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, 20222023
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)
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 30, 2022,29, 2023, the registrant had outstanding 24,894,52625,076,871 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)
(Unaudited) | | | | As of |
| | | | | | | | | | | | | | November 30, 2023 | | February 28, 2023 |
| | November 30, 2022 | | February 28, 2022 | |
Assets | Assets | | | | | Assets | | | | |
Current assets: | Current assets: | | Current assets: | |
Cash and cash equivalents | Cash and cash equivalents | | $ | 3,290 | | | $ | 12,082 | | Cash and cash equivalents | | $ | 7,509 | | | $ | 2,820 | |
Accounts receivable (net of allowance for credit losses of $5,763 as of November 30, 2022 and $4,716 as of February 28, 2022) | | 173,341 | | | 85,106 | | |
Inventories: | | |
Raw material | | 137,100 | | | 81,022 | | |
Work-in-process | | 1,763 | | | 840 | | |
Finished goods | | 2,583 | | | 1,135 | | |
Trade accounts receivable, net of allowance for credit losses of $2,096 and $5,752 at November 30, 2023 and February 28, 2023, respectively | | Trade accounts receivable, net of allowance for credit losses of $2,096 and $5,752 at November 30, 2023 and February 28, 2023, respectively | | 142,463 | | | 156,443 | |
Other receivables | | Other receivables | | 31,005 | | | 26,969 | |
Inventories | | Inventories | | 126,737 | | | 143,920 | |
Contract assets | Contract assets | | 78,560 | | | 2,866 | | Contract assets | | 75,719 | | | 79,273 | |
Prepaid expenses and other | Prepaid expenses and other | | 9,997 | | | 1,583 | | Prepaid expenses and other | | 9,295 | | | 7,991 | |
Assets held for sale | | — | | | 235 | | |
Current assets of discontinued operations | | — | | | 201,664 | | |
| Total current assets | Total current assets | | 406,634 | | | 386,533 | | Total current assets | | 392,728 | | | 417,416 | |
Property, plant and equipment, net | Property, plant and equipment, net | | 491,367 | | | 193,358 | | Property, plant and equipment, net | | 525,338 | | | 498,503 | |
Right-of-use assets | Right-of-use assets | | 24,248 | | | 13,954 | | Right-of-use assets | | 22,830 | | | 26,392 | |
Goodwill | Goodwill | | 710,246 | | | 190,391 | | Goodwill | | 705,487 | | | 702,512 | |
Intangibles and other assets, net | | 481,121 | | | 39,115 | | |
Deferred tax assets | Deferred tax assets | | 3,438 | | | 3,464 | | Deferred tax assets | | 5,820 | | | 12,467 | |
Intangible assets, net | | Intangible assets, net | | 451,289 | | | 469,392 | |
Investment in joint venture | Investment in joint venture | | 82,420 | | | — | | Investment in joint venture | | 97,238 | | | 84,760 | |
Non-current assets of discontinued operations | | — | | | 306,212 | | |
Other assets | | Other assets | | 8,026 | | | 10,037 | |
| Total assets | Total assets | | $ | 2,199,474 | | | $ | 1,133,027 | | Total assets | | $ | 2,208,756 | | | $ | 2,221,479 | |
Liabilities and Shareholders’ Equity | Liabilities and Shareholders’ Equity | | | | | Liabilities and Shareholders’ Equity | | | | |
Current liabilities: | Current liabilities: | | Current liabilities: | |
Accounts payable | Accounts payable | | $ | 108,935 | | | $ | 24,840 | | Accounts payable | | $ | 95,158 | | | $ | 84,256 | |
Income tax payable | Income tax payable | | — | | | 3,828 | | Income tax payable | | 45 | | | 272 | |
Accrued salaries and wages | Accrued salaries and wages | | 35,821 | | | 17,123 | | Accrued salaries and wages | | 25,868 | | | 26,262 | |
Accrued dividends | | 4,640 | | | — | | |
Other accrued liabilities | Other accrued liabilities | | 51,402 | | | 12,873 | | Other accrued liabilities | | 72,476 | | | 70,047 | |
Customer deposits | | 536 | | | 294 | | |
Contract liabilities | | 1,022 | | | — | | |
Lease liability, short-term | Lease liability, short-term | | 5,399 | | | 3,289 | | Lease liability, short-term | | 6,453 | | | 6,403 | |
Debt due within one year | | 13,000 | | | — | | |
Current liabilities of discontinued operations | | — | | | 88,283 | | |
| | Total current liabilities | Total current liabilities | | 220,755 | | | 150,530 | | Total current liabilities | | 200,000 | | | 187,240 | |
Debt due after one year, net | | 1,010,648 | | | 226,484 | | |
Long-term debt, net | | Long-term debt, net | | 980,004 | | | 1,058,120 | |
Lease liability, long-term | Lease liability, long-term | | 19,673 | | | 11,403 | | Lease liability, long-term | | 17,112 | | | 20,704 | |
Deferred income taxes | | 31,879 | | | 47,672 | | |
Deferred tax liabilities | | Deferred tax liabilities | | 33,370 | | | 40,536 | |
Other long-term liabilities | Other long-term liabilities | | 64,006 | | | 5,366 | | Other long-term liabilities | | 57,120 | | | 61,419 | |
Long-term liabilities of discontinued operations | | — | | | 24,207 | | |
| Total liabilities | Total liabilities | | 1,346,961 | | | 465,662 | | Total liabilities | | 1,287,606 | | | 1,368,019 | |
Commitments and contingencies | | |
Commitments and contingencies (Note 17) | | Commitments and contingencies (Note 17) | | | | |
Shareholders’ equity: | Shareholders’ equity: | | Shareholders’ equity: | |
Series A Convertible Preferred Stock, $1 par, shares authorized 240; 240 shares issued and outstanding at November 30, 2022 and 0 shares issued and outstanding at February 28, 2022 | | 240 | | | — | | |
Common stock, $1 par, shares authorized 100,000; 24,876 shares issued and outstanding at November 30, 2022 and 24,688 shares issued and outstanding at February 28, 2022 | | 24,876 | | | 24,688 | | |
Series A Convertible Preferred Stock, $1 par, shares authorized 240; 240 shares issued and outstanding at November 30, 2023 and February 28, 2023 | | Series A Convertible Preferred Stock, $1 par, shares authorized 240; 240 shares issued and outstanding at November 30, 2023 and February 28, 2023 | | 240 | | | 240 | |
Common Stock, $1 par value; 100,000 shares authorized; 25,077 and 24,912 shares issued and outstanding at November 30, 2023 and February 28, 2023, respectively | | Common Stock, $1 par value; 100,000 shares authorized; 25,077 and 24,912 shares issued and outstanding at November 30, 2023 and February 28, 2023, respectively | | 25,077 | | | 24,912 | |
Capital in excess of par value | Capital in excess of par value | | 325,433 | | | 85,847 | | Capital in excess of par value | | 333,555 | | | 326,839 | |
Retained earnings | Retained earnings | | 512,815 | | | 584,154 | | Retained earnings | | 566,235 | | | 506,042 | |
Accumulated other comprehensive loss | Accumulated other comprehensive loss | | (10,851) | | | (27,324) | | Accumulated other comprehensive loss | | (3,957) | | | (4,573) | |
Total shareholders’ equity | Total shareholders’ equity | | 852,513 | | | 667,365 | | Total shareholders’ equity | | 921,150 | | | 853,460 | |
Total liabilities and shareholders' equity | Total liabilities and shareholders' equity | | $ | 2,199,474 | | | $ | 1,133,027 | | Total liabilities and shareholders' equity | | $ | 2,208,756 | | | $ | 2,221,479 | |
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)amounts)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | | | | | | | |
Sales | | $ | 373,301 | | | $ | 135,083 | | | $ | 987,145 | | | $ | 395,732 | |
Cost of sales | | 300,219 | | | 97,510 | | | 752,455 | | | 285,572 | |
Gross margin | | 73,082 | | | 37,573 | | | 234,690 | | | 110,160 | |
| | | | | | | | |
Selling, general and administrative | | 27,689 | | | 16,283 | | | 97,247 | | | 47,483 | |
| | | | | | | | |
Operating income from continuing operations | | 45,393 | | | 21,290 | | | 137,443 | | | 62,677 | |
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Interest expense | | 26,123 | | | 1,627 | | | 61,739 | | | 5,017 | |
| | | | | | | | |
Equity in (earnings) loss of unconsolidated subsidiaries | | (1,006) | | | — | | | (1,006) | | | — | |
Other (income) expense, net | | (610) | | | (91) | | | (582) | | | (106) | |
Income from continuing operations before income taxes | | 20,886 | | | 19,754 | | | 77,292 | | | 57,766 | |
Income tax expense | | 2,447 | | | 6,647 | | | 18,380 | | | 18,778 | |
Net income from continuing operations | | 18,439 | | | 13,107 | | | 58,912 | | | 38,988 | |
Income from discontinued operations, net of tax | | 1,069 | | | 7,978 | | | 17,126 | | | 23,412 | |
Loss on disposal of discontinued operations, net of tax | | (40,050) | | | — | | | (130,073) | | | — | |
Net income (loss) from discontinued operations | | (38,981) | | | 7,978 | | | (112,947) | | | 23,412 | |
Net income (loss) | | (20,542) | | | 21,085 | | | (54,035) | | | 62,400 | |
Accrued dividends on preferred stock | | (3,600) | | | — | | | (4,640) | | | — | |
Net income (loss) available to common shareholders | | $ | (24,142) | | | $ | 21,085 | | | $ | (58,675) | | | $ | 62,400 | |
Earnings per common share from continuing operations | | | | | | | | |
Basic earnings per share | | $ | 0.60 | | | $ | 0.53 | | | $ | 2.19 | | | $ | 1.57 | |
Diluted earnings per share | | $ | 0.59 | | | $ | 0.53 | | | $ | 2.17 | | | $ | 1.55 | |
Earnings per common share from discontinued operations | | | | | | | | |
Basic earnings (loss) per share | | $ | (1.57) | | | $ | 0.32 | | | $ | (4.55) | | | $ | 0.94 | |
Diluted earnings (loss) per share | | $ | (1.56) | | | $ | 0.32 | | | $ | (4.52) | | | $ | 0.93 | |
Earnings per common share | | | | | | | | |
Basic earnings (loss) per share | | $ | (0.97) | | | $ | 0.85 | | | $ | (2.37) | | | $ | 2.51 | |
Diluted earnings (loss) per share | | $ | (0.97) | | | $ | 0.85 | | | $ | (2.35) | | | $ | 2.48 | |
| | | | | | | | |
Cash dividends declared per common share | | $ | 0.17 | | | $ | 0.17 | | | $ | 0.51 | | | $ | 0.51 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Nine Months Ended November 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Sales | $ | 381,605 | | | $ | 373,301 | | | $ | 1,171,020 | | | $ | 987,145 | |
Cost of sales | 293,456 | | | 300,219 | | | 888,606 | | | 752,455 | |
Gross margin | 88,149 | | | 73,082 | | | 282,414 | | | 234,690 | |
| | | | | | | |
Selling, general and administrative | 35,325 | | | 27,689 | | | 103,087 | | | 97,247 | |
| | | | | | | |
Operating income | 52,824 | | | 45,393 | | | 179,327 | | | 137,443 | |
| | | | | | | |
Interest expense | 25,855 | | | 26,123 | | | 82,331 | | | 61,739 | |
Equity in earnings of unconsolidated subsidiaries | (8,742) | | | (1,006) | | | (11,136) | | | (1,006) | |
Other (income) expense, net | 41 | | | (610) | | | (9) | | | (582) | |
Income from continuing operations before income taxes | 35,670 | | | 20,886 | | | 108,141 | | | 77,292 | |
Income tax expense | 8,780 | | | 2,447 | | | 24,397 | | | 18,380 | |
Net income from continuing operations | 26,890 | | | 18,439 | | | 83,744 | | | 58,912 | |
Income from discontinued operations, net of tax | — | | | 1,665 | | | — | | | 17,126 | |
Loss on disposal of discontinued operations, net of tax | — | | | (40,646) | | | — | | | (130,073) | |
Net loss from discontinued operations | — | | | (38,981) | | | — | | | (112,947) | |
Net income (loss) | 26,890 | | | (20,542) | | | 83,744 | | | (54,035) | |
Dividends on preferred stock | (3,600) | | | (3,600) | | | (10,800) | | | (4,640) | |
Net income (loss) available to common shareholders | $ | 23,290 | | | $ | (24,142) | | | $ | 72,944 | | | $ | (58,675) | |
Basic earnings (loss) per share | | | | | | | |
Earnings per common share from continuing operations | $ | 0.93 | | | $ | 0.60 | | | $ | 2.91 | | | $ | 2.19 | |
Loss per common share from discontinued operations | $ | — | | | $ | (1.57) | | | $ | — | | | $ | (4.55) | |
Earnings (loss) per common share | $ | 0.93 | | | $ | (0.97) | | | $ | 2.91 | | | $ | (2.37) | |
Diluted earnings (loss) per share | | | | | | | |
Earnings per common share from continuing operations | $ | 0.92 | | | $ | 0.59 | | | $ | 2.86 | | | $ | 2.17 | |
Loss per common share from discontinued operations | $ | — | | | $ | (1.56) | | | $ | — | | | $ | (4.52) | |
Earnings (loss) per common share | $ | 0.92 | | | $ | (0.97) | | | $ | 2.86 | | | $ | (2.35) | |
| | | | | | | |
Weighted average shares outstanding - Basic | 25,077 | | | 24,867 | | | 25,024 | | | 24,804 | |
Weighted average shares outstanding - Diluted | 29,330 | | | 24,995 | | | 29,278 | | | 24,984 | |
| | | | | | | |
Cash dividends declared per common share | $ | 0.17 | | | $ | 0.17 | | | $ | 0.51 | | | $ | 0.51 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) available to common shareholders | | $ | (24,142) | | | $ | 21,085 | | | $ | (58,675) | | | $ | 62,400 | |
Other comprehensive income: | | | | | | | | |
Unrealized translation gain (loss) | | (5,019) | | | (1,508) | | | (7,765) | | | (1,953) | |
Reclassification of foreign currency translation adjustment from accumulated other comprehensive loss to loss on sale of discontinued operations | | 27,750 | | | — | | | 27,750 | | | — | |
Unrealized gain (loss) on derivatives qualified for hedge accounting: | | | | | | | | |
Unrealized gain (loss) on interest rate swap | | (3,512) | | | — | | | (3,512) | | | — | |
| | | | | | | | |
Other comprehensive income (loss) | | 19,219 | | | (1,508) | | | 16,473 | | | (1,953) | |
Comprehensive income (loss) | | $ | (4,923) | | | $ | 19,577 | | | $ | (42,202) | | | $ | 60,447 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
| | | | | | | | |
Net income (loss) available to common shareholders | | $ | 23,290 | | | $ | (24,142) | | | $ | 72,944 | | | $ | (58,675) | |
Other comprehensive income (loss): | | | | | | | | |
Unrealized translation gain (loss) | | 3,029 | | | (5,019) | | | 1,293 | | | (7,765) | |
Reclassification of foreign currency translation adjustment from accumulated other comprehensive loss to loss on sale of discontinued operations | | — | | | 27,750 | | | — | | | 27,750 | |
| | | | | | | | |
Unrealized gain (loss) on derivatives qualified for hedge accounting: | | | | | | | | |
Unrealized gain (loss) on interest rate swap, net of tax(1) | | (115) | | | (3,512) | | | 1,867 | | | (3,512) | |
Amounts reclassified from accumulated other comprehensive income to earnings, net of tax(2) | | (1,057) | | | — | | | (2,544) | | | — | |
Other comprehensive income | | 1,857 | | | 19,219 | | | 616 | | | 16,473 | |
Comprehensive income (loss) | | $ | 25,147 | | | $ | (4,923) | | | $ | 73,560 | | | $ | (42,202) | |
| | | | | | | | |
(1) Net of tax expense (benefit) of $(42) and $678 for the three and nine months ended November 30, 2023, respectively. |
(2) Net of tax benefit of $(384) and $(924) for the three and nine months ended November 30, 2023, respectively. | | |
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, |
| | 2022 | | 2021 |
Cash flows from operating activities | | | | |
Net income (loss) available to common shareholders | | (58,675) | | | 62,400 | |
Less: Net income (loss) from discontinued operations | | (112,947) | | | 23,412 | |
Plus: accrued dividends on Preferred Stock | | 4,640 | | | — | |
Net income from continuing operations | | 58,912 | | | 38,988 | |
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | |
Bad debt expense | | (38) | | | (250) | |
Depreciation and amortization | | 55,813 | | | 28,033 | |
Deferred income taxes | | (20,421) | | | (4,925) | |
Equity in earnings of unconsolidated entities | | (1,006) | | | — | |
Loss on disposal of business | | — | | | 640 | |
| | | | |
Impairment of long-lived assets | | 235 | | | — | |
| | | | |
Net (gain) loss on sale of property, plant and equipment | | (1,381) | | | 284 | |
Amortization of deferred borrowing costs | | 5,916 | | | 551 | |
Share-based compensation expense | | 7,138 | | | 6,542 | |
Effects of changes in assets and liabilities, net of acquisitions and dispositions: | | | | |
Accounts receivable | | (16,430) | | | (16,322) | |
Inventories | | (14,646) | | | (9,522) | |
Prepaid expenses and other | | (6,195) | | | (49) | |
Other assets | | (3,950) | | | (2,750) | |
Net change in contract assets and liabilities | | 2,410 | | | (377) | |
Accounts payable | | (15,122) | | | 2,370 | |
Other accrued liabilities and income taxes payable | | 17,387 | | | 2,725 | |
Net cash provided by operating activities of continuing operations | | 68,622 | | | 45,938 | |
Cash flows from investing activities | | | | |
Proceeds from sale or insurance settlements of property, plant and equipment | | 4,114 | | | 2,371 | |
Purchase of property, plant and equipment | | (35,085) | | | (15,777) | |
Proceeds from sale of subsidiaries, net | | 106,766 | | | — | |
Acquisition of subsidiaries, net of cash acquired | | (1,283,448) | | | — | |
Net cash used in investing activities of continuing operations | | (1,207,653) | | | (13,406) | |
Cash flows from financing activities | | | | |
Proceeds from issuance of common stock | | 1,767 | | | 1,544 | |
Payments for taxes related to net share settlement of equity awards | | (2,592) | | | (2,169) | |
Proceeds from revolving loan | | 255,000 | | | 216,000 | |
Payments on revolving loan | | (322,000) | | | (203,000) | |
Proceeds from long term debt | | 1,540,000 | | | — | |
Payments of debt financing costs | | (87,555) | | | — | |
Payments on long term debt | | (366,500) | | | — | |
Repurchase and retirement of treasury stock | | — | | | (28,869) | |
Payments of dividends | | (12,664) | | | (12,673) | |
Net cash provided by (used in) financing activities of continuing operations | | 1,005,456 | | | (29,167) | |
Effect of exchange rate changes on cash | | (2,199) | | | 1,442 | |
Net cash provided by operating activities from discontinued operations | | 7,973 | | | 3,730 | |
Net cash used in investing activities from discontinued operations | | (3,991) | | | (3,019) | |
Net cash provided by financing activities from discontinued operations | | 120,000 | | | — | |
Cash provided by discontinued operations | | 123,982 | | | 711 | |
Net increase (decrease) in cash and cash equivalents | | (11,792) | | | 711 | |
Cash and cash equivalents at beginning of period | | 15,082 | | | 14,837 | |
Cash and cash equivalents at end of period | | 3,290 | | | 15,548 | |
Less: Cash and cash equivalents from discontinued operations at end of period | | — | | | (19,415) | |
Cash and cash equivalents from continuing operations at end of period | | $ | 3,290 | | | $ | 940 | |
| | | | | | | | | | | | | | |
| | Nine Months Ended November 30, |
| | 2023 | | 2022 |
Cash flows from operating activities | | | | |
Net income (loss) available to common shareholders | | $ | 72,944 | | | $ | (58,675) | |
Less: Net loss from discontinued operations | | — | | | 112,947 | |
Plus: Dividends on preferred stock | | 10,800 | | | 4,640 | |
Net income from continuing operations | | 83,744 | | | 58,912 | |
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | | |
Bad debt expense (recovery) | | 53 | | | (38) | |
Depreciation and amortization | | 59,034 | | | 55,813 | |
Deferred income taxes | | (274) | | | (20,421) | |
Equity in earnings of unconsolidated entities | | (11,136) | | | (1,006) | |
| | | | |
| | | | |
| | | | |
| | | | |
Impairment of long-lived assets | | — | | | 235 | |
Net (gain) on sale of property, plant and equipment | | (39) | | | (1,381) | |
Amortization of debt financing costs | | 9,105 | | | 5,916 | |
Share-based compensation expense | | 6,207 | | | 7,138 | |
Changes in current assets and current liabilities | | 38,819 | | | (34,969) | |
Changes in other long-term assets and long-term liabilities | | (4,585) | | | (1,577) | |
Net cash provided by operating activities of continuing operations | | 180,928 | | | 68,622 | |
Cash flows from investing activities | | | | |
Purchase of property, plant and equipment | | (66,900) | | | (35,085) | |
Acquisition of subsidiaries, net of cash acquired | | — | | | (1,283,448) | |
Proceeds from sale of subsidiaries, net | | — | | | 106,766 | |
| | | | |
| | | | |
Other investing activities | | 47 | | | 4,114 | |
Net cash used in investing activities of continuing operations | | (66,853) | | | (1,207,653) | |
Cash flows from financing activities | | | | |
Proceeds from issuance of common stock | | 1,465 | | | 1,767 | |
Payments for taxes related to net share settlement of equity awards | | (791) | | | (2,592) | |
Proceeds from revolving loan | | 189,000 | | | 255,000 | |
Payments on revolving loan | | (274,000) | | | (322,000) | |
Proceeds from long term debt | | — | | | 1,540,000 | |
Payments of debt financing costs | | (1,299) | | | (87,555) | |
Payments on long term debt and finance leases | | (268) | | | (366,500) | |
| | | | |
Payments of dividends | | (23,551) | | | (12,664) | |
Net cash provided by (used in) financing activities of continuing operations | | (109,444) | | | 1,005,456 | |
Effect of exchange rate changes on cash | | 58 | | | (2,199) | |
| | | | |
Net cash provided by operating activities from discontinued operations | | — | | | 7,973 | |
Net cash used in investing activities from discontinued operations | | — | | | (3,991) | |
Net cash provided by financing activities from discontinued operations | | — | | | 120,000 | |
Net cash provided by discontinued operations | | — | | | 123,982 | |
Net increase (decrease) in cash and cash equivalents | | 4,689 | | | (11,792) | |
Cash and cash equivalents at beginning of period | | 2,820 | | | 15,082 | |
| | | | |
| | | | |
Cash and cash equivalents from continuing operations at end of period | | $ | 7,509 | | | $ | 3,290 | |
The accompanying notes are an integral part of the consolidated financial statements.
