AZZ INC
For the period ended May 31, 2024. Filed Jul 10, 2024.
View on SEC.govAbout this filing
A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
May 31, 2024 · Filed Jul 10, 2024
AZZ$125.71+2.9%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2023-11-30; filed 2024-01-09.
0000008947-24-000013
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsCurrent report: 10-Q
Period ended 2024-05-31; filed 2024-07-10.
0000008947-24-000153
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of OperationsThe baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 109 previous paragraphs and 87 current paragraphs.
30 unchanged; 26 reworded; 31 added; 50 removed; 3 previous and 0 current paragraphs rearranged.
Tables are not compared: 13 previous and 3 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (31)
Current report
Business Operations Update
Current report
Our results for the three months ended May 31, 2024 (the "current quarter"), were favorably impacted by the growth in demand for our manufactured solutions in the construction, industrial and transportation industries, coupled with our value driven pricing strategy.
Current report
The demand for our manufactured solutions was the primary contributor to net income of $39.6 million for the three months ended May 31, 2024. However, net income attributable to common shareholders was a loss of $36.8 million, after deducting preferred dividends and the redemption premium on our Series A Preferred Stock. Our operating results for the three months ended May 31, 2024, including operating results by segment, are described in the summary on the following page, and detailed descriptions can be found below under “Results of Operations.”
Current report
Our operations generated $71.9 million of cash in the current three-month period, which includes $7.6 million generated from reduction in working capital. Our operating cash flows were used to make $27.4 million of capital investments in our business and return $7.9 million to our common and preferred shareholders through dividend payments. Financing activities included the issuance of common shares, generating $308.7 million in cash flows, which we used to fund the redemption of our Series A Preferred Stock of $308.9 million. In addition, we reduced our outstanding debt through $25.0 million in net payments on our Term Loan B and Revolving Credit Facility. As a result of this and other activity, our cash and cash equivalents were $10.5 million as of May 31, 2024, an increase of $6.7 million from May 31, 2023. As of May 31, 2024, we had $350.7 million available under the Revolving Credit Facility. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found below under “Liquidity and Capital Resources.”
Current report
Outlook
Current report
While it is difficult to predict future North American economic activity and its impact on the demand for our galvanizing and coil coating solutions, as well the impact that political or regulatory developments may have on us, we have noted several factors below that have impacted or may impact our results of operations during the first quarter of fiscal 2025.
Current report
•Sales prices in our AZZ Metal Coatings segment are expected to remain consistent with current levels, although fluctuations in mix and some competitive pressures may impact selling price.
Current report
•Sales prices in our AZZ Precoat Metals segment are expected to remain consistent with current levels, with expected seasonal fluctuations in mix due to an increase in construction business, which may impact the average selling price.
Current report
•Demand in our AZZ Metal Coatings and AZZ Precoat Metals segments is expected to follow our typical seasonal patterns.
Current report
•Customer inventories for our AZZ Metal Coatings segment remain consistent, which should support the continued demand for our metal coatings solutions.
Current report
•Customer inventories for our AZZ Precoat Metals segment remain at historical levels, which should support the continued demand for our coil coating solutions.
Current report
See notes below.
Current report
(1) Infrastructure Solutions segment includes our equity in earnings from our investment in the AVAIL JV as well as other expenses related to
Current report
(2) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments.
Current report
Sales for the AZZ Precoat Metals segment increased $14.4 million, or 6.5% for the current quarter. The increase is due to a higher volume of coil coated in the current quarter, while the average price remained flat.
Current report
Operating income for the AZZ Precoat Metals segment increased $2.4 million, or 6.4% for the current quarter. The increase is primarily due to increased sales as described above, offset by higher cost of sales and selling, general and administrative expense. Cost of sales increased $11.8 million, primarily due to variable costs related to the increased volume of steel processed, coupled with an increase in depreciation expense.
Current report
Corporate selling, general and administrative expenses increased $0.6 million, or 3.4%, for the current quarter, compared to the prior year quarter.
Current report
Equity in earnings of unconsolidated subsidiaries for the current quarter increased $2.4 million, to $3.8 million, compared to $1.4 million in the prior year quarter. The increase is primarily due to higher earnings from the AVAIL JV, primarily driven by AVAIL's enclosure, high-voltage and medium-voltage bus businesses.
Current report
As of May 31, 2024, our total liquidity of $361.2 million consisted of available capacity on our Revolving Credit Facility of $350.7 million and cash and cash equivalents of $10.5 million.
Current report
Net cash provided by operating activities for the current three-month period was $71.9 million, driven primarily by net income from continuing operations of $39.6 million, adjusted to exclude non-cash charges, net of non-cash income of $22.5 million, an increase in cash resulting from a reduction in working capital of $7.6 million, an increase in cash resulting from other long-term assets and liabilities, including deferred taxes, of $1.7 million and a cash distribution on the investment in the AVAIL JV of $0.5 million. The reduction in working capital is due primarily to increases in accounts payable, accrued expenses and income taxes payable; offset by increases in prepaid expenses and contract assets due to insurance renewals and higher sales, respectively. Net cash provided by operating activities was used to fund $27.4 million of capital expenditures, make net payments on long-term debt and finance leases liabilities of $25.2 million, make dividend payments of $7.9 million and make payments for taxes related to net share settlement of equity awards of $4.6 million. We also completed a secondary public offering of 4.6 million shares of our common stock, which provided cash of $308.7 million, which was used to redeem our 240,000 shares of Series A Preferred Stock for $308.9 million.
