Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operation.
You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements regarding our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.
Overview
As mentioned in Item 1, AZZ operates two distinct business segments, the Energy Segment and the Galvanizing Segment. Our discussion and analysis of financial condition and results of operations is divided by each of our segments along with corporate costs and other costs not specifically identifiable to a segment. For a reconciliation of segment operating income to pretax income, see Note 13 to the Consolidated Financial Statements. References herein to fiscal years are to the twelve-month periods that end in February of the relevant calendar year. For example, the twelve-month period ended February 28, 2017 is referred to as “fiscal 2017” or “fiscal year 2017.”
For the fiscal year ended
February 28, 2017
, we recorded net sales of
$858.9 million
compared to the prior year’s net sales of
$903.2 million
. Of the total net sales for fiscal
2017
, approximately
56.3%
of our net sales were generated from the Energy Segment and approximately
43.7%
were generated from the Galvanizing Segment. Net income for fiscal
2017
was
$60.9 million
compared to
$76.8 million
for fiscal
2016
. Net income as a percentage of net sales was
7.1%
for fiscal
2017
as compared to
8.5%
for fiscal
2016
. Earnings per share fell by
21.3%
to
$2.33
per share for fiscal
2017
compared to
$2.96
per share for fiscal
2016
, on a diluted basis.
Results of Operations
Year ended February 28, 2017 compared with year ended February 29, 2016
Backlog
We ended fiscal
2017
with a backlog of
$346.4 million
, a slight increase compared to fiscal
2016
. The Company's backlog as of year end pertains solely to the Energy Segment's operations. The book-to-ship ratio remained flat compared to fiscal 2016. The book-to-ship ratio was
1.00
to 1 for fiscal
2017
and 1.00 to 1 for fiscal
2016
.
The following table reflects bookings and shipments for fiscal
2017
and
2016
.
Backlog Table
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
Backlog
|
|
2/29/2016
|
|
$
|
334,456
|
|
|
2/28/2015
|
|
$
|
332,595
|
|
Bookings
|
|
|
|
858,934
|
|
|
|
|
905,053
|
|
Acquired Backlog
|
|
|
|
11,903
|
|
|
|
|
—
|
|
Shipments
|
|
|
|
858,930
|
|
|
|
|
903,192
|
|
Backlog as reported
|
|
2/28/2017
|
|
$
|
346,363
|
|
|
2/29/2016
|
|
$
|
334,456
|
|
Book-to-Ship Ratio
|
|
|
|
1.00
|
|
|
|
|
1.00
|
|
Net Sales
Our total net sales for fiscal
2017
decreased by
$44.3 million
, or
4.9%
, as compared to fiscal
2016
.
The following table reflects the breakdown of revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Net sales:
|
|
|
|
|
Energy
|
|
$
|
483,394
|
|
|
$
|
500,830
|
|
Galvanizing
|
|
375,536
|
|
|
402,362
|
|
Total Net Sales
|
|
$
|
858,930
|
|
|
$
|
903,192
|
|
Our Energy Segment recorded net sales for fiscal
2017
of
$483.4 million
, a decrease of
3.5%
compared to fiscal
2016
net sales of
$500.8 million
. The decrease in net sales for fiscal
2017
was caused by several factors including reduced turnarounds in the U.S. refinery market, continued softness in the petrochemical market, and delays in the release of several large projects in the U.S. and overseas.
Our Galvanizing Segment, which consisted of forty-one hot dip galvanizing facilities as of February 28, 2017, generated net sales of
$375.5 million
, a
6.7%
decrease from the prior year’s net sales of
$402.4 million
. The decline was a result of a volume decrease in steel processed caused by softness in the solar, petrochemical, and the oil and gas markets which offset higher pricing during the year.
Operating Income
Operating income for the Energy Segment decreased
$6.4 million
, or
11.0%
, for fiscal
2017
, to
$52.0 million
as compared to
$58.5 million
for fiscal
2016
. Operating margins for this segment were
10.8%
for fiscal
2017
as compared to
11.7%
for fiscal
2016
. This decrease was attributable to the reduction in refinery turnarounds described above, which typically carry a higher margin, coupled with generally lower margin projects in the balance of the segment.
Operating income for the Galvanizing Segment decreased
$15.7 million
, or
16.6%
, for fiscal 2017 to
$79.0 million
as compared to
$94.8 million
for the prior year. Operating margins were
21.0%
for fiscal 2017 as compared to
23.6%
for fiscal 2016. This
decrease is attributable to lower volumes in fiscal 2017 and the $7.3 million of realignment charge related to the shutdown of two galvanizing plants, the repurposing of a third plant, and the disposal of obsolete assets taken in the second quarter of fiscal 2017.
Corporate expenses were
$32.7 million
for fiscal
2017
and
$30.9 million
for fiscal
2016
. This increase is attributable to higher spend on professional services, higher employee costs, and depreciation of corporate assets in fiscal 2017.
Interest
Interest expense for fiscal
2017
decreased
2.8%
to
$14.7 million
as compared to
$15.2 million
in fiscal
2016
. This decrease is the result of lower borrowings during fiscal
2017
stemming from mandatory and elective principal reductions, partially offset by higher interest rates. For additional information on outstanding debt, see Note 12 of the Notes to the Consolidated Financial Statements. As of
February 28, 2017
, we had outstanding debt of
$272.3 million
compared to
$327.0 million
at the end of fiscal
2016
. AZZ's debt to equity ratio was
0.51
to 1 at the end of fiscal
2017
compared to
0.68
to 1 at the end of fiscal
2016
.
Net Gain On Sale of Property, Plant and Equipment and Insurance Proceeds
We recorded a net loss of
$0.1 million
from the sale of property, plant and equipment and insurance proceeds in fiscal
2017
. This net loss was the result of the sale of miscellaneous equipment during the year. We recorded a net gain of
$0.3 million
from the sale of property, plant and equipment and insurance proceeds in fiscal
2016
. The net gain is primarily related to the sale of our St. Catherines property located in Ontario, Canada.
Other (Income) Expense
For fiscal
2017
, a total of
$1.2 million
in income was recorded to other (income) expense, net, which was primarily attributable to a reimbursement of legal fees of $0.6 million from a lawsuit in fiscal 2016 and net foreign exchange gains. For fiscal
2016
, we recorded
$3.1 million
of expense to other (income) expense, net, which was attributable to a fourth quarter settlement of a commercial lawsuit, in addition to some currency translation losses.
Provision For Income Taxes
The provision for income taxes reflected an effective tax rate of
28.1%
for fiscal
2017
and
26.4%
for fiscal
2016
. The Company's tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year. The most significant impact on the difference between our statutory U.S. federal income tax rate of 35.0% and our effective tax rate is the result of certain U.S. state tax planning for the current and prior fiscal year.
Year ended February 29, 2016 compared with year ended February 28, 2015
Backlog
We ended fiscal
2016
with a backlog of
$334.5 million
, an increase of
0.6%
as compared to fiscal
2015
. The Company's backlog as of year end pertains to the Energy Segment's operations. The book-to-ship ratio remained relatively flat compared to fiscal
2015
. The book-to-ship ratio was
1.00
to 1 for fiscal
2017
and
1.01
to 1 for fiscal
2016
.
The following table reflects bookings and shipments for fiscal 2016 and 2015.
Backlog Table
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
Backlog
|
|
2/28/2015
|
|
$
|
332,595
|
|
|
2/28/2014
|
|
$
|
325,013
|
|
Bookings
|
|
|
|
905,053
|
|
|
|
|
824,269
|
|
Shipments
|
|
|
|
903,192
|
|
|
|
|
816,687
|
|
Backlog as reported
|
|
2/29/2016
|
|
$
|
334,456
|
|
|
2/28/2015
|
|
$
|
332,595
|
|
Book-to-Ship Ratio
|
|
|
|
1.00
|
|
|
|
|
1.01
|
|
Net Sales
Our total net sales for fiscal
2016
increased by
$86.5 million
, or
10.6%
, as compared to fiscal
2015
.
The following table reflects the breakdown of revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Net sales:
|
|
|
|
|
Energy
|
|
$
|
500,830
|
|
|
$
|
458,339
|
|
Galvanizing
|
|
402,362
|
|
|
358,348
|
|
Total Net Sales
|
|
$
|
903,192
|
|
|
$
|
816,687
|
|
Our Energy Segment recorded net sales for fiscal
2016
of
$500.8 million
, an increase of
9.3%
compared to fiscal
2015
net sales of
$458.3 million
. The increase in net sales for fiscal
2016
was attributable to greater penetration and project scope expansion in specialty welding services for petroleum refining both domestically and internationally.
Our Galvanizing Segment, which consisted of forty-three hot dip galvanizing facilities as of February 28,
2016
, generated net sales of
$402.4 million
, a
12.3%
increase from the prior year’s net sales of
$358.3 million
. The volume of steel processed for the fiscal year increased 15.6% while sales prices were slightly lower in fiscal 2016 compared to fiscal 2015. The acquisition of US Galvanizing, LLC and Alpha Galvanizing Inc. accounted for a significant portion of the increase in net sales and steel processed in the current year. The solar and original equipment manufacturer (OEM) markets also added to the increased sales and steel processed volumes during the year.
Operating Income
Operating income for the Energy Segment increased
$19.8 million
, or
51.1%
, for fiscal
2016
, to
$58.5 million
as compared to
$38.7 million
for fiscal
2015
. Operating margins for this segment were
11.7%
for fiscal
2016
as compared to
8.4%
for fiscal
2015
. This increase was attributable to increased net sales, improved pricing, and better execution overall. During
2015
, operating income was impacted by realignment charges described in Note 6 in the Notes to the Consolidated Financial Statements and certain cost overruns on projects at NLI and Aquilex SRO.
Operating income for the Galvanizing Segment increased
$6.2 million
, or
7.0%
, for fiscal
2016
to
$94.8 million
as compared to
$88.6 million
for the prior year. Operating margins were
23.6%
for fiscal
2016
as compared to
24.7%
for fiscal
2015
. As noted within the net sales discussion, the acquisition of US Galvanizing, LLC and Alpha Galvanizing Inc. were the primary contributors of operating income growth which was partially offset by higher zinc costs year over year.
Corporate expenses were
$30.9 million
for fiscal 2016 and
$20.4 million
for fiscal 2015. During fiscal 2016, we experienced higher legal fees associated with attorney fees related to a commercial lawsuit which settled during the fourth quarter, higher
outside costs associated with various acquisitions and divestiture activities, and charges taken in the fourth quarter related to rectifying incorrect matching payments made to employee benefit plans of certain employees in prior years. During fiscal 2015, the Company recognized a $9.1 million gain from the reversal of the contingent liability associated with the acquisition of NLI. Based on the criteria set forth in the acquisition agreement, we no longer believe an additional payment to the previous owners is probable. Excluding the gain from the reversal of the NLI contingency, for the year, general corporate expenses would have totaled $29.5 million during fiscal 2015 and the year over year comparison would have been relatively flat.
Interest
Interest expense for fiscal
2016
decreased
8.5%
to
$15.2 million
as compared to
$16.6 million
in fiscal 2015. This decrease is the result of lower borrowings during fiscal 2016 stemming from mandatory and elective principal reductions. For additional information on outstanding debt, see Note 12 to the Consolidated Financial Statements. As of February 29, 2016, we had gross outstanding debt of
$327.0 million
compared to
$337.8 million
at the end of fiscal 2015. AZZ's debt to equity ratio was 0.68 to 1 at the end of fiscal 2016 compared to 0.80 to 1 at the end of fiscal 2015.
Net Gain On Sale of Property, Plant and Equipment and Insurance Proceeds
We recorded a net gain of
$0.3 million
from the sale of plant, property and equipment and insurance proceeds during fiscal
2016
. The net gain is primarily related to the sale of our St. Catherines property located in Ontario, Canada. We recorded a net gain of
$2.5 million
from the sale of property, plant and equipment and insurance proceeds in fiscal 2015. The gain from the prior fiscal year is primarily attributable to the property, plant and equipment lost as a result of the fires at our Joliet, Illinois, Goodyear, Arizona and New Orleans, Louisiana galvanizing facilities, offset by insurance proceeds.
