FORM 10-Q |
ý | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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, including zip code) |
Large accelerated filer | ý | Accelerated filer | ¨ | Non-accelerated filer | ¨ | |||||
Smaller reporting company | ¨ | Emerging growth company | ¨ |
Title of each class: | Outstanding at August 31, 2018: | |
Common Stock, $1.00 par value per share | 26,050,242 |
PAGE NO. | ||
PART I. | ||
Item 1. | Financial Statements (Unaudited) | |
Item 2. | ||
Item 3. | ||
Item 4. | ||
PART II. | ||
Item 1. | ||
Item 1A. | ||
Item 2. | ||
Item 3. | ||
Item 4. | ||
Item 5. | ||
Item 6. | ||
August 31, 2018 | February 28, 2018 | |||||||
Assets | ||||||||
Current assets: | ||||||||
Cash and cash equivalents | $ | 9,204 | $ | 20,853 | ||||
Accounts receivable (net of allowance for doubtful accounts of $2,398 as of August 31, 2018 and $569 as of February 28, 2018) | 152,468 | 141,488 | ||||||
Inventories: | ||||||||
Raw material | 103,959 | 98,475 | ||||||
Work-in-process | 354 | 2,544 | ||||||
Finished goods | 8,565 | 9,742 | ||||||
Contract assets | 71,236 | 51,787 | ||||||
Prepaid expenses and other | 6,657 | 4,265 | ||||||
Total current assets | 352,443 | 329,154 | ||||||
Property, plant and equipment, net | 209,404 | 216,855 | ||||||
Goodwill | 324,080 | 321,307 | ||||||
Intangibles and other assets, net | 152,097 | 160,893 | ||||||
Total assets | $ | 1,038,024 | $ | 1,028,209 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable | $ | 43,247 | $ | 54,162 | ||||
Income tax payable | 2,453 | 144 | ||||||
Accrued salaries and wages | 18,725 | 19,011 | ||||||
Other accrued liabilities | 22,768 | 19,622 | ||||||
Customer deposits | 1,311 | 1,816 | ||||||
Contract liabilities | 23,763 | 22,698 | ||||||
Debt due within one year | — | 14,286 | ||||||
Total current liabilities | 112,267 | 131,739 | ||||||
Debt due after one year, net | 295,679 | 286,609 | ||||||
Other long-term liabilities | 10,759 | 11,696 | ||||||
Deferred income taxes | 33,394 | 32,962 | ||||||
Total liabilities | 452,099 | 463,006 | ||||||
Commitments and contingencies | ||||||||
Shareholders’ equity: | ||||||||
Common stock, $1 par, shares authorized 100,000; 26,050 shares issued and outstanding at August 31, 2018 and 25,959 shares issued and outstanding at February 28, 2018 | 26,050 | 25,959 | ||||||
Capital in excess of par value | 42,787 | 38,446 | ||||||
Retained earnings | 544,136 | 526,018 | ||||||
Accumulated other comprehensive loss | (27,048 | ) | (25,220 | ) | ||||
Total shareholders’ equity | 585,925 | 565,203 | ||||||
Total liabilities and shareholders' equity | $ | 1,038,024 | $ | 1,028,209 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net sales | $ | 222,787 | $ | 196,329 | $ | 485,023 | $ | 401,612 | ||||||||
Cost of sales | 175,883 | 152,529 | 379,414 | 310,430 | ||||||||||||
Gross margin | 46,904 | 43,800 | 105,609 | 91,182 | ||||||||||||
Selling, general and administrative | 29,799 | 26,413 | 64,808 | 53,772 | ||||||||||||
Operating income | 17,105 | 17,387 | 40,801 | 37,410 | ||||||||||||
Interest expense | 3,980 | 3,400 | 7,818 | 6,760 | ||||||||||||
Other (income) expense, net | (857 | ) | 260 | (1,148 | ) | 75 | ||||||||||
Income before income taxes | 13,982 | 13,727 | 34,131 | 30,575 | ||||||||||||
Income tax expense | 2,738 | 3,941 | 7,169 | 8,727 | ||||||||||||
Net income | $ | 11,244 | $ | 9,786 | $ | 26,962 | $ | 21,848 | ||||||||
Earnings per common share | ||||||||||||||||
Basic earnings per share | $ | 0.43 | $ | 0.38 | $ | 1.04 | $ | 0.84 | ||||||||
Diluted earnings per share | $ | 0.43 | $ | 0.38 | $ | 1.03 | $ | 0.84 | ||||||||
Cash dividends declared per common share | $ | 0.17 | $ | 0.17 | $ | 0.34 | $ | 0.34 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net income | $ | 11,244 | $ | 9,786 | $ | 26,962 | $ | 21,848 | ||||||||
Other comprehensive income (loss): | ||||||||||||||||
Foreign currency translation adjustments, net of income tax of $0 | 455 | 5,326 | (1,801 | ) | 4,328 | |||||||||||
Interest rate swap, net of income tax of $7, $7, $15 and $15, respectively. | (13 | ) | (14 | ) | (27 | ) | (27 | ) | ||||||||
Other comprehensive income (loss) | 442 | 5,312 | (1,828 | ) | 4,301 | |||||||||||
Comprehensive income | $ | 11,686 | $ | 15,098 | $ | 25,134 | $ | 26,149 |
Six Months Ended August 31, | ||||||||
2018 | 2017 | |||||||
Cash Flows From Operating Activities | ||||||||
Net income | $ | 26,962 | $ | 21,848 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||
Provision for doubtful accounts | 2,050 | 47 | ||||||
Amortization and depreciation | 25,698 | 24,984 | ||||||
Deferred income taxes | 467 | 850 | ||||||
Net loss on property, plant and equipment due to impairment | 811 | — | ||||||
Net loss (gain) on sale of property, plant and equipment | (308 | ) | 554 | |||||
Amortization of deferred borrowing costs | 343 | 303 | ||||||
Share-based compensation expense | 3,659 | 3,400 | ||||||
Effects of changes in assets and liabilities: | ||||||||
Accounts receivable | (13,179 | ) | 939 | |||||
Inventories | (2,171 | ) | (13,304 | ) | ||||
Prepaid expenses and other | (2,390 | ) | (4,021 | ) | ||||
Other assets | (1,017 | ) | (1,106 | ) | ||||
Net change in contract assets and liabilities | (19,278 | ) | (14,197 | ) | ||||
Accounts payable | (10,025 | ) | (6,770 | ) | ||||
Other accrued liabilities and income taxes payable | 5,845 | (10,742 | ) | |||||
Net cash provided by operating activities | 17,467 | 2,785 | ||||||
Cash Flows From Investing Activities | ||||||||
Proceeds from sale of property, plant and equipment | 339 | 177 | ||||||
Purchase of property, plant and equipment | (7,179 | ) | (16,636 | ) | ||||
Acquisition of subsidiaries, net of cash acquired | (8,000 | ) | (10,250 | ) | ||||
Net cash used in investing activities | (14,840 | ) | (26,709 | ) | ||||
Cash Flows From Financing Activities | ||||||||
Proceeds from revolving loan | 178,000 | 209,000 | ||||||
Payments on revolving loan | (169,000 | ) | (115,500 | ) | ||||
Payments on long term debt | (14,286 | ) | (63,504 | ) | ||||
Purchases of treasury shares | — | (5,185 | ) | |||||
Payments of dividends | (8,844 | ) | (8,845 | ) | ||||
Net cash provided by (used in) financing activities | (14,130 | ) | 15,966 | |||||
Effect of exchange rate changes on cash | (146 | ) | 205 | |||||
Net decrease in cash and cash equivalents | (11,649 | ) | (7,753 | ) | ||||
Cash and cash equivalents at beginning of period | 20,853 | 11,302 | ||||||
Cash and cash equivalents at end of period | $ | 9,204 | $ | 3,549 | ||||
Supplemental disclosures | ||||||||
Cash paid for interest | $ | 7,838 | $ | 7,020 | ||||
Cash paid for income taxes | $ | 1,514 | $ | 7,605 |
Capital in Excess of Par Value | Retained Earnings | Accumulated Other Comprehensive Loss | Total | ||||||||||||||||||||
Common Stock | |||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||
Balance at February 28, 2018 | 25,959 | $ | 25,959 | $ | 38,446 | $ | 526,018 | $ | (25,220 | ) | $ | 565,203 | |||||||||||
Share-based compensation | 15 | 15 | 3,644 | — | — | 3,659 | |||||||||||||||||
Restricted stock units | 30 | 30 | (563 | ) | — | — | (533 | ) | |||||||||||||||
Stock issued for SARs | 9 | 9 | (30 | ) | — | — | (21 | ) | |||||||||||||||