| | | | | | | | | | | | | | |
Supplemental disclosures of non-cash investing and financing activities | | | | |
Cash paid for interest | | $ | 52,488 | | | $ | 3,655 | |
Cash paid for income taxes | | $ | 15,627 | | | $ | 23,259 | |
Issuance of preferred stock in exchange for convertible notes | | $ | 233,722 | | | $ | — | |
Accrued dividends on Series A Preferred Stock | | $ | 4,640 | | | $ | — | |
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2023 |
| | Series A Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | Shares | | Amount | | Shares | | Amount | |
Balance at August 31, 2023 | | 240 | | | $ | 240 | | | 25,077 | | | $ | 25,077 | | | $ | 331,366 | | | $ | 547,208 | | | $ | (5,814) | | | $ | 898,077 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 2,189 | | | — | | | — | | | 2,189 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Dividends on preferred stock | | — | | | — | | | — | | | — | | | — | | | (3,600) | | | — | | | (3,600) | |
Dividends paid on common shares | | — | | | — | | | — | | | — | | | — | | | (4,263) | | | — | | | (4,263) | |
Net income | | — | | | — | | | — | | | — | | | — | | | 26,890 | | | — | | | 26,890 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | 1,857 | | | 1,857 | |
Balance at November 30, 2023 | | 240 | | | $ | 240 | | | 25,077 | | | $ | 25,077 | | | $ | 333,555 | | | $ | 566,235 | | | $ | (3,957) | | | $ | 921,150 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2023 |
| | Series A Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | Shares | | Amount | | Shares | | Amount | |
Balance at February 28, 2023 | | 240 | | | $ | 240 | | | 24,912 | | | $ | 24,912 | | | $ | 326,839 | | | $ | 506,042 | | | $ | (4,573) | | | $ | 853,460 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 6,207 | | | — | | | — | | | 6,207 | |
| | | | | | | | | | | | | | | | |
Common stock issued under stock-based plans and related income tax expense | | — | | | — | | | 123 | | | 123 | | | (914) | | | — | | | — | | | (791) | |
Common stock issued under employee stock purchase plan | | — | | | — | | | 42 | | | 42 | | | 1,423 | | | — | | | — | | | 1,465 | |
| | | | | | | | | | | | | | | | |
Dividends on preferred stock | | — | | | — | | | — | | | — | | | — | | | (10,800) | | | — | | | (10,800) | |
Dividends paid on common shares | | — | | | — | | | — | | | — | | | — | | | (12,751) | | | — | | | (12,751) | |
Net income | | — | | | — | | | — | | | — | | | — | | | 83,744 | | | — | | | 83,744 | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | 616 | | | 616 | |
Balance at November 30, 2023 | | 240 | | | $ | 240 | | | 25,077 | | | $ | 25,077 | | | $ | 333,555 | | | $ | 566,235 | | | $ | (3,957) | | | $ | 921,150 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2022 |
| | Series A Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | | |
| | Shares | | Amount | | Shares | | Amount | |
Balance at August 31, 2022 | | 240 | | | $ | 240 | | | 24,862 | | | $ | 24,862 | | | $ | 323,386 | | | $ | 541,203 | | | $ | (30,070) | | | $ | 859,621 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 2,348 | | | — | | | — | | | 2,348 | |
| | | | | | | | | | | | | | | | |
Common stock issued under stock-based plans and related income tax expense | | — | | | — | | | 14 | | | 14 | | | (301) | | | — | | | — | | | (287) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Dividends on preferred stock | | — | | | — | | | — | | | — | | | — | | | (3,600) | | | — | | | (3,600) | |
Dividends paid on common shares | | — | | | — | | | — | | | — | | | — | | | (4,246) | | | — | | | (4,246) | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | (20,542) | | | — | | | (20,542) | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | 19,219 | | | 19,219 | |
Balance at November 30, 2022 | | 240 | | | $ | 240 | | | 24,876 | | | $ | 24,876 | | | $ | 325,433 | | | $ | 512,815 | | | $ | (10,851) | | | $ | 852,513 | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2022 |
| | Series A Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | Shares | | Amount | | Shares | | Amount | |
Balance at February 28, 2022 | | — | | | $ | — | | | 24,688 | | | $ | 24,688 | | | $ | 85,847 | | | $ | 584,154 | | | $ | (27,324) | | | $ | 667,365 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 7,118 | | | — | | | — | | | 7,118 | |
Issuance of Class A convertible preferred stock in exchange for convertible debt | | 240 | | | 240 | | | — | | | — | | | 233,482 | | | — | | | — | | | 233,722 | |
Common stock issued under stock-based plans and related income tax expense | | — | | | — | | | 136 | | | 136 | | | (2,728) | | | — | | | — | | | (2,592) | |
Common stock issued under employee stock purchase plan | | — | | | — | | | 52 | | | 52 | | | 1,714 | | | — | | | — | | | 1,766 | |
| | | | | | | | | | | | | | | | |
Dividends on preferred stock | | — | | | — | | | — | | | — | | | — | | | (4,640) | | | — | | | (4,640) | |
Dividends paid on common shares | | — | | | — | | | — | | | — | | | — | | | (12,664) | | | — | | | (12,664) | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | (54,035) | | | — | | | (54,035) | |
Other comprehensive income | | — | | | — | | | — | | | — | | | — | | | — | | | 16,473 | | | 16,473 | |
Balance at November 30, 2022 | | 240 | | | $ | 240 | | | 24,876 | | | $ | 24,876 | | | $ | 325,433 | | | $ | 512,815 | | | $ | (10,851) | | | $ | 852,513 | |
The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2022 |
| | Series A Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | | | | | | | | |
| | Shares | | Amount | | Shares | | Amount | |
Balance at August 31, 2022 | | 240 | | | $ | 240 | | | 24,862 | | | $ | 24,862 | | | $ | 323,386 | | | $ | 541,203 | | | $ | (30,070) | | | $ | 859,621 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 2,348 | | | — | | | — | | | 2,348 | |
| | | | | | | | | | | | | | | | |
Common stock issued under stock-based plans and related income tax expense | | — | | | — | | | 14 | | | 14 | | | (301) | | | — | | | — | | | (287) | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
Accrued dividends on preferred stock | | — | | | — | | | — | | | — | | | — | | | (3,600) | | | — | | | (3,600) | |
Cash dividends paid | | — | | | — | | | — | | | — | | | — | | | (4,246) | | | — | | | (4,246) | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | (20,542) | | | — | | | (20,542) | |
Foreign currency translation | | — | | | — | | | — | | | — | | | — | | | — | | | (5,019) | | | (5,019) | |
Reclassification of foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | — | | | 27,750 | | | 27,750 | |
Interest rate swap | | — | | | — | | | — | | | — | | | — | | | — | | | (3,512) | | | (3,512) | |
Balance at November 30, 2022 | | 240 | | | $ | 240 | | | 24,876 | | | $ | 24,876 | | | $ | 325,433 | | | $ | 512,815 | | | $ | (10,851) | | | $ | 852,513 | |
| | | | | | | | | | | | | | | | |
| | | | | | |
| | | | | | | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2022 |
| | Series A Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | | | | | | | | |
| | Shares | | Amount | | Shares | | Amount | |
Balance at February 28, 2022 | | — | | | $ | — | | | 24,688 | | | $ | 24,688 | | | $ | 85,847 | | | $ | 584,154 | | | $ | (27,324) | | | $ | 667,365 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 7,118 | | | — | | | — | | | 7,118 | |
Issuance of Series A convertible preferred stock in exchange for convertible debt | | 240 | | | 240 | | | — | | | — | | | 233,482 | | | — | | | — | | | 233,722 | |
Common stock issued under stock-based plans and related income tax expense | | — | | | — | | | 136 | | | 136 | | | (2,728) | | | — | | | — | | | (2,592) | |
Common stock issued under employee stock purchase plan | | — | | | — | | | 52 | | | 52 | | | 1,714 | | | — | | | — | | | 1,766 | |
| | | | | | | | | | | | | | | | |
Accrued dividends on preferred stock | | — | | | — | | | — | | | — | | | — | | | (4,640) | | | — | | | (4,640) | |
Cash dividends paid | | — | | | — | | | — | | | — | | | — | | | (12,664) | | | — | | | (12,664) | |
Net income (loss) | | — | | | — | | | — | | | — | | | — | | | (54,035) | | | — | | | (54,035) | |
Foreign currency translation | | — | | | — | | | — | | | — | | | — | | | — | | | (7,765) | | | (7,765) | |
Reclassification of foreign currency translation adjustment | | — | | | — | | | — | | | — | | | — | | | — | | | 27,750 | | | 27,750 | |
Interest rate swap | | — | | | — | | | — | | | — | | | — | | | — | | | (3,512) | | | (3,512) | |
Balance at November 30, 2022 | | 240 | | | $ | 240 | | | 24,876 | | | $ | 24,876 | | | $ | 325,433 | | | $ | 512,815 | | | $ | (10,851) | | | $ | 852,513 | |
AZZ INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(In thousands)
(Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2021 |
| | Series A Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | | | | | | | | |
| | Shares | | Amount | | Shares | | Amount | |
Balance at August 31, 2021 | | — | | | $ | — | | | 24,840 | | | $ | 24,840 | | | $ | 79,908 | | | $ | 559,207 | | | $ | (25,529) | | | $ | 638,426 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 1,860 | | | — | | | — | | | 1,860 | |
| | | | | | | | | | | | | | | | |
Common stock issued under stock-based plans and related income tax expense | | — | | | — | | | 1 | | | 1 | | | (21) | | | — | | | — | | | (20) | |
| | | | | | | | | | | | | | | | |
Repurchase and retirement of treasury shares | | — | | | — | | | (148) | | | (148) | | | — | | | (7,488) | | | — | | | (7,636) | |
| | | | | | | | | | | | | | | | |
Cash dividends paid | | — | | | — | | | — | | | — | | | — | | | (4,163) | | | — | | | (4,163) | |
Net income | | — | | | — | | | — | | | — | | | — | | | 21,085 | | | — | | | 21,085 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | — | | | — | | | (1,508) | | | (1,508) | |
| | | | | | | | | | | | | | | | |
Balance at November 30, 2021 | | — | | | $ | — | | | 24,693 | | | $ | 24,693 | | | $ | 81,747 | | | $ | 568,641 | | | $ | (27,037) | | | $ | 648,044 | |
| | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | |
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2021 |
| | Series A Preferred Stock | | Common Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | | | | | | | | |
| | Shares | | Amount | | Shares | | Amount | |
Balance at February 28, 2021 | | — | | | $ | — | | | 25,108 | | | $ | 25,108 | | | $ | 75,979 | | | $ | 547,289 | | | $ | (25,084) | | | $ | 623,292 | |
Share-based compensation | | — | | | — | | | — | | | — | | | 6,542 | | | — | | | — | | | 6,542 | |
| | | | | | | | | | | | | | | | |
Common stock issued under stock-based plans and related income tax expense | | — | | | — | | | 108 | | | 108 | | | (2,277) | | | — | | | — | | | (2,169) | |
Common stock issued under employee stock purchase plan | | — | | | — | | | 41 | | | 41 | | | 1,503 | | | — | | | — | | | 1,544 | |
Repurchase and retirement of treasury shares | | — | | | — | | | (564) | | | (564) | | | — | | | (28,305) | | | — | | | (28,869) | |
| | | | | | | | | | | | | | | | |
Cash dividends paid | | — | | | — | | | — | | | — | | | — | | | (12,673) | | | — | | | (12,673) | |
Net income | | — | | | — | | | — | | | — | | | — | | | 62,400 | | | — | | | 62,400 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | — | | | (70) | | | (1,953) | | | (2,023) | |
| | | | | | | | | | | | | | | | |
Balance at November 30, 2021 | | — | | | $ | — | | | 24,693 | | | $ | 24,693 | | | $ | 81,747 | | | $ | 568,641 | | | $ | (27,037) | | | $ | 648,044 | |
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”("AZZ", the “Company”"Company", "our" or “we”"we") was established in 1956 and incorporated under the laws of the state of Texas. The Company is the leading independentWe are a provider of hot-dip galvanizing and coil coating solutions to a broad arrayrange of markets and customers, predominantlyend-markets in North America.
On May 13, 2022, the Company completed the acquisition of the Precoat Metals business division (“Precoat Metals”) of Sequa Corporation (“Sequa”), a portfolio company owned by Carlyle, a global private equity firm. See Notes 2 and 14 for further discussion about Precoat. As a result of the Precoat Acquisition, the Company changed its reportable segments, and added AZZ Precoat Metals as a new reportable segment. See Note 6 for more information about the Company's operating segments.
The Company has We have three distinct operating segments: the AZZ Metal Coatings segment, the AZZ Precoat Metals segment, and the AZZ Infrastructure Solutions segment. The Company's AZZ Metal Coatings providessegment is a leading provider of metal finishing solutions for corrosion protection, including hot-dip galvanizing, spin galvanizing, powder coating, anodizing and plating and other metal coating applications to the North American steel fabrication and other industries through 41 galvanizing plants and six surface technologies plants located in the United States and Canada.industries. The AZZ Precoat Metals segment provides advanced applications ofaesthetic and corrosion protective and decorative coatings and related value-added services for steel and aluminum coil, primarily serving the construction; appliance; heating, ventilation, and air conditioning (HVAC); container; transportation and other end markets. AZZ Precoat Metals operates through 13 plants locatedmarkets in the United States.North America. The AZZ Infrastructure Solutions segment consists of the Company's 40% interest in AIS Investment Holdings LLC (the "AVAIL JV"). AIS Investment Holdings LLC 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. As discussed in Note 3, onAIS Investment Holdings LLC was wholly-owned by the Company until September 30, 2022, the Company consummated a transaction whereby the Companywhen AZZ contributed itsits' AZZ Infrastructure Solutions business,segment, excluding AZZ Crowley Tubing and excluding certain receivables retained by AZZ ("AIS"), to a joint venturethe AVAIL JV and sold a 60% interest in the joint ventureAVAIL JV to Fernweh AIS Acquisition LP. TheGroup LLC ("Fernweh"). For the three and nine months ended November 30, 2022, financial data for the AZZ Infrastructure Solutions segment is segregated and reported as discontinued operations, and financial data for the segment has been segregated and presented as discontinued operations for all periods presented. See Note 3 and Note 7 for additional information about the Company's discontinued operations and consummation of the joint venture.operations.
Presentation
The accompanying condensed consolidated balance sheet as of February 28, 20222023 was derived from audited financial statements. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended February 28, 2022,2023, 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. See Note 3 for more information about results of operations reported in discontinued operations in the consolidated balance sheets, statementsstatement of operations and statementsstatement of cash flows as of and for the three and nine months ended November 30, 2022 and as of February 28, 2022.
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, 202329, 2024 is referred to as fiscal 2023.2024.
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, 2022,2023, the results of its operations for the three and nine months ended November 30, 20222023 and 2021,2022, and cash flows for the nine months ended November 30, 20222023 and 2021.2022. The interim results reported herein are not necessarily indicative of results for a full year.
Coronavirus (COVID-19)Significant Accounting Policies
Other receivables
Other receivables includes income taxes receivable, receivables for supplier rebates, and Current State of the Business Environmentother miscellaneous receivables.
While we continue to support our customers, there remains continuing uncertainties regarding to what extent, if any, that the COVID-19 pandemic, or newly identified variants of COVID-19, or additional regulatory requirements, will ultimately have on the demand for our products and services or with our supply chain or our employees. We expect continued uncertainty in our business and the global economy due to the duration and intensity of the COVID-19 pandemic, pressure from inflation, supply chain disruptions, and volatility in employment trends and consumer confidence in the economy which may potentially impact our future results.
The impact of COVID-19 to the Company's personnel and operations has been limited during the third quarter of fiscal 2023. However, labor market shortages and supply chain challenges have continued throughout the quarter. The constrained labor market and supply chain disruptions continue to impact the availability and cost of skilled labor and has increased cost for production materials. Disruptions to certain parts of our supply chain have, in certain cases, limited our ability to fulfill demand in the future. The extent of COVID-19's impact on our business will depend on future developments, including the continued new variants and surges in the spread of COVID-19, the Company's continued ability to source and distribute its products, the impact of COVID-19 on capital and financial markets, and the related impact on consumer confidence and spending, all of which are uncertain and difficult to predict, considering the continuously evolving landscape. Accordingly, our financial condition, results of operations or cash flows could be impacted in ways that we are not able to predict today.
Recently Adopted Accounting Pronouncements Not Yet Adopted
In October 2021,November 2023, the Financial Accounting Standards Board ("FASB")FASB issued Accounting Standards Update No. ("ASU") 2021-08,ASU 2023-07, Business combinationsSegment Reporting (Topic 805)280): Accounting for Contract Assets and Contract liabilities from Contracts with CustomersImprovements to Reportable Segment Disclosures ("ASU 2021-08"2023-07"), which expands disclosures about a public entity’s reportable segments and requires contract assetsmore enhanced information about a reportable segment’s expenses, interim segment profit or loss, and contract liabilities acquiredhow a public entity’s chief operating decision maker uses reported segment profit or loss information in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606") at the acquisition date as if the acquirer had originated the contracts rather than adjust them to fair value. The standardassessing segment performance and allocating resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2022, including2023 and interim periods within those fiscal years. The Company adopted ASU 2021-08 duringyears beginning after December 15, 2024. We are currently assessing the first quarterimpact of fiscal 2023. The adoptionthis update on our consolidated financial statement disclosures.
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
In March 2020 and as clarified in January 2021,December 2023, the FASB issued ASU 2020-04,2023-09, Reference Rate ReformIncome Taxes (Topic 848)740): Facilitation of the Effects of Reference Rate Reform on Financial Reporting Improvements to Income Tax Disclosures(“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. 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 continues to evaluate its contracts and transactions for the potential application of ASU 2020-04, but there has been no material impact to its financial condition, results of operations, or cash flows as of November 30, 2022.
Investment in Unconsolidated Joint Venture
The Company accounts for its investmentexpands disclosures in an unconsolidated joint venture under the equity method of accounting as we exercise significant influence over, but do not control, the joint venture. The investmententity’s income tax rate reconciliation table and regarding cash taxes paid both in the unconsolidated joint venture is initially recorded at fair value,U.S. and subsequently increasedforeign jurisdictions. The update will be effective for capital contributions and allocationsannual periods beginning after December 15, 2024. We are currently assessing the impact of net income, and decreased for capital distributions and allocations of net income or loss. Equity in net income or loss from the unconsolidated joint venture is allocated basedthis update on our economic interest. We record our interest in the joint venture on a one-month lag to allow sufficient time to review and assess the joint venture’s effect on our reported results. We assess our investment in unconsolidated joint venture for recoverability when events and circumstances are present that suggest there has been a decline in value, and if it is determined that a loss in value of the investment is other than temporary, we write down the investment to its fair value. We do not believe that the value of our equity investment was impaired as of November 30, 2022.consolidated financial statement disclosures.
2. Acquisitions
Precoat Acquisition
On May 13, 2022, the Company acquired Precoat Metals for a purchase price of approximately $1.3 billion (the "Precoat Acquisition"). Based in St. Louis, Missouri,AZZ Precoat Metals is the leading independent provider of metal coil coating solutions in North America. Precoat engages in the advanced application of protective and decorative coatings and related value-added services for steel and aluminum coil primarily serving the construction; appliance; heating, ventilation and air conditioning (HVAC); container; transportation and other end markets. The acquisition representsrepresented a continued transition of the Company to a focused provider of coating and galvanizing services for critical applications.
The Precoat Acquisition was funded primarily with proceeds from a Term Loan B and Preferred Equity. See Note 9 for a description of the Term Loan B. The Company incurred acquisition costscompleted the final purchase accounting valuation during the first quarter of $13.2 million for the nine months ended November 30, 2022, which are included in "Selling, general and administrative" expense in the accompanying condensed consolidated statements of operations. AZZ Precoat Metals contributed revenue of $499.6 million and operating income of $63.9 million to the Company's condensed consolidated statements of operations from May 13, 2022, through November 30, 2022.
The Company accounted for the Precoat Acquisition as a business combination under the acquisition method of accounting. Goodwill from the acquisition of $532.4$527.8 million represents the excess purchase price over the estimated value of net tangible and intangible assets and liabilities assumed, and is expected to be deductible for income tax purposes. The Company's chief operating decision maker assesses performance and allocates resources to Precoat separately from the AZZ Metal Coatings and AZZ Infrastructure Solutions segments;segment; therefore, Precoat is accounted for as a separate segment, the AZZ Precoat Metals segment. See Note 68 for more information about the Company's operating segments. Goodwill from the acquisition was allocated to the AZZ Precoat Metals segment. Assets acquired and liabilities assumed in the Precoat Acquisition were recorded at their estimated fair values as of the acquisition date. See Note 15 for additional information regarding certain environmental liabilities assumed as part of the Precoat Acquisition.
The Company has not finalized these estimates as of the date of this report; therefore, the fair value estimates set forth below are subject to adjustment during the measurement period following the acquisition date. The final allocation of purchase consideration could include changes in the estimated fair value of working capital (including accounts receivable, inventories, contract assets, prepaid assets, account payable and accrued liabilities), right-of-use assets and lease liabilities, property, plant and equipment, intangible assets and other long-term liabilities. Adjustments in the purchase price allocation may require a change in the amount allocated to goodwill during the period in which the adjustments are determined.
When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. The Company has engaged third-party valuation experts to assist in determination of fair value of property and equipment, intangible assets, pension benefit obligation and certain other assets and liabilities. Preliminary estimates from third-party experts along with the analysis and expertise of management have formed the basis for the preliminary allocation. Detailed analysis and review of the condition, existence and utility of assets acquired, and assumptions inherent in the estimation of fair value of intangible assets and pension obligation is currently ongoing. Management believes that the current information provides a reasonable basis for estimatingthe fair values of assets acquired and liabilities assumed. These estimates, judgmentsDuring the first quarter of fiscal 2024, the Company made purchase price allocation adjustments that impacted goodwill, contract assets and assumptions are subject to change and should be treated as preliminary values as there could be significant changes upon final valuation. The Company expects to complete the final valuations within one year of the acquisition date.accrued expenses.
The following table represents the preliminary summary of the assets acquired and liabilities assumed, in aggregate, related to the Precoat Acquisition, as of the date of the acquisition (in thousands):
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | |
| | May 13, 2022 |
Assets | | |
| | |
Accounts receivable, net | | $ | 77,422 | |
| | |
Inventories | | 43,369 | |
Contract assets | | 70,73168,314 | |
Prepaid expenses and other | | 2,2452,247 | |
Property, plant and equipment | | 306,953305,503 | |
Right-of-use assetassets | | 10,95413,753 | |
Goodwill | | 532,391527,793 | |
Intangibles and otherDeferred tax asset | | 8,660 | |
Intangible assets, net | | 446,000 | |
Other assets | | 446,746546 | |
Total fair value of assets acquired | | $ | 1,490,8131,493,607 | |
Liabilities | | |
Accounts payable | | $ | (99,223) | |
Accrued expenses | | (32,062)(31,761) | |
Other accrued liabilities | | (3,741) | |
Customer deposits | | (1,574)(5,330) | |
Lease liability, short-term | | (1,706)(2,440) | |
Lease liability, long-term | | (9,248)(11,313) | |
Deferred tax liabilities | | (3,100) | |
Other long-term liabilities | | (56,711)(60,091) | |
Total fair value of liabilities assumed | | (207,365)$ | (210,158) | |
Total Purchase Price,purchase price, net of cash acquired | | $ | 1,283,4481,283,449 | |
DuringIntangible assets include customer relationships, tradenames and technology. Other long-term liabilities include the nine months ended November 30, 2022, the Company made adjustments to the assets acquired for Inventories, Property, plantpension obligation and equipment, Goodwill and Intangibles and other assets. As a result of these changes, for the three
months ended November 30, 2022, the Company recorded a net decrease to depreciation and amortization expense of approximately $0.3 million related to prior quarters of fiscal 2023.
DAAM Acquisition
On February 28, 2022, the Company entered into an agreement to acquire all the outstanding shares of DAAM Galvanizing Co. Ltd. ("DAAM"), a privately held hot-dip galvanizing company based in Edmonton, Alberta Canada, for approximately $35.5 million. DAAM currently operates two galvanizing facilities in Canada; one located in Edmonton, Alberta and a second in Saskatoon, Saskatchewan,certain environmental liabilities assumed as well as a service depot in Calgary, Alberta. The addition of DAAM expanded the Company's geographical coverage in the Northwest and enhanced the scope of metal coatings solutions offered in Canada. The business is included in the Company's AZZ Metal Coatings segment. The goodwill arising from this acquisition was allocated to the AZZ Metal Coatings segment, and the Company estimates that approximately 50%part of the goodwill amount is expected to be deductiblePrecoat Acquisition. See Notes 16 and 17 for income tax purposes.
The Company has engaged third-party valuation experts to assist with the purchase price allocation, the recorded valuation of property, plant and equipment, intangible assets and certain other assets andmore information about these long-term liabilities. Estimates from third-party experts along with the analysis and expertise of management have formed the basis for the allocation. During the three months ended November 30, 2022, the purchase price allocation was finalized.