Other (Income) Expense
For fiscal
2016
, a total of
$3.1 million
in expense was recorded to other (income) expense, net, which was primarily attributable to a fourth quarter settlement of a commercial lawsuit, in addition to some currency translation losses. For fiscal 2015, we recorded
$2.7 million
of expense to other (income) expense, net, which was attributable to the demolition and cleanup efforts at our New Orleans, Louisiana and Goodyear, Arizona galvanizing facilities, following fires at the two facilities.
Provision For Income Taxes
The provision for income taxes reflected an effective tax rate of
26.4%
for fiscal
2016
and
27.9%
for fiscal 2015. The Company's tax rate is affected by recurring items, such as tax rates in foreign jurisdictions and the relative amounts of income we earn in those jurisdictions. It is also affected by discrete items that may occur in any given year, but may not be consistent from year to year. The most significant impact on the difference between our statutory U.S. federal income tax rate of 35.0% and our effective tax rate is the result of certain U.S. state tax planning for the current and prior fiscal year.
Liquidity and Capital Resources
We have historically met our cash needs through a combination of cash flows from operating activities along with bank and bond market debt. Our cash requirements are generally for operating activities, cash dividend payments, capital improvements, debt repayment and acquisitions. We believe that our cash position, cash flows from operating activities and our expectation of continuing availability to draw upon our credit facilities are sufficient to meet our cash flow needs for the foreseeable future.
Net cash provided by operating activities for fiscal
2017
was
$111.2 million
compared to
$143.6 million
provided by operating activities for fiscal
2016
. The decrease in cash provided by operating activities for fiscal
2017
is attributable to a decrease in net income and by a less favorable impact of changes in working capital.
Net cash used in investing activities for fiscal
2017
was
$63.3 million
compared to net cash used in investing activities of
$99.3 million
for fiscal
2016
. The decrease in cash used during fiscal
2017
was primarily attributable to fewer acquisitions, partially offset by increased capital expenditures.
Net cash used in financing activities for fiscal
2017
was
$76.6 million
compared to net cash used in financing activities of
$25.3 million
for fiscal
2016
. The increase in cash used during fiscal
2017
was primarily attributable to increased net principal payments under our debt agreements and the purchase of 100,000 treasury shares.
We consider the undistributed earnings of our foreign subsidiaries as of fiscal year ended February 28, 2017, to be indefinitely reinvested and, accordingly, no U.S. income taxes have been provided thereon. Should the Company decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States. As of fiscal year ended February 28, 2017, the amount of cash associated with indefinitely reinvested foreign earnings was approximately $7.2 million. We have not, nor do we anticipate the need to repatriate
earnings to the United States to satisfy domestic liquidity needs arising in the ordinary course of business including liquidity needs associated with our domestic debt service requirements. However, the Company may repatriate some cash to the U.S. through settlement of inter-company loans or return of capital distributions in a tax efficient manner.
During fiscal
2017
, we spent
$64.1 million
on capital expenditures including acquisitions, net of cash. The breakdown of capital spending by segment for fiscal
2017
,
2016
and 2015 can be found in Note 13 to the Consolidated Financial Statements.
On March 27, 2013, we entered into a Credit Agreement (the “Credit Agreement”) with Bank of America and other lenders. The Credit Agreement provides for a $75.0 million term facility and a $225.0 million revolving credit facility that includes a $75.0 million “accordion” feature. The Credit Agreement is used to provide for working capital needs, capital improvements, dividends, future acquisitions and letter of credit needs.
Interest rates for borrowings under the Credit Agreement are based on either a Eurodollar Rate or a Base Rate plus a margin ranging from 1.0% to 2.0% depending on our Leverage Ratio (as defined in the Credit Agreement). The Eurodollar Rate is defined as LIBOR for a term equivalent to the borrowing term (or other similar interbank rates if LIBOR is unavailable). The Base Rate is defined as the highest of the applicable Fed Funds rate plus 0.50%, the Prime rate, or the Eurodollar Rate plus 1.0% at the time of borrowing. The Credit Agreement also carries a Commitment Fee for the unfunded portion ranging from 0.20% to 0.30% per annum, depending on our Leverage Ratio.
The $75.0 million term facility under the Credit Agreement requires quarterly principal and interest payments, which commenced on June 30, 2013 and are required to be made through March 27, 2018, the maturity date.
The Credit Agreement provides various financial covenants requiring us, among other things, to a) maintain on a consolidated basis net worth equal to at least the sum of $230.0 million, plus 50.0% of future net income, b) maintain on a consolidated basis a Leverage Ratio not to exceed 3.25:1.0, c) maintain on a consolidated basis a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of at least 1.75:1.0 and d) not to make Capital Expenditures (as defined in the Credit Agreement) on a consolidated basis in an amount in excess of $60.0 million during the fiscal year ended February 28, 2014 and $50.0 million during any subsequent year.
On August 8, 2016 we executed the First Amendment to the Credit Agreement. The changes included, among other things, amendments to covenants including removing the cap on Capital Expenditures, raising the limits on asset disposition and other secured debt, and establishing a basket for investments specifically in joint ventures. The amendment also removed limitations on dividends and on redemption of equity interest as long as the Company’s Leverage Ratio remained below 2.75:1.0.
On March 21, 2017, we executed the Amended and Restated Credit Agreement (the “2017 Credit Agreement”) with Bank of America and other lenders. The 2017 Credit Agreement amended the Credit Agreement entered into on March 27, 2013 by the following: (i) extending the maturity date until March 21, 2022, (ii) providing for a senior revolving credit facility in a principal amount of up to $450 million, with an additional $150 million accordion, (iii) including a $75 million sublimit for the issuance of standby and commercial letters of credit, (iv) including a $30 million sublimit for swing line loans, (v) restricting indebtedness incurred in respect of capital leases, synthetic lease obligations and purchase money obligations not to exceed $20 million, (vi) restricting investments in any foreign subsidiaries not to exceed $50 million in the aggregate, and (vii) including various financial covenants and certain restricted payments relating to dividends and share repurchases as specifically set forth in the 2017 Credit Agreement. The 2017 Credit Agreement will be used to finance working capital needs, capital improvements, dividends, future acquisitions and letter of credit needs.
On March 31, 2008, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) pursuant to which the Company issued $100.0 million aggregate principal amount of its 6.24% unsecured Senior Notes (the “2008 Notes”) due March 31, 2018 through a private placement (the “2008 Note Offering”). Pursuant to the Note Purchase Agreement, the Company’s payment obligations with respect to the 2008 Notes may be accelerated upon any Event of Default, as defined in the Note Purchase Agreement.
The Company entered into an additional Note Purchase Agreement on January 21, 2011 (the “2011 Agreement”), pursuant to which the Company issued $125.0 million aggregate principal amount of its 5.42% unsecured Senior Notes (the “2011 Notes”), due in January of 2021, through a private placement (the “2011 Note Offering”). Pursuant to the 2011 Agreement, the Company's payment obligations with respect to the 2011 Notes may be accelerated under certain circumstances.
The 2008 Notes and the 2011 Notes each provide for various financial covenants requiring us, among other things, to a) maintain on a consolidated basis net worth (as defined in the Note Purchase Agreement) equal to at least the sum of $116.9 million plus 50.0% of future net income; b) maintain a ratio of indebtedness to EBITDA (as defined in Note Purchase Agreement) not to exceed 3.25:1.00; c) maintain on a consolidated basis a Fixed Charge Coverage Ratio (as defined in the Note Purchase Agreement) of at
least 2.0:1.0; d) not at any time permit the aggregate amount of all Priority Indebtedness (as defined in the Note Purchase Agreement) to exceed 10.0% of Consolidated Net Worth.
As of
February 28, 2017
, the Company was in compliance with all of its debt covenants.
Historically, we have not experienced a significant impact on our operations from increases in general inflation other than for specific commodities. We have exposure to commodity price increases in both segments of our business, primarily copper, aluminum, steel and nickel based alloys in the Energy Segment and zinc and natural gas in the Galvanizing Segment. We attempt to minimize these increases through escalation clauses in customer contracts for copper, aluminum, steel and nickel based alloys, when market conditions allow and through fixed cost contract purchases on zinc. In addition to these measures, we attempt to recover other cost increases through improvements to our manufacturing process, supply chain management, and through increases in prices where competitively feasible.
Off Balance Sheet Transactions and Related Matters
There are no off-balance sheet transactions, arrangements, obligations (including contingent obligations) other than the contingent obligations as described in the contingent liability section, or other relationships of the Company with unconsolidated entities or other persons that have, or may have, a material effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.
Contractual Commitments
The following summarizes the Company’s operating leases, debt and interest payments for the next five fiscal years and thereafter:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Debt
|
|
Interest
|
|
Total
|
|
|
(In thousands)
|
2018
|
|
$
|
6,627
|
|
|
$
|
16,629
|
|
|
$
|
11,573
|
|
|
$
|
34,829
|
|
2019
|
|
5,629
|
|
|
130,661
|
|
|
8,079
|
|
|
144,369
|
|
2020
|
|
3,347
|
|
|
—
|
|
|
6,775
|
|
|
10,122
|
|
2021
|
|
2,655
|
|
|
125,000
|
|
|
6,775
|
|
|
134,430
|
|
2022
|
|
2,542
|
|
|
—
|
|
|
—
|
|
|
2,542
|
|
Thereafter
|
|
8,042
|
|
|
—
|
|
|
—
|
|
|
8,042
|
|
Total
|
|
$
|
28,842
|
|
|
$
|
272,290
|
|
|
$
|
33,202
|
|
|
$
|
334,334
|
|
Commodity pricing
We have no contracted commitments for any commodities including steel, aluminum, natural gas, nickel based alloys, copper, zinc or any other commodity, except for those entered into under the normal course of business.
Other
At
February 28, 2017
, the Company had outstanding letters of credit in the amount of
$23.1 million
. These letters of credit are issued to a portion of the Company’s customers in our Energy Segment to cover any potential warranty costs, performance issues, insurance reserves and bid bonds. In addition, as of
February 28, 2017
, a warranty reserve in the amount of
$2.1 million
has been provided to offset any future warranty claims.
The Company has been named as a defendant in certain lawsuits that arose in the normal course of business. In the opinion of management, after consulting with legal counsel, the potential liabilities, if any, resulting from these matters would not have a material effect on our financial position, results of operations or cash flow.
Critical Accounting Policies and Estimates
The preparation of the consolidated financial statements requires us to make estimates that affect the reported value of assets, liabilities, revenues and expenses. Our estimates are based on historical experience and various other factors that we believe are reasonable under the circumstances and form the basis for our conclusions. We continually evaluate the information used to make these estimates as business and economic conditions change. Accounting policies and estimates considered most critical are allowances for doubtful accounts, accruals for contingent liabilities, revenue recognition, impairment of long-lived assets, identifiable intangible assets and goodwill, accounting for income taxes, restricted stock units, performance share units and stock
appreciation rights. Actual results may differ from these estimates under different assumptions or conditions. The development and selection of the critical accounting policies and the related disclosures below have been reviewed with the Audit Committee of the Board of Directors. More information regarding significant accounting policies can be found in Note 1 to the Consolidated Financial Statements.
Allowance for Doubtful Accounts
– The carrying value of our accounts receivable is continually evaluated based on the likelihood of collection. An allowance is maintained for estimated losses resulting from our customers’ inability to make required payments. The allowance is determined by historical experience of uncollected accounts, the level of past due accounts, overall level of outstanding accounts receivable, information about specific customers with respect to their inability to make payments and future expectations of conditions that might impact the collectability of accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
Accruals for Contingent Liabilities
- The amounts we record for estimated claims, such as self-insurance programs, warranty, environmental and other contingent liabilities, requires us to make judgments regarding the amount of expenses that will ultimately be incurred. We use past history and experience and other specific circumstances surrounding these claims in evaluating the amount of liability that should be recorded. Actual results may be different than what we estimate. In connection with our acquisition of NLI on June 1, 2012, the Company had a contingent obligation to make an additional payment of up to
$20.0 million
based on the future financial performance of the NLI business. During fiscal 2015, the Company deemed this additional payment not probable or likely to occur and the accrual recorded at the end of fiscal 2014 of $9.1 million was reversed. The accrual reversal was recorded to selling, general and administrative expense. As of June 2016, the measurement period for this contingency payment has expired and no additional payment was made.
