Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements regarding our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
A discussion regarding our financial condition and results of operations as well as our liquidity and capital resources for fiscal year 2021 compared to fiscal year 2020 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended February 28, 2021, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at www.azz.com/investor-relations.
Overview
We are a global provider of galvanizing and a variety of metal coating solutions, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. We operate two distinct business segments, the Metal Coatings segment and the Infrastructure Solutions segment. 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 12 to the consolidated financial statements. References herein to fiscal years are to the twelve-month periods that end in February of the relevant calendar year. For example, the twelve-month period ended February 28, 2022 is referred to as “fiscal 2022” or “fiscal year 2022.”
Coronavirus (COVID-19)
The continued uncertainty associated with COVID-19, and any of the ongoing variants, did not have a material adverse effect on our results of operations for the year ended February 28, 2022. While we continue to support our customers, there remain uncertainties regarding the duration and, to what extent, if any, that the COVID-19 pandemic, or newly identified variants, or additional regulatory requirements, will ultimately have on the demand for our products and services or with our supply chain or our employees.
The impact of COVID-19 to the Company's personnel and operations has been limited. During fiscal 2022, the Company continued to see improvement in sales and operating income in both of its operating segments. However, labor market and supply chain challenges increased during the third and fourth quarters, resulting in increased operating expenses as the constrained labor market and supply chain disruptions impacted the availability and cost of labor and materials.
Results of Operations
For the fiscal year ended February 28, 2022, we recorded sales of $902.7 million, compared to prior year’s sales of $838.9 million. Of total sales for fiscal 2022, approximately 57.5% were generated from the Metal Coatings segment and approximately 42.5% of sales were generated from the Infrastructure Solutions segment. Net income for fiscal 2022 was $84.0 million, compared to $39.6 million for fiscal 2021. Net income as a percentage of sales was 9.3% for fiscal 2022 as compared to 4.7% for fiscal 2021. Diluted earnings per share increased by 120.4%, to $3.35 per share for fiscal 2022, compared to $1.52 per share for fiscal 2021.
During fiscal 2022, we completed two acquisitions, both in our Metal Coatings segment.
Backlog
Our backlog relates entirely to our Infrastructure Solutions segment, consisting of our Electrical platform and Industrial platform, and is inclusive of transaction taxes for certain foreign subsidiaries. As of February 28, 2022, our backlog was $304.5 million, an increase of $118.4 million, or 63.6%, compared to fiscal 2021. The increase in backlog is due to an increase in orders in the Electrical platform, partially offset by the continued reduction of international backlog, including China, related to several non-recurring contracts and cancelled contracts, and, to a lesser extent, divestitures that occurred in fiscal year 2021. For the year ended February 28, 2022, net bookings increased $235.8 million, or 30.0%, to $1.02 billion, compared to same period of fiscal 2021, as a result of very strong bookings in our Electrical platform and continued strength within the Metal Coatings segment. The book to sales ratio increased in fiscal 2022 as compared to fiscal 2021, to 1.13 to 1.00 for fiscal 2022, compared to 0.94 to 1.00 for fiscal 2021.
The following table reflects bookings and sales for fiscal 2022 and 2021 (in thousands, except ratios).
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Period Ended | | Amount | | Period Ended | | Amount |
Backlog | | 2/28/2021 | | $ | 186,119 | | | 2/28/2020 | | $ | 243,799 | |
Net bookings | | | | 1,021,067 | | | | | 785,263 | |
Disposed backlog | | | | — | | | | | (4,026) | |
Sales recognized | | | | (902,664) | | | | | (838,917) | |
Backlog | | 2/28/2022 | | $ | 304,522 | | | 2/28/2021 | | $ | 186,119 | |
Book to sales ratio | | | | 1.13 | | | | | 0.94 | |
Sales
Our total sales for fiscal 2022 increased by $63.7 million, or 7.6%, as compared to fiscal 2021.
The following table reflects the breakdown of revenue by segment (in thousands):
| | | | | | | | | | | | | | |
| | Year Ended February 28, |
| | 2022 | | 2021 |
Sales: | | | | |
Metal Coatings | | $ | 519,000 | | | $ | 457,791 | |
Infrastructure Solutions | | 383,664 | | | 381,126 | |
Total sales | | $ | 902,664 | | | $ | 838,917 | |
Sales for the Metal Coatings segment increased $61.2 million, or 13.4%, to $519.0 million, from the prior year’s sales of $457.8 million. The increase in sales was primarily due to improved price realization for our superior quality and service and to a lesser extent, the acquisition of a metal coatings business during the fourth quarter of fiscal 2021. The acquisition of a galvanizing plant in the fourth quarter of fiscal 2022 did not materially impact sales for fiscal 2022.
Sales for the Infrastructure Solutions segment increased $2.5 million, or 0.7%, to $383.7 million for fiscal 2022, compared to $381.1 million for fiscal 2021. The increase in sales for fiscal 2022 was primarily due to sales increases in both domestic and international operations (as the prior year was significantly impacted by COVID-19) in the Industrial platform, partially offset by the divestiture of the low-margin SMS business in the third quarter of fiscal year 2021. The increase was partially offset by a decrease in the Electrical platform, which was primarily attributable to lower sales in China as several large projects were completed. In addition, the decrease was, to a lesser extent, due to delays in material receipts due to supply chain disruptions within our customer-base and the constrained labor market at several of our enclosure plants in our domestic operations. The decrease in our enclosure plants was partially offset by increases in our domestic high- and medium-bus duct, switchgear, lighting and tubing businesses.
Operating Income
The following table reflects the breakdown of operating income (loss) by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Year Ended February 28, 2022 | | Year Ended February 28, 2021 |
| | Metal Coatings | | Infrastructure Solutions | | Corporate | | Total | | Metal Coatings | | Infrastructure Solutions | | Corporate | | Total |
Operating income (loss): | | | | | | | | | | | | | | | | |
Sales | | $ | 519,000 | | | $ | 383,664 | | | $ | — | | | $ | 902,664 | | | $ | 457,791 | | | $ | 381,126 | | | $ | — | | | $ | 838,917 | |
Cost of sales | | 374,900 | | | 302,541 | | | — | | | 677,441 | | | 334,894 | | | 315,276 | | | — | | | 650,170 | |
Gross margin | | 144,100 | | | 81,123 | | | — | | | 225,223 | | | 122,897 | | | 65,850 | | | — | | | 188,747 | |
Selling, general and administrative | | 16,765 | | | 47,377 | | | 49,538 | | | 113,680 | | | 16,155 | | | 50,160 | | | 40,819 | | | 107,134 | |
Restructuring and impairment charges | | — | | | (1,797) | | | — | | | (1,797) | | | 10,796 | | | 9,203 | | | — | | | 19,999 | |
Total operating income (loss) | | $ | 127,335 | | | $ | 35,543 | | | $ | (49,538) | | | $ | 113,340 | | | $ | 95,946 | | | $ | 6,487 | | | $ | (40,819) | | | $ | 61,614 | |
Operating income for the Metal Coatings segment increased $31.4 million, or 32.7%, for fiscal 2022, to $127.3 million, as compared to $95.9 million for the prior year. Operating margins increased to 24.5% for fiscal 2022, as compared to 21.0% for fiscal 2021. The increase was primarily due to impairment and restructuring charges recognized in fiscal 2021 of $10.8 million, the increase in sales as described above and the achievement of operational efficiencies in our surface technologies platform.
Operating income for the Infrastructure Solutions segment increased $29.1 million for fiscal 2022, to $35.5 million, as compared to $6.5 million for the prior year. Operating margins for this segment were 9.3% for fiscal 2022, as compared to 1.7% for fiscal 2021. Gross margins improved on operating leverage within both the Industrial and Electrical platforms compared to prior year, as well as a divestiture of an under-performing business in the Industrial platform in the third quarter of fiscal year 2021. In addition, in fiscal 2021, operating income was impacted by impairment charges of $9.2 million, See "Restructuring and Impairment charges" below. Selling, general and administrative costs decreased due to cost containment measures that were implemented due to COVID-19.
Corporate expenses increased $8.7 million, to $49.5 million for fiscal 2022, compared to $40.8 million for fiscal 2021. The increase is primarily due to increased payroll and benefits costs (see Note 10 in Item 8), acquisition costs and other administrative costs.
Restructuring and Impairment Charges
During fiscal 2022, the Company continued to execute on its plan to strategically review our business portfolio, continue to acquire metal coatings businesses, and divest certain non-core business. During the fourth quarter of fiscal 2022, the Company had a change to the plan of sale for one of its businesses in the Infrastructure Solutions segment. The Company recognized $3.9 million of impairment charges during fiscal 2021, which is included in in "Restructuring and impairment charges" in the consolidated statements of income. During fiscal 2022, in accordance with applicable accounting guidance, the Company reclassified a business previously held for sale to assets held and used. When there is a change to a plan of sale and the assets are reclassified from held for sale to held and used, the long-lived assets are reported at the lower of (i) the carrying amount before held for sale designation, adjusted for depreciation that would have been recognized if the assets had not been classified as held for sale, or (ii) the fair value at the date the assets no longer satisfy the criteria for classification as held for sale. Following an analysis of the long-lived assets for the business, the Company reversed a portion of the previously recognized impairment charges, and recognized income of $1.8 million in fiscal 2022 as a result of the change to the plan of sale, which is included in "Restructuring and Impairment charges" in the consolidated statements of operations.
As of February 28, 2022, one non-operating location in the Metal Coatings segment is classified as held for sale. The assets of the business expected to be disposed of within the next twelve months are included in "Assets held for sale" in the accompanying consolidated balance sheets.
During fiscal 2021, we closed on the sale of two businesses, one in each of our Metal Coatings and Infrastructure Solutions segments. We also sold one non-operating location in our Metal Coatings segment. In addition, we closed a small number of Metal Coatings locations that were in underperforming and lower growth geographies.
During fiscal 2021, we recorded certain charges related to these restructuring activities, which are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended February 28, 2021 |
| | Metal Coatings | | Infrastructure Solutions | | Total |
Write down of assets held for sale to estimated sales price | | $ | 2,652 | | | $ | 4,100 | | | $ | 6,752 | |
Write down of assets expected to be abandoned | | 6,923 | | | — | | | 6,923 | |
Loss on sale of subsidiaries | | 1,221 | | | 1,859 | | | 3,080 | |
Write down of excess inventory | | — | | | 2,511 | | | 2,511 | |
Costs associated with assets held for sale | | — | | | 733 | | | 733 | |
Total charges | | $ | 10,796 | | | $ | 9,203 | | | $ | 19,999 | |
Interest Expense
Interest expense for fiscal 2022 decreased $3.3 million, or 33.7%, to $6.4 million, as compared to $9.6 million in fiscal 2021. This decrease is primarily attributable to the Company's 2020 Senior Notes, which were funded in late fiscal 2021 and carried a much lower interest rate than the previously outstanding Senior Notes. While the borrowings under the 2020 Senior Notes increased $25.0 million to $150.0 million, they carry lower interest rates than the Company's previous senior notes. As of February 28, 2022, we had gross outstanding debt of $227.0 million, compared to $179.0 million at the end of fiscal 2021. AZZ's debt to equity ratio was 0.34 to 1 at the end of fiscal 2022, compared to 0.29 to 1 at the end of fiscal 2021, as we reduced
debt during the year and refinanced our existing senior notes. For additional information on outstanding debt, see Note 6 to the consolidated financial statements.
Other (Income) Expense, Net
For fiscal 2022, other expense, net decreased $0.4 million, to $0.6 million for fiscal 2022 compared to $1.0 million for fiscal 2021. The activity for both years consisted primarily of foreign currency losses resulting from unfavorable movements in exchange rates.
Provision for Income Taxes
The provision for income taxes reflected an effective tax rate of 21.0% for fiscal 2022 and 22.3% for fiscal 2021. The decrease is due primarily to certain nonrecurring state income tax items in the prior year.
Liquidity and Capital Resources
We have historically met our cash needs through a combination of cash flows from operating activities along with bank and bond market debt. Our cash requirements are generally for operating activities, cash dividend payments, capital improvements, debt repayment and acquisitions. We believe that our cash position, cash flows from operating activities and our expectation of continuing availability to draw upon our credit facilities are sufficient to meet our cash flow needs for the foreseeable future.
Cash Flows
The following table summarizes our cash flows by category for the periods presented (in thousands):
| | | | | | | | | | | | | | |
| | Year Ended |
| | February 28, 2022 | | February 28, 2021 |
Net cash provided by operating activities | | $ | 86,010 | | | $ | 92,035 | |
Net cash used in investing activities | | (86,835) | | | (28,593) | |
Net cash provided by (used in) financing activities | | 912 | | | (88,425) | |
Net cash provided by operating activities for fiscal 2022 was $86.0 million, compared to $92.0 million for fiscal 2021. The decrease in cash provided by operating activities for fiscal 2022 is primarily attributable to the impact of decreases in working capital, primarily due to changes in accounts receivable and inventories, partially offset by accounts payable and other accrued liabilities. Cash flow from operations also decreased due to the loss on disposal of businesses and other impairment charges in the prior year. These net decreases were partially offset by an increase in net income in the current year.
Net cash used in investing activities for fiscal 2022 was $86.8 million, compared to $28.6 million for fiscal 2021. The increase in cash used during fiscal 2022 was primarily attributable to the acquisition of two businesses in our Metal Coatings segment during the fourth quarter, partially offset by lower capital expenditures. The breakdown of capital spending by segment for fiscal 2022, 2021 and 2020 can be found in Note 12 to the consolidated financial statements.
Net cash provided by financing activities for fiscal 2022 was $0.9 million, compared to net cash used in financing activities of $88.4 million for fiscal 2021. The decrease in cash used in financing activities during fiscal 2022 was primarily attributable to an increase in net proceeds from the revolver, as well as a decrease in repurchases of Company common stock, partially offset by a decrease in net proceeds for long term debt. See "Financing and Capital" and “Share Repurchases” sections below for additional information.
Financing and Capital
2017 Revolving Credit Facility
On March 21, 2017, the Company executed the Amended and Restated Credit Agreement (the “2017 Credit Agreement”) with Bank of America and other lenders, which amended its previous credit agreement. The 2017 Credit Agreement was scheduled to mature on March 21, 2022, and included the following provisions: (i) providing for a senior revolving credit facility in a principal amount of up to $450 million, with an additional $150 million accordion, (ii) including a $75 million sublimit for the issuance of standby and commercial letters of credit, (iii) including a $30 million sublimit for swing line loans, (iv) restricting indebtedness incurred with respect to capital leases, synthetic lease obligations and purchase money obligations not to exceed $20 million, (v) restricting investments in any foreign subsidiaries not to exceed $50 million in the aggregate, and (vi) including various financial covenants and certain restricted payments relating to dividends and share repurchases as specifically set forth in the 2017 Credit Agreement. The balance due on the $75.0 million term facility under the previous Credit Agreement was paid in full as a result of the execution of the 2017 Credit Agreement.