The following table represents the summary of the assets acquired and liabilities assumed, in aggregate, related to the DAAM acquisition, as of the date of the acquisition (in thousands):
| | | | | | | | |
| | February 28, 2022 |
Assets | | |
Accounts receivable | | $ | 3,253 | |
Inventories | | 2,451 | |
| | |
Property, plant and equipment | | 11,462 | |
Goodwill | | 13,691 | |
Intangibles and other assets | | 9,975 | |
Liabilities | | |
Accounts payable and other accrued liabilities | | (3,910) | |
Deferred tax liabilities | | (1,422) | |
Total purchase price | | $ | 35,500 | |
Unaudited Pro Forma Information
The following unaudited pro forma financial information for the three and nine months ended November 30, 2022 and 2021 combines the historical results of the Company and the acquisitionsacquisition of Precoat Metals, and DAAM, assuming that the companies were combined as of March 1, 2021 and include2022. The pro forma financial information includes business combination accounting effects from the Precoat Acquisition, including amortization chargesexpense from acquired intangible assets, depreciation expense onfrom acquired property, plant and equipment, interest expense on thefrom financing transactions usedwhich occurred to fund the Precoat Acquisition, acquisition-related transaction costs and tax-related effects. The pro forma information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitionsacquisition of Precoat Metals and DAAM had taken place on March 1, 20212022 or of future operating performance.
| | | Three Months Ended November 30, | | Nine Months Ended November 30, | | | | Three Months Ended November 30, | | | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 | | | | 2022 | | | | 2022 |
Revenue | Revenue | | $ | 373,301 | | | $ | 329,885 | | | $ | 1,180,165 | | | $ | 972,267 | | Revenue | | | | $ | 373,301 | | | | | $ | 1,180,165 | |
Net income from continuing operations(1) | Net income from continuing operations(1) | | $ | 18,439 | | | $ | 26,088 | | | $ | 49,487 | | | $ | 91,956 | | Net income from continuing operations(1) | | | | $ | 18,439 | | | | | $ | 43,442 | |
| (1) Net income for the nine months ended November 30, 2022 includes acquisition costs of approximately $45.0 million, of which $11.5 million was incurred by AZZ and $33.5 million was incurred by Precoat Metals prior to the acquisition. | | (1) Net income for the nine months ended November 30, 2022 includes acquisition costs of approximately $45.0 million, of which $11.5 million was incurred by AZZ and $33.5 million was incurred by Precoat Metals prior to the acquisition. |
3. Discontinued Operations
In fiscal 2023, the Company continued to execute its plan to divest of non-core businesses. On June 23,September 30, 2022, the Company and Fernweh Group LLC ("Fernweh"), jointly entered into a definitive agreement whereby AZZ contributed its AZZ Infrastructure Solutions ("AIS") segment, (“AIS”)excluding AZZ Crowley Tubing, to a joint venture, AIS Investment Holdings LLC (the “AIS JV”"AVAIL JV"), and sold a 60% interest in the AISAVAIL JV to Fernweh at an implied enterprise valueGroup LLC ("Fernweh"). On September 30, 2022, the AVAIL JV was deconsolidated. Beginning October 1, 2022,
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Management previously committedthe Company began accounting for its 40% interest in the AVAIL JV under the equity method of accounting. The AVAIL JV is included in the AZZ Infrastructure Solutions segment.
The divestiture of the AZZ Infrastructure Solutions segment represents an intentional strategic shift in our operations and will allow the Company to become a plan to divest substantially allfocused provider of coating and galvanizing solutions for critical applications. As a result, the results of the AIS segment were classified as discontinued operations in our condensed statements of operations and classifiedexcluded from both continuing operations and segment results for the AIS business as held for sale in the accompanying interim consolidated balance sheets as of August 31,three and nine months ended November 30, 2022.
As part of recognizing the business as held for sale in accordance with GAAP, the Company was required to measure AIS at the lower of its carrying amount or fair value less cost to sell. As a result of this analysis, during the second quarter of fiscal 2023, the Company recognized an estimateda non-cash, pre-tax loss on disposal of $159.9 million, of which $45.0 million was recognized during the three months ended November 30, 2022, and $114.9 million.million was recognized during the second quarter of fiscal 2023. The loss is included in "Loss on disposal of discontinued operations" in the consolidated statements of operations. The loss was determined by comparing the fair value of the consideration received for the sale of a 60% interest in the AIS JV and the fair value of the Company’s retained 40% investment in the AIS JV with the net assets of the AIS JV immediately prior to the transaction. The fair value of the Company’s retained investment in the AIS JV was determined in a manner consistent with the transaction price received for the sale of the 60% interest in the AIS JV.
The results of operations from discontinued operations for the three and nine months ended November 30, 2022, have been reflected as discontinued operations in the consolidated statements of operations and consist of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | Three Months Ended | | | | Nine Months Ended |
| | | November 30, 2022 | | | | November 30, 2022 |
Sales | | | $ | 42,300 | | | | | $ | 256,224 | |
Cost of sales | | | 35,020 | | | | | 202,707 | |
Gross margin | | | 7,280 | | | | | 53,517 | |
| | | | | | | |
Selling, general and administrative | | | 4,074 | | | | | 26,186 | |
| | | | | | | |
Loss on disposal of discontinued operations | | | 45,010 | | | | | 159,910 | |
Operating loss from discontinued operations | | | (41,804) | | | | | (132,579) | |
| | | | | | | |
Interest expense | | | 2 | | | | | 8 | |
Other (income) expense, net | | | 2,002 | | | | | 6,270 | |
Loss from discontinued operations before income tax | | | (43,808) | | | | | (138,857) | |
Income tax benefit | | | (4,827) | | | | | (25,910) | |
Net loss from discontinued operations | | | $ | (38,981) | | | | | $ | (112,947) | |
Loss per common share from discontinued operations: | | | | | | | |
Basic loss per share | | | $ | (1.57) | | | | | $ | (4.55) | |
Diluted loss per share | | | $ | (1.56) | | | | | $ | (4.52) | |
The depreciation, amortization, capital expenditures, and significant operating and investing non-cash items of the discontinued operations consist of the following (in thousands):
| | | | | |
| Nine Months Ended November 30, 2022 |
Depreciation and amortization | $ | 7,279 | |
Purchase of property, plant and equipment | 4,831 | |
Non-cash loss on disposal of discontinued operations | (159,910) | |
Gain on sale of property, plant and equipment | 486 | |
| |
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
4. Inventories
The following table summarizes the components of inventory (in thousands):
| | | | | | | | | | | | | | |
| | As of |
| | November 30, 2023 | | February 28, 2023 |
Raw material | | $ | 120,761 | | | $ | 138,227 | |
Work in process | | 1,587 | | | 1,558 | |
Finished goods | | 4,389 | | | 4,135 | |
Total inventories | | $ | 126,737 | | | $ | 143,920 | |
| | | | |
5. Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the year.
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):During | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Numerator: | | | | | | | | |
Net income from continuing operations | | $ | 26,890 | | | $ | 18,439 | | | $ | 83,744 | | | $ | 58,912 | |
Dividends on preferred stock | | (3,600) | | | (3,600) | | | (10,800) | | | (4,640) | |
Numerator for basic earnings per share continuing operations | | $ | 23,290 | | | $ | 14,839 | | | $ | 72,944 | | | $ | 54,272 | |
| | | | | | | | |
Dividends on preferred stock | | 3,600 | | | — | | | 10,800 | | | — | |
Numerator for diluted earnings per share continuing operations | | $ | 26,890 | | | $ | 14,839 | | | $ | 83,744 | | | $ | 54,272 | |
| | | | | | | | |
Net loss from discontinued operations | | $ | — | | | $ | (38,981) | | | $ | — | | | $ | (112,947) | |
| | | | | | | | |
Net income (loss) available to common shareholders | | $ | 23,290 | | | $ | (24,142) | | | $ | 72,944 | | | $ | (58,675) | |
| | | | | | | | |
Dividends on preferred stock | | 3,600 | | | — | | | 10,800 | | | — | |
Numerator for diluted earnings per share—net income (loss) available to common shareholders | | $ | 26,890 | | | $ | (24,142) | | | $ | 83,744 | | | $ | (58,675) | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average shares outstanding for basic earnings per share | | 25,077 | | | 24,867 | | | 25,024 | | | 24,804 | |
Effect of dilutive securities: | | | | | | | | |
Employee and director stock awards | | 136 | | | 128 | | | 137 | | | 180 | |
| | | | | | | | |
Series A Convertible Preferred Stock | | 4,117 | | | — | | | 4,117 | | | — | |
Denominator for diluted earnings per share | | 29,330 | | | 24,995 | | | 29,278 | | | 24,984 | |
| | | | | | | | |
Basic earnings (loss) per share | | | | | | | | |
Earnings per common share from continuing operations | | $ | 0.93 | | | $ | 0.60 | | | $ | 2.91 | | | $ | 2.19 | |
Loss per common share from discontinued operations | | $ | — | | | $ | (1.57) | | | $ | — | | | $ | (4.55) | |
Earnings (loss) per common share | | $ | 0.93 | | | $ | (0.97) | | | $ | 2.91 | | | $ | (2.37) | |
Diluted earnings (loss) per share | | | | | | | | |
Earnings per common share from continuing operations | | $ | 0.92 | | | $ | 0.59 | | | $ | 2.86 | | | $ | 2.17 | |
Loss per common share from discontinued operations | | $ | — | | | $ | (1.56) | | | $ | — | | | $ | (4.52) | |
Earnings (loss) per common share | | $ | 0.92 | | | $ | (0.97) | | | $ | 2.86 | | | $ | (2.35) | |
For the three months ended November 30, 2023 and 2022, approximately 120,819 and 103,403 shares related to employee equity awards, respectively, were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive. For the nine months ended November 30, 2023 and 2022, 126,356 and 78,862 shares, respectively, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive. In addition, all shares related to the Series A Convertible Preferred Stock (4.1 million weighted average shares) were excluded from the computation of diluted earnings per share for the three and nine months ended November 30, 2022, as their effect would have been anti-dilutive. These shares could be dilutive in future periods.
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
6. Sales
Disaggregated Sales
The following table presents disaggregated sales, for continuing operations, by customer industry (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2023 | | 2022 | | 2023 | | 2022 |
Sales: | | | | | | | | |
Construction | | $ | 214,081 | | | $ | 205,316 | | | $ | 637,035 | | | $ | 493,573 | |
Industrial | | 35,489 | | | 37,330 | | | 118,273 | | | 118,457 | |
Consumer | | 29,384 | | | 29,864 | | | 99,537 | | | 78,972 | |
Transportation | | 35,871 | | | 33,597 | | | 107,734 | | | 98,715 | |
Electrical/Utility | | 24,804 | | | 26,131 | | | 76,116 | | | 69,100 | |
Other (1) | | 41,976 | | | 41,063 | | | 132,325 | | | 128,328 | |
Total Sales | | $ | 381,605 | | | $ | 373,301 | | | $ | 1,171,020 | | | $ | 987,145 | |
| | | | | | | | |
(1) Other includes less significant markets, such as agriculture, recreation, petro-chem, AZZ Tubular products and sales from recycling. |
See also Note 8 for sales information by operating segment.
Contract Assets and Liabilities
The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets (unbilled receivables), and contract liabilities (customer advances and deposits) on the consolidated balance sheets. Our contract assets and contract liabilities are primarily related to the AZZ Precoat Metals segment. Customer billing can occur subsequent to revenue recognition, resulting in contract assets. In addition, the Company completedcan receive advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the saleconsolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
As of November 30, 2023 and February 28, 2023, the AIS segment,balance for contract assets was $75.7 million and recorded an additional pre-tax loss$79.3 million, respectively, primarily related to the AZZ Precoat Metals segment. Contract liabilities of $45.0$1.0 million which isand $1.3 million as of November 30, 2023 and February 28, 2023, respectively, are included in "Loss on disposal of discontinued operations""Other accrued liabilities" in the consolidated statements of operations. The additional loss includes $27.8 million from the derecognition of the cumulative translation adjustment related to its investment in foreign entities within the AIS segment, as well as an adjustment of $17.2 million for the change in net assets for the period between August 31, 2022, when the estimated loss was recorded, and September 30, 2022, when the transaction closed.balance sheets.
On September 30, 2022, the AIS JV transaction closed; as a result, the joint venture was deconsolidated and the Company retained a 40% interest in the joint venture, which is now accounted for under the equity method of accounting. The proceeds from the sale consisted of approximately $108.0 million, as well as $120.0 million that was funded by committed debt financing taken on by the AIS JV immediately prior to the closing of the sale. The debt financing of the AIS JV did not impact the Company's existing credit facility. The Company used the cash received from the AIS JV to repay a portion of the Term Loan B, the Revolving Credit Facility and for general corporate purposes. See Note 9.
The divestiture of the AZZ Infrastructure Solutions segment represents an intentional strategic shift in our operations and will allow the Company to become a focused provider of coating and galvanizing solutions for critical applications. As a result, the results of the AIS segment were classified as discontinued operations in our condensed statements of operations and excluded from both continuing operations and segment results for all periods presented.
We have separately reported the assets and liabilities of the discontinued operations in the consolidated balance sheets. The assets and liabilities have been reflected as discontinued operations in the consolidated balance sheets as of November 30, 2022 and February 28, 2022, and consist of the following (in thousands):
| | | | | | | | | | | |
| November 30, 2022 | | February 28, 2022 |
Current assets of discontinued operations: | | | |
Cash and cash equivalents | $ | — | | | $ | 3,000 | |
Accounts receivable | — | | | 81,911 | |
Inventories | | | |
Raw materials | — | | | 36,581 | |
Work-in-process | — | | | 6,445 | |
Finished goods | — | | | 77 | |
Contract assets | — | | | 71,762 | |
| | | |
Prepaid expenses and other | — | | | 1,888 | |
| | | |
Total current assets of discontinued operations | — | | | 201,664 | |
Long-term assets of discontinued operations: | | | |
Property, plant and equipment | — | | | 37,490 | |
Right-of-use asset | — | | | 29,332 | |
Goodwill | — | | | 195,222 | |
Intangibles and other assets, net | — | | | 42,442 | |
Deferred tax asset | — | | | 1,726 | |
| | | |
Total non-current assets of discontinued operations | — | | | 306,212 | |
Total assets of discontinued operations | $ | — | | | $ | 507,876 | |
Current liabilities of discontinued operations: | | | |
Accounts payable | $ | — | | | $ | 19,146 | |
Income tax payable | — | | | (264) | |
Accrued salaries and wages | — | | | 11,301 | |
Other accrued liabilities | — | | | 11,219 | |
Customer deposits | — | | | 387 | |
Contract liabilities | — | | | 42,465 | |
Lease liability, short-term | — | | | 4,029 | |
| | | |
Total current liabilities of discontinued operations | — | | | 88,283 | |
Long-term liabilities of discontinued operations: | | | |
| | | |
Lease liability, long-term | — | | | 24,207 | |
| | | |
| | | |
Total long-term liabilities of discontinued operations | — | | | 24,207 | |
Total liabilities of discontinued operations | $ | — | | | $ | 112,490 | |
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Supplemental Cash Flow Information
The results of operations from discontinued operations for the three and nine months ended November 30, 2022 and 2021, have been reflected as discontinued operations in the consolidated statements of operations and consist of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Nine Months Ended November 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Sales | $ | 42,300 | | | $ | 96,654 | | | $ | 256,224 | | | $ | 282,278 | |
Cost of sales | 35,020 | | | 77,263 | | | 202,707 | | | 222,432 | |
Gross margin | 7,280 | | | 19,391 | | | 53,517 | | | 59,846 | |
| | | | | | | |
Selling, general and administrative | 4,074 | | | 10,589 | | | 26,186 | | | 35,192 | |
Loss on disposal of discontinued operations | 45,010 | | | — | | | 159,910 | | | — | |
Operating income (loss) from discontinued operations | (41,804) | | | 8,802 | | | (132,579) | | | 24,654 | |
| | | | | | | |
Interest expense | 2 | | | 2 | | 8 | | 63 |
| | | | | | | |
Other (income) expense, net | 2,002 | | | 1,504 | | | 6,270 | | | 1,468 | |
Income (loss) from discontinued operations before income tax | (43,808) | | | 7,296 | | | (138,857) | | | 23,123 | |
Income tax (benefit) expense | (4,827) | | | (682) | | | (25,910) | | | (289) | |
Net income (loss) from discontinued operations | $ | (38,981) | | | $ | 7,978 | | | $ | (112,947) | | | $ | 23,412 | |
Earnings per common share from discontinued operations: | | | | | | | |
Basic earnings (loss) per share | $ | (1.57) | | | $ | 0.32 | | | $ | (4.55) | | | $ | 0.94 | |
Diluted earnings (loss) per share | $ | (1.56) | | | $ | 0.32 | | | $ | (4.52) | | | $ | 0.93 | |
We have included theIn order to determine net cash provided by discontinued operationsoperating activities, net income is adjusted by, among other things, changes in the consolidated statements of cash flows. The depreciation, amortization, capital expenditures,current assets and significant operating and investing non-cash items of the discontinued operation for the nine months ended November 30, 2022 and 2021, consists of the followingcurrent liabilities as follows (in thousands):
| | | | | | | | | | | |
| Nine Months Ended November 30, |
| 2022 | | 2021 |
Amortization and depreciation | $ | 7,279 | | | $ | 5,189 | |
Purchase of property, plant and equipment | $ | 4,831 | | | $ | 3,373 | |
Non-cash loss on disposal of discontinued operations | $ | 159,910 | | | $ | — | |
4. 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 any potentially dilutive securities 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, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Numerator: | | | | | | | | |
Net income from continuing operations | | $ | 18,439 | | | $ | 13,107 | | | $ | 58,912 | | | $ | 38,988 | |
Dividends on preferred stock | | (3,600) | | | — | | | (4,640) | | | — | |
Net income from continuing operations available to common shareholders | | 14,839 | | | 13,107 | | | 54,272 | | | 38,988 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Net income (loss) from discontinued operations | | $ | (38,981) | | | $ | 7,978 | | | $ | (112,947) | | | $ | 23,412 | |
| | | | | | | | |
Net income (loss) available to common shareholders | | $ | (24,142) | | | $ | 21,085 | | | $ | (58,675) | | | $ | 62,400 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Denominator: | | | | | | | | |
Weighted average shares outstanding for basic earnings per share | | 24,867 | | | 24,729 | | | 24,804 | | | 24,910 | |
Effect of dilutive securities: | | | | | | | | |
Employee and director stock awards | | 128 | | | 216 | | | 180 | | | 222 | |
| | | | | | | | |
| | | | | | | | |
Denominator for diluted earnings per share | | 24,995 | | | 24,945 | | | 24,984 | | | 25,132 | |
| | | | | | | | |
Earnings per common share from continuing operations: | | | | | | | | |
Basic earnings per share | | $ | 0.60 | | | $ | 0.53 | | | $ | 2.19 | | | $ | 1.57 | |
Diluted earnings per share | | $ | 0.59 | | | $ | 0.53 | | | $ | 2.17 | | | $ | 1.55 | |
Earnings per common share from discontinued operations: | | | | | | | | |
Basic earnings per share | | $ | (1.57) | | | $ | 0.32 | | | $ | (4.55) | | | $ | 0.94 | |
Diluted earnings per share | | $ | (1.56) | | | $ | 0.32 | | | $ | (4.52) | | | $ | 0.93 | |
Earnings per common share: | | | | | | | | |
Basic earnings per share | | $ | (0.97) | | | $ | 0.85 | | | $ | (2.37) | | | $ | 2.51 | |
Diluted earnings per share | | $ | (0.97) | | | $ | 0.85 | | | $ | (2.35) | | | $ | 2.48 | |
For the three months ended November 30, 2022 and 2021, 103,403 and 150,171 shares related to stock-based compensation, respectively, were excluded from the calculation of diluted earnings per share because the effect would be anti-dilutive. For the nine months ended November 30, 2022 and 2021, 78,862 and 137,186 shares related to stock-based compensation, respectively, were excluded from the calculation of diluted earnings per share because the effect would be anti-dilutive. In addition, all shares related to the Series A Convertible Preferred Stock (4.1 million shares) were excluded for the three and nine months ended November 30, 2022 because the effect would be anti-dilutive. These shares could be dilutive in future periods. | | | | | | | | | | | |
| Nine Months Ended November 30, |
| 2023 | | 2022 |
Decrease (increase) in current assets: | | | |
Accounts receivable, net | $ | 13,922 | | | $ | (6,927) | |
Other receivables | (4,033) | | | (9,503) | |
Inventories | 17,191 | | | (14,646) | |
Contract assets | 1,136 | | | (3,950) | |
Prepaid expenses and other | (1,304) | | | (6,195) | |
Increase (decrease) in current liabilities: | | | |
Accounts payable | 8,654 | | | (15,122) | |
Income taxes payable | (227) | | | (3,784) | |
Accrued expenses | 3,480 | | | 25,158 | |
Changes in current assets and current liabilities | $ | 38,819 | | | $ | (34,969) | |
Cash flows related to interest and income taxes were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended November 30, |
| | 2023 | | 2022 |
Cash paid for interest | | $ | 74,993 | | | $ | 52,488 | |
Cash paid for income taxes | | 17,683 | | | 15,627 | |
Supplemental disclosures of non-cash investing and financing activities were as follows (in thousands):
| | | | | | | | | | | | | | |
| | Nine Months Ended November 30, |
| | 2023 | | 2022 |
Issuance of preferred stock in exchange for convertible notes | | $ | — | | | $ | 233,722 | |
Accrued dividends on preferred stock | | 2,400 | | | 4,640 | |
Accruals for capital expenditures | | 4,768 | | | 960 | |
5. Sales
Disaggregated Sales
The following table presents disaggregated sales, for continuing operations, by customer industry (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Sales: | | | | | | | | |
Construction | | $ | 205,316 | | | $ | 32,419 | | | $ | 493,573 | | | $ | 91,018 | |
Industrial | | 37,330 | | | 28,367 | | | 118,457 | | | 87,061 | |
Consumer | | 29,864 | | | — | | | 78,972 | | | — | |
Transportation | | 33,597 | | | 24,315 | | | 98,715 | | | 75,189 | |
Electrical/Utility | | 26,131 | | | 20,262 | | | 69,100 | | | 55,402 | |
Other (1) | | 41,063 | | | 29,720 | | | 128,328 | | | 87,062 | |
Total sales | | $ | 373,301 | | | $ | 135,083 | | | $ | 987,145 | | | $ | 395,732 | |
(1) Other includes less significant markets, such as agriculture, recreation, petro-chem, AZZ Tubular products and sales from recycling and other. |
See also Note 6 for sales information by operating segment.
Contract Assets and Liabilities
The timing of sales recognition, billings and cash collections results in accounts receivable, contract assets (unbilled receivables), and contract liabilities (customer advances and deposits) on the consolidated balance sheets, primarily related to the AZZ Precoat Metals segment. The Company periodically receives advances or deposits from customers, before sales are recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
Contract assets and contract liabilities were $78.6 million and $1.0 million, respectively, as of November 30, 2022. The Company did not record any sales for the three or nine months ended November 30, 2022 or 2021 related to performance obligations satisfied in prior periods.
6.8. Operating Segments
Segment Information
The Company has three distinctCompany’s Chief Executive Officer, who is the chief operating segments:decision maker ("CODM"), reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Sales and operating income are the primary measures used by the CODM to evaluate segment operating performance and to allocate resources to the AZZ Metal Coatings segment,and the AZZ Precoat Metals segmentsegments, and net income is the primary measure used by the CODM to evaluate performance and allocate resources to the AZZ Infrastructure Solutions segment. The AIS Joint Venture agreement discussedExpenses related to certain centralized administration or executive functions that are not specifically related to an operating segment are included in Corporate. As presented in Note 3, resulted in our AZZ Infrastructure Solutions segment being classifiedthe AVAIL JV operating results for the period prior to deconsolidation are included within discontinued operations, with the exception of AZZ Crowley Tubing, which was retained by the Company and merged into the AZZ Metal Coatings segment. See Note 3 for the results of operations related to the AZZ Infrastructure Solutions segment. For the three and nine months ended November 30, 2022,
A summary of each of the Company's investment in the AIS JVoperating segments is a reportable operating segment.as follows:
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
AZZ 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 manufacturing process in which molten zinc reacts to steel. The zinc alloying provides corrosion protection and extends the life-cyclelife cycle of fabricated steel for several decades. The Tubing business provides small-diameter offset pipe utilized primarily in the energy sector.
The AZZ Precoat Metals segment provides aesthetic— engages in the advanced application of protective and corrosion protectivedecorative coatings and related value-added servicesmanufacturing for steel and aluminum coil primarily serving the construction; appliance; heating, ventilation and air conditioning (HVAC); container; transportation and other end markets in the United States.markets.