Current report
Net cash provided by operating activities for the prior year three-month period was $46.9 million, driven primarily by net income of $28.5 million, adjusted to exclude non-cash charges, net of non-cash income of $22.1 million, offset by a decrease in cash resulting from an increase in working capital of $1.0 million and a decrease in cash resulting from other long-term assets and liabilities, including deferred taxes, of $2.7 million. Net cash provided by operating activities was used to fund $17.0 million of capital expenditures, make net payments on long-term debt and finance leases liabilities of $20.0 million, make dividend payments of $7.8 million and make payments for taxes related to net share settlement of equity awards of $1.7 million.
Current report
On March 20, 2024, we repriced the Term Loan B. The repricing adjusted the Term Loan B spread from a rate of SOFR plus 3.75% to SOFR plus 3.25%.
Current report
Debt Compliance and Outstanding Borrowings
Current report
April 2024 Secondary Offering
Current report
On April 30, 2024, we completed a secondary public offering in which we sold 4.6 million shares of our common stock at $70.00 per share (the "April 2024 Secondary Offering"). We received gross proceeds of $322.0 million, and paid offering expenses of $13.3 million, for net proceeds of $308.7 million. The proceeds from the April 2024 Offering were used to redeem the Series A Preferred Stock.
Current report
Series A Convertible Preferred Stock
Current report
On May 9, 2024, we fully redeemed our 240,000 shares of 6.0% Series A Convertible Preferred Stock ("Series A Preferred Stock"), for $308.9 million. The payment was calculated as the face value of the Series A Preferred Stock of $240.0 million, multiplied by the Return Factor (as defined below) of 1.4, less dividends paid to date of $27.1 million. The redemption premium of $75.2 million, which is calculated as the difference between the redemption amount and the book value of $233.7 million, was recorded as a deemed dividend, and reduces net income available to common shareholders. The Series A Preferred Stock was redeemed using proceeds from the April 2024 Secondary Offering.
Current report
On August 5, 2022, we exchanged our $240.0 million 6.00% convertible subordinated notes due June 30, 2030 for 240,000 shares of 6.0% Series A Preferred Stock, following the receipt of shareholder approval for the issuance of Series A Preferred Stock. The Series A Preferred Stock has a $1.00 par value per share, and ranked senior to the common stock of the Company, including with respect to both income and capital, but junior to our indebtedness. The Series A Preferred Stock is classified as "Mezzanine equity" in the consolidated balance sheets and was fully redeemed on May 9, 2024.
Current report
As of May 31, 2024, we had non-cancelable forward contracts to purchase approximately $37.9 million of zinc at various volumes and prices. We also had non-cancelable forward contracts to purchase approximately $9.2 million of natural gas at various volumes and prices. All such contracts expire by the first quarter of fiscal 2026. We had no other contracted commitments for any other commodities including steel, aluminum, copper, zinc, nickel-based alloys, natural gas, except for those entered into under the normal course of business.
Current report
Recent Accounting Pronouncements
Current report
See Note 1 to the condensed consolidated financial statements, included herein, for a full description of recent accounting pronouncements, including the actual and expected dates of adoption and estimated effects on our consolidated results of operations and financial condition, which is incorporated herein by reference.
Removed paragraphs (50)
Previous report
Operating income for the AZZ Precoat Metals segment increased $11.7 million, or 55.6% for the current quarter. The increase is primarily due to: lower applied cost of sales (primarily driven by improved efficiencies which offset higher cost of labor and materials, as well as lower freight costs); lower selling, general and administrative expense (primarily salaries and wages and the change in classification of amortization of intangible assets of $4.3 million); and the increase in sales as described above.
Previous report
Operating income for the AZZ Infrastructure Solutions segment decreased $0.3 million, due to legal expenses.
Previous report
Corporate selling, general and administrative expenses increased $8.3 million, or 89.9%, for the current quarter, compared to the prior year quarter. The increase is primarily due to: amortization expense of $5.9 million related to all intangible assets, which is included in corporate expense in the current quarter, and allocated to the segments in the prior year quarter; a decrease in income from the transition services agreement associated with the AVAIL JV; and employee-related costs; partially offset by the allocation of certain compensation and information technology costs to the segments, that were previously included in corporate expenses.
Previous report
Equity in earnings of unconsolidated subsidiaries for the current quarter increased $7.7 million, to $8.7 million, compared to $1.0 million in the prior year quarter. The increase is primarily due to higher earnings from the AVAIL JV, and three months of equity in earnings in the current quarter, compared to one month in the prior year quarter, as the AVAIL JV equity in earnings are recorded on a one-month lag.
