AZZ(AZZ) - 2025 Q1 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited condensed consolidated financial statements and management's discussion and analysis for the specified interim period Item 1. Financial Statements (Unaudited) This section presents AZZ Inc.'s unaudited condensed consolidated financial statements for the quarter ended May 31, 2024, including balance sheets, statements of operations, comprehensive income (loss), cash flows, and changes in shareholders' equity, along with detailed notes explaining accounting policies, segment information, debt, equity, and commitments Condensed Consolidated Balance Sheets This table presents the company's financial position, detailing assets, liabilities, and equity at specific reporting dates | Item | May 31, 2024 (in thousands) | February 29, 2024 (in thousands) | | :---------------------------------------------------------------------------------------------------------------------------------------------- | :-------------------------- | :------------------------------- | | Assets | | | | Cash and cash equivalents | $10,546 | $4,349 | | Trade accounts receivable, net | $144,391 | $142,246 | | Other receivables | $17,403 | $15,599 | | Inventories | $113,988 | $117,656 | | Contract assets | $93,262 | $79,335 | | Prepaid expenses and other | $16,752 | $7,814 | | Total current assets | $396,342 | $366,999 | | Property, plant and equipment, net | $555,355 | $541,652 | | Right-of-use assets | $22,592 | $23,739 | | Goodwill | $705,204 | $705,468 | | Deferred tax assets | $5,594 | $5,606 | | Intangible assets, net | $439,558 | $445,435 | | Investment in joint venture | $101,639 | $98,169 | | Other assets | $9,495 | $8,437 | | Total assets | $2,235,779 | $2,195,505 | | Liabilities, Mezzanine Equity and Shareholders' Equity | | | | Accounts payable | $116,829 | $88,001 | | Income tax payable | $3,414 | $172 | | Accrued salaries and wages | $18,806 | $30,823 | | Other accrued liabilities | $78,258 | $68,651 | | Lease liability, short-term | $6,558 | $6,659 | | Total current liabilities | $223,865 | $194,306 | | Long-term debt, net | $929,800 | $952,742 | | Lease liability, long-term | $16,801 | $17,827 | | Deferred tax liabilities | $42,033 | $38,567 | | Other long-term liabilities | $56,048 | $57,572 | | Total liabilities | $1,268,547 | $1,261,014 | | Mezzanine equity: Series A Convertible Preferred Stock | — | $233,722 | | Common stock | $29,814 | $25,102 | | Capital in excess of par value | $405,309 | $103,330 | | Retained earnings | $535,168 | $576,231 | | Accumulated other comprehensive loss | $(3,059) | $(3,894) | | Total shareholders' equity | $967,232 | $700,769 | | Total liabilities, mezzanine equity and shareholders' equity | $2,235,779 | $2,195,505 | Condensed Consolidated Statements of Operations This table outlines the company's revenues, expenses, and net income for the reported interim periods | Item | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :--------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Sales | $413,208 | $390,873 | | Cost of sales | $310,538 | $293,854 | | Gross margin | $102,670 | $97,019 | | Selling, general and administrative | $32,921 | $31,523 | | Operating income | $69,749 | $65,496 | | Interest expense, net | $(22,774) | $(28,706) | | Equity in earnings of unconsolidated subsidiaries | $3,824 | $1,420 | | Other income (expense), net | $204 | $(38) | | Income before income taxes | $51,003 | $38,172 | | Income tax expense | $11,401 | $9,650 | | Net income | $39,602 | $28,522 | | Dividends on Series A Preferred Stock | $(1,200) | $(3,600) | | Redemption premium on Series A Preferred Stock | $(75,198) | — | | Net income (loss) available to common shareholders | $(36,796) | $24,922 | | Basic earnings (loss) per common share | $(1.38) | $1.00 | | Diluted earnings (loss) per common share | $(1.38) | $0.98 | | Weighted average shares outstanding - Basic | 26,751 | 24,940 | | Weighted average shares outstanding - Diluted | 26,751 | 29,150 | | Cash dividends declared per common share | $0.17 | $0.17 | Condensed Consolidated Statements of Comprehensive Income (Loss) This table presents net income alongside other comprehensive income or loss components for the interim periods | Item | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :----------------------------------------------------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income (loss) available to common shareholders | $(36,796) | $24,922 | | Other comprehensive income (loss): | | | | Unrealized translation gain (loss) | $(425) | $19 | | Unrealized translation gain for unconsolidated subsidiary | — | $1,112 | | Unrealized gain (loss) on derivatives qualified for hedge accounting: | | | | Unrealized gain (loss) on interest rate swap, net of tax | $2,219 | $(3,384) | | Amounts reclassified from accumulated other comprehensive income to earnings, net of tax | $(1,100) | $(549) | | Unrealized gain (loss) on interest rate swap, net of tax for unconsolidated subsidiary | $141 | $(165) | | Other comprehensive income (loss) | $835 | $(2,967) | | Comprehensive income (loss) | $(35,961) | $21,955 | Condensed Consolidated Statements of Cash Flows This table summarizes the cash inflows and outflows from