The financial covenants, as defined in the 2017 Credit Agreement, require the Company to maintain on a consolidated basis a Leverage Ratio not to exceed 3.25:1.0 and an Interest Coverage Ratio of at least 3.00:1.0. The Line of Credit will be used to finance working capital needs, capital improvements, dividends, future acquisitions, letter of credit needs and share repurchases.
Interest rates for borrowings under the 2017 Credit Agreement are based on either a Eurodollar Rate or a Base Rate plus a margin ranging from 0.875% to 1.875% depending on our Leverage Ratio (as defined in the 2017 Credit Agreement). The Eurodollar Rate is defined as LIBOR for a term equivalent to the borrowing term (or other similar interbank rates if LIBOR is unavailable). The Base Rate is defined as the highest of the applicable Fed Funds rate plus 0.50%, the Prime rate, or the
Eurodollar Rate plus 1.0% at the time of borrowing. The 2017 Credit Agreement also carries a Commitment Fee for the unfunded portion ranging from 0.175% to 0.30% per annum, depending on our Leverage Ratio. On July 8, 2021, the 2017 Credit Agreement was replaced with the 2021 Credit Agreement, which is described below.
2021 Credit Agreement
On July 8, 2021, the Company refinanced the 2017 Credit Agreement, which was scheduled to mature in March 2022, with a new five-year unsecured revolving credit facility under a credit agreement, dated July 8, 2021 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 matures in July 2026 and includes the following significant terms;
i.provides for a senior unsecured revolving credit facility with a principal amount of up to $400.0 million revolving loan commitments, and includes an additional $200.0 million uncommitted incremental accordion facility,
ii.interest rate margin ranges from 87.5 bps to 175 bps for Eurodollar Rate loans, and from 0.0 bps to 75 bps for Base Rate loans, depending on leverage ratio of the Company and its consolidated subsidiaries as a group,
iii.includes a letter of credit sub-facility up to $85.0 million for the issuance of standby and commercial letters of credit,
iv.includes a $50.0 million sublimit for swing line loans,
v.includes customary representations and warranties, affirmative covenants and negative covenants, and events of default, including restrictions on incurrence of non-ordinary course debt, investment and dividends, subject to various exceptions, carve-outs and baskets, and
vi.includes a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each to be tested at quarter end.
The effective interest rate for the 2021 Credit Agreement was 2.49% as of February 28, 2022.
The proceeds of the loans under the 2021 Credit Agreement are used primarily to finance working capital needs, capital improvements, dividends, future acquisitions and general corporate purposes.
As of February 28, 2022, we had $77.0 million of outstanding debt against the 2021 Credit Agreement and letters of credit outstanding under the 2021 Credit Agreement in the amount of $9.7 million, which left approximately $313.3 million of additional credit available.
2020 Senior Notes
On October 9, 2020, the Company completed a private placement transaction and entered into a Note Purchase Agreement, whereby the Company agreed to borrow $150.0 million of senior unsecured notes (the “2020 Senior Notes”), consisting of two separate tranches:
•7-year borrowing: $70.0 million priced at 2.77% coupon, and
•12-year borrowing: $80.0 million priced at 3.17% coupon.
The $80.0 million tranche was funded on December 17, 2020. The $70.0 million tranche was funded in January 2021. The Company used the proceeds to repay the existing $125.0 million 5.42% Senior Notes maturing on January 20, 2021, as well as for general corporate purposes. Interest on the 2020 Senior Notes is paid semi-annually.
The Company's debt agreements require the Company to maintain certain financial ratios. As of February 28, 2022, the Company was in compliance with all covenants or other requirements set forth in the debt agreements.
Precoat Acquisition
On March 7, 2022, the Company and Sequa, a portfolio company of global investment firm Carlyle, jointly announced the signing of a definitive agreement whereby the Company intends to acquire Sequa's Precoat Metals business division ("Precoat") for a net purchase price of approximately $1.3 billion (the "Precoat Acquisition"). The Precoat Acquisition, which is subject to certain normal and customary closing conditions, is expected to close during the first quarter of the Company's fiscal year 2023. The Company has obtained financing commitments required to complete the transaction, consisting of a $400.0 million revolving credit facility, and a $1.525 billion senior secured term loan facility. As part of the transaction, we also expect to repay our current 2020 Senior Notes, which will include an early termination premium. Our new financing will have interest rates that are higher than our current notes, resulting in higher interest expense.
Share Repurchases
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 Authorization”). Repurchases under the 2020 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 purchased 601,822 of its common shares in the amount of $30.8 million at an average purchase price of $51.20 under the 2020 Authorization during fiscal 2022.
Other Exposures
We have exposure to commodity price increases in both segments of our business, primarily copper, aluminum, steel and nickel-based alloys in the Infrastructure Solutions segment and zinc and natural gas in the Metal Coatings segment. We attempt to minimize these increases through escalation clauses in customer contracts for copper, aluminum, steel and nickel-based alloys, when market conditions allow and through fixed cost contract purchases on zinc. In addition to these measures, we attempt to recover other cost increases through improvements to our manufacturing process, supply chain management, and through increases in prices where competitively feasible.
Letters of Credit
As of February 28, 2022, we had total outstanding letters of credit in the amount of $22.0 million. These letters of credit are issued for a number of reasons, but are most commonly issued in lieu of customer retention withholding payments covering warranty or performance periods.
Off Balance Sheet Arrangements and Contractual Commitments
As of February 28, 2022, 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.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires us to make estimates that affect the reported value of assets, liabilities, sales and expenses. Our estimates are based on historical experience and various other factors that we believe are reasonable under the circumstances and form the basis for our conclusions. We continually evaluate the information used to make these estimates. Accounting policies and estimates considered most critical are allowances for doubtful accounts, revenue recognition, impairment of long-lived assets, identifiable intangible assets and goodwill, including purchase accounting and accounting for income taxes. Actual results may differ from these estimates under different assumptions or conditions. The following accounting policies involve critical accounting estimates because they are dependent on our judgement and assumptions about matters that are inherently uncertain.
Allowance for Credit Losses
The carrying value of our accounts receivable is periodically evaluated based on the likelihood of collection. An allowance is maintained for estimated credit losses resulting from our customers’ inability to make contracted payments. The allowance is determined by historical experience of uncollected accounts, the level of past due accounts, overall level of outstanding accounts receivable, information about specific customers with respect to their inability to make payments and future expectations of conditions that might impact the collectability of accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
Revenue recognition - Infrastructure Solutions segment
Our Infrastructure Solutions segment is a provider of specialized products and services designed to support industrial, electrical and other industrial applications. For custom built products, we recognize sales over time. For custom services, which consist of specialized welding and other professional services, we recognize sales over time as the services are rendered due to the fact that the services enhance a customer owned asset. For off-the-shelf products, which consist of tubing and lighting products, we recognize sales upon the transfer of the goods to the customer.
For sales recognized over time, we generally use the cost-to-cost method of revenue recognition. Under this approach, the extent of progress towards completion is measured based on the ratio of costs incurred to date compared with the total estimated costs upon completion of the project. This method requires the estimation of total contract sales, project costs and margin, which involves significant management judgment. As a significant change in one or more of these estimates could affect the profitability of our contracts, management reviews and updates its contract related estimates regularly.
Total contract cost estimates are based on current contract specifications and expected engineering requirements and require us to make estimates on expected profit. The estimates for profit margin are based on judgments we make to project the outcome of future events, and can sometimes span more than one year. We estimate labor productivity and availability, the complexity of the work to be performed, change orders issued by our customers, and other specialized engineering and production related activities. Our cost estimation process is based on historical data, including historical actuals to original estimates, and the application of the professional knowledge and experience of engineers, general managers and finance professionals to these historical results. We review and update our estimates of costs regularly, or more frequently when circumstances significantly change, which can affect the profitability of our contracts.
In addition to fixed consideration, the contracts within our Infrastructure Solutions segment can include variable consideration, including claims, incentive fees, liquidated damages or other penalties. We recognize revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We estimate the amount of revenue to be recognized on variable consideration using the expected value or the most likely amount method, whichever is expected to better predict the amount. Management’s estimates of variable consideration and the determination of whether to include estimated amounts in transaction prices are based largely on historical experience, professional knowledge and experience, and all other relevant information that is reasonably available at the time of the estimate.
Impairment of Long-Lived Assets, Identifiable Intangible Assets and Goodwill
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination and is not amortized. We test goodwill and intangible assets with an indefinite life for potential impairment annually during the fourth quarter and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, which would result in impairment.
We use the income approach to complete our annual goodwill assessment. The income approach uses future cash flows and estimated terminal values for our reporting units that are discounted using a market participant perspective to determine the fair value of the reporting unit, which is then compared to the carrying value of that reporting unit to determine if there is impairment. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates, discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. A significant change in events, circumstances or any of these assumptions could result in an impairment of long-lived assets, including identifiable intangible assets. Variables impacting future cash flows include, but are not limited to, the level of customer demand for and response to products and services we offer to the power generation market, the electrical transmission and distribution markets, the general industrial market and the hot-dip galvanizing market, changes in economic conditions of these various markets, changes in costs of raw material and natural gas, and the availability of experienced labor and management to implement our growth strategies.
Recent Accounting Pronouncements
See Part II, Item 8. Consolidated Financial Statements and Supplementary Data, Note 1, Summary of Significant Account Policies, of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K, 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 Disclosure
In addition to reporting financial results in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”), the Company has provided adjusted operating income, adjusted earnings and adjusted earnings per share (collectively, the “Adjusted Earnings Measures”), which are non-GAAP measures. Management believes that the presentation of these measures provides investors with a greater transparency comparison of operating results across a broad spectrum of companies, which provides a more complete understanding of the Company’s financial performance, competitive position and prospects for the future. Management also believes that investors regularly rely on non-GAAP financial measures, such as adjusted operating income, adjusted earnings and adjusted earnings per share, to assess operating performance and that such
measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP.
The following tables provides a reconciliation for the years ended February 28, 2022 and February 28, 2021 between the various measures calculated in accordance with GAAP to the Adjusted Earnings Measures (dollars in thousands, except per share data):
| | | | | | | | | | | | | | |
| | Year Ended February 28, |
| | 2022 | | 2021 |
Operating income | | $ | 113,340 | | | $ | 61,614 | |
Restructuring and impairment charges(1) | | (1,797) | | | 19,999 | |
Acquisition costs(2) | | 1,554 | | | — | |
Adjusted operating income | | $ | 113,097 | | | $ | 81,613 | |
(1) See "Results of Operations-Restructuring and Impairment Charges" for further discussion on fiscal 2022 restructuring and impairment charges. |
(2) Acquisition costs represent costs related to the Precoat Acquisition. See "Precoat Acquisition" above. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Year Ended |
| February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
| Amount | | Per Diluted Share(1) | | Amount | | Per Diluted Share(1) | | Amount | | Per Diluted Share(1) |
Net income and diluted earnings per share | $ | 84,022 | | | $ | 3.35 | | | $ | 39,614 | | | $ | 1.52 | | | $ | 48,234 | | | $ | 1.84 | |
Adjustments (net of tax): | | | | | | | | | | | |
Restructuring and impairment charges: | | | | | | | | | | | |
Metal Coatings | — | | | — | | | 10,796 | | | 0.41 | | | — | | | — | |
Infrastructure Solutions(2) | (1,797) | | | (0.07) | | | 9,203 | | | 0.35 | | | 27,789 | | | 1.07 | |
Acquisition related expenditures(3) | 1,554 | | | 0.06 | | | — | | | — | | | | | |
Subtotal | (243) | | | (0.01) | | | 19,999 | | | 0.77 | | | 27,789 | | | 1.07 | |
Tax provision (benefit) related to restructuring and impairment charges(4) | 56 | | | — | | | (4,584) | | | (0.18) | | | (4,777) | | | (0.18) | |
Total adjustments | (187) | | | (0.01) | | | 15,415 | | | 0.59 | | | 23,012 | | | 0.88 | |
Adjusted earnings and adjusted earnings per share | $ | 83,835 | | | $ | 3.34 | | | $ | 55,029 | | | $ | 2.11 | | | $ | 71,246 | | | $ | 2.71 | |
______________________________
(1) Earnings per share amounts included in the table above may not sum due to rounding differences.
(2) See "Results of Operations-Restructuring and Impairment Charges" for further discussion on fiscal 2022 restructuring and impairment charges.
(3) Acquisition related expenditures represents expenses related to the Precoat Acquisition.
(4) The non-GAAP effective tax rates for fiscal 2022, 2021 and 2020 were 22.9%, 22.9% and 17.2%, respectively.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Schedules
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
AZZ, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of AZZ, Inc Company Inc. (a Texas Corporation) and subsidiaries (the “Company”) as of February 28, 2022 and 2021, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity, and cash flows for each of the three years in the period ended February 28, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2022 and 2021, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2022, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of February 28, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated April 22, 2022 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Revenue recognition – Infrastructure Solutions
As described further in Note 1 to the financial statements, the Company recognizes revenue upon transfer of control of promised goods or services to customers in an amount that reflects the consideration the Company expects to receive in exchange for those products or services. The amount and timing of revenue recognition varies based on the nature of the goods or services provided and the terms and conditions of the Company’s contracts with customers. The Company enters into contracts with Infrastructure Solutions customers which generally specify the delivery of what constitutes a single performance obligation of either custom built products, custom services, or off-the-shelf products. Management determines, based on the provisions of the customer contracts, whether revenue for a particular project should be recorded upon delivery of the product or service or whether a portion of the total expected contract revenue should be recognized over time as work progresses. This requires a detailed evaluation of each material contract. For customer contracts where management determines that revenue should be recognized over time, significant judgment is required to determine the proper amount of revenue to recognize each period. We determined that revenue recognition pertaining to Infrastructure Solutions customer contracts is a critical audit matter.
The principal considerations for our determination that Infrastructure Solutions customer contracts is a critical audit matter result from the significant judgment exercised by management in determining the amount of revenue to recognize for a particular period. Processes involving higher amounts of management judgment include the interpretation of the provisions of customer contracts, which may include unique contract terms, to determine whether revenue should be recognized at a point in time or over time as work progresses. In addition, for contracts where management determines revenue should be recognized over time as work progresses, management must estimate both total expected project costs and expected gross margin, including evaluating customer change orders, for all uncompleted contracts to determine the appropriate amount of revenue to
recognize. The audit effort required to evaluate management’s judgments in determining proper revenue recognition for the Company’s contracts with Infrastructure Solutions customers was extensive and required a high degree of auditor judgment.