Revenue Recognition
– Revenue is recognized for the Energy Segment upon transfer of title and risk to customers, or based upon the percentage of completion method of accounting for electrical products built to customer specifications and for services under long term contracts. We typically recognize revenue for the Galvanizing Segment at completion of the service unless we specifically agree with the customer to hold its material for a predetermined period of time after the completion of the galvanizing process and, in that circumstance, we invoice and recognize revenue upon shipment. Customer advanced payments presented in the balance sheets arise from advanced payments received from our customers prior to shipment of the product and are not related to revenue recognized under the percentage of completion method. The extent of progress for revenue recognized using the percentage of completion method is measured by the ratio of contract costs incurred to date to total estimated contract costs at completion. Contract costs include direct labor and material and certain indirect costs. Selling, general and administrative costs are charged to expense as incurred. Provisions for estimated losses, if any, on uncompleted contracts are made in the period in which such losses are able to be determined. The assumptions made in determining the estimated cost could differ from actual performance resulting in a different outcome for profits or losses than anticipated.
Impairment of Long-Lived Assets, Identifiable Intangible Assets and Goodwill
– We record impairment losses on long-lived assets, including identifiable intangible assets, when events and circumstances indicate that the assets might be impaired and the undiscounted projected cash flows associated with those assets are less than the carrying amounts of those assets. In those situations, impairment losses on long-lived assets are measured based on the excess of the carrying amount over the asset’s fair value, generally determined based upon discounted estimates of future cash flows. A significant change in events, circumstances or projected cash flows could result in an impairment of long-lived assets, including identifiable intangible assets. An annual impairment test of goodwill is performed in the fourth quarter of each fiscal year. The test is calculated using the anticipated future cash flows after tax from our operating segments. Based on the present value of the future cash flows, we will determine whether impairment may exist. A significant change in projected cash flows or cost of capital for future years could result in an impairment of goodwill in future years. Variables impacting future cash flows include, but are not limited to, the level of customer demand for and response to products and services we offer to the power generation market, the electrical transmission and distribution markets, the general industrial market and the hot dip galvanizing market, changes in economic conditions of these various markets, raw material and natural gas costs and availability of experienced labor and management to implement our growth strategies. Our testing concluded that none of our goodwill was impaired.
Accounting for Income Taxes
– Our income tax expense, deferred tax assets and liabilities, and liabilities for unrecognized tax benefits reflect management’s best assessment of estimated current and future taxes to be paid. We are subject to income taxes in both the United States and numerous foreign jurisdictions. Significant judgments and estimates are required in determining the consolidated income tax expense. Deferred income taxes arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the financial statements, which will result in taxable or deductible amounts in the future.
In evaluating our ability to recover our deferred tax assets within the jurisdiction from which they arise, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax-planning strategies, and results of recent operations. In projecting future taxable income, we begin with historical results adjusted for the results of discontinued operations and incorporate assumptions about the amount of future state, federal, and foreign pretax
operating income adjusted for items that do not have tax consequences. The assumptions about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying businesses. Deferred tax assets are reduced by a valuation allowance if it is more likely than not that some portion or all of the deferred tax asset will not be realized.
The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across our global operations. Generally accepted accounting principles in the United States of America ("GAAP") states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. We may (1) record unrecognized tax benefits as liabilities in accordance with GAAP and (2) adjust these liabilities when our judgment changes as a result of the evaluation of new information not previously available. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from our current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information is available.
We currently do not record unrecognized tax benefits related to U.S. federal, state or, foreign tax exposure. We continue to review our tax exposure for any significant need to record unrecognized tax benefits in the future.
We consider the earnings of certain non-U.S. subsidiaries to be indefinitely invested outside the United States on the basis of estimates that future domestic cash generation will be sufficient to meet future domestic cash needs and our specific plans for reinvestment of those subsidiary earnings. We have not recorded a deferred tax liability related to the U.S. federal and state income taxes and foreign withholding taxes on approximately $24.8 million of undistributed earnings of foreign subsidiaries indefinitely invested outside the United States. If we decide to repatriate the foreign earnings, we would need to adjust our income tax provision in the period we determined that the earnings will no longer be indefinitely invested outside the United States.
Restricted Stock Units, Performance Share Units and Stock Appreciation Rights
– Our employees and directors are periodically granted restricted stock units, performance share units, and stock appreciation rights by the Compensation Committee of the Board of Directors. The compensation cost of all employee stock-based compensation awards is measured based on the grant-date fair value of those awards and that cost is recorded as compensation expense over the period during which the employee is required to perform service in exchange for the award (generally over the vesting period of the award).
The valuation of stock appreciation rights awards is complex in that there are a number of variables included in the calculation of the value of the award:
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•
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Volatility of our stock price
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•
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Expected term of the stock appreciation rights
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•
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Expected dividend yield
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•
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Risk-free interest rate over the expected term
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These variables are developed using a combination of our internal data with respect to stock price volatility and exercise behavior of award holders and information from outside sources. The development of each of these variables requires a significant amount of judgment. Changes in the values of the above variables would result in different valuations and, therefore, different amounts of compensation cost.
We have elected to use a Black-Scholes pricing model in the valuation of our stock appreciation rights. Restricted stock units and performance share units are valued at the stock price on the date of grant.
Item 8. Consolidated Financial Statements and Supplementary Data.
Index to Consolidated Financial Statements and Schedules
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Page
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1.
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2.
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Consolidated Financial Statement Schedule
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
AZZ Inc.
Fort Worth, Texas
We have audited the accompanying consolidated balance sheets of AZZ Inc. as of February 28, 2017 and February 29, 2016 and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended February 28, 2017. Our audits also included the financial statement schedule listed in Item 15 of this Form 10-K. We have also audited AZZ Inc.’s internal control over financial reporting as of February 28, 2017, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). AZZ Inc.’s management is responsible for these financial statements, financial statement schedule, maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on these financial statements, financial statement schedule and to express an opinion on the company’s internal control over financial reporting based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements and the schedule are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of AZZ Inc. as of February 28, 2017 and February 29, 2016 and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2017, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, AZZ Inc. maintained, in all material respects, effective internal control over financial reporting as of February 28, 2017, based on the COSO criteria.
Also in our opinion, the financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As indicated in the accompanying Management’s Report on Internal Control over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of Power Electronics, Inc. (PEI), whose acquisition was completed on March 1, 2016. PEI is included in the consolidated balance sheet of AZZ Inc. as of February 28, 2017 and the related consolidated statements of income and comprehensive income, shareholders’ equity, and cash flows for the year then ended. PEI constituted approximately 1.8% of the Company’s total assets as of February 28, 2017 and 4.0% and 8.3% of revenues and net income, respectively, for the year then ended. Management did not assess the effectiveness of internal control over financial reporting of PEI because of the timing of the acquisition. Our audit of internal control over financial reporting of AZZ Inc. also did not include an evaluation of the internal control over financial reporting of PEI.
/s/ BDO USA, LLP
Dallas, Texas
April 20, 2017
AZZ Inc.
CONSOLIDATED STATEMENTS OF INCOME
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Year Ended
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February 28, 2017
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February 29, 2016
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February 28, 2015
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(In thousands, except per share data)
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Net Sales
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$
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858,930
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$
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903,192
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$
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816,687
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Cost of Sales
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654,146
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673,081
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610,991
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Gross Profit
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204,784
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230,111
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205,696
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Selling, General and Administrative
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106,424
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107,823
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98,871
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Operating Income
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98,360
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122,288
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106,825
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Interest Expense
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14,732
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15,155
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16,561
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Net (Gain) Loss On Sale of Property, Plant and Equipment, and Insurance Proceeds
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76
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(327
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)
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(2,525
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)
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Other Expense (Income) - net
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(1,197
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)
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3,092
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2,659
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Income Before Income Taxes
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84,749
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104,368
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90,130
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Income Tax Expense
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23,828
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27,578
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25,187
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Net Income
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$
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60,921
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$
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76,790
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$
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64,943
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Earnings Per Common Share
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Basic Earnings Per Share
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$
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2.35
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$
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2.98
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$
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2.53
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Diluted Earnings Per Share
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$
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2.33
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$
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2.96
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$
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2.52
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Weighted Average Shares Outstanding
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Basic
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25,965
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25,800
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25,676
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Diluted
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26,097
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25,937
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25,778
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The accompanying notes are an integral part of the consolidated financial statements.
AZZ Inc.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
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Year Ended
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February 28, 2017
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February 29, 2016
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February 28, 2015
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(In thousands)
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Net Income
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$
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60,921
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$
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76,790
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$
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64,943
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Other Comprehensive Loss:
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Foreign Currency Translation Adjustments -
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Unrealized Translation Gains (Losses)
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1,520
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(7,674
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(11,760
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)
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Interest Rate Swap, Net of Income Tax of $29, $29 and $29, respectively.
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(54
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)
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(54
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)
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(54
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)
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Other Comprehensive Income (Loss)
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1,466
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(7,728
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)
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(11,814
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)
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Comprehensive Income
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$
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62,387
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$
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69,062
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$
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53,129
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The accompanying notes are an integral part of the consolidated financial statements.
AZZ Inc.
CONSOLIDATED BALANCE SHEETS
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February 28, 2017
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February 29, 2016
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Assets
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(In thousands, except per share data)
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Current assets:
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Cash and cash equivalents
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$
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11,302
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$
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40,191
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Accounts receivable, net of allowance for doubtful accounts of $347 and $264 in 2017 and 2016, respectively
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138,470
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131,416
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Inventories - net
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123,208
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102,135
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Costs and estimated earnings in excess of billings on uncompleted contracts
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20,546
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32,287
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Deferred income tax assets
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249
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200
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|
Prepaid expenses and other
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2,762
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|
3,105
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Total current assets
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296,537
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309,334
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Property, plant, and equipment, net
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228,610
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226,333
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Goodwill
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306,579
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292,527
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Intangibles and other assets
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146,113
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153,816
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$
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977,839
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$
|
982,010
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Liabilities and Shareholders’ Equity
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Current liabilities:
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Accounts payable
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$
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49,816
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$
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46,748
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Income tax payable
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|
778
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2,697
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Accrued salaries and wages
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23,429
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30,473
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Other accrued liabilities
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18,390
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|
|
20,406
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Customer advance payment
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20,860
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15,652
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Billings in excess of costs and estimated earnings on uncompleted contracts
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11,948
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|
|
9,237
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Debt due within one year
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16,629
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|
|
23,192
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|
Total current liabilities
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|
141,850
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148,405
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|
Debt due after one year, net
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254,800
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|
302,429
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Deferred income tax liabilities
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|
51,550
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|
|
49,960
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|
Total liabilities
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448,200
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500,794
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Commitments and Contingencies
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|
|
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Shareholders’ equity:
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|
|
|
Common Stock, $1.00 par value; 100,000 shares authorized; 25,964 shares issued and outstanding at February 28, 2017 and 25,874 at February 29, 2016
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25,964
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|
|
25,874
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Capital in excess of par value
|
|
37,739
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|
|
35,148
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|
Retained earnings
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495,030
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450,754
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Accumulated other comprehensive loss
|
|
(29,094
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)
|
|
(30,560
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)
|
Total shareholders’ equity
|
|
529,639
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|
|
481,216
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|
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$
|
977,839
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|
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$
|
982,010
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|
The accompanying notes are an integral part of the consolidated financial statements.