operating, investing, and financing activities for the interim periods | Cash Flow Category | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :---------------------------------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net income (loss) available to common shareholders | $(36,796) | $24,922 | | Plus: Dividends on Series A Preferred Stock | $1,200 | $3,600 | | Plus: Redemption premium on Series A Preferred Stock | $75,198 | — | | Net income | $39,602 | $28,522 | | Adjustments to reconcile net income to net cash provided by operating activities: | | | | Bad debt expense | $330 | $18 | | Depreciation and amortization | $20,323 | $18,524 | | Deferred income taxes | $3,164 | $(2,022) | | Equity in earnings of unconsolidated entities | $(3,824) | $(1,420) | | Distribution on investment in AVAIL joint venture | $539 | — | | Net loss (gain) on sale of property, plant and equipment | $(16) | $(2) | | Amortization of debt financing costs | $3,109 | $3,029 | | Share-based compensation expense | $2,535 | $1,904 | | Changes in current assets and current liabilities | $7,610 | $(1,002) | | Changes in other long-term assets and long-term liabilities | $(1,428) | $(658) | | Net cash provided by operating activities | $71,944 | $46,893 | | Cash flows from investing activities | | | | Purchase of property, plant and equipment | $(27,396) | $(17,036) | | Other investing activities | $17 | $9 | | Net cash used in investing activities | $(27,379) | $(17,027) | | Cash flows from financing activities | | | | Proceeds from secondary public offering and issuance of additional common stock | $308,723 | — | | Redemption of Series A Preferred Stock | $(308,920) | — | | Payments for taxes related to net share settlement of equity awards | $(4,567) | $(1,710) | | Proceeds from revolving loan | $75,000 | $92,000 | | Payments on revolving loan | $(70,000) | $(112,000) | | Payments of debt financing costs | $(715) | — | | Payments on long term debt and finance lease liabilities | $(30,196) | — | | Payments of dividends | $(7,867) | $(7,835) | | Net cash used in financing activities | $(38,542) | $(29,545) | | Effect of exchange rate changes on cash | $174 | $737 | | Net increase in cash and cash equivalents | $6,197 | $1,058 | | Cash and cash equivalents at beginning of period | $4,349 | $2,820 | | Cash and cash equivalents at end of period | $10,546 | $3,878 | Condensed Consolidated Statements of Changes in Shareholders' Equity This table details the changes in common stock, capital in excess of par value, retained earnings, and accumulated other comprehensive loss | Item | Common Shares (in thousands) | Common Stock Amount (in thousands) | Capital in Excess of Par Value (in thousands) | Retained Earnings (in thousands) | Accumulated Other Comprehensive Loss (in thousands) | Total (in thousands) | | :------------------------------------------------------------------- | :--------------------------- | :--------------------------------- | :-------------------------------------------- | :------------------------------- | :------------------------------------------ | :------------------- | | Three Months Ended May 31, 2024 | | | | | | | | Balance at February 29, 2024 | 25,102 | $25,102 | $103,330 | $576,231 | $(3,894) | $700,769 | | Share-based compensation | — | — | $2,535 | — | — | $2,535 | | Common stock issued under stock-based plans and related tax expense | 112 | $112 | $(4,679) | — | — | $(4,567) | | Secondary public offering and issuance of additional common stock | 4,600 | $4,600 | $304,123 | — | — | $308,723 | | Dividends on Series A Preferred Stock | — | — | — | $(1,200) | — | $(1,200) | | Cash dividends paid on common stock | — | — | — | $(4,267) | — | $(4,267) | | Redemption premium on Series A Preferred Stock | — | — | — | $(75,198) | — | $(75,198) | | Net income | — | — | — | $39,602 | — | $39,602 | | Other comprehensive income | — | — | — | — | $835 | $835 | | Balance at May 31, 2024 | 29,814 | $29,814 | $405,309 | $535,168 | $(3,059) | $967,232 | | Three Months Ended May 31, 2023 | | | | | | | | Balance at February 28, 2023 | 24,912 | $24,912 | $93,357 | $506,042 | $(4,573) | $619,738 | | Share-based compensation | — | — | $1,904 | — | — | $1,904 | | Common stock issued under stock-based plans and related tax expense | 101 | $101 | $(1,812) | — | — | $(1,711) | | Dividends on Series A Preferred Stock | — | — | — | $(3,600) | — | $(3,600) | | Cash dividends paid on common stock | — | — | — | $(4,235) | — | $(4,235) | | Net income | — | — | — | $28,522 | — | $28,522 | | Other comprehensive loss | — | — | — | — | $(2,967) | $(2,967) | | Balance at May 31, 2023 | 25,013 | $25,013 | $93,449 | $526,729 | $(7,540) | $637,651 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures supporting the condensed consolidated financial statements Note 1. The Company and Basis of Presentation This note describes AZZ Inc.'s business segments and the basis for preparing the unaudited interim financial statements - AZZ Inc. is a provider of hot-dip galvanizing and coil coating solutions to a broad range of end-markets in North America, operating through three distinct segments: AZZ Metal Coatings, AZZ Precoat Metals, and AZZ Infrastructure Solutions (a 40% non-controlling interest in the AVAIL