Our audit procedures related to Infrastructure Solutions customer contracts included the following:
•We tested the effectiveness of internal controls over management’s review of customer contracts and change orders, to determine whether revenue should be recognized at a point in time or over time as work progresses.
•For customer contracts where revenue is recorded over time as work progresses, we tested the effectiveness of internal controls over the accumulation of project costs and estimated project margin, which are key inputs into management’s estimation of the amount of revenue to recognize each period.
•We examined a sample of customer contracts to determine if management’s conclusions with respect to contract terms and revenue recognition appeared appropriate in the circumstances.
•We evaluated the accuracy of estimates made by management in prior periods by comparing previous estimates to actual results.
•We tested a sample of customer contracts for which management concluded that it was appropriate to recognize revenue over time as work progressed by evaluating key inputs and assumptions which impacted the amount of revenue recognized for each contract tested. The key inputs and assumptions included:
◦The accumulation of historical costs incurred for the project,
◦Management’s estimate of the total gross margin expected to be realized for the entire project, including estimates of costs yet to be incurred to complete the project.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2020.
Dallas, Texas
April 22, 2022
Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
AZZ Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of AZZ Inc (a Texas Corporation) and subsidiaries (the “Company”) as of February 28, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended February 28, 2022, and our report dated April 22, 2022 expressed unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying “Item 9A, Management’s Annual Report on Internal Controls over Financial Reporting”. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Dallas, Texas
April 22, 2022
AZZ INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
| | | | | | | | | | | | | | |
| | February 28, 2022 | | February 28, 2021 |
Assets | | | | |
Current assets: | | | | |
Cash and cash equivalents | | $ | 15,082 | | | $ | 14,837 | |
Accounts receivable, net of allowance for credit losses of $5,207 and $5,713 at February 28, 2022 and February 28, 2021, respectively | | 167,016 | | | 128,765 | |
Inventories: | | | | |
Raw material | | 117,603 | | | 87,822 | |
Work-in-process | | 7,285 | | | 4,451 | |
Finished goods | | 1,212 | | | 1,546 | |
Contract assets | | 74,629 | | | 61,370 | |
Prepaid expenses and other | | 3,471 | | | 6,029 | |
Assets held for sale | | 235 | | | 235 | |
Total current assets | | 386,533 | | | 305,055 | |
Property, plant and equipment, net | | 230,848 | | | 207,089 | |
Right-of-use assets | | 43,286 | | | 37,801 | |
Goodwill | | 385,613 | | | 353,881 | |
Deferred tax assets | | 5,191 | | | 3,969 | |
Intangibles and other assets, net | | 81,557 | | | 91,432 | |
Total assets | | $ | 1,133,028 | | | $ | 999,227 | |
Liabilities and Shareholders’ Equity | | | | |
Current liabilities: | | | | |
Accounts payable | | $ | 43,987 | | | $ | 41,542 | |
Income tax payable | | 3,564 | | | — | |
Accrued salaries and wages | | 28,424 | | | 22,606 | |
Other accrued liabilities | | 24,092 | | | 27,645 | |
Customer deposits | | 681 | | | 348 | |
Contract liabilities | | 42,465 | | | 17,873 | |
Lease liability, short-term | | 7,318 | | | 6,619 | |
| | | | |
Total current liabilities | | 150,531 | | | 116,633 | |
Debt due after one year, net | | 226,484 | | | 178,419 | |
Lease liability, long-term | | 35,610 | | | 32,631 | |
Deferred tax liabilities | | 47,672 | | | 39,283 | |
Other long-term liabilities | | 5,366 | | | 8,969 | |
Total liabilities | | 465,663 | | | 375,935 | |
Commitments and contingencies (Note 15) | | | | |
Shareholders’ equity: | | | | |
Common Stock, $1.00 par value; 100,000 shares authorized; 24,688 and 25,108 shares issued and outstanding at February 28, 2022 and February 28, 2021, respectively | | 24,688 | | | 25,108 | |
Capital in excess of par value | | 85,847 | | | 75,979 | |
Retained earnings | | 584,154 | | | 547,289 | |
Accumulated other comprehensive loss | | (27,324) | | | (25,084) | |
Total shareholders’ equity | | 667,365 | | | 623,292 | |
Total liabilities and shareholders' equity | | $ | 1,133,028 | | | $ | 999,227 | |
The accompanying notes are an integral part of the consolidated financial statements.
AZZ INC.
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share amounts)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Sales | | $ | 902,664 | | | $ | 838,917 | | | $ | 1,061,817 | |
Cost of sales | | 677,441 | | | 650,170 | | | 824,589 | |
Gross margin | | 225,223 | | | 188,747 | | | 237,228 | |
| | | | | | |
Selling, general and administrative | | 113,680 | | | 107,134 | | | 139,253 | |
Restructuring and impairment charges | | (1,797) | | | 19,999 | | | 18,632 | |
Operating income | | 113,340 | | | 61,614 | | | 79,343 | |
| | | | | | |
Interest expense | | 6,395 | | | 9,648 | | | 13,463 | |
Other expense, net | | 600 | | | 969 | | | 990 | |
Income before income taxes | | 106,345 | | | 50,997 | | | 64,890 | |
Income tax expense | | 22,323 | | | 11,383 | | | 16,656 | |
Net income | | $ | 84,022 | | | $ | 39,614 | | | $ | 48,234 | |
Earnings per common share | | | | | | |
Basic earnings per share | | $ | 3.38 | | | $ | 1.53 | | | $ | 1.84 | |
Diluted earnings per share | | $ | 3.35 | | | $ | 1.52 | | | $ | 1.84 | |
Weighted average shares outstanding | | | | | | |
Basic | | 24,855 | | | 25,897 | | | 26,191 | |
Diluted | | 25,077 | | | 26,045 | | | 26,281 | |
| | | | | | |
Cash dividends declared per common share | | $ | 0.68 | | | $ | 0.68 | | | $ | 0.68 | |
The accompanying notes are an integral part of the consolidated financial statements.
AZZ INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Net income | | $ | 84,022 | | | $ | 39,614 | | | $ | 48,234 | |
Other comprehensive income (loss): | | | | | | |
Foreign currency translation adjustment, net of income tax of $—, $— and $— | | (2,310) | | | 5,865 | | | (2,093) | |
Interest rate swap, net of income tax of $—, $27 and $29, respectively | | — | | | (50) | | | (54) | |
Other comprehensive income (loss) | | (2,310) | | | 5,815 | | | (2,147) | |
Comprehensive income | | $ | 81,712 | | | $ | 45,429 | | | $ | 46,087 | |
| | | | | | |
The accompanying notes are an integral part of the consolidated financial statements.
AZZ INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended |
| | February 28, 2022 | | February 28, 2021 | | February 29, 2020 |
Cash flows from operating activities: | | | | | | |
Net income | | $ | 84,022 | | | $ | 39,614 | | | $ | 48,234 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | |
Depreciation and amortization | | 44,665 | | | 44,603 | | | 50,194 | |
Deferred income taxes | | 3,467 | | | (1,561) | | | (2,617) | |
Loss on disposal of business | | 552 | | | 3,080 | | | 18,632 | |
Loss on abandonment of long-lived assets | | | | 6,923 | | | — | |
Loss (gain) on disposal group held for sale | | (1,797) | | | 6,752 | | | — | |
Inventory write-downs | | — | | | 2,511 | | | — | |
Impairment loss on long lived assets | | — | | | — | | | 9,157 | |
Loss (gain) on sale of property, plant & equipment | | 607 | | | 219 | | | (71) | |
Share-based compensation expense | | 9,449 | | | 7,330 | | | 6,290 | |
Amortization of deferred debt issuance costs | | 455 | | | 545 | | | 538 | |
Bad debt expense | | (377) | | | 1,040 | | | 2,734 | |
Effects of changes in operating assets and liabilities, net of acquisitions: | | | | | | |
Accounts receivable | | (34,609) | | | 7,926 | | | (1,006) | |
Inventories | | (27,871) | | | 2,145 | | | 25,875 | |
Prepaid expenses and other assets | | 794 | | | 6,497 | | | (291) | |
Net change in contract assets and liabilities | | 12,218 | | | 5,137 | | | (47,040) | |
Accounts payable | | 1,284 | | | (21,521) | | | 8,145 | |
Other accrued liabilities and income taxes payable | | (6,849) | | | (19,205) | | | 23,536 | |
Net cash provided by operating activities: | | 86,010 | | | 92,035 | | | 142,310 | |
Cash flows from investing activities: | | | | | | |
Proceeds from the sale or insurance settlement of property, plant, and equipment | | 2,789 | | | 461 | | | 340 | |
Proceeds from sale of subsidiary, net | | — | | | 12,444 | | | 23,584 | |
Acquisition of subsidiaries, net of cash acquired | | (61,219) | | | (4,419) | | | (60,628) | |
Purchases of property, plant and equipment | | (28,405) | | | (37,079) | | | (32,595) | |
Net cash used in investing activities: | | (86,835) | | | (28,593) | | | (69,299) | |
Cash flows from financing activities: | | | | | | |
Proceeds from issuance of common stock | | 2,788 | | | 2,832 | | | 3,113 | |
Payments for taxes related to net share settlement of equity awards | | (2,187) | | | (712) | | | (1,231) | |
Proceeds from revolving loan | | 296,000 | | | 228,000 | | | 428,500 | |
Payments on revolving loan | | (248,000) | | | (277,000) | | | (466,500) | |
Proceeds from long-term debt | | — | | | 150,000 | | | — | |
Payments on long-term debt | | — | | | (125,000) | | | — | |
Debt issuance costs paid | | — | | | (592) | | | — | |
Repurchase and retirement of common stock | | (30,815) | | | (48,311) | | | (5,799) | |
Payment of dividends | | (16,874) | | | (17,642) | | | (17,822) | |
Net cash provided by (used in) financing activities: | | 912 | | | (88,425) | | | (59,739) | |
Effect of exchange rate changes on cash and cash equivalents | | 158 | | | 3,133 | | | (590) | |
Net change in cash and cash equivalents | | 245 | | | (21,850) | | | 12,682 | |
Cash and cash equivalents, beginning of year | | 14,837 | | | 36,687 | | | 24,005 | |
Cash and cash equivalents, end of year | | $ | 15,082 | | | $ | 14,837 | | | $ | 36,687 | |
| | | | | | |
Supplemental disclosures of cash flow information: | | | | | | |
Cash paid for interest | | $ | 6,062 | | | $ | 8,999 | | | $ | 13,023 | |
Cash paid for income taxes | | $ | 31,660 | | | $ | 16,118 | | | $ | 18,802 | |
The accompanying notes are an integral part of the consolidated financial statements.
AZZ INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Capital In Excess Of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Loss | | Total |
| | Shares | | Amount | |
Balance at February 28, 2019 | | 26,115 | | | $ | 26,115 | | | $ | 58,695 | | | $ | 547,670 | | | $ | (28,752) | | | $ | 603,728 | |
Share-based compensation | | — | | | — | | | 6,290 | | | — | | | — | | | 6,290 | |
Common stock issued under stock-based plans and related income tax expense | | 74 | | | 74 | | | (1,305) | | | — | | | — | | | (1,231) | |
Common stock issued under employee stock purchase plan | | 90 | | | 90 | | | 3,023 | | | — | | | — | | | 3,113 | |
Repurchase and retirement of common stock | | (131) | | | (131) | | | — | | | (5,668) | | | — | | | (5,799) | |
Cash dividends paid | | — | | | — | | | — | | | (17,822) | | | — | | | (17,822) | |
Net income | | — | | | — | | | — | | | 48,234 | | | — | | | 48,234 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | (2,093) | | | (2,093) | |
Interest rate swap, net of tax | | — | | | — | | | — | | | — | | | (54) | | | (54) | |
Balance at February 29, 2020 | | 26,148 | | | $ | 26,148 | | | $ | 66,703 | | | $ | 572,414 | | | $ | (30,899) | | | $ | 634,366 | |
Share-based compensation | | — | | | $ | — | | | $ | 7,330 | | | $ | — | | | $ | — | | | $ | 7,330 | |
Common stock issued under stock-based plans and related income tax expense | | 83 | | | 83 | | | (795) | | | — | | | — | | | (712) | |
Common stock issued under employee stock purchase plan | | 91 | | | 91 | | | 2,741 | | | — | | | — | | | 2,832 | |
Repurchase and retirement of common stock | | (1,214) | | | (1,214) | | | — | | | (47,097) | | | — | | | (48,311) | |
Cash dividends paid | | — | | | — | | | — | | | (17,642) | | | — | | | (17,642) | |
Net income | | — | | | — | | | — | | | 39,614 | | | — | | | 39,614 | |
Foreign currency translation | | — | | | — | | | — | | | — | | | 5,865 | | | 5,865 | |
Interest rate swap, net of tax | | — | | | — | | | — | | | — | | | (50) | | | (50) | |
Balance at February 28, 2021 | | 25,108 | | | $ | 25,108 | | | $ | 75,979 | | | $ | 547,289 | | | $ | (25,084) | | | $ | 623,292 | |
Share-based compensation | | — | | | $ | — | | | $ | 9,449 | | | $ | — | | | $ | — | | | $ | 9,449 | |
Common stock issued under stock-based plans and related income tax expense | | 109 | | | 109 | | | (2,296) | | | — | | | — | | | (2,187) | |
Common stock issued under employee stock purchase plan | | 73 | | | 73 | | | 2,715 | | | — | | | — | | | 2,788 | |
Repurchase and retirement of common stock | | (602) | | | (602) | | | — | | | (30,213) | | | — | | | (30,815) | |
Cash dividends paid | | — | | | — | | | — | | | (16,874) | | | — | | | (16,874) | |
Net income | | — | | | — | | | — | | | 84,022 | | | — | | | 84,022 | |
Foreign currency translation | | — | | | — | | | — | | | (70) | | | (2,240) | | | (2,310) | |
Interest rate swap, net of tax | | — | | | — | | | — | | | — | | | — | | | — | |
Balance at February 28, 2022 | | 24,688 | | | $ | 24,688 | | | $ | 85,847 | | | $ | 584,154 | | | $ | (27,324) | | | $ | 667,365 | |
The accompanying notes are an integral part of the consolidated financial statements.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.Summary of Significant Accounting Policies
Organization
AZZ Inc. (the “Company,” “AZZ” or “we”) operates primarily in the United States of America and Canada and also has operations in Brazil, China, the Netherlands, Poland and India. The Company has two reportable segments: Metal Coatings and Infrastructure Solutions. The Company's reportable segments are also referred to as operating segments. See Note 12 for information about the Company's operations by segment.
