Proceeds from revolving loan | | 161,000 | | | 320,500 | | Proceeds from revolving loan | | 35,000 | | | 76,000 | |
Payments on revolving loan | Payments on revolving loan | | (182,000) | | | (306,500) | | Payments on revolving loan | | (28,000) | | | (60,000) | |
| Purchases of treasury shares | | (30,953) | | | 0 | | |
Repurchase and retirement of treasury stock | | Repurchase and retirement of treasury stock | | (6,264) | | | 0 | |
Payments of dividends | Payments of dividends | | (13,324) | | | (13,355) | | Payments of dividends | | (4,245) | | | (4,425) | |
Net cash (used in) provided by financing activities | Net cash (used in) provided by financing activities | | (64,229) | | | 1,209 | | Net cash (used in) provided by financing activities | | (5,610) | | | 11,036 | |
Effect of exchange rate changes on cash | Effect of exchange rate changes on cash | | 2,330 | | | (145) | | Effect of exchange rate changes on cash | | (418) | | | 722 | |
Net decrease in cash and cash equivalents | Net decrease in cash and cash equivalents | | (17,492) | | | (9,716) | | Net decrease in cash and cash equivalents | | (2,434) | | | (10,273) | |
Cash and cash equivalents at beginning of period | Cash and cash equivalents at beginning of period | | 36,687 | | | 24,005 | | Cash and cash equivalents at beginning of period | | 14,837 | | | 36,687 | |
Cash and cash equivalents at end of period | Cash and cash equivalents at end of period | | $ | 19,195 | | | $ | 14,289 | | Cash and cash equivalents at end of period | | $ | 12,403 | | | $ | 26,414 | |
| Supplemental disclosures | Supplemental disclosures | | Supplemental disclosures | |
Cash paid for interest | Cash paid for interest | | $ | 5,241 | | | $ | 8,426 | | Cash paid for interest | | $ | 394 | | | $ | 869 | |
Cash paid for income taxes | Cash paid for income taxes | | $ | 15,208 | | | $ | 7,985 | | Cash paid for income taxes | | $ | 1,322 | | | $ | 11 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2020 |
| | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| | | | | |
| | 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 under stock-based plans and related income tax expense | | 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 | |
Share-based compensation | | — | | | — | | | 2,317 | | | — | | | — | | | 2,317 | |
Common stock issued under stock-based plans and related income tax expense | | 23 | | | 23 | | | (39) | | | — | | | — | | | (16) | |
Common stock issued under employee stock purchase plan | | 58 | | | 58 | | | 1,636 | | | — | | | — | | | 1,694 | |
Repurchase and retirement of treasury shares | | (200) | | | (200) | | | — | | | (6,179) | | | — | | | (6,379) | |
Cash dividends paid | | — | | | — | | | — | | | (4,467) | | | — | | | (4,467) | |
Net loss | | — | | | — | | | — | | | (1,790) | | | — | | | (1,790) | |
Foreign currency translation | | — | | | — | | | — | | | — | | | 4,540 | | | 4,540 | |
Interest rate swap | | — | | | — | | | — | | | — | | | (14) | | | (14) | |
Balance at August 31, 2020 | | 26,076 | | | $ | 26,076 | | | $ | 71,797 | | | $ | 561,094 | | | $ | (27,426) | | | $ | 631,541 | |
Share-based compensation | | — | | | — | | | 1,690 | | | — | | | — | | | 1,690 | |
Common stock issued under stock-based plans and related income tax expense | | 6 | | | 6 | | | (97) | | | — | | | — | | | (91) | |
| | | | | | | | | | | | |
Repurchase and retirement of treasury shares | | (652) | | | (652) | | | — | | | (23,922) | | | — | | | (24,574) | |
Cash dividends paid | | — | | | — | | | — | | | (4,432) | | | — | | | (4,432) | |
Net income | | — | | | — | | | — | | | 19,703 | | | — | | | 19,703 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | 255 | | | 255 | |
Interest rate swap | | — | | | — | | | — | | | — | | | (14) | | | (14) | |
Balance at November 30, 2020 | | 25,430 | | | $ | 25,430 | | | $ | 73,390 | | | $ | 552,443 | | | $ | (27,185) | | | $ | 624,078 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2021 |
| | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| | | | | |
| | Shares | | Amount | |
Balance at February 28,2021 | | 25,108 | | | $ | 25,108 | | | $ | 75,979 | | | $ | 547,289 | | | $ | (25,084) | | | $ | 623,292 | |
Share-based compensation expense | | — | | | — | | | 1,811 | | | — | | | — | | | 1,811 | |
Common stock issued under stock-based plans and related income tax expense | | 89 | | | 89 | | | (2,190) | | | — | | | — | | | (2,101) | |
| | | | | | | | | | | | |
| | | | | | | | | | | | |
Repurchase and retirement of common stock | | (126) | | | (126) | | | — | | | (6,138) | | | — | | | (6,264) | |
Cash dividends paid | | — | | | — | | | — | | | (4,245) | | | — | | | (4,245) | |
Net income | | — | | | — | | | — | | | 22,337 | | | — | | | 22,337 | |
Foreign currency translation | | — | | | — | | | — | | | (70) | | | 2,651 | | | 2,581 | |
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Balance at May 31, 2021 | | 25,071 | | | $ | 25,071 | | | $ | 75,600 | | | $ | 559,173 | | | $ | (22,433) | | | $ | 637,411 | |
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AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | Nine Months Ended November 30, 2019 | | Three Months Ended May 31, 2020 |
| | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income (Loss) | | Total |
| | | Shares | | Amount | | | Shares | | Amount | |
Balance at February 28, 2019 | | 26,115 | | | $ | 26,115 | | | $ | 46,141 | | | $ | 560,224 | | | $ | (28,752) | | | $ | 603,728 | | |
Balance at February 28, 2020 | | Balance at February 28, 2020 | | 26,148 | | | $ | 26,148 | | | $ | 66,703 | | | $ | 572,414 | | | $ | (30,899) | | | $ | 634,366 | |
Share-based compensation | Share-based compensation | | — | | | — | | | 1,350 | | | — | | | — | | | 1,350 | | Share-based compensation | | — | | | — | | | 1,766 | | | — | | | — | | | 1,766 | |
Common stock issued under stock-based plans and related income tax expense | Common stock issued under stock-based plans and related income tax expense | | 37 | | | 37 | | | (728) | | | — | | | — | | | (691) | | Common stock issued under stock-based plans and related income tax expense | | 47 | | | 47 | | | (586) | | | — | | | — | | | (539) | |
| Cash dividends paid | Cash dividends paid | | — | | | — | | | — | | | (4,440) | | | — | | | (4,440) | | Cash dividends paid | | — | | | — | | | — | | | (4,425) | | | — | | | (4,425) | |
Net income | Net income | | — | | | — | | | — | | | 21,284 | | | — | | | 21,284 | | Net income | | — | | | — | | | — | | | 5,541 | | | — | | | 5,541 | |
Foreign currency translation | Foreign currency translation | | — | | | — | | | — | | | — | | | (1,960) | | | (1,960) | | Foreign currency translation | | — | | | — | | | — | | | — | | | (1,039) | | | (1,039) | |
Interest rate swap | Interest rate swap | | — | | | — | | | — | | | — | | | (14) | | | (14) | | 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 under stock-based plans and related income tax expense | | 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 | | |
Share-based compensation | | — | | | — | | | 1,818 | | | — | | | — | | | 1,818 | | |
Common stock issued under stock-based plans and related income tax expense | | 19 | | | 19 | | | (545) | | | — | | | — | | | (526) | | |
Balance at May 31, 2020 | | Balance at May 31, 2020 | | 26,195 | | | $ | 26,195 | | | $ | 67,883 | | | $ | 573,530 | | | $ | (31,952) | | | $ | 635,656 | |
| Cash dividends paid | | — | | | — | | | — | | | (4,461) | | | — | | | (4,461) | | |
Net income | | — | | | — | | | — | | | 22,035 | | | — | | | 22,035 | | |
Foreign currency translation | | — | | | — | | | — | | | — | | | (215) | | | (215) | | |
Interest rate swap | | — | | | — | | | — | | | — | | | (14) | | | (14) | | |
Balance at November 30, 2019 | | 26,240 | | | $ | 26,240 | | | $ | 51,484 | | | $ | 605,746 | | | $ | (30,227) | | | $ | 653,243 | | |
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The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
1.The Company and Basis of Presentation
AZZ Inc. (“AZZ”, the “Company”, "our" or “we”) was established in 1956 and incorporated under the laws of the state of Texas. The Company is a global provider of metal coating solutions, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. The Company has 2 distinct operating segments: the Metal Coatings segment and the Infrastructure Solutions segment (previously referred to as the Company's Energy segment).segment. AZZ Metal Coatings provides hot dip galvanizing, spin 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 Infrastructure Solutions 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 markets worldwide.
Presentation
The accompanying condensed consolidated balance sheet as of February 29, 2020, which28, 2021 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 29, 2020,28, 2021, included in the Company’s Annual Report on Form 10-K covering such period. Certain previously reported amounts have been reclassified to conform to current period presentation.
The Company's 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 28, 20212022 is referred to as fiscal 2021.2022.
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 November 30, 2020,May 31, 2021, the results of its operations for the three and nine months ended November 30,May 31, 2021 and 2020, and 2019, and cash flows for the ninethree months ended November 30, 2020May 31, 2021 and 2019. These2020. The interim results reported herein are not necessarily indicative of results for a full year. Certain previously reported amounts have been reclassified to conform to current period presentation.
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 and the resulting economic contraction has resulted in increased business uncertainty. The Company continues to be impacted by the inability for its Infrastructure Solutions Industrial Platformplatform to access certain customer sites to perform services, temporary slow-downs in order placements in the Infrastructure Solutions Electrical Platform,platform, and increased costs associated with maintaining safe operations across the entire business. The Company has been able to remain open during the entirety of the pandemic to service its customers. The consequences of a prolonged economic decline could include, but are not limited to, reduced sales, increased instances of uncollectible customer receivables, and increased asset impairments in future periods. Accordingly, the Company 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 operations or statements of cash flows for fiscal year 20212022 or beyond.