Employee stock purchase plan | 37 | 37 | 1,290 | — | — | 1,327 | |||||||||||||||||
Cash dividends paid | — | — | — | (8,844 | ) | — | (8,844 | ) | |||||||||||||||
Net income | — | — | — | 26,962 | — | 26,962 | |||||||||||||||||
Foreign currency translation | — | — | — | — | (1,801 | ) | (1,801 | ) | |||||||||||||||
Interest rate swap | — | — | — | — | (27 | ) | (27 | ) | |||||||||||||||
Balance at August 31, 2018 | 26,050 | $ | 26,050 | $ | 42,787 | $ | 544,136 | $ | (27,048 | ) | $ | 585,925 |
1. | The Company and Basis of Presentation |
2. | Summary of Significant Accounting Policies |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net sales: | ||||||||||||||||
Industrial - oil and gas, construction, and general* | $ | 120,305 | $ | 115,834 | $ | 271,613 | $ | 228,919 | ||||||||
Transmission and distribution* | 60,152 | 41,229 | 126,106 | 84,339 | ||||||||||||
Power generation* | 42,330 | 39,266 | 87,304 | 88,354 | ||||||||||||
Total net sales | $ | 222,787 | $ | 196,329 | $ | 485,023 | $ | 401,612 |
3. | Earnings Per Share |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Numerator: | ||||||||||||||||
Net income for basic and diluted earnings per common share | $ | 11,244 | $ | 9,786 | $ | 26,962 | $ | 21,848 | ||||||||
Denominator: | ||||||||||||||||
Denominator for basic earnings per common share–weighted average shares | 26,019 | 25,970 | 26,001 | 25,991 | ||||||||||||
Effect of dilutive securities: | ||||||||||||||||
Employee and director stock awards | 72 | 66 | 61 | 74 | ||||||||||||
Denominator for diluted earnings per common share | 26,091 | 26,036 | 26,062 | 26,065 | ||||||||||||
Earnings per share basic and diluted: | ||||||||||||||||
Basic earnings per common share | $ | 0.43 | $ | 0.38 | $ | 1.04 | $ | 0.84 | ||||||||
Diluted earnings per common share | $ | 0.43 | $ | 0.38 | $ | 1.03 | $ | 0.84 |
4. | Share-based Compensation |
Restricted Stock Units | Weighted Average Grant Date Fair Value | ||||||
Non-vested balance as of February 28, 2018 | 109,777 | $ | 56.62 | ||||
Granted | 82,371 | 42.00 | |||||
Vested | (37,670 | ) | 54.63 | ||||
Forfeited | (7,290 | ) | 55.27 | ||||
Non-vested balance as of August 31, 2018 | 147,188 | $ | 49.01 |
Performance Stock Units | Weighted Average Grant Date Fair Value | ||||||
Non-vested balance as of February 28, 2018 | 70,030 | $ | 54.59 | ||||
Granted | 46,183 | 42.00 | |||||
Vested | (3,378 | ) | 46.65 | ||||
Forfeited | (29,710 | ) | 49.51 | ||||
Non-vested balance as of August 31, 2018 | 83,125 | $ | 49.74 |
SARs | Weighted Average Exercise Price | ||||||
Outstanding as of February 28, 2018 | 148,513 | $ | 43.29 | ||||
Granted | — | — | |||||
Exercised | (43,928 | ) | 40.96 | ||||
Forfeited | — | — | |||||
Outstanding as of August 31, 2018 | 104,585 | $ | 44.27 | ||||
Exercisable as of August 31, 2018 | 104,585 | $ | 44.27 |
Six Months Ended August 31, | ||||||||
2018 | 2017 | |||||||
Compensation expense | $ | 3,659 | $ | 3,400 | ||||
Income tax benefits | $ | 823 | $ | 1,088 |
5. | Segments |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net sales: | ||||||||||||||||
Energy | $ | 106,515 | $ | 97,299 | $ | 253,501 | $ | 210,504 | ||||||||
Metal Coatings | 116,272 | 99,030 | 231,522 | 191,108 | ||||||||||||
Total net sales | $ | 222,787 | $ | 196,329 | $ | 485,023 | $ | 401,612 | ||||||||
Operating income (loss): | ||||||||||||||||
Energy | $ | 4,273 | $ | 2,363 | $ | 14,231 | $ | 9,074 | ||||||||
Metal Coatings | 22,076 | 23,409 | 47,260 | 44,651 | ||||||||||||
Corporate | (9,244 | ) | (8,385 | ) | (20,690 | ) | (16,315 | ) | ||||||||
Total operating income | $ | 17,105 | $ | 17,387 | $ | 40,801 | $ | 37,410 |
August 31, 2018 | February 28, 2018 | |||||||
Total assets: | ||||||||
Energy | $ | 574,230 | $ | 554,866 | ||||
Metal Coatings | 453,821 | 460,575 | ||||||
Corporate | 9,973 | 12,768 | ||||||
Total | $ | 1,038,024 | $ | 1,028,209 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net sales: | ||||||||||||||||
United States | $ | 188,278 | $ | 162,490 | $ | 401,834 | $ | 329,219 | ||||||||
International | 34,509 | 33,839 | 83,189 | 72,393 | ||||||||||||
Total | $ | 222,787 | $ | 196,329 | $ | 485,023 | $ | 401,612 |
August 31, 2018 | February 28, 2018 | |||||||
Property, plant and equipment, net: | ||||||||
United States | $ | 187,983 | $ | 194,418 | ||||
Canada | 17,410 | 18,254 | ||||||
Other countries | 4,011 | 4,183 | ||||||
Total | $ | 209,404 | $ | 216,855 |
6. | Warranty Reserves |
Warranty Reserve | |||
Balance at February 28, 2018 | $ | 2,013 | |
Warranty costs incurred | (1,179 | ) | |
Additions charged to income | 1,221 | ||
Balance at August 31, 2018 | $ | 2,055 |
7. | Debt |
August 31, 2018 | February 28, 2018 | ||||||
2011 Senior Notes | $ | 125,000 | $ | 125,000 | |||
2008 Senior Notes | — | 14,286 | |||||
2017 Revolving Credit Facility | 171,000 | 162,000 | |||||
Total debt | 296,000 | 301,286 | |||||
Unamortized debt issuance costs for Senior Notes | (321 | ) | (391 | ) | |||
Total debt, net | 295,679 | 300,895 | |||||
Less amount due within one year | — | (14,286 | ) | ||||
Debt due after one year, net | $ | 295,679 | $ | 286,609 |
8. | Acquisitions |
Period Ended | Period Ended | |||||||||||
Backlog | 2/28/2018 | $ | 265,417 | 2/28/2017 | $ | 317,922 | ||||||
Net bookings* | 295,738 | 193,754 | ||||||||||
Acquired backlog | 6,006 | — | ||||||||||
Revenues recognized | (262,236 | ) | (205,283 | ) | ||||||||
Backlog* | 5/31/2018 | 304,925 | 5/31/2017 | 306,393 | ||||||||
Book to revenue ratio | 1.13 | 0.94 | ||||||||||
Net bookings | 253,882 | 190,055 | ||||||||||
Revenues recognized | (222,787 | ) | (196,329 | ) | ||||||||
Backlog | 8/31/2018 | 336,020 | 8/31/2017 | 300,119 | ||||||||
Book to revenue ratio | 1.14 | 0.97 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Net sales: | ||||||||||||||||
Energy | $ | 106,515 | $ | 97,299 | $ | 253,501 | $ | 210,504 | ||||||||
Metal Coatings | 116,272 | 99,030 | 231,522 | 191,108 | ||||||||||||
Total net sales | $ | 222,787 | $ | 196,329 | $ | 485,023 | $ | 401,612 |
Three Months Ended August 31, | Six Months Ended August 31, | |||||||||||||||
2018 | 2017 | 2018 | 2017 | |||||||||||||
Operating income (loss): | ||||||||||||||||
Energy | $ | 4,273 | $ | 2,363 | $ | 14,231 | $ | 9,074 | ||||||||
Metal Coatings | 22,076 | 23,409 | 47,260 | 44,651 | ||||||||||||
Corporate | (9,244 | ) | (8,385 | ) | (20,690 | ) | (16,315 | ) | ||||||||
Total operating income | $ | 17,105 | $ | 17,387 | $ | 40,801 | $ | 37,410 |
Six Months Ended August 31, | ||||||||
2018 | 2017 | |||||||
Net cash provided by operating activities | $ | 17,467 | $ | 2,785 | ||||
Net cash used in investing activities | (14,840 | ) | (26,709 | ) | ||||
Net cash provided by (used in) financing activities | (14,130 | ) | 15,966 |
Operating Leases | Long-Term Debt | Interest | Total | |||||||||||||
Fiscal: | ||||||||||||||||
2019 | $ | 4,291 | $ | — | $ | 6,898 | $ | 11,189 | ||||||||
2020 | 7,293 | — | 13,796 | 21,089 | ||||||||||||
2021 | 5,944 | 125,000 | 13,796 | 144,740 | ||||||||||||
2022 | 5,728 | — | 7,021 | 12,749 | ||||||||||||
2023 | 5,464 | 171,000 | 694 | 177,158 | ||||||||||||
Thereafter | 26,343 | — | — | 26,343 | ||||||||||||