Previous report
Income from Discontinued Operations
Previous report
The results of our AZZ Infrastructure Solutions segment were classified as discontinued operations in our condensed consolidated statements of operations and excluded from continuing operations for all periods presented. The results of operations from discontinued operations for the three months ended November 30, 2022 consist of the following (in thousands):
Previous report
See Note 3 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
Previous report
NINE MONTHS ENDED NOVEMBER 30, 2023 COMPARED TO THE NINE MONTHS ENDED NOVEMBER 30, 2022
Previous report
Sales
Previous report
For the nine months ended November 30, 2023 (the "current nine-month period"), consolidated sales increased $183.9 million, or 18.6%, compared to the nine months ended November 30, 2022 (the "prior year nine-month period"). Sales for the AZZ Metal Coatings segment increased $14.2 million, or 2.9%, for the current nine-month period, compared to the prior year nine-month period. The increase in sales was primarily due to an increase in the volume of steel processed during the period, and improved price realization for our superior quality and service. Sales for the AZZ Precoat Metals segment increased $169.6 million, or 34.0% for the current nine-month period, primarily due to: the current year including a full nine-month period compared to the period from May 13, 2022 through November 30, 2023 for the prior year nine-month period, which contributed $178.4 million in sales, partially offset by a decrease of $8.8 million in sales due to lower volume of coil coated, partially offset by an increase in selling price.
Previous report
Operating Income
Previous report
For the current nine-month period, consolidated operating income increased $41.9 million, or 30.5%, compared to the prior year nine-month period.
Previous report
Operating income for the AZZ Metal Coatings segment increased $4.6 million, or 3.7% for the current nine-month period, compared to the prior year nine-month period. The increase was due to improved sales as described above offset by higher cost of sales and higher selling, general and administrative expenses. Cost of sales increased $3.1 million, primarily due to higher labor and overhead costs, partially offset by a change in classification of amortization of intangible assets of $5.4 million and a decrease in zinc costs. Selling, general and administrative expense increased due to the recognition of a $4.5 million legal accrual, and the change in classification of certain compensation and information technology costs of $2.0 million to the AZZ Metal Coatings segment, from the Corporate segment.
Previous report
Operating income for the AZZ Precoat Metals segment increased $45.5 million, or 71.2%. The increase is primarily due to the inclusion of a full 1 st quarter of fiscal 2024 compared to a partial fiscal quarter of 2023, which contributed $31.0 million, and increases in operating income for the 2 nd and 3 rd quarters of current nine-month period compared to the prior year nine-month period. The increases in the 2 nd and 3 rd quarters were due to: lower applied cost of sales (primarily driven by improved efficiencies which offset higher cost of labor and materials, as well as lower freight costs); lower selling, general and administrative expense (primarily salaries and wages and the change in classification of amortization of intangible assets of $12.2 million); and the increase in sales as described above.
Previous report
Operating income for the AZZ Infrastructure Solutions segment decreased $6.2 million, due to a legal settlement of $5.75 million and legal expenses associated with the settlement and other matters.
Previous report
Corporate Expenses
Previous report
Corporate selling, general and administrative expenses increased $2.0 million, or 4.0%, for the current nine-month period, compared to the prior year nine-month period. The increase is primarily due to: amortization expense of $18.1 million related to all intangible assets, which is included in corporate expense in the current nine-month period, and allocated to the segments in the prior year nine-month period; a decrease in transition services agreement fees associated with the AVAIL JV; and employee-related costs. These increases were offset by a decrease in acquisition costs of $15.3 million incurred in the prior year nine-month period and the allocation of certain compensation and information technology costs to the segments in the current nine-month period, that were previously included in corporate expenses.
Previous report
Interest Expense
Previous report
Interest expense for the current nine-month period increased $20.6 million, to $82.3 million, compared to $61.7 million for the prior year nine-month period. The increase in interest expense is attributable to the debt that was obtained in conjunction with the Precoat Acquisition, which was outstanding for the full current nine-month period, compared to the prior year, as well as higher rates of interest on our borrowings.
Previous report
Equity in earnings of unconsolidated subsidiaries for the current nine-month period increased $10.1 million, to $11.1 million, compared to $1.0 million in the prior year nine-month period. The increase is primarily due to higher earnings from the AVAIL JV, and nine months of equity in earnings in the current nine-month period, compared to one month in the prior year nine-month period, as the AVAIL JV equity in earnings are recorded on a one-month lag. See Note 9 of our consolidated financial statements for more information about the AVAIL JV.
Previous report
Income Taxes
Previous report
The provision for income taxes from continuing operations reflects an effective tax rate of 22.6% for the nine months ended November 30, 2023, compared to 23.8% for the prior year comparable period. The decrease in the effective tax rate is attributable to an unfavorable adjustment in the prior year related to management fees recorded as a result of continuing operations versus discontinued operations reporting.
Previous report
Income from Discontinued Operations, net of tax
Previous report
The results of our AZZ Infrastructure Solutions segment were classified as discontinued operations in our condensed consolidated statements of operations and excluded from continuing operations for all periods presented. The results of operations from discontinued operations for the prior year nine-month period consist of the following (in thousands):
Previous report
See Note 3 to our consolidated financial statements included in this Quarterly Report on Form 10-Q for more information.