The AZZ Infrastructure Solutions segment — consists of the Company's investment in and equity in earnings of the Company's 40% investment in the AVAIL JV, as well as other expenses directly related to AIS receivables and liabilities that were retained following the divestiture of the AIS business. The AVAIL JV which provides specialized products and services designed to support primarily industrial and electrical applications. The product offerings include custom switchgear, electrical enclosures, mediummedium- and high voltagehigh-voltage bus ducts, explosion proof and hazardous
duty lighting.lighting products. The AIS JVAZZ 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 operatingNet income from continuing operations by segment for each period werethe three and nine months ended November 30, 2023 and 2022 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, 2023 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions(1) | | Corporate(2)(3) | | Total |
Sales | $ | 163,186 | | | $ | 218,419 | | | $ | — | | | $ | — | | | $ | 381,605 | |
Cost of sales | 115,952 | | | 177,504 | | | — | | | — | | | 293,456 | |
Gross margin | 47,234 | | | 40,915 | | | — | | | — | | | 88,149 | |
| | | | | | | | | |
Selling, general and administrative | 9,392 | | | 8,163 | | | 290 | | | 17,480 | | | 35,325 | |
| | | | | | | | | |
Operating income (loss) from continuing operations | 37,842 | | | 32,752 | | | (290) | | | (17,480) | | | 52,824 | |
| | | | | | | | | |
Interest expense | — | | | — | | | — | | | 25,855 | | | 25,855 | |
Equity in earnings of unconsolidated subsidiaries | — | | | — | | | (8,742) | | | — | | | (8,742) | |
Other expense | 29 | | | — | | | — | | | 12 | | | 41 | |
Income (loss) from continuing operations before income tax | $ | 37,813 | | | $ | 32,752 | | | $ | 8,452 | | | (43,347) | | | 35,670 | |
Income tax expense | | | | | | | 8,780 | | | 8,780 | |
Net income (loss) from continuing operations | | | | | | | $ | (52,127) | | | $ | 26,890 | |
| | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Sales: | | | | | | | | |
| | | | | | | | |
AZZ Metal Coatings | | $ | 158,274 | | | $ | 135,083 | | | $ | 487,567 | | | $ | 395,732 | |
AZZ Precoat Metals | | 215,027 | | | — | | | 499,578 | | | — | |
| | | | | | | | |
Total sales | | $ | 373,301 | | | $ | 135,083 | | | $ | 987,145 | | | $ | 395,732 | |
| | | | | | | | |
Operating income: | | | | | | | | |
AZZ Metal Coatings | | $ | 33,546 | | | $ | 33,111 | | | $ | 123,812 | | | $ | 97,072 | |
AZZ Precoat Metals | | 21,053 | | | — | | | 63,914 | | | — | |
| | | | | | | | |
Corporate(1) | | (9,206) | | | (11,821) | | | (50,283) | | | (34,395) | |
Total operating income from continuing operations | | $ | 45,393 | | | $ | 21,290 | | | $ | 137,443 | | | $ | 62,677 | |
(1) Includes expenditures of $15.2 million for the nine months ended November 30, 2022, directly related to the Precoat Acquisition and the divestiture of the AZZ Infrastructure Solutions operating segment. There were no such expenditures for the three months ended November 30, 2022. |
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended November 30, 2023 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions(1) | | Corporate(2)(3) | | Total |
Sales | $ | 501,816 | | | $ | 669,204 | | | $ | — | | | $ | — | | | $ | 1,171,020 | |
Cost of sales | 353,280 | | | 535,326 | | | — | | | — | | | 888,606 | |
Gross margin | 148,536 | | | 133,878 | | | — | | | — | | | 282,414 | |
| | | | | | | | | |
Selling, general and administrative | 20,143 | | | 24,429 | | | 6,244 | | | 52,271 | | | 103,087 | |
| | | | | | | | | |
Operating income (loss) from continuing operations | 128,393 | | | 109,449 | | | (6,244) | | | (52,271) | | | 179,327 | |
| | | | | | | | | |
Interest expense | — | | | — | | | — | | | 82,331 | | | 82,331 | |
Equity in earnings of unconsolidated subsidiaries | — | | | — | | | (11,136) | | | — | | | (11,136) | |
Other (income) expense | 40 | | | — | | | — | | | (49) | | | (9) | |
Income (loss) from continuing operations before income tax | $ | 128,353 | | | $ | 109,449 | | | $ | 4,892 | | | (134,553) | | | 108,141 | |
Income tax expense | | | | | | | 24,397 | | | 24,397 | |
Net income (loss) from continuing operations | | | | | | | $ | (158,950) | | | $ | 83,744 | |
| | | | | | | | | |
(1) Infrastructure Solutions segment includes the Company’s equity in (earnings) loss from its investment in the AVAIL JV, as well as other expenses related to receivables and liabilities that were retained by the Company following the sale of the AIS business. |
(2) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments. |
(3) For fiscal year 2024, amortization expense for acquired intangible assets is included in Corporate expenses in "Selling, general and administrative" expense as these expenses are not allocated to the segments. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, 2022 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions(1) | | Corporate(2)(3) | | Total |
Sales | $ | 158,274 | | | $ | 215,027 | | | $ | — | | | $ | — | | | $ | 373,301 | |
Cost of sales | 120,134 | | | 180,085 | | | — | | | — | | | 300,219 | |
Gross margin | 38,140 | | | 34,942 | | | — | | | — | | | 73,082 | |
| | | | | | | | | |
Selling, general and administrative | 4,594 | | | 13,889 | | | — | | | 9,206 | | | 27,689 | |
| | | | | | | | | |
Operating income (loss) from continuing operations | 33,546 | | | 21,053 | | | — | | | (9,206) | | | 45,393 | |
| | | | | | | | | |
Interest expense | — | | | — | | | — | | | 26,123 | | | 26,123 | |
Equity in earnings of unconsolidated subsidiaries | — | | | — | | | (1,006) | | | — | | | (1,006) | |
Other income | (124) | | | — | | | — | | | (486) | | | (610) | |
Income (loss) from continuing operations before income tax | $ | 33,670 | | | $ | 21,053 | | | $ | 1,006 | | | (34,843) | | | 20,886 | |
Income tax expense | | | | | | | 2,447 | | | 2,447 | |
Net income (loss) from continuing operations | | | | | | | $ | (37,290) | | | $ | 18,439 | |
| | | | | | | | | |
|
|
|
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended November 30, 2022 |
| Metal Coatings | | Precoat Metals(4) | | Infrastructure Solutions(1) | | Corporate(2)(3) | | Total |
Sales | $ | 487,567 | | | $ | 499,578 | | | $ | — | | | $ | — | | | $ | 987,145 | |
Cost of sales | 350,152 | | | 402,303 | | | — | | | — | | | 752,455 | |
Gross margin | 137,415 | | | 97,275 | | | — | | | — | | | 234,690 | |
| | | | | | | | | |
Selling, general and administrative | 13,603 | | | 33,361 | | | — | | | 50,283 | | | 97,247 | |
| | | | | | | | | |
Operating income (loss) from continuing operations | 123,812 | | | 63,914 | | | — | | | (50,283) | | | 137,443 | |
| | | | | | | | | |
Interest expense | — | | | — | | | — | | | 61,739 | | | 61,739 | |
Equity in earnings of unconsolidated subsidiaries | — | | | — | | | (1,006) | | | — | | | (1,006) | |
Other (income) expense | 6 | | | (41) | | | — | | | (547) | | | (582) | |
Income (loss) from continuing operations before income tax | $ | 123,806 | | | $ | 63,955 | | | $ | 1,006 | | | (111,475) | | | 77,292 | |
Income tax expense | | | | | | | 18,380 | | | 18,380 | |
Net income (loss) from continuing operations | | | | | | | $ | (129,855) | | | $ | 58,912 | |
| | | | | | | | | |
(1) Infrastructure Solutions segment includes the Company’s equity in (earnings) loss from its investment in the AVAIL JV. |
(2) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments. |
(3) For fiscal year 2023, amortization expense for acquired intangible assets is included in Metal Coatings expenses in "Cost of sales" and in Precoat Metals in "Selling, general and administrative" expense. |
(4) For the nine months ended November 30, 2022, Precoat Metals segment includes results from May 13, 2022 - November 30, 2022. |
Asset balances by operating segment for each period were as follows (in thousands):
| | | | | | | | | | | | | | |
| | November 30, 2022 | | February 28, 2022 |
Total assets: | | | | |
AZZ Metal Coatings | | $ | 579,830 | | | $ | 578,885 | |
AZZ Precoat Metals | | 1,484,074 | | | — | |
AZZ Infrastructure Solutions - Investment in Joint Venture | | 82,420 | | | — | |
Corporate | | 53,150 | | | 46,266 | |
Discontinued operations: | | | | |
AZZ Infrastructure Solutions | | — | | | 507,876 | |
Total | | $ | 2,199,474 | | | $ | 1,133,027 | |
| | | | | | | | | | | | | | |
| | As of |
| | November 30, 2023 | | February 28, 2023 |
Assets: | | | | |
Metal Coatings | | $ | 559,149 | | | $ | 588,337 | |
Precoat Metals | | 1,504,828 | | | 1,488,810 | |
Infrastructure Solutions - Investment in Joint Venture | | 97,238 | | | 84,760 | |
Corporate | | 47,541 | | | 59,572 | |
| | | | |
| | | | |
Total assets | | $ | 2,208,756 | | | $ | 2,221,479 | |
Financial Information About Geographical Areas
The following table presents sales by geographic regionFinancial information about geographical areas for each periodthe periods presented was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Sales: | | | | | | | | |
United States | | $ | 363,660 | | | $ | 127,462 | | | $ | 951,855 | | | $ | 370,910 | |
International | | 9,641 | | | 7,621 | | | 35,290 | | | 24,822 | |
Total | | $ | 373,301 | | | $ | 135,083 | | | $ | 987,145 | | | $ | 395,732 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Nine Months Ended November 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Sales: | | | | | | | |
United States | $ | 370,485 | | | $ | 363,660 | | | $ | 1,140,344 | | | $ | 951,855 | |
Canada | 11,120 | | | 9,641 | | | 30,676 | | | 35,290 | |
| | | | | | | |
Total | $ | 381,605 | | | $ | 373,301 | | | $ | 1,171,020 | | | $ | 987,145 | |
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
| | | | | | | | | | | | | | |
| | As of |
| | November 30, 2023 | | February 28, 2023 |
Property, plant and equipment, net: | | | | |
United States | | $ | 506,070 | | | $ | 478,722 | |
Canada | | 19,268 | | | 19,781 | |
| | | | |
Total | | $ | 525,338 | | | $ | 498,503 | |
The following table presents fixed assets by geographic region for each period (in thousands):
| | | | | | | | | | | | | | |
| | November 30, 2022 | | February 28, 2022 |
Property, plant and equipment, net: | | | | |
United States | | $ | 471,279 | | | $ | 167,634 | |
Canada | | 20,088 | | | 25,724 | |
| | | | |
Total | | $ | 491,367 | | | $ | 193,358 | |
9. Investments in Unconsolidated Entity
On September 30, 2022,AVAIL JV
Following the Company entered into a joint venture with Fernweh Group LLC ("Fernweh"), whereby AZZ contributedsale of its AZZ Infrastructure Solutions segment (“AIS”) to AIS Investment Holdings LLC (the “AIS JV”), and sold a 60% interest in the AIS JV to Fernweh. The Company's investment in the AIS JV was $82.4 million at November 30, 2022. The Company recognized equity in earnings of unconsolidated entities of $1.0 million for the three and nine months ended November 30, 2022. See Note 7 for further discussion of the Company's investment in the AIS JV.
7. Investments in Unconsolidated Entity
AZZ Infrastructure Solutions (AIS) Joint Venture
On September 30, 2022, the Company and Fernweh Group LLC ("Fernweh") closed on the transaction whereby AZZ contributed its AZZ Infrastructure Solutions segment (“AIS”) to AIS Investment Holdings LLC (the “AIS JV”), and sold a 60% controlling interest in the AISAVAIL JV to Fernweh, at an implied enterprise value of AIS of $300.0 million. The AIS JV operates under the name "Avail Infrastructure Solutions" ("AVAIL"). As a result of the transaction, AIS iswas deconsolidated and the Company's retainedCompany began accounting for its 40% interest in the AVAIL joint venture is accounted forJV under the equity method of accounting. The proceeds fromAVAIL JV is included in the sale included approximately $108.0 million, as well as $120.0 million that was funded by committed debt financing taken on by the AIS JV immediately prior to the closing of the divestiture of AZZ’s controlling interest.
As a change of control occurred with the transaction, a new basis of accounting will occur at the AIS JV when AVAIL completes its business combination accounting for the transaction. AZZ has not presented summarized financial statements, as those statements are incomplete at this time and do not include adjustments to asset values, depreciation, or amortization that may be required once AVAIL completes its business combination accounting.Infrastructure Solutions segment. We record our interestequity in earnings in the joint ventureAVAIL JV on a one-month lag to allow sufficient time to review and assess the joint venture’s effect on our reported results. SinceAs of November 30, 2023, our investment in the transaction closed on September 30, 2022, we haveAVAIL JV is $97.2 million. We recorded one month$11.1 million of equity in earnings during the nine months ended November 30, 2023. The Company has a related-party payable with the AVAIL JV. As of unconsolidated entities inNovember 30, 2023 and February 28, 2023, the amount of $1.0balance was $4.6 million representing AVAIL's October 2022 results of operations. Once AVAIL completes the business combination accounting, the reported results will reflect the effects of the business combination accounting as though such values were recorded at the time the transaction closed.and $6.3 million, respectively,
8. Derivative Instruments | | | | | |
Summarized Balance Sheet |
| As of |
| November 30, 2023(1) |
Current assets | $ | 273,535 | |
Long-term assets | 173,312 | |
Total assets | $ | 446,847 | |
Current liabilities | 102,225 | |
Long-term liabilities | 132,175 | |
Total liabilities | $ | 234,400 | |
Total partners' capital | 212,447 | |
Total liabilities and partners' capital | $ | 446,847 | |
| | | | | | | | | | | |
Summarized Operating Data | | |
| Three Months Ended November 30, 2023(1) | | Nine Months Ended November 30, 2023(1) |
Sales | $ | 127,156 | | | $ | 346,493 | |
Gross profit | 36,150 | | | 87,013 | |
Net income | 13,139 | | | 21,969 | |
| | | |
(1) The Company reports on a one-month lag basis; therefore, amounts in the summarized financials above are as of and for the three and nine months ended October 31, 2023. Amounts in the table above exclude certain adjustments made by the Company to record equity in earnings of the AVAIL JV, primarily related to goodwill amortization. |
10. Derivative Instruments
Interest Rate Swap Derivative
As a policy, the Company does not hold, issue or trade derivative instruments for speculative purposes. The Company may periodically enter into forward sale contracts to purchase a specified volume of zinc at fixed prices. These contracts are not accounted for as derivatives because they meet the criteria for the normal purchases and normal sales scope exception in ASC 815.
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable-rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable-rate debt.
On September 27, 2022, the Company entered into a fixed-ratean interest rate swap agreement with banks that are parties to the 20212022 Credit Agreement, amended onAgreement. On October 7, 2022, the agreement was amended to change the SOFR-based component of the interest rate on a portion of the Company'sour variable-rate debt to a fixed rate of 4.277%, resulting in a total fixed rate of 8.627% (the “2022 Swap”"2022 Swap"). On August 17, 2023, the Company repriced its Term Loan B, to which the 2022 Swap is related, to reduce the interest rate to SOFR + 3.75%. Following the repricing, the 2022 Swap has a total fixed rate of 8.027%. The 2022 Swap had an initial notional amount of $550.0 million and a maturity date of September 30, 2025. The notional amount of the interest rate swap decreases each quarter by a pro-rata portion of theany quarterly principal payments made on the Term Loan B.B, and the current notional amount is $543.1 million. The objective of the 2022 Swap is to eliminate the variability of cash flows in interest payments attributable to changes in benchmark one-month SOFR interest rates, for approximately one-half of the total amount of our variable-rate debt. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month SOFR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable-rate debt. The CompanyWe designated the 2022 Swap as a cash flow hedge at inception. Cash settlements, in the form of cash payments or cash receipts, of the 2022 Swap are recognized in interest expense.
At November 30, 2022,2023, changes in fair value attributable to the effective portion of the 2022 Swap were included on the condensed consolidated balance sheetsheets in accumulated other comprehensive income. For derivative instruments that qualify for
hedge accounting treatment, the fair value is recognized on the Company’sour condensed consolidated balance sheets as derivative assets or liabilities with offsetting changes in fair value, to the extent effective, recognized in accumulated other comprehensive income until reclassified into earnings when the interest expense on the underlying debt is reflected in earnings. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. During the nine months ended November 30, 2023, we reclassified $3.5 million before income tax, or $2.5 million net of tax, from other comprehensive income to earnings.
9.11. Debt
The Company'sCompany’s long-term debt consisted of the followinginstruments and balances outstanding for each of the periods presented (in thousands):
| | | | | | | | | | | |
| November 30, 2022 | | February 28, 2022 |
Revolving Credit Facility | $ | 10,000 | | | $ | 77,000 | |
2020 Senior Notes | — | | | 150,000 | |
Term Loan B | 1,083,500 | | | — | |
| | | |
Total debt, gross | 1,093,500 | | | 227,000 | |
Unamortized debt issuance costs | (69,852) | | | (516) | |
Total debt, net | 1,023,648 | | | 226,484 | |
Less amount due within one year | (13,000) | | | — | |
Total debt due after one year, net | $ | 1,010,648 | | | $ | 226,484 | |
2021 Credit Agreement
On July 8, 2021, the Company entered into a five-year unsecured revolving credit facility under a credit agreement, by and among the Company, borrower, Citibank, N.A., as administrative agent and the other agents and lender parties thereto (the “2021 Credit Agreement”). The 2021 Credit Agreement was scheduled to mature in July 2026 and included the following significant terms;
i.provided for a senior unsecured revolving credit facility with a principal amount of up to $400.0 million of 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 the leverage ratio of the Company and its consolidated subsidiaries as a group;
iii.included a letter of credit sub-facility up to $85.0 million for the issuance of standby and commercial letters of credit;
iv.included a $50.0 million sublimit for swing line loans;
v.included 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.included a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each to be tested at each quarter-end;
On May 13, 2022, the 2021 Credit Agreement was repaid with proceeds from the 2022 Credit Agreement, which is described below.
| | | | | | | | | | | | | | |
| | As of |
| | November 30, 2023 | | February 28, 2023 |
Revolving Credit Facility | | $ | 10,000 | | | $ | 95,000 | |
| | | | |
Term Loan B | | 1,030,250 | | | 1,030,250 | |
Total debt, gross | | $ | 1,040,250 | | | $ | 1,125,250 | |
Unamortized debt issuance costs | | (60,246) | | | (67,130) | |
Total debt, net | | 980,004 | | | 1,058,120 | |
Less current portion of long-term debt | | — | | | — | |
Long-term debt, net | | $ | 980,004 | | | $ | 1,058,120 | |
2022 Credit Agreement and Term Loan B
OnThe Company has a credit agreement with a syndicate of financial institutions as lenders that was entered into on May 13, 2022 the Company replaced the 2021 Credit Agreement with a new Credit Agreement (the "2022 Credit Agreement") by and among. On August 17, 2023, the Company borrower, Citibank, N.A., as administrative and collateral agent, andrepriced the other agents and lender parties thereto$1.0 billion Term Loan B, which was outstanding under the 2022 Credit Agreement. Agreement as of November 30, 2023. The repricing reduced the interest rate margin by 50 basis points to an interest rate of Secured Overnight Financing Rate ("SOFR") plus 3.75% and removed the Credit Spread Adjustment, as defined in the 2022 Credit Agreement, of 10 basis points.
The 2022 Credit Agreement includes the following significant terms;terms:
i.provides for a senior secured initial term loan in the aggregate principal amount of $1.1$1.3 billion (the "Term Loan B"), due May 13, 2029, which is secured by substantially all of the assets of the Company;
ii.provides for a maximum senior secured revolving credit facilityRevolving Credit Facility in the aggregate principal amount of $400.0 million (the "Revolving Credit Facility"), due May 13, 2027;
iii.includes a letter of credit sub-facility of up to $100.0 million, which is part of, and not in addition to, the Revolving Credit Facility;
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
iv.borrowings under the Term Loan B bear an interest rate of SOFR plus 3.75% (following the repricing on August 17, 2023 as noted above) and the Revolving Credit Facility each bearbears an interest rate of Secured Overnight Financing Rate ("SOFR")SOFR plus 4.25% (as of November 30, 2023—see Note 18 for information related to the repricing of the Company’s Revolving Credit Facility on December 20, 2023);
v.includes customary affirmative and negative covenants, and events of default; including restrictions on the incurrence of non-ordinary course debt, investment and dividends, subject to various exceptions, and;exceptions; and,
vi.includes a maximum quarterly leverage ratio financial covenant, and an interest coverage ratio financial covenant, with reporting requirements to our banking group at each quarter-end;quarter-end.
The Company utilizes proceeds from the Revolving Credit Facility primarily to finance working capital needs, capital improvements, dividends, acquisitions and for general corporate purposes. The proceeds of
As defined in the Term Loan Bcredit agreement, quarterly prepayments were used to finance a portion ofdue against the Precoat Acquisition, pay transaction-related costs owed under the Securities Purchase Agreement (defined below) and refinance certain prior indebtedness, including the repayment of outstanding borrowings under the 2021 Credit Agreement. The proceeds were also utilized to redeem 100% of the Company’s 2020 Senior Notes on June 6, 2022.
Outstanding principal of the Term Loan B isand were payable on the last business day of each May, August, November and February, beginning August 31, 2022, in a quarterly aggregate principal amount of $3.25 million, with the entire remaining principal amount due on May 13, 2029, the maturity date. Additional prepayments made against the Term Loan B contribute to these required quarterly payments. Due to a prepayment of $240.0 million that the Company made on the Term Loan B during fiscal year 2023 in connection with the sale of the AIS business, the quarterly mandatory principal payment requirement has been met, and the quarterly payments of $3.25 million are not required at this time.
The weighted average interest rate for the Company's outstanding debt, including the Revolving Credit Facility and the Term Loan B, was 8.53%8.54% at November 30, 2022.2023.
The Company's credit agreement requiresrequired the Company to maintain a maximum Total Net Leverage Ratio (as defined in the loan agreement) no greater than 6.25 through November 2022. For each subsequent quarter, the maximum ratio decreases by 25 basis points through May 31, 2024, when the maximum Total Net Leverage Ratio reaches 4.5.
Convertible Subordinated Notes
On May 13, 2022, the Company completed the issuance of $240.0 million aggregate principal amount of 6.00% convertible subordinated notes due June 30, 2030 (the "Convertible Notes") pursuant to the Securities Purchase Agreement (the "Securities Purchase Agreement") with BTO Pegasus Holdings DE L.P., a Delaware limited partnership (together with its assignees, "Blackstone"), an investment vehicle of funds affiliated with Blackstone Inc. Interest on the Convertible Notes was payable on June 30 and December 31. The Convertible Notes were exchanged for 240,000 shares of the Company's 6.0% Series A Convertible Preferred Stock on August 5, 2022, following the receipt of shareholder approval for the issuance of preferred shares. See Note 13 for a description of the Series A Convertible Preferred Stock.
The Company used the proceeds of the Convertible Notes, along with the Term Loan B, to fund the Company’s Precoat Acquisition.
The Company's debt agreements require the Company to maintain certain affirmative and negative covenants. As of November 30, 2022,2023, the Company was required to maintain a Total Net Leverage Ratio no greater than 5.0. As of November 30, 2023, we were in compliance with all covenants andor other requirements set forth in the debt agreements.
During the three months endedAs of November 30, 2022, the Company utilized a significant portion2023, we had $1.04 billion of the cash received from the AIS JV to reduce the Term Loan B,floating- and utilized the remaining cash received to reducefixed-rate debt outstanding on the Revolving Credit Facility and the Term Loan B, with varying maturities through fiscal 2029. As of November 30, 2023, we are in compliance with each of the covenants related to these outstanding borrowings. Additionally, as of November 30, 2023, we had approximately $375.5 million of additional credit available for general corporate purposes.future draws or letters of credit.
Letters of Credit
As of November 30, 2023, we had total outstanding letters of credit in the amount of $14.5 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, performance periods and insurance collateral.