Recently Adopted Accounting Pronouncements
In June 2016,December 2019, the Financial Accounting Standards Board ("FASB"(“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 adopted ASU 2016-13 in the first quarter of its fiscal 2021 utilizing the modified retrospective transition method. The adoption of ASU 2016-13 did not 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 adopted ASU 2018-15 in the first quarter of its fiscal 2021 and the adoption did not 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.Taxes ("ASU 2019-12"). 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 bewas effective for the Company in the first quarter of its fiscal 2022. The Company adopted ASU 2019-12 in the first quarter of fiscal 2022 and earlythe adoption is permitted. The Company is currently evaluating thedid not have a material impact of adopting this new accounting guidance on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In March 2020 and as clarified in January 2021, the FASB issued Accounting Standards Update No. (“ASU”) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial
Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective immediately for all entities. An entity may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date between March 12, 2020 and December 31, 2022. The Company adopted ASU 2020-04 in the first quarter of fiscal 2022 and the adoption did not have a material impact on its financial condition, results of operations, and cash flows.
2.Earnings Per Share
Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by giving effect to the potential dilution that could occur if stock awards vested and were converted into common shares during the period.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
| | | | Three Months Ended November 30, | | Nine Months Ended November 30, | | | Three Months Ended May 31, | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
Numerator: | Numerator: | | | | | | | | | Numerator: | | | | | |
Net income for basic and diluted earnings per common share | Net income for basic and diluted earnings per common share | | $19,703 | | $22,035 | | $23,454 | | $58,877 | Net income for basic and diluted earnings per common share | | $22,337 | | $5,541 | |
Denominator: | Denominator: | | | | | | | | | Denominator: | | | | | |
Denominator for basic earnings per common share–weighted average shares | Denominator for basic earnings per common share–weighted average shares | | 25,936 | | | 26,234 | | | 26,090 | | | 26,185 | | Denominator for basic earnings per common share–weighted average shares | | 25,051 | | | 26,157 | | |
Effect of dilutive securities: | Effect of dilutive securities: | | Effect of dilutive securities: | | |
Employee and director equity awards | Employee and director equity awards | | 115 | | | 29 | | | 87 | | | 61 | | Employee and director equity awards | | 219 | | | 35 | | |
Denominator for diluted earnings per common share | Denominator for diluted earnings per common share | | 26,051 | | | 26,263 | | | 26,177 | | | 26,246 | | Denominator for diluted earnings per common share | | 25,270 | | | 26,192 | | |
Earnings per share basic and diluted: | Earnings per share basic and diluted: | | | | | | | | | Earnings per share basic and diluted: | | | | | |
Basic income per common share | Basic income per common share | | $ | 0.76 | | | $ | 0.84 | | | $ | 0.90 | | | $ | 2.25 | | Basic income per common share | | $ | 0.89 | | | $ | 0.21 | | |
Diluted income per common share | Diluted income per common share | | $ | 0.76 | | | $ | 0.84 | | | $ | 0.90 | | | $ | 2.24 | | Diluted income per common share | | $ | 0.88 | | | $ | 0.21 | | |
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The Company had 80,148 and 128,918 restricted stock units and stock appreciation rights forFor the three and nine months ended November 30, 2020, respectively, thatMay 31, 2021, 154,259 shares were not included inexcluded from the calculation of diluted EPS because the effect would be antidilutive. These securitiesshares could be dilutive in future periods.
3.Sales
Disaggregated Sales
The following table presents disaggregated sales by customer industry (in thousands):
| | | | Three Months Ended November 30, | | Nine Months Ended November 30, | | | Three Months Ended May 31, | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
Sales: | Sales: | | | | | | | | | Sales: | | | | | |
Industrial | Industrial | | $ | 138,240 | | | $ | 195,063 | | | $ | 335,462 | | | $ | 499,215 | | Industrial | | $ | 153,983 | | | $ | 130,109 | | |
Transmission and distribution | Transmission and distribution | | 56,656 | | | 55,316 | | | 203,332 | | | 184,283 | | Transmission and distribution | | 43,667 | | | 49,057 | | |
Power generation | Power generation | | 31,727 | | | 40,760 | | | 104,493 | | | 132,954 | | Power generation | | 32,176 | | | 34,127 | | |
Total sales | Total sales | | $ | 226,623 | | | $ | 291,139 | | | $ | 643,287 | | | $ | 816,452 | | Total sales | | $ | 229,826 | | | $ | 213,293 | | |
See Note 4 for sales information by segment.
Contract Liabilities
The following table shows the changes in contract liabilities for the ninethree months ended November 30,May 31, 2021 and 2020, and 2019, respectively (in thousands):
| | | 2020 | | 2019 | | 2021 | | 2020 |
Balance at February 29, | | $ | 18,418 | | | $ | 56,928 | | |
Balance at February 28/29, | | Balance at February 28/29, | | $ | 16,138 | | | $ | 18,418 | |
Contract liabilities added during the period | Contract liabilities added during the period | | 5,017 | | | 22,237 | | Contract liabilities added during the period | | 12,375 | | | 4,796 | |
Sales recognized during the period | Sales recognized during the period | | (11,914) | | | (52,298) | | Sales recognized during the period | | (11,415) | | | (5,849) | |
Balance at November 30, | | $ | 11,521 | | | $ | 26,867 | | |
Balance at May 31, | | Balance at May 31, | | $ | 17,098 | | | $ | 17,365 | |
The Company did not record any sales for the ninethree months ended November 30,May 31, 2021 or 2020 or 2019 related to performance obligations satisfied in prior periods. The increases or decreases in accounts receivable, contract assets, and contract liabilities during the ninethree months ended November 30,May 31, 2021 and 2020 and 2019 were due primarily to normal timing differences between the Company’s performance and customer payments divestitures, and, to a lesser extent, customer inspection delays and effects of COVID-19 on the Company's customers.in fiscal 2021.
The Company expects to recognize sales, related to the $11.5$17.1 million balance of contract liabilities as of November 30, 2020May 31, 2021 of approximately $2.2$12.1 million, $7.0$4.7 million, $0.2 million and $2.3$0.1 million in fiscal 2021, 2022, 2023, 2024 and 2023,2025, respectively.
4.Operating Segments
Segment Information
The Company has 2 distinct operating segments: the Metal Coatings segment and the Infrastructure Solutions segment.
The Metal Coatings segment provides hot dip galvanizing, spin 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. Hot dip galvanizing is a metallurgical process in which molten zinc reacts to steel. The zinc alloying provides corrosion protection to fabricated steel for extended periods of up to 50 years.
The Infrastructure Solutions segment provides specialized products and services designed to support primarily industrial and electrical applications. The product offerings include custom switchgear, electrical enclosures, medium and high voltage bus ducts, explosion proof and hazardous duty lighting and tubular products. The Infrastructure Solutions segment also focuses on life-cycle extension for the power generation, refining and industrial infrastructure, through providing automated weld overlay solutions for corrosion and erosion mitigation.
Sales and operating income by segment for each period were as follows (in thousands):
| | | | Three Months Ended November 30, | | Nine Months Ended November 30, | | | Three Months Ended May 31, | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
Sales: | Sales: | | | | | | | | | Sales: | | | | | |
Metal Coatings | Metal Coatings | | $ | 115,616 | | | $ | 129,196 | | | $ | 351,643 | | | $ | 376,193 | | Metal Coatings | | $ | 127,735 | | | $ | 118,991 | | |
Infrastructure Solutions | Infrastructure Solutions | | 111,007 | | | 161,943 | | | 291,644 | | | 440,259 | | Infrastructure Solutions | | 102,091 | | | 94,302 | | |
Total sales | Total sales | | $ | 226,623 | | | $ | 291,139 | | | $ | 643,287 | | | $ | 816,452 | | Total sales | | $ | 229,826 | | | $ | 213,293 | | |
| Operating income: | Operating income: | | Operating income: | | |
Metal Coatings | Metal Coatings | | $ | 28,671 | | | $ | 27,258 | | | $ | 69,355 | | | $ | 85,323 | | Metal Coatings | | $ | 31,576 | | | $ | 25,085 | | |
Infrastructure Solutions | Infrastructure Solutions | | 8,722 | | | 17,421 | | | 3,364 | | | 34,231 | | Infrastructure Solutions | | 9,624 | | | (1,048) | | |
Corporate | Corporate | | (9,522) | | | (11,251) | | | (29,879) | | | (32,945) | | Corporate | | (10,488) | | | (9,719) | | |
Total operating income | Total operating income | | $ | 27,871 | | | $ | 33,428 | | | $ | 42,840 | | | $ | 86,609 | | Total operating income | | $ | 30,712 | | | $ | 14,318 | | |
Asset balances by segment for each period were as follows (in thousands):
| | | | | | | | | | | | | | |
| | November 30, 2020 | | February 29, 2020 |
Total assets: | | | | |
Metal Coatings | | $ | 474,830 | | | $ | 504,632 | |
Infrastructure Solutions | | 515,103 | | | 548,032 | |
Corporate | | 19,936 | | | 21,167 | |
Total | | $ | 1,009,869 | | | $ | 1,073,831 | |
| | | | | | | | | | | | | | |
| | May 31, 2021 | | February 28, 2021 |
Total assets: | | | | |
Metal Coatings | | $ | 490,326 | | | $ | 480,778 | |
Infrastructure Solutions | | 521,428 | | | 489,986 | |
Corporate | | 27,485 | | | 25,678 | |
Total | | $ | 1,039,239 | | | $ | 996,442 | |
Financial Information About Geographical Areas
The following table presents sales by geographic region for each period (dollars in thousands):
| | | | Three Months Ended November 30, | | Nine Months Ended November 30, | | | Three Months Ended May 31, | |
| | | 2020 | | 2019 | | 2020 | | 2019 | | | 2021 | | 2020 | |
Sales: | Sales: | | | | | | | | | Sales: | | | | | |
United States | United States | | $ | 180,429 | | | $ | 214,577 | | | $ | 540,162 | | | $ | 655,582 | | United States | | $ | 191,116 | | | $ | 190,842 | | |
International | International | | 46,194 | | | 76,562 | | | 103,125 | | | 160,870 | | International | | 38,710 | | | 22,451 | | |
Total | Total | | $ | 226,623 | | | $ | 291,139 | | | $ | 643,287 | | | $ | 816,452 | | Total | | $ | 229,826 | | | $ | 213,293 | | |
The following table presents fixed assets by geographic region for each period (dollars in thousands):
| | | November 30, 2020 | | February 29, 2020 | | May 31, 2021 | | February 28, 2021 |
Property, plant and equipment, net: | Property, plant and equipment, net: | | | | | Property, plant and equipment, net: | | | | |
United States | United States | | $ | 179,668 | | | $ | 190,365 | | United States | | $ | 180,004 | | | $ | 180,718 | |
Canada | Canada | | 15,088 | | | 16,385 | | Canada | | 14,953 | | | 15,007 | |
Other countries | Other countries | | 6,422 | | | 6,354 | | Other countries | | 12,732 | | | 10,184 | |
Total | Total | | $ | 201,178 | | | $ | 213,104 | | Total | | $ | 207,689 | | | $ | 205,909 | |
5.Warranty Reserves
A reserve has been established to provide for the estimated future cost of warranties on certain delivered products. The warranty accrual is included in "Other accrued liabilities" on the condensed consolidated balance sheets. Management monitors established reserves and adjusts warranty estimates based upon the progression of resolution activities with the Company's customers. Warranties typically cover non-conformance to customer specifications andor defects in material and workmanship.