JV)[25] - The unaudited condensed consolidated financial statements are prepared in accordance with U.S. GAAP for interim financial information and include all necessary normal recurring adjustments, with interim results not necessarily indicative of a full year[26][27] - The company expects to adopt new accounting standards ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Taxes) in fiscal 2025 and 2026, respectively, which will result in additional disclosures but are not expected to affect financial position, results of operations, or cash flows[28][29] Note 2. Inventories This note provides a breakdown of inventory components and changes in the inventory reserve | Category | May 31, 2024 (in thousands) | February 29, 2024 (in thousands) | | :---------------- | :-------------------------- | :------------------------------- | | Raw material | $109,590 | $111,674 | | Work in process | $625 | $898 | | Finished goods | $3,773 | $5,084 | | Total inventories | $113,988 | $117,656 | - The inventory reserve decreased from $4.5 million as of February 29, 2024, to $3.6 million as of May 31, 2024[32] Note 3. Earnings Per Share This note details the calculation of basic and diluted earnings per common share, including the impact of preferred stock - On April 30, 2024, AZZ completed a secondary offering of 4.6 million common shares, increasing the total outstanding common shares to 29.8 million[35] | Metric | Three Months Ended May 31, 2024 | Three Months Ended May 31, 2023 | | :----------------------------------------- | :------------------------------ | :------------------------------ | | Net income | $39,602 | $28,522 | | Dividends on Series A Preferred Stock | $(1,200) | $(3,600) | | Redemption premium on Series A Preferred Stock | $(75,198) | — | | Numerator for basic earnings per share | $(36,796) | $24,922 | | Numerator for diluted earnings per share | $(36,796) | $28,522 | | Weighted average shares outstanding - Basic | 26,751 | 24,940 | | Weighted average shares outstanding - Diluted | 26,751 | 29,150 | | Basic earnings (loss) per common share | $(1.38) | $1.00 | | Diluted earnings (loss) per common share | $(1.38) | $0.98 | - For the three months ended May 31, 2024, all 3.1 million weighted average shares related to the Series A Convertible Preferred Stock were excluded from the diluted earnings per share computation as their effect would have been anti-dilutive[36] Note 4. Disaggregated Sales This note presents the company's sales disaggregated by industry and discusses changes in contract assets | Industry | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :------------- | :--------------------------------------------- | :--------------------------------------------- | | Construction | $228,512 | $207,162 | | Industrial | $40,076 | $39,087 | | Transportation | $38,362 | $35,179 | | Consumer | $35,385 | $35,179 | | Utilities | $28,615 | $27,361 | | Other | $42,258 | $46,905 | | Total Sales | $413,208 | $390,873 | - Contract assets increased from $79.3 million as of February 29, 2024, to $93.3 million as of May 31, 2024, primarily related to the AZZ Precoat Metals segment[42] Note 5. Supplemental Cash Flow Information This note provides additional details on changes in current assets and liabilities affecting cash flows, and cash paid for interest and income taxes | Item | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :---------------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Accounts receivable, net | $(2,519) | $11,872 | | Other receivables | $(1,823) | $1,064 | | Inventories | $3,620 | $(1,198) | | Contract assets | $(13,928) | $(1,949) | | Prepaid expenses and other | $(8,940) | $(2,494) | | Accounts payable | $25,941 | $(2,665) | | Income taxes payable | $3,242 | $(94) | | Accrued expenses | $2,017 | $(5,538) | | Changes in current assets and liabilities | $7,610 | $(1,002) | | Item | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :--------------------- | :--------------------------------------------- | :--------------------------------------------- | | Cash paid for interest | $21,059 | $25,866 | | Cash paid for income taxes | $934 | $895 | | Item | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :--------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Accrued dividends on Series A Preferred Stock | — | $2,400 | | Accruals for capital expenditures | $8,517 | $2,409 | Note 6. Operating Segments This note provides financial information for AZZ's Metal Coatings, Precoat Metals, and Infrastructure Solutions segments, including sales, operating income, and assets - AZZ operates three segments: AZZ Metal Coatings (hot-dip galvanizing, spin galvanizing, powder coating, anodizing, plating), AZZ Precoat Metals (protective and decorative coatings for steel and aluminum coil), and AZZ Infrastructure Solutions (40% non-controlling interest in AVAIL JV, providing equipment and services to power generation, transmission, distribution, oil and gas, and industrial markets)[48][49] | Segment | Sales (May 31, 2024) | Operating Income (May 31, 2024) | Sales (May 31, 2023) | Operating Income (May 31, 2023) | | :-------------------------- | :------------------- | :------------------------------ | :------------------- | :------------------------------ | | Metal Coatings | $176,651 | $47,932 | $168,794 | $45,470 | | Precoat Metals | $236,557 | $40,094 | $222,079 | $37,691 | | Infrastructure Solutions | — | $(29) | — | $(22) | | Corporate | — | $(18,248) | — | $(17,643) | | Total | $413,208 | $69,749 | $390,873 | $65,496 | | Segment | May 31, 2024 (in thousands) | February 29, 2024 (in thousands) | | :----------------------------------------- | :-------------------------- | :------------------------------- | | Metal Coatings | $550,741 | $553,505 | | Precoat Metals | $1,534,214 | $1,500,122 | | Infrastructure Solutions - Investment in Joint Venture | $101,639 | $98,169 | | Corporate | $49,185 | $43,709 | | Total assets | $2,235,779 | $2,195,505 | | Region | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :-------------- | :--------------------------------------------- | :--------------------------------------------- | | United States | $403,051 | $381,322 | | Canada | $10,157 | $9,551 | | Total | $413,208 | $390,873 | Note 7. Investments in Unconsolidated Entity This note details AZZ's equity method investment in the AVAIL joint venture, including its summarized financial information - AZZ accounts for its 40% interest in the AVAIL JV under the equity method, reporting $3.8 million in equity in earnings for the three months ended May 31, 2024[58] - The investment in the AVAIL JV was $101.6 million as of May 31, 2024, which includes an excess of $10.2 million over the underlying value of net assets, accounted for as equity method goodwill[58] | Summarized Balance Sheet (May 31, 2024) | Amount (in thousands) | | :-------------------------------------- | :-------------------- | | Current assets | $279,806 | | Long-term assets | $171,533 | | Total assets | $451,339 | | Current liabilities | $113,512 | | Long-term liabilities | $126,625 | | Total liabilities | $240,137 | | Total partners' capital | $211,202 | | Total liabilities and partners' capital | $451,339 | | Summarized Operating Data (Three Months Ended May 31, 2024) | Amount (in thousands) | | :-------------------------------------------------------- | :-------------------- | | Sales | $129,107 | | Gross profit | $31,526 | | Net income | $8,160 | Note 8. Derivative Instruments This note describes the company's use of interest rate swap agreements to manage interest rate risk on its floating-rate debt - AZZ uses interest rate swap agreements to manage exposure to fluctuations in interest rates on its floating-rate debt, converting a portion to a fixed rate[64] - The 2022 Swap, designated as a cash flow hedge, converts the SOFR portion of the Term Loan B to 4.277%, resulting in a total fixed rate of 7.527% after repricing, with a notional amount of $540.4 million as of May 31, 2024[64] - During the three months ended May 31, 2024, $1.1 million (net of tax) was reclassified from other comprehensive income to earnings, representing the effective portion of the 2022 Swap[65] Note 9. Debt This note provides details on the company's Revolving Credit Facility and Term Loan B, including interest rates and compliance with covenants | Debt Type | May 31, 2024 (in thousands) | February 29, 2024 (in thousands) | | :---------------------------- | :-------------------------- | :------------------------------- | | Revolving Credit Facility | $35,000 | $30,000 | | Term Loan B | $950,250 | $980,250 | | Total debt, gross | $985,250 | $1,010,250 | | Unamortized debt issuance costs | $(55,450) | $(57,508) | | Long-term debt, net | $929,800 | $952,742 | - The Term Loan B was repriced on March 20, 2024, adjusting the SOFR spread from 3.75% to 3.25%[69] - The weighted average interest rate for outstanding debt decreased from 9.07% as of May 31, 2023, to 8.09% as of May 31, 2024[70] - AZZ was in compliance with all covenants of the 2022 Credit Agreement as of May 31, 2024, with $350.7 million of additional credit available[71][72] | Item | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :----------------------- | :--------------------------------------------- | :--------------------------------------------- | | Gross Interest expense | $24,207 | $28,962 | | Less: Capitalized interest | $(1,433) | $(256) | | Interest expense, net | $22,774 | $28,706 | Note 10. Fair Value Measurements This note explains the classification and measurement of financial instruments at fair value, including interest rate swaps and long-term debt - AZZ classifies fair value measurements into Level 1 (quoted market prices), Level 2 (observable market-based inputs), and Level 3 (unobservable inputs)[74] | Item | Carrying Value (May 31, 2024) | Fair Value Level 2 (May 31, 2024) | Carrying Value (Feb 29, 2024) | Fair Value Level 2 (Feb 29, 2024) | | :------------------------- | :---------------------------- | :-------------------------------- | :---------------------------- | :-------------------------------- | | Interest Rate Swap Agreement | $4,806 | $4,806 | $3,410 | $3,410 | | Pension Liability | $30,257 | — | $31,148 | — | - The fair value of the investment in the unconsolidated AVAIL JV is a Level 3 non-recurring measurement, while long-term debt fair values are Level 2 non-recurring measurements[80][81] - The estimated fair value of outstanding debt was $992.6 million at May 31, 