Basis of consolidation
The consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to current period presentation. See Note 13 for more information about assets reclassified from assets held for sale to assets held and used in the consolidated balance sheets as of February 28, 2021.
Coronavirus (COVID-19)
The continued uncertainty associated with COVID-19, and any of the ongoing variants, did not have a material adverse effect on the Company's results of operations for the year ended February 28, 2022. While the Company continues to support its customers, there remains uncertainties regarding the duration and, to what extent, if any, that the COVID-19 pandemic, or newly identified variants, or additional regulatory requirements, will ultimately have on the demand for the Company's products and services or with its supply chain or its employees.
The impact of COVID-19 to the Company's personnel and operations has been limited. During fiscal 2022, the Company continued to see improvement in sales and operating income in both of its reportable segments.
Use of estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.
The Company maintains cash and cash equivalents with various financial institutions. The Company's policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company's banking relationships, and has not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk related to cash and cash equivalents.
The Company has limited concentrations of credit risk with respect to trade accounts receivable due to its multiple operating segments, large and diversified customer base and its geographic diversification. The Company performs ongoing evaluations of its customers' financial condition. Collateral is usually not required from customers as a condition of sale.
Accounts receivable, net of allowance for credit losses
Accounts receivable are stated amounts due from customers. The Company maintains an allowance for credit losses for estimated losses resulting from the inability of customers to make required payments. The Company treats trade accounts receivable as one portfolio and records an allowance based on a combination of management’s knowledge of its customer base, historical losses, current economic conditions and customer specific events. The Company adjusts this allowance based on specific information in connection with aged receivables. Accounts receivable are considered to be past due when payment is not received in accordance with the customer’s credit terms. Accounts are written off when management determines the account is uncollectible. Recoveries, unless material, are recorded against the allowance in the period received.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the changes in the allowance for credit losses for fiscal 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Balance at beginning of year | | $ | 5,713 | | | $ | 4,951 | | | $ | 2,267 | |
Adjustment based on aged receivables analysis | | (377) | | | 1,040 | | | 2,734 | |
Charge-offs, net | | (116) | | | (354) | | | (129) | |
Other | | (64) | | | (41) | | | 106 | |
Effect of exchange rate changes | | 51 | | | 117 | | | (27) | |
Balance at end of year | | $ | 5,207 | | | $ | 5,713 | | | $ | 4,951 | |
Revenue recognition
The Company recognizes revenue when all five of the following criteria have been satisfied:
1)Identification of the contract with a customer;
2)Identification of the performance obligations in the contract;
3)Determination of the transaction price;
4)Allocation of the transaction price to performance obligations in the contract; and
5)Fulfillment of performance obligations.
Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The amount and timing of revenue recognition varies by segment, based on the nature of the goods or services provided and the terms and conditions of the customer contract.
Metal Coatings Segment
AZZ's Metal Coatings segment is a provider of hot-dip galvanizing, powder coating, anodizing and plating, and other metal coating applications to the steel fabrication and other industries. Within this segment, the contract is typically governed by a customer purchase order or work order. The contract generally specifies the delivery of what constitutes a single performance obligation consisting of metal coating services. The Company recognizes sales over time as the metal coating is applied to customer provided material as the process enhances a customer controlled asset. Contract modifications are rare within this segment and most contracts are on a fixed price basis with no variable consideration.
Infrastructure Solutions segment
AZZ's Infrastructure Solutions segment is a provider of specialized products and services designed to support industrial and electrical applications. Within this segment, the contract is governed by a customer purchase order and an executed product or services agreement. The contract generally specifies the delivery of what constitutes a single performance obligation consisting of either custom built products, custom services, or off-the-shelf products. For arrangements with multiple performance obligations, the transaction price is allocated to each performance obligation, based on the relative standalone selling prices of the goods or services being provided, and revenue is recognized upon the satisfaction of each performance obligation. The Company combines contracts for revenue recognition purposes that are executed with the same customer within a short timeframe from each other and that purport to be for a single commercial objective.
For custom built products, the Company recognizes sales over time, provided that the goods do not have an alternative use to the Company and the Company has an unconditional right to payment for work completed to date plus a reasonable margin. For custom services, which consist of specialized welding and other professional services, the Company recognizes sales over time as the services are rendered, because the services enhance a customer owned asset. For off-the-shelf products, which consist of tubing and lighting products, the Company recognizes revenue upon the transfer of the goods to the customer.
For sales recognized over time, the Company generally uses the cost-to-cost method of revenue recognition. Under this approach, the extent of progress towards completion is measured based on the ratio of costs incurred to date versus the total estimated costs upon completion of the project. This requires the Company to estimate the total contract sales, project costs and margin, which can involve significant management judgment. As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, management reviews and updates its contract related estimates regularly. The Company recognizes adjustments in estimated margin on contracts on a cumulative catch-up basis, and subsequent sales
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
are recognized using the adjusted estimate. If the estimate of contract margin indicates an anticipated loss on the contract, the Company recognizes the total estimated loss in the period it is identified.
Due to the custom nature of the goods and services provided, contracts within the Infrastructure Solutions segment are often modified to account for changes in contract specifications and requirements. A contract modification exists when the modification either creates new, or changes the existing, enforceable rights and obligations in the contract. For the Company, most contract modifications are related to goods or services that are not distinct from those in the original contract due to the significant interrelationship or interdependencies between the deliverables. Such modifications are accounted for as if they were part of the original contract. As a result, the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to sales on a cumulative catch-up basis.
In addition to fixed consideration, the Company’s contracts within its Infrastructure Solutions segment may include variable consideration, including claims, incentive fees, liquidated damages or other penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value or the most likely amount method, whichever is expected to better predict the amount.
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, primarily related to the Company’s Infrastructure Solutions segment. Amounts are billed as work progresses in accordance with agreed upon contractual terms, either at periodic intervals (e.g., weekly or monthly) or upon achievement of contractual milestones. Billing can occur subsequent to revenue recognition, resulting in contract assets. In addition, the Company can receive advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
The following table shows the changes in contract liabilities for fiscal year 2022 and 2021 (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Balance at beginning of period | $ | 17,873 | | | $ | 18,418 | |
Contract liabilities added during the period | 38,085 | | | 13,603 | |
Sales recognized during the period | (13,493) | | | (14,148) | |
Balance at end of period | $ | 42,465 | | | $ | 17,873 | |
The Company expects to recognize sales of approximately $36.7 million, $5.6 million, $0.1 million and $0.1 million in fiscal 2023, 2024, 2025 and 2026, respectively, related to the $42.5 million balance of contract liabilities as of February 28, 2022.
The increases or decreases in accounts receivable, contract assets and contract liabilities during fiscal year 2022 were primarily due to normal timing differences between the Company’s performance and customer payments, divestitures, and, to a lesser extent, customer inspection delays and effects of COVID-19 on the Company's customers. The increase in contract liabilities in fiscal 2022 is primarily due to an increase in orders in the Company's Infrastructure Solutions segment. The acquisitions for fiscal year 2022 described in Note 14 had no impact on contract assets or liabilities as of the date of acquisition.
Other
No general rights of return exist for customers, and the Company establishes provisions for estimated warranties. The Company generally does not sell extended warranties. Revenue is recognized net of applicable sales and other taxes. The Company does not adjust the contract price for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a good or service to a customer and when the customer pays for that good or service will be one year or less, which is generally the case. Sales commissions are deferred and recognized over the same period as the related sales. Shipping and handling is treated as a fulfillment obligation instead of a separate performance obligation and such costs are expensed as incurred.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Disaggregated Revenue
Revenue by segment and geography is disclosed in Note 12. In addition, the following table presents disaggregated revenue by customer industry for fiscal years 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Sales: | | | | | |
Industrial | $ | 559,653 | | | $ | 511,740 | | | $ | 605,236 | |
Transmission and distribution | 189,559 | | | 209,729 | | | 254,836 | |
Power generation | 153,452 | | | 117,448 | | | 201,745 | |
Total sales | $ | 902,664 | | | $ | 838,917 | | | $ | 1,061,817 | |
Cash and cash equivalents
The Company considers cash and cash equivalents to include cash on hand, deposits with banks and all highly liquid investments with an original maturity of three months or less. Cash and cash equivalents includes restricted cash of $0.3 million and $0.9 million as of February 28, 2022 and February 28, 2021, respectively, in support of bank guarantees for certain customers and leased facilities in international locations.
Non-cash investing and financing activities
The Company had $0.9 million, $1.5 million and $2.4 million of accrued capital expenditures at the end of fiscal 2022, 2021 and 2020, respectively, which are excluded from the consolidated statements of cash flows until paid.
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined principally using a weighted-average method for the Infrastructure Solutions segment and the first-in-first-out (FIFO) method for the Metal Coatings segment. The Company determines the reserves for excess quantities and obsolescence based on forecasted demand within specific time horizons, technological obsolescence, and an assessment of any inventory that is not in sellable condition, and records a charge to reduce inventory to its net realizable value. For information related to charges recognized to reduce inventory in the Infrastructure Solutions segment to its net realizable value in fiscal 2021, see Note 13.
Property, plant and equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
| | | | | |
Buildings and structures | 10-25 years |
Machinery and equipment | 3-15 years |
Furniture and fixtures | 3-15 years |
Automotive equipment | 3 years |
Computers and software | 3-7 years |
Repairs and maintenance are charged to expense as incurred; renewals and betterments that significantly extend the useful life of the asset are capitalized.
Amortizable intangible and long-lived assets
Purchased intangible assets on the consolidated balance sheets are comprised of customer relationships, non-compete agreements, trademarks, technology and certifications. Such intangible assets (excluding indefinite-lived intangible assets) are amortized on a straight-line basis over the estimated useful lives of the assets ranging from two to nineteen years. Long-lived assets, such as property and equipment and intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Recoverability is measured by a comparison of their carrying amount to the estimated undiscounted cash flows to be generated by those assets. If the undiscounted cash flows are less than the carrying amount, the Company records impairment losses for the excess of their carrying value over the estimated
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
fair value. The Company did not recognize any impairment charges for fiscal year 2022. For fiscal year 2021, the Company recorded charges of $13.7 million to write-down certain property, plant and equipment and other intangible assets that were held for sale or abandoned. In addition, for fiscal year 2020, the Company recorded impairment losses of $9.2 million. See Note 13 for additional information about these impairment charges.
When there is a change to a plan of sale, and the assets are reclassified from held for sale to held and used, the long-lived assets would be reported at the lower of (i) the carrying amount before held for sale designation, adjusted for depreciation that would have been recognized if the assets had not been classified as held for sale, or (ii) the fair value at the date the assets no longer satisfy the criteria for classification as held for sale. Investments in real estate are classified as held for sale in the period in which certain criteria are met including when management commits to a plan to sell, an active program to locate a buyer has been initiated, the sale is probable, and actions required to complete the plan of sale indicate that it is unlikely that significant changes to the plan of sale will be made or the plan of sale will be withdrawn. See Note 13 for additional information.
Goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. The Company tests goodwill with an indefinite life for potential impairment annually as of December 31 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, which would result in impairment. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment. The test is calculated using an income approach and market approach, which are Level 3 fair value inputs, as described in "Financial instruments" below. Based on the results of its analysis, the Company determines whether an impairment may exist. A significant change in projected cash flows or cost of capital for future years could result in an impairment of goodwill in future years. Variables impacting future cash flows include, but are not limited to, the level of customer demand for and response to products and services we offer to the power generation market, the electrical transmission and distribution markets, the general industrial market and the hot-dip galvanizing market; changes in economic conditions of these various markets; raw material and natural gas costs and availability of experienced labor and management to implement our growth strategies. For fiscal years 2022, 2021 and 2020, no goodwill impairment losses were recognized. See Note 3 for information about the goodwill write-off related to divestitures in fiscal 2021 and 2020.
Other indefinite-lived intangible assets consist of certain tradenames that were obtained through acquisitions. The Company tests intangible assets with an indefinite life for potential impairment annually as of December 31 and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the intangible asset below its carrying amount, which would result in impairment. The Company performed its annual indefinite-lived intangible asset impairment test as of December 31, 2021. The Company elected to perform a qualitative assessment and determined that no conditions existed that would make it more likely than not that the indefinite-lived intangible assets were impaired. Therefore, no further quantitative assessment was required. For fiscal 2022, 2021 and 2020, no impairment losses related to these indefinite-lived intangible assets were recorded.
Debt issuance costs
Debt issuance costs that are incurred by the Company in connection with the issuance of debt are amortized to interest expense using the effective interest rate method over the term of the debt. Costs related to the Company’s revolving credit facility are included in "Intangibles and other assets, net" on the consolidated balance sheets. Costs related to the Company's senior notes are presented as a reduction to long-term debt on the consolidated balance sheets.
Income taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes a valuation allowance against net deferred tax assets to the extent that the Company believes those net assets are not more likely than not to be realized. In making such a determination, the Company considers all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If the Company determines that it would be able to realize its
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
As applicable, the Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company is subject to taxation in the U.S. and various state, provincial, local, and foreign jurisdictions. With few exceptions, as of February 28, 2022, the Company is no longer subject to U.S. federal or state examinations by tax authorities for years before fiscal 2019.
Financial instruments
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. 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; or
•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, accrued liabilities and the revolving credit facility) approximates the fair value of these instruments based upon either their short-term nature or their variable market rate of interest. As of February 28, 2022 and 2021, the fair value of the $150.0 million outstanding 2020 Senior Notes was approximately $144.0 million and $144.8 million, respectively. These fair values were determined using the discounted cash flow at the market rate as well as the applicable market interest rates, which are classified as Level 2 inputs.
Warranty reserves
A reserve has been established to provide for the estimated future cost of warranties on a portion of the Company’s delivered products, and is included in "Other accrued liabilities" in the consolidated balance sheets. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. A provision for warranty on products is made on the basis of the Company's historical experience and identified warranty issues. Management assesses the adequacy of its warranty reserve on a quarterly basis, and adjustments are made as necessary.
The following table shows the changes in the Company’s warranty reserve for fiscal year 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Balance at beginning of period | $ | 4,460 | | | $ | 3,702 | | | $ | 1,751 | |
Warranty costs incurred | (1,136) | | | (1,865) | | | (2,118) | |
Additions charged to income | 362 | | | 2,623 | | | 4,069 | |
| | | | | |
Balance at end of period | $ | 3,686 | | | $ | 4,460 | | | $ | 3,702 | |
Foreign Currency Translation
The local currency is the functional currency for the Company’s foreign operations. Related assets and liabilities are translated into United States dollars at exchange rates existing at the balance sheet date, and revenues and expenses are translated at weighted-average exchange rates. The foreign currency translation adjustment is recorded as a separate component of shareholders’ equity and is included in accumulated other comprehensive income (loss).