AZZ Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS
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|
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|
|
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|
|
|
Year Ended
|
|
|
February 28, 2017
|
|
February 29, 2016
|
|
February 28, 2015
|
|
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(In thousands)
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Cash flows from operating activities:
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|
|
|
|
|
|
Net income
|
|
$
|
60,921
|
|
|
$
|
76,790
|
|
|
$
|
64,943
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
Depreciation and amortization
|
|
50,357
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|
|
47,417
|
|
|
46,089
|
|
Deferred income taxes
|
|
1,509
|
|
|
2,707
|
|
|
15,818
|
|
Net loss on disposition of property, plant & equipment due to realignment
|
|
6,602
|
|
|
286
|
|
|
2,651
|
|
Net (gain) loss on sale of property, plant & equipment and insurance proceeds
|
|
76
|
|
|
(327
|
)
|
|
(2,525
|
)
|
Share-based compensation expense
|
|
5,870
|
|
|
4,538
|
|
|
4,080
|
|
Amortization of deferred debt issuance costs
|
|
1,262
|
|
|
1,347
|
|
|
1,431
|
|
Provision for doubtful accounts
|
|
48
|
|
|
(1,072
|
)
|
|
458
|
|
Effects of changes in operating assets and liabilities, net of acquisitions:
|
|
|
|
|
|
|
Accounts receivable
|
|
(4,912
|
)
|
|
(843
|
)
|
|
(9,382
|
)
|
Inventories
|
|
(17,951
|
)
|
|
11,124
|
|
|
(879
|
)
|
Prepaid expenses and other assets
|
|
(1,977
|
)
|
|
1,996
|
|
|
5,543
|
|
Net change in billings related to costs and estimated earnings on uncompleted contracts
|
|
14,509
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|
|
5,739
|
|
|
(5,635
|
)
|
Accounts payable
|
|
1,245
|
|
|
(2,236
|
)
|
|
11,025
|
|
Other accrued liabilities and income taxes payable
|
|
(6,383
|
)
|
|
(3,877
|
)
|
|
(15,460
|
)
|
Net cash provided by operating activities:
|
|
111,176
|
|
|
143,589
|
|
|
118,157
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
Proceeds from the sale or insurance settlement of property, plant, and equipment
|
|
769
|
|
|
1,137
|
|
|
1,330
|
|
Acquisition of subsidiaries, net of cash acquired
|
|
(22,679
|
)
|
|
(60,584
|
)
|
|
(11,518
|
)
|
Purchases of property, plant and equipment
|
|
(41,434
|
)
|
|
(39,861
|
)
|
|
(29,377
|
)
|
Net cash used in investing activities:
|
|
(63,344
|
)
|
|
(99,308
|
)
|
|
(39,565
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
Excess tax benefits from share-based compensation
|
|
—
|
|
|
1,025
|
|
|
259
|
|
Proceeds from revolving loan
|
|
179,500
|
|
|
181,481
|
|
|
10,977
|
|
Payments on revolving loan
|
|
(211,000
|
)
|
|
(170,561
|
)
|
|
(57,905
|
)
|
Payments on long-term debt
|
|
(23,192
|
)
|
|
(21,786
|
)
|
|
(20,848
|
)
|
Purchases of treasury shares
|
|
(5,282
|
)
|
|
—
|
|
|
—
|
|
Payment of dividends
|
|
(16,645
|
)
|
|
(15,482
|
)
|
|
(14,897
|
)
|
Net cash used in financing activities:
|
|
(76,619
|
)
|
|
(25,323
|
)
|
|
(82,414
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
|
(102
|
)
|
|
(1,294
|
)
|
|
(1,216
|
)
|
Net change in cash and cash equivalents
|
|
(28,889
|
)
|
|
17,664
|
|
|
(5,038
|
)
|
Cash and cash equivalents, beginning of year
|
|
40,191
|
|
|
22,527
|
|
|
27,565
|
|
Cash and cash equivalents, end of year
|
|
$
|
11,302
|
|
|
$
|
40,191
|
|
|
$
|
22,527
|
|
Supplemental disclosures of cash flow information:
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
13,780
|
|
|
$
|
14,228
|
|
|
$
|
15,613
|
|
Cash paid for income taxes
|
|
$
|
19,857
|
|
|
$
|
21,574
|
|
|
$
|
15,264
|
|
The accompanying notes are an integral part of the consolidated financial statements.
AZZ Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Capital in
excess of par
value
|
|
Retained
earnings
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
|
|
|
Shares
|
|
Amount
|
|
|
|
(In thousands)
|
Balance at February 28, 2014
|
|
25,577
|
|
|
$
|
25,577
|
|
|
$
|
21,954
|
|
|
$
|
339,400
|
|
|
$
|
(11,018
|
)
|
|
$
|
375,913
|
|
Stock compensation
|
|
16
|
|
|
16
|
|
|
4,064
|
|
|
—
|
|
|
—
|
|
|
4,080
|
|
Restricted Stock Units
|
|
21
|
|
|
21
|
|
|
(497
|
)
|
|
—
|
|
|
—
|
|
|
(476
|
)
|
Stock issued for SARs
|
|
40
|
|
|
40
|
|
|
(371
|
)
|
|
—
|
|
|
—
|
|
|
(331
|
)
|
Employee Stock Purchase Plan
|
|
78
|
|
|
78
|
|
|
2,297
|
|
|
—
|
|
|
—
|
|
|
2,375
|
|
Excess tax benefits from
share-based compensation
|
|
—
|
|
|
—
|
|
|
259
|
|
|
—
|
|
|
—
|
|
|
259
|
|
Cash dividend paid
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14,897
|
)
|
|
—
|
|
|
(14,897
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
64,943
|
|
|
—
|
|
|
64,943
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11,760
|
)
|
|
(11,760
|
)
|
Interest rate swap, net of $29 of income tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(54
|
)
|
|
(54
|
)
|
Balance at February 28, 2015
|
|
25,732
|
|
|
$
|
25,732
|
|
|
$
|
27,706
|
|
|
$
|
389,446
|
|
|
$
|
(22,832
|
)
|
|
$
|
420,052
|
|
Stock compensation
|
|
15
|
|
|
15
|
|
|
4,523
|
|
|
—
|
|
|
—
|
|
|
4,538
|
|
Restricted Stock Units
|
|
17
|
|
|
17
|
|
|
(390
|
)
|
|
—
|
|
|
—
|
|
|
(373
|
)
|
Stock issued for SARs
|
|
41
|
|
|
41
|
|
|
(132
|
)
|
|
—
|
|
|
—
|
|
|
(91
|
)
|
Employee Stock Purchase Plan
|
|
69
|
|
|
69
|
|
|
2,416
|
|
|
—
|
|
|
—
|
|
|
2,485
|
|
Excess tax benefits from
share-based compensation
|
|
—
|
|
|
—
|
|
|
1,025
|
|
|
—
|
|
|
—
|
|
|
1,025
|
|
Cash dividend paid
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15,482
|
)
|
|
—
|
|
|
(15,482
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
76,790
|
|
|
—
|
|
|
76,790
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(7,674
|
)
|
|
(7,674
|
)
|
Interest rate swap, net of $29 of income tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(54
|
)
|
|
(54
|
)
|
Balance at February 29, 2016
|
|
25,874
|
|
|
$
|
25,874
|
|
|
$
|
35,148
|
|
|
$
|
450,754
|
|
|
$
|
(30,560
|
)
|
|
$
|
481,216
|
|
Stock compensation
|
|
13
|
|
|
13
|
|
|
5,857
|
|
|
—
|
|
|
—
|
|
|
5,870
|
|
Restricted Stock Units
|
|
25
|
|
|
25
|
|
|
(605
|
)
|
|
—
|
|
|
—
|
|
|
(580
|
)
|
Stock issued for SARs
|
|
81
|
|
|
81
|
|
|
(322
|
)
|
|
—
|
|
|
—
|
|
|
(241
|
)
|
Employee Stock Purchase Plan
|
|
71
|
|
|
71
|
|
|
2,843
|
|
|
—
|
|
|
—
|
|
|
2,914
|
|
Retirement of treasury shares
|
|
(100
|
)
|
|
(100
|
)
|
|
(5,182
|
)
|
|
—
|
|
|
—
|
|
|
(5,282
|
)
|
Cash dividend paid
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(16,645
|
)
|
|
—
|
|
|
(16,645
|
)
|
Net income
|
|
—
|
|
|
—
|
|
|
—
|
|
|
60,921
|
|
|
—
|
|
|
60,921
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1,520
|
|
|
1,520
|
|
Interest rate swap, net of $29 of income tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(54
|
)
|
|
(54
|
)
|
Balance at February 28, 2017
|
|
25,964
|
|
|
$
|
25,964
|
|
|
$
|
37,739
|
|
|
$
|
495,030
|
|
|
$
|
(29,094
|
)
|
|
$
|
529,639
|
|
The accompanying notes are an integral part of the consolidated financial statements.
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of significant accounting policies
Organization
-AZZ Inc. (the “Company” “AZZ” or “We”) operates primarily in the United States of America and Canada and has recently begun operating in China, Brazil, Poland and the Netherlands. Information about the Company's operations by segment is included in Note 13 to the consolidated financial statements.
Basis of consolidation
—The consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of estimates
—The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of credit risk
—Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable.
The Company maintains cash and cash equivalents with various financial institutions. These financial institutions are located throughout the United States and Canada, as well as Europe, China and Brazil. The Company's policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company's banking relationships and has not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk related to cash and cash equivalents.
Concentrations of credit risk with respect to trade accounts receivable are limited due to the Company’s diversity by virtue of
two
operating segments, the number of customers, and the absence of a concentration of trade accounts receivable in a small number of customers. The Company performs continuous evaluations of the collectability of trade accounts receivable and allowance for doubtful accounts based upon historical losses, economic conditions and customer specific events. After all collection efforts are exhausted and an account is deemed uncollectible, it is written off against the allowance for doubtful accounts. Collateral is usually not required from customers as a condition of sale.
Revenue recognition
—The Company recognizes revenue for the Energy Segment upon transfer of title and risk to customer or based upon the percentage of completion method of accounting for electrical products built to customer specifications and services under long-term contracts. We typically recognize revenue for the Galvanizing Segment at completion of the service unless we specifically agree with the customer to hold its material for a predetermined period of time after the completion of the galvanizing process and, in that circumstance, we invoice and recognize revenue upon shipment. Customer advanced payments presented in the balance sheets arise from advanced payments received from our customers prior to shipment of the product and are not related to revenue recognized under the percentage of completion method. The extent of progress for revenue recognized using the percentage of completion method is measured by the ratio of contract costs incurred to date to total estimated contract costs at completion. Contract costs include direct labor and material and certain indirect costs. Selling, general and administrative costs are charged to expense as incurred.
Provisions for estimated losses, if any, on uncompleted contracts are made in the period in which such losses are able to be determined. The assumptions made in determining the estimated cost could differ from actual performance resulting in a different outcome for profits or losses than anticipated.
Cash and cash equivalents
—The Company considers cash and cash equivalents to include cash on hand, deposits with banks and all highly liquid investments with an original maturity of three months or less.
Inventories
—Cost is determined principally using a weighted-average method for the Energy Segment and the first-in-first-out (FIFO) method for the Galvanizing Segment.
Property, plant and equipment
—For financial reporting purposes, depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
Buildings and structures
|
10-25 years
|
Machinery and equipment
|
3-15 years
|
Furniture and fixtures
|
3-15 years
|
Automotive equipment
|
3 years
|
Computers and software
|
3 years
|
Maintenance and repairs are charged to expense as incurred; renewals and betterments that significantly extend the useful life of the asset are capitalized.
Long-lived assets, intangible assets and goodwill
—Purchased intangible assets included on the balance sheets are comprised of customer lists, backlogs, engineering drawings and non-compete agreements. Such intangible assets are being amortized using the straight-line method over the estimated useful lives of the assets ranging from
two
to
nineteen
years. The Company records impairment losses on long-lived assets, including identifiable intangible assets, when events and circumstances indicate that the assets might be impaired and the undiscounted projected cash flows associated with those assets are less than their carrying amount. In those situations, impairment loss on a long-lived asset is measured based on the excess of the carrying amount of the asset over the asset’s fair value. For goodwill, the Company performs an annual impairment test on December 31st of each year or as indicators are present. The test is calculated using the anticipated future cash flows after tax from our operating segments, which includes the impact of our corporate related expenses. Based on the present value of the future cash flows, we determine whether impairment may exist. A significant change in projected cash flows or cost of capital for future years could result in an impairment of goodwill in future years. Variables impacting future cash flows include, but are not limited to, the level of customer demand for and response to products and services we offer to the power generation market, the electrical transmission and distribution markets, the general industrial market and the hot dip galvanizing market; changes in economic conditions of these various markets; raw material and natural gas costs and availability of experienced labor and management to implement our growth strategies. As of February 28, 2017, no impairment of long-lived assets, intangible assets or goodwill was determined.