The following table shows the changes in the warranty reserves for the ninethree months ended November 30, 2020May 31, 2021 (dollars in thousands):
| | | | | |
Balance at February 29, 202028, 2021 | $ | 3,7024,079 | |
Warranty costs incurred | (1,251)(112) | |
Additions charged to income | 1,073170 | |
Transferred to held for sale | (478) | |
Balance at November 30, 2020May 31, 2021 | $ | 3,0464,137 | |
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6.Debt
The Company's debt consisted of the following for each of the periods presented (dollars in thousands):
| | | | | | | | | | | |
| November 30, 2020 | | February 29, 2020 |
2017 Revolving Credit Facility | $ | 57,000 | | | $ | 78,000 | |
| | | |
| | | |
2011 Senior Notes | 125,000 | | | 125,000 | |
Total debt, gross | 182,000 | | | 203,000 | |
Unamortized debt issuance costs | (22) | | | (122) | |
Total debt, net | 181,978 | | | 202,878 | |
Less amount due within one year | 0 | | | (125,000) | |
Debt due after one year, net | $ | 181,978 | | | $ | 77,878 | |
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On October 9, 2020, the Company completed a private placement transaction and entered into a Note Purchase Agreement, whereby the Company agreed to borrow $150.0 million of senior unsecured notes (the “Notes”), consisting of two separate tranches:
•7-year borrowing: $70.0 million priced at 2.77% coupon, and
•12-year borrowing: $80.0 million priced at 3.17% coupon.
The proceeds of the $80.0 million tranche was funded on December 17, 2020. The $70.0 million tranche will be funded in January 2021. The Company expects to use the proceeds to repay the existing $125.0 million 5.42% Senior Notes maturing on January 20, 2021, as well as being available for general corporate purposes. Interest on the outstanding Notes will be paid semi-annually. See Note 12. | | | | | | | | | | | |
| May 31, 2021 | | February 28, 2021 |
2017 Revolving Credit Facility | $ | 36,000 | | | $ | 29,000 | |
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2020 Senior Notes | 150,000 | | | 150,000 | |
Total debt, gross | 186,000 | | | 179,000 | |
Unamortized debt issuance costs | (565) | | | (581) | |
Total debt, net | 185,435 | | | 178,419 | |
Less amount due within one year | 0 | | | 0 | |
Debt due after one year, net | $ | 185,435 | | | $ | 178,419 | |
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The Company's debt agreements require the Company to maintain certain financial ratios.ratios, of which the most restrictive is a debt to EBITDA leverage ratio of at least 3.25 to 1.00. As of November 30, 2020,May 31, 2021, the Company was in compliance with all covenants or other requirements set forth in the debt agreements.
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 (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Operating lease cost | | $ | 3,545 | | | $ | 4,803 | | | $ | 11,713 | | | $ | 13,717 | |
Operating cash flows from operating leases included in lease liabilities | | 2,069 | | | 2,234 | | | 6,313 | | | 6,640 | |
ROU assets obtained in exchange for new operating lease liabilities | | 0 | | | 4,385 | | | 1,529 | | | 7,534 | |
| | | | | | | | | | | | | | | |
| Three Months Ended May 31, | | |
| 2021 | | 2020 | | | | |
Operating cash flows from operating leases included in lease liabilities | $ | 2,299 | | | $ | 2,119 | | | | | |
Lease liabilities obtained from new ROU assets - operating | 12,661 | | | 204 | | | | | |
Weighted-average remaining lease term - operating leases (years) | 8.4 | | 7.6 | | | | |
Weighted-average discount rate - operating leases | 4.6 | % | | 5.0 | % | | | | |
Operating and financing cash flows from financing leases included in lease liabilities | 18 | | | — | | | | | |
Lease liabilities obtained from new ROU assets - financing | 0 | | | — | | | | | |
Weighted-average remaining lease term - financing leases (years) | 4.3 | | — | | | | | |
Weighted-average discount rate - financing leases | 4.3 | % | | — | % | | | | |
The following table outlines the classification of lease expense in the statements of income (dollars in thousands):
| | | | | | | | | | | |
| Three Months Ended May 31, |
| 2021 | | 2020 |
Cost of sales | $ | 2,546 | | | $ | 3,225 | |
Selling, general and administrative | 1,130 | | | 1,249 | |
Total lease expense | $ | 3,676 | | | $ | 4,474 | |
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| | November 30, 2020 | | February 29, 2020 |
Weighted-average remaining lease term - operating leases | | 7.13 years | | 7.94 years |
Weighted-average discount rate - operating leases | | 4.86 | % | | 4.89 | % |
As of November 30, 2020,May 31, 2021, maturities of the Company's lease liabilities were as follows (dollars in thousands):
| Fiscal year: | Fiscal year: | | Amount | Fiscal year: | | Operating Leases | | Finance Leases | | Total |
2021 (remaining 3 months) | | $ | 2,055 | | |
2022 | | 7,998 | | |
2022 (remaining 9 months) | | 2022 (remaining 9 months) | | $ | 6,896 | | | $ | 53 | | | $ | 6,949 | |
2023 | 2023 | | 7,495 | | 2023 | | 8,709 | | | 71 | | | 8,780 | |
2024 | 2024 | | 6,620 | | 2024 | | 7,818 | | | 71 | | | 7,889 | |
2025 | 2025 | | 5,766 | | 2025 | | 6,777 | | | 68 | | | 6,845 | |
2026 | | 2026 | | 5,330 | | | 14 | | | 5,344 | |
Thereafter | Thereafter | | 17,424 | | Thereafter | | 21,962 | | | 0 | | | 21,962 | |
Total lease payments | Total lease payments | | 47,358 | | Total lease payments | | 57,492 | | | 277 | | | 57,769 | |
Less imputed interest | Less imputed interest | | (7,774) | | Less imputed interest | | (9,872) | | | (21) | | | (9,893) | |
Total | Total | | $ | 39,584 | | Total | | $ | 47,620 | | | $ | 256 | | | $ | 47,876 | |
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 Coronavirus Aid, Relief, and Economic Security Act (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 benefitbenefited 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 Company continues to monitor U.S. and international governmental mandates and programs for applicability to the Company.
The provision for income taxes reflects an effective tax rate of 25.1%25.5% for the three months ended November 30, 2020,May 31, 2021, as compared to 28.6%45.8% for the respective prior year comparable period. The decrease in the effective tax rate was primarily attributable to the unfavorable adjustments recordedimpact of COVID-19 on book earnings in the prior year comparable period relatedquarter compared to tax return to tax provision adjustments, as well as an India tax audit settlement thatthe current quarter ended May 31, 2021. The Company recorded discrete items in the first quarter of the prior year and the current year; however, since book income was recordedsignificantly lower in the prior year, quarter.
For the nine months ended November 30, 2020, the effective tax rate was 32.3%, compared to 22.3% forimpacted more significantly by the prior year comparable period. The increase in the effective tax rate is primarily attributable to the fiscal 2021 restructuring charges impact on book income, coupled with the recognition of uncertain tax positions in the first quarter, as well as losses in foreign jurisdictions for which the Company does not expect to recognize the benefit.discrete items.
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. 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. There are stock appreciation rights 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 November 30, 2020, there were approximately 49,000 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 and be issued earlier in accordance with the Plan’s 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 awards vest.
A summary of the Company’s non-vested restricted stock unit award activity (including DERs) for the nine months ended November 30, 2020 is as follows:
| | | | | | | | | | | | | | |
| | Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Outstanding as of February 29, 2020 | | 194,946 | | | $ | 44.34 | |
Granted | | 131,120 | | | 28.78 | |
Vested | | (72,747) | | | 45.67 | |
Forfeited | | (26,124) | | | 36.82 | |
Outstanding as of November 30, 2020 | | 227,195 | | | $ | 35.65 | |
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 vest on the third anniversary of the grant date subject to various vesting conditions. The fiscal 2019 and 2020 PSU awards have vesting conditions based on the Company’s degree of achievement of a target annual average adjusted return on assets during these three year periods relative to the 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 ("TSR") during such three years in comparison to a defined specific industry peer group. For fiscal 2021, the Company's annual PSU awards are subject to the Company's TSR relative to its proxy peer group and will not be subject to any multiplier. The Company estimates the grant date value of PSU awards 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 nine months ended November 30, 2020 is as follows:
| | | | | | | | | | | | | | |
| | Performance Stock Units | | Weighted Average Grant Date Fair Value |
Outstanding as of February 29, 2020 | | 109,936 | | | $ | 47.75 | |
Granted | | 69,955 | | | 33.22 | |
Vested | | 0 | | | 0 | |
Forfeited | | (36,307) | | | 50.54 | |
Outstanding as of November 30, 2020 | | 143,584 | | | $ | 39.97 | |
The PSU awards in the table above are presented at the face value of the respective grants. However, the PSU awards prior to fiscal 2021 that may ultimately vest can vary in a range 0% to 250%, and 0% to 200% thereafter, of the face amount of such awards depending on the outcome of the performance or market vesting conditions.
