azz-20210531

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended May 31, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-12777

AZZ Inc.

(Exact name of registrant as specified in its charter)


Texas		75-0948250
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Museum Place, Suite 500
3100 West 7th Street
Fort Worth,	Texas	76107
(Address of principal executive offices)		(Zip Code)

(817) 810-0095

(Registrant’s telephone number, including area code)

NONE

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

AZZ

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of June 30, 2021 the registrant had outstanding 25,071,582 shares of common stock; $1.00 par value per share.

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AZZ INC.

INDEX


		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statements of Shareholders’ Equity	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	17
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4.	Controls and Procedures	22

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	23
Item 1A.	Risk Factors	23
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 5	Other Information	23
Item 6.	Exhibits	25

	SIGNATURES	26

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

AZZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


	May 31, 2021		February 28, 2021
Assets
Current assets:
Cash and cash equivalents	$	12,403	$	14,837
Accounts receivable (net of allowance for credit losses of $5,362 as of May 31, 2021 and $5,713 as of February 28, 2021)	134,531		128,127
Inventories:
Raw material	92,283		86,913
Work-in-process	6,214		4,453
Finished goods	1,453		1,546
Contract assets	71,185		58,056
Prepaid expenses and other	11,211		5,876
Assets held for sale	5,628		3,684
Total current assets	334,908		303,492
Property, plant and equipment, net	207,689		205,909
Operating lease right-of-use assets	48,698		37,801
Goodwill	354,839		353,881
Intangibles and other assets, net	93,105		95,359
Total assets	$	1,039,239	$	996,442
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	48,831	$	41,034
Income tax payable	4,778		—
Accrued salaries and wages	16,614		22,606
Other accrued liabilities	36,278		27,136
Customer deposits	421		348
Contract liabilities	17,098		16,138
Lease liability, short-term	7,174		6,588


Total current liabilities	131,194		113,850
Debt due after one year, net	185,435		178,419
Lease liability, long-term	40,702		32,629
Deferred income taxes	38,467		39,283
Other long-term liabilities	6,030		8,969
Total liabilities	401,828		373,150
Commitments and contingencies
Shareholders’ equity:
Common stock, $1 par, shares authorized 100,000; 25,071 shares issued and outstanding at May 31, 2021 and 25,108 shares issued and outstanding at February 28, 2021	25,071		25,108
Capital in excess of par value	75,600		75,979
Retained earnings	559,173		547,289
Accumulated other comprehensive loss	(22,433)		(25,084)
Total shareholders’ equity	637,411		623,292
Total liabilities and shareholders' equity	$	1,039,239	$	996,442

The accompanying notes are an integral part of the condensed consolidated financial statements.

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(Unaudited)


	Three Months Ended May 31,
	2021		2020

Sales	$	229,826	$	213,293
Cost of sales	171,899		171,085
Gross margin	57,927		42,208

Selling, general and administrative	27,215		27,890

Operating income	30,712		14,318

Interest expense	1,697		2,634

Other (income) expense, net	(969)		1,456
Income before income taxes	29,984		10,228
Income tax expense	7,647		4,687
Net income	$	22,337	$	5,541
Earnings per common share
Basic earnings per share	$	0.89	$	0.21
Diluted earnings per share	$	0.88	$	0.21

Cash dividends declared per common share	$	0.17	$	0.17

The accompanying notes are an integral part of the condensed consolidated financial statements.

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)


	Three Months Ended May 31,
	2021		2020

Net income	$	22,337	$	5,541
Other comprehensive income (loss):
Foreign currency translation adjustments, net of income tax of $0	2,581		(1,039)
Interest rate swap, net of income tax of $0 and $7, respectively	—		(14)
Other comprehensive income (loss)	2,581		(1,053)
Comprehensive income	$	24,918	$	4,488

The accompanying notes are an integral part of the condensed consolidated financial statements.