2024, compared to a principal amount of $985.3 million[81] Note 11. Leases This note details the company's operating and finance lease assets and liabilities, including lease terms and future payments - As of May 31, 2024, AZZ was the lessee for 149 operating leases and 46 finance leases with terms of 12 months or more[82] | Item | May 31, 2024 (in thousands) | February 29, 2024 (in thousands) | | :--------------------------------- | :-------------------------- | :------------------------------- | | Operating right-of-use assets | $18,474 | $19,808 | | Finance right-of-use assets | $4,118 | $3,931 | | Operating lease liabilities ― short-term | $5,729 | $5,893 | | Operating lease liabilities ― long-term | $13,429 | $14,606 | | Finance lease liabilities ― short-term | $829 | $766 | | Finance lease liabilities ― long-term | $3,372 | $3,221 | | Metric | May 31, 2024 | February 29, 2024 | | :--------------------------------------------- | :----------- | :---------------- | | Weighted-average remaining lease term - operating leases | 3.97 years | 4.12 years | | Weighted-average discount rate - operating leases | 4.55% | 4.49% | | Weighted-average remaining lease term - finance leases | 5.08 years | 5.21 years | | Weighted-average discount rate - finance leases | 6.86% | 6.70% | | Lease Expense Category | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :--------------------- | :--------------------------------------------- | :--------------------------------------------- | | Total operating lease expense | $3,492 | $3,525 | | Total financing lease expense | $291 | $92 | | Total lease expense | $3,783 | $3,617 | | Fiscal Year | Operating Leases (in thousands) | Finance Leases (in thousands) | Total (in thousands) | | :---------- | :------------------------------ | :---------------------------- | :------------------- | | 2025 | $4,940 | $816 | $5,756 | | 2026 | $5,740 | $1,015 | $6,755 | | 2027 | $4,552 | $976 | $5,528 | | 2028 | $2,529 | $889 | $3,418 | | 2029 | $1,917 | $672 | $2,589 | | 2030 | $462 | $447 | $909 | | Thereafter | $796 | $170 | $966 | | Total lease payments | $20,936 | $4,985 | $25,921 | | Less imputed interest | $(1,778) | $(784) | $(2,562) | | Total | $19,158 | $4,201 | $23,359 | Note 12. Income Taxes This note discusses the effective income tax rate and its primary drivers for the reported interim period - The effective tax rate decreased to 22.4% for the three months ended May 31, 2024, from 25.3% in the prior year, primarily due to higher discrete items driven by tax deductions for stock compensation[93] Note 13. Mezzanine Equity This note describes the redemption of Series A Convertible Preferred Stock and its impact on net income available to common shareholders - On May 9, 2024, AZZ fully redeemed its 240,000 shares of 6.0% Series A Convertible Preferred Stock for $308.9 million, using proceeds from the April 2024 Secondary Offering[94] - A redemption premium of $75.2 million was recorded as a deemed dividend, reducing net income available to common shareholders[94] - The Series A Preferred Stock, previously classified as 'Mezzanine equity,' had a liquidation preference of approximately $312.5 million as of February 29, 2024[96] - Dividends declared and paid for the three months ended May 31, 2024, and May 31, 2023, were $3.6 million, paid in cash[97] Note 14. Equity This note details changes in shareholders' equity, including common stock offerings and components of accumulated other comprehensive income (loss) - On April 30, 2024, AZZ completed a secondary public offering, selling 4.6 million common shares at $70.00 per share, generating net proceeds of $308.7 million, which were used to redeem the Series A Preferred Stock[105] | AOCI Component | Balance Feb 29, 2024 | Net Change (3M May 31, 2024) | Balance May 31, 2024 | Balance Feb 28, 2023 | Net Change (3M May 31, 2023) | Balance May 31, 2023 | | :-------------------------------------------------------- | :------------------- | :--------------------------- | :------------------- | :------------------- | :--------------------------- | :------------------- | | Foreign Currency Translation Gain (Loss) | $(7,628) | $(425) | $(8,053) | $(7,571) | $19 | $(7,552) | | Foreign Currency Translation Gain (Loss) for Unconsolidated Subsidiary, Net of Tax | $1,418 | — | $1,418 | — | $1,112 | $1,112 | | Net Actuarial Gain (Loss), Net of Tax | $(184) | — | $(184) | $119 | — | $119 | | Interest Rate Swap, Net of Tax | $2,533 | $1,119 | $3,652 | $2,879 | $(3,933) | $(1,054) | | Interest Rate Swap, Net of Tax for Unconsolidated Subsidiary | $(33) | $141 | $108 | — | $(165) | $(165) | | Total | $(3,894) | $835 | $(3,059) | $(4,573) | $(2,967) | $(7,540) | Note 15. Defined Benefit Pension Plan This note provides information on the company's underfunded defined benefit pension plan and expected contributions - The Precoat Metals segment has an underfunded defined benefit pension plan with a liability of $30.3 million as of May 31, 2024[110] - AZZ recognized $0.2 million of net benefit cost for the three months ended May 31, 2024, and expects to pay $6.7 million in contributions to the Plan during the remainder of fiscal 2025[111] Note 16. Commitments and Contingencies This note outlines the company's legal