Debt issuance costs
—Debt issue costs related to the revolver are included in other assets and are amortized using the effective interest rate method over the term of the debt. Debt issue costs related to debt other than the revolver are netted with total debt due after on year and are amortized using the effective interest rate method over the term of the debt.
Income taxes
—We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
We recognize deferred tax assets to the extent that we believe these assets are more likely than not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations. If we determine that we would be able to realize our deferred tax assets in the future in excess of their net recorded amount, we would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
As applicable, we record uncertain tax positions in accordance with GAAP on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. We currently do not have any unrecognized tax benefits to record related to U.S. federal, state or, foreign tax exposure. We continue to review our tax exposure for any significant need to record unrecognized tax benefits in the future.
The Company is subject to taxation in the U.S. and various state, provincial and local and foreign jurisdictions. With few exceptions, as of fiscal 2017, the Company is no longer subject to U.S. federal or state examinations by tax authorities for years before fiscal 2014.
Share-based compensation
—The Company has granted restricted stock units awards, performance share units and stock appreciation rights for a fixed number of shares to employees and directors. A discussion of share-based compensation can be found in Note 11 to the Consolidated Financial Statements.
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Financial instruments
—Fair value is an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Hierarchy Levels 1, 2, or 3 are terms for the priority of inputs to valuation techniques used to measure fair value. Hierarchy Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Hierarchy Level 2 inputs are inputs other than quoted prices included with Level 1 that are directly or indirectly observable for the asset or liability. Hierarchy Level 3 inputs are inputs that are not observable in the market.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivable, accounts payable, accrued expenses and debt. Our financial instruments are presented at fair value in our consolidated balance sheets, with the exception of our outstanding Senior Notes. For fiscal
2017
and
2016
the fair value of our senior outstanding notes, as described in Note 12 to the Consolidated Financial Statements, was approximately
$144.4 million
and
$154.7 million
, respectively. These fair values were determined using the discounted cash flow at the market rate as well as the applicable market interest rates classified as Level 2 inputs. During fiscal
2017
a principal payment was made in the amount of
$14.3 million
related to the
$100.0 million
unsecured Senior Notes due March 31, 2018, which accounts for a portion of the decrease in fair value for the compared periods partially offset by increased market interest rates.
Derivative financial instruments
—From time to time, the Company uses derivatives to manage interest rate risk. The Company’s policy is to use derivatives for risk management purposes only, which includes maintaining the ratio between the Company’s fixed and floating rate debt obligations that management deems appropriate, and prohibits entering into such contracts for trading purposes. The Company enters into derivatives only with counterparties (primarily financial institutions) which have substantial financial wherewithal to minimize credit risk. As the result of the recent global financial crisis, a number of financial institutions have failed or required government assistance, and counterparties considered substantial may develop credit risk. The amount of gains or losses from the use of derivative financial instruments has not been and is not expected to be material to the Company’s consolidated financial statements. As of
February 28, 2017
, the Company had no derivative financial instruments.
Warranty reserves
—Within other accrued liabilities, a reserve has been established to provide for the estimated future cost of warranties on a portion of the Company’s delivered products. Management periodically reviews the reserves, and adjustments are made accordingly. A provision for warranty on products is made on the basis of the Company’s historical experience and identified warranty issues. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship.
The following is a roll-forward of amounts accrued for warranties (in thousands):
|
|
|
|
|
Balance at February 28, 2014
|
$
|
1,338
|
|
Warranty costs incurred
|
(1,294
|
)
|
Additions charged to income
|
2,243
|
|
Balance at February 28, 2015
|
$
|
2,287
|
|
Warranty costs incurred
|
(2,570
|
)
|
Additions charged to income
|
3,198
|
|
Balance at February 29, 2016
|
$
|
2,915
|
|
Warranty costs incurred
|
(1,947
|
)
|
Additions charged to income
|
1,130
|
|
Balance at February 28, 2017
|
$
|
2,098
|
|
Accumulated Other Comprehensive Income (Loss)
—Accumulated Other Comprehensive Income (Loss) includes foreign currency translation adjustments from our foreign subsidiaries.
Foreign Currency Translation
—The local currency is the functional currency for the Company’s foreign operations. Related assets and liabilities are translated into United States dollars at exchange rates existing at the balance sheet date, and revenues and expenses are translated at weighted-average exchange rates. The foreign currency translation adjustment is recorded as a separate component of shareholders’ equity and is included in accumulated other comprehensive income (loss).
Accruals for Contingent Liabilities
— The amounts we record for estimated claims, such as self-insurance programs, warranty, environmental and other contingent liabilities, requires us to make judgments regarding the amount of expenses that will ultimately be incurred. We use past history and experience and other specific circumstances surrounding these claims in evaluating the amount of liability that should be recorded. Actual results may be different than what we estimate. In connection with our acquisition of NLI on June 1, 2012, the Company had a contingent obligation to make an additional payment of up to
$20.0 million
based on
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
the future financial performance of the NLI business. During fiscal 2015, the Company deemed this additional payment not probable or likely to occur and the accrual recorded at the end of fiscal 2014 of $9.1 million was reversed. The accrual reversal was recorded to selling, general and administrative expense. As of June 2016, the measurement period for this contingency payment has expired and no additional payment was made.
Accounting Standards Recently Adopted
In March 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” The amendment in this ASU affects all organizations that issue share-based payment awards to employees and is intended to simplify several aspects of the accounting for these awards, including income tax consequences, classification of awards as either equity or liabilities, classification on the statement of cash flows, and allowing an accounting policy election to account for forfeitures as they occur. As permitted by ASU 2016-09, the Company elected to early adopt ASU 2016-09 in the quarter ended August 31, 2016 with an effective date of March 1, 2016. As a result of the adoption, a tax benefit of $1.3 million was recorded in the quarter ended August 31, 2016. The tax benefit was driven primarily by the exercise, during the first six months of fiscal 2017, of share-based awards issued prior to fiscal 2014. The adoption was on a prospective basis and therefore had no impact on prior years.
In April 2015, the FASB issued ASU 2015-03, "Interest-Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs." ASU 2015-03 requires that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. Previously, debt issuance costs were recognized as deferred charges and recorded as other assets. In August 2015, the FASB issued ASU 2015-15, "Interest-Imputation of Interest (Subtopic 835-30): Presentation and Subsequent Measurement of Debt Issuance Costs Associated with Line-of-Credit Arrangements." ASU 2015-15 allows an entity to defer and present debt issuance costs as an asset and subsequently amortize the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement. The guidance is effective for annual and interim periods beginning after December 15, 2015 with early adoption permitted and is to be implemented retrospectively.
Effective March 1, 2016, we adopted these standards which required the retroactive application and represented a change in accounting principle. The unamortized debt issuance costs of approximately $1.4 million associated with a portion of our outstanding debt, which were previously presented as a component of intangibles and other assets on the consolidated balance sheets, are reflected as a reduction to the carrying liability of our outstanding debt. Debt issuance costs associated with our revolving line of credit remain classified in intangibles and other assets and continue to be charged to interest expense over the term of the agreement. As a result of this change in accounting principal, the consolidated balance sheet as of February 29, 2016 was adjusted as follows:
|
|
|
|
|
|
|
|
|
|
|
|
February 29, 2016
|
|
Previously Reported
|
Effect of Adoption of Accounting Principle
|
As Adjusted
|
|
(in thousands)
|
Assets:
|
|
|
|
Intangibles and other assets
|
$
|
155,177
|
|
$
|
(1,361
|
)
|
$
|
153,816
|
|
Total assets
|
$
|
983,371
|
|
$
|
(1,361
|
)
|
$
|
982,010
|
|
|
|
|
|
Liabilities:
|
|
|
|
Debt due after one year
|
$
|
303,790
|
|
$
|
(1,361
|
)
|
$
|
302,429
|
|
Total liabilities
|
$
|
502,155
|
|
$
|
(1,361
|
)
|
$
|
500,794
|
|
New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases." The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing a right to use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", issued as a new Topic, Accounting Standards Codification (ASC) Topic 606 ("ASU 2014-09"). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The premise of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. On April 1, 2015, the FASB decided to defer the effective date of the new revenue standard by one year. As a result, public entities would apply the new revenue standard to annual reporting periods beginning after December 15, 2017. This standard will be effective for the Company beginning in fiscal 2019. The Company is planning on adopting this standard retrospectively. We believe this standard will impact the current accounting for contracts accounted for under the percentage of completion method of revenue recognition, however the overall impact to the prior year financial results is still under review.
2. Inventories
Inventories (net) consisted of the following at February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Raw materials
|
|
$
|
80,169
|
|
|
$
|
66,548
|
|
Work-in-process
|
|
36,033
|
|
|
28,539
|
|
Finished goods
|
|
7,006
|
|
|
7,048
|
|
|
|
$
|
123,208
|
|
|
$
|
102,135
|
|
3. Property, Plant, and Equipment
Property, plant and equipment consisted of the following at February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Land
|
|
$
|
22,360
|
|
|
$
|
21,265
|
|
Building and structures
|
|
139,627
|
|
|
141,370
|
|
Machinery and equipment
|
|
228,246
|
|
|
215,796
|
|
Furniture, fixtures, software and computers
|
|
25,593
|
|
|
22,237
|
|
Automotive equipment
|
|
2,998
|
|
|
3,206
|
|
Construction in progress
|
|
23,669
|
|
|
12,827
|
|
|
|
442,493
|
|
|
416,701
|
|
Less accumulated depreciation
|
|
(213,883
|
)
|
|
(190,368
|
)
|
Net property, plant, and equipment
|
|
$
|
228,610
|
|
|
$
|
226,333
|
|
Depreciation expense was
$33.4 million
,
$31.2 million
, and
$28.1 million
for fiscal 2017, 2016, and 2015, respectively.
4. Costs and estimated earnings on uncompleted contracts
Costs and estimated earnings on uncompleted contracts consisted of the following at February 28, 2017 and February 29, 2016:
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Costs incurred on uncompleted contracts
|
|
$
|
98,123
|
|
|
$
|
164,809
|
|
Estimated earnings
|
|
53,598
|
|
|
79,171
|
|
|
|
151,721
|
|
|
243,980
|
|
Less billings to date
|
|
143,123
|
|
|
220,930
|
|
|
|
$
|
8,598
|
|
|
$
|
23,050
|
|
The amounts noted above are included in the accompanying consolidated balance sheets under the following captions:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Cost and estimated earnings in excess of billings on uncompleted contracts
|
|
$
|
20,546
|
|
|
$
|
32,287
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
(11,948
|
)
|
|
(9,237
|
)
|
|
|
$
|
8,598
|
|
|
$
|
23,050
|
|
5. Other accrued liabilities
Other accrued liabilities consisted of the following at February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Accrued interest
|
|
$
|
2,036
|
|
|
$
|
2,356
|
|
Tenant improvements
|
|
278
|
|
|
507
|
|
Accrued warranty
|
|
2,098
|
|
|
2,915
|
|
Commissions
|
|
2,483
|
|
|
2,685
|
|
Personnel expenses
|
|
8,251
|
|
|
8,456
|
|
Group medical insurance
|
|
1,969
|
|
|
1,699
|
|
Other
|
|
1,275
|
|
|
1,788
|
|
|
|
$
|
18,390
|
|
|
$
|
20,406
|
|
As part of AZZ's ongoing efforts to optimize cost and effectiveness, during fiscal 2017, the Company undertook a review of its operations in order to optimize financial performance of its operating assets. As a result, the Company recognized
$8.0 million
of realignment charges in the second quarter of fiscal 2017. A total of
$6.7 million
was included in Cost of Sales for the disposition and write off of certain fixed assets within the Galvanizing Segment, including the cost of closing two plants, the write off of certain assets related to the conversion of a third plant from a standard galvanizing plant to a galvanized rebar plant, and the cost of writing off certain other functionally obsolete assets across other galvanizing plants during the second quarter. We also reserved
$1.3 million
in Selling, General and Administrative Expense for realignment costs related to one-time employee severance associated with changes needed to improve management efficiency in the Energy and Galvanizing Segments.