Stock Appreciation Rights
Stock appreciation rights ('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 seven 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 SARs activity for the nine months ended November 30, 2020 is as follows:
| | | | | | | | | | | | | | |
| | Options/SAR’s | | Weighted Average Exercise Price |
Outstanding as of February 29, 2020 | | 94,826 | | | $ | 44.58 | |
Granted | | 0 | | | 0 | |
Exercised | | 0 | | | 0 | |
Forfeited | | (43,489) | | | 45.10 | |
Outstanding as of November 30, 2020 | | 51,337 | | | $ | 44.13 | |
Exercisable as of November 30, 2020 | | 51,337 | | | $ | 44.13 | |
| | | | |
The average remaining contractual term for SARs outstanding and SARs that were exercisable as of November 30, 2020 was 0.29 years and such awards had 0 intrinsic 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 the ESPP have a duration of 24 months (the "offering period") and commence on each January 1 and July 1, and end 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 58,107 and 51,438 shares from the ESPP during the nine months ended November 30, 2020 and 2019, 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):
| | | | | | | | | | | | | | |
| | Nine Months Ended November 30, |
| | 2020 | | 2019 |
Compensation expense | | $ | 5,773 | | | $ | 4,904 | |
Income tax benefits | | $ | 525 | | | $ | 1,030 | |
Unrecognized compensation cost related to the Company's employee equity grants at November 30, 2020 totals $10.1 million and is expected to be recognized over a period of 1.91 years.
The Company’s policy is to issue shares required under these plans from the Company’s authorized but unissued shares.
10. Equity
On January 19, 2012, the Company's Board of Directors authorized the repurchase of up to 10 percent of the then outstanding shares of the Company's Common Stock (the "2012 Share Repurchase Program"). The 2012 Share Repurchase Program did not have an expiration date, and the amount and prices paid for any future share purchases under the authorization were to be based on market conditions and other factors at the time of the purchase. Repurchases under the 2012 Share Repurchase Program were made through open market purchases or private transactions.
On November 10, 2020, the Company's Board of Directors authorized a $100 million share repurchase program pursuant to which the Company may repurchase its Common Stock (the “2020 Share Repurchase Program”Authorization”). Repurchases under the 2020 Share Repurchase ProgramAuthorization will be made through open market and/or private transactions, in accordance with applicable federal securities laws, and could include repurchases pursuant to Rule 10b5-1 trading plans, which allows stock repurchases when the Company might otherwise be precluded from doing so.
During the ninethree months ended November 30, 2020,May 31, 2021, the Company repurchased 852,452125,770 of its common shares in the amount of $31.0$6.3 million at an average purchase price of $36.31 under the 2012 Share Repurchase Program. The Company did 0t purchase any shares$49.80 under the 2020 Share Repurchase Program during the nine months ended November 30, 2020.
11. Goodwill and Intangible Assets
Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The impairment tests are based on Level 3 fair value inputs. Fair value is an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Hierarchy Levels 1, 2, or 3 are terms for the priority of inputs to valuation techniques used to measure fair value. Hierarchy Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Hierarchy Level 2 inputs are inputs, other than quoted prices included with level 1, that are directly or indirectly observable for the asset or liability. Hierarchy Level 3 are inputs that are not observable in the market. During the nine months ended November 30, 2020, the Company continued to execute its strategy to divest of non-core businesses, which began in the last quarter of 2020 with the planned exit of most of our business serving customers in the nuclear power businesses. The Company closed certain transactions in the second quarter of 2021 and the Company classified other businesses as held-for-sale in the accompanying consolidated balance sheet. In connection with the divestitures, the Company allocated goodwill to the businesses disposed of or held for sale based on the relative fair value of those businesses compared with the fair value of the reporting unit where goodwill was recorded. The determination of the amount of goodwill to allocate to the disposal group as opposed to the ongoing operations required significant management judgment regarding future cash flows, discount rates and other market relevant data.
Authorization.
In addition, the Company performed goodwill impairment tests10. Assets Held for those reporting units following the allocation of goodwill to the divested or held for sale businesses during the second quarter of fiscal 2021. NaN goodwill impairment charges have been recorded during fiscal 2021. The changes in the carrying amounts of goodwill by reportable segment for the nine months ended November 30, 2020 are as follows:
| | | | | | | | | | | | | | | | | |
| Metal Coatings | | Infrastructure Solutions | | Total |
Balance as of February 29, 2020 | $ | 157,048 | | | $ | 199,177 | | | $ | 356,225 | |
Allocated to Galvabar | (1,132) | | | 0 | | | (1,132) | |
Allocated to Southern Mechanical Services | 0 | | | (2,262) | | | (2,262) | |
Allocated to disposal group | 0 | | | (1,693) | | | (1,693) | |
Foreign currency translation adjustment | 692 | | | 0 | | | 692 | |
Balance as of November 30, 2020 | $ | 156,608 | | | $ | 195,222 | | | $ | 351,830 | |
| | | | | |
Sale
12. Restructuring and Impairment Charges
As described in Note 11, theThe Company has been executing a plan to divest certain non-core businesses.During the first nine months of fiscal 2021, the Company closed on the sale of its Galvabar business and its Southern Mechanical Services business, and the board of directors approved a plan to divest certain other businesses within the Company. The Company recorded net proceeds of $8.3 million and a loss on the sale of the Galvabar business, which is included in the Metal Coatings segment, of $1.2 million. During the third quarter of fiscal 2021, the Company completed the sale of Southern Mechanical Services, which is included in the Infrastructure Solutions segment, for net proceeds of $4.1 million. The Company recognized impairment charges of $0.9 million for Southern Mechanical Services during the second quarter, and an additional loss on sale of $1.9 million during the third quarter of fiscal 2021. The loss of the sale of these businesses are included in "Restructuring and impairment charges" in the consolidated statements of operations.
As of November 30, 2020, one additional business in the Infrastructure Solutions segment and two non-operating locations in the Metal Coatings segment are classified as held for sale. The assets and liabilities of the businesses expected to be disposed of within the next twelve months are included in "Assets held for sale" in the accompanying consolidated balance sheet. In addition, the Company expects to close a small number of Metal Coatings locations that were in underperforming and lower growth geographies.
During the nine months ended November 30, 2020, the Company recorded certain charges related to its restructuring activities, which are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, |
` | | Metal Coatings | | Infrastructure Solutions | | Total |
Write down on assets held for sale to estimated sales price | | $ | 2,930 | | | $ | 4,100 | | | $ | 7,030 | |
Write down of assets expected to be abandoned | | 6,922 | | | 0 | | | 6,922 | |
Loss on sale of subsidiaries | | 1,191 | | | 1,859 | | | 3,050 | |
Write down of excess inventory | | 0 | | | 2,511 | | | 2,511 | |
Costs associated with assets held for sale | | 0 | | | 756 | | | 756 | |
Total charges | | $ | 11,043 | | | $ | 9,226 | | | $ | 20,269 | |
Assets Held for Sale
The strategic decision to divest of these businesses reflects the Company's longer termlong-term strategy to become a more focused metal coatings company. The historical annual sales, operating profit and net assets of these businesses were not significant enough to qualify as discontinued operations.
Assets and liabilities allocated to the disposal group are as follows:
| | | | | | | | |
| | As of November 30, 2020May 31, 2021 |
Assets | | |
Accounts receivable | | $ | 1,3134,715 | |
Inventories | | 1,0242,600 | |
Contract assets | | 3,3032,204 | |
Other current assets | | 11186 | |
Property, plant and equipment | | 1,7681,348 | |
Other assets | | 6043 | |
Goodwill | | 1,693 | |
| | |
Liabilities | | |
Accounts payable | | 365856 | |
Contract liabilities | | 1,0861,926 | |
Other accrued liabilities | | 1,050877 | |
Lease liability – long term | | 312 | |
Total carrying value | | 6,6689,118 | |
Less: Impairment of carrying value of remaining assets held for sale to estimated sales price | | (3,490) | |
Fair value of disposal group | | $ | 3,1785,628 | |
Infrastructure Solutions Segment11. Commitments and Contingencies
Legal
DuringThe 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 first nine monthsCompany’s intellectual property, worker’s compensation, environmental matters, and various commercial disputes, all arising in the normal course of fiscal 2021,business. As discovery progresses on all outstanding legal matters, the Company will continue to evaluate opportunities to either settle the disputes for nuisance value or potentially enter into mediation as a resultway to resolve the disputes prior to trial. As the pending cases progress through additional discovery and potential mediation, our assessment of the continued market pressureslikelihood of an unfavorable outcome on the pending lawsuits may change. Although the outcome of these lawsuits or other proceedings cannot be predicted with certainty, and the amount of any potential liability that could arise with respect to such lawsuits or other matters cannot be predicted at this time, management, after consultation with legal counsel 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 oil and gas services market,aggregate, to have a material effect on the Company undertook an evaluationCompany’s financial position, results of inventory within the tubular products business.operations or cash flows. As a result of the evaluation, the Company determined certain inventories to be in excess of their net realizable value, and recorded an inventory write down of $2.5 million to record the inventory at its current market value.
12. Subsequent Event
Metal Coatings Segment
During the first nine months of fiscalOn July 8, 2021, the Company approvedrefinanced its current un-secured revolving credit facility, which was scheduled to mature in March 2022, with a plan to closenew five-year un-secured revolving credit facility under that certain locations withincredit agreement, dated July 8, 2021 by and among the Metal Coatings segmentCompany, borrower, Citibank, N.A., as administrative agent and the other agents and lender parties thereto (the “2021 Credit Agreement”). The 2021 Credit Agreement matures in future periods. Management performed an analysis ofJuly 2026 and includes the assets at each location expected to be closed.For assets that will not be transferred to another location for use in operations, management wrote the assets down to reflect a decrease in the estimated useful life and lower value to the Company.following significant terms;
Thei.provides for a senior un-secured revolving credit facility with a principal amount of up to $400.0 million revolving loan commitments, and includes an additional $200.0 million uncommitted incremental accordion facility,
ii.interest rate margin ranges from 87.5 bps to 175 bps for Eurodollar Rate loans, and from 0.0 bps to 75 bps for Base Rate loans, depending on leverage ratio of the Company recognizedand its consolidated subsidiaries as a group,
iii.includes a letter of credit sub-facility up to $85.0 million for the following charges to income from operations related to locations expected to be closed:
issuance of standby and commercial letters of credit,
| | | | | | | | |
| | Nine Months Ended November 30, 2020iv.includes a $50.0 million sublimit for swing line loans, |
| | |
Inventory write down | | $ | 336 | |
Property & equipment write downs | | 2,956 | |
Intangible impairment | | 3,258 | |
Other | | 372 | |
Total | | $ | 6,922 | |
v.includes customary representations and warranties, affirmative covenants and negative covenants, and events of default, including restrictions on incurrence of non-ordinary course debt, investment and dividends, subject to various exceptions, carve-outs and baskets, and
vi.includes a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each to be tested at quarter end.
13. Subsequent EventThe proceeds of the loans under the 2021 Credit Agreement will be used primarily to finance working capital needs, capital improvements, dividends, future acquisitions and general corporate purposes.