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Loss
The components of accumulated other comprehensive loss consisted of the following as of February 28, 2022 and February 28, 2021 (in thousands):
| | | | | | | | | | | |
| 2022 | | 2021 |
Foreign currency translation adjustments | $ | (27,324) | | | $ | (25,084) | |
| | | |
Accumulated other comprehensive loss | $ | (27,324) | | | $ | (25,084) | |
Accruals for Contingent Liabilities
The Company is subject to the possibility of various loss contingencies arising in the normal course of business. The amounts the Company may record for estimated claims, such as self-insurance programs, warranty, environmental, legal, and other contingent liabilities, requires the Company to make judgments regarding the amount of expenses that will ultimately be incurred. The Company uses past history and experience and other specific circumstances surrounding these claims in evaluating the amount of liability that should be recorded. Due to the inherent limitations in estimating future events, actual amounts paid or transferred may differ from those estimates.
Leases
The Company is a lessee under various leases for facilities and equipment. For such leases, the Company recognizes a right-of-use ("ROU") asset and lease liability on the consolidated balance sheet as of the lease commencement date based on the present value of the future minimum lease payments. An ROU asset represents the Company's right to use an underlying asset during the lease term and a lease liability represents the Company's obligation to make lease payments. However, for short-term leases with an initial term of twelve months or less that do not contain an option to purchase that is likely to be exercised, the Company does not record ROU assets or lease liabilities on the consolidated balance sheet.
The Company's uses its incremental borrowing rate to determine the present value of future payments unless the implicit rate in the lease is readily determinable. The incremental borrowing rate is calculated based on what the Company would pay to borrow on a collateralized basis, over a similar term, based on information available at lease commencement. In determining the future minimum lease payments, the Company incorporates options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The ROU asset includes any initial direct costs incurred and is recorded net of any lease incentives received. Leasehold improvements are capitalized and depreciated over the term of the lease, including any options for which the Company is reasonably certain will be exercised, with a maximum of 10 years.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, as the ROU asset is amortized and the lease liability is accreted. For its facility leases, the Company accounts for lease and non-lease components on a combined basis, and for its equipment leases, lease and non-lease components are accounted for separately.
Some of the Company's lease agreements may include rental payments that adjust periodically for inflation or are based on an index rate which are included as variable lease payments. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes ("ASU 2019-12"). This standard is intended to simplify the accounting and disclosure requirements for income taxes by eliminating various exceptions in accounting for income taxes as well as clarifying and amending existing guidance to improve consistency in the application of ASC 740. ASU 2019-12 was effective for the Company in the first quarter of its fiscal 2022. The Company adopted ASU 2019-12 in the first quarter of fiscal 2022, and the adoption did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In March 2020 and as clarified in January 2021, the FASB issued Accounting Standards Update No. (“ASU”) 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. An entity may elect to apply the amendments on a full retrospective basis as
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 has not adopted ASU 2020-04, but will continue to evaluate the possible adoption of any such expedients or exceptions, as well as the impact on its financial condition, results of operations, and cash flows, during the effective period.
2. Property, Plant and Equipment
Property, plant and equipment consisted of the following as of February 28, 2022 and February 28, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Land | | $ | 22,318 | | | $ | 21,439 | |
Building and structures | | 176,747 | | | 158,190 | |
Machinery and equipment | | 283,333 | | | 253,027 | |
Furniture, fixtures, software and computers | | 33,994 | | | 31,695 | |
Automotive equipment | | 5,350 | | | 3,714 | |
Construction in progress | | 14,623 | | | 26,223 | |
| | 536,365 | | | 494,288 | |
Less accumulated depreciation | | (305,517) | | | (287,199) | |
Property, plant, and equipment, net | | $ | 230,848 | | | $ | 207,089 | |
| | | | |
The following table outlines the classification of depreciation expense in the consolidated statements of income for fiscal 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Cost of sales | | $ | 30,357 | | | $ | 29,884 | | | $ | 30,721 | |
Selling, general and administrative | | 2,004 | | | 2,319 | | | 2,349 | |
Total depreciation expense | | $ | 32,361 | | | $ | 32,203 | | | $ | 33,070 | |
3. Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are subject to annual impairment tests. Other intangible assets are amortized over their estimated useful lives.
Changes in goodwill by segment for fiscal years 2022 and 2021 were as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2022 |
Segment | | Beginning Balance | | Acquisitions | | Divestiture | | Other | | Currency Translation Adjustment | | Ending Balance |
Metal Coatings | | $ | 158,659 | | | $ | 32,389 | | | $ | — | | | $ | (477) | | | $ | (180) | | | $ | 190,391 | |
Infrastructure Solutions | | 195,222 | | | — | | | — | | | — | | | — | | | 195,222 | |
Total | | $ | 353,881 | | | $ | 32,389 | | | $ | — | | | $ | (477) | | | $ | (180) | | | $ | 385,613 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2021 |
Segment | | Beginning Balance | | Acquisitions | | Divestiture | | Other | | Currency Translation Adjustment | | Ending Balance |
Metal Coatings | | $ | 157,048 | | | $ | 1,551 | | | $ | (1,132) | | | $ | — | | | $ | 1,192 | | | $ | 158,659 | |
Infrastructure Solutions | | 199,177 | | | — | | | (2,262) | | | (1,693) | | | — | | | 195,222 | |
Total | | $ | 356,225 | | | $ | 1,551 | | | $ | (3,394) | | | $ | (1,693) | | | $ | 1,192 | | | $ | 353,881 | |
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The impairment tests are based on Level 3 fair value inputs. Fair value is an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants.
During fiscal 2021 and 2020, the Company continued to execute its strategy to divest of non-core businesses, which included the divestiture of businesses serving customers in the nuclear power businesses. In connection with these activities, the Company allocated goodwill to the businesses disposed of or held for sale based on the relative fair value of those businesses in the reporting unit to which the goodwill applied. The determination of the amount of goodwill to allocate to the disposal group as opposed to the ongoing operations required significant management judgment regarding future cash flows, discount rates and other market relevant data. During fiscal 2022, the Company made changes to a plan of sale for a business that was previously held for sale in the Infrastructure Solutions segment. The Company had previously recognized the impact of the impairment in the prior year related to this business. This business was reclassified from assets held for sale into assets held and used during fiscal 2022. See Note 13 for more information.
In February 2020, the Company completed the sale of its nuclear logistics business reported within its Infrastructure Solutions segment. The Company allocated $7.9 million of goodwill to this business, which was written off upon the completion of the sale. The estimate of goodwill to allocate to the disposal group required significant management judgment regarding future cash flows, discount rates and other market relevant data. See Note 13 for more information.
The Company completed its fiscal 2022 annual goodwill impairment analysis as of December 31, 2021 and concluded that no impairment existed at any of its reporting units as of the testing date.
Amortizable intangible assets consisted of the following as of February 28, 2022 and February 28, 2021 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Weighted-Average Life (Years) | | 2022 | | 2021 |
Customer related intangibles | | 15 | | $ | 149,796 | | | $ | 145,782 | |
Non-compete agreements | | 12 | | 7,903 | | | 8,803 | |
Trademarks | | 21.0 | | 23,303 | | | 26,695 | |
Technology | | 25.0 | | 2,554 | | | 2,554 | |
Certifications | | 8 | | 408 | | | 399 | |
| | | | | | |
| | | | | | |
Gross intangible assets | | | | 183,964 | | | 184,233 | |
Less accumulated amortization | | | | (111,638) | | | (100,342) | |
Total amortizable intangible assets, net | | | | $ | 72,326 | | | $ | 83,891 | |
The following table outlines the classification of amortization expense in the statements of income for fiscal 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Cost of sales | | $ | 6,658 | | | $ | 6,838 | | | $ | 6,873 | |
Selling, general and administrative | | 5,646 | | | 5,562 | | | 10,251 | |
Total amortization expense | | $ | 12,304 | | | $ | 12,400 | | | $ | 17,124 | |
In addition, for fiscal 2020, intangibles with a net carrying value of approximately $14.6 million were written-off as part of the sale of the nuclear logistics business and nuclear-related intangibles with a carrying value of approximately $7.2 million were impaired as part of the exit from the nuclear certified portion of the industrial welding solutions business. See Note 13 for more information.
In addition to its amortizable intangible assets, the Company has recorded indefinite-lived intangible assets of $3.4 million on the consolidated balance sheets as of February 28, 2022 and February 28, 2021, related to certain tradenames acquired as part of prior business acquisitions. These indefinite-lived intangible assets are not amortized, but are assessed for impairment annually or whenever an impairment may be indicated. During fiscal 2022 and 2021, the Company performed an annual review of its indefinite-lived intangibles and no impairment was indicated.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following summarizes the estimated amortization expense for the next five fiscal years and beyond (in thousands):
| | | | | | | | |
| | |
2023 | | $ | 11,741 | |
2024 | | 9,913 | |
2025 | | 9,104 | |
2026 | | 9,075 | |
2027 | | 8,808 | |
Thereafter | | 23,685 | |
Total | | $ | 72,326 | |
4. Other Accrued Liabilities
Other accrued liabilities consisted of the following as of February 28, 2022 and February 28, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Accrued interest | | $ | 789 | | | $ | 957 | |
Accrued warranty | | 3,686 | | | 4,460 | |
Commissions | | 2,959 | | | 3,618 | |
Personnel expenses | | 6,539 | | | 9,709 | |
Group medical insurance | | 2,575 | | | 2,517 | |
Sales and other taxes payable | | 3,850 | | | 2,592 | |
Other | | 3,694 | | | 3,792 | |
Total | | $ | 24,092 | | | $ | 27,645 | |
5. Leases
The Company is a lessee under various leases for facilities and equipment. See Note 1 for a description of the Company's accounting policy for leases.
As of February 28, 2022, the Company was the lessee for 156 operating leases with terms of 12 months or more and 10 finance leases. 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. The majority of the Company’s long-term lease expenses are at fixed prices.
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. The Company's short-term lease agreements include expenses incurred hourly, daily, monthly and for other durations of time of one year or less.
The Company’s future lease commitments as of February 28, 2022 do not reflect all of the Company’s short-term lease commitments.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table outlines the classification of the Company's right-of-use asset and lease liabilities in the balance sheets for fiscal 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | | | | |
Balance Sheet | Classification | | February 28, 2022 | | February 28, 2021 |
Assets | | | | | |
Right-of-use assets | Right-of-use assets | | $ | 43,286 | | | $ | 37,801 | |
Liabilities | | | | | |
Operating lease liabilities ― ST | Lease liability - short-term | | 7,140 | | | 6,552 | |
Operating lease liabilities ― LT | Lease liability - long-term | | 34,965 | | | 32,405 | |
Finance lease liabilities ― ST | Lease liability - short-term | | 178 | | | 66 | |
Finance lease liabilities ― LT | Lease liability - long-term | | 645 | | | 226 | |
The following table outlines the classification of lease expense in the statements of income for fiscal 2022, 2021, and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Cost of sales | $ | 11,070 | | | $ | 10,533 | | | $ | 13,521 | |
Selling, general and administrative | 3,959 | | | 4,485 | | | 4,923 | |
Total lease cost | $ | 15,029 | | | $ | 15,018 | | | $ | 18,444 | |
As of February 28, 2022, maturities of the Company's lease liabilities were as follows (in thousands):
| | | | | | | | | | | | | | | | | |
Fiscal year: | Operating Leases | | Finance Leases | | Total |
2023 | $ | 8,880 | | | $ | 199 | | | $ | 9,079 | |
2024 | 7,930 | | | 199 | | | 8,129 | |
2025 | 6,838 | | | 196 | | | 7,034 | |
2026 | 5,302 | | | 132 | | | 5,434 | |
2027 | 5,009 | | | 105 | | | 5,114 | |
Thereafter | 16,331 | | | 46 | | | 16,377 | |
Total lease payments | 50,290 | | | 877 | | | 51,167 | |
Less imputed interest | (8,183) | | | (56) | | | (8,239) | |
Total | 42,107 | | | 821 | | | 42,928 | |
Supplemental information related to the Company's portfolio of leases was as follows (in thousands, except years and percentages):
| | | | | | | | | | | |
| 2022 | | 2021 |
Operating cash flows from operating leases included in lease liabilities | $ | 9,044 | | | $ | 8,143 | |
Lease liabilities obtained from new ROU assets - operating | $ | 13,389 | | | $ | 2,186 | |
Weighted-average remaining lease term - operating leases | 7.90 years | | 6.92 years |
Weighted-average discount rate - operating leases | 4.56 | % | | 4.71 | % |
Operating and financing cash flows from financing leases included in lease liabilities | $ | 100 | | | $ | 25 | |
Lease liabilities obtained from new ROU assets - financing | $ | 519 | | | $ | 230 | |
Weighted-average remaining lease term - financing leases | 4.73 years | | 4.25 years |
Weighted-average discount rate - financing leases | 2.95 | % | | 4.00 | % |
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. Debt
The Company’s long-term debt instruments and balances outstanding as of February 28, 2022 and February 28, 2021 were as follows (in thousands):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Revolving Credit Facility | | $ | 77,000 | | | $ | 29,000 | |
| | | | |
2020 Senior Notes | | 150,000 | | | 150,000 | |
Total debt, gross | | 227,000 | | | 179,000 | |
Unamortized debt issuance costs | | (516) | | | (581) | |
Total debt, net | | 226,484 | | | 178,419 | |
Less amount due within one year | | — | | | — | |
Debt due after one year, net | | $ | 226,484 | | | $ | 178,419 | |
2017 Revolving Credit Facility
On March 21, 2017, the Company executed the Amended and Restated Credit Agreement (the “2017 Credit Agreement”) with Bank of America and other lenders, which amended its previous credit agreement. The 2017 Credit Agreement was scheduled to mature on March 21, 2022, and included the following provisions: (i) provided for a senior revolving credit facility in a principal amount of up to $450.0 million, with an additional $150.0 million accordion, (ii) included a $75.0 million sublimit for the issuance of standby and commercial letters of credit, (iii) included a $30.0 million sublimit for swing line loans, (iv) restricted indebtedness incurred with respect to capital leases, synthetic lease obligations and purchase money obligations not to exceed $20.0 million, (v) restricted investments in any foreign subsidiaries not to exceed $50.0 million in the aggregate, and (vi) included various financial covenants and certain restricted payments relating to dividends and share repurchases as specifically set forth in the 2017 Credit Agreement.