10.12. Fair Value Measurements
Recurring Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In accordance with ASC 820, Fair Value Measurements and Disclosures (“("ASC 820”820"), certain of the Company’s assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs that are corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
The carrying amount of the Company's financial instruments (cash equivalents, accounts receivable, accounts payable and accrued liabilities) approximates the fair value of these instruments based upon their short-term nature.
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Interest Rate Swap Agreement
The Company’s derivative instrument consists of an interest rate swap contract, which is a Level 2 of the fair value hierarchy and reportedincluded in "Other assets" in the condensed consolidated balance sheet as of December 31, 2021 as derivative liabilities current and derivative liabilities long-term.November 30, 2023. See Note 810 for more information.
The Company’s financial instrument that is measured at fair value on a recurring basis as of November 30, 20222023 and February 28, 20222023 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Carrying Value | | | | | | | | Carrying Value | | | | | | |
| November 30, | | Fair Value Measurements Using | | February 28, | | Fair Value Measurements Using |
| 2023 | | Level 1 | | Level 2 | | Level 3 | | 2023 | | Level 1 | | Level 2 | | Level 3 |
Assets (Liabilities): | | | | | | | | | | | | | | | |
Interest Rate Swap Agreement | $ | 2,975 | | | $ | — | | | $ | 2,975 | | | $ | — | | | $ | 3,925 | | | $ | — | | | $ | 3,925 | | | $ | — | |
Total Assets | $ | 2,975 | | | | | | | | | $ | 3,925 | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| November 30, | Fair Value Measurements Using | | February 28, | Fair Value Measurements Using |
| 2022 | | Level 1 | | Level 2 | | Level 3 | | 2022 | | Level 1 | | Level 2 | | Level 3 |
Interest rate swap agreement | $ | (3,512) | | | $ | — | | | $ | (3,512) | | | $ | — | | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Non-recurring Fair Value MeasurementsInvestment in Joint Venture
The fair value of the AVAIL JV that is accounted for under the equity method was determined based on the transaction price. Subsequent measurement of the fair value of the AVAIL JV is determined based on the income approach. The income approach uses discounted cash flow models that require various observable and non-observable inputs, such as operating margins, revenues, product costs, operating expenses, capital expenditures, terminal-year values and risk-adjusted discount rates. These valuations resulted in Level 3 nonrecurring fair value measurements. As of November 30, 2023, the estimated fair value of the investment in the AVAIL JV approximates the carrying value of $97.2 million.
Long-Term Debt
The fair value of the Company’s Term Loan B is based on quoted market prices in active markets and is included in the Level 1 fair value hierarchy. The fair value of the Company’s revolving credit facility is estimated based on market values for debt issues with similar characteristics or rates currently available for debt with similar terms and is included in the Level 2 fair value hierarchy. The principal amount of our outstanding debt was $1.04 billion and $1.13 billion at November 30, 2023 and February 28, 2023, respectively. The estimated fair value of our outstanding debt was $1.04 billion and $1.13 billion at November 30, 2023 and February 28, 2023, respectively.
11.13. Leases
The Company is a lessee under various leases for facilities and equipment. As of November 30, 2022,2023, the Company was the lessee for 167159 operating leases and 25 finance leases with terms of 12 months or more and 15 finance leases.more. Many of the operating leases either have renewal options of between one and five years or convert to month-to-month agreements at the end of the specified lease term.
The Company’s operating leases are primarily for (i) operating facilities, (ii) vehicles and equipment used in operations, (iii) facilities used for back-office functions and (iv) equipment used for back-office functions, and (v) temporary storage. The majority of the Company’s long-term lease expenses have both a fixed and variable component.
Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has a significant number of short-term leases, including month-to-month agreements, some of which continue in perpetuity until the lessor or the Company terminates the lease agreement.agreements. The Company's short-term lease agreements include expenses incurred hourly, daily, monthly and for other durations for aof time period of one year or less.
The Company’s future lease commitments as of November 30, 20222023 do not reflect the entiretyall of the Company’s short-term lease commitments.
The following table outlines, for the Company's continuing operations, the classification of the Company's right-of-use assets and lease liabilities in the consolidated balance sheets as of November 30, 2022 and fiscal year end 2022 (in thousands):
| | | | | | | | | | | | | | | | | |
Balance Sheet | Classification | | November 30, 2022 | | February 28, 2022 |
Assets | | | | | |
Right-of-use assets | Right-of-use assets | | $ | 24,248 | | | $ | 13,954 | |
Liabilities | | | | | |
Operating lease liabilities ― ST | Lease liability - short-term | | 5,199 | | | 3,131 | |
Operating lease liabilities ― LT | Lease liability - long-term | | 18,971 | | | 10,798 | |
Finance lease liabilities ― ST | Lease liability - short-term | | 200 | | | 158 | |
Finance lease liabilities ― LT | Lease liability - long-term | | 702 | | | 605 | |
Supplemental non-cash information related to the Company's portfolio of operating leases was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Nine Months Ended November 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Operating cash flows from operating leases included in lease liabilities | $ | 2,862 | | | $ | 2,338 | | | $ | 8,069 | | | $ | 6,780 | |
Lease liabilities obtained from new ROU assets - operating | 2,396 | | | 376 | | | 4,938 | | | 13,646 | |
Operating and financing cash flows from financing leases included in lease liabilities | 70 | | | 37 | | | 182 | | | 74 | |
Lease liabilities obtained from new ROU assets - financing | — | | | 348 | | | 398 | | | 362 | |
| | | | | | | |
| | | | | | | |
AZZ INC.
| | | | | | | | | | | |
| November 30, 2022 | | February 28, 2022 |
Weighted-average remaining lease term - operating leases (years) | 7.03 | | 7.90 |
Weighted-average discount rate - operating leases | 4.72 | % | | 4.56 | % |
Weighted-average remaining lease term - financing leases (years) | 4.45 | | 4.73 |
Weighted-average discount rate - financing leases | 4.12 | % | | 2.95 | % |
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table outlines the classification of the Company's right-of-use asset and lease liabilities in the balance sheets as of November 30, 2023 and February 28, 2023 (in thousands):
| | | | | | | | | | | | | | | | | |
| Balance Sheet Classification | | As of |
| | November 30, 2023 | | February 28, 2023 |
Assets | | | | | |
Right-of-use assets | Right-of-use assets | | $ | 22,830 | | | $ | 26,392 | |
Liabilities | | | | | |
Operating lease liabilities ― short-term | Lease liability - short-term | | $ | 5,999 | | | $ | 6,119 | |
Operating lease liabilities ― long-term | Lease liability - long-term | | 15,732 | | | 19,659 | |
Finance lease liabilities ― short-term | Lease liability - short-term | | 454 | | | 284 | |
Finance lease liabilities ― long-term | Lease liability - long-term | | 1,380 | | | 1,045 | |
Supplemental information related to the Company's portfolio of operating leases from continuing operations was as follows (in thousands, except years and percentages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Nine Months Ended November 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Operating cash flows from operating leases included in lease liabilities | $ | 1,811 | | | $ | 2,862 | | | $ | 5,471 | | | $ | 8,069 | |
Lease liabilities obtained from new ROU assets - operating | 60 | | | 2,396 | | | 1,942 | | | 4,938 | |
Decrease in ROU assets related to lease terminations | — | | | — | | | (1,294) | | | — | |
Operating and financing cash flows from financing leases included in lease liabilities | 130 | | | 70 | | | 330 | | | 182 | |
Lease liabilities obtained from new ROU assets - financing | 173 | | | — | | | 773 | | | 398 | |
| | | | | | | | | | | |
| As of |
| November 30, 2023 | | February 28, 2023 |
Weighted-average remaining lease term - operating leases | 4.29 years | | 5.04 years |
Weighted-average discount rate - operating leases | 4.44 | % | | 4.31 | % |
Weighted-average remaining lease term - financing leases | 4.25 years | | 4.61 years |
Weighted-average discount rate - financing leases | 5.66 | % | | 5.15 | % |
The following table outlines the classification of lease expense related to operating leases from continuing operations, in the statements of operations (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Nine Months Ended November 30, |
| 2022 | | 2021 | | 2022 | | 2021 |
Cost of sales | $ | 3,306 | | | $ | 1,858 | | | $ | 8,590 | | | $ | 5,073 | |
Selling, general and administrative | 494 | | | 339 | | | 1,435 | | | 939 | |
| | | | | | | |
Total lease expense | $ | 3,800 | | | $ | 2,197 | | | $ | 10,025 | | | $ | 6,012 | |
As of November 30, 2022, maturities of the Company's lease liabilities, excluding lease liabilities associated with our discontinued operations, were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Fiscal year: | | Operating Leases | | Finance Leases | | Total |
2023 | | $ | 1,595 | | | $ | 58 | | | $ | 1,653 | |
2024 | | 5,978 | | | 232 | | | 6,210 | |
2025 | | 5,410 | | | 232 | | | 5,642 | |
2026 | | 4,634 | | | 188 | | | 4,822 | |
2027 | | 3,784 | | | 163 | | | 3,947 | |
Thereafter | | 5,624 | | | 118 | | | 5,742 | |
Total lease payments | | 27,025 | | | 991 | | | 28,016 | |
Less imputed interest | | (2,855) | | | (89) | | | (2,944) | |
Total | | $ | 24,170 | | | $ | 902 | | | $ | 25,072 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, | | Nine Months Ended November 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Cost of sales | $ | 2,997 | | | $ | 3,306 | | | $ | 9,234 | | | $ | 8,590 | |
Selling, general and administrative | 495 | | | 494 | | | 1,500 | | | 1,435 | |
Total lease cost | $ | 3,492 | | | $ | 3,800 | | | $ | 10,734 | | | $ | 10,025 | |
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
As of November 30, 2023, maturities of the Company's lease liabilities were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
Fiscal year: | Operating Leases | | Finance Leases | | Total |
2024 | $ | 1,787 | | | $ | 136 | | | $ | 1,923 | |
2025 | 6,532 | | | 536 | | | 7,068 | |
2026 | 5,583 | | | 459 | | | 6,042 | |
2027 | 4,410 | | | 423 | | | 4,833 | |
2028 | 2,441 | | | 349 | | | 2,790 | |
2029 | 1,871 | | | 138 | | | 2,009 | |
Thereafter | 1,252 | | | 24 | | | 1,276 | |
Total lease payments | $ | 23,876 | | | $ | 2,065 | | | $ | 25,941 | |
Less imputed interest | (2,145) | | | (231) | | | (2,376) | |
Total | $ | 21,731 | | | $ | 1,834 | | | $ | 23,565 | |
The Company subleases multiple buildings in Columbia, South Carolina to multiple subtenants. The Columbia sublease agreements are by and between AZZ Precoat Metals and multiple subtenants. Sublease income is recognized over the term of the sublease on a straight-line basis and is reported in the consolidated statement of operations in "Cost of sales." The Company recognized $0.3 million and $0.8 million of income from subleases during the three and nine months ended November 30, 2023, respectively.
AZZ INC.
12.NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
14. Income Taxes
Continuing Operations
The provision for income taxes from continuing operations reflects an effective tax rate of 24.6% for the three months ended November 30, 2023, compared to 11.7% for the three months ended November 30, 2022. The increase in the effective tax rate is attributable to a favorable adjustment in the prior year period due to the recognition of an outside basis difference related to the AVAIL JV.
The provision for income taxes from continuing operations reflects an effective tax rate of 22.6% for the nine months ended November 30, 2023, compared to 23.8% for the prior year comparable period. The decrease in the effective tax rate is attributable to an unfavorable adjustment in the prior year related to management fees recorded as a result of continuing operations versus discontinued operations reporting.
Discontinued Operations
The following table outlines income or loss and the related tax expense (benefit) from discontinued operations for the three and nine months ended November 30, 2022 and 2021 (in thousands):
| | | Three Months Ended November 30, | | Nine Months Ended November 30, | | | Three Months Ended | | | Nine Months Ended |
| | 2022 | | 2021 | | 2022 | | 2021 | | | November 30, 2022 | | | November 30, 2022 |
Income from discontinued operations before income taxes | Income from discontinued operations before income taxes | $ | 1,202 | | | $ | 7,296 | | | $ | 21,053 | | | $ | 23,123 | | Income from discontinued operations before income taxes | | $ | 1,202 | | | | $ | 21,053 | |
Income tax (expense) benefit | Income tax (expense) benefit | (133) | | | 682 | | | (3,927) | | | 289 | | Income tax (expense) benefit | | 463 | | | | (3,927) | |
Income from discontinued operations, net of tax | Income from discontinued operations, net of tax | $ | 1,069 | | | $ | 7,978 | | | $ | 17,126 | | | $ | 23,412 | | Income from discontinued operations, net of tax | | $ | 1,665 | | | | $ | 17,126 | |
| Loss on disposal of discontinued operations | Loss on disposal of discontinued operations | $ | (45,010) | | | $ | — | | | $ | (159,910) | | | $ | — | | Loss on disposal of discontinued operations | | $ | (45,010) | | | | $ | (159,910) | |
Income tax benefit | Income tax benefit | 4,960 | | | — | | | 29,837 | | | — | | Income tax benefit | | 4,364 | | | | 29,837 | |
Loss on disposal of discontinued operations, net of tax | Loss on disposal of discontinued operations, net of tax | $ | (40,050) | | | $ | — | | | $ | (130,073) | | | $ | — | | Loss on disposal of discontinued operations, net of tax | | $ | (40,646) | | | | $ | (130,073) | |
The provision for income taxes from continuing operations reflects an effective tax rate of 11.7% for the three months ended November 30, 2022, compared to 33.6% for the three months ended November 30, 2021. The decrease in the effective tax rate was primarily attributable to the tax benefit from an outside basis difference between book and tax in the Company's investment in the AIS JV.
The provision for income taxes from discontinued operations reflects an effective tax rate of 11.0% and 18.7% for the three months ended November 30, 2022, compared to (9.3)% for the three months ended November 30, 2021. The increase is related to an unfavorable permanent adjustment for cumulative translation adjustment that, for tax purposes, is non-deductible.
For theand nine months ended November 30, 2022, the effective tax rate from continuing operations was 23.8%, compared to 32.5% for the prior year comparable period. The decrease in the effective tax rate is the result of unfavorable adjustments related to uncertain tax positions recorded in the prior year comparable period and to the tax benefit from an outside basis difference between book and tax in the Company's investment in the AIS JV.
The provision for income taxes from discontinued operations reflects an effective tax rate of 18.7% for the nine months ended November 30, 2022, compared to (1.2)% for the nine months ended November 30, 2021. The increase is related to an unfavorable permanent adjustment for cumulative translation adjustment that, for tax purposes, is non-deductible.2022.
13.15. Equity
2020 Share Authorization
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 Authorization”). Repurchases under the 2020 Share Authorization 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 nine months ended November 30, 2022, to prioritize repayments of debt, including debt incurred to finance the Precoat Acquisition, the Company did not repurchase shares of common stock under the 2020 Share Authorization. During the nine months ended November 30, 2021, the Company repurchased 564,300 shares of common stock for $28.9 million, or $51.16 per share.
Series A Convertible Preferred Stock
On August 5, 2022, the Company exchanged the Convertible Notesits $240.0 million aggregate principal amount of 6.0% convertible subordinated notes due June 30, 2030 for 240,000 shares of 6.0% Series A Convertible Preferred Stock, following the receipt of shareholder approval for the issuance of preferred stock. The Series A Convertible Preferred Stock is convertible by the holder at any time into shares of the Company's common stock at a conversion price of $58.30 per common share. The preferred stock accumulates a 6.0% dividend per annum. Dividends are payable quarterly on March 31, June 30, September 30 and December 31 of each year. In addition, the preferred shares are subject to a minimum conversion threshold of 1,000 shares per conversion, and customary anti-dilution and dividend adjustments. The preferred shares have full voting rights as if converted and have a fully participating liquidation preference.
As of both November 30, 2022,2023 and February 28, 2023, the 240,000 shares of outstanding Series A Convertible Preferred Stock had accrued dividends of $4.6$2.4 million and could be converted into 4.1 million shares of common stock, at the option of the holder.
As
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive income (loss) ("AOCI"), after tax, for the three and nine months ended November 30, 2023 and 2022 there were no sharesconsisted of outstanding preferred stock and no accrued dividends.the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, |
| | 2023 | | 2022 |
| | Foreign Currency Translation Gain (Loss) | | Net Actuarial Gain (Loss), Net of Tax | | Interest Rate Swap, Net of Tax | | Total | | Foreign Currency Translation Gain (Loss) | | Net Actuarial Gain (Loss), Net of Tax | | Interest Rate Swap, Net of Tax | | Total |
Balance as of beginning of period | | $ | (9,307) | | | $ | 119 | | | $ | 3,374 | | | $ | (5,814) | | | $ | (30,070) | | | $ | — | | | $ | — | | | $ | (30,070) | |
Other comprehensive income before reclassification | | 3,029 | | | — | | | (115) | | | 2,914 | | | (5,019) | | | — | | | (3,512) | | | (8,531) | |
Amounts reclassified from AOCI | | — | | | — | | | (1,057) | | | (1,057) | | | 27,750 | | | — | | | — | | | 27,750 | |
Net change in AOCI | | 3,029 | | | — | | | (1,172) | | | 1,857 | | | 22,731 | | | — | | | (3,512) | | | 19,219 | |
Balance as of end of period | | $ | (6,278) | | | $ | 119 | | | $ | 2,202 | | | $ | (3,957) | | | $ | (7,339) | | | $ | — | | | $ | (3,512) | | | $ | (10,851) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, |
| | 2023 | | 2022 |
| | Foreign Currency Translation Gain (Loss) | | Net Actuarial Gain (Loss), Net of Tax | | Interest Rate Swap, Net of Tax | | Total | | Foreign Currency Translation Gain (Loss) | | Net Actuarial Gain (Loss), Net of Tax | | Interest Rate Swap, Net of Tax | | Total |
Balance as of beginning of period | | $ | (7,571) | | | $ | 119 | | | $ | 2,879 | | | $ | (4,573) | | | $ | (27,324) | | | $ | — | | | $ | — | | | $ | (27,324) | |
Other comprehensive income before reclassification | | 1,293 | | | — | | | 1,867 | | | 3,160 | | | (7,765) | | | — | | | (3,512) | | | (11,277) | |
Amounts reclassified from AOCI | | — | | | — | | | (2,544) | | | (2,544) | | | 27,750 | | | — | | | — | | | 27,750 | |
Net change in AOCI | | 1,293 | | | — | | | (677) | | | 616 | | | 19,985 | | | — | | | (3,512) | | | 16,473 | |
Balance as of end of period | | $ | (6,278) | | | $ | 119 | | | $ | 2,202 | | | $ | (3,957) | | | $ | (7,339) | | | $ | — | | | $ | (3,512) | | | $ | (10,851) | |
14.16. Defined Benefit Pension Plan
Pension and Employee Benefit Obligations
In the Company's Precoat Metals segment, certain current or past employees participate in a defined benefit pension plan sponsored(the "Plan"). Prior to the Precoat Acquisition, benefit accruals were frozen for all participants. After the freeze, participants no longer accrued benefits under the Plan, and administered by the Company. The pension plan calls for benefitsnew hires of AZZ Precoat Metals are not eligible to be paid to eligible employees at retirement, based primarily upon years of service and compensation rates near retirement. The plan is closed to new participants, while those participants alreadyparticipate in the plan continue to accrue benefits. In conjunction withPlan. As of November 30, 2023, the acquisition of Precoat Metals,Plan was underfunded, and the Company assumed an accumulated benefit obligation in excess of related plan assets associated with the defined benefithas a pension planliability of $31.6 million, which is included in "Other long-term liabilities" in the consolidated balance sheets. The Plan has been frozen to new participants,sheets and supports existing employees of AZZ Precoat Metals and other participating employees. See Note 2 for a discussionrepresents the underfunded portion of the acquisition of Precoat Metals.Plan.
15.17. Commitments and Contingencies
Legal
The Company and its subsidiaries are named defendants and plaintiffs in various routine lawsuits incidental to itsour business. These proceedings include labor and employment claims, worker’s compensation, environmental matters, and various commercial disputes, including certain breachuse of contract claims,the Company’s intellectual property, worker’s compensation and environmental matters, all of which arisearising in the normal course of conducting business. As discovery progresses on all outstanding legal matters, the Company continuously evaluateswill continue to evaluate opportunities to either settle the
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
disputes for nuisance value or potentially enter into mediation as a way to resolve the disputes prior to trial. As the pending cases progress through additional discovery including expert testimony and potential mediation, our assessment of the likelihood of an unfavorable outcome on one or more of the pending lawsuits may change. TheAlthough 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,time, management, after consultation with legal counsel believes it has strong defenses to all of these matters and does not expect liabilities, if any, from these claims or proceedings, either individually or in the aggregate, to have a material effect on the Company’s financial position, results of operations or cash flows.
The Company’s prior-owned affiliate ₋ The Calvert Company entered into a series of commercial contracts in 2011 and 2015 to provide equipment and services to a power plant in Georgia. The general contractor on the project, WECTEC (a subsidiary of Westinghouse), filed bankruptcy in New York in March of 2017. The Company’s affiliate continued to perform work on the project for the owners/licensee under an interim bridge contract. We believe the affiliate was eventually terminated for convenience on the project, and the affiliate filed an adversary proceeding in bankruptcy court against WECTEC and the owners to collect all unpaid amounts. The owners of the Georgia power plant filed a countersuit in April of 2018. In connection with the Company selling the majority interest in the AIS business to Fernweh Group on September 30, 2022, the Company agreed to retain this lawsuit. After a long and protracted discovery process and motion practice, we determined in the quarter ended August 30, 2023 that the most favorable outcome to the Company to resolve the dispute may be a negotiated settlement. This decision was made in consideration of the expenses of a lengthy jury trial and potentially protracted appeal process; the resources necessary to continue the prosecution and defense of the case given the size of the discovery and the number of issues involved; the risk factors typically associated with jury verdicts in light of all of the political circumstances currently present in Georgia regarding the power plant; and the benefit of resolving a dispute whose genesis arose more than twelve years ago based solely upon risk avoidance, and not upon the merits of the case. During the third quarter of fiscal 2024, all of the parties entered into a confidential settlement agreement, with no parties admitting any guilt or negligence and the Company agreed to pay the owners/licensee $5.75 million on or around January 15, 2024 to resolve all outstanding matters related to the dispute. In addition, the agreement included the forgiveness of the Company's receivable from WECTEC of $3.7 million, which was fully reserved by the Company. This settlement of $5.75 million was accrued during the second quarter of fiscal year 2024, and is included in "Selling, general and administrative" expense in the consolidated statement of operations for the nine months ended November 30, 2023 and in "Other accrued liabilities" in the consolidated balance sheet as of November 30, 2023. The settlement was included in the AZZ Infrastructure Solutions segment, and the settlement payment will be made in the fourth quarter of fiscal 2024.
In 2017, Southeast Texas Industries, Inc. (“STI”) filed a breach of contract lawsuit against the Company in the 1st District Court of Jasper County, Texas (the “Court”). In 2020, the Company filed a counter suit against STI for amounts due to the Company for work performed. The parties unsuccessfully mediated the case in November 2021. On October 16, 2023, the case went to trial, and on October 27, 2023, the jury rendered a verdict in favor of STI and against AZZ Beaumont in the amount of $4.5 million in damages for breach of contract and breach of express warranty. After a final judgment amount is entered with the Court, the Company expects to pursue all available appellate options as the Company believes it has strong grounds for appeal, which may take up to 2 years. As of November 30, 2023, the Company has recorded a legal accrual of $4.5 million, which is included in "Other accrued liabilities" on our consolidated balance sheets, reflecting the Company's best estimate of the probable loss. It is reasonably possible that our estimate of the probable loss may change after: (i) the hearing on attorney fees, which is currently scheduled for January 26, 2024; (ii) after the Judge renders a final judgement; or (iii) throughout the appellate process. The Company expects to purchase a supersedeas bond to cover the final judgment amount throughout the duration of the appellate process.
A litigation matter between the Company and a previous customer of an affiliate of the AIS business, which was retained following the disposition of the AIS business, is scheduled to go to trial during the fourth quarter of fiscal 2024. The Company is the Plaintiff and believes that it will be able to recover its damages against the Defendant. As of November 30, 2023, the Company has a receivable due from the Defendant, net of allowance, of $5.2 million, which is included in "Accounts receivable, net" in the consolidated balance sheets, which the Company believes is collectible. However, neither the likelihood of an unfavorable outcome nor the ultimate collectability of this receivable, if any, can be determined at this time.