On January 4,The foregoing summary of certain terms and provisions of the 2021 Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the Company acquired all the assets2021 Credit Agreement, a copy of Acme Galvanizing, Inc., a privately held hot-dip galvanizingwhich is attached hereto as Exhibit 10.3 to this Form 10-Q and zinc electroplating company based in Milwaukee, Wisconsin, for net proceeds of $4.2 million.is incorporated herein by reference.
.
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,”"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 reportQuarterly Report may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand for theour products and services, offered by AZZ Inc. ("AZZ", the "Company", "our" or "we") including demand by the metal coatings market, power generation markets, electrical transmission and distribution markets, and the industrial markets,markets. In addition, within each of which maythe markets we serve, our customers and our operations could potentially be adversely impacted by the ongoing COVID-19 pandemic where our ability to assess the future and full impact on the Company, our customers and our suppliers is limited.coronavirus ("COVID-19") pandemic. We could also experience fluctuations in prices and raw material cost, including zinc and natural gas, which are used in ourthe hot dip galvanizing process or other potentialprocess; supply-chain disruptions orvendor delays; customer requested delays of our products or services; changesdelays in the political stability and economic conditions impacting our business in the domestic and foreign markets that we serve; customer requested delays of shipments; additional acquisition opportunities; currency exchange rates; adequacy of financing; availability of experienced management and employees to implement AZZ’s growth strategy; a downturn in market conditions in any industry relating to the products we inventory or sell or the services that we provide; economic volatility or changes in the political stability in the United States and other foreign markets in which we operate; acts of war or terrorism inside the United States or abroad.abroad; and other changes in economic and financial conditions. AZZ has provided additional information regarding risks associated with the business in AZZ's Annual Report on Form 10-K for the fiscal year ended February 29, 202028, 2021 and other filings with the SEC, available for viewing on AZZ's website at www.azz.com and on the SEC's website at www.sec.gov.
You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
The following discussion should be read in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020,28, 2021, and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
Results of Operations
Strategy
We have a developed strategy and periodically review our strategy against our performance, market conditions and competitive threats. As a result of our ongoing evaluations and assessments, as well as the uncertainties brought upon the Company by the COVID-19 pandemic, we further evaluated our strategies and better defined our core and non-core operations. As a result of this ongoing assessment, during the second quarter of fiscal year 2021, management approved a plan to divest certain businesses, close certain under-performing operations and recorded impairment charges against assets. During the third quarter of fiscal 2021, we publicly announced strategic and financial initiatives to enhance shareholder value. We are conductingThese initiatives include a comprehensive Board-led review of our portfolio and capital allocation and have engagedthe engagement of leading independent financial, legal and tax advisors in support of this review. We have continued these initiatives in fiscal 2022. These actions will allow us to accelerate the strategy to become a more focused metal coatings company, which we believe will more rapidly enhance shareholder value.
During the third quarter of fiscal 2021, we divested two businesses and closed one underperforming operation. See "Restructuring and Impairment charges" below.
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 ofcontinued uncertainty associated with 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 industriesdid not have a responsibility to maintainmaterial adverse effect on our results of operations while these restrictive measures are in place. Based on input fromfor the government and our customers, we continue 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.
We have been impacted by the inability for our Infrastructure Solutions Industrial Platform to access certain customer sites to perform services, temporary slow-downs in order placements in the Infrastructure Solutions Electrical Platform, and have incurred costs associated with maintaining safe operations across our entire business. We have been able to remain open during the entirety of the pandemic to service our customers.three months ended May 31, 2021. While we continue to support our customers, there remains uncertainties remain regarding the duration recurrence and, to what extent, if any, that the COVID-19 pandemic, or newly identified variants, will ultimately have on the demand for our products and services or with our supply chain. We continue to monitor the situation as information becomes readily available and continue to take actions to provide for the safety of our personnel, and to support the requirements under the Department of Homeland Security’s Cybersecurity and Infrastructure Security Agency ("CISA").
As described above,
Our operations remain open globally and the spreadimpact to our personnel and operations has been limited by the effects of COVID-19. The most significant impact to us has been our ability to serve customers at their business locations.We have experienced limited customer order deferrals, but there have been few outright customer order cancellations. During the first
quarter of fiscal 2022, we continued to see improvement in sales and operating income in both of our operating segments. While governments have taken actions, including the approval of vaccines to limit the impacts 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 sales, 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 operationsincome or statements of cash flows for fiscal year 2021 and beyond.2022.
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 preliminaryan evaluation of the CARES Act, we qualified for the deferral of payroll and other tax payments and we continue to evaluate certain employer payroll tax credits.payments.
Overview
We have two distinct operating segments, the Metal Coatings segment and the Infrastructure Solutions segment (previously referred to as our Energy segment).segment. Management believes that the most meaningful analysis of our results of operations is to analyze our performance by segment. We use sales and operating income by segment to evaluate our segments. Segment operating income consists of 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 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Restructuring and Impairment Charges
During the ninethree months ended November 30, 2020,May 31, 2021, we have been executingcontinue to execute a plan to divest certain non-core businesses. During the first nine months of fiscal 2021, we closed on the sale of two businesses, andwhich was approved by the board of directors approved a plan to divest certain other businesses within the Company.in fiscal 2021. As of November 30, 2020,May 31, 2021, one additional business in our Infrastructure Solutions segment and twois classified as held for sale. In addition, one non-operating locationslocation in our Metal Coatings segment areis classified as held for sale. The assets and liabilities of the businessesthese locations are expected to be disposed of within the next twelve months, and are included in "Assets held for sale" in the accompanying consolidated balance sheet. In addition, we expect to close a small number of Metal Coatings locations that were in underperforming and lower growth geographies.
During the nine months ended November 30, 2020, we recorded certain charges related to these restructuring activities, which are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2020 |
| | Metal Coatings | | Infrastructure Solutions | | Total |
Write down on assets held for sale to estimated sales price | | $ | 2,930 | | | $ | 4,100 | | | $ | 7,030 | |
Write down of assets expected to be abandoned | | 6,922 | | | — | | | 6,922 | |
Loss on sale of subsidiaries | | 1,191 | | | 1,859 | | | 3,050 | |
Write down of excess inventory | | — | | | 2,511 | | | 2,511 | |
Costs associated with assets held for sale | | — | | | 756 | | | 756 | |
Total charges | | $ | 11,043 | | | $ | 9,226 | | | $ | 20,269 | |
Orders and Backlog
Our backlog is exclusive of transaction taxes for certain foreign subsidiaries and relates entirely to our Infrastructure Solutions segment.segment and excludes transaction taxes for certain foreign subsidiaries. As of November 30, 2020,May 31, 2021, backlog was $174.4 million, a decrease of $36.3remained flat to February 28, 2021, at $186.1 million. Our backlog decreased $19.3 million, or 17.2%9.4%, as compared to $210.6$205.4 million as of August 31, 2020. Our backlog decreased $100.1 million, or 36.5%, as compared tofor the same period in the prior fiscal year. The decrease in backlog is primarily due to the continued impact of COVID-19, which resulted in a decrease in bookings and sales over the past 12 months, and, to a lesser extent, divestitures that occurred in fiscal 2021. For the three months ended November 30, 2020,May 31, 2021, backlog was favorably impacted by an increase in our incoming net bookings decreased by $69.3of $54.9 million, or 27.0%31.4%, when compared to same period of fiscal 2020 and our book-to-sales ratio decreased to 0.86 to 1 from 0.91 to 1. These decreases were primarily attributable to a decrease in net bookings related to lower overall demand for our electrical products, which was due primarily to the slowdown in the economy as a result of COVID-19. The reductions in backlog were also2021, due to a decrease in net bookingssome COVID-19 related restrictions during the quarter. The decrease in restrictions also favorably impacted our book-to-sales ratio, which increased to 1.00, from 0.82. The decrease in backlog was also due to an increase in sales recognized in the current quarter compared to the nine months ended November 30, 2019,prior quarter, primarily related primarily to sales recognized in the current quarter for certain large international projects thatfor which bookings were recorded in prior years with no corresponding sales in the current period.years.
The table below includes the progression of backlog (dollars in thousands):
| | | Period Ended | | Period Ended | | | Period Ended | | Period Ended | |
Backlog | Backlog | | 2/29/2020 | | $ | 243,799 | | | 2/28/2019 | | $ | 332,894 | | Backlog | | 2/28/2021 | | $ | 186,119 | | | 2/28/2020 | | $ | 243,799 | |
Net bookings | Net bookings | | | | 174,865 | | | | | 256,344 | | Net bookings | | | | 229,805 | | | | | 174,865 | |
| Sales recognized | Sales recognized | | (213,293) | | | (289,123) | | Sales recognized | | (229,826) | | | (213,293) | |
Backlog | Backlog | | 5/31/2020 | | $ | 205,371 | | | 5/31/2019 | | $ | 300,115 | | Backlog | | 5/31/2021 | | $ | 186,098 | | | 5/31/2020 | | $ | 205,371 | |
Book to sales ratio | Book to sales ratio | | | | 0.82 | | | | | 0.89 | | Book to sales ratio | | | | 1.00 | | | | | 0.82 | |
Net bookings | | 208,627 | | | 238,007 | | |
Sales recognized | | (203,372) | | | (236,190) | | |
Backlog | | 8/31/2020 | | 210,626 | | | 8/31/2019 | | 301,932 | | |
Book to sales ratio | | | | 1.03 | | | | | 1.01 | | |
Net bookings | | 194,376 | | | 263,695 | | |
Backlog adjusted due to divestiture | | (4,026) | | | — | | |
Sales recognized | | (226,623) | | | (291,139) | | |
Backlog | | 11/30/2020 | | 174,353 | | | 11/30/2019 | | 274,488 | | |
Book to Sales ratio | | | | 0.86 | | | | | 0.91 | | |
| |
Segment Sales
The following table reflects the breakdown of sales by segment (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Sales: | | | | | | | | |
Metal Coatings | | $ | 115,616 | | | $ | 129,196 | | | $ | 351,643 | | | $ | 376,193 | |
Infrastructure Solutions | | 111,007 | | | 161,943 | | | 291,644 | | | 440,259 | |
Total sales | | $ | 226,623 | | | $ | 291,139 | | | $ | 643,287 | | | $ | 816,452 | |
For the three months ended November 30, 2020, consolidated sales decreased $64.5 million, or 22.2%, as compared to the same period in fiscal 2020. Sales for the Metal Coatings segment decreased $13.6 million, or 10.5%, for the three months ended November 30, 2020 as compared to the same period in fiscal 2020. The decrease was related to lower volumes of steel processed, due primarily to the slowdown in the economy as a result of COVID-19. Sales for the Infrastructure Solutions segment decreased $50.9 million, or 31.5%, for the three months ended November 30, 2020 as compared to the same period in fiscal 2020. In the Industrial Platform, the decrease was due to lower sales from certain large international electrical projects recognized in the prior period with no corresponding sales in the current period and lower sales related to oil and gas markets.