Interest rates for borrowings under the 2017 Credit Agreement were based on either a Eurodollar Rate or a Base Rate plus a margin, ranging from 0.875% to 1.875% depending on our Leverage Ratio (as defined in the 2017 Credit Agreement). The Eurodollar Rate was defined as LIBOR for a term equivalent to the borrowing term (or other similar interbank rates if LIBOR is unavailable). The Base Rate was defined as the highest of the applicable Fed Funds rate plus 0.50%, the Prime rate, or the Eurodollar Rate plus 1.0% at the time of borrowing. The 2017 Credit Agreement also carried a Commitment Fee for the unfunded portion ranging from 0.175% to 0.30% per annum, depending on our Leverage Ratio. On July 8, 2021, the 2017 Credit Agreement was replaced with the 2021 Credit Agreement, which is described below.
2021 Credit Agreement
On July 8, 2021, the Company refinanced the 2017 Credit Agreement, which was scheduled to mature in March 2022, with a new 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 matures in July 2026 and includes the following significant terms;
i.provides for a senior unsecured revolving credit facility with a principal amount of up to $400.0 million revolving loan commitments, and includes an additional $200.0 million uncommitted incremental accordion facility,
ii.interest rate margin ranges from 87.5 bps to 175 bps for Eurodollar Rate loans, and from 0.0 bps to 75 bps for Base Rate loans, depending on leverage ratio of the Company and its consolidated subsidiaries as a group,
iii.includes a letter of credit sub-facility up to $85.0 million for the issuance of standby and commercial letters of credit,
iv.includes a $50.0 million sublimit for swing line loans,
v.includes customary representations and warranties, affirmative covenants and negative covenants, and events of default, including restrictions on incurrence of non-ordinary course debt, investment and dividends, subject to various exceptions, carve-outs and baskets, and
vi.includes a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each to be tested at quarter end.
The effective interest rate for the 2021 Credit Agreement was 2.49% as of February 28, 2022.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The proceeds of the loans under the 2021 Credit Agreement are used primarily to finance working capital needs, capital improvements, dividends, future acquisitions and for general corporate purposes.
As of February 28, 2022, we had $77.0 million of outstanding debt against the 2021 Credit Agreement and letters of credit outstanding under the 2021 Credit Agreement in the amount of $9.7 million, resulting in approximately $313.3 million of additional credit available.
2020 Senior Notes
On October 9, 2020, the Company completed a private placement transaction and entered into a Note Purchase Agreement, whereby the Company agreed to borrow $150.0 million of senior unsecured notes (the “2020 Senior Notes”), consisting of two separate tranches:
•7-year borrowing: $70.0 million priced at 2.77% coupon; and
•12-year borrowing: $80.0 million priced at 3.17% coupon.
The $80.0 million tranche was funded on December 17, 2020. The $70.0 million tranche was funded in January 2021. The Company used the proceeds to repay the existing $125.0 million 5.42% Senior Notes that matured on January 20, 2021, as well as for general corporate purposes. Interest on the 2020 Senior Notes is paid semi-annually. In connection with the 2020 Senior Notes, the Company incurred debt issuance costs of approximately $0.6 million. These costs have been allocated between the two tranches and are being amortized over periods of seven and 12 years, and are included in “Debt due after one year, net” in the consolidated balance sheets.
The Company's debt agreements require the Company to maintain certain financial ratios. As of February 28, 2022, the Company was in compliance with all covenants or other requirements set forth in the debt agreements.
For each of the five years after February 28, 2022, required principal payments under the terms of the long-term debt, including the 2021 Credit Agreement, are as follows (dollars in thousands):
| | | | | | | | |
Fiscal Year: | | Future Debt Maturities |
2023 | | $ | — | |
2024 | | — | |
2025 | | — | |
2026 | | — | |
2027 | | 77,000 | |
Thereafter | | 150,000 | |
Total | | $ | 227,000 | |
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. Income Taxes
The provision for income taxes for fiscal year 2022, 2021 and 2020 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Income before income taxes: | | | | | |
Domestic | $ | 98,610 | | | $ | 46,766 | | | $ | 44,406 | |
Foreign | 7,735 | | | 4,231 | | | 20,484 | |
Income before income taxes | $ | 106,345 | | | $ | 50,997 | | | $ | 64,890 | |
Current provision: | | | | | |
| Federal | $ | 15,644 | | | $ | 9,532 | | | $ | 12,563 | |
| Foreign | 738 | | | 2,660 | | | 5,259 | |
| State and local | 2,547 | | | 1,754 | | | 1,451 | |
Total current provision for income taxes | $ | 18,929 | | | $ | 13,946 | | | $ | 19,273 | |
Deferred provision (benefit): | | | | | |
| Federal | $ | 4,407 | | | $ | (2,165) | | | $ | (1,452) | |
| Foreign | (1,540) | | | (2,294) | | | (21) | |
| State and local | 527 | | | 1,896 | | | (1,144) | |
Total deferred provision for (benefit from) income taxes | $ | 3,394 | | | $ | (2,563) | | | $ | (2,617) | |
Total provision for income taxes | $ | 22,323 | | | $ | 11,383 | | | $ | 16,656 | |
A reconciliation from the federal statutory income tax rate to the effective income tax rate is as follows for the prior three fiscal years:
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Statutory federal income tax rate | | 21.0 | % | | 21.0 | % | | 21.0 | % |
Permanent differences | | (0.5) | | | (0.1) | | | 0.1 | |
State income taxes, net of federal income tax benefit | | 1.9 | | | 5.4 | | | — | |
Valuation allowance | | (0.5) | | | (0.4) | | | — | |
Stock compensation | | 0.1 | | | 1.1 | | | — | |
Tax credits | | (1.4) | | | (3.4) | | | 2.0 | |
Foreign tax rate differential | | 0.5 | | | 0.1 | | | 1.4 | |
Uncertain tax positions | | (1.1) | | | (1.0) | | | 1.4 | |
Audit settlement | | 0.7 | | | 1.9 | | | — | |
Other | | 0.4 | | | (2.3) | | | (0.2) | |
Effective income tax rate | | 21.0 | % | | 22.3 | % | | 25.7 | % |
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial accounting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax liability are as follows for fiscal year 2022 and 2021 (in thousands):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Deferred income tax assets: | | | | |
Employee related items | | $ | 3,750 | | | $ | 3,282 | |
Inventories | | 6,536 | | | 5,729 | |
Accrued warranty | | 459 | | | 429 | |
Accounts receivable | | | | 2,347 | |
Lease liabilities | | 8,200 | | | 8,962 | |
Other deferred income tax assets | | 92 | | | 239 | |
Net operating loss and other credit carry-forwards | | 10,418 | | | 6,649 | |
| | | | |
| | $ | 29,455 | | | $ | 27,637 | |
Less: valuation allowance | | (142) | | | (689) | |
Total deferred income tax assets | | 29,313 | | | 26,948 | |
Deferred income tax liabilities: | | | | |
Depreciation methods and property basis differences | | $ | (20,688) | | | $ | (18,982) | |
Right-of-use lease assets | | (7,809) | | | (8,623) | |
Accounts receivable | | (619) | | | — | |
Other assets and tax-deductible goodwill | | (42,678) | | | (34,740) | |
Total deferred income tax liabilities | | (71,794) | | -71794000 | (62,345) | |
Net deferred income tax liabilities | | $ | (42,481) | | | $ | (35,397) | |
As of February 28, 2022, the Company had pretax state NOL carry-forwards of $70.1 million which, if unused, will begin to expire in 2023 and pretax foreign NOL carry-forwards of $14.0 million, which, if unused, will begin to expire in 2026.
As of fiscal year end 2022 and 2021, a portion of the Company's deferred tax assets were the result of state and foreign jurisdiction NOL carry-forwards and state credit carry-forwards. The Company believes that it is more likely than not that the benefit from certain foreign NOL carry-forwards and state credit carry-forwards will not be realized. In recognition of this risk, the Company has provided a valuation allowance of $0.1 million and $0.7 million as of fiscal year end 2022 and 2021, respectively.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company's global operations. Generally accepted accounting principles in the United States of America ("GAAP") states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company may (1) record unrecognized tax benefits as liabilities in accordance with GAAP and (2) adjust these liabilities when the Company's judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of the beginning and ending balance of total unrecognized tax benefits, which is included in "Other long-term liabilities" in the consolidated balance sheets for the years ended February 28, 2022 and 2021 is as follows (in thousands):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Balance at beginning of period | | $ | 3,350 | | | $ | 2,531 | |
Increase for tax positions related to current periods: | | — | | | — | |
Gross increases | | 513 | | | 5,617 | |
Gross decreases | | (260) | | | — | |
Increase for tax positions related to prior periods: | | | | |
Gross increases | | 997 | | | — | |
Gross decreases | | (356) | | | (1,263) | |
Decreases related to settlements with taxing authorities | | (691) | | | (642) | |
Lapse of statute of limitations | | (1,259) | | | (2,893) | |
Balance at end of period | | $ | 2,294 | | | $ | 3,350 | |
Current year increases to our Uncertain Tax Positions (“UTPs”) primarily relate to matters related to research and development credits and stock compensation. Current year decreases primarily relate to the lapse of the statute of limitations in certain jurisdictions and settlements with certain taxing authorities.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. Penalties and interest credited for fiscal 2022 and 2021 were $(0.2) million and $(0.4) million, respectively.
The Company has prior year tax returns currently being examined in one state and does not have any other returns currently being examined by taxing authorities. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. As the outcome of any tax audits cannot be predicted with certainty, if any issues addressed in the Company's tax audits are resolved in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future.
The Company has operations and taxable presence in multiple jurisdictions in the U.S. and outside of the U.S. in Canada, the Netherlands, China, Poland, Brazil, India and Singapore. The tax positions of the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions around the world. The Company currently considers U.S. federal and state and Canada, to be significant tax jurisdictions. The Company’s U.S. federal and state tax returns since February 28, 2019 remain open to examination. With some exceptions, tax years prior to fiscal 2019 in jurisdictions outside of U.S. are closed. The statute of limitations for fiscal year end 2019 will expire in December 2022. The Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits related to various federal, foreign and state positions of $0.6 million may be resolved in the next 12 months.
Prior to enactment of H.R. 1, formerly known as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), the Company asserted that all unremitted earnings of its foreign subsidiaries were considered indefinitely reinvested. As a result of the Tax Act, the Company reported and paid U.S. tax on the majority of its previously unremitted foreign earnings. As of February 28, 2022, the Company continues to be indefinitely reinvested with respect to investments in its foreign subsidiaries. Additionally, the Company has not recorded deferred tax liabilities associated with the remaining unremitted earnings that are considered indefinitely reinvested. It is impracticable for the Company to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings, due to the complexities associated with the hypothetical calculation.
8. Equity
On January 19, 2012, the Company's Board of Directors authorized the repurchase of up to ten percent of the then outstanding shares of the Company's common stock (the "2012 Authorization"). The 2012 Authorization did not have an expiration date, and the amount and prices paid for any future share purchases under the authorization were to be based on market conditions and other factors at the time of the purchase. Repurchases under the 2012 Authorization were made through open market purchases or private transactions.
On November 10, 2020, the Company's Board of Directors authorized a $100.0 million share repurchase program pursuant to which the Company may repurchase its common stock (the “2020 Authorization”). Repurchases under the 2020
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 following table outlines the Company's share repurchases under the 2020 Authorization during fiscal 2022 and 2021 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | |
| Purchased under 2020 Authorization | | Purchased under 2012 Authorization | | Total Shares Repurchased |
Year Ended February 28, 2022 | | | | | |
Number of shares repurchased | 602 | | | — | | | 602 | |
Total amount of shares repurchased | $ | 30,815 | | | $ | — | | | $ | 30,815 | |
Average price per share | $ | 51.20 | | | $ | — | | | $ | 51.20 | |
| | | | | |
Year Ended February 28, 2021 | | | | | |
Number of shares repurchased | 331 | | | 883 | | | 1,214 | |
Total amount of shares repurchased | $ | 15,998 | | | $ | 32,313 | | | $ | 48,311 | |
Average price per share | $ | 48.36 | | | $ | 36.60 | | | $ | 39.80 | |
9. 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. Diluted earnings per share has been adjusted for the dilutive effect of the weighted average number of restricted stock units, performance share units and stock appreciation rights outstanding.
The following table sets forth the computation of basic and diluted earnings per share for fiscal years 2022, 2021 and 2020 (in thousands, except per share data):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Numerator: | | | | | | |
Net income for basic and diluted earnings per common share | | $ | 84,022 | | | $ | 39,614 | | | $ | 48,234 | |
Denominator: | | | | | | |
Total weighted average basic shares | | 24,855 | | | 25,897 | | | 26,191 | |
Effect of dilutive securities: | | | | | | |
Shares applicable to stock-based compensation | | 222 | | | 148 | | | 90 | |
Total weighted average diluted shares | | 25,077 | | | 26,045 | | | 26,281 | |
Earnings per share: | | | | | | |
Basic earnings per share | | $ | 3.38 | | | $ | 1.53 | | | $ | 1.84 | |
Diluted earnings per share | | $ | 3.35 | | | $ | 1.52 | | | $ | 1.84 | |
For fiscal 2022, 2021 and 2020, approximately 0.1 million, 0.2 million and 0.1 million employee equity awards were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.
10. Employee Benefit Plans
401(k) Retirement Plan
The Company has a 401(k) retirement plan covering substantially all of its employees. Company contributions to the 401(k) retirement plan were $5.0 million, $4.8 million, and $5.4 million for fiscal 2022, 2021, and 2020, respectively.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Multiemployer Pension Plans
In addition to the Company's 401(k) retirement plan, the Company participates in a number of multiemployer defined benefit pension plans for employees, which are covered by collective bargaining agreements. The Company is not aware of any significant future obligations or funding requirements related to these plans other than the ongoing contributions that are paid as hours are worked by plan participants.
However, the risks of participating in multiemployer pension plans are different from those in single-employer plans in that (i) assets contributed to the plan by one employer may be used to provide benefits to employees or former employees of other participating employers; (ii) if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be required to be assumed by the remaining participating employers and (iii) if the Company chooses to stop participating in a multiemployer pension plan, it may be required to pay the plan a withdrawal amount, based on the underfunded status of the plan.