Environmental
The Company assumed certain environmental liabilities as part of the Precoat Acquisition described in Note 2. As of November 30, 2022,2023, the reserve balance for environmental liabilities was $22.0 million, of which $1.5$3.2 million is classified as current. Environmental remediation liabilities include costs directly associated with site investigation and clean up, such as materials, external contractor costs, legal and consulting expenses and incremental internal costs directly related to ongingongoing remediation plans. Estimates used to record environmental remediation liabilities are based on the Company's best estimate of
AZZ INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
probable future costs based on site-specific facts and circumstances known at the time of the estimate and these estimates are updated on a quarterly basis. Estimates of the cost for the potential or ongoing remediation plans are developed using internal resources and third-party environmental engineers and consultants.
The Company accrues the anticipated cost of environmental remediation when the obligation is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. While any revisions to the Company's environmental remediation liabilities could be material to the operating results of any fiscal quarter or fiscal year, the Company does not expect such additional remediation expenses to have an adverse material effect on its financial position, results of operations, or cash flows.
Capital Commitments—Greenfield Aluminum Coil Coating Facility
We are expanding our coatings capabilities by constructing a new 25-acre aluminum coil coating facility in Washington, Missouri that is expected to be operational in 2025. The new facility will be included in the AZZ Precoat Metals segment and is supported by a take-or-pay contract for approximately 75% of the output from the new plant. We expect to spend approximately $125.8 million in progress payments over the estimated two-year construction timeline and we currently have capital commitments of approximately $48.4 million. We expect to pay approximately $71.2 million in fiscal 2024, of which $33.6 million was paid during the current nine-month period. The remaining payments in fiscal 2024 are expected to be funded through cash flows from operations and borrowings under the Revolving Credit Facility. The project is not expected to result in a material adverse effect on our business, results of operations, cash flow or financial condition.
18. Subsequent Events
On December 20, 2023, the Company repriced the $400.0 million Revolving Credit Facility, which was outstanding under the 2022 Credit Agreement. The repricing converted from a rate of SOFR + 425 plus a Credit Spread Adjustment of 10 basis points, to a tiered rate ranging from SOFR plus 275 - 350 basis points, depending on the Company's net leverage ratio, with no Credit Spread Adjustment.
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," “could,”"could," "should," "expects," "plans," “will,” “might,” “would,” “projects,” “currently,” “intends,” “outlook,” “forecasts,” “targets,”"will," "might," "would," "projects," "currently," "intends," "outlook," "forecasts," "targets," "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. Forward-looking statements speak only as of the date they are made and are subject to risks that could cause them to differ materially from actual results. Certain factors could affect the outcome of the matters described herein. This Quarterly Report may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand for our products and services, including demand by the construction markets, the industrial markets, and the metal coatings markets.In addition, within each of the markets we serve, our customers and our operations could potentially continue to be adversely impacted by the continuing impact of the COVID-19 pandemic, including governmental issued mandates regarding the same in the jurisdictions in which we operate, sell to, or from whom we purchase.We could also experience additional increases in labor costs, components and raw materials including zinc and natural gas, which are used in our hot-dip galvanizing process; supply-chain vendor delays; customer requested delays of our products or services; delays in additional acquisition opportunities; currency exchangean increase in our debt leverage and/or interest rates on our debt, of which a significant portion is tied to variable interest 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, including a prolonged economic downturn or macroeconomic conditions such as inflation 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; and other changes in economic and financial conditions. AZZ has provided additional information regarding risks associated with the business, including in Part I, Item 1A. Risk Factors, in AZZ's Annual Report on Form 10-K for the fiscal year ended February 28, 20222023 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 when evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
The following discussion should be read in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022,2023, and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q.
RESULTS OF OPERATIONS
StrategyOverview
We haveare a developed strategyprovider of hot-dip galvanizing and periodically review our performance, opportunities, market conditions and competitive threats. On May 13, 2022, the Company completed the acquisitioncoil coating solutions to a broad range of the Precoat Metals business division (“Precoat”) of Sequa Corporation (“Sequa”), a portfolio company of global investment firm Carlyle, for a purchase price of approximately $1.3 billion (the "Precoat Acquisition"). As part of the Precoat Acquisition, the Company acquired the Precoat Metals division from the Seller, which engagesend-markets, predominantly in the business of applying protective and decorative coatings and films for continuous steel and aluminum coil and performing ancillary services related thereto. The Precoat Acquisition advances our strategy to become a predominantly metal coatings focused company, which we believe will more rapidly enhance shareholder value. See Note 2 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information about the Precoat Acquisition.
Coronavirus (COVID-19)
While we continue to support our customers, there remains continuing uncertainties regarding to what extent, if any, that the COVID-19 pandemic, or newly identified variants of COVID-19, or additional regulatory requirements, will ultimately have on the demand for our products and services or with our supply chain or our employees.North America. We expect continued uncertainty in our business and the global economy due to the duration and intensity of the COVID-19 pandemic, pressure from inflation, supply chain disruptions, and volatility in employment trends and consumer confidence which may impact our results.
The impact of COVID-19 to the Company's personnel and operations has been limited during the third quarter of fiscal 2023. However, labor market shortages and supply chain challenges have continued during the quarter, resulting in increased operating expenses as the constrained labor market and supply chain disruptions impacted the availability and cost of skilled labor and materials. Disruptions to certain parts of our supply chain have, in certain cases, limited our ability to fulfill demand in the future. The extent of COVID-19's impact on our business will depend on future developments, including the continued new variants and surges in the spread of COVID-19, the Company's continued ability to source and distribute its products, the impact of COVID-19 on capital and financial markets, and the related impact on consumer confidence and spending, all of which are uncertain and difficult to predict, considering the continuously evolving landscape. Accordingly, our financial condition, results of operations or cash flows could be impacted in ways that we are not able to predict today.
Overview
The Company hasoperate three distinct operating segments:business segments, the AZZ Metal Coatings segment, the AZZ Precoat Metals segment, and the AZZ Infrastructure Solutions segment. TheFor the three and nine months ended November 30, 2023, the AZZ Infrastructure Solutions segment (excludingconsists of the Company's 40% investment in the AVAIL JV. For the three and nine months ended November 30, 2022, the AZZ Crowley Tubing) is now reported as discontinuedInfrastructure Solutions segment includes the results of operations and financial data for this segment has been segregated and presented as discontinued operations for all periods presented.of the AIS business prior to the divestiture of the AVAIL JV. See Note 3 toof our consolidated financial statements for additional information.more information about the divestiture of the AVAIL JV. Our discussion and analysis of financial condition and results of operations is divided by each of our segments, along with corporate costs and other costs not specifically identifiable to a segment. For a reconciliation of segment operating income to consolidated operating income, see Note 8 to the consolidated financial statements. 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 the performance of 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 the three and nine months ended November 30, 2022, the Company's investment in the AIS JV is a reportable operating segment. For a reconciliation of operating income from continuing operations by segment to consolidated operating income from continuing operations, see Note 6 to our consolidated financial statements included in this Quarterly Report on Form 10-Q.
Recent Developments
Acquisitions
On May 13, 2022, the Company completed the Precoat acquisition for a purchase price of approximately $1.3 billion (the "Precoat Acquisition"). Headquartered in St. Louis, Missouri, Precoat is the leading independent provider of metal coil coating solutions in North America. Precoat engages in the advanced application of protective and decorative coatings and related value-added services for steel and aluminum coil primarily serving the construction; appliance; heating, ventilation and air conditioning (HVAC); container; transportation and other end markets. The acquisition represents a continued transition of the Company from a diverse holding company to a focused provider of coating and galvanizing services for critical applications.
Divestiture of AZZ Infrastructure Solutions Business
On September 30, 2022, the Company and Fernweh Group LLC ("Fernweh") closed on the transaction whereby AZZ contributed its AZZ Infrastructure Solutions segment (“AIS”) to AIS Investment Holdings LLC (the “AIS JV”), and sold a 60% controlling interest in the AIS JV to Fernweh at an implied enterprise value of AIS of $300.0 million. See "Liquidity and Capital Resources—AIS Joint Venture" section below for further discussion of the AIS JV.
QUARTER ENDED NOVEMBER 31, 202230, 2023 COMPARED TO THE QUARTER ENDED NOVEMBER 31, 202130, 2022
Segment Sales and Operating Income from Continuing Operations
The following table reflects the breakdown of salesnet income from continuing operations by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, 2023 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions(1) | | Corporate(2)(3) | | Total |
Sales | $ | 163,186 | | | $ | 218,419 | | | $ | — | | | $ | — | | | $ | 381,605 | |
Cost of sales | 115,952 | | | 177,504 | | | — | | | — | | | 293,456 | |
Gross margin | 47,234 | | | 40,915 | | | — | | | — | | | 88,149 | |
| | | | | | | | | |
Selling, general and administrative | 9,392 | | | 8,163 | | | 290 | | | 17,480 | | | 35,325 | |
| | | | | | | | | |
Operating income (loss) from continuing operations | 37,842 | | | 32,752 | | | (290) | | | (17,480) | | | 52,824 | |
| | | | | | | | | |
Interest expense | — | | | — | | | — | | | 25,855 | | | 25,855 | |
Equity in earnings of unconsolidated subsidiaries | — | | | — | | | (8,742) | | | — | | | (8,742) | |
Other expense | 29 | | | — | | | — | | | 12 | | | 41 | |
Income (loss) from continuing operations before income tax | $ | 37,813 | | | $ | 32,752 | | | $ | 8,452 | | | (43,347) | | | 35,670 | |
Income tax expense | | | | | | | 8,780 | | | 8,780 | |
Net income (loss) from continuing operations | | | | | | | $ | (52,127) | | | $ | 26,890 | |
| | | | | | | | | |
(1) Infrastructure Solutions segment includes the Company’s equity in (earnings) loss from its investment in the AVAIL JV, as well as other expenses related to receivables and liabilities that were retained by the Company following the sale of the AIS business. |
(2) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments. |
(3) For fiscal year 2024, amortization expense for acquired intangible assets is included in Corporate expenses in "Selling, general and administrative" expense as these expenses are not allocated to the segments. |
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | |
| | 2022 | | 2021 | | | | |
Sales: | | | | | | | | |
Metal Coatings | | $ | 158,274 | | | $ | 135,083 | | | | | |
Precoat Metals | | 215,027 | | | — | | | | | |
| | | | | | | | |
Total Sales | | $ | 373,301 | | | $ | 135,083 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended November 30, 2022 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions(1) | | Corporate(2)(3) | | Total |
Sales | $ | 158,274 | | | $ | 215,027 | | | $ | — | | | $ | — | | | $ | 373,301 | |
Cost of sales | 120,134 | | | 180,085 | | | — | | | — | | | 300,219 | |
Gross margin | 38,140 | | | 34,942 | | | — | | | — | | | 73,082 | |
| | | | | | | | | |
Selling, general and administrative | 4,594 | | | 13,889 | | | — | | | 9,206 | | | 27,689 | |
| | | | | | | | | |
Operating income (loss) from continuing operations | 33,546 | | | 21,053 | | | — | | | (9,206) | | | 45,393 | |
| | | | | | | | | |
Interest expense | — | | | — | | | — | | | 26,123 | | | 26,123 | |
Equity in earnings of unconsolidated subsidiaries | — | | | — | | | (1,006) | | | — | | | (1,006) | |
Other income | (124) | | | — | | | — | | | (486) | | | (610) | |
Income (loss) from continuing operations before income tax | $ | 33,670 | | | $ | 21,053 | | | $ | 1,006 | | | (34,843) | | | 20,886 | |
Income tax expense | | | | | | | 2,447 | | | 2,447 | |
Net income (loss) from continuing operations | | | | | | | $ | (37,290) | | | $ | 18,439 | |
| | | | | | | | | |
(1) Infrastructure Solutions segment includes the Company’s equity in (earnings) loss from its investment in the AVAIL JV. |
(2) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments. |
(3) For fiscal year 2023, amortization expense for acquired intangible assets is included in Metal Coatings expenses in "Cost of sales" and in Precoat Metals in "Selling, general and administrative" expense. |
|
Sales
For the three months ended November 30, 20222023 (the "current quarter"), consolidated sales increased $238.2$8.3 million, or 176.3%2.2%, compared to the three months ended November 30, 20212022 (the "prior year quarter"). Sales for the AZZ Metal Coatings segment increased $23.2$4.9 million, or 17.2%3.1%, for the current quarter, compared to the prior year quarter. The increase was primarily due to improved price realization for our superior quality and service and an increase in the selling price, partially offset by a lower volume of steel galvanized.
processed during the quarter. Sales for the AZZ Precoat Metals segment which was acquired on May 13, 2022, were $215.0increased $3.4 million, or 1.6% for the current quarter. The increase is primarily due to an increase in selling price, partially offset by a lower volume of coil coated in the current period.
Segment Operating Income
The following table reflectsFor the breakdown ofcurrent quarter, consolidated operating income by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, 2022 | | Three Months Ended November 30, 2021 |
| | Metal Coatings | | Precoat Metals | | | | Corporate | | Total | | Metal Coatings | | Precoat Metals | | | | Corporate | | Total |
Operating income (loss) from continuing operations: | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 158,274 | | | $ | 215,027 | | | | | $ | — | | | $ | 373,301 | | | $ | 135,083 | | | $ | — | | | | | $ | — | | | $ | 135,083 | |
Cost of sales | | 120,134 | | | 180,085 | | | | | — | | | 300,219 | | | 97,510 | | | — | | | | | — | | | 97,510 | |
Gross margin | | 38,140 | | | 34,942 | | | | | — | | | 73,082 | | | 37,573 | | | — | | | | | — | | | 37,573 | |
Selling, general and administrative | | 4,594 | | | 13,889 | | | | | 9,206 | | | 27,689 | | | 4,462 | | | — | | | | | 11,821 | | | 16,283 | |
| | | | | | | | | | | | | | | | | | | | |
Total operating income (loss) from continuing operations | | $ | 33,546 | | | $ | 21,053 | | | | | $ | (9,206) | | | $ | 45,393 | | | $ | 33,111 | | | $ | — | | | | | $ | (11,821) | | | $ | 21,290 | |
increased $7.4 million, or 16.4%, compared to the prior year quarter.Operating income for the AZZ Metal Coatings segment increased $0.4$4.3 million, or 1.3%,12.8% for the current quarter, compared to the prior year quarter. The current quarter increase was due to improvedincreased sales as described above, coupled with lower cost of sales, partially offset by higher selling, general and administrative expenses. The decrease in cost of sales of $4.2 million was primarily due to lower zinc and overhead costs, and a change in classification of amortization of intangible assets of $1.9 million, partially offset by an increase in labor costs. Selling, general and administrative expense increased due to the recognition of a $4.5 million legal accrual, and the change in classification of certain compensation and information technology costs for labor and raw materials forof $0.7 million, to the current quarter.AZZ Metal Coatings segment, from the Corporate segment.
Operating income for the AZZ Precoat Metals segment which was acquired on May 13, 2022, was $21.1increased $11.7 million, or 55.6% for the current quarter. The increase is primarily due to: lower applied cost of sales (primarily driven by improved efficiencies which offset higher cost of labor and materials, as well as lower freight costs); lower selling, general and administrative expense (primarily salaries and wages and the change in classification of amortization of intangible assets of $4.3 million); and the increase in sales as described above.
Operating income for the AZZ Infrastructure Solutions segment decreased $0.3 million, due to legal expenses.
Corporate Expenses
Corporate selling, general and administrative expenses decreased $2.6increased $8.3 million, or 22.1%89.9%, for the current quarter, compared to the prior year quarter. The decreaseincrease is primarily due to incometo: amortization expense of $5.9 million related to all intangible assets, which is included in corporate expense in the current quarter, and allocated to the segments in the prior year quarter; a decrease in income from the transition services agreement associated with the AIS JV, as well as external consultingAVAIL JV; and employee-related costs; partially offset by the allocation of certain compensation and information technology costs associated with our ongoing strategic reviewto the segments, that were previously included in the prior year quarter, with no corresponding expense in the current quarter.corporate expenses.
Interest Expense
Interest expense for the current quarter increased $24.5decreased $0.3 million, to $26.1$25.9 million, compared to $1.6$26.1 million for the prior year quarter. The significant increasedecrease in interest expense is primarily attributable to a decrease in the additionalweighted average debt that was obtainedoutstanding, partially offset by an increase in conjunction with the Precoat Acquisition, including the Term Loan B of $1.3 billion and the Convertible Notes of $240.0 million. The Convertible Notes transitioned from subordinated debt (e.g., interest) to Preferred Equity (e.g., dividends)interest rates on August 5, 2022.
our outstanding debt.
Equity in Earnings of Unconsolidated Entities
Equity in earnings of unconsolidated subsidiaries offor the current quarter increased $7.7 million, to $8.7 million, compared to $1.0 million represents our proportionate share of net income from our investment in the AIS JV. We have a 40%prior year quarter. The increase is primarily due to higher earnings from the AVAIL JV, and three months of equity interestin earnings in the AIScurrent quarter, compared to one month in the prior year quarter, as the AVAIL JV equity in earnings are recorded on a one-month lag.
See Note 9 of our consolidated financial statements for more information about the AVAIL JV.
Income Taxes
The provision for income taxes from continuing operations reflects an effective tax rate of 24.6% for the three months ended November 30, 2023, compared to 11.7% for the current quarter, compared to 33.6% for the prior year quarter.three months ended November 30, 2022. The decreaseincrease in the effective tax rate was primarilyis attributable to a favorable adjustment in the tax benefit fromprior year period due to the recognition of an outside basis difference between book and tax inrelated to the Company's investment in the AISAVAIL JV.
Income from Discontinued Operations
Following the AIS JV agreement with Fernweh, theThe results of our AZZ Infrastructure Solutions segment were classified as discontinued operations in our condensed consolidated statements of operations and excluded from continuing operations for all periods presented. The results of operations from discontinued operations for the three months ended November 30, 2022 and 2021 consist of the following (in thousands):
| | | | | | | |
| | | Three Months Ended |
| | | November 30, 2022 |
Sales | | | $ | 42,300 | |
Cost of sales | | | 35,020 | |
Gross margin | | | 7,280 | |
| | | |
Selling, general and administrative | | | 4,074 | |
| | | |
Loss on disposal of discontinued operations | | | 45,010 | |
Operating loss from discontinued operations | | | (41,804) | |
| | | |
Interest expense | | | 2 | |
Other (income) expense, net | | | 2,002 | |
Loss from discontinued operations before income tax | | | (43,808) | |
Income tax benefit | | | (4,827) | |
Net loss from discontinued operations | | | $ | (38,981) | |
| | | | | | | | | | | |
| Three Months Ended November 30, |
| 2022 | | 2021 |
Sales | $ | 42,300 | | | $ | 96,654 | |
Cost of sales | 35,020 | | | 77,263 | |
Gross margin | 7,280 | | | 19,391 | |
| | | |
Selling, general and administrative | 4,074 | | | 10,589 | |
Loss on disposal of discontinued operations | 45,010 | | | — | |
Operating income (loss) from discontinued operations | (41,804) | | | 8,802 | |
| | | |
Interest expense | 2 | | 2 | |
| | | |
Other (income) expense, net | 2,002 | | | 1,504 | |
Income (loss) from discontinued operations before income tax | (43,808) | | | 7,296 | |
Income tax (benefit) expense | (4,827) | | | (682) | |
Net income (loss) from discontinued operations | $ | (38,981) | | | $ | 7,978 | |
Sales for the AZZ Infrastructure Solutions segment decreased $54.4 million, or 56.2%, for the current quarter, comparedSee Note 3 to the prior year quarter. The decrease is primarily due to the divestiture of our AZZ Infrastructure Solutions segment on September 30, 2022, resulting in the inclusion of one month of sales for the current quarter, compared to a full quarter for the prior year period.
Operating income for the AZZ Infrastructure Solutions segment decreased by $50.6 million, or 574.9%, for the current quarter, compared to the prior year quarter. For the three months ended November 30, 2022, the Company recognized a non-cash loss on disposal of approximately $45.0 million, which isconsolidated financial statements included in "Lossthis Quarterly Report on disposal of discontinued operations" above.During the three months ended November 30, 2022, the Company completed the sale of the AIS segment. The additional loss includes $27.8 million from the derecognition of the cumulative translation adjustment related to its investment in foreign entities within the AIS segment, as well as an adjustment of $17.2 millionForm 10-Q for the change in net assets for the period between August 31, 2022, when the estimated loss was recorded, and September 30, 2022, when the transaction closed.
The provision for income taxes from discontinued operations reflects an effective tax rate of 11.0% for the current quarter, compared to (9.3)% for the prior year quarter. The increase is related to an unfavorable permanent adjustment for cumulative translation adjustment that, for tax purposes, is non-deductible.more information.
NINE MONTHS ENDED NOVEMBER 31, 202230, 2023 COMPARED TO THE NINE MONTHS ENDED NOVEMBER 31, 202130, 2022
Segment Sales and Operating Income from Continuing Operations
The following table reflects the breakdown of salesnet income from continuing operations by segment (in thousands). The results for Precoat Metals represent results of operations from May 13, 2022, the acquisition date, through November 30, 2022.:
| | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, | | |
| | 2022 | | 2021 | | | | |
Sales: | | | | | | | | |
Metal Coatings | | $ | 487,567 | | | $ | 395,732 | | | | | |
Precoat Metals | | 499,578 | | | — | | | | | |
| | | | | | | | |
Total Sales | | $ | 987,145 | | | $ | 395,732 | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended November 30, 2023 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions(1) | | Corporate(2)(3) | | Total |
Sales | $ | 501,816 | | | $ | 669,204 | | | $ | — | | | $ | — | | | $ | 1,171,020 | |
Cost of sales | 353,280 | | | 535,326 | | | — | | | — | | | 888,606 | |
Gross margin | 148,536 | | | 133,878 | | | — | | | — | | | 282,414 | |
| | | | | | | | | |
Selling, general and administrative | 20,143 | | | 24,429 | | | 6,244 | | | 52,271 | | | 103,087 | |
| | | | | | | | | |
Operating income (loss) from continuing operations | 128,393 | | | 109,449 | | | (6,244) | | | (52,271) | | | 179,327 | |
| | | | | | | | | |
Interest expense | — | | | — | | | — | | | 82,331 | | | 82,331 | |
Equity in earnings of unconsolidated subsidiaries | — | | | — | | | (11,136) | | | — | | | (11,136) | |
Other (income) expense | 40 | | | — | | | — | | | (49) | | | (9) | |
Income (loss) from continuing operations before income tax | $ | 128,353 | | | $ | 109,449 | | | $ | 4,892 | | | (134,553) | | | 108,141 | |
Income tax expense | | | | | | | 24,397 | | | 24,397 | |
Net income (loss) from continuing operations | | | | | | | $ | (158,950) | | | $ | 83,744 | |
| | | | | | | | | |
(1) Infrastructure Solutions segment includes the Company’s equity in (earnings) loss from its investment in the AVAIL JV, as well as other expenses related to receivables and liabilities that were retained by the Company following the sale of the AIS business. |
(2) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments. |
(3) For fiscal year 2024, amortization expense for acquired intangible assets is included in Corporate expenses in "Selling, general and administrative" expense as these expenses are not allocated to the segments. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Nine Months Ended November 30, 2022 |
| Metal Coatings | | Precoat Metals(4) | | Infrastructure Solutions(1) | | Corporate(2)(3) | | Total |
Sales | $ | 487,567 | | | $ | 499,578 | | | $ | — | | | $ | — | | | $ | 987,145 | |
Cost of sales | 350,152 | | | 402,303 | | | — | | | — | | | 752,455 | |
Gross margin | 137,415 | | | 97,275 | | | — | | | — | | | 234,690 | |
| | | | | | | | | |
Selling, general and administrative | 13,603 | | | 33,361 | | | — | | | 50,283 | | | 97,247 | |
| | | | | | | | | |
Operating income (loss) from continuing operations | 123,812 | | | 63,914 | | | — | | | (50,283) | | | 137,443 | |
| | | | | | | | | |
Interest expense | — | | | — | | | — | | | 61,739 | | | 61,739 | |
Equity in earnings of unconsolidated subsidiaries | — | | | — | | | (1,006) | | | — | | | (1,006) | |
Other (income) expense | 6 | | | (41) | | | — | | | (547) | | | (582) | |
Income (loss) from continuing operations before income tax | $ | 123,806 | | | $ | 63,955 | | | $ | 1,006 | | | (111,475) | | | 77,292 | |
Income tax expense | | | | | | | 18,380 | | | 18,380 | |
Net income (loss) from continuing operations | | | | | | | $ | (129,855) | | | $ | 58,912 | |
| | | | | | | | | |
(1) Infrastructure Solutions segment includes the Company’s equity in (earnings) loss from its investment in the AVAIL JV. |
(2) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments. |
(3) For fiscal year 2023, amortization expense for acquired intangible assets is included in Metal Coatings expenses in "Cost of sales" and in Precoat Metals in "Selling, general and administrative" expense. |
(4) For the nine months ended November 30, 2022, Precoat Metals segment includes results from May 13, 2022 - November 30, 2022. |
Sales
For the nine months ended November 30, 20222023 (the "current nine-month period"), consolidated sales increased $591.4$183.9 million, or 149.4%18.6%, compared to the nine months ended November 30, 20212022 (the "prior year nine-month period"). Sales for the AZZ Metal Coatings segment increased $91.8$14.2 million, or 23.2%2.9%, for the current nine-month period, compared to the prior year nine-month period. The increase in sales was primarily due to an increase in the volume of steel processed during the period, and improved price realization for our superior quality and service. The volume of steel processed also increased in the current period, compared to the prior year period.