For the nine months ended November 30, 2020, consolidated sales decreased $173.2 million, or 21.2%, as compared to the year-to-date period in fiscal 2020. Sales for the Metal Coatings segment decreased $24.6 million, or 6.5%, for the nine | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, | | |
| | 2021 | | 2020 | | | | |
Sales: | | | | | | | | |
Metal Coatings | | $ | 127,735 | | | $ | 118,991 | | | | | |
Infrastructure Solutions | | 102,091 | | | 94,302 | | | | | |
Total sales | | $ | 229,826 | | | $ | 213,293 | | | | | |
For the three months ended November 30, 2020May 31, 2021, consolidated sales increased $16.5 million, or 7.8%, as compared to the same period in fiscal 2021. Sales for the Metal Coatings segment increased $8.7 million, or 7.3%, for the three months ended May 31, 2021, as compared to the same period in fiscal 2021. The increase was primarily due to improved price realization for our superior quality and service, the acquisition of a metal coatings facility in the fourth quarter of fiscal 2021 and the improved performance of our surface technology offerings. The volume of steel processed remained steady in the current quarter, compared to the prior year quarter. Sales for the Infrastructure Solutions segment increased $7.8 million, or 8.3%, for the three months ended May 31, 2021 as compared to the same period in fiscal 2020. The decreaseincrease was primarily related to lower volumes of steel processed, primarily due to the slowdownan improvement in the economy asspring turnaround season in the Industrial platform (as the prior year was significantly impacted by COVID-19), partially offset by a resultdecrease related to a divestiture in the third quarter of COVID-19. Sales forfiscal 2021. In the Infrastructure Solutions segmentElectrical platform, sales decreased $148.6 million, or 33.8%, for the nine months ended November 30, 2020 as compared to the same period in fiscal 2020. In the Industrial Platform, the decrease wasprior year, primarily due to lower sales from certain large international electricalin China as projects recognizednear completion, partially offset by an increase in the prior period with no correspondingbacklog and sales for switchgear and enclosure products in the current period and lower sales related to oil and gas markets. The decrease is also due to the Westinghouse bankruptcy settlement amounts received in the prior year-to-date period that did not repeat in fiscal year 2021.
our domestic operations.
Segment Operating Income
The following table reflects the breakdown of operating income by segment (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2020 | | 2019 | | 2020 | | 2019 |
Operating income: | | | | | | | | |
Metal Coatings | | $ | 28,671 | | | $ | 27,258 | | | $ | 69,355 | | | $ | 85,323 | |
Infrastructure Solutions | | 8,722 | | | 17,421 | | | 3,364 | | | 34,231 | |
Corporate | | (9,522) | | | (11,251) | | | (29,879) | | | (32,945) | |
Total operating income | | $ | 27,871 | | | $ | 33,428 | | | $ | 42,840 | | | $ | 86,609 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended May 31, 2021 | | Three Months Ended May 31, 2020 |
| | Metal Coatings | | Infra- structure Solutions | | Corporate | | Total | | Metal Coatings | | Infra- structure Solutions | | Corporate | | Total |
Operating income (loss): | | | | | | | | | | | | | | | | |
Sales | | $ | 127,735 | | | $ | 102,091 | | | $ | — | | | $ | 229,826 | | | $ | 118,991 | | | $ | 94,302 | | | $ | — | | | $ | 213,293 | |
Cost of sales | | 92,078 | | | 79,821 | | | — | | | 171,899 | | | 89,339 | | | 81,746 | | | — | | | 171,085 | |
Gross margin | | 35,657 | | | 22,270 | | | — | | | 57,927 | | | 29,652 | | | 12,556 | | | — | | | 42,208 | |
Selling, general and administrative | | 4,081 | | | 12,646 | | | 10,488 | | | 27,215 | | | 4,567 | | | 13,604 | | | 9,719 | | | 27,890 | |
| | | | | | | | | | | | | | | | |
Total operating income | | $ | 31,576 | | | $ | 9,624 | | | $ | (10,488) | | | $ | 30,712 | | | $ | 25,085 | | | $ | (1,048) | | | $ | (9,719) | | | $ | 14,318 | |
Operating income for the Metal Coatings segment increased $1.4$6.5 million, or 5.2%25.9%, for the three months ended November 30, 2020,May 31, 2021, as compared to the same period in fiscal 2021. The increase was primarily due to the increase in sales described above, a decrease in the cost of zinc in the kettles and the achievement of operational efficiencies in our surface technologies platform. Operating income for the Infrastructure Solutions segment increased by $10.7 million, or 1,018.3%, for the three months ended May 31, 2021 as compared to the same period in fiscal 2021. The increase was primarily related to the increase in sales as noted above and cost controls implemented in fiscal 2021 across the platform to mitigate disrupted markets.
Corporate expenses increased $0.8 million, or 7.9%, for the three months ended May 31, 2021, as compared to the same period in fiscal 2021. The increase is primarily due to increases in administrative costs associated with the previously announced strategic review.
Other (income) expense, net
Other income was $1.0 million for the three months ended May 31, 2021, as compared to other expense of $1.4 million the same period in fiscal 2020. The increase was primarily due to a decrease in zinc costs, which led to an increase in gross margin.The increase was partially offset by a lower volume of steel processed, as described above. Operating income for the Infrastructure Solutions segment decreased by $8.7 million, or 49.9%, for the three months ended November 30, 2020 as compared to the same period in fiscal 2020. The decrease was primarily related to the decrease in sales as noted above, as well as the loss on the sale of a subsidiary of $1.9 million for the three months ended November 30, 2020. See "Restructuring and Impairment charges" above.
In the Metal Coatings segment, operating income decreased $16.0 million, or 18.7%, for the nine months ended November 30, 2020, as compared to the same period in fiscal 2020, primarily related to the lower volumes noted above, partially offset by a decrease in zinc costs. Operating income was also significantly impacted by the loss on sale of a subsidiary and impairment and restructuring charges, which impacted operating income in the year-to-date period by $11.0 million, of which the majority was recognized in the second quarter of fiscal 2021. Operating income for the Infrastructure Solutions segment decreased by $30.9 million, or 90.2%, for the nine months ended November 30, 2020 as compared to the same period in fiscal 2020. The decrease was primarily related to the decrease in sales as noted above, as well as impairment charges and the loss on the sale of a subsidiary, which totaled $9.2 million for the year-to-date period. See "Restructuring and Impairment charges" above.
Corporate Expenses
Corporate expenses decreased $1.7 million, or 15.4%, for the three months ended November 30, 2020, as compared to the same period in fiscal 2020. The decrease is primarily due to lower payroll and administrative costs.
On a year-to-date basis, corporate expenditures decreased $3.1 million, or 9.3%, to $29.9 million, compared to the same period in the prior year, primarily driven by lower payroll, travel and other administrative costs.
Other (income) expense, net
Other income was flat at $0.7 million for the three months ended November 30, 2020, as compared to the same period in fiscal 2020.
Other expense increased $0.4 million, to $0.8 million, for the nine months ended November 30, 2020, as compared to expense of $0.4 million in the comparable prior year. The increase was primarily due to miscellaneous revenue received in the prior year with no corresponding revenuefavorable foreign exchange transaction adjustments in the current year, coupled with miscellaneous expense in the current year with no corresponding expense in the prior year. The increase in expense was partially offset by a decrease in foreign currency transaction loss.
Interest Expense
Interest expense for the three months ended November 30, 2020 was $2.3May 31, 2021 decreased $0.9 million, or 35.6%, to $1.7 million, as compared to $3.3$2.6 million for the respective prior period. Interest expense decreased by $1.0 million, or 31.2% for the three months ended November 30, 2020. The decrease was primarily attributable to lower average outstanding debt balancesCompany's 2020 Senior Notes, which were funded in late fiscal 2021, and favorablecarry lower interest rates on our variable rate debt onthan the revolving credit facility.
Interest expense for the nine months ended November 30, 2020 was $7.4 million, as compared to $10.4 million for the respective prior period. Interest expense decreased by $3.1 million, or 29.3%, for the nine months ended November 30, 2020. The decrease was primarily attributable to lower average outstanding debt balances and favorable interest rates on our variable rate debt on the revolving credit facility. Our gross debt to equity ratio was 0.29 to 1 as of November 30, 2020, compared to 0.39 to 1 as of November 30, 2019, as we reduced debt during the year-to-date period.
Company's previous senior notes.
Income Taxes
The provision for income taxes reflects an effective tax rate of 25.1%25.5% for the three months ended November 30, 2020,May 31, 2021, as compared to 28.6%45.8% for the respective prior year comparable period. The decrease in the effective tax rate was primarily attributable to the unfavorable adjustments recordedimpact of COVID-19 on book earnings in the prior year comparable period relatedquarter compared to tax return to tax provision adjustments, as well as an India tax audit settlement thatthe current quarter ended May 31, 2021. The Company recorded discrete items in the first quarter of the prior year and the current year; however, since book income was recordedsignificantly lower in the prior year, quarter.
For the nine months ended November 30, 2020, the effective tax rate was 32.3%, compared to 22.3% forimpacted more significantly by the prior year comparable period. The increase in the effective tax rate is primarily attributable to the fiscal 2021 restructuring charges impact on book income, coupled with the recognition of uncertain tax positions in the first quarter, as well as losses in foreign jurisdictions for which the Company does not expect to recognize the benefit.
discrete items.