Previous report
Net cash provided by operating activities of continuing operations for the nine-month period was $180.9 million compared to $68.6 million for the prior year nine-month period. The increase in cash provided by operating activities is primarily attributable to increases in net income from continuing operations and in depreciation and amortization, a decrease in deferred income taxes and increases from changes in working capital in the current nine-month period compared to the prior year nine-month period. Changes in current assets and current liabilities increased cash provided by operating activities by $73.8 million, due to decreases in accounts receivable, other receivables, inventories and prepaid expenses and increases in accounts payable, partially offset by decreases in other accrued liabilities. Net cash provided by operating activities from discontinued operations was $8.0 million for the prior year nine-month period.
Previous report
Net cash used in investing activities of continuing operations for the nine-month period was $66.9 million compared to $1.21 billion for the prior year nine-month period. The decrease in cash used in investing activities for the current quarter was attributable to the Precoat Acquisition completed in the first quarter of fiscal 2023. In the current year, cash used in investing activities was primarily due to cash used for capital expenditures and increased from the prior year nine-month period due to the construction of the coil coating facility in Washington, Missouri. Net cash used in investing activities from discontinued operations was $4.0 million for the prior year nine-month period.
Previous report
Net cash used in financing activities of continuing operations for the nine-month period was $109.4 million compared to net cash provided by financing activities of $1.01 billion for the prior year nine-month period. The decrease in cash from financing activities during the current quarter was primarily attributable to proceeds from long-term debt in the prior year nine-month period, which were used to fund the Precoat Acquisition.
Previous report
The Company has a credit agreement with a syndicate of financial institutions as lenders that was entered into on May 13, 2022 (the "2022 Credit Agreement"). On August 17, 2023, the Company repriced the $1.0 billion Term Loan B, which was outstanding under the 2022 Credit Agreement as of November 30, 2023. The repricing reduced the interest rate margin by 50 basis points to an interest rate of Secured Overnight Financing Rate ("SOFR") plus 3.75% and removed the Credit Spread Adjustment, as defined in the 2022 Credit Agreement, of 10 basis points.
Previous report
On December 20, 2023, the Company repriced the $400.0 million Revolving Credit Facility, which was outstanding under the 2022 Credit Agreement. The repricing converted from a rate of SOFR + 425 plus a Credit Spread Adjustment of 10 basis points, to a tiered rate ranging from SOFR plus 275 - 350 basis points, depending on the Company's net leverage ratio, with no Credit Spread Adjustment.
Previous report
As of November 30, 2023, we had outstanding letters of credit in the amount of $14.5 million. These letters of credit are issued for a number of reasons, but are most commonly issued to support collateral requirements with insurance companies.
Previous report
Non-GAAP Disclosures
Previous report
In addition to reporting financial results in accordance with Generally Accepted Accounting Principles in the United States ("GAAP"), we provided adjusted net income and adjusted earnings per share, (collectively, the "Adjusted Earnings Measures"), which are non-GAAP measures. Management believes that the presentation of these measures provides investors with greater transparency when comparing operating results across a broad spectrum of companies, which provides a more complete understanding of our financial performance, competitive position and prospects for future capital investment and debt reduction. Management also believes that investors regularly rely on non-GAAP financial measures, such as adjusted net income and adjusted earnings per share, to assess operating performance and that such measures may highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP.
Previous report
In calculating adjusted net income and adjusted earnings per share, management excludes intangible asset amortization, acquisition expenses, transaction related expenses and certain legal settlements and accruals. Management also provides EBITDA and Adjusted EBITDA, which are non-GAAP measures. Management defines EBITDA as earnings excluding depreciation, amortization, interest, and provision for income taxes. Adjusted EBITDA is defined as earnings excluding depreciation, amortization, interest, provision for income taxes, acquisition expenses, transaction related expenses and certain legal settlements and accruals. Management believes EBITDA and Adjusted EBITDA are used by investors to analyze operating performance and evaluate the Company's ability to incur and service debt and its capacity for making capital expenditures in the future. EBITDA and Adjusted EBITDA are also useful to investors to help assess the Company's estimated enterprise value. In addition, management believes that the adjustments shown below are useful to investors in order to allow them to compare the Company's financial results during the periods shown without the effect of each of these adjustments.
Previous report
Management provides non-GAAP financial measures for informational purposes and to enhance understanding of the Company’s GAAP consolidated financial statements. Readers should consider these measures in addition to, but not instead of or superior to, the Company's financial statements prepared in accordance with GAAP. These non-GAAP financial measures may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
Previous report
The following tables provide a reconciliation for the three and nine months ended November 30, 2023 and 2022 between the various measures calculated in accordance with GAAP to the Adjusted Earnings Measures (in thousands, except per share data):
Previous report
Adjusted Net Income and Adjusted Earnings Per Share from Continuing Operations
Previous report
(1)Earnings per share amounts included in the table above may not sum due to rounding differences. Year-to-date earnings per share does not always represent the
Previous report
sum of the quarters' earnings per share when the preferred shares for any quarter in the year-to-date period are anti-dilutive.