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Three Months Ended May 31,
	2021		2020
Cash Flows From Operating Activities
Net income	$	22,337	$	5,541
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Bad debt expense	(218)		129
Amortization and depreciation	11,084		11,668
Deferred income taxes	(892)		(2,147)


Net (gain) loss on sale of property, plant and equipment	(15)		40
Amortization of deferred borrowing costs	139		135
Share-based compensation expense	1,811		1,766
Effects of changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable	(7,966)		8,721
Inventories	(8,254)		(4,449)
Prepaid expenses and other	(5,419)		(941)
Other assets	(778)		123
Net change in contract assets and liabilities	(9,839)		3,168
Accounts payable	6,321		(15,328)
Other accrued liabilities and income taxes payable	2,749		(19,610)
Net cash provided by (used in) operating activities	11,060		(11,184)
Cash Flows From Investing Activities
Proceeds from sale of property, plant and equipment	23		—
Purchase of property, plant and equipment	(7,489)		(10,847)


Net cash used in investing activities	(7,466)		(10,847)
Cash Flows From Financing Activities

Payments for taxes related to net share settlement of equity awards	(2,101)		(539)
Proceeds from revolving loan	35,000		76,000
Payments on revolving loan	(28,000)		(60,000)



Repurchase and retirement of treasury stock	(6,264)		—
Payments of dividends	(4,245)		(4,425)
Net cash (used in) provided by financing activities	(5,610)		11,036
Effect of exchange rate changes on cash	(418)		722
Net decrease in cash and cash equivalents	(2,434)		(10,273)
Cash and cash equivalents at beginning of period	14,837		36,687
Cash and cash equivalents at end of period	$	12,403	$	26,414

Supplemental disclosures
Cash paid for interest	$	394	$	869
Cash paid for income taxes	$	1,322	$	11

The accompanying notes are an integral part of the condensed consolidated financial statements.

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Three Months Ended May 31, 2021
	Common Stock			Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total

	Shares	Amount
Balance at February 28,2021	25,108	$	25,108	$	75,979	$	547,289	$	(25,084)	$	623,292
Share-based compensation expense	—	—		1,811		—		—		1,811
Common stock issued under stock-based plans and related income tax expense	89	89		(2,190)		—		—		(2,101)


Repurchase and retirement of common stock	(126)	(126)		—		(6,138)		—		(6,264)
Cash dividends paid	—	—		—		(4,245)		—		(4,245)
Net income	—	—		—		22,337		—		22,337
Foreign currency translation	—	—		—		(70)		2,651		2,581

Balance at May 31, 2021	25,071	$	25,071	$	75,600	$	559,173	$	(22,433)	$	637,411

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)


	Three Months Ended May 31, 2020
	Common Stock			Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total

	Shares	Amount
Balance at February 28, 2020	26,148	$	26,148	$	66,703	$	572,414	$	(30,899)	$	634,366
Share-based compensation	—	—		1,766		—		—		1,766
Common stock issued under stock-based plans and related income tax expense	47	47		(586)		—		—		(539)



Cash dividends paid	—	—		—		(4,425)		—		(4,425)
Net income	—	—		—		5,541		—		5,541
Foreign currency translation	—	—		—		—		(1,039)		(1,039)
Interest rate swap	—	—		—		—		(14)		(14)
Balance at May 31, 2020	26,195	$	26,195	$	67,883	$	573,530	$	(31,952)	$	635,656

The accompanying notes are an integral part of the condensed consolidated financial statements.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

1.The Company and Basis of Presentation

AZZ Inc. (“AZZ”, the “Company”, "our" or “we”) was established in 1956 and incorporated under the laws of the state of Texas. The Company is a global provider of metal coating solutions, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. The Company has two distinct operating segments: the Metal Coatings segment and the Infrastructure Solutions segment. AZZ Metal Coatings provides hot dip galvanizing, spin galvanizing, powder coating, anodizing and plating, and other metal coating applications to the steel fabrication and other industries through facilities located throughout the United States and Canada. AZZ Infrastructure Solutions is dedicated to delivering safe and reliable transmission of power from generation sources to end customers, and automated weld overlay solutions for corrosion and erosion mitigation to critical infrastructure in markets worldwide.

Presentation

The accompanying condensed consolidated balance sheet as of February 28, 2021 was derived from audited financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended February 28, 2021, included in the Company’s Annual Report on Form 10-K covering such period. Certain previously reported amounts have been reclassified to conform to current period presentation.