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 generally include 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 (dollars in thousands):
| | | Nine Months Ended November 30, | | Three Months Ended May 31, |
| | 2020 | | 2019 | | 2021 | | 2020 |
Net cash provided by operating activities | | $ | 59,394 | | | $ | 72,054 | | |
Net cash provided by (used in) operating activities | | Net cash provided by (used in) operating activities | | $ | 11,060 | | | $ | (11,184) | |
Net cash used in investing activities | Net cash used in investing activities | | (14,987) | | | (82,834) | | Net cash used in investing activities | | (7,466) | | | (10,847) | |
Net cash (used in) provided by financing activities | Net cash (used in) provided by financing activities | | (64,229) | | | 1,209 | | Net cash (used in) provided by financing activities | | (5,610) | | | 11,036 | |
For the nine months ended November 30, 2020, netNet cash provided by operating activities for the three months ended May 31, 2021 was $59.4$11.1 million, compared to net cash used in investingoperating activities was $15.0of $11.2 million net cash used in financing activities was $64.2 million, andfor the net effect of exchange rate changes on cash was anprior year quarter. The increase of $2.3 million, resulting in a net decrease in cash and cash equivalents of $17.5 million. In comparison to the comparable period in fiscal 2020, the decrease in cash provided by operating activities for the nine months ended November 30, 2020, arecurrent quarter is primarily attributable to changesincreased net income.
Net cash used in working capital as a result of lower sales.investing activities for the three months ended May 31, 2021 was $7.5 million, compared to $10.8 million for the prior year quarter. The Company's use ofdecrease in cash used for investing activities was lower due to lower spend on acquisitions and the sale of two businesses duringfor the current year-to-date period. quarter was primarily attributable to decreased capital expenditures.
Net cash used in financing activities increased duringfor the ninethree months ended November 30, 2020 asMay 31, 2021 was $5.6 million, compared to $11.0 million of cash provided by investing activities for the prior year comparable period,quarter. The increase in cash used for financing activities during the current quarter was primarily dueattributable to an increase in net repaymentspayments on the revolving loan in the current year, compared to net proceeds from the revolving loan in the prior year, as well as share revolver, and repurchases in the current year.of shares of Company common stock. See “Share Repurchases” sections below for additional information.
Our working capital was $201.3$203.7 million as of November 30, 2020,May 31, 2021, as compared to $73.9$189.6 million as of February 29, 2020.28, 2021.
Financing and Capital
On October 9, 2020, we completed a private placement transaction and entered into a Note Purchase Agreement, whereby we agreed to borrow $150.0 million of senior unsecured notes (the “Notes”“2020 SeniorNotes”), consisting of two separate tranches:
•7-year borrowing: $70.0 million priced at 2.77% coupon, and
•12-year borrowing: $80.0 million priced at 3.17% coupon.
The proceeds of the $80.0 million tranche was funded on December 17, 2020. The $70.0 million tranche will bewas funded in January 2021. The proceeds will be utilizedwere used to repay the existing $125.0 million 5.42% Senior Notes maturing on January 20, 2021, as well as being available for general corporate purposes. Interest on the outstanding 2020 Senior Notes will beis paid semi-annually.
Financingsemi-annually, in January and CapitalJuly.
As of November 30, 2020,May 31, 2021, we had $182.0$186.0 million of floatingfloating- and fixed ratefixed-rate notes outstanding with varying maturities through fiscal 20232032 and we were in compliance with all of the covenants related to these outstanding borrowings. As of November 30, 2020,May 31, 2021, we had approximately $383.2$404.0 million of additional credit available for future draws or letters of credit.
For additional information on the Company's outstanding borrowings see Note 6 of the consolidated financial statements and further below under Contractual Obligations.
Share Repurchase Program
On January 19, 2012, our Board of Directors authorizedJuly 8, 2021, the repurchase of upCompany refinanced its current un-secured revolving credit facility, which was scheduled to ten percent ofmature in March 2022, with a new five-year un-secured revolving credit facility under that certain credit agreement, dated July 8, 2021 by and among the then outstanding shares of our Common StockCompany, borrower, Citibank, N.A., as administrative agent and the other agents and lender parties thereto (the "2012 Share Repurchase Program"“2021 Credit Agreement”). The 2012 Share Repurchase Program did not have an expiration date,2021 Credit Agreement matures in July 2026 and includes the amount and prices paid for any future share purchases under the authorization were to be based on market conditions and other factors at the time of the purchase. Repurchases under the 2012 Share Repurchase Program were made through open market purchases or private transactions in accordance with applicable federal securities laws, including Rule 10b-18 under the Exchange Act.following significant terms;
i.provides for a senior un-secured revolving credit facility with a principal amount of up to $400.0 million revolving loan commitments, and includes an additional $200.0 million uncommitted incremental accordion facility,
ii.interest rate margin ranges from 87.5 bps to 175 bps for Eurodollar Rate loans, and from 0.0 bps to 75 bps for Base Rate loans, depending on leverage ratio of the Company and its consolidated subsidiaries as a group,
iii.includes a letter of credit sub-facility up to $85.0 million for the issuance of standby and commercial letters of credit,
iv.includes a $50.0 million sublimit for swing line loans,
v.includes customary representations and warranties, affirmative covenants and negative covenants, and events of default, including restrictions on incurrence of non-ordinary course debt, investment and dividends, subject to various exceptions, carve-outs and baskets, and
vi.includes a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each to be tested at quarter end.
The proceeds of the loans under the 2021 Credit Agreement will be used primarily to finance working capital needs, capital improvements, dividends, future acquisitions and general corporate purposes.
The foregoing summary of certain terms and provisions of the 2021 Credit Agreement does not purport to be complete and is qualified in its entirety by reference to the 2021 Credit Agreement, a copy of which is attached hereto as Exhibit 10.3 to this Form 10-Q and is incorporated herein by reference.
Share Repurchase Program
On November 10, 2020, ourthe Company's Board of Directors authorized a $100 million share repurchase program pursuant to which the Company may repurchase its Common Stock (the “2020 Share Repurchase Program”Authorization”). Repurchases under the 2020 Share Repurchase ProgramAuthorization will be made through open market and/or private transactions, in accordance with applicable federal securities laws, and could include repurchases pursuant to Rule 10b5-1 trading plans, which allows stock repurchases when the Company might otherwise be precluded from doing so.
During the ninethree months ended November 30, 2020,May 31, 2021, the Company repurchased 852,452125,770 of its common shares in the amount of $31.0$6.3 million at an average purchase price of $36.31 under the 2012 Share Repurchase Program. The Company did not purchase any shares$49.80 under the 2020 Share Repurchase Program during the nine months ended November 30, 2020.Authorization. For additional information regarding our share repurchases during the current year-to-date period, see Part II, “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.”
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 Infrastructure Solutions 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 November 30, 2020,May 31, 2021, we 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, sales 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 (1) | | Purchase Commitments (2) | | Long-Term Debt | | Interest (3) | | Total |
Fiscal: | | |
2021 | | $ | 2,055 | | | $ | 5,000 | | | $ | 125,000 | | | $ | 3,801 | | | $ | 135,856 | |
2022 | | 7,998 | | | — | | | — | | | 1,655 | | | 9,653 | |
2023 | | 7,495 | | | — | | | 57,000 | | | 287 | | | 64,782 | |
2024 | | 6,620 | | | — | | | — | | | | | 6,620 | |
2025 | | 5,766 | | | — | | | — | | | — | | | 5,766 | |
Thereafter | | 17,424 | | | — | | | — | | | — | | | 17,424 | |
Total | | $ | 47,358 | | | $ | 5,000 | | | $ | 182,000 | | | $ | 5,743 | | | $ | 240,101 | |
(1) The Company has entered into a new lease in Poland that is expected to commence in March 2021, and will result in contractual obligations of approximately $3.3 million over the 15-year lease term, which is not included in the table above.
(2) Purchase commitments consist of non-cancelable forward contracts to purchase zinc at various volumes and prices. All such contracts expire in fiscal 2021.
(3) For variable rate debt, interest payments are calculated using current interest rates.
As of November 30, 2020,May 31, 2021, we had outstanding letters of credit in the amount of $28.1$25.5 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, sales and expenses that are not readily apparent from other sources.
During the ninethree months ended November 30, 2020,May 31, 2021, 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 29, 2020.28, 2021.
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 ninethree months of fiscal 2021.2022. 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 29, 2020.28, 2021.
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 (i) recorded, processed, summarized and reported within the time periods specified in the SEC’s rules; and (ii) 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 August 31, 2019, the Company identified multiple control deficiencies that constituted 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 process. 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 additional errors is not material to the current period, the deficiencies identified represent a material weakness in the Company’s internal control over financial reporting.
Management implemented remediation activities, including personnel changes, to address the control deficiencies identified above. The remediation plan that has been implemented through November 30, 2020 includes: (i) new controls over the preparation of the Company’s income tax provision and related disclosures, including enhanced management review controls, as well as oversight regarding key aspects of the income tax provision work papers and the Company’s income tax compliance program; and (ii) the addition of personnel with strong tax provision experience, additional training for impacted employees, and the engagement of a third-party to review and assist with the remediation plan.
Management believes the actions taken are adequate to remediate the material weakness that the Company previously identified. Management will to continue to test the enhanced control environment in the fourth quarter. If the results of remaining controls testing progresses as planned, management expects sufficient evidence will be available to conclude the material weakness described above no longer exists with the filing of the Company’s FY2021 Annual Report on Form 10-K. As management continues to evaluate and improve internal control over financial reporting, the Company may decide to take
additional measures to further address internal control deficiencies or, in appropriate circumstances, make revisions to its internal controls.
Other than the changes described above, 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, its internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
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 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 condition, results of operations or cash flows.
Item 1A. Risk Factors
There are numerous factors that affect our business, financial condition, results of operations and cash flows, many of which are beyond our control. In addition to other information set forth in this Quarterly Report, careful consideration should be given to “Item 1A. Risk Factors” in Part I and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II of our Annual Report, which contain descriptions of significant factors that might cause the actual results of operations in future periods to differ materially from those currently projected in the forward-looking statements contained therein.
Other than the following COVID-19 pandemic risk factor below, thereThere have been no material changes from risk factors previously disclosed in the Company’s most recent Annual Report on Form 10-K. See the discussion of the Company’s risk factors under Part I, Item 1A. in the Company’s Annual Report on Form 10-K for the fiscal year ended February 29, 2020.28, 2021.
The outbreak and global spread of the novel coronavirus (“COVID-19”) has impacted and is expected to continue to impact our business as well as the operations of some of our customers and suppliers, product demand, logistics, and facility operations and the duration, unknown at this time, of the challenges associated with the virus may result in significant adverse effects on our business, financial condition and results of operations.
On March 11, 2020, the World Health Organization declared the COVID-19 outbreak a pandemic, and the virus continues to significantly impact the geographical areas in which we operate.A myriad of international, national and local measures have been implemented by governments and businesses over the past few months to address the virus and attempt to slow its outbreak, including shelter in place orders and similar restrictions, restrictions on business operations, closure of borders and other measures that have had negative effects on the economy. The rapid spread of COVID-19, as well as the measures governments and private organizations have implemented in order to stem the spread of this pandemic, is resulting in significant worldwide disruptions and contractions in economic activity.