Total | $ | 55,063 | $ | 296,000 | $ | 42,205 | $ | 393,268 |
3.1 | Amended and Restated Certificate of Formation of AZZ Inc. (incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed by the Registrant on July 14, 2015) | |
3.2 | Amended and Restated Bylaws of AZZ Inc. (incorporated by reference to Exhibit 3.2 to the Current Report on Form 8-K filed by the Registrant on January 23, 2017) | |
10.1 | Note Purchase Agreement dated March 31, 2008, by and among AZZ incorporated and the purchasers listed therein (incorporated by reference to Exhibit 10(1) to the Current Report on Form 8-K filed by the Registrant on April 2, 2008). | |
10.2* | ||
10.3 | Note Purchase Agreement, dated as of January 20, 2011, by and among AZZ incorporated and the purchasers identified therein (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on January 21, 2011). | |
10.4 | Amended and Restated Credit Agreement by and between AZZ Inc. as borrower, Bank of America N.A. as Administrative Agent, Swing Line Lender and L/C Issuer, and the other Lender's party thereto (incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed by the Registrant on March 24, 2017). | |
10.5* | AZZ incorporated 2014 Long Term Incentive Plan (incorporated by reference to Appendix A to the Registrant’s Definitive Proxy Statement on Form DEFA filed May 29, 2014). | |
10.6* | First Amendment to AZZ Inc. 2014 Long Term Incentive Plan (incorporated by reference to Exhibit 10.2 to the Current Report on Form 8-K filed by the Registrant on January 21, 2016. | |
10.7* | ||
10.8* | ||
10.9* | ||
10.10* | ||
31.1 | ||
31.2 | ||
32.1 | ||
32.2 | ||
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase | |
101.DEF | XBRL Taxonomy Definition Linkbase | |
101.LAB | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase |
AZZ Inc. (Registrant) | ||||
Date: | October 9, 2018 | By: | /s/ Paul W. Fehlman | |
Paul W. Fehlman Senior Vice President and Chief Financial Officer |
1. | Definitions. All capitalized terms used herein and not expressly defined herein shall have the respective meanings given to such terms in the Agreement. |
2. | Entire Agreement. Except as expressly modified by this First Amendment, the Agreement shall be and remain in full force and effect in accordance with its terms and shall constitute the legal, valid, binding and enforceable obligations of the Company and Executive. |
3. | Section 3.04 of the Agreement is hereby replaced in its entirety to read as follows: |
4. | Section 4.02 (b) of the Agreement is hereby replaced in its entirety to read as follows: |
5. | The last paragraph of Section 4.02 is hereby amended to add the following sentence: |
6. | Section 4.04(b) is hereby replaced in its entirety to read as follows: |
7. | The last paragraph of Section 4.04 is hereby amended to add the following sentence: |
8. | Section 8.02 of the Agreement is hereby replaced in its entirety to read as follows: |
9. | Article I, Section 1.01 to Exhibit A (Form of Release) as attached to the Agreement is hereby replaced in its entirety to read as follows: |
10. | Article II, Section 2.01 of Exhibit A (Form of Release) as attached to the Agreement is hereby replaced in its entirety to read as follows: |
1. | Definitions. All capitalized terms used herein and not expressly defined herein shall have the respective meanings given to such terms in the Agreement. |
2. | Entire Agreement. Except as expressly modified by this First Amendment, the Agreement shall be and remain in full force and effect in accordance with its terms and shall constitute the legal, valid, binding and enforceable obligations of the Company and Executive. |
3. | Section 3.04 of the Agreement is hereby replaced in its entirety to read as follows: |
4. | Section 4.02 (b) of the Agreement is hereby replaced in its entirety to read as follows: |
5. | The last paragraph of Section 4.02 is hereby amended to add the following sentence: |
6. | Section 4.04(b) is hereby replaced in its entirety to read as follows: |
7. | The last paragraph of Section 4.04 is hereby amended to add the following sentence: |
8. | Section 8.02 of the Agreement is hereby replaced in its entirety to read as follows: |
9. | Section 1.01 to Exhibit A (Form of Release) as attached to the Agreement is hereby replaced in its entirety to read as follows: |
10. | Section 2.01 of Exhibit A (Form of Release) as attached to the Agreement is hereby replaced in its entirety to read as follows: |
1. | Definitions. All capitalized terms used herein and not expressly defined herein shall have the respective meanings given to such terms in the Agreement. |
2. | Entire Agreement. Except as expressly modified by this First Amendment, the Agreement shall be and remain in full force and effect in accordance with its terms and shall constitute the legal, valid, binding and enforceable obligations of the Company and Executive. |
3. | Section 3.02 of the Agreement is hereby amended to add the following paragraph at the end of the section as follows: |
4. | Section 4.01of the Agreement is hereby replaced in its entirety to read as follows: |
5. | Section 1.01 to Exhibit A (Form of Release and Waiver) as attached to the Agreement is hereby replaced in its entirety to read as follows: |
6. | Section 2.01 of Exhibit A (Form of Release and Waiver) as attached to the Agreement is hereby replaced in its entirety to read as follows: |
1. | Definitions. All capitalized terms used herein and not expressly defined herein shall have the respective meanings given to such terms in the Agreement. |
2. | Entire Agreement. Except as expressly modified by this First Agreement, the Agreement shall be and remain in full force and effect in accordance with its terms and shall constitute the legal, valid, binding and enforceable obligations of the Company and Executive. |
3. | Section 3.02 of the Agreement is hereby amended to add the following paragraph at the end of the section as follows: |
4. | Section 4.01of the Agreement is hereby replaced in its entirety to read as follows: |
5. | Section 1.01 to Exhibit A (Form of Release and Waiver) as attached to the Agreement is hereby replaced in its entirety to read as follows: |
6. | Section 2.01 of Exhibit A (Form of Release and Waiver) as attached to the Agreement is hereby replaced in its entirety to read as follows: |
Dated: | October 9, 2018 | /s/ Thomas E. Ferguson | |
Thomas E. Ferguson | |||
President and Chief Executive Officer |
Dated: | October 9, 2018 | /s/ Paul W. Fehlman | |
Paul W. Fehlman | |||
Senior Vice President and Chief Financial Officer |
1. | to my knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: | October 9, 2018 | /s/ Thomas E. Ferguson | |
Thomas E. Ferguson | |||
President and Chief Executive Officer |
1. | to my knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
2. | the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: | October 9, 2018 | /s/ Paul W. Fehlman | |
Paul W. Fehlman | |||
Senior Vice President and | |||
Chief Financial Officer |
Document and Entity Information |
6 Months Ended |
---|---|
Aug. 31, 2018
shares
| |
Document and Entity Information [Abstract] | |
Entity Registrant Name | AZZ INC |
Entity Central Index Key | 0000008947 |