Previous report
(2) For the nine months ended November 30, 2022, the calculation of diluted earnings per share is based on weighted average shares outstanding of 24,984, as the
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Reworded paragraphs (26)
Previous wording
Certain statements herein about our expectations of future events or results constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by terminology such as "may," "could," "should," "expects," "plans," "will," "might," "would," "projects," "currently," "intends," "outlook," "forecasts," "targets," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Such forward-looking statements are based on currently available competitive, financial, and economic data and management’s views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Forward-looking statements speak only as of the date they are made and are subject to risks that could cause them to differ materially from actual results. Certain factors could affect the outcome of the matters described herein. This Quarterly Report may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand for our products and services, including demand by the construction markets, the industrial markets, and the metal coatings markets. We could also experience additional increases in labor costs, components and raw materials including zinc and natural gas, which are used in our hot-dip galvanizing process; supply-chain vendor delays; customer requested delays of our products or services; delays in additional acquisition opportunities; an increase in our debt leverage and/or interest rates on our debt, of which a significant portion is tied to variable interest rates; availability of experienced management and employees to implement AZZ’s growth strategy; a downturn in market conditions in any industry relating to the products we inventory or sell or the services that we provide; economic volatility, including a prolonged economic downturn or macroeconomic conditions such as inflation or changes in the political stability in the United States and other foreign markets in which we operate; acts of war or terrorism inside the United States or abroad; and other changes in economic and financial conditions. AZZ has provided additional information regarding risks associated with the business, including in Part I, Item 1A. Risk Factors, in AZZ's Annual Report on Form 10-K for the fiscal year ended February 28, 2023 and other filings with the SEC, available for viewing on AZZ's website at www.azz.com and on the SEC's website at www.sec.gov.
Current wording
Certain statements herein about our expectations of future events or results constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by terminology such as "may," "could," "should," "expects," "plans," "will," "might," "would," "projects," "currently," "intends," "outlook," "forecasts," "targets," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Such forward-looking statements are based on currently available competitive, financial, and economic data and management’s views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Forward-looking statements speak only as of the date they are made and are subject to risks that could cause them to differ materially from actual results. Certain factors could affect the outcome of the matters described herein. This Quarterly Report may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand for our manufactured solutions, including demand by the construction markets, the industrial markets, and the metal coatings markets. We could also experience additional increases in labor costs, components and raw materials including zinc and natural gas, which are used in our hot-dip galvanizing process; supply-chain vendor delays; customer requested delays of our manufactured solutions; delays in additional acquisition opportunities; an increase in our debt leverage and/or interest rates on our debt, of which a significant portion is tied to variable interest rates; availability of experienced management and employees to implement AZZ’s growth strategy; a downturn in market conditions in any industry relating to the manufactured solutions that we provide; economic volatility, including a prolonged economic downturn or macroeconomic conditions such as inflation or changes in the political stability in the United States and other foreign markets in which we operate; acts of war or terrorism inside the United States or abroad; and other changes in economic and financial conditions. AZZ has provided additional information regarding risks associated with the business, including in Part I, Item 1A. Risk Factors, in AZZ's Annual Report on Form 10-K for the fiscal year ended February 29, 2024 and other filings with the SEC, available for viewing on AZZ's website at www.azz.com and on the SEC's website at www.sec.gov.
Previous wording
We are a provider of hot-dip galvanizing and coil coating solutions to a broad range of end-markets, predominantly in North America. We operate three distinct business segments, the AZZ Metal Coatings segment, the AZZ Precoat Metals segment, and the AZZ Infrastructure Solutions segment. For the three and nine months ended November 30, 2023, the AZZ Infrastructure Solutions segment consists of the Company's 40% investment in the AVAIL JV. For the three and nine months ended November 30, 2022, the AZZ Infrastructure Solutions segment includes the results of operations of the AIS business prior to the divestiture of the AVAIL JV. See Note 3 of our consolidated financial statements for more information about the divestiture of the AVAIL JV. Our discussion and analysis of financial condition and results of operations is divided by each of our segments, along with corporate costs and other costs not specifically identifiable to a segment. For a reconciliation of segment operating income to consolidated operating income, see Note 8 to the consolidated financial statements. Management believes that the most meaningful analysis of our results of operations is to analyze our performance by segment. We use sales and operating income by segment to evaluate the performance of our segments. Segment operating income consists of sales less cost of sales and selling, general and administrative expenses that are specifically identifiable to a segment.
Current wording
We are a provider of hot-dip galvanizing and coil coating solutions to a broad range of end-markets, predominantly in North America. We operate three distinct business segments, the AZZ Metal Coatings segment, the AZZ Precoat Metals segment, and the AZZ Infrastructure Solutions segment. Our discussion and analysis of financial condition and results of operations is divided by each of our segments, along with corporate costs and other costs not specifically identifiable to a segment. For a reconciliation of segment operating income to consolidated operating income, see Note 6 to the consolidated financial statements. Management believes that the most meaningful analysis of our results of operations is to analyze our performance by segment. We use sales and operating income by segment to evaluate the performance of our segments. Segment operating income consists of sales less cost of sales and selling, general and administrative expenses that are specifically identifiable to a segment.
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Segment Sales and Operating Income from Continuing Operations
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Segment Sales and Operating Income
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The following table reflects the breakdown of net income from continuing operations by segment (in thousands):
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The following table reflects the breakdown of net income by segment (in thousands):
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to the AIS segment that was retained following the sale of the AIS business. See Note 17.
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receivables and liabilities that were retained following the sale of the AIS business.
