AZZ INC. Forward Looking Statements 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," "should," "expects," "plans," "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. In addition, certain factors could affect the outcome of the matters described herein. This report may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand for the products and services offered byAZZ Inc. ("AZZ", the "Company", "our" or "we") including demand by the metal coatings market, power generation markets, electrical transmission and distribution markets, and the industrial markets, each of which may be impacted by the ongoing COVID-19 pandemic where our ability to assess the future and full impact on the Company, our customers and our suppliers is limited. We could also experience fluctuations in prices and raw material cost, including zinc and natural gas, which are used in our hot dip galvanizing process or other potential supply-chain disruptions or customer requested delays of our products or services; changes in the political stability and economic conditions impacting our business in the domestic and foreign markets that we serve; customer requested delays of shipments; additional acquisition opportunities; currency exchange rates; adequacy of financing; 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; and acts of war or terrorism insidethe United States or abroad. AZZ has provided additional information regarding risks associated with the business in AZZ's Annual Report on Form 10-K for the fiscal year endedFebruary 29, 2020 and other filings with theSEC , available for viewing on AZZ's website at www.azz.com and on theSEC's website at www.sec.gov. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise. The following discussion should be read in conjunction with management's discussion and analysis contained in our Annual Report on Form 10-K for the fiscal year endedFebruary 29, 2020 , and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q. Results of Operations Strategy We have a developed strategy and periodically review our strategy against our performance, market conditions and competitive threats. As a result of our ongoing evaluations and assessments, as well as the uncertainties brought upon the Company by the COVID-19 pandemic, we further evaluated our strategies and better defined our core and non-core operations. As a result of this ongoing assessment, during the second quarter of fiscal year 2021, management approved a plan to divest certain businesses, close certain under-performing operations and recorded impairment charges against assets. During the third quarter of fiscal 2021, we publicly announced strategic and financial initiatives to enhance shareholder value. We are conducting a comprehensive Board-led review of our portfolio and capital allocation and have engaged leading independent financial, legal and tax advisors in support of this review. These actions will allow us to accelerate the strategy to become a more focused metal coatings company, which we believe will more rapidly enhance shareholder value. During the third quarter of fiscal 2021, we divested two businesses and closed one underperforming operation