accruals, environmental liabilities, capital commitments, and forward purchase contracts - AZZ has recorded a legal accrual of $5.5 million as of May 31, 2024, related to a breach of contract lawsuit where a jury rendered a verdict against AZZ Beaumont, with the company planning to pursue appellate options[113] - A receivable of $5.2 million is due from a previous customer of an AIS business affiliate, with a trial scheduled for fiscal 2026[114] - AZZ agreed to settle an environmental indemnification lawsuit with Nucor Coatings Corporation for $5.25 million, which is included in 'Other accrued liabilities' as of May 31, 2024, with payment expected in Q2 fiscal 2025[115][117] - The reserve balance for environmental remediation liabilities was $20.9 million as of May 31, 2024, with $2.9 million classified as current[118] - AZZ is constructing a new $124.0 million aluminum coil coating facility in Washington, Missouri, expected to be operational in calendar year 2025 (fiscal year 2026), with $47.0 million remaining to be spent prior to the end of fiscal 2025[120] - As of May 31, 2024, AZZ had non-cancelable forward contracts to purchase approximately $37.9 million of zinc and $9.2 million of natural gas, all expiring by the first quarter of fiscal 2026[121] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on AZZ Inc.'s financial performance and condition for the three months ended May 31, 2024, highlighting sales growth driven by demand in construction, industrial, and transportation sectors, alongside strategic financial activities like the redemption of preferred stock and debt reduction. It also outlines the company's outlook, segment-specific results, and liquidity management Business Operations Update This section summarizes key financial results, cash flow generation, and strategic financing activities for the quarter - Results for the three months ended May 31, 2024, were favorably impacted by growth in demand for manufactured solutions in the construction, industrial, and transportation industries, coupled with a value-driven pricing strategy[127] - Net income was $39.6 million, but net income attributable to common shareholders was a loss of $36.8 million after deducting preferred dividends and the redemption premium on Series A Preferred Stock[127] - Operations generated $71.9 million of cash, including $7.6 million from working capital reduction, used for $27.4 million in capital investments and $7.9 million in dividend payments[127] - Financing activities included a $308.7 million common stock offering used to fund the $308.9 million redemption of Series A Preferred Stock, and a $25.0 million net reduction in outstanding debt[127] - Cash and cash equivalents increased to $10.5 million as of May 31, 2024, with $350.7 million available under the Revolving Credit Facility[127] Outlook This section provides management's expectations for future sales prices, seasonal demand patterns, and customer inventory levels - Sales prices in both AZZ Metal Coatings and AZZ Precoat Metals segments are expected to remain consistent with current levels, though product mix and competitive pressures may cause fluctuations[129] - Demand in both Metal Coatings and Precoat Metals segments is expected to follow typical seasonal patterns[129] - Customer inventories for both segments remain consistent or at historical levels, supporting continued demand for metal coatings and coil coating solutions[129] RESULTS OF OPERATIONS This section provides a detailed analysis of the company's financial performance for the reported interim period Overview This section introduces AZZ's business segments and the primary metrics used for evaluating their performance - AZZ provides hot-dip galvanizing and coil coating solutions primarily in North America, operating through three segments: AZZ Metal Coatings, AZZ Precoat Metals, and AZZ Infrastructure Solutions[130] - Segment sales and operating income are the primary measures for evaluating Metal Coatings and Precoat Metals, while net income is used for Infrastructure Solutions[130] QUARTER ENDED MAY 31, 2024 COMPARED TO THE QUARTER ENDED MAY 31, 2023 This section compares the company's financial results for the three months ended May 31, 2024, against the same period in the prior year Segment Sales and Operating Income This table presents a comparative breakdown of sales and operating income across AZZ's business segments | Segment | Sales (May 31, 2024) | Operating Income (May 31, 2024) | Sales (May 31, 2023) | Operating Income (May 31, 2023) | | :-------------------------- | :------------------- | :------------------------------ | :------------------- | :------------------------------ | | Metal Coatings | $176,651 | $47,932 | $168,794 | $45,470 | | Precoat Metals | $236,557 | $40,094 | $222,079 | $37,691 | | Infrastructure Solutions | — | $(29) | — | $(22) | | Corporate | — | $(18,248) | — | $(17,643) | | Total | $413,208 | $69,749 | $390,873 | $65,496 | Sales This section analyzes the drivers behind the consolidated and segment-specific sales growth for the quarter - Consolidated sales increased by $22.3 million, or 5.7%, to $413.2 million for the current quarter compared to the prior year quarter[136] - AZZ Metal Coatings segment sales