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For the three months ended November 30, 2023 (the "current quarter"), consolidated sales increased $8.3 million, or 2.2%, compared to the three months ended November 30, 2022 (the "prior year quarter"). Sales for the AZZ Metal Coatings segment increased $4.9 million, or 3.1%, for the current quarter, compared to the prior year quarter. The increase was primarily due to an increase in the selling price, partially offset by a lower volume of steel processed during the quarter. Sales for the AZZ Precoat Metals segment increased $3.4 million, or 1.6% for the current quarter. The increase is primarily due to an increase in selling price, partially offset by a lower volume of coil coated in the current period.
Current wording
For the current quarter, consolidated sales increased $22.3 million, or 5.7%, compared to the three months ended May 31, 2023 (the "prior year quarter"). Sales for the AZZ Metal Coatings segment increased $7.9 million, or 4.7%, for the current quarter, compared to the prior year quarter. The increase was primarily due to a higher volume of steel processed $11.7 million, partially offset by a lower average selling price due to product mix $3.0 million, and a decrease in other sales $0.9 million.
Previous wording
For the current quarter, consolidated operating income increased $7.4 million, or 16.4%, compared to the prior year quarter.
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For the current quarter, consolidated operating income increased $4.3 million, or 6.5%, compared to the prior year quarter.
Previous wording
Operating income for the AZZ Metal Coatings segment increased $4.3 million, or 12.8% for the current quarter, compared to the prior year quarter. The current quarter increase was due to increased sales as described above, coupled with lower cost of sales, partially offset by higher selling, general and administrative expenses. The decrease in cost of sales of $4.2 million was primarily due to lower zinc and overhead costs, and a change in classification of amortization of intangible assets of $1.9 million, partially offset by an increase in labor costs. Selling, general and administrative expense increased due to the recognition of a $4.5 million legal accrual, and the change in classification of certain compensation and information technology costs of $0.7 million, to the AZZ Metal Coatings segment, from the Corporate segment.
Current wording
Operating income for the AZZ Metal Coatings segment increased $2.5 million, or 5.4% for the current quarter, compared to the prior year quarter. The current quarter increase was due to increased sales as described above, partially offset by higher cost of sales. The increase in cost of sales of $4.9 million was primarily due to an increase in labor costs $1.9 million and overhead costs $5.3 million, offset by lower zinc costs $2.3 million.
Previous wording
Interest expense for the current quarter decreased $0.3 million, to $25.9 million, compared to $26.1 million for the prior year quarter. The decrease in interest expense is primarily attributable to a decrease in the weighted average debt outstanding, partially offset by an increase in interest rates on our outstanding debt.
Current wording
Interest expense for the current quarter decreased $5.9 million, to $22.8 million, compared to $28.7 million for the prior year quarter. The decrease in interest expense is primarily attributable to a decrease in the weighted average debt outstanding of $120.0 million and a decrease in the weighted average interest rate on our outstanding debt of 0.98% in the current quarter compared to the prior quarter, coupled with higher capitalized interest of $1.2 million.
Previous wording
The provision for income taxes from continuing operations reflects an effective tax rate of 24.6% for the three months ended November 30, 2023, compared to 11.7% for the three months ended November 30, 2022. The increase in the effective tax rate is attributable to a favorable adjustment in the prior year period due to the recognition of an outside basis difference related to the AVAIL JV.
Current wording
The provision for income taxes reflects an effective tax rate of 22.4% for the three months ended May 31, 2024, compared to 25.3% for the three months ended May 31, 2023. The decrease in the effective tax rate is attributable to higher discrete items driven by tax deductions for stock compensation.
Previous wording
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 generally include cash dividend payments, capital improvements, debt repayment, acquisitions, and share repurchases. 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.
Current wording
We have historically met our cash needs through a combination of cash flows from operating activities along with equity from capital markets and from bank and bond market debt. Our cash requirements generally include quarterly cash dividend payments, capital improvements and debt repayment. We believe that our cash position, cash flows from operating activities, access to capital markets and our expectation of continuing availability to draw upon our credit facilities are sufficient to meet our cash flow needs for the foreseeable future.
Previous wording
The 2022 Credit Agreement includes the following significant terms:
Current wording
We have a credit agreement with a syndicate of financial institutions that was entered into on May 13, 2022, and was subsequently amended on August 17, 2023, December 20, 2023 and March 20, 2024 (collectively referred to herein as the "2022 Credit Agreement"). The 2022 Credit Agreement includes the following significant terms:
Previous wording
i. provides for a senior secured initial term loan in the aggregate principal amount of $1.3 billion (the "Term Loan B"), due May 13, 2029, which is secured by substantially all of the assets of the Company;
Current wording
i. provides for a senior secured initial term loan in the aggregate principal amount of $1.3 billion (the "Term Loan B"), due May 13, 2029, which is secured by substantially all of the assets of the Company; as of May 31, 2024, the outstanding balance of the Term Loan B was $950.3 million;
Previous wording
iv. borrowings under the Term Loan B bear an interest rate of SOFR plus 3.75% (following the repricing on August 17, 2023 as noted above) and the Revolving Credit Facility bears an interest rate of SOFR plus 4.25% (as of November 30, 2023—see below for information related to the repricing of the Company’s Revolving Credit Facility on December 20, 2023);
Current wording
iv. borrowings under the Term Loan B bear a tiered interest rate of Secured Overnight Financing Rate ("SOFR") plus 3.25% (following the repricing on March 20, 2024 as described below) and the Revolving Credit Facility bears a leverage-based rate with various tiers between 2.75% and 3.50% as of May 31, 2024 the interest rate was SOFR plus 2.75%;
Previous wording
The Company utilizes proceeds from the Revolving Credit Facility primarily to finance working capital needs, capital improvements, dividends, acquisitions and for general corporate purposes.