Our business and customers support critical infrastructure sectors as defined by the Department of Homeland Security and similar global agencies.These sectors are deemed vital, such that their incapacitation would have a debilitating effect on security, national economic security, national public health or safety or any combination thereof.
COVID-19 has impacted and is anticipated to continue to impact our business, including the normal operations of our facilities, overall demand for electrical products and industrial services, changes to supply chain availability and costs, logistics delays, including temporary closures as may be mandated or otherwise made necessary by governmental authorities, and any additional carryover of economic effects.Even though our facilities are all currently operational, and have implemented prevention procedures, including enhanced cleaning procedures and social distancing efforts, we believe the future impact of COVID-19 will vary across our diversified portfolio during the remainder of this fiscal year and potentially beyond.We believe our Infrastructure Solutions segment will be more significantly impacted than our Metal Coatings segment.The Infrastructure Solutions segment has experienced postponement of certain contracts and certain restrictions and conditions have also presented or delayed the Company’s access to certain customer facilities to deliver products and services during the quarter.
The duration of the COVID-19 outbreak continues to be evaluated by governments and experts, and therefore, at this time, we cannot determine the overall ultimate impact on the Company.The extent of the impact will depend on future
developments, which are highly uncertain and cannot be predicted.The duration, unknown at this time, of the challenges associated with the global COVID-19 pandemic could result in significant adverse effect on our business, financial condition, results of operations and cash flows.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On January 19, 2012, our Board of Directors authorized the repurchase of up to ten percent of the then outstanding shares of our Common Stock (the "2012 Share Repurchase Program"). The 2012 Share Repurchase Program 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 are made through open market purchases or private transactions in accordance with applicable federal securities laws, including Rule 10b-18 under the Exchange Act.
On November 10, 2020, ourthe Company's Board of Directors authorized a $100 million share repurchase program pursuant to which the Company may repurchase ourits Common Stock (the “2020 Share Repurchase Program”Authorization”). Repurchases under the 2020 Share Repurchase ProgramAuthorization will be made through open market and/or private transactions, in accordance with applicable federal securities laws, and could include repurchases pursuant to Rule 10b5-1 trading plans, which allows stock repurchases when the Company might otherwise be precluded from doing so. The Company did not purchase any shares under the 2020 Share Repurchase Program during the nine months ended November 30, 2020.
The following table provides information with respect to purchases of common stock of the Company made during the ninethree months ended November 30, 2020,May 31, 2021, by the Company or any "affiliated purchaser" as defined in Rule 10b-18(a)(3) under the Exchange act:
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Period | Total Number of Share Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publically Announced Plans or Programs | Maximum Number of shares that May Yet Be Purchased Under the Plans or Programs |
Beginning balance, February 29, 2020 | — | | $ | — | | — | | 882,916 | |
March 1 through March 31 | — | | — | | — | | 882,916 | |
April 1 through April 30 | — | | — | | — | | 882,916 | |
May 1 through May 31 | — | | — | | — | | 882,916 | |
June 1 through June 30 | — | | — | | — | | 882,916 | |
July 1 through July 30 | 117,000 | | 31.81 | | 117,000 | | 765,916 | |
August 1 through August 31 | 83,000 | | 32.01 | | 83,000 | | 682,916 | |
September 1 through September 31 | — | | — | | — | | 682,916 | |
October 1 through October 31 | 181,700 | | 34.69 | | 181,700 | | 501,216 | |
November 1 through November 30 | 470,752 | | 38.81 | | 470,752 | | 30,464 | |
Total | 852,452 | | $ | 36.31 | | 852,452 | | 30,464 | |
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Period | Total Number of Share Purchased | | Average Price Paid per Share | | Total Number of Shares Purchased as Part of Publically Announced Plans or Programs | | Approximate Dollar Value that May Yet Be Used Under the Plans or Programs |
Beginning balance, February 29, 2021 | | | | | | | $ | 84,002,349 | |
March 1 through March 31 | 60,649 | | | $ | 49.47 | | | 60,649 | | | 83,941,700 | |
April 1 through April 30 | 56,043 | | | 49.82 | | | 56,043 | | | 83,885,657 | |
May 1 through May 31 | 9,078 | | | 51.92 | | | 9,078 | | | 83,876,579 | |
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Total | 125,770 | | | $ | 49.80 | | | 125,770 | | | $ | 83,876,579 | |
Item 5. Other Information.
On October 29, 2020,Change in Control Agreement
The Company’s Compensation Committee of the Board of Directors, (the “Board”in consultation with its independent compensation advisor, Meridian Compensation Partners, LLC (“Meridian”) of AZZ Inc. (the “Company”) appointed Mr. Philip Schlom as Senior Vice President and Chief Financial Officer, conducted a review of the Company. Mr. Schlom, 56, had been serving asexisting change in control severance benefits being provided to the Company’s Interim Chief Financial Officer since May 2020executive officers (the “Executive Officers”). Based upon the review and joined the Company in October 2019 as the Vice President, Chief Accounting Officer.
On November 4, 2020, Mr. Schlom entered into an employment agreement (the “Employment Agreement”) with the Company, which has a three year term, unless terminated earlier in accordance with the terms of the Employment Agreement.
In his position as the Company’s Senior Vice President and Chief Financial Officer, Mr. Schlom is eligible to earn a pro-rata annual cash incentive bonus under the Company’s Senior Management Bonus Plan (the “STI Plan”), which provides for an annual cash incentive target based upon 65% of Mr. Schlom’s annual base salary pursuant to the achievement of certain individual and Company performance criteria. He will also be eligible each year to receive an annual equity award, the amount and nature to be determined annually by the Company’s Compensation Committee. For the Company’s fiscal year endingadvice
February 28, 2021, Mr. Schlom’s equity award target value consisted of 50% performance share units (“PSUs”) and 50% RSUs issued underprovided to the Compensation Committee by Meridian, the Company’s 2014 Long Term Incentive Plan (the “2014 LTI Plan”). The Employment Agreement also provides forBoard of Directors approved certain modifications to its existing change in control severance payments, which may include base salarybenefits to ensure uniformity of terms and accrued paid time off throughconditions among its Executive Officers and to align severance benefits with the datemarket practices of termination, as well as a pro-rated annual cash bonus, based upon the Company’s actual performance andindustry peer companies. Effective July 8, 2021, the number of days of employment in the calendar year of termination, in the event Mr. Schlom’s employment is terminated by the Company without Cause or by Mr. Schlom for Good Reason (each term as defined in the Employment Agreement). In the event of a termination, the receipt of severance payments is conditioned upon the execution of a general release in a form approved by the Company. Mr. Schlom is also subject to confidentiality and other restrictive covenants prohibiting competition, solicitation of customers and employees and interference with business relationships during his employment and for 12 months thereafter.
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Name | Position | FY2021 Base Salary | FY2021 STI Plan Target | FY2021 LTI Plan Target |
Philip Schlom | SVP and Chief Financial Officer | $350,000 | $227,500 | $300,000 |
In addition to the Employment Agreement, Mr. Schlom and the Company also entered into a standardized change in control form agreement (the “Change“CIC Agreement”) with its Executive Officers, including our named executive officers (except for the Chief Executive Officer), whom will retain his existing change in Control Agreement”).control agreement. The Change in Controlmaterial terms of the standardized form CIC Agreement will remain in effect for so long as Mr. Schlomstates that if an Executive Officer is employed by the Company and provides, among other things, that, upon the occurrence of a Change in Control (as defined interminated (i) during the Change in Control Agreement)Period, (ii) without Cause, or (iii) such Executive Officer resigns for Good Reason (all capitalized terms are defined in the form CIC Agreement which is attached as Exhibit 10.7, and is incorporated herein), Mr. Schlomthe Executive Officers will receive certain payments frombe entitled to (i) any accrued but unpaid Annual Base Salary for the fiscal year in which employment ends (plus accrued and unpaid expenses reimbursable in accordance with Company if his employment is terminatedpolices; (ii) 24 months of Annual Cash Compensation (defined as Annual Base Salary and Target Cash Bonus) paid on a regular payroll cycle over a 24 month period; (iii) accelerated vesting of all outstanding time-based equity awards; and (iv) 24 months of medical, dental and vision insurance coverage (100% paid by the Company) substantially comparable to the coverage maintained by the Company without Cause or by Mr. Schlom for Good Reason (each such term as defined in the Employment Agreement), in each case within 12 monthsExecutive Officer immediately prior to the date of such Change in Control.
Mr. Schlom has no family relationships with any director or executive officer of the Company, and there are no arrangements or understandings with any person pursuant to which he will be appointed Senior Vice President and Chief Financial Officer of the Company. In addition, there have been no transactions directly or indirectly involving Mr. Schlom that would be required to be disclosed pursuant to Item 404(a) of Regulation S-K under the Securities Exchange Act of 1934.
Promotion of Gary Hill
On October 8, 2020, Mr. Gary Hill, 55, the Company's President and General Manager – Industrial Platform, was promoted to Chief Operating Officer – Infrastructure Solutions of the Company.
Mr. Hill’s biographical information, including his previous leadership positions held in the Company, and his business experience, may be found in the Company’s Proxy Statement filed with the Securities and Exchange Commission on May 27, 2020 (the “2020 Proxy Statement”) and is incorporated herein by reference.
In connection with Mr. Hill’s promotion to Chief Operating Officer – Infrastructure Solutions, his annual base salary increased to $355,000.All other terms and conditions of Mr. Hill’s existing employment agreement and compensation arrangements were previously discussed in the Company’s 2020 Proxy Statement and remain unchanged and in full force and effect and are incorporated herein by reference.
Mr. Hill remains subject to confidentiality and other restrictive covenants prohibiting competition, solicitation of customers and employees and interference with business relationships during his employment and for 12 months thereafter.
There are no transactions to which the Company is a party and in which Mr. Hill has a material interest that are required to be disclosed under Item 404(a) of Regulation S-K.Mr. Hill has no family relationship with any directors or executive officers of the Company.termination.
Item 6. Exhibits
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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.
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| | | | AZZ Inc. (Registrant) |
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Date: | January 11,July 9, 2021 | | By: | /s/ Philip A. Schlom |
| | | | Philip A. Schlom Chief Financial Officer |