Sales for the AZZ Precoat Metals segment which was acquired onincreased $169.6 million, or 34.0% for the current nine-month period, primarily due to: the current year including a full nine-month period compared to the period from May 13, 2022 were $499.6 millionthrough November 30, 2023 for the nine months ended.prior year nine-month period, which contributed $178.4 million in sales, partially offset by a decrease of $8.8 million in sales due to lower volume of coil coated, partially offset by an increase in selling price.
Segment Operating Income
The following table reflectsFor the breakdown ofcurrent nine-month period, consolidated operating income by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Nine Months Ended November 30, 2022 | | Nine Months Ended November 30, 2021 |
| | Metal Coatings | | Precoat Metals | | | | Corporate | | Total | | Metal Coatings | | Precoat Metals | | | | Corporate | | Total |
Operating income (loss) from continuing operations: | | | | | | | | | | | | | | | | | | | | |
Sales | | $ | 487,567 | | | $ | 499,578 | | | | | $ | — | | | $ | 987,145 | | | $ | 395,732 | | | $ | — | | | | | $ | — | | | $ | 395,732 | |
Cost of sales | | 350,152 | | | 402,303 | | | | | — | | | 752,455 | | | 285,572 | | | — | | | | | — | | | 285,572 | |
Gross margin | | 137,415 | | | 97,275 | | | | | — | | | 234,690 | | | 110,160 | | | — | | | | | — | | | 110,160 | |
Selling, general and administrative | | 13,603 | | | 33,361 | | | | | 50,283 | | | 97,247 | | | 13,088 | | | — | | | | | 34,395 | | | 47,483 | |
| | | | | | | | | | | | | | | | | | | | |
Total operating income (loss) from continuing operations | | $ | 123,812 | | | $ | 63,914 | | | | | $ | (50,283) | | | $ | 137,443 | | | $ | 97,072 | | | $ | — | | | | | $ | (34,395) | | | $ | 62,677 | |
increased $41.9 million, or 30.5%, compared to the prior year nine-month period.Operating income for the AZZ Metal Coatings segment increased $26.7$4.6 million, or 27.5%,3.7% for the current nine-month period, compared to the prior year nine-month period. The increase was primarily due the increase into improved sales as described above offset by higher cost of sales and higher selling, general and administrative expenses. Cost of sales increased $3.1 million, primarily due to higher labor and overhead costs, partially offset by a change in classification of amortization of intangible assets of $5.4 million and a decrease in zinc costs. Selling, general and administrative expense increased due to the recognition of a $4.5 million legal accrual, and the change in classification of certain compensation and information technology costs for labor and raw materials forof $2.0 million to the current nine-month period.AZZ Metal Coatings segment, from the Corporate segment.
Operating income for the AZZ Precoat Metals segment increased $45.5 million, or 71.2%. The increase is primarily due to the inclusion of a full 1st quarter of fiscal 2024 compared to a partial fiscal quarter of 2023, which was acquired on May 13, 2022, was $63.9contributed $31.0 million, and increases in operating income for the 2nd and 3rd quarters of current nine-month period compared to the prior year nine-month period. The increases in the 2nd and 3rd quarters were due to: lower applied cost of sales (primarily driven by improved efficiencies which offset higher cost of labor and materials, as well as lower freight costs); lower selling, general and administrative expense (primarily salaries and wages and the change in classification of amortization of intangible assets of $12.2 million); and the increase in sales as described above.
Operating income for the AZZ Infrastructure Solutions segment decreased $6.2 million, due to a legal settlement of $5.75 million and legal expenses associated with the settlement and other matters.
Corporate Expenses
Corporate selling, general and administrative expenses increased $15.9$2.0 million, or 46.2%4.0%, for the current nine-month period, compared to the prior year nine-month period. The increase is primarily due to: amortization expense of $18.1 million related to all intangible assets, which is included in corporate expense in the current nine-month period, and allocated to the segments in the prior year nine-month period; a decrease in transition services agreement fees associated with the AVAIL JV; and employee-related costs. These increases were offset by a decrease in acquisition costs relatedof $15.3 million incurred in the prior year nine-month period and the allocation of certain compensation and information technology costs to the Precoat Acquisition, costs related tosegments in the AIS joint venture, and increased payroll and employee-related compensation costs related to both of these transactions.current nine-month period, that were previously included in corporate expenses.
Interest Expense
Interest expense for the current nine-month period increased $56.7$20.6 million, to $61.7$82.3 million, compared to $5.0$61.7 million for the prior year nine-month period. The significant increase in interest expense was primarilyis attributable to the additional debt that was obtained in conjunction with the Precoat Acquisition, includingwhich was outstanding for the Term Loan Bfull current nine-month period, compared to the prior year, as well as higher rates of $1.3 billion and the Convertible
Notes of $240.0 million. The Convertible Notes transitioned from from subordinated debt (e.g., interest) to Preferred Equity (e.g., dividends)interest on August 5, 2022.our borrowings.
Equity in Earnings of Unconsolidated Entities
Equity in earnings of unconsolidated subsidiaries of $1.0 million represents our proportionate share of net income or loss from our investment in the AIS JV. We have a 40% equity interest in the AIS JV.
Income Taxes
Forfor the current nine-month period increased $10.1 million, to $11.1 million, compared to $1.0 million in the prior year nine-month period. The increase is primarily due to higher earnings from the AVAIL JV, and nine months of equity in earnings in the current nine-month period, compared to one month in the prior year nine-month period, as the AVAIL JV equity in earnings are recorded on a one-month lag. See Note 9 of our consolidated financial statements for more information about the AVAIL JV.
Income Taxes
The provision for income taxes from continuing operations reflects an effective tax rate from continuing operations was 23.8%,of 22.6% for the nine months ended November 30, 2023, compared to 32.5%23.8% for the prior year nine-monthcomparable period. The decrease in the effective tax rate is the result ofattributable to an unfavorable adjustments related to uncertain tax positions recordedadjustment in the prior year comparable period andrelated to the tax benefit from an outside basis difference between book and tax in the Company's investment in the AIS JV.management fees recorded as a result of continuing operations versus discontinued operations reporting.
Income from Discontinued Operations, net of tax
The results of our AZZ Infrastructure Solutions segment arewere classified as discontinued operations in our condensed consolidated statements of operations and excluded from continuing operations for all periods presented. The results of operations from discontinued operations for the current and prior year nine-month period consist of the following (in thousands):
| | | | | | | | | | | |
| Nine Months Ended November 30, |
| 2022 | | 2021 |
Sales | $ | 256,224 | | | $ | 282,278 | |
Cost of sales | 202,707 | | | 222,432 | |
Gross margin | 53,517 | | | 59,846 | |
| | | |
Selling, general and administrative | 26,186 | | | 35,192 | |
Loss on disposal of discontinued operations | 159,910 | | | — | |
Operating income (loss) from discontinued operations | (132,579) | | | 24,654 | |
| | | |
Interest expense | 8 | | | 63 | |
| | | |
Other (income) expense, net | 6,270 | | | 1,468 | |
Income (loss) from discontinued operations before income tax | (138,857) | | | 23,123 | |
Income tax (benefit) expense | (25,910) | | | (289) | |
Net income (loss) from discontinued operations | $ | (112,947) | | | $ | 23,412 | |
| | | | | | | |
| | | Nine Months Ended |
| | | November 30, 2022 |
Sales | | | $ | 256,224 | |
Cost of sales | | | 202,707 | |
Gross margin | | | 53,517 | |
| | | |
Selling, general and administrative | | | 26,186 | |
| | | |
Loss on disposal of discontinued operations | | | 159,910 | |
Operating loss from discontinued operations | | | (132,579) | |
| | | |
Interest expense | | | 8 | |
Other (income) expense, net | | | 6,270 | |
Loss from discontinued operations before income tax | | | (138,857) | |
Income tax benefit | | | (25,910) | |
Net loss from discontinued operations | | | $ | (112,947) | |
Sales for the AZZ Infrastructure Solutions segment decreased $26.1 million, or 9.2%, for the current nine-month period, comparedSee Note 3 to the prior year nine-month period. The decrease is primarily due to the divestiture of our AZZ Infrastructure Solutions segment on September 30, 2022, resulting in the inclusion of a partial period of sales for the current nine-month period, compared to a full period for the prior year nine-month period.
Operating income for the AZZ Infrastructure Solutions segment decreased by $157.2 million, or 637.8%, for the current nine-month period, compared to the prior year nine-month period. For the current nine-month period, the Company recognized a non-cash loss on disposal of approximately $159.9 million, which isconsolidated financial statements included in "Lossthis Quarterly Report on disposal of discontinued operations" above. The loss represents the difference between the carrying amount and the estimated fair value of the Company's interest in the AIS JV. The loss includes a $45.0 million loss recognized during the current quarter. The additional loss includes $27.8 million from the derecognition of the cumulative translation adjustment related to its investment in foreign entities within the AIS segment, as well as an adjustment of $17.2 millionForm 10-Q for the change in net assets for the period between August 31, 2022, when the estimated loss was recorded, and September 30, 2022, when the transaction closed.more information.
The decrease is also due to the divestiture of our AZZ Infrastructure Solutions segment on September 30, 2022, resulting in the inclusion of a partial period of operating income for the current nine-month period, compared to a full period for the prior year nine-month period.
The provision for income taxes from discontinued operations reflects an effective tax rate of 18.7% for the nine months ended November 30, 2022, compared to (1.2)% for the nine months ended November 30, 2021. The increase is related to an unfavorable permanent adjustment for cumulative translation adjustment that, for tax purposes, is non-deductible.
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 and working capital for the periods presented (in thousands):
| | | Nine Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2023 | | 2022 |
Net cash provided by operating activities of continuing operations | Net cash provided by operating activities of continuing operations | | $ | 68,622 | | | $ | 45,938 | | Net cash provided by operating activities of continuing operations | | $ | 180,928 | | | $ | 68,622 | |
Net cash used in investing activities of continuing operations | Net cash used in investing activities of continuing operations | | (1,207,653) | | | (13,406) | | Net cash used in investing activities of continuing operations | | (66,853) | | | (1,207,653) | |
Net cash provided by (used in) financing activities of continuing operations | Net cash provided by (used in) financing activities of continuing operations | | 1,005,456 | | | (29,167) | | Net cash provided by (used in) financing activities of continuing operations | | (109,444) | | | 1,005,456 | |
| Net cash provided by operating activities from discontinued operations | Net cash provided by operating activities from discontinued operations | | 7,973 | | | 3,730 | | Net cash provided by operating activities from discontinued operations | | — | | | 7,973 | |
Net cash used in investing activities from discontinued operations | Net cash used in investing activities from discontinued operations | | (3,991) | | | (3,019) | | Net cash used in investing activities from discontinued operations | | — | | | (3,991) | |
Net cash provided by financing activities from discontinued operations | Net cash provided by financing activities from discontinued operations | | 120,000 | | | — | | Net cash provided by financing activities from discontinued operations | | — | | | 120,000 | |
| Working Capital | Working Capital | | 185,879 | | | 236,003 | | Working Capital | | 192,728 | | | 230,176 | |
Net cash provided by operating activities of continuing operations for the nine-month period was $68.6$180.9 million compared to $45.9$68.6 million for the prior year nine-month period. The increase in cash provided by operating activities is primarily attributable to an increaseincreases in net income from continuing operations and an increase in depreciation and amortization, a decrease in deferred income taxes and increases from changes in working capital in the current nine-month period compared to the prior year nine-month period. Changes in current assets and current liabilities increased cash provided by operating activities by $73.8 million, due to decreases in accounts receivable, other receivables, inventories and prepaid expenses and increases in accounts payable, partially offset by increases in deferred taxes and decreases in working capital. The decrease in working capital resulted from lower quarter-end accounts payable and increases in inventories, prepaid expenses, other assets, partially offset by increases other accrued liabilities. Net cash provided by operating activities offrom discontinued operations for the nine-month period was $8.0 million, compared to $3.7 million for the prior year nine-month period.
Net cash used in investing activities of continuing operations for the nine-month period was $1.2 billion,$66.9 million compared to $13.4 million$1.21 billion for the prior year nine-month period. The increasedecrease in cash used in investing activities for the current quarter was attributable to the Precoat Acquisition completed in the first quarter of fiscal 2023. In the current year, cash used in investing activities was primarily due to cash used for capital expenditures and increased from the prior year nine-month period due to the construction of the coil coating facility in Washington, Missouri. Net cash provided byused in investing activities offrom discontinued operations for the nine-month period was $4.0 million, compared to $3.0 million for the prior year nine-month period.
Net cash provided byused in financing activities of continuing operations for the nine-month period was $1.0 billion,$109.4 million compared to net cash used inprovided by financing activities of $29.2 million$1.01 billion for the prior year nine-month period. The increasedecrease in cash used infrom financing activities during the current quarter was primarily attributable to an increase in proceeds from long-term debt. See “Financing and Capital” section below for additional information.debt in the prior year nine-month period, which were used to fund the Precoat Acquisition.
Financing and Capital
2021 Credit Agreement
On July 8, 2021, the Company entered into a five-year unsecured revolving credit facility under a credit agreement, by and among the Company, as borrower, Citibank, N.A., as administrative agent and the other agents and lender parties thereto (the “2021 Credit Agreement”). The 2021 Credit Agreement was scheduled to mature in July 2026 and included the following significant terms:
i.provided for a senior unsecured revolving credit facility with a principal amount of up to $400.0 million of 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 the leverage ratio of the Company and its consolidated subsidiaries as a group;
iii.included a letter of credit sub-facility up to $85.0 million for the issuance of standby and commercial letters of credit;
iv.included a $50.0 million sublimit for swing line loans;
v.included 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.included a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each to be tested at quarter end.
On May 13, 2022, the Revolving Credit Facility under the 2021 Credit Agreement was repaid with proceeds from the 2022 Credit Agreement, which is further described below.
2022 Credit Agreement and Term Loan B
OnThe Company has a credit agreement with a syndicate of financial institutions as lenders that was entered into on May 13, 2022 the Company replaced the 2021 Credit Agreement with a new Credit Agreement (the "2022 Credit Agreement") by and among. On August 17, 2023, the Company as borrower, Citibank, N.A., as administrative and collateral agent, andrepriced the other agents and lender parties thereto$1.0 billion Term Loan B, which was outstanding under the 2022 Credit Agreement. Agreement as of November 30, 2023. The repricing reduced the interest rate margin by 50 basis points to an interest rate of Secured Overnight Financing Rate ("SOFR") plus 3.75% and removed the Credit Spread Adjustment, as defined in the 2022 Credit Agreement, of 10 basis points.
The 2022 Credit Agreement includes the following significant terms;terms:
i.provides for a senior secured initial term loan in the aggregate principal amount of $1.1$1.3 billion (the "Term Loan B"), due May 13, 2029, which is secured by substantially all of the assets of the Company;
ii.provides for a maximum senior secured revolving credit facilityRevolving Credit Facility in the aggregate principal amount of $400.0 million (the "Revolving Credit Facility"), due May 13, 2027;
iii.includes a letter of credit sub-facility of up to $100.0 million, which is part of, and not in addition to, the Revolving Credit Facility;
iv.borrowings under the Term Loan B bear an interest rate of SOFR plus 3.75% (following the repricing on August 17, 2023 as noted above) and the Revolving Credit Facility each bearbears an interest rate of Secured Overnight Financing Rate ("SOFR")SOFR plus 4.25% (as of November 30, 2023—see below for information related to the repricing of the Company’s Revolving Credit Facility on December 20, 2023);
v.includes customary affirmative and negative covenants, and events of default; including restrictions on the incurrence of non-ordinary course debt, investment and dividends, subject to various exceptions; and,
vi.includes a maximum quarterly leverage ratio financial covenant, and an interest coveragewith reporting requirements to our banking group at each quarter-end.
On December 20, 2023, the Company repriced the $400.0 million Revolving Credit Facility, which was outstanding under the 2022 Credit Agreement. The repricing converted from a rate of SOFR + 425 plus a Credit Spread Adjustment of 10 basis points, to a tiered rate ranging from SOFR plus 275 - 350 basis points, depending on the Company's net leverage ratio, financial covenant,with no Credit Spread Adjustment.
The Company utilizes proceeds of the advances underfrom the Revolving Credit Facility will be utilized primarily to finance working capital needs, capital improvements, dividends, acquisitions and for general corporate purposes. The proceeds of
As defined in the Term Loan Bcredit agreement, quarterly prepayments were used to finance a portion ofdue against the Precoat Acquisition, pay transaction-related costs owed under the Securities Purchase Agreement (defined below) and refinance certain prior indebtedness, including the repayment of outstanding borrowings under the 2021 Credit Agreement. The proceeds were also utilized to redeem 100% of the Company’s 2020 Senior Notes on June 6, 2022.
Outstanding principal of the Term Loan B isand were payable on the last business day of each May, August, November and February, beginning August 31, 2022, in a quarterly aggregate principal amount of $3.25 million, with the entire remaining principal amount due on May 13, 2029, the maturity date. Additional prepayments made against the Term Loan B contribute to these required quarterly payments. Due to a prepayment of $240.0 million that the Company made on the Term Loan B during fiscal year 2023 in connection with the sale of the AIS business, the quarterly mandatory principal payment requirement has been met, and the quarterly payments of $3.25 million are not required at this time.
The effectiveweighted average interest rate for the 2022Company's outstanding debt, including the Revolving Credit Facility and the Term Loan B, was 8.53%8.54% at November 30, 2022.2023.
The 2022 Credit Agreement requiresCompany's credit agreement required the Company to maintain a maximum Total Net Leverage Ratio (as defined in the loan agreement) no greater than 6.25 through November 2022. For each subsequent quarter, the maximum ratio decreases by 25 basis points through May 31, 2024, when the maximum Total Net Leverage Ratio reaches 4.5.
Convertible Subordinated Notes
On May 13, 2022, the Company completed the issuance of $240.0 million aggregate principal amount of 6.00% convertible subordinated notes due June 30, 2030 (the "Convertible Notes") pursuant to the Securities Purchase Agreement (the "Securities Purchase Agreement") with BTO Pegasus Holdings DE L.P., a Delaware limited partnership (together with its assignees, "Blackstone"), an investment vehicle of funds affiliated with Blackstone Inc. Interest on the Convertible Notes was payable on June 30 and December 31. The Convertible Notes were exchanged for 240,000 shares of the Company's 6.0% Series A Convertible Preferred Stock on August 5, 2022, following the receipt of shareholder approval for the issuance of preferred shares. The Series A Preferred Stock are convertible by the holder at any time into shares of the Company's common stock at a price of $58.30 per share of common stock. In addition, the Series A Preferred Stock are subject to a minimum conversion threshold of 1,000 shares per conversion, and customary anti-dilution and dividend adjustments.
The Company used the proceeds of the Convertible Notes to fund the Company’s Precoat Acquisition.
The Company's debt agreements require the Company to maintain certain affirmative and negative covenants. As of November 30, 2022,2023, the Company was required to maintain a Total Net Leverage Ratio no greater than 5.0. As of November 30, 2023, we were in compliance with all covenants andor other requirements set forth in the debt agreements.
As of November 30, 2022,2023, we had $1.1$1.04 billion of floating- and fixed-rate notesdebt outstanding on the Revolving Credit Facility and the Term Loan B, with varying maturities through fiscal 2032 and2029. As of November 30, 2023, we wereare in compliance with alleach of the covenants related to these outstanding borrowings. AsAdditionally, as of November 30, 2022,2023, we had approximately $373.3$375.5 million of additional credit available for future draws or letters of credit.
Letters of Credit
We incurred higher average interest rates compared to the same periodAs of November 30, 2023, we had total outstanding letters of credit in the prior year,amount of $14.5 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, performance periods and we expect this trend to continue throughout fiscal 2023. While the actual timing and extent of the future increases in interest rates remains unknown, higher long-term interest rates are expected to significantly increase interest expense on our variable-rate outstanding debt.insurance collateral.
Interest Rate Swap
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable-rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable-rate debt.
On September 27, 2022, the Company entered into a fixed-ratean interest rate swap agreement with banks that are parties to the 20212022 Credit Agreement, amended onAgreement. On October 7, 2022, the agreement was amended to change the SOFR-based component of the interest rate on a portion of the Company's our
variable-rate debt to a fixed rate of 4.277%, resulting in a total fixed rate of 8.627% (the “2022 Swap”"2022 Swap"). On August 17, 2023, the Company repriced its Term Loan B, to which the 2022 Swap is related, to reduce the interest rate to SOFR + 3.75%. Following the repricing, the 2022 Swap has a total fixed rate of 8.027%. The 2022 Swap had an initial notional amount of $550$550.0 million and a maturity date of September 30, 2025. The notional amount of the interest rate swap decreases each quarter by a pro-rata portion of theany quarterly principal payments made on the Term Loan B.B, and the current notional amount is $543.1 million. The objective of the 2022 Swap is to eliminate the variability of cash flows in interest payments attributable to changes in benchmark one-month SOFR interest rates, for approximately one-half of the total amount of our variable-rate debt. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month SOFR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable-rate debt. The CompanyWe designated the 2022 Swap as a cash flow hedge at inception. Cash settlements, in the form of cash payments or cash receipts, of the 2022 Swap are recognized in interest expense.
AZZ Infrastructure Solutions (AIS) Joint VentureGreenfield Aluminum Coil Coating Facility
On September 30, 2022, the Company completed the joint venture between the Company and Fernweh Group LLC ("Fernweh"). Under the agreement with Fernweh, AZZ contributed its AZZ Infrastructure Solutions segment (“AIS”)
We are expanding our coatings capabilities by constructing a new 25-acre aluminum coil coating facility in Washington, Missouri that is expected to AIS Investment Holdings LLC (the “AIS JV”), and sold a 60% interestbe operational in 2025. The new facility will be included in the AIS JV to Fernweh at an implied enterprise valueAZZ Precoat Metals segment and is supported by a take-or-pay contract for approximately 75% of AIS of $300.0 million. The AIS JV operates under the name "Avail Infrastructure Solutions" ("AVAIL"). The Company received proceedsoutput from the salenew plant. We expect to spend approximately $125.8 million in progress payments over the estimated two-year construction timeline and we currently have capital commitments of approximately $108.0$48.4 million. We expect to pay approximately $71.2 million as well as $120.0in fiscal 2024, of which $33.6 million that was paid during the current nine-month period. The remaining payments in fiscal 2024 are expected to be funded by committed debt financing taken on by the AVAIL joint venture immediately prior to the closing of the divestiture of AZZ’s controlling interest. As a result of the transaction, AIS is deconsolidatedthrough cash flows from operations and the Company's retained 40% interest in the AVAIL joint venture is accounted forborrowings under the equity method of accounting. See Note 3 of our consolidated financial statements included in this Quarterly Report on Form 10-Q for further information about the AIS segment. The Company used the cash received from the transaction to repay $210.0 million on the Term Loan B, $15.0 million on the Revolving Credit Facility and $3.0 million for working capital purposes.Facility. The project is not expected to result in a material adverse effect on our business, results of operations, cash flow or financial condition.