The following table outlines the Company's participation in multiemployer pension plans considered to be individually significant (dollar amounts in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | EIN/Pension Plan Number | | Pension Protection Act Reported Status (1) | | FIP/RP Status (2) | | Company Contributions (3) | | Surcharge Imposed (4) | | Expiration Date of Collective Bargaining Agreements |
| | | | | Fiscal Year | | |
Pension Fund | | | 2022 | | 2021 | | | 2022 | | 2021 | | 2020 | | |
Boilermaker-Blacksmith National Pension Trust | | EIN:48-6168020 Plan: 001 | | Endangered | | Endangered | | Implemented | | $ | 3,827 | | | $ | 3,340 | | | $ | 5,337 | | | Yes | | Various through 12/31/2021 |
Contributions to other multiemployer pension plans | | | | | | | | | | 130 | | | 97 | | | 366 | | | | | |
Total contributions | | | | | | | | | | $ | 3,957 | | | $ | 3,437 | | | $ | 5,703 | | | | | |
(1) The most recent Pension Protection Act reported status available for fiscal 2022 and 2021 is for the plan’s year-end as of December 31, 2021 and 2020, respectively. The zone status is based on information that the Company received from the plan trustee and is certified by the plan’s actuary. A plan is generally classified in critical status if a funding deficiency is projected within four years or five years, depending on other criteria. A plan in critical status is classified in critical and declining status if it is projected to become insolvent in the next 15 or 20 years, depending on other criteria. A plan is classified in endangered status if its funded percentage is less than 80% or a funding deficiency is projected within seven years. If the plan satisfies both of these triggers, it is classified in seriously endangered status. A plan not classified in any other status is classified in the green zone. As of the date the financial statements were issued, Form 5500, which is filed by employee benefit plans to satisfy annual reporting requirements under the Employee Retirement Income Security Act and under the Internal Revenue Code, was not available for the plan year ended in 2021.
(2) The “FIP/RP Status” column indicates plans for which a Funding Improvement Plan (“FIP”) or a Rehabilitation Plan (“RP”) has been implemented.
(3) For the multiemployer pension plan considered to be individually significant, the Company was not listed in the Form 5500 as providing more than 5% of the total contributions for plan years ended December 31, 2020 and 2019, which are the most recent reports available.
(4) A multiemployer pension plan that has been certified as endangered, seriously endangered or critical may begin to levy a statutory surcharge on contribution rates. Once authorized, the surcharge would be at a rate of 5% for the first 12 months and 10% for any periods thereafter. Contributing employers, however, may eliminate the surcharge by entering into a collective bargaining agreement that meets the requirements of the applicable FIP or RP.
11. Share-based Compensation
The Company has two share-based compensation plans, the 2014 Long Term Incentive Plan (the "2014 Plan") and the Amended and Restated 2005 Long Term Incentive Plan (the “2005 Plan”).
The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and members of the board of directors and permits the granting of restricted shares, restricted stock units, performance awards, stock appreciation rights and other stock-based awards. The maximum number of shares that may be issued under the 2014 Plan is 1.5 million shares and, as of February 28, 2022, the Company had approximately 0.7 million shares reserved for future issuance under this
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plan. The 2005 Plan permitted the granting of stock appreciation rights and other equity-based awards to certain employees. This plan was terminated upon the effective date of the 2014 Plan and no future grants may be made under the 2005 Plan. There were stock appreciation rights granted under the 2005 Plan prior to its termination. All outstanding stock appreciation rights were exercised during fiscal year 2022.
The Company accounts for its share-based employee compensation plans in accordance with ASC 718, Compensation—Stock Compensation. The Company recognizes compensation expense over the requisite service period, which is in line with the applicable vesting period for each share-based award.
Restricted Stock Unit Awards
Restricted stock unit ("RSU") awards are valued at the market price of the Company's common stock on the grant date. Awards generally vest ratably over a period of three years, but these awards may vest earlier in accordance with the Plan’s accelerated vesting provisions. RSU awards have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the awards vest and shares are issued.
A summary of the Company's RSU award activity (including DERs) for fiscal years 2022, 2021, and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Restricted Stock Units | | Weighted Average Grant Date Fair Value | | Restricted Stock Units | | Weighted Average Grant Date Fair Value |
Outstanding at beginning of year | 226,446 | | | $ | 35.66 | | | 194,946 | | | $ | 44.34 | | | 146,532 | | | $ | 48.93 | |
Granted | 77,787 | | | 51.23 | | | 131,120 | | | 28.78 | | | 140,070 | | | 43.86 | |
Vested | (84,060) | | | 35.78 | | | (70,913) | | | 45.67 | | | (84,595) | | | 54.63 | |
Forfeited | (6,075) | | | 39.02 | | | (28,707) | | | 36.59 | | | (7,061) | | | 45.30 | |
Outstanding at end of year | 214,098 | | | $ | 41.24 | | | 226,446 | | | $ | 35.66 | | | 194,946 | | | $ | 44.34 | |
Vested and expected to vest at end of year | 214,098 | | | $ | 41.24 | | | 224,807 | | | $ | 35.56 | | | 193,718 | | | $ | 44.34 | |
The total fair value of RSU awards vested during fiscal years 2022, 2021, and 2020 was $4.6 million, $2.3 million and $3.8 million, respectively.
Performance Share Unit Awards
The Company grants performance share unit ("PSU") awards to certain employees, which also include DERs as described above. These PSU awards have a three-year performance cycle and will vest and become issuable, if at all, on the third anniversary from the award date. The PSU awards granted in fiscal 2020 are subject to the Company’s degree of achievement of a target annual average adjusted return on assets during these three-year periods and, in certain circumstances, vesting is based on the relative performance of a predetermined group of peer companies. In addition, these PSU awards may have vesting conditions or certain vesting multipliers, which are based on the Company’s total shareholder return during such three-year periods in comparison to a defined specific industry peer group. The PSU awards granted in fiscal 2021 and 2022 are based on the Company's total shareholder return during the three-year period, in comparison to a defined specific industry peer group and include certain vesting multipliers. The Company estimates the fair value of PSU awards with performance and service conditions using the value of the Company's common stock on the date of grant. The Company estimates the fair value of PSU awards with market conditions using a Monte Carlo simulation model on the date of grant.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company’s PSU award activity (including DERs) for fiscal years 2022, 2021, and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| Performance Stock Units | | Weighted Average Grant Date Fair Value | | Performance Stock Units | | Weighted Average Grant Date Fair Value | | Performance Stock Units | | Weighted Average Grant Date Fair Value |
Outstanding at the beginning of year | 143,584 | | | $ | 39.96 | | | 109,936 | | | $ | 47.75 | | | 83,125 | | | $ | 49.74 | |
Granted | 55,114 | | | 63.39 | | | 69,955 | | | 33.22 | | | 49,000 | | | 46.19 | |
Vested | (44,243) | | | 54.00 | | | — | | | — | | | — | | | — | |
Forfeited | — | | | — | | | (36,307) | | | 50.57 | | | (22,189) | | | 55.08 | |
Outstanding at the end of year | 154,455 | | | $ | 44.05 | | | 143,584 | | | $ | 39.96 | | | 109,936 | | | $ | 47.75 | |
The PSU awards in the table above are presented at the face value of the respective grants. However, the number of PSU awards that may ultimately vest can vary in a range 0% to 200% of the face amount of such awards, depending on the outcome of the performance or market vesting conditions, as applicable.
Stock Appreciation Rights
Stock appreciation rights ("SARs") are granted with an exercise price equal to the market value of the Company's common stock on the date of grant. These awards generally have a contractual term of seven years and vested ratably over a period of three years, although some vested immediately on issuance. These awards were valued using the Black-Scholes option pricing model. The Company did not grant any SARs in fiscal year 2022, 2021 or 2020. As of February 28, 2022, there were no SARs outstanding.
A summary of the Company’s SAR activity for fiscal years 2022, 2021 and 2020 is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
| SARs | | Weighted Average Exercise Price | | SARs | | Weighted Average Exercise Price | | SARs | | Weighted Average Exercise Price |
Outstanding at beginning of year | 5,435 | | | $ | 45.25 | | | 94,826 | | | $ | 44.58 | | | 98,184 | | | $ | 44.46 | |
Granted | — | | | — | | | — | | | — | | | — | | | — | |
Exercised | (5,435) | | | 45.25 | | | (45,902) | | | 44.00 | | | (2,965) | | | 44.58 | |
Forfeited | — | | | — | | | (43,489) | | | 45.10 | | | (393) | | | 43.92 | |
Outstanding at end of year | — | | | $ | — | | | 5,435 | | | $ | 45.25 | | | 94,826 | | | $ | 44.58 | |
Exercisable at the end of year | — | | | $ | — | | | 5,435 | | | $ | 45.25 | | | 94,826 | | | $ | 44.58 | |
Directors Grants
The Company granted each of its independent directors a total of 1,976, 3,174 and 2,124 shares of its common stock during fiscal years 2022, 2021 and 2020, respectively. These common stock grants were valued at $53.13, $33.08 and $47.08 per share for fiscal years 2022, 2021 and 2020, respectively, which was the market price of the Company's common stock on the respective grant dates.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Employee Stock Purchase Plan
The Company has an employee stock purchase plan ("ESPP"), which is open to all employees. The ESPP allows employees of the Company to purchase common stock of the Company through accumulated payroll deductions. Offerings under this plan have a duration of 24 months (the "Offering Period"). On the first day of an Offering Period (the “Enrollment Date”) the participant is granted the option to purchase shares on each exercise date at the lower of 85% of the market value of a share of our common stock on the Enrollment Date or the exercise date. The participant’s right to purchase common stock under the plan is restricted to no more than $25,000 per calendar year, and the participant may not purchase more than 5,000 shares during any Offering Period. Participants may terminate their interest in a given offering or a given exercise period by withdrawing all of their accumulated payroll deductions at any time prior to the end of the Offering Period. An aggregate of 1.5 million shares of common stock are authorized for issuance under the ESPP. Of this amount, 1.2 million shares were available for issuance as of February 28, 2022. The Company issues new shares upon purchase through the ESPP.
Share-based Compensation Expense
The following table shows share-based compensation expense and the related income tax benefit included in the consolidated statements of income for fiscal years 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 |
Compensation expense | $ | 9,449 | | | $ | 7,330 | | | $ | 6,290 | |
Income tax benefits | $ | 1,984 | | | $ | 1,539 | | | $ | 1,321 | |
Unrecognized compensation cost related to unvested stock awards at February 28, 2022 was $8.6 million, which is expected to be recognized over a weighted average period of 1.44 years.
The actual tax benefit/(expense) realized from share-based compensation during fiscal years 2022, 2021 and 2020 was $(0.4) million, $(0.4) million and $(0.1) million, respectively.
The Company’s policy is to issue shares under these plans from the Company’s authorized but unissued shares. The Company has no formal or informal plan to repurchase shares on the open market to satisfy these requirements.
12. Operating Segments
Segment Information
The Company’s Chief Executive Officer, who is the chief operating 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 (loss) are the primary measures used by the CODM to evaluate segment operating performance and to allocate resources to segments. Expenses related to certain centralized administration or executive functions that are not specifically related to an operating segment are included in Corporate.
A summary of each of the Company's reportable segments is as follows:
Metal Coatings — provides hot-dip galvanizing, spin galvanizing, powder coating, anodizing and plating, and other metal coating applications to the steel fabrication and other industries through facilities located throughout the United States and Canada. Hot-dip galvanizing is a metallurgical process in which molten zinc reacts to steel. The zinc alloying provides corrosion protection and extends the life-cycle of fabricated steel for several decades.
Infrastructure Solutions — provides specialized products and services designed to support primarily industrial and electrical applications. The product offerings include custom switchgear, electrical enclosures, medium and high voltage bus ducts, explosion proof and hazardous duty lighting and tubular products. The Infrastructure Solutions segment also focuses on life-cycle extension for the power generation, refining and industrial infrastructure, through providing automated weld overlay solutions for corrosion and erosion mitigation.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following tables show information by reportable segment for fiscal years 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Sales: | | |
Metal Coatings | | $ | 519,000 | | | $ | 457,791 | | | $ | 498,989 | |
Infrastructure Solutions | | 383,664 | | | 381,126 | | | 562,828 | |
Total sales | | $ | 902,664 | | | $ | 838,917 | | | $ | 1,061,817 | |
| | | | | | |
Operating income (loss): | | | | | | |
Metal Coatings | | $ | 127,335 | | | $ | 95,946 | | | $ | 107,926 | |
Infrastructure Solutions(1) | | 35,543 | | | 6,487 | | | 32,845 | |
Corporate | | (49,538) | | | (40,819) | | | (42,796) | |
Loss on disposal of business | | — | | | — | | | (18,632) | |
Total operating income | | $ | 113,340 | | | $ | 61,614 | | | $ | 79,343 | |
| | | | | | |
(1) Operating income for the Infrastructure Solutions segment for fiscal 2020 includes impairment charges of $9.2 million, of
which $7.2 million are included in Selling, general and administrative expense, and $2.0 million are included in Cost of
sales. See Notes 1 and 3 for more information.
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Depreciation and amortization: | | | | | | |
Metal Coatings | | $ | 30,000 | | | $ | 29,930 | | | $ | 30,042 | |
Infrastructure Solutions | | 13,037 | | | 12,978 | | | 18,414 | |
Corporate | | 1,628 | | | 1,695 | | | 1,738 | |
Total | | $ | 44,665 | | | $ | 44,603 | | | $ | 50,194 | |
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Expenditures for acquisitions, net of cash, and property, plant and equipment: | | | | | | |
Metal Coatings | | $ | 82,737 | | | $ | 29,305 | | | $ | 81,340 | |
Infrastructure Solutions | | 4,814 | | | 9,619 | | | 9,158 | |
Corporate | | 2,073 | | | 2,574 | | | 2,725 | |
Total | | $ | 89,624 | | | $ | 41,498 | | | $ | 93,223 | |
Asset information by segment was as follows as of February 28, 2022 and February 28, 2021 (in thousands):
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Assets: | | | | |
Metal Coatings | | $ | 575,088 | | | $ | 480,778 | |
Infrastructure Solutions | | 525,086 | | | 492,771 | |
Corporate | | 32,854 | | | 25,678 | |
Total assets | | $ | 1,133,028 | | | $ | 999,227 | |
Financial Information About Geographical Areas
Financial information about geographical areas for the periods presented was as follows for fiscal years 2022, 2021 and 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | 2022 | | 2021 | | 2020 |
Sales: | | | | | | |
United States | | $ | 789,047 | | | $ | 711,696 | | | $ | 850,656 | |
International | | 113,617 | | | 127,221 | | | 211,161 | |
Total | | $ | 902,664 | | | $ | 838,917 | | | $ | 1,061,817 | |
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| | | | | | | | | | | | | | |
| | 2022 | | 2021 |
Property, plant and equipment, net: | | | | |
United States | | $ | 194,539 | | | $ | 181,898 | |
Canada | | 26,264 | | | 15,007 | |
Other countries | | 10,045 | | | 10,184 | |
Total | | $ | 230,848 | | | $ | 207,089 | |
13. Restructuring and Impairment Charges
Fiscal 2022
During fiscal 2022, the Company continued to execute it's plan to divest certain non-core business, which was approved by the board of directors in fiscal 2021. During the fourth quarter of fiscal 2022, the Company had a change to the plan of sale for one of its businesses in the Infrastructure Solutions segment. The Company recognized $3.9 million of impairment charges related to this business during fiscal 2021, which are included in in "Restructuring and impairment charges" in the consolidated statements of income. During fiscal 2022, the Company reclassified the business from assets held for sale to assets held and used. When there is a change to a plan of sale and the assets are reclassified from held for sale to held and used, the long-lived assets are reported at the lower of (i) the carrying amount before held for sale designation, adjusted for depreciation that would have been recognized if the assets had not been classified as held for sale, or (ii) the fair value at the date the assets no longer satisfy the criteria for classification as held for sale. Following an analysis of the long-lived assets for the business, the Company reversed a portion of the previously recognized impairment charges, and recognized income of $1.8 million in fiscal 2022 as a result of the change to the plan of sale, which is included in "Restructuring and Impairment charges" in the consolidated statements of operations. In addition, $1.7 million of the impairment charges recognized in fiscal 2021 was allocated to goodwill, reducing the goodwill allocated to this business to zero.