Document Type | 10-Q |
Document Period End Date | Aug. 31, 2018 |
Amendment Flag | false |
Document Fiscal Year Focus | 2019 |
Document Fiscal Period Focus | Q2 |
Current Fiscal Year End Date | --02-28 |
Entity Filer Category | Large Accelerated Filer |
Entity Common Stock, Shares Outstanding | 26,050,242 |
Condensed consolidated Balance Sheets (Parenthetical) - USD ($) shares in Thousands, $ in Thousands |
Aug. 31, 2018 |
Feb. 28, 2018 |
---|---|---|
Statement of Financial Position [Abstract] | ||
Accounts Receivable, Allowance for Doubtful Accounts | $ 2,398 | $ 569 |
Common Stock, Par Value (usd per share) | $ 1 | $ 1 |
Common Stock, Shares Authorized (shares) | 100,000 | 100,000 |
Common Stock, Shares Issued (shares) | 26,050 | 25,959 |
Common Stock, Shares, Outstanding | 26,050 | 25,959 |
Condensed Consolidated Statements of Income (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Aug. 31, 2018 |
Aug. 31, 2017 |
Aug. 31, 2018 |
Aug. 31, 2017 |
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Income Statement [Abstract] | ||||
Net sales | $ 222,787 | $ 196,329 | $ 485,023 | $ 401,612 |
Costs and Expenses | ||||
Cost of sales | 175,883 | 152,529 | 379,414 | 310,430 |
Gross margin | 46,904 | 43,800 | 105,609 | 91,182 |
Selling, general and administrative | 29,799 | 26,413 | 64,808 | 53,772 |
Operating income | 17,105 | 17,387 | 40,801 | 37,410 |
Interest expense | 3,980 | 3,400 | 7,818 | 6,760 |
Other (income) expense, net | (857) | 260 | (1,148) | 75 |
Income before income taxes | 13,982 | 13,727 | 34,131 | 30,575 |
Income tax expense | 2,738 | 3,941 | 7,169 | 8,727 |
Net income | $ 11,244 | $ 9,786 | $ 26,962 | $ 21,848 |
Earnings Per Common Share | ||||
Basic Earnings Per Share (usd per share) | $ 0.43 | $ 0.38 | $ 1.04 | $ 0.84 |
Diluted Earnings Per Share (usd per share) | 0.43 | 0.38 | 1.03 | 0.84 |
Common Stock, Dividends, Per Share, Declared | $ 0.17 | $ 0.17 | $ 0.34 | $ 0.34 |
Condensed Consolidated Statements of Comprehensive Income (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Aug. 31, 2018 |
Aug. 31, 2017 |
Aug. 31, 2018 |
Aug. 31, 2017 |
|
Statement of Comprehensive Income [Abstract] | ||||
Net income | $ 11,244 | $ 9,786 | $ 26,962 | $ 21,848 |
Other comprehensive income (loss): | ||||
Foreign currency translation adjustments, net of income tax of $0 | 455 | 5,326 | (1,801) | 4,328 |
Interest rate swap, net of income tax of $7, $7, $15 and $15, respectively. | (13) | (14) | (27) | (27) |
Other comprehensive income (loss) | 442 | 5,312 | (1,828) | 4,301 |
Comprehensive income | $ 11,686 | $ 15,098 | $ 25,134 | $ 26,149 |
Condensed Consolidated Statements of Comprehensive Income (Parenthetical) (Unaudited) - USD ($) $ in Thousands |
3 Months Ended | 6 Months Ended | ||
---|---|---|---|---|
Aug. 31, 2018 |
Aug. 31, 2017 |
Aug. 31, 2018 |
Aug. 31, 2017 |
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Statement of Comprehensive Income [Abstract] | ||||
Interest rate swap, income tax | $ 7 | $ 7 | $ 15 | $ 15 |
Consolidated Statement of Shareholders' Equity (Unaudited) - 6 months ended Aug. 31, 2018 - USD ($) shares in Thousands, $ in Thousands |
Total |
Common Stock |
Capital in Excess of Par Value |
Retained Earnings |
Accumulated Other Comprehensive Income (Loss) |
---|---|---|---|---|---|
Balance at Feb. 28, 2018 | $ 565,203 | $ 25,959 | $ 38,446 | $ 526,018 | $ (25,220) |
Balance (shares) at Feb. 28, 2018 | 25,959 | ||||
Increase (Decrease) in Stockholders' Equity [Roll Forward] | |||||
Stock Compensation (shares) | 15 | ||||
Stock Compensation | 3,659 | $ 15 | 3,644 | ||
Restricted Stock Units (shares) | 30 | ||||
Restricted Stock Units | (533) | $ 30 | (563) | ||
Stock Issued for Stock Appreciation Rights Shares | 9 | ||||
Stock Issued For Stock Appreciation Rights | (21) | $ 9 | (30) | ||
Employee Stock Purchase Plan (shares) | 37 | ||||
Employee Stock Purchase Plan | 1,327 | $ 37 | 1,290 | ||
Cash Dividend Paid | (8,844) | (8,844) | |||
Net income | 26,962 | 26,962 | |||
Foreign Currency Translation | (1,801) | (1,801) | |||
Interest rate swap | (27) | (27) | |||
Balance at Aug. 31, 2018 | $ 585,925 | $ 26,050 | $ 42,787 | $ 544,136 | $ (27,048) |
Balance (shares) at Aug. 31, 2018 | 26,050 |
Basis of Presentation (Notes) |
6 Months Ended |
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Aug. 31, 2018 | |
Organization, Consolidation and Presentation of Financial Statements [Abstract] | |
Basis of Presentation | 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 services, 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 Energy segment and Metal Coatings segment. AZZ Energy is dedicated to delivering safe and reliable transmission of power from generation sources to end customers, and automated weld overlay solutions for corrosion and erosion mitigation to critical infrastructure in the energy markets worldwide. AZZ Metal Coatings is a leading provider of metal finishing solutions for corrosion protection, including hot dip galvanizing to the North American steel fabrication industry. Presentation The accompanying condensed consolidated balance sheet as of February 28, 2018, which was derived from audited financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended February 28, 2018, included in the Company’s Annual Report on Form 10-K covering such period. Our fiscal year ends on the last day of February and is identified as the fiscal year for the calendar year in which it ends. For example, the fiscal year ended February 28, 2019 is referred to as fiscal 2019. In the opinion of management, the accompanying unaudited 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 August 31, 2018, the results of its operations for the three and six months ended August 31, 2018 and 2017, and cash flows for the six months ended August 31, 2018 and 2017. These interim results are not necessarily indicative of results for a full year. Accounting Standards Recently Adopted On March 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) and the related amendments ("ASC 606") using the modified retrospective method applied to those contracts which were not completed as of February 28, 2018. Results for operating periods beginning on or after March 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the accounting standards in effect for those periods. However, for the three and six months ended August 31, 2018, the impact of applying ASC 606 as opposed to applying legacy accounting guidance did not result in a significant change to reported revenues or costs of revenues. Accordingly, no reconciliation has been provided to show the difference between applying ASC 606 and legacy guidance for the three and six months ended August 31, 2018. In addition, there was no cumulative effect adjustment to the beginning retained earnings on March 1, 2018 related to the adoption. See Note 2 for a description of the Company's accounting policy resulting from the adoption of ASC 606. On March 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The adoption did not have a material impact on the Company's consolidated statements of cash flows. Recently Issued Accounting Pronouncements In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842). Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. This ASU will be effective for the Company in the first quarter of its fiscal year 2020 and early adoption is permitted. The ASU requires adoption based upon a modified retrospective transition approach. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard to its consolidated financial statements and related disclosures. In particular, the Company has made progress in assessing its portfolio of leases for accounting and disclosure purposes. To address the new standard's requirements, the Company is also in the process of assessing the design of the future lease accounting procedures and related internal controls, selecting and implementing lease accounting software, and finalizing policies, including the election of any practical expedients permitted by the standard. While the Company has not yet completed its evaluation of the financial statement impact of the new lease accounting standard, the Company expects to recognize right of use assets and lease liabilities for its operating leases in its consolidated balance sheets upon adoption and thereafter. |
Summary of Significant Accounting Policies |
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Significant Accounting Policies [Text Block] | Summary of Significant Accounting Policies The Company’s significant accounting policies are detailed in Note 1 of its Annual Report on Form 10-K for the year ended February 28, 2018. The following section includes revised accounting policies related to the adoption of ASC 606. Revenue recognition The Company determines revenue recognition through the following steps: 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)Recognition of revenue when, or as, the Company satisfies a performance obligation 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. Energy Segment AZZ's Energy segment is a provider of specialized products and services designed to support industrial, nuclear 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. When the Company does enter into an arrangement 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 to the customer 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 revenues 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 revenues 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, the Company recognizes revenue at a point-in-time upon the transfer of the goods to the customer. For services and custom built products, the Company recognizes revenues over time using a cost-to-cost input measure. This requires the Company to estimate the total contract revenues, 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 under a cumulative catch-up basis and subsequent revenues 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 Energy 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 revenue on a cumulative catch-up basis. In addition to fixed consideration, the Company’s contracts within its Energy segment can 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. Metal Coatings Segment AZZ’s Metal Coatings segment is a provider of hot dip galvanizing, powder coating and other metal coating applications to the steel fabrication industry. Within this segment, the contract is 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 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. The Company recognizes revenue over time as the metal coating is applied to the 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. 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 sheet, primarily related to the Company’s Energy 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 sheet on a contract-by-contract basis at the end of each reporting period. For the six months ended August 31, 2018, the Company recognized $20.1 million of revenues from amounts that were included in contract liabilities at February 28, 2018. The Company did not record any revenues for the three or six months ended August 31, 2018 related to performance obligations satisfied in prior periods. The Company expects to recognize revenues of approximately $18.2 million, $4.1 million and $1.5 million in fiscal 2019, 2020 and 2021, respectively, related to the $23.8 million balance of contract liabilities as of August 31, 2018. The increases or decreases in accounts receivable, contract assets and contract liabilities during the three and six months ended August 31, 2018 were due primarily to normal timing differences between the Company’s performance and customer payments. The Lectrus acquisition described in Note 8 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 revenues. Shipping and handling is treated as a fulfillment obligation instead of a separate performance obligation and such costs are expensed as incurred. Disaggregated Revenue Revenue by segment and geography is disclosed in Note 5. In addition, the following table presents disaggregated revenue by customer industry (in thousands):
* The Company revised its internal methodology for allocating revenues by customer industry during the three months ended August 31, 2018. All prior periods have been recast to conform to this revised methodology. |
Earnings Per Share |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Earnings Per Share | Earnings Per Share Earnings per share is based on the weighted average number of shares outstanding during each period, adjusted for the dilutive effect of stock awards. The following table sets forth the computation of basic and diluted earnings per share (in thousands, expect per share data):
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Stock-based Compensation |
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Share-based Compensation [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Stock-based Compensation | Share-based Compensation The Company has one share-based compensation plan, the 2014 Long Term Incentive Plan (the “Plan”). The purpose of the Plan is to promote the growth and prosperity of the Company by permitting the Company to grant to its employees, directors and advisors various types of restricted stock unit awards, performance share units, stock options, and stock appreciation rights to purchase common stock of the Company. The maximum number of shares that may be issued under the Plan is 1,500,000 shares. As of August 31, 2018, the Company had approximately 1,248,775 shares available for future issuance under the Plan. Restricted Stock Unit Awards Restricted stock unit awards are valued at the market price of our common stock on the grant date. Awards generally vest ratably over a period of three years but these awards may vest earlier in accordance with the Plan’s accelerated vesting provisions. A summary of the Company’s non-vested restricted stock unit award activity for the six month period ended August 31, 2018 is as follows:
Performance Share Unit Awards Performance share unit awards are valued at the market price of our common stock on the grant date. These awards have a three year performance cycle and will vest and become payable, if at all, on the third anniversary of the award date. The awards are subject to the Company’s degree of achievement of a target annual average adjusted return on assets during these three-year periods. In addition, a multiplier may be applied to the total awards granted which is based on the Company’s total shareholder return during such three-year period in comparison to a defined specific industry peer group as set forth in the plan. A summary of the Company’ non-vested performance share unit award activity for the six month period ended August 31, 2018 is as follows:
Stock Appreciation Rights Stock appreciation rights are granted with an exercise price equal to the market value of our common stock on the date of grant. These awards generally have a contractual term of 7 years and vest ratably over a period of three years although some may vest immediately on issuance. These awards are valued using the Black-Scholes option-pricing model. A summary of the Company’s stock appreciation rights activity for the six month period ended August 31, 2018 is as follows:
The average remaining contractual term for those stock appreciation rights outstanding as of August 31, 2018 is 2.33 years, with an aggregate intrinsic value of $1.0 million. The average remaining contractual terms for those stock appreciation rights that are exercisable as of August 31, 2018 is 2.33 years, with an aggregate intrinsic value of $1.0 million. Employee Stock Purchase Plan The Company also has an employee stock purchase plan, which 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. The fair value of the estimated number of shares to be issued under each offering is determined using the Black-Scholes option-pricing model. For the six month period ended August 31, 2018, the Company issued 37,224 shares under the Employee Stock Purchase Plan. Share-based Compensation Expense Share-based compensation expense and related income tax benefits related to all the plans listed above were as follows (in thousands):
Unrecognized compensation cost related to restricted stock units, performance share unit awards, stock appreciation rights, and the employee stock purchase plan at August 31, 2018 totals $8.8 million. The Company’s policy is to issue shares required under these plans from the Company’s authorized but unissued shares. |
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Segments | Segments Segment Information Net sales and operating income by segment for each period were as follows (in thousands):
Asset balances by segment for each period were as follows (in thousands):
For the three and six months ended August 31, 2018, the Company recognized impairment charges of $0.8 million, which were classified within cost of sales in the consolidated statement of income and were related to property, plant and equipment in the Metal Coatings segment that was vacated or abandoned upon the consolidation of two galvanizing facilities in the Gulf Coast region of the United States. As part of the consolidation of facilities, the Company also recognized $0.5 million in employee severance and other disposal costs for the three and six months ended August 31, 2018, which were also classified within cost of sales in the consolidated statement of income. Financial Information About Geographical Areas The following table presents revenues by geographic region for each period (in thousands):
The following table presents fixed assets by geographic region for each period (in thousands):
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Warranty Reserves |
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Product Warranties Disclosures [Abstract] | |||||||||||||||||||||||||||||
Warranty Reserves | Warranty Reserves A reserve has been established to provide for the estimated future cost of warranties on a portion of the Company’s delivered products and is classified within other accrued liabilities on the consolidated balance sheets. Management periodically reviews the reserves and makes adjustments accordingly. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The following table shows the changes in the warranty reserves for the six month period ended August 31, 2018 (in thousands):
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Debt |
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Debt [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term Debt [Text Block] | Debt The Company's debt consisted of the following for each of the periods presented (in thousands):
On March 31, 2018, the Company made the final principal payment of $14.3 million to fully settle the 2008 Senior Notes on the scheduled maturity date. |
Acquisitions |
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Aug. 31, 2018 | |
Business Combinations [Abstract] | |
Business Combination Disclosure [Text Block] | Acquisitions On March 22, 2018, the Company purchased certain assets through a bankruptcy sales process from Lectrus Corporation, a privately-held corporation based in Chattanooga, Tennessee. Lectrus designs and manufactures custom metal enclosures and provides electrical and mechanical integration. The acquisition will complement AZZ's current metal enclosure and switchgear businesses. This acquisition was not significant. Accordingly, disclosures of the purchase price allocation and unaudited pro forma results of operations have not been provided. |
Basis of Presentation (Policies) |
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Aug. 31, 2018 | |
Accounting Policies [Abstract] | |
Basis of Presentation | 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 services, 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 Energy segment and Metal Coatings segment. AZZ Energy is dedicated to delivering safe and reliable transmission of power from generation sources to end customers, and automated weld overlay solutions for corrosion and erosion mitigation to critical infrastructure in the energy markets worldwide. AZZ Metal Coatings is a leading provider of metal finishing solutions for corrosion protection, including hot dip galvanizing to the North American steel fabrication industry. Presentation The accompanying condensed consolidated balance sheet as of February 28, 2018, which was derived from audited financial statements, and the unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended February 28, 2018, included in the Company’s Annual Report on Form 10-K covering such period. Our fiscal year ends on the last day of February and is identified as the fiscal year for the calendar year in which it ends. For example, the fiscal year ended February 28, 2019 is referred to as fiscal 2019. In the opinion of management, the accompanying unaudited 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 August 31, 2018, the results of its operations for the three and six months ended August 31, 2018 and 2017, and cash flows for the six months ended August 31, 2018 and 2017. These interim results are not necessarily indicative of results for a full year. |