increased by $7.9 million (4.7%) due to a higher volume of steel processed ($11.7 million), partially offset by a lower average selling price from product mix ($3.0 million)[136][137] - AZZ Precoat Metals segment sales increased by $14.4 million (6.5%) due to a higher volume of coil coated, while the average price remained flat[137] Operating Income This section analyzes the factors influencing the consolidated and segment-specific operating income changes for the quarter - Consolidated operating income increased by $4.3 million, or 6.5%, for the current quarter compared to the prior year quarter[137] - AZZ Metal Coatings segment operating income increased by $2.5 million (5.4%) due to increased sales, partially offset by higher cost of sales (increased labor and overhead costs, offset by lower zinc costs)[137] - AZZ Precoat Metals segment operating income increased by $2.4 million (6.4%) due to increased sales, offset by higher cost of sales (variable costs from increased volume and depreciation expense)[138] Corporate Expenses This section discusses the changes in corporate selling, general, and administrative expenses for the reported period - Corporate selling, general, and administrative expenses increased by $0.6 million, or 3.4%, for the current quarter compared to the prior year quarter[138] Interest Expense This section explains the decrease in net interest expense, primarily due to reduced debt and lower interest rates - Interest expense decreased by $5.9 million to $22.8 million, primarily due to a $120.0 million decrease in weighted average debt outstanding and a 0.98% decrease in the weighted average interest rate, coupled with higher capitalized interest of $1.2 million[138] Equity in Earnings of Unconsolidated Entities This section details the increase in equity earnings from the AVAIL joint venture, driven by strong business performance - Equity in earnings of unconsolidated subsidiaries increased by $2.4 million to $3.8 million, primarily due to higher earnings from the AVAIL JV, driven by its enclosure, high-voltage, and medium-voltage bus businesses[139] Income Taxes This section discusses the change in the effective tax rate, primarily influenced by discrete tax items - The effective tax rate decreased to 22.4% for the three months ended May 31, 2024, from 25.3% in the prior year, primarily due to higher discrete items driven by tax deductions for stock compensation[139] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's cash position, debt structure, and capital management strategies Cash Flows This section summarizes the company's cash generation and utilization across operating, investing, and financing activities - As of May 31, 2024, total liquidity was $361.2 million, consisting of $350.7 million available on the Revolving Credit Facility and $10.5 million in cash and cash equivalents[141] | Cash Flow Category | Three Months Ended May 31, 2024 (in thousands) | Three Months Ended May 31, 2023 (in thousands) | | :---------------------------------- | :--------------------------------------------- | :--------------------------------------------- | | Net cash provided by operating activities | $71,944 | $46,893 | | Net cash used in investing activities | $(27,379) | $(17,027) | | Net cash used in financing activities | $(38,542) | $(29,545) | - Net cash provided by operating activities for the current three-month period was $71.9 million, driven by net income ($39.6 million), non-cash charges ($22.5 million), and a $7.6 million reduction in working capital[142] - Operating cash flows were used to fund $27.4 million of capital expenditures, make $25.2 million in net payments on long-term debt and finance leases, pay $7.9 million in dividends, and make $4.6 million in payments for taxes related to net share settlement of equity awards[142] - Financing activities included a $308.7 million common stock offering used to redeem $308.9 million of Series A Preferred Stock[142] Financing and Capital This section details the company's debt facilities, recent equity offering, and capital expenditure plans - The 2022 Credit Agreement includes a $1.3 billion Term Loan B (outstanding balance of $950.3 million as of May 31, 2024) and a $400.0 million Revolving Credit Facility[144] - The Term Loan B was repriced on March 20, 2024, adjusting the SOFR spread from 3.75% to 3.25%[146] - The weighted average interest rate for outstanding debt was 8.09% as of May 31, 2024, down from 9.07% as of May 31, 2023[147] - AZZ completed a secondary public offering on April 30, 2024, generating $308.7 million in net proceeds, which were used to redeem the Series A Preferred Stock for $308.9 million on May 9, 2024[150][151] - AZZ is constructing a new $124.0 million aluminum coil coating facility, with $47.0 million remaining to be spent prior to the end of fiscal 2025, expected to be funded through cash flows from operations[153] - As of May 31, 2024, $53.2 million remained available under the 2020 Share Authorization for future common stock repurchases[154] Other Exposures This section discusses the company's exposure to commodity price increases and its mitigation strategies - AZZ has exposure to commodity price increases, primarily zinc and natural gas in the