The remaining assets and liabilities related to the business reclassified to assets held and used have been reclassified to the appropriate asset and liability accounts in the consolidated balance sheet. The following table shows the assets and liabilities related to this business as reported, adjustments to reclassify the asset to assets held and used, and the adjusted amounts, as of February 28, 2021:
| | | | | | | | | | | | | | | | | | | | |
| | As of February 28, 2021 |
| | As Reported | | Adjustments | | As Adjusted |
Assets | | | | | | |
Accounts receivable | | $ | 128,127 | | | $ | 638 | | | $ | 128,765 | |
Inventories | | 92,912 | | | 907 | | | 93,819 | |
Contract assets | | 58,056 | | | 3,314 | | | 61,370 | |
Other current assets | | 5,876 | | | 153 | | | 6,029 | |
Assets held for sale | | 3,684 | | | (3,449) | | | 235 | |
Property, plant and equipment | | 205,909 | | | 1,180 | | | 207,089 | |
Intangibles and other assets, net | | 91,390 | | | 42 | | | 91,432 | |
Total | | $ | 585,954 | | | $ | 2,785 | | | $ | 588,739 | |
| | | | | | |
Liabilities | | | | | | |
Accounts payable | | $ | 41,034 | | | $ | 508 | | | $ | 41,542 | |
Other accrued liabilities | | 27,136 | | | 509 | | | 27,645 | |
Contract liabilities | | 16,138 | | | 1,735 | | | 17,873 | |
Lease liability, short-term | | 6,588 | | | 31 | | 6,619 | |
Lease liability, long-term | | 32,629 | | | 2 | | | 32,631 | |
Total | | $ | 123,525 | | | $ | 2,785 | | | $ | 126,310 | |
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fiscal 2021
During fiscal 2021, the Company executed a plan to divest certain non-core businesses. The Company closed on the sale of its Galvabar business and its AZZ SMS, LLC ("SMS") business, and the board of directors approved a plan to divest certain other businesses within the Company. The Company recorded net proceeds of $8.3 million and a loss on the sale of the Galvabar business, which is included in the Metal Coatings segment, of $1.2 million. During fiscal 2021, the Company completed the sale of SMS, which is included in the Infrastructure Solutions segment, for net proceeds of $4.1 million. The Company recognized impairment charges of $0.9 million for SMS during the second quarter, and an additional loss on sale of $1.9 million during the third quarter of fiscal 2021. The loss of the sale of these businesses are included in "Restructuring and impairment charges" in the consolidated statements of income.
In addition, the Company closed a small number of Metal Coatings locations that were in underperforming and lower growth geographies during fiscal 2021.
During fiscal 2021, the Company recognized certain charges related to the businesses sold, assets held for sale and assets that were abandoned, which are summarized in the table below:
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended February 28, 2021 |
| | Metal Coatings | | Infrastructure Solutions | | Total |
Write down of assets held for sale to estimated sales price | | $ | 2,652 | | | $ | 4,100 | | | $ | 6,752 | |
Write down of assets expected to be abandoned | | 6,923 | | | — | | | 6,923 | |
Loss on sale of subsidiaries | | 1,221 | | | 1,859 | | | 3,080 | |
Write down of excess inventory | | — | | | 2,511 | | | 2,511 | |
Costs associated with assets held for sale | | — | | | 733 | | | 733 | |
Total charges | | $ | 10,796 | | | $ | 9,203 | | | $ | 19,999 | |
Fiscal 2020
In February 2020, the Company completed the sale of its nuclear logistics business reported within its Infrastructure Solutions segment. The Company received net cash proceeds of $23.6 million and recognized a loss on disposal of $18.6 million, which is included in restructuring and impairment charges in the consolidated statements of income. The strategic decision to divest of the business reflects the Company's longer-term strategy to focus on core businesses, markets and on its Metal Coatings segment. The historical annual sales, operating profit and net assets of the nuclear logistics business were not significant enough to qualify the sale as a discontinued operation. Goodwill was allocated to the disposal group on a relative fair value basis. The determination of the amount of goodwill to allocate to the disposal group required significant management judgment regarding future cash flows, discount rates and other market relevant data.
During fiscal year 2020, in conjunction with the divestiture of its nuclear logistics business, the Company exited from the nuclear certified portion of its industrial welding solutions business within the Infrastructure Solutions segment. In conjunction with this divestiture, the Company incurred impairment charges of $9.2 million, of which $2.0 million is included in cost of sales and $7.2 million is included in selling, general and administrative in the consolidated statement of income. The impairment charges are related to certain intangible assets and nuclear specific property, plant and equipment that are no longer being utilized.
As of February 28, 2022 and February 28, 2021, the Company had no restructuring liabilities outstanding.
Assets Held for Sale
The strategic decision to divest both the Galvabar and SMS businesses reflects the Company's long-term strategy to focus on growth within its core businesses. The historical annual sales, operating profit and net assets of these two businesses were not significant enough to qualify as discontinued operations.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of February 28, 2022, one non-operating location in the Metal Coatings segment is classified as held for sale. The assets of the business include property, plant and equipment of $0.2 million, are expected to be disposed of within the next twelve months and are included in "Assets held for sale" in the accompanying consolidated balance sheets.
14. Acquisitions
Fiscal 2022
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 $36.2 million. DAAM currently operates two galvanizing facilities in Canada; one located in Edmonton, Alberta and a second in Saskatoon, Saskatchewan, 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 in Canada. The business is included in the Company's Metal Coatings segment. The goodwill arising from this acquisition was allocated to the Metal Coatings segment and a portion of the goodwill amount is expected to be deductible for income tax purposes.
Since the DAAM acquisition was completed on February 28, 2022, the purchase price allocation has not been finalized. As such, the fair values of the assets acquired and liabilities assumed are preliminary and are subject to change. The following table represents the preliminary summary of the assets acquired and liabilities assumed, in aggregate, related to the DAAM acquisition, as of the date of the acquisition (in thousands):
| | | | | | | | |
Assets | | |
Accounts receivable | | $ | 2,576 | |
Inventories | | 2,308 | |
Property, plant and equipment | | 14,436 | |
Goodwill | | 24,498 | |
Liabilities | | |
Accounts payable and other accrued liabilities | | (4,003) | |
Deferred tax liabilities | | (3,596) | |
Total purchase price | | $ | 36,219 | |
In January 2022, the Company completed the acquisition of all the assets of Steel Creek Galvanizing Company, LLC ("Steel Creek"), a privately held hot-dip galvanizing company based in Blacksburg, South Carolina, for approximately $25.0 million. The acquisition expanded the Company's geographical reach in metal coatings solutions and extends its ability to support customers in the Southeast region of the United States. The business is included in the Company's Metal Coatings segment. The goodwill arising from this acquisition was allocated to the Metal Coatings segment and is expected to be deductible for income tax purposes.
The allocation of the purchase price of Steel Creek has not been completed, and the assets acquired and liabilities assumed are preliminary and subject to change. The following table summarizes the fair values of the preliminary allocation of assets acquired and liabilities assumed, in aggregate, related to the Steel Creek acquisition, as of the date of the acquisition (in thousands):
| | | | | | | | |
Assets | | |
Accounts receivable | | $ | 598 | |
Inventories | | 3,593 | |
Property, plant and equipment | | 15,796 | |
Intangibles | | 872 | |
Goodwill | | 7,732 | |
Liabilities | | |
Accounts payable and other accrued liabilities | | (765) | |
Contingent consideration | | (2,826) | |
Total purchase price | | $ | 25,000 | |
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the initial cash payment upon closing, contingent consideration of up to $2.8 million is payable based on the achievement of specified operating results over the three-year period following completion of the acquisition.
Fiscal 2021
For fiscal year 2021, the Company completed the acquisition of all the assets of Acme Galvanizing, Inc., which was not significant. Accordingly, disclosures of the purchase price allocations and unaudited pro forma results of operations have not been provided. The goodwill arising from this acquisition was allocated to the Metal Coatings segment and is expected to be deductible for income tax purposes. In addition, in conjunction with the acquisition, the Company assumed liabilities related to environmental remediation of approximately $0.6 million.
Fiscal 2020
In April 2019, the Company completed the acquisition of all the outstanding shares of K2 Partners, Inc. ("K2") and Tennessee Galvanizing, Inc. ("Tennessee Galvanizing"), two privately held companies. K2 provides powder coating and electroplating solutions to customers in the Midwest and Southeast from locations in Texas and Florida. Tennessee Galvanizing provides galvanizing solutions to customers throughout the United States. These acquisitions expanded the Company's geographical reach in metal coating solutions and broadened its offerings in strategic markets. The businesses are included in the Company's Metal Coatings segment. The goodwill arising from these acquisitions was allocated to the Metal Coatings segment and is not deductible for income tax purposes.
The following table summarizes the fair values of the assets acquired and liabilities assumed, in aggregate, related to the acquisitions in fiscal 2020, as of the date of each respective acquisition (in thousands):
| | | | | | | | |
Assets | | |
Accounts receivable | | $ | 4,591 | |
Inventories | | 1,830 | |
Prepaid expenses and other | | 22 | |
Property, plant and equipment | | 5,336 | |
Intangibles | | 15,512 | |
Goodwill | | 39,419 | |
Liabilities | | |
Accounts payable and other accrued liabilities | | (1,575) | |
Contingent consideration | | (2,000) | |
Deferred income taxes | | (2,507) | |
Total purchase price | | $ | 60,628 | |
In addition to the initial cash payment upon closing for the K2 acquisition, contingent consideration of up to $2.0 million is payable based on the achievement of specified operating results over the three-year period following completion of the acquisition. The contingent consideration is expected to be paid in early fiscal 2023.
The following table sets forth the components of identifiable intangible assets acquired and their estimated useful lives as of the date of each respective acquisition (in thousands):
| | | | | | | | | | | | | | |
| | Fair Value | | Useful Life |
Customer relationships | | $ | 15,360 | | | 15 years |
Non-compete agreements | | 152 | | | 3 years |
Total intangible assets | | $ | 15,512 | | | |
During fiscal 2020, the acquired companies described above generated net sales of $27.9 million and net income of $2.6 million in the Company’s consolidated statements of income from the date of each respective acquisition.
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following unaudited pro forma financial information summarizes the combined results of operations for the Company and the companies included as part of the fiscal 2020 acquisitions, as though the companies were combined as of the beginning of the Company’s fiscal 2020. The pro forma amounts presented are not necessarily indicative of either the actual consolidated results had the acquisitions occurred as of the beginning of fiscal 2020 or of future consolidated operating results.
The unaudited pro forma financial information was as follows (in thousands):
| | | | | | | | |
| | 2020 |
Revenues | | $ | 1,072,633 | |
Net income | | 49,702 | |
Pro forma results presented above reflect: (i) incremental depreciation relating to fair value adjustments to property, plant, and equipment and (ii) amortization adjustments relating to fair value estimates of intangible assets. Pro forma adjustments described above have been tax affected using the Company's effective rate during the respective periods.
Supplemental Disclosures
During fiscal 2022, 2021 and 2020, the Company paid approximately $61.2 million, $4.4 million and $60.6 million, respectively, for these acquisitions, net of cash acquired. The Company expensed acquisition related costs of approximately $2.0 million and $0.8 million, during fiscal 2022 and 2020, respectively. During fiscal 2021, the Company did not expense any acquisition costs.
The goodwill resulting from these acquisitions during fiscal 2022, 2021 and 2020 consists largely of the Company’s expected future product and services sales and synergies from combining the products and services and technology with the Company’s existing product and services portfolio.
15. Commitments and Contingencies
Legal
The Company and its subsidiaries are named defendants and plaintiffs in various routine lawsuits incidental to our business. These proceedings include labor and employment claims, use of the Company’s intellectual property, worker’s compensation, environmental matters, and various commercial disputes, all arising in the normal course of business. 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 and potential mediation, our assessment of the likelihood of an unfavorable outcome on the pending lawsuits may change. Although the outcome of these lawsuits or other proceedings cannot be predicted with certainty, and the amount of any potential liability that could arise with respect to such lawsuits or other matters cannot be predicted at this time, management, after consultation with legal counsel believes it has strong defenses to all of these matters and does not expect liabilities, if any, from these claims or proceedings, either individually or in the aggregate, to have a material effect on the Company’s financial position, results of operations or cash flows.
Commodity pricing
As of February 28, 2022, the Company had non-cancelable forward contracts to purchase approximately $74.0 million of zinc at various volumes and prices. All such contracts expire in fiscal 2023. The Company had no other contracted commitments for any other commodities including steel, aluminum, natural gas, copper, zinc, nickel based alloys, except for those entered into under the normal course of business.
Other
As of February 28, 2022, the Company had total outstanding letters of credit in the amount of $22.0 million. These letters of credit are issued for a number of reasons, but are most commonly issued in lieu of customer retention withholding payments covering warranty or performance periods. In addition, as of February 28, 2022, a warranty reserve in the amount of $3.7 million was established to offset any future warranty claims.
16. Subsequent Events
On March 7, 2022, the Company and Sequa Corporation ("Sequa"), a portfolio company of global investment firm Carlyle, jointly announced an agreement whereby the Company will acquire Sequa's Precoat Metals business division ("Precoat") for a net purchase price of approximately $1.3 billion. Precoat, headquartered in St. Louis, Missouri, is North America's largest independent provider of metal coil coating solutions. The transaction, which is subject to certain closing conditions, is expected to close during the first quarter of the Company's fiscal year 2023.