During fiscal 2016, the Company reviewed its available capacity within the Energy segment and recorded additional realignment costs related to severance associated with consolidating capacity at various facilities. Additionally we reserved for the disposition and write off of certain fixed assets in connection with the capacity consolidation. The total cost related to the capacity consolidation is estimated to be
$0.9 million
. A total of
$0.2 million
of one-time severance costs and
$0.2 million
of costs for the disposition of certain fixed assets are included in Selling, General and Administrative Expenses. A total of
$0.2 million
of one-time severance costs and
$0.3 million
of costs for the disposition of certain fixed assets are included in Cost of Sales.
The following table shows changes in the realignment accrual for the year ended February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
(in thousands)
|
Realignment cost accrued
|
$
|
61
|
|
|
$
|
456
|
|
Additions to reserve
|
1,260
|
|
|
437
|
|
Realignment costs utilized
|
(1,014
|
)
|
|
(832
|
)
|
|
$
|
307
|
|
|
$
|
61
|
|
7. Employee benefit plans
The Company has historically had a profit sharing plan and 401(k) match plan covering substantially all of its employees. Under the provisions of the plan, the Company contributes amounts as authorized by the Board of Directors. Total contributions to the profit sharing plan and the Company’s 401(k) match plan, were
$4.5
million,
$4.9
million, and
$10.0
million for fiscal 2017, 2016, and 2015, respectively. As of March 1, 2015, the Company discontinued its profit sharing plan for its employees and implemented a new employee bonus program as a short-term incentive for performance. The accrual for the new employee bonus plan is presented in Accrued Salaries and Wages on the balance sheet for reporting periods subsequent to March 1, 2015.
8. Income taxes
The provision for income taxes consists of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
2016
|
2015
|
|
|
(in thousands)
|
Income before income taxes:
|
|
|
|
Domestic
|
$
|
74,424
|
|
$
|
95,554
|
|
$
|
76,434
|
|
Foreign
|
10,325
|
|
8,814
|
|
13,696
|
|
Income before income taxes
|
$
|
84,749
|
|
$
|
104,368
|
|
$
|
90,130
|
|
Current provision (benefit):
|
|
|
|
|
Federal
|
$
|
23,282
|
|
$
|
28,099
|
|
$
|
3,770
|
|
|
Foreign
|
2,751
|
|
2,706
|
|
3,025
|
|
|
State and Local
|
(696
|
)
|
(337
|
)
|
2,575
|
|
Total current provision for income taxes
|
$
|
25,337
|
|
$
|
30,468
|
|
$
|
9,370
|
|
Deferred provision (benefit):
|
|
|
|
|
Federal
|
$
|
(2,691
|
)
|
$
|
(5,813
|
)
|
$
|
15,455
|
|
|
Foreign
|
189
|
|
(123
|
)
|
(858
|
)
|
|
State and Local
|
993
|
|
3,046
|
|
1,220
|
|
Total deferred provision (benefit) for income taxes
|
$
|
(1,509
|
)
|
$
|
(2,890
|
)
|
$
|
15,817
|
|
Total provision for income taxes
|
$
|
23,828
|
|
$
|
27,578
|
|
$
|
25,187
|
|
A reconciliation from the federal statutory income tax rate to the effective income tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Statutory federal income tax rate
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Permanent differences
|
|
0.7
|
|
|
0.4
|
|
|
0.6
|
|
State income taxes, net of federal income tax benefit
|
|
0.4
|
|
|
(1.5
|
)
|
|
2.7
|
|
Benefit of Section 199 of the Code, manufacturing deduction
|
|
(2.3
|
)
|
|
(2.7
|
)
|
|
(2.4
|
)
|
Valuation allowance
|
|
—
|
|
|
(1.2
|
)
|
|
(3.4
|
)
|
Stock compensation
|
|
(1.8
|
)
|
|
—
|
|
|
—
|
|
Tax credits
|
|
(3.1
|
)
|
|
(3.2
|
)
|
|
(3.4
|
)
|
Foreign tax rate differential
|
|
(0.8
|
)
|
|
(0.4
|
)
|
|
(0.7
|
)
|
Other
|
|
—
|
|
|
—
|
|
|
(0.5
|
)
|
Effective income tax rate
|
|
28.1
|
%
|
|
26.4
|
%
|
|
27.9
|
%
|
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial accounting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax liability are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Deferred income tax assets:
|
|
|
|
|
Employee related items
|
|
$
|
6,839
|
|
|
$
|
5,652
|
|
Inventories
|
|
1,286
|
|
|
1,106
|
|
Accrued warranty
|
|
715
|
|
|
1,008
|
|
Accounts receivable
|
|
261
|
|
|
173
|
|
Net operating loss carry forward
|
|
4,011
|
|
|
2,903
|
|
|
|
13,112
|
|
|
10,842
|
|
Less: valuation allowance
|
|
(648
|
)
|
|
(648
|
)
|
Total deferred income tax assets
|
|
12,464
|
|
|
10,194
|
|
Deferred income tax liabilities:
|
|
|
|
|
Depreciation methods and property basis differences
|
|
(27,913
|
)
|
|
(31,008
|
)
|
Other assets and tax-deductible goodwill
|
|
(35,852
|
)
|
|
(28,946
|
)
|
Total deferred income tax liabilities
|
|
(63,765
|
)
|
|
(59,954
|
)
|
Net deferred income tax liabilities
|
|
$
|
(51,301
|
)
|
|
$
|
(49,760
|
)
|
In general, it is our practice and intention to reinvest the earnings of our non-U.S. subsidiaries in those operations. As of fiscal year end 2017, we have not made a provision for U.S. or additional foreign withholding taxes on approximately
$24.8 million
of the excess of the amount for financial reporting over the tax basis of investments in foreign subsidiaries that is indefinitely reinvested. Generally, such amounts become subject to U.S. taxation upon the remittance of dividends and under certain other circumstances. It is not practicable to estimate the amount of deferred tax liability related to investments in these foreign subsidiaries.
The following table summarizes the Net Operating Loss (NOL) Carryforward:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
$
|
4,011
|
|
|
$
|
2,903
|
|
Foreign
|
|
$
|
—
|
|
|
$
|
—
|
|
As of
February 28, 2017
, the Company had pretax state NOL carryforwards of
$55.5 million
which, if unused, will begin to expire in 2025.
As of fiscal year end 2017 and 2016, a portion of our deferred tax assets were the result of state NOL carryforwards. We believe that it is more likely than not that the benefit from certain state NOL carry forwards will not be realized. In recognition of this risk, we have provided a valuation allowance of
$0.6 million
and
$0.6 million
as of fiscal year end 2017 and 2016, respectively.
We will review this risk within the next fiscal year and may conclude that a significant portion of the valuation allowance will no longer be needed. The tax benefits related to any reversal of the valuation allowance will be recognized as a reduction of income tax expense.
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. Goodwill and intangible assets
Goodwill is not amortized but is subject to annual impairment tests. Other intangible assets are amortized over their estimated useful lives.
Changes in goodwill by segment during the years ended February 28, 2017 and February 29, 2016 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
March 1,
2016
|
|
Acquisitions
|
|
Foreign
Exchange
Translation
|
|
February 28,
2017
|
|
|
(In thousands)
|
Galvanizing
|
|
$
|
109,314
|
|
|
$
|
—
|
|
|
$
|
666
|
|
|
$
|
109,980
|
|
Energy
|
|
183,213
|
|
|
13,386
|
|
|
—
|
|
|
196,599
|
|
Total
|
|
$
|
292,527
|
|
|
$
|
13,386
|
|
|
$
|
666
|
|
|
$
|
306,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Segment
|
|
March 1,
2015
|
|
Acquisitions
|
|
Foreign
Exchange
Translation
|
|
February 29,
2016
|
|
|
(In thousands)
|
Galvanizing
|
|
$
|
95,538
|
|
|
$
|
15,576
|
|
|
$
|
(1,800
|
)
|
|
$
|
109,314
|
|
Energy
|
|
183,536
|
|
|
—
|
|
|
(323
|
)
|
|
183,213
|
|
Total
|
|
$
|
279,074
|
|
|
$
|
15,576
|
|
|
$
|
(2,123
|
)
|
|
$
|
292,527
|
|
The Company completes its annual impairment analysis of goodwill on December 31st of each year. As a result, the Company determined that there was no impairment of goodwill.
Amortizable intangible assets consisted of the following at February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Amortizable intangible assets
|
|
|
|
|
Customer related intangibles
|
|
$
|
177,514
|
|
|
$
|
169,637
|
|
Non-compete agreements
|
|
5,651
|
|
|
5,596
|
|
Trademarks
|
|
4,569
|
|
|
4,569
|
|
Technology
|
|
7,400
|
|
|
7,400
|
|
Engineering drawings
|
|
24,600
|
|
|
24,600
|
|
Backlog
|
|
7,600
|
|
|
7,600
|
|
|
|
227,334
|
|
|
219,402
|
|
Less accumulated amortization
|
|
(88,314
|
)
|
|
(71,201
|
)
|
|
|
$
|
139,020
|
|
|
$
|
148,201
|
|
The Company recorded amortization expense of
$16.9
million,
$16.2
million and
$18.0
million for fiscal
2017
,
2016
and 2015, respectively. The following table projects the estimated amortization expense for the five succeeding fiscal years and thereafter.
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
(In thousands)
|
2018
|
|
$
|
16,206
|
|
2019
|
|
15,354
|
|
2020
|
|
14,831
|
|
2021
|
|
14,665
|
|
2022
|
|
12,580
|
|
Thereafter
|
|
65,384
|
|
Total
|
|
$
|
139,020
|
|
10. Earnings per share
Basic earnings per share is based on the weighted average number of shares outstanding during each year. Diluted earnings per share were similarly computed but have been adjusted for the dilutive effect of the weighted average number of restricted stock units, performance share units and stock appreciation rights outstanding.
The following table sets forth the computation of basic and diluted earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands, except per share data)
|
Numerator:
|
|
|
|
|
|
|
Net income for basic and diluted earnings per common share
|
|
$
|
60,921
|
|
|
$
|
76,790
|
|
|
$
|
64,943
|
|
Denominator:
|
|
|
|
|
|
|
Denominator for basic earnings per common share–weighted average shares
|
|
25,965
|
|
|
25,800
|
|
|
25,676
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
Employee and director stock awards
|
|
132
|
|
|
137
|
|
|
102
|
|
Denominator for diluted earnings per common share
|
|
26,097
|
|
|
25,937
|
|
|
25,778
|
|
Earnings per share basic and diluted:
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
2.35
|
|
|
$
|
2.98
|
|
|
$
|
2.53
|
|
Diluted earnings per common share
|
|
$
|
2.33
|
|
|
$
|
2.96
|
|
|
$
|
2.52
|
|
For fiscal 2017 and 2016, the Company had no stock appreciation rights that were excluded from the computation of diluted earnings per share. Stock appreciation rights of approximately
80,683
were excluded from the computation of diluted earnings per share for fiscal 2015 as the effect would be anti-dilutive.
11. 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, 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
February 28, 2017
, the Company had approximately
1,270,511
shares reserved 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 issued prior to fiscal 2015 generally have a three year cliff vesting schedule and awards issued subsequent to fiscal 2015 generally vest ratably over a period of
three
years but these awards may vest early in accordance with the Plan’s accelerated vesting provisions.
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The activity in our non-vested restricted stock unit awards for the year ended
February 28, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
|
Weighted
Average Grant
Date Fair Value
|
Non-Vested Balance as of February 29, 2016
|
|
98,693
|
|
|
$
|
45.03
|
|
Granted
|
|
73,921
|
|
|
56.66
|
|
Vested
|
|
(35,330
|
)
|
|
45.82
|
|
Forfeited
|
|
(2,737
|
)
|
|
50.71
|
|
Non-Vested Balance as of February 28, 2017
|
|
134,547
|
|
|
$
|
51.10
|
|
The total fair value of restricted stock units vested during fiscal years 2017, 2016, and 2015 was
$1.6
million,
$0.9
million and
$0.8
million, respectively. For fiscal years 2017, 2016 and 2015, there were
134,547
,
98,693
and
77,446
, respectively, of non-vested restricted stock units outstanding with weighted average grant date fair values of
$51.10
,
$45.03
and
$41.31
, respectively.