AZZ Metal Coatings segment, and natural gas, steel, and aluminum in the AZZ Precoat Metals segment[155] - The company mitigates commodity price risks through fixed premium agreements with zinc suppliers, fixed purchase cost agreements with natural gas suppliers, manufacturing process improvements, supply chain management, and price increases[155] - As of May 31, 2024, AZZ had non-cancelable forward contracts to purchase approximately $37.9 million of zinc and $9.2 million of natural gas, all expiring by the first quarter of fiscal 2026[156] Off Balance Sheet Arrangements and Contractual Obligations This section confirms the absence of off-balance sheet arrangements and outlines contractual obligations - As of May 31, 2024, AZZ did not have any off-balance sheet arrangements as defined under SEC rules[157] Critical Accounting Policies and Estimates This section confirms no significant changes to the company's critical accounting policies and estimates - There were no significant changes to AZZ's critical accounting policies and estimates compared to those disclosed in the Annual Report on Form 10-K for the fiscal year ended February 29, 2024[159] Recent Accounting Pronouncements This section refers to the notes for details on recently adopted and pending accounting pronouncements - Refer to Note 1 to the condensed consolidated financial statements for a full description of recent accounting pronouncements, including adoption dates and estimated effects[160] Item 3. Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes to the company's market risk disclosures during the three months ended May 31, 2024, and refers to the Annual Report on Form 10-K for a comprehensive discussion - There have been no material changes to AZZ's market risk disclosures during the three months ended May 31, 2024[161] Item 4. Controls and Procedures Management, including the CEO and CFO, concluded that the company's disclosure controls and procedures were effective as of May 31, 2024, ensuring timely and accurate reporting. No significant changes in internal control over financial reporting were reported - The Chief Executive Officer and Chief Financial Officer concluded that AZZ's disclosure controls and procedures were effective as of May 31, 2024, to provide reasonable assurance that required information is recorded, processed, summarized, and reported timely[162] - There have been no significant changes in the company's internal controls over financial reporting during the period covered by this report[163] PART II. OTHER INFORMATION This section provides additional non-financial disclosures, including legal proceedings, risk factors, and equity matters Item 1. Legal Proceedings AZZ Inc. is involved in various routine lawsuits, including labor, environmental, and commercial disputes. Management believes it has strong defenses and does not expect these proceedings to materially affect the company's financial position, results of operations, or cash flows - AZZ and its subsidiaries are named defendants and plaintiffs in various routine lawsuits incidental to its business, including labor and employment claims, worker's compensation, environmental matters, and commercial disputes[164] - Management, after consultation with legal counsel, believes it has strong defenses to all these matters and does not expect liabilities, if any, to have a material effect on the Company's financial position, results of operations, or cash flows[164] Item 1A. Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's most recent Annual Report on Form 10-K - There have been no material changes from risk factors previously disclosed in the Company's most recent Annual Report on Form 10-K for the fiscal year ended February 29, 2024[166] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds AZZ did not repurchase any common stock under its $100 million 2020 Share Authorization during the three months ended May 31, 2024, leaving $53.2 million available for future repurchases - AZZ did not purchase any shares of common stock under the 2020 Share Authorization during the three months ended May 31, 2024[167] - As of May 31, 2024, $53.2 million remained available under the 2020 Share Authorization for future common stock repurchases[167] Item 5. Other Information No directors or executive officers adopted, modified, or terminated a Rule 10b5-1 or non-Rule 10b5-1 trading arrangement during the three months ended May 31, 2024 - During the three months ended May 31, 2024, none of AZZ's directors or executive officers adopted, modified, or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement[168] Item 6. Exhibits This section lists the exhibits filed with the Form 10-Q, including certifications and Inline XBRL documents - Exhibits include certifications of the Chief Executive Officer and Chief Financial Officer pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act of 2002, along with Inline XBRL documents[170][171] SIGNATURES The report is duly signed on behalf of AZZ Inc. by Tiffany Moseley, Chief Accounting Officer and Principal Accounting Officer, on July 10, 2024 - The report was signed on behalf of AZZ Inc. by Tiffany Moseley, Chief Accounting Officer and Principal Accounting Officer, on July 10, 2024[173]