New Accounting Pronouncements | Accounting Standards Recently Adopted On March 1, 2018, the Company adopted Accounting Standards Update ("ASU") No. 2014-09, Revenue from Contracts with Customers (Topic 606) and the related amendments ("ASC 606") using the modified retrospective method applied to those contracts which were not completed as of February 28, 2018. Results for operating periods beginning on or after March 1, 2018 are presented under ASC 606, while prior period amounts have not been adjusted and continue to be reported in accordance with the accounting standards in effect for those periods. However, for the three and six months ended August 31, 2018, the impact of applying ASC 606 as opposed to applying legacy accounting guidance did not result in a significant change to reported revenues or costs of revenues. Accordingly, no reconciliation has been provided to show the difference between applying ASC 606 and legacy guidance for the three and six months ended August 31, 2018. In addition, there was no cumulative effect adjustment to the beginning retained earnings on March 1, 2018 related to the adoption. See Note 2 for a description of the Company's accounting policy resulting from the adoption of ASC 606. On March 1, 2018, the Company adopted ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which clarifies the presentation and classification of certain cash receipts and cash payments in the statement of cash flows. The adoption did not have a material impact on the Company's consolidated statements of cash flows. Recently Issued Accounting Pronouncements In February 2016, the Financial Accounting Standards Board ("FASB") issued ASU 2016-02, Leases (Topic 842). Under the new guidance, a lessee will be required to recognize assets and liabilities for all leases with lease terms of more than 12 months. Consistent with current GAAP, the recognition, measurement, and presentation of expenses and cash flows arising from a lease by a lessee primarily will depend on its classification as a finance or operating lease. This ASU will be effective for the Company in the first quarter of its fiscal year 2020 and early adoption is permitted. The ASU requires adoption based upon a modified retrospective transition approach. The Company has not yet determined whether it will elect early adoption and is currently evaluating the impact of the adoption of this standard to its consolidated financial statements and related disclosures. In particular, the Company has made progress in assessing its portfolio of leases for accounting and disclosure purposes. To address the new standard's requirements, the Company is also in the process of assessing the design of the future lease accounting procedures and related internal controls, selecting and implementing lease accounting software, and finalizing policies, including the election of any practical expedients permitted by the standard. While the Company has not yet completed its evaluation of the financial statement impact of the new lease accounting standard, the Company expects to recognize right of use assets and lease liabilities for its operating leases in its consolidated balance sheets upon adoption and thereafter. |
Summary of Significant Accounting Policies (Policies) |
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Revenue Recognition | Revenue recognition The Company determines revenue recognition through the following steps: 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)Recognition of revenue when, or as, the Company satisfies a performance obligation 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. Energy Segment AZZ's Energy segment is a provider of specialized products and services designed to support industrial, nuclear 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. When the Company does enter into an arrangement 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 to the customer 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 revenues 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 revenues 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, the Company recognizes revenue at a point-in-time upon the transfer of the goods to the customer. For services and custom built products, the Company recognizes revenues over time using a cost-to-cost input measure. This requires the Company to estimate the total contract revenues, 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 under a cumulative catch-up basis and subsequent revenues 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 Energy 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 revenue on a cumulative catch-up basis. In addition to fixed consideration, the Company’s contracts within its Energy segment can 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. Metal Coatings Segment AZZ’s Metal Coatings segment is a provider of hot dip galvanizing, powder coating and other metal coating applications to the steel fabrication industry. Within this segment, the contract is 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 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. The Company recognizes revenue over time as the metal coating is applied to the 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. 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 sheet, primarily related to the Company’s Energy 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 sheet on a contract-by-contract basis at the end of each reporting period. For the six months ended August 31, 2018, the Company recognized $20.1 million of revenues from amounts that were included in contract liabilities at February 28, 2018. The Company did not record any revenues for the three or six months ended August 31, 2018 related to performance obligations satisfied in prior periods. The Company expects to recognize revenues of approximately $18.2 million, $4.1 million and $1.5 million in fiscal 2019, 2020 and 2021, respectively, related to the $23.8 million balance of contract liabilities as of August 31, 2018. The increases or decreases in accounts receivable, contract assets and contract liabilities during the three and six months ended August 31, 2018 were due primarily to normal timing differences between the Company’s performance and customer payments. The Lectrus acquisition described in Note 8 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 revenues. Shipping and handling is treated as a fulfillment obligation instead of a separate performance obligation and such costs are expensed as incurred. Disaggregated Revenue Revenue by segment and geography is disclosed in Note 5. In addition, the following table presents disaggregated revenue by customer industry (in thousands):
* The Company revised its internal methodology for allocating revenues by customer industry during the three months ended August 31, 2018. All prior periods have been recast to conform to this revised methodology. |
Summary of Significant Accounting Policies (Tables) |
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Accounting Policies [Abstract] | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Disaggregation of Revenue [Table Text Block] | Disaggregated Revenue Revenue by segment and geography is disclosed in Note 5. In addition, the following table presents disaggregated revenue by customer industry (in thousands):
* The Company revised its internal methodology for allocating revenues by customer industry during the three months ended August 31, 2018. All prior periods have been recast to conform to this revised methodology. |