Share Repurchase Program
During the threenine months ended May 31,November 30, 2023 and 2022, to prioritize repayments of debt, including debt incurred to finance the Precoat Acquisition, the Company did not purchase anyrepurchase shares of common stock under the 2020 Share Authorization. The Company has $84.0 million that may be used to purchase shares. See Part II, “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.”
Other Exposures
We have exposure to commodity price increases in all three of our operating segments, primarily zinc and natural gas in the AZZ Metal Coatings segment, and natural gas, steel and aluminum in the AZZ Precoat Metals segment. We attempt to minimize these increases through fixed cost contract purchases on zinc and natural gas. 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. We have indirect exposure to copper, aluminum, steel and nickel-based alloys in the AZZ Infrastructure Solutions segment through our 40% investment in the AISAVAIL JV.
Off Balance Sheet Arrangements and Contractual Obligations
As of November 30, 2022, we2023, the Company did not have any off-balance sheet arrangements as defined under SEC rules. Specifically, there were no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on the financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
As of November 30, 2022,2023, we had outstanding letters of credit in the amount of $16.7$14.5 million. These letters of credit are issued for a number of reasons, but are most commonly issued to support collateral requirements with insurance companies.
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. We continuously evaluate our estimates and assumptions based upon 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.
Except as noted below, during the current quarter, thereThere were no significant changes to our critical accounting policies and estimates compared to the critical accounting policies and estimates disclosed in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Annual Report on Form 10-K for the year ended February 28, 2022.
Environmental Remediation Liabilities
The Company assumed certain environmental liabilities as part of the Precoat Acquisition. The Company's accounting policy for the recognition of environmental liabilities requires significant judgements and estimates by management and may be impacted by changing regulations and approaches to remediation plans. Any revisions to these estimates could have a material adverse impact on the Company's financial condition or results of operations.
Environmental remediation liabilities include costs directly associated with site investigation and clean up, such as materials, external contractor costs, legal and consulting expenses and incremental internal costs directly related to the remedy. Estimates used to record environmental remediation liabilities are based on the Company's best estimate of probable future costs based on site-specific facts and circumstances known at the time of the estimate and these estimates are updated on a quarterly basis. Estimates of the cost for the likely remedy are developed using internal resources and third-party environmental engineers and consultants. The Company records the environmental remediation liabilities that represent the points in the range of estimates that are most probable, or the minimum amount when no amount within the range is a better estimate than any other amount.
The Company accrues the anticipated cost of environmental remediation when the obligation is probable and can be reasonably estimated. While any revisions could be material to the operating results of any fiscal quarter or fiscal year, the Company does not expect such additional expenses would have a material adverse effect on its financial position, results of operations, or cash flows.
Business Combinations
Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to utilize assumptions and estimates, which are based upon available information that may be subject to further refinement over the purchase accounting period of one year.
Joint Venture
On September 30, 2022, the Company completed the joint venture between the Company and Fernweh Group LLC ("Fernweh"). Under the agreement with Fernweh, AZZ contributed its AZZ Infrastructure Solutions segment (“AIS”) to AIS Investment Holdings LLC (the “AIS JV”), and sold a 60% interest in the AIS JV to Fernweh at an implied enterprise value of AIS of $300.0 million. Following the classification of the AIS segment as held for sale, the Company measured the AIS segment at the lower of its carrying amount or fair value. As a result, the Company recorded a loss on the sale of the AIS segment. The loss was determined by comparing the fair value of the consideration received for the sale of a 60% interest in the AIS JV and the fair value of the Company’s retained 40% investment in the AIS JV with the net assets of the AIS JV immediately prior to the transaction. The fair value of the Company’s retained investment in the AIS JV was determined in a manner consistent with the transaction price received for the sale of the 60% interest in the AIS JV. The determination of the estimated fair value of the Company's 40% interest in the AIS JV required significant judgement, including the utilization of assumptions and estimates, which were based on available information at the time of the assessment.
The Company accounts for its investment in an unconsolidated joint venture under the equity method of accounting as we exercise significant influence over, but do not control, the joint venture. The investment in the unconsolidated joint venture is initially recorded at fair value, and subsequently increased for capital contributions and allocations of net income, and decreased for capital distributions and allocations of net income or loss. Equity in net income (loss) from the unconsolidated joint venture is2023.
allocated based on our economic interest. We record our interest in the joint venture on a one-month lag to allow sufficient time to review and assess the joint venture’s effect on our reported results. We assess our investment in unconsolidated joint venture for recoverability when events and circumstances are present that suggest there has been a decline in value, and if it is determined that a loss in value of the investment is other than temporary, we write down the investment to its fair value.
Interest Rate Swap
The Company is exposed to interest rate risk on its floating-rate debt. On September 27, 2022, the Company entered into an interest rate swap agreement to effectively convert its floating-rate debt to a fixed-rate basis. The principal objective of this contract is to reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
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.
Non-GAAP Disclosures
In addition to reporting financial results in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”("GAAP"), we provided adjusted earnings,net income and adjusted earnings per share, Earnings before Interest, Taxes, Depreciation and Amortization ("EBITDA") and Adjusted EBITDA (collectively, the “Adjusted"Adjusted Earnings Measures”Measures"), which are non-GAAP measures. Management believes that the presentation of these measures provides investors with greater transparency when comparing operating results across a broad spectrum of companies, which provides a more complete understanding of our financial performance, competitive position and prospects for the future.future capital investment and debt reduction. Management also believes that investors regularly rely on non-GAAP financial measures, such as EBITDA, adjusted EBITDA, adjusted operatingnet income adjusted earnings and adjusted earnings per share, to assess operating performance and that such measures may highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP.
In calculating adjusted net income and adjusted earnings per share, management excludes intangible asset amortization, acquisition expenses, transaction related expenses and certain legal settlements and accruals. Management also provides EBITDA and Adjusted EBITDA, which are non-GAAP measures. Management defines EBITDA as earnings excluding depreciation, amortization, interest, and provision for income taxes. Adjusted EBITDA is defined as earnings excluding depreciation, amortization, interest, provision for income taxes, acquisition expenses, transaction related expenses and certain legal settlements and accruals. Management believes EBITDA and Adjusted EBITDA are used by investors to analyze operating performance and evaluate the Company's ability to incur and service debt and its capacity for making capital expenditures in the future. EBITDA and Adjusted EBITDA are also useful to investors to help assess the Company's estimated enterprise value. In addition, management believes that the adjustments shown below are useful to investors in order to allow them to compare the Company's financial results during the periods shown without the effect of each of these adjustments.
Management provides non-GAAP financial measures for informational purposes and to enhance understanding of the Company’s GAAP consolidated financial statements. Readers should consider these measures in addition to, but not instead of or superior to, the Company's financial statements prepared in accordance with GAAP. These non-GAAP financial measures may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
The following tables provide a reconciliation for the three and nine months ended November 30, 20222023 and 20212022 between the various measures calculated in accordance with GAAP to the Adjusted Earnings Measures (in thousands, except per share data):
Adjusted Earnings and Adjusted Earnings per Share
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| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
| | Amount | | Per Diluted Share(1) | | Amount | | Per Diluted Share(1) | | Amount | | Per Diluted Share(1) | | Amount | | Per Diluted Share(1) |
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Net income (loss) available to common shareholders and diluted earnings per share | | $ | (24,142) | | | (0.97) | | | $ | 21,085 | | | 0.85 | | | $ | (58,675) | | | (2.35) | | | $ | 62,400 | | | 2.48 | |
Adjustments: | | | | | | | | | | | | | | | | |
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Acquisition and transaction related expenditures(2) | | — | | | — | | | — | | | — | | | 15,320 | | | 0.61 | | | — | | | —�� | |
Loss on disposal of discontinued operations | | 45,010 | | | 1.80 | | | — | | | — | | | 159,910 | | | 6.40 | | | — | | | — | |
Additional depreciation and amortization related to acquisition(3) | | 7,986 | | | 0.32 | | | — | | | — | | | 18,634 | | | 0.75 | | | — | | | — | |
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Subtotal | | 52,996 | | | 2.12 | | | — | | | — | | | 193,864 | | | 7.76 | | | — | | | — | |
Tax impact(4) | | (6,877) | | | (0.28) | | | — | | | — | | | (37,986) | | | (1.52) | | | — | | | — | |
Total adjustments | | 46,119 | | | 1.85 | | | — | | | — | | | 155,878 | | | 6.24 | | | — | | | — | |
Adjusted earnings and adjusted earnings per share | | $ | 21,977 | | | $ | 0.88 | | | $ | 21,085 | | | $ | 0.85 | | | $ | 97,203 | | | $ | 3.89 | | | $ | 62,400 | | | $ | 2.48 | |
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(1) Earnings per share amounts included in the table above may not sum due to rounding differences. |
(2) Includes expenses related to the Precoat acquisition, as well as the divestiture of the AZZ Infrastructure Solutions business into the AIS JV. |
(3) Due to purchase price accounting related to the acquisition of Precoat Metals, additional depreciation and amortization was adjusted during the third quarter. The year-to-date amount includes $3.2 million related to the first quarter, $7.5 million related to the second quarter and $8.0 million related to the third quarter. |
(4) Tax benefit consists of: 21% federal statutory rate and 3% blended state tax rate for all adjustments except the loss on disposal of discontinued operations, and 11% and 18% for the loss on disposal of discontinued operations for the three and nine months ended November 30, 2022, respectively. |
EBITDA and Adjusted EBITDA
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| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Net income (loss) | | $ | (20,542) | | | $ | 21,085 | | | $ | (54,035) | | | $ | 62,400 | |
Interest Expense(1) | | 26,126 | | | 1,630 | | | 61,747 | | | 5,081 | |
Income Tax (Benefit) Expense(1) | | (2,380) | | | 5,964 | | | (7,530) | | | 18,489 | |
Depreciation and Amortization(1) | | 22,970 | | | 11,138 | | | 63,092 | | | 33,222 | |
Total Adjustments | | 46,716 | | | 18,732 | | | 117,309 | | | 56,792 | |
Non-GAAP EBITDA | | 26,174 | | | 39,817 | | | 63,274 | | | 119,192 | |
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Acquisition and transaction-related expenditures | | — | | | — | | | 15,320 | | | — | |
Loss on disposal of discontinued operations | | 45,010 | | | — | | | 159,910 | | | — | |
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Adjusted EBITDA | | $ | 71,184 | | | $ | 39,817 | | | $ | 238,504 | | | $ | 119,192 | |
(1) Interest expense, income taxes, depreciation and amortization above include both continuing and discontinued operations, so will not be comparable to the statements of operations included herein, which separate continuing and discontinued operations. | |
Adjusted EBITDA by Segment | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended November 30, | | Nine Months Ended November 30, |
| | 2022 | | 2021 | | 2022 | | 2021 |
Metal Coatings | | | | | | | | |
Net income (loss) | | $ | 32,972 | | | $ | 33,191 | | | $ | 121,832 | | | $ | 97,169 | |
Interest Expense | | 9 | | | 4 | | | 21 | | | 9 | |
Income Tax Expense | | 689 | | | — | | | 1,953 | | | — | |
Depreciation and Amortization Expense | | 8,225 | | | 7,534 | | | 24,785 | | | 22,610 | |
Total adjustments | | 8,923 | | | 7,538 | | | 26,759 | | | 22,619 | |
Non-GAAP EBITDA | | 41,895 | | | 40,729 | | | 148,591 | | | 119,788 | |
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Precoat Metals | | | | | | | | |
Net income (loss) | | $ | 21,235 | | | $ | — | | | $ | 64,221 | | | $ | — | |
Interest Expense | | (182) | | | — | | | (266) | | | — | |
Income Tax Expense | | — | | | — | | | — | | | — | |
Depreciation and Amortization Expense | | 13,381 | | | — | | | 29,891 | | | — | |
Total adjustments | | 13,199 | | | — | | | 29,625 | | | — | |
Non-GAAP EBITDA | | 34,434 | | | — | | | 93,846 | | | — | |
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Corporate | | | | | | | | |
Net income (loss) | | $ | (35,768) | | | $ | (20,084) | | | $ | (127,141) | | | $ | (58,181) | |
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Net income from continuing operations | | $ | 18,439 | | | $ | 13,107 | | | $ | 58,912 | | | $ | 38,988 | |
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Adjusted Net Income and Adjusted Earnings Per Share from Continuing Operations
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| Three Months Ended November 30, | | Nine Months Ended November 30, | |
| 2023 | | 2022 | | 2023 | | 2022 | |
| Amount | | Per Diluted Share(1) | | Amount | | Per Diluted Share(1) | | Amount | | Per Diluted Share(1) | | Amount | | Per Diluted Share(1) | |
Net income from continuing operations | $ | 26,890 | | | | | $ | 18,439 | | | | | $ | 83,744 | | | | | $ | 58,912 | | | | |
Less: preferred stock dividends | (3,600) | | | | | (3,600) | | | | | (10,800) | | | | | (4,640) | | | | |
Net income from continuing operations available to common shareholders | 23,290 | | | | | 14,839 | | | | | 72,944 | | | | | 54,272 | | | | |
Impact of after-tax interest expense for convertible notes | — | | | | | — | | | | | — | | | | | — | | | | |
Impact of preferred stock dividends | 3,600 | | | | | — | | | | | 10,800 | | | | | — | | | | |
Net income and diluted earnings per share from continuing operations(2) | 26,890 | | | $ | 0.92 | | | 14,839 | | | $ | 0.59 | | | 83,744 | | | $ | 2.86 | | | 54,272 | | | $ | 2.17 | | |
Impact of preferred stock dividends | — | | | | | — | | | | | — | | | | | 4,640 | | | | |
Net income and diluted earnings per share from continuing operations for Adjusted net income calculation(2) | 26,890 | | | 0.92 | | | 14,839 | | | 0.59 | | | 83,744 | | | 2.86 | | | 58,912 | | | 2.10 | | |
Adjustments: | | | | | | | | | | | | | | | | |
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Acquisition and transaction-related expenditures(3) | — | | | — | | | — | | | — | | | — | | | — | | | 15,320 | | | 0.55 | | |
Amortization of intangible assets | 5,872 | | | 0.20 | | | 6,133 | | | 0.25 | | | 18,108 | | | 0.62 | | | 17,615 | | | 0.63 | | |
Legal settlement and accrual(4) | 4,500 | | | 0.15 | | | — | | | — | | | 10,250 | | | 0.35 | | | — | | | — | | |
Subtotal | 10,372 | | | 0.35 | | | 6,133 | | | 0.25 | | | 28,358 | | | 0.97 | | | 32,935 | | | 1.18 | | |
Tax impact(5) | (2,489) | | | (0.08) | | | (1,472) | | | (0.06) | | | (6,806) | | | (0.23) | | | (7,904) | | | (0.28) | | |
Total adjustments | 7,883 | | | 0.27 | | | 4,661 | | | 0.19 | | | 21,552 | | | 0.74 | | | 25,031 | | | 0.90 | | |
Adjusted net income and adjusted earnings per share from continuing operations | $ | 34,773 | | | $ | 1.19 | | | $ | 19,500 | | | $ | 0.78 | | | $ | 105,296 | | | $ | 3.60 | | | $ | 83,943 | | | $ | 3.00 | | |
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Weighted average shares outstanding - Diluted | | | 29,330 | | | | | 24,995 | | | | | 29,278 | | | | | 28,022 | | |
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(1) Earnings per share amounts included in the table above may not sum due to rounding differences. Year-to-date earnings per share does not always represent the
sum of the quarters' earnings per share when the preferred shares for any quarter in the year-to-date period are anti-dilutive.
(2) For the nine months ended November 30, 2022, the calculation of diluted earnings per share is based on weighted average shares outstanding of 24,984, as the
preferred shares are anti-dilutive for this calculation. The calculation of adjusted diluted earnings per share is based on weighted average shares outstanding of
28,022, as the preferred shares are dilutive for this calculation. Adjusted net income for adjusted earnings per share also includes the addback of preferred
dividends.
(3) Includes Corporate expenses related to the Precoat Metals acquisition and the divestiture of AZZ Infrastructure Solutions business into the AVAIL JV.
(4) For the three months ended November 30, 2023, represents a legal accrual related to the Metal Coatings segment of $4.5 million. For the nine months ended
November 20, 2023, consists of the $4.5 million accrual for the Metal Coatings segment and $5.75 million for the settlement of a litigation matter related
to the AIS segment that was retained following the sale of the AIS business. See Note 17.
(5) The non-GAAP effective tax rate for each of the periods presented is estimated at 24.0%.
Adjusted EBITDA from Continuing Operations
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| Three Months Ended November 30, | | Nine Months Ended November 30, |
| 2023 | | 2022 | | 2023 | | 2022 |
Net income from continuing operations | $ | 26,890 | | | $ | 18,439 | | | $ | 83,744 | | | $ | 58,912 | |
Interest expense | 25,855 | | | 26,123 | | | 82,331 | | | 61,739 | |
Income tax expense | 8,780 | | | 2,447 | | | 24,397 | | | 18,380 | |
Depreciation and amortization | 20,357 | | | 21,938 | | | 59,034 | | | 55,813 | |
Adjustments: | | | | | | | |
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Acquisition and transaction-related expenditures | — | | | — | | | — | | | 15,320 | |
Legal settlement and accrual | 4,500 | | | — | | | 10,250 | | | — | |
Adjusted EBITDA from continuing operations | $ | 86,382 | | | $ | 68,947 | | | $ | 259,756 | | | $ | 210,164 | |
Adjusted EBITDA from Continuing Operations by Segment
A reconciliation of adjusted EBITDA by segment to net income from continuing operations is as follows (in thousands):
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| Three Months Ended November 30, 2023 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions | | Corporate | | Total |
Net income (loss) from continuing operations | $ | 37,813 | | | $ | 32,752 | | | $ | 8,452 | | | $ | (52,127) | | | $ | 26,890 | |
Interest expense | — | | | — | | | — | | | 25,855 | | | 25,855 | |
Income tax expense | — | | | — | | | — | | | 8,780 | | | 8,780 | |
Depreciation and amortization | 6,678 | | | 7,501 | | | — | | | 6,178 | | | 20,357 | |
Adjustments: | | | | | | | | | |
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| | | | | | | | | |
Legal accrual | 4,500 | | | — | | | — | | | — | | | 4,500 | |
Adjusted EBITDA from continuing operations | $ | 48,991 | | | $ | 40,253 | | | $ | 8,452 | | | $ | (11,314) | | | $ | 86,382 | |
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| Nine Months Ended November 30, 2023 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions | | Corporate | | Total |
Net income (loss) from continuing operations | $ | 128,353 | | | $ | 109,449 | | | $ | 4,892 | | | $ | (158,950) | | | $ | 83,744 | |
Interest expense | — | | | — | | | — | | | 82,331 | | | 82,331 | |
Income tax expense | — | | | — | | | — | | | 24,397 | | | 24,397 | |
Depreciation and amortization | 19,647 | | | 20,407 | | | — | | | 18,980 | | | 59,034 | |
Adjustments: | | | | | | | | | |
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Legal settlement and accrual | 4,500 | | | — | | | 5,750 | | | — | | | 10,250 | |
Adjusted EBITDA from continuing operations | $ | 152,500 | | | $ | 129,856 | | | $ | 10,642 | | | $ | (33,242) | | | $ | 259,756 | |
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| Three Months Ended November 30, 2022 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions | | Corporate | | Total |
Net income (loss) from continuing operations | $ | 33,670 | | | $ | 21,053 | | | $ | 1,006 | | | $ | (37,290) | | | $ | 18,439 | |
Interest expense | — | | | — | | | — | | | 26,123 | | | 26,123 | |
Income tax expense | — | | | — | | | — | | | 2,447 | | | 2,447 | |
Depreciation and amortization | 8,225 | | | 13,381 | | | — | | | 332 | | | 21,938 | |
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Adjusted EBITDA from continuing operations | $ | 41,895 | | | $ | 34,434 | | | $ | 1,006 | | | $ | (8,388) | | | $ | 68,947 | |
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| Nine Months Ended November 30, 2022 |
| Metal Coatings | | Precoat Metals | | Infrastructure Solutions | | Corporate | | Total |
Net income (loss) from continuing operations | $ | 123,806 | | | $ | 63,955 | | | $ | 1,006 | | | $ | (129,855) | | | $ | 58,912 | |
Interest expense | — | | | — | | | — | | | 61,739 | | | 61,739 | |
Income tax expense | — | | | — | | | — | | | 18,380 | | | 18,380 | |
Depreciation and amortization | 24,785 | | | 29,891 | | | — | | | 1,137 | | | 55,813 | |
Adjustments: | | | | | | | | | |
| | | | | | | | | |
Acquisition and transaction-related expenditures | — | | | — | | | — | | | 15,320 | | | 15,320 | |
| | | | | | | | | |
Adjusted EBITDA from continuing operations | $ | 148,591 | | | $ | 93,846 | | | $ | 1,006 | | | $ | (33,279) | | | $ | 210,164 | |
Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes to the Company’s market risk disclosures during the three and nine months ended November 30, 2022.2023. For a discussion of the Company’s exposure to market risk, refer to the Company’s market risk disclosures set forth in Part II, Item 7A, Quantitative and Qualitative Disclosures About Market Risk, of our Annual Report on Form 10-K for the year ended February 28, 2022.2023.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The Company closed the Precoat Acquisition May 13, 2022, as discussed in Note 2 in the accompanying notes to the condensed consolidated financial statements included in this Quarterly Report on Form 10-Q. As such, the scope of the assessment of the effectiveness of our disclosure controls and procedures did not include internal control over financial reporting at Precoat. Precoat's assets and revenues represented approximately 67.5% of the Company's total assets and 57.6% and 50.6% of its total revenues (from continuing operations) as of and for the three and nine months ended November 30, 2022.
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, which excluded the internal control over financial reporting of Precoat, the Chief Executive Officer and the Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q to provide reasonable assurance that information required to be disclosed in Company 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 Control Over Financial Reporting
On May 13, 2022, the Company completed its previously announced acquisition of Precoat. During the first quarter of fiscal 2023, management commenced an evaluation of the design and operating effectiveness of internal control over financial reporting related to the Precoat Acquisition. The evaluation of changes to processes, technology systems, and other components of internal controls over financial reporting related to the acquisition of Precoat is ongoing. This process may result in the addition or changes to our internal controls over financial reporting.
Except for the changes made in connection with the Precoat Acquisition, thereThere have been no significant changes in the Company's internal controls over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, its internal controls 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 its business. These proceedings include labor and employment claims, worker’s compensation, environmental matters, and various commercial disputes, all of which arise in the normal course of conducting 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 way to resolve the disputes prior to trial. As the pending cases progress through additional discovery, including expert testimony and mediation, our assessment of the likelihood of an unfavorable outcome on one or more of the pending lawsuits may change. 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 aggregate, to have a material effect on the Company’s financial position, 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.
There 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 28, 2022.2023.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
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 Authorization"). Repurchases under the 2020 Share Authorization 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 of common stock under the 2020 Share Authorization during the nine months ended November 30, 2022.2023. The Company has $84.0 million that may be used to repurchase outstanding shares of common stock.
Item 5. Other Information.
None.During the nine months ended November 30, 2023, none of our directors or executive officers adopted, modified or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement as defined in Item 408 of Regulation S-K.
Item 6. Exhibits
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101.INS+ | | Inline 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+ | | Inline XBRL Taxonomy Extension Schema Document |
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101.CAL+ | | Inline XBRL Taxonomy Extension Calculation Linkbase Document |
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101.DEF+ | | Inline XBRL Taxonomy Extension Definition Linkbase Document |
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101.LAB+ | | Inline XBRL Taxonomy Extension Label Linkbase Document |
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101.PRE+ | | Inline XBRL Taxonomy Extension Presentation Linkbase Document |
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104+104 | | Cover Page Interactive Date File (embedded with the Inline XBRL document). |
* Schedules and exhibits have been omitted pursuant to Item 601(b) of Regulation S-K.The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission.The Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedules and exhibits so furnished.
+ Filed herewithherewith.
++ Furnished herewith
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 9, 20232024 | | By: | /s/ Philip A. SchlomTiffany Moseley |
| | | | Philip A. SchlomTiffany Moseley Chief FinancialAccounting Officer and Principal Accounting Officer |