Current wording
We primarily utilize proceeds from the Revolving Credit Facility to finance working capital needs, capital improvements, quarterly cash dividends, acquisitions and other general corporate purposes.
Previous wording
As defined in the credit agreement, quarterly prepayments were due against the outstanding principal of the Term Loan B and were payable on the last business day of each May, August, November and February, beginning August 31, 2022, in a quarterly aggregate principal amount of $3.25 million, with the entire remaining principal amount due on May 13, 2029, the maturity date. Additional prepayments made against the Term Loan B contribute to these required quarterly payments. Due to a prepayment of $240.0 million that the Company made on the Term Loan B during fiscal year 2023 in connection with the sale of the AIS business, the quarterly mandatory principal payment requirement has been met, and the quarterly payments of $3.25 million are not required at this time.
Current wording
As defined in the 2022 Credit Agreement, quarterly prepayments were due against the outstanding principal of the Term Loan B and were payable on the last business day of each May, August, November and February, beginning August 31, 2022, in a quarterly aggregate principal amount of $3.25 million, with the entire remaining principal amount due on May 13, 2029, the maturity date. Additional prepayments made against the Term Loan B contribute to these required quarterly payments. Due to prepayments made against the Term Loan B since August 31, 2022, the quarterly mandatory principal payment requirement has been met, and the quarterly payments of $3.25 million are not required at this time.
Previous wording
The weighted average interest rate for the Company's outstanding debt, including the Revolving Credit Facility and the Term Loan B, was 8.54% at November 30, 2023.
Current wording
The weighted average interest rate for our outstanding debt, including the Revolving Credit Facility and the Term Loan B, was 8.09% and 9.07% as of May 31, 2024 and 2023, respectively.
Previous wording
The Company's credit agreement required the Company to maintain a maximum Total Net Leverage Ratio (as defined in the loan agreement) no greater than 6.25 through November 2022. For each subsequent quarter, the maximum ratio decreases by 25 basis points through May 31, 2024, when the maximum Total Net Leverage Ratio reaches 4.5. As of November 30, 2023, the Company was required to maintain a Total Net Leverage Ratio no greater than 5.0. As of November 30, 2023, we were in compliance with all covenants or other requirements set forth in the debt agreements.
Current wording
Our 2022 Credit Agreement requires us to maintain a maximum Total Net Leverage Ratio (as defined in the loan agreement) no greater than 4.5. As of May 31, 2024, we were in compliance with all covenants and other requirements set forth in the 2022 Credit Agreement.
Previous wording
As of November 30, 2023, we had $1.04 billion of floating- and fixed-rate debt outstanding on the Revolving Credit Facility and the Term Loan B, with varying maturities through fiscal 2029. As of November 30, 2023, we are in compliance with each of the covenants related to these outstanding borrowings. Additionally, as of November 30, 2023, we had approximately $375.5 million of additional credit available for future draws or letters of credit.
Current wording
As of May 31, 2024, we had $985.3 million of debt outstanding on the Revolving Credit Facility and the Term Loan B, with varying maturities through fiscal 2029. We had approximately $350.7 million of additional credit available as of May 31, 2024.
Previous wording
As of November 30, 2023, we had total outstanding letters of credit in the amount of $14.5 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, performance periods and insurance collateral.
Current wording
As of May 31, 2024, we had total outstanding letters of credit in the amount of $14.3 million. These letters of credit are most commonly issued in lieu of customer retention withholding payments covering warranty, performance periods and insurance collateral.
Previous wording
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable-rate debt. We utilize interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable-rate debt. On September 27, 2022, the Company entered into an interest rate swap agreement with banks that are parties to the 2022 Credit Agreement. On October 7, 2022, the agreement was amended to change the SOFR-based component of the interest rate on a portion of our variable-rate debt to a fixed rate of 4.277%, resulting in a total fixed rate of 8.627% (the "2022 Swap"). On August 17, 2023, the Company repriced its Term Loan B, to which the 2022 Swap is related, to reduce the interest rate to SOFR + 3.75%. Following the repricing, the 2022 Swap has a total fixed rate of 8.027%. The 2022 Swap had an initial notional amount of $550.0 million and a maturity date of September 30, 2025. The notional amount of the interest rate swap decreases by a pro-rata portion of any quarterly principal payments made on the Term Loan B, and the current notional amount is $543.1 million. The objective of the 2022 Swap is to eliminate the variability of cash flows in interest payments attributable to changes in benchmark one-month SOFR interest rates, for approximately one-half of the total amount of our variable-rate debt. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month SOFR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable-rate debt. We designated the 2022 Swap as a cash flow hedge at inception. Cash settlements, in the form of cash payments or cash receipts, of the 2022 Swap are recognized in interest expense.