The Company's fiscal year ends on the last day of February and is identified as the fiscal year for the calendar year in which it ends. For example, the fiscal year ending February 28, 2022 is referred to as fiscal 2022.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position of the Company as of May 31, 2021, the results of its operations for the three months ended May 31, 2021 and 2020, and cash flows for the three months ended May 31, 2021 and 2020. The interim results reported herein are not necessarily indicative of results for a full year. Certain previously reported amounts have been reclassified to conform to current period presentation.

Coronavirus (COVID-19)

In March 2020, the World Health Organization declared the viral strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. The spread of COVID-19 and the resulting economic contraction has resulted in increased business uncertainty. The Company continues to be impacted by the inability for its Infrastructure Solutions Industrial platform to access certain customer sites to perform services, temporary slow-downs in order placements in the Infrastructure Solutions Electrical platform, and increased costs associated with maintaining safe operations across the entire business. The Company has been able to remain open during the entirety of the pandemic to service its customers. The Company cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may materially impact its consolidated balance sheet, statements of operations or statements of cash flows for fiscal year 2022 or beyond.

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board (“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. The standard 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

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

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Reporting” (“ASU 2020-04”), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate (“LIBOR”) or by another reference rate expected to be discontinued. The amendments are effective immediately for all entities. An entity may elect to apply the amendments on a full retrospective basis as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or on a prospective basis to new modifications from any date between March 12, 2020 and December 31, 2022. The Company adopted ASU 2020-04 in the first quarter of fiscal 2022 and the adoption did not have a material impact on its financial condition, results of operations, and cash flows.

2.Earnings Per Share

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by giving effect to the potential dilution that could occur if stock awards vested and were converted into common shares during the period.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):


	Three Months Ended May 31,
	2021		2020
Numerator:
Net income for basic and diluted earnings per common share	$22,337		$5,541
Denominator:
Denominator for basic earnings per common share–weighted average shares	25,051		26,157
Effect of dilutive securities:
Employee and director equity awards	219		35
Denominator for diluted earnings per common share	25,270		26,192
Earnings per share basic and diluted:
Basic income per common share	$	0.89	$	0.21
Diluted income per common share	$	0.88	$	0.21

For the three months ended May 31, 2021, 154,259 shares were excluded from the calculation of diluted EPS because the effect would be antidilutive. These shares could be dilutive in future periods.

3.Sales

Disaggregated Sales

The following table presents disaggregated sales by customer industry (in thousands):


	Three Months Ended May 31,
	2021		2020
Sales:
Industrial	$	153,983	$	130,109
Transmission and distribution	43,667		49,057
Power generation	32,176		34,127
Total sales	$	229,826	$	213,293

See Note 4 for sales information by segment.

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Contract Liabilities

The following table shows the changes in contract liabilities for the three months ended May 31, 2021 and 2020, respectively (in thousands):


	2021		2020
Balance at February 28/29,	$	16,138	$	18,418
Contract liabilities added during the period	12,375		4,796
Sales recognized during the period	(11,415)		(5,849)
Balance at May 31,	$	17,098	$	17,365

The Company did not record any sales for the three months ended May 31, 2021 or 2020 related to performance obligations satisfied in prior periods. The increases or decreases in accounts receivable, contract assets, and contract liabilities during the three months ended May 31, 2021 and 2020 were due primarily to normal timing differences between the Company’s performance and customer payments in fiscal 2021.

The Company expects to recognize sales, related to the $17.1 million balance of contract liabilities as of May 31, 2021 of approximately $12.1 million, $4.7 million, $0.2 million and $0.1 million in fiscal 2022, 2023, 2024 and 2025, respectively.

4.Operating Segments

Segment Information

The Company has two distinct operating segments: the Metal Coatings segment and the Infrastructure Solutions segment.

The Metal Coatings segment provides hot dip galvanizing, spin galvanizing, powder coating, anodizing and plating, and other metal coating applications to the steel fabrication and other industries through facilities located throughout the United States and Canada. Hot dip galvanizing is a metallurgical process in which molten zinc reacts to steel. The zinc alloying provides corrosion protection to fabricated steel for extended periods of up to 50 years.