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.
The activity in our non-vested performance stock unit awards for the year ended
February 28, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
Performance
Stock Units
|
Weighted
Average Grant
Date Fair Value
|
Non-Vested Balance as of February 29, 2016
|
|
27,415
|
|
$
|
46.65
|
|
Granted
|
|
24,011
|
|
57.47
|
|
Vested
|
|
—
|
|
—
|
|
Forfeited
|
|
—
|
|
—
|
|
Non-Vested Balance as of February 28, 2017
|
|
51,426
|
|
$
|
51.70
|
|
Stock Appreciation Rights
Stock appreciation rights awards 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
3
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 awards activity for the years ended February 28, 2017, February 29, 2016 and February 28, 2015 is as follows:
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
|
SAR’s
|
|
Weighted
Average
Exercise
Price
|
|
SAR’s
|
|
Weighted
Average
Exercise
Price
|
|
SAR’s
|
|
Weighted
Average
Exercise
Price
|
Outstanding at beginning of year
|
|
312,748
|
|
|
$
|
34.23
|
|
|
376,982
|
|
|
$
|
31.27
|
|
|
396,174
|
|
|
$
|
26.64
|
|
Granted
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
126,532
|
|
|
43.92
|
|
Exercised
|
|
(141,983
|
)
|
|
24.85
|
|
|
(59,441
|
)
|
|
14.67
|
|
|
(98,942
|
)
|
|
22.79
|
|
Forfeited
|
|
(626
|
)
|
|
43.92
|
|
|
(4,793
|
)
|
|
44.56
|
|
|
(46,782
|
)
|
|
44.14
|
|
Outstanding at end of year
|
|
170,139
|
|
|
$
|
42.02
|
|
|
312,748
|
|
|
$
|
34.23
|
|
|
376,982
|
|
|
$
|
31.27
|
|
Exercisable at end of year
|
|
126,975
|
|
|
$
|
41.27
|
|
|
217,961
|
|
|
$
|
29.83
|
|
|
204,107
|
|
|
$
|
21.55
|
|
Weighted average fair value for the fiscal year indicated of SARs granted during such year
|
|
|
|
$
|
—
|
|
|
|
|
$
|
—
|
|
|
|
|
$
|
16.94
|
|
The average remaining contractual term for those stock appreciation rights outstanding as of
February 28, 2017
was
3.52
years, with an aggregate intrinsic value of
$2.8 million
. The average remaining contractual terms for those stock appreciation rights that are exercisable as of
February 28, 2017
was
3.38
years, with an aggregate intrinsic value of
$2.2 million
.
The following table summarizes additional information about stock appreciation rights outstanding at
February 28, 2017
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Range of
Exercise Prices
|
|
Total
SAR’s
|
|
Average
Remaining
Life
|
|
Weighted
Average
Exercise
Price
|
|
SAR’s
Currently
Exercisable
|
|
Weighted
Average
Exercise
Price
|
$20.91
|
|
9,954
|
|
1.00
|
|
$
|
20.91
|
|
|
9,954
|
|
$
|
20.91
|
|
$25.67
|
|
9,538
|
|
2.00
|
|
$
|
25.67
|
|
|
9,538
|
|
$
|
25.67
|
|
$39.65
|
|
950
|
|
3.52
|
|
$
|
39.65
|
|
|
950
|
|
$
|
39.65
|
|
$43.92
|
|
89,180
|
|
4.01
|
|
$
|
43.92
|
|
|
56,016
|
|
$
|
43.92
|
|
$45.26
|
|
40,000
|
|
3.68
|
|
$
|
45.26
|
|
|
30,000
|
|
$
|
45.26
|
|
$45.36
|
|
19,758
|
|
3.00
|
|
$
|
45.36
|
|
|
19,758
|
|
$
|
45.36
|
|
$46.43
|
|
759
|
|
3.72
|
|
$
|
46.43
|
|
|
759
|
|
$
|
46.43
|
|
$20.91 - $46.43
|
|
170,139
|
|
3.52
|
|
$
|
42.02
|
|
|
126,975
|
|
$
|
41.27
|
|
The Company is no longer issuing SAR's as a form of share-based compensation, therefore the Black-Scholes option pricing model was not used subsequent to fiscal 2015. Assumptions used in the Black-Scholes option pricing model for fiscal year 2015 are as follows for all stock appreciation rights:
|
|
|
|
|
|
2015
|
Expected term in years
|
|
4.5
|
Expected dividend yield
|
|
1.20% – 1.32%
|
Expected price volatility
|
|
35.39% – 40.00%
|
Risk-free interest rate
|
|
2.32 – 2.73
|
Directors Grants
The Company granted each of its independent directors a total of
1,641
,
1,915
and
2,000
shares of its common stock during fiscal years 2017, 2016 and 2015, respectively. These common stock grants were valued at
$60.94
,
$52.21
and
$44.90
per share for fiscal years 2017, 2016 and 2015, respectively, which was the market price of our common stock on the respective grant dates.
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
Share-based compensation expense and related income tax benefits related to all the plans listed above were as follows for the fiscal years ended February 28, 2017, February 29, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
|
|
2017
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Compensation expense
|
|
$
|
5,870
|
|
|
$
|
4,538
|
|
|
$
|
4,080
|
|
Income tax benefits
|
|
$
|
2,055
|
|
|
$
|
1,588
|
|
|
$
|
1,428
|
|
Unrecognized compensation cost related to all the above at February 28, 2017 totaled
$6.8
million. These costs are expected to be recognized over a weighted period of
1.91
years.
The actual tax benefit realized for tax deductions from share-based compensation during each of these fiscal years totaled
$1.5 million
,
$1.0 million
and
$0.3 million
, respectively.
The Company’s policy is to issue shares required under these plans from the Company’s treasury shares or from the Company’s authorized but unissued shares. The Company has no formal or informal plan to repurchase shares on the open market to satisfy these requirements.
12. Debt
Following is a summary of debt at February 28, 2017 and February 29, 2016:
|
|
|
|
|
|
|
|
|
|
Debt consisted of the following:
|
|
2017
|
|
2016
|
|
|
(In thousands)
|
Senior Notes, due in balloon payment in January 2021
|
|
$
|
125,000
|
|
|
$
|
125,000
|
|
Senior Notes, due in annual installments of $14,286 beginning in March 2012 through March 2018
|
|
28,571
|
|
|
42,857
|
|
Term Note, due in quarterly installments beginning in June 2013 through March 2018
|
|
49,219
|
|
|
58,125
|
|
Revolving line of credit with bank
|
|
69,500
|
|
|
101,000
|
|
Total debt
|
|
272,290
|
|
|
326,982
|
|
Unamortized debt issuance costs for Senior Notes and Term Note
|
|
(861
|
)
|
|
(1,361
|
)
|
Total debt, net
|
|
271,429
|
|
|
325,621
|
|
Less amount due within one year
|
|
(16,629
|
)
|
|
(23,192
|
)
|
Debt due after one year, net
|
|
$
|
254,800
|
|
|
$
|
302,429
|
|
On March 27, 2013, we entered into a Credit Agreement (the “Credit Agreement”) with Bank of America and other lenders. The Credit Agreement provided for a
$75.0 million
term facility and a
$225.0 million
revolving credit facility that included a
$75.0 million
“accordion” feature. The Credit Agreement is used to provide for working capital needs, capital improvements, dividends, future acquisitions and letter of credit needs.
Interest rates for borrowings under the Credit Agreement are based on either a Eurodollar Rate or a Base Rate plus a margin ranging from
1.0%
to
2.0%
depending on our Leverage Ratio. The
Eurodollar
Rate is defined as LIBOR for a term equivalent to the borrowing term (or other similar interbank rates if LIBOR is unavailable). The Base Rate is defined as the highest of the applicable
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fed Funds rate plus 0.50%, the Prime rate, or the Eurodollar Rate plus 1.0% at the time of borrowing. The Credit Agreement also carries a Commitment Fee for the unfunded portion ranging from 0
.20%
to 0
.30%
per annum, depending on our Leverage Ratio.
The
$75.0 million
term facility under the Credit Agreement requires quarterly principal and interest payments commencing on June 30, 2013 through March 27, 2018, the maturity date.
The Credit Agreement provides various financial covenants requiring us, among other things, to a) maintain on a consolidated basis net worth equal to at least the sum of
$230.0 million
, plus
50.0%
of future net income, b) maintain on a consolidated basis a Leverage Ratio (as defined in the Credit Agreement) not to exceed
3.25
:1.0, c) maintain on a consolidated basis a Fixed Charge Coverage Ratio (as defined in the Credit Agreement) of at least
1.75
:1.0 and d) not to make Capital Expenditures (as defined in the Credit Agreement) on a consolidated basis in an amount in excess of
$60.0 million
during the fiscal year ended February 28, 2014 and
$50.0 million
during any subsequent year.
As of
February 28, 2017
, we had
$69.5 million
of outstanding debt against the revolving credit facility provided and letters of credit outstanding in the amount of
$23.1 million
, which left approximately
$132.4 million
of additional credit available under the Credit Agreement.
On March 31, 2008, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) pursuant to which the Company issued
$100.0 million
aggregate principal amount of its
6.24%
unsecured Senior Notes (the “2008 Notes”) due March 31, 2018 through a private placement (the “2008 Note Offering”). Pursuant to the Note Purchase Agreement, the Company’s payment obligations with respect to the 2008 Notes may be accelerated upon any Event of Default, as defined in the Note Purchase Agreement.
The Company entered into an additional Note Purchase Agreement on January 21, 2011 (the “2011 Agreement”), pursuant to which the Company issued
$125.0 million
aggregate principal amount of its
5.42%
unsecured Senior Notes (the “2011 Notes”), due in January of 2021, through a private placement (the “2011 Note Offering”). Pursuant to the 2011 Agreement, the Company's payment obligations with respect to the 2011 Notes may be accelerated under certain circumstances.
The 2008 Notes and the 2011 Notes each provide for various financial covenants requiring us, among other things, to a) maintain on a consolidated basis net worth equal to at least the sum of
$116.9 million
plus
50.0%
of future net income; b) maintain a ratio of indebtedness to EBITDA (as defined in Note Purchase Agreement) not to exceed
3.25
:1.00; c) maintain on a consolidated basis a Fixed Charge Coverage Ratio (as defined in the Note Purchase Agreement) of at least
2.0
:1.0; d) not at any time permit the aggregate amount of all Priority Indebtedness (as defined in the Note Purchase Agreement) to exceed
10.0%
of Consolidated Net Worth (as defined in the Note Purchase Agreement).
As of
February 28, 2017
, the Company was in compliance with all of its debt covenants.