Current wording
We manage our exposure to fluctuations in interest rates on our floating-rate debt by entering into interest rate swap agreements to convert a portion of our variable-rate debt to a fixed rate. On September 27, 2022, we entered into a fixed-rate interest rate swap agreement, which was subsequently amended on October 7, 2022, (the "2022 Swap"), with banks that are parties to the 2022 Credit Agreement, to change the SOFR-based component of the interest rate. The 2022 Swap converts the SOFR portion to 4.277%. On March 20, 2024, we repriced our Term Loan B to SOFR plus 3.25%, resulting in a total fixed rate of 7.527%. The 2022 Swap had an initial notional amount of $550.0 million and a maturity date of September 30, 2025. The notional amount of the interest rate swap decreases by a pro-rata portion of any quarterly principal payments made on the Term Loan B, and the current notional amount is $540.4 million as of May 31, 2024. The objective of the 2022 Swap is to eliminate the variability of cash flows in interest payments attributable to changes in benchmark one-month SOFR interest rates, for a portion of our variable-rate debt. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month SOFR interest rates over the interest rate swap term. The changes in cash flows of the 2022 Swap exactly offset changes in cash flows of the variable-rate debt. We designated the 2022 Swap as a cash flow hedge at inception. Cash payments or receipts to settle the 2022 Swap are recognized in interest expense.
Previous wording
We are expanding our coatings capabilities by constructing a new 25-acre aluminum coil coating facility in Washington, Missouri that is expected to be operational in 2025. The new facility will be included in the AZZ Precoat Metals segment and is supported by a take-or-pay contract for approximately 75% of the output from the new plant. We expect to spend approximately $125.8 million in progress payments over the estimated two-year construction timeline and we currently have capital commitments of approximately $48.4 million. We expect to pay approximately $71.2 million in fiscal 2024, of which $33.6 million was paid during the current nine-month period. The remaining payments in fiscal 2024 are expected to be funded through cash flows from operations and borrowings under the Revolving Credit Facility. The project is not expected to result in a material adverse effect on our business, results of operations, cash flow or financial condition.
Current wording
We are expanding our coatings capabilities by constructing a new 25-acre aluminum coil coating facility in Washington, Missouri that is expected to be operational in calendar year 2025 (the Company fiscal year 2026). The new greenfield facility will be included in the AZZ Precoat Metals segment and is supported by a take-or-pay contract for approximately 75% of the output from the new plant. We expect to spend approximately $124.0 million in capital payments over the life of the project, of which $60.8 million was paid prior to fiscal 2025 and $16.2 million was paid during the three months ended May 31, 2024. The remaining balance of $47.0 million is to occur prior to the end of fiscal 2025, of which we have capital commitments of $28.6 million. The remaining payments in fiscal 2025 are expected to be funded through cash flows from operations.
Previous wording
During the nine months ended November 30, 2023 and 2022, to prioritize repayments of debt, including debt incurred to finance the Precoat Acquisition, the Company did not repurchase shares of common stock under the 2020 Share Authorization. The Company has $84.0 million that may be used to purchase shares. See Part II, “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.”
Current wording
During the three months ended May 31, 2024 and 2023, we did not repurchase shares of common stock under the 2020 Share Authorization. As of May 31, 2024, we had $53.2 million available under the 2020 Share Authorization that may be used to purchase shares in the future. See Part II, “Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.”
Previous wording
We have exposure to commodity price increases in all three of our operating segments, primarily zinc and natural gas in the AZZ Metal Coatings segment, and natural gas, steel and aluminum in the AZZ Precoat Metals segment. We attempt to minimize these increases through fixed cost contract purchases on zinc and natural gas. 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. We have indirect exposure to copper, aluminum, steel and nickel-based alloys in the AZZ Infrastructure Solutions segment through our 40% investment in the AVAIL JV.
Current wording
We have exposure to commodity price increases in all three of our operating segments, primarily zinc and natural gas in the AZZ Metal Coatings segment, and natural gas, steel and aluminum in the AZZ Precoat Metals segment. We attempt to minimize these increases by entering into agreements with our zinc suppliers and such agreements generally include fixed premiums, and by entering into agreements with our natural gas suppliers to fix a portion of our purchase cost. 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 to match inflationary increases where competitively feasible. We have indirect exposure to copper, aluminum, steel and nickel-based alloys in the AZZ Infrastructure Solutions segment through our 40% investment in the AVAIL JV.
Previous wording
As of November 30, 2023, the Company did not have any off-balance sheet arrangements as defined under SEC rules. Specifically, there were no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on the financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
Current wording
As of May 31, 2024, we did not have any off-balance sheet arrangements as defined under SEC rules. Specifically, there were no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on the financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
Previous wording
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. We continuously evaluate our estimates and assumptions based upon current facts, historical experience, and various other factors that we believe are reasonable under the circumstances to determine reported amounts of assets, liabilities, sales and expenses that are not readily apparent from other sources.
Current wording
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes.
Rearranged previous paragraphs (3)
Previous report — wording carried elsewhere
Segment Sales and Operating Income from Continuing Operations
Previous report — wording carried elsewhere
The following table reflects the breakdown of net income from continuing operations by segment (in thousands):
Previous report — wording carried elsewhere
Equity in Earnings of Unconsolidated Entities