The Infrastructure Solutions segment provides specialized products and services designed to support primarily industrial and electrical applications. The product offerings include custom switchgear, electrical enclosures, medium and high voltage bus ducts, explosion proof and hazardous duty lighting and tubular products. The Infrastructure Solutions segment also focuses on life-cycle extension for the power generation, refining and industrial infrastructure, through providing automated weld overlay solutions for corrosion and erosion mitigation.

Sales and operating income by segment for each period were as follows (in thousands):


	Three Months Ended May 31,
	2021		2020
Sales:
Metal Coatings	$	127,735	$	118,991
Infrastructure Solutions	102,091		94,302
Total sales	$	229,826	$	213,293

Operating income:
Metal Coatings	$	31,576	$	25,085
Infrastructure Solutions	9,624		(1,048)
Corporate	(10,488)		(9,719)
Total operating income	$	30,712	$	14,318

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


	May 31, 2021		February 28, 2021
Total assets:
Metal Coatings	$	490,326	$	480,778
Infrastructure Solutions	521,428		489,986
Corporate	27,485		25,678
Total	$	1,039,239	$	996,442

Financial Information About Geographical Areas

The following table presents sales by geographic region for each period (dollars in thousands):


	Three Months Ended May 31,
	2021		2020
Sales:
United States	$	191,116	$	190,842
International	38,710		22,451
Total	$	229,826	$	213,293

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


	May 31, 2021		February 28, 2021
Property, plant and equipment, net:
United States	$	180,004	$	180,718
Canada	14,953		15,007
Other countries	12,732		10,184
Total	$	207,689	$	205,909

5.Warranty Reserves

A reserve has been established to provide for the estimated future cost of warranties on certain delivered products. The warranty accrual is included in "Other accrued liabilities" on the condensed consolidated balance sheets. Management monitors established reserves and adjusts warranty estimates based upon the progression of resolution activities with the Company's customers. Warranties typically cover non-conformance to customer specifications or defects in material and workmanship.

The following table shows the changes in the warranty reserves for the three months ended May 31, 2021 (dollars in thousands):


Balance at February 28, 2021	$	4,079
Warranty costs incurred	(112)
Additions charged to income	170

Balance at May 31, 2021	$	4,137

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6.Debt

The Company's debt consisted of the following for each of the periods presented (dollars in thousands):


	May 31, 2021		February 28, 2021
2017 Revolving Credit Facility	$	36,000	$	29,000



2020 Senior Notes	150,000		150,000
Total debt, gross	186,000		179,000
Unamortized debt issuance costs	(565)		(581)
Total debt, net	185,435		178,419
Less amount due within one year	—		—
Debt due after one year, net	$	185,435	$	178,419

The Company's debt agreements require the Company to maintain certain financial ratios, of which the most restrictive is a debt to EBITDA leverage ratio of at least 3.25 to 1.00. As of May 31, 2021, the Company was in compliance with all covenants or other requirements set forth in the debt agreements.

7.Leases

The Company is a lessee under various operating leases for facilities and equipment. Supplemental information related to the Company's portfolio of operating leases was as follows (dollars in thousands):


	Three Months Ended May 31,
	2021			2020
Operating cash flows from operating leases included in lease liabilities	$	2,299		$	2,119
Lease liabilities obtained from new ROU assets - operating	12,661			204
Weighted-average remaining lease term - operating leases (years)	8.4			7.6
Weighted-average discount rate - operating leases	4.6		%	5.0		%
Operating and financing cash flows from financing leases included in lease liabilities	18			—
Lease liabilities obtained from new ROU assets - financing	—			—
Weighted-average remaining lease term - financing leases (years)	4.3			—
Weighted-average discount rate - financing leases	4.3		%	—		%

The following table outlines the classification of lease expense in the statements of income (dollars in thousands):


	Three Months Ended May 31,
	2021		2020
Cost of sales	$	2,546	$	3,225
Selling, general and administrative	1,130		1,249
Total lease expense	$	3,676	$	4,474

SEC Form 10-Q filed by AZZ Inc.