Earnings Per Share (Tables) |
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Earnings Per Share [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Computation of basic and diluted earnings per share | The following table sets forth the computation of basic and diluted earnings per share (in thousands, expect per share data):
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Stock-based Compensation (Tables) |
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Share-based Compensation Arrangement by Share-based Payment Award [Line Items] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Share-based Compensation, Performance Shares Award Unvested Activity [Table Text Block] | non-vested performance share unit award activity for the six month period ended August 31, 2018 is as follows:
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Restricted Stock Unit Awards Non-Vested | non-vested restricted stock unit award activity for the six month period ended August 31, 2018 is as follows:
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Stock Appreciation Rights and Option Awards | A summary of the Company’s stock appreciation rights activity for the six month period ended August 31, 2018 is as follows:
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Share-based compensation expense and related income tax | Share-based compensation expense and related income tax benefits related to all the plans listed above were as follows (in thousands):
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Segments (Tables) |
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Schedule of Segment Reporting Information, by Segment [Table Text Block] | Net sales and operating income by segment for each period were as follows (in thousands):
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Reconciliation of Assets from Segment to Consolidated [Table Text Block] | Asset balances by segment for each period were as follows (in thousands):
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Revenue from External Customers by Geographic Areas [Table Text Block] | The following table presents revenues by geographic region for each period (in thousands):
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Long-lived Assets by Geographic Areas [Table Text Block] | The following table presents fixed assets by geographic region for each period (in thousands):
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Warranty Reserves (Tables) |
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Product Warranties Disclosures [Abstract] | |||||||||||||||||||||||||||||
Changes in the warranty reserves | The following table shows the changes in the warranty reserves for the six month period ended August 31, 2018 (in thousands):
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Debt (Tables) |
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Debt [Abstract] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of Debt [Table Text Block] | The Company's debt consisted of the following for each of the periods presented (in thousands):
On March 31, 2018, the Company made the final principal payment of $14.3 million to fully settle the 2008 Senior Notes on the scheduled maturity date. |
Summary of Significant Accounting Policies Disaggregation of Revenue (Details) - USD ($) $ in Thousands |
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Aug. 31, 2018 |
Aug. 31, 2017 |
Aug. 31, 2018 |
Aug. 31, 2017 |
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Disaggregation of Revenue [Line Items] | ||||
Revenue, Net | $ 222,787 | $ 196,329 | $ 485,023 | $ 401,612 |
Industrial [Member] | ||||
Disaggregation of Revenue [Line Items] | ||||
Revenue, Net | 120,305 | 115,834 | 271,613 | 228,919 |
Trasmission & Distribution [Member] | ||||
Disaggregation of Revenue [Line Items] | ||||
Revenue, Net | 60,152 | 41,229 | 126,106 | 84,339 |
Power Generation [Member] | ||||
Disaggregation of Revenue [Line Items] | ||||
Revenue, Net | $ 42,330 | $ 39,266 | $ 87,304 | $ 88,354 |
Summary of Significant Accounting Policies Revenue Details (Details) - USD ($) $ in Millions |
6 Months Ended | 12 Months Ended | ||
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Feb. 28, 2019 |
Aug. 31, 2018 |
Feb. 28, 2021 |
Feb. 28, 2020 |
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Revenue, Initial Application Period Cumulative Effect Transition [Line Items] | ||||
Contract with Customer, Liability, Revenue Recognized | $ 20.0 | |||
Future Revenues | $ 18.2 | $ 1.5 | $ 4.1 | |
Revenue, Remaining Performance Obligation | $ 23.8 |
Earnings Per Share (Details) - USD ($) $ / shares in Units, shares in Thousands, $ in Thousands |
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Aug. 31, 2018 |
Aug. 31, 2017 |
Aug. 31, 2018 |
Aug. 31, 2017 |
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Numerator: | ||||
Net income for basic and diluted earnings per common share | $ 11,244 | $ 9,786 | $ 26,962 | $ 21,848 |
Denominator: | ||||
Denominator for basic earnings per common share-weighted average shares (shares) | 26,019 | 25,970 | 26,001 | 25,991 |
Effect of dilutive securities: | ||||
Employee and Director stock awards (shares) | 72 | 66 | 61 | 74 |
Denominator for diluted earnings per common share (shares) | 26,091 | 26,036 | 26,062 | 26,065 |
Earnings per share basic and diluted: | ||||
Basic earnings per Common share (usd per share) | $ 0.43 | $ 0.38 | $ 1.04 | $ 0.84 |
Diluted earnings per common share (usd per share) | $ 0.43 | $ 0.38 | $ 1.03 | $ 0.84 |
Stock-based Compensation (Details 2) - USD ($) $ in Thousands |
6 Months Ended | |
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Aug. 31, 2018 |
Aug. 31, 2017 |
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Share-based Compensation [Abstract] | ||
Share-based Compensation | $ 3,659 | $ 3,400 |
Share based compensation expense and related income tax benefits | ||
Income tax benefits | $ 823 | $ 1,088 |
Warranty Reserves (Details) $ in Thousands |
6 Months Ended |
---|---|
Aug. 31, 2018
USD ($)
| |
Movement in Standard Product Warranty Accrual [Roll Forward] | |
Opening Balance | $ 2,013 |
Warranty costs incurred | 1,179 |
Closing Balance | 2,055 |
Product Warranty Accrual, Warranties Issued | $ 1,221 |
Debt (Details) - USD ($) $ in Thousands |
Aug. 31, 2018 |
Feb. 28, 2018 |
---|---|---|
Debt Instrument [Line Items] | ||
Long-term Debt | $ 295,679 | $ 300,895 |
Long-term Debt, Gross | 296,000 | 301,286 |
Unamortized Debt Issuance Expense | (321) | (391) |
Debt, Current | 0 | (14,286) |
Long-term Debt, Excluding Current Maturities | 295,679 | 286,609 |
Senior Notes [Member] | Unsecured Senior Notes Due January 2021 [Member] | ||
Debt Instrument [Line Items] | ||
Long-term Debt | 125,000 | 125,000 |
Senior Notes [Member] | Unsecured Senior Notes Due March 2012 through March 2018 [Member] | ||
Debt Instrument [Line Items] | ||
Long-term Debt | 0 | 14,286 |
Line of Credit [Member] | Line of Credit [Member] | ||
Debt Instrument [Line Items] | ||
Long-term Debt | $ 171,000 | $ 162,000 |
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