Maturities of debt are as follows:
|
|
|
|
|
|
Fiscal Year
|
|
(In thousands)
|
2018
|
|
$
|
16,629
|
|
2019
|
|
130,661
|
|
2020
|
|
—
|
|
2021
|
|
125,000
|
|
2022
|
|
—
|
|
Thereafter
|
|
—
|
|
Total
|
|
$
|
272,290
|
|
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. Operating segments
Information regarding operations and assets by segment was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net sales:
|
|
(In thousands)
|
Energy
|
|
$
|
483,394
|
|
|
$
|
500,830
|
|
|
$
|
458,339
|
|
Galvanizing
|
|
375,536
|
|
|
402,362
|
|
|
358,348
|
|
|
|
$
|
858,930
|
|
|
$
|
903,192
|
|
|
$
|
816,687
|
|
|
|
|
|
|
|
|
Operating income:
|
|
|
|
|
|
|
Energy
|
|
$
|
52,029
|
|
|
$
|
58,471
|
|
|
$
|
38,703
|
|
Galvanizing
|
|
79,033
|
|
|
94,766
|
|
|
88,562
|
|
Corporate
|
|
(32,702
|
)
|
|
(30,949
|
)
|
|
(20,440
|
)
|
Total Operating Income
|
|
98,360
|
|
|
122,288
|
|
|
106,825
|
|
Interest expense
|
|
14,732
|
|
|
15,155
|
|
|
16,561
|
|
Net (gain) loss on sale of property, plant and equipment and insurance proceeds
|
|
76
|
|
|
(327
|
)
|
|
(2,525
|
)
|
Other (income) expense, net
|
|
(1,197
|
)
|
|
3,092
|
|
|
2,659
|
|
Income before income taxes
|
|
$
|
84,749
|
|
|
$
|
104,368
|
|
|
$
|
90,130
|
|
|
|
|
|
|
|
|
Depreciation and amortization:
|
|
|
|
|
|
|
Energy
|
|
$
|
19,624
|
|
|
$
|
19,131
|
|
|
$
|
20,725
|
|
Galvanizing
|
|
28,650
|
|
|
26,863
|
|
|
23,964
|
|
Corporate
|
|
2,083
|
|
|
1,423
|
|
|
1,400
|
|
|
|
$
|
50,357
|
|
|
$
|
47,417
|
|
|
$
|
46,089
|
|
|
|
|
|
|
|
|
Expenditures for acquisitions, net of cash, and property, plant and equipment:
|
|
|
|
|
|
|
Energy
|
|
$
|
31,474
|
|
|
$
|
12,863
|
|
|
$
|
10,647
|
|
Galvanizing
|
|
32,099
|
|
|
86,724
|
|
|
26,928
|
|
Corporate
|
|
540
|
|
|
858
|
|
|
3,320
|
|
|
|
$
|
64,113
|
|
|
$
|
100,445
|
|
|
$
|
40,895
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
Energy
|
|
$
|
536,042
|
|
|
$
|
500,078
|
|
|
$
|
523,247
|
|
Galvanizing
|
|
428,330
|
|
|
436,471
|
|
|
378,823
|
|
Corporate
|
|
13,467
|
|
|
45,461
|
|
|
34,844
|
|
|
|
$
|
977,839
|
|
|
$
|
982,010
|
|
|
$
|
936,914
|
|
|
|
|
|
|
|
|
Geographic net sales:
|
|
|
|
|
|
|
United States
|
|
$
|
701,368
|
|
|
$
|
724,559
|
|
|
$
|
631,544
|
|
Other countries
|
|
157,718
|
|
|
179,832
|
|
|
189,855
|
|
Eliminations
|
|
(156
|
)
|
|
(1,199
|
)
|
|
(4,712
|
)
|
|
|
$
|
858,930
|
|
|
$
|
903,192
|
|
|
$
|
816,687
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net:
|
|
|
|
|
|
|
United States
|
|
$
|
205,079
|
|
|
$
|
204,587
|
|
|
$
|
173,712
|
|
Canada
|
|
18,002
|
|
|
17,868
|
|
|
20,289
|
|
Other Countries
|
|
5,529
|
|
|
3,878
|
|
|
2,582
|
|
|
|
$
|
228,610
|
|
|
$
|
226,333
|
|
|
$
|
196,583
|
|
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. Commitments and contingencies
Leases
The Company is obligated under various operating leases for property, plant and equipment. As
February 28, 2017
, future minimum lease payments under non-cancelable operating leases with initial terms in excess of
one
year are summarized in the below table:
|
|
|
|
|
Fiscal Year:
|
(In thousands)
|
2018
|
$
|
6,627
|
|
2019
|
5,629
|
|
2020
|
3,347
|
|
2021
|
2,655
|
|
2022
|
2,542
|
|
Thereafter
|
8,042
|
|
Total
|
$
|
28,842
|
|
Rent expense was
$17.0 million
,
$13.9 million
and
$14.1 million
for fiscal years
2017
,
2016
and
2015
, respectively. Rent expense includes various equipment rentals that do not meet the terms of a non-cancelable lease or that have initial terms of less than one year.
Commodity pricing
We have no contracted commitments for any commodities including steel, aluminum, natural gas, cooper, zinc, nickel based alloys, except for those entered into under the normal course of business.
Other
At
February 28, 2017
, the Company had outstanding letters of credit in the amount of
$23.1 million
. These letters of credit are issued for a number of reasons, but are most commonly issued in lieu of customer retention withholding payments covering warranty or performance periods. In addition, as of
February 28, 2017
, a warranty reserve in the amount of
$2.1 million
was established to offset any future warranty claims.
15. Selected quarterly financial data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
May 31,
2016
|
|
August 31,
2016
|
|
November 30,
2016
|
|
February 28,
2017
|
|
|
(in thousands, except per share data)
|
Net sales
|
|
$
|
242,667
|
|
|
$
|
195,045
|
|
|
$
|
227,459
|
|
|
$
|
193,759
|
|
Gross profit
|
|
63,327
|
|
|
41,886
|
|
|
53,866
|
|
|
45,705
|
|
Net income
|
|
21,063
|
|
|
10,023
|
|
|
18,251
|
|
|
11,584
|
|
Basic earnings per share
|
|
0.81
|
|
|
0.39
|
|
|
0.70
|
|
|
0.45
|
|
Diluted earnings per share
|
|
0.81
|
|
|
0.38
|
|
|
0.70
|
|
|
0.44
|
|
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
May 31,
2015
|
|
August 31,
2015
|
|
November 30,
2015
|
|
February 29,
2016
|
|
|
(in thousands, except per share data)
|
Net sales
|
|
$
|
228,888
|
|
|
$
|
214,246
|
|
|
$
|
242,447
|
|
|
$
|
217,611
|
|
Gross profit
|
|
59,304
|
|
|
53,505
|
|
|
62,448
|
|
|
54,854
|
|
Net income
|
|
19,924
|
|
|
17,243
|
|
|
23,547
|
|
|
16,076
|
|
Basic earnings per share
|
|
0.77
|
|
|
0.67
|
|
|
0.91
|
|
|
0.62
|
|
Diluted earnings per share
|
|
0.77
|
|
|
0.67
|
|
|
0.91
|
|
|
0.62
|
|
16. Acquisitions
On March 1, 2016, we completed an acquisition of the equity securities of Power Electronics, Inc. ("PEI"), a Millington, Maryland-based manufacturer and integrator of electrical enclosure systems. The acquisition of PEI will enhance our capacity to serve existing and new customers in a diverse set of industries along the Eastern seaboard of the United States. The goodwill arising from this acquisition was allocated to the Energy Segment and is deductible for income tax purposes.
Unaudited pro forma results of operations assuming the PEI acquisition had taken place at the beginning of each period are not provided because the historical operating results of PEI were not significant and pro forma results would not be significantly different from reported results for the periods presented.
On February 1, 2016, we completed our acquisition of substantially all the assets of Alpha Galvanizing Inc., an Atkinson, Nebraska-based business unit of Olson Industries, Inc. ("Alpha Galvanizing"). Alpha Galvanizing has served steel fabrication customers that manufacture electrical utility poles, agricultural machinery and industrial manufacturing components since 1996. Alpha Galvanizing was acquired to expand the footprint of AZZ Galvanizing and to support AZZ’s locations in Minnesota and Denver, Colorado, as well as serve customers in the upper Midwest region. The goodwill arising from this acquisition was allocated to the Galvanizing Segment and is deductible for income tax purposes.
Unaudited pro forma results of operations assuming the Alpha Galvanizing Inc. acquisition had taken place at the beginning of each period are not provided because the historical operating results of Alpha Galvanizing Inc. were not significant and pro forma results would not be significantly different from reported results for the periods presented.
On June 5, 2015, we completed the acquisition of substantially all the assets of US Galvanizing, LLC, a provider of steel corrosion coating services and a wholly-owned subsidiary of Trinity Industries, Inc. The acquisition of the US Galvanizing, LLC assets includes six galvanizing facilities located in Hurst, Texas; Kennedale, Texas; Big Spring, Texas; San Antonio, Texas; Morgan City, Louisiana; and Kosciusko, Mississippi. Additionally, the transaction includes Texas Welded Wire, a secondary business integrated within US Galvanizing's Hurst, Texas facility. US Galvanizing, LLC was acquired to expand AZZ’s Southern locations. The goodwill arising from this acquisition was allocated to the Galvanizing Segment and is deductible for income tax purposes.
Unaudited pro forma results of operations assuming the US Galvanizing, LLC acquisition had taken place at the beginning of each period are not provided because the historical operating results of US Galvanizing, LLC were not significant and pro forma results would not be significantly different from reported results for the periods presented.
On June 30, 2014, we completed our acquisition of substantially all the assets of Zalk Steel & Supply Co. (“Zalk Steel”), a Minneapolis, Minnesota-based galvanizing company, for a purchase price of
$10.5 million
and the assumption of
$0.3 million
in liabilities. The Company recorded
$3.3 million
of goodwill, which has been allocated to the Galvanizing Segment, and
$3.4 million
of intangible assets associated with this acquisition. The intangible assets associated with the acquisition consist primarily of trade names, customer relationships and non-compete agreements. These intangible assets are being amortized on a straight-line basis over a period of
19 years
for customer relationships,
19 years
for trade names, and
5 years
for non-compete agreements. Zalk Steel was acquired to expand AZZ's existing footprint in the upper Midwest region of the United States. The goodwill arising from this acquisition was allocated to the Galvanizing Segment and is deductible for income tax purposes.
AZZ Inc.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited pro forma results of operations assuming the Zalk Steel acquisition had taken place at the beginning of each period are not provided because the historical operating results of Zalk Steel were not significant and pro forma results would not be significantly different from reported results for the periods presented.
17. Subsequent Events
On March 21, 2017, we executed the Amended and Restated Credit Agreement (the “2017 Credit Agreement”) with Bank of America and other lenders. The 2017 Credit Agreement amended the Credit Agreement entered into on March 27, 2013 by the following: (i) extending the maturity date until March 21, 2022, (ii) providing for a senior revolving credit facility in a principal amount of up to $450 million, with an additional $150 million accordion, (iii) including a $75 million sublimit for the issuance of standby and commercial letters of credit, (iv) including a $30 million sublimit for swing line loans, (v) restricting indebtedness incurred in respect of capital leases, synthetic lease obligations and purchase money obligations not to exceed $20 million, (vi) restricting investments in any foreign subsidiaries not to exceed $50 million in the aggregate, and (vii) including various financial covenants and certain restricted payments relating to dividends and share repurchases as specifically set forth in the 2017 Credit Agreement. The 2017 Credit Agreement will be used to finance working capital needs, capital improvements, dividends, future acquisitions and letter of credit needs.
Two of the Company’s indirectly held subsidiaries, The Calvert Company, Inc. and Nuclear Logistics LLC, have existing contracts with subsidiaries of Westinghouse Electric Company (“WEC”). WEC and the relevant subsidiaries filed relief under Chapter 11 of the Bankruptcy Code on March 29, 2017 in the United States Bankruptcy Court for the Southern District of New York, jointly administered as In re Westinghouse Electric Company, et al., Case No. 17-10751 (the "Bankruptcy Case"). The Bankruptcy Court overseeing the Bankruptcy Case has approved, on an interim basis, an $800M Debtor-in-Possession Financing Facility (“DIP Financing”) to help WEC finance its business operations during the reorganization process. A final hearing on the DIP Financing is scheduled for April 26, 2017. The Company estimates it had approximately $7.2 million in pre-petition exposure with WEC to the Company’s two subsidiaries as of March 29, 2017. The Company’s subsidiaries will continue, for the time being and while it monitors and evaluates the Bankruptcy Case, to honor its executory contracts and has applied for critical vendor status with WEC. At this time, the Company cannot accurately estimate what recovery may be had on any pre-petition amounts or the potential future negative effects if the existing nuclear plant construction projects currently in backlog are cancelled. The Company expects to collect all post-petition amounts due and owing. It will likely be several months before WEC determines who to pay as its critical vendors, if anyone, or otherwise makes a determination as to which contracts to assume and which to reject as part of its reorganization process. The Company does not believe that rejection of the outstanding contracts with WEC, taken in part or combined, would have a material adverse impact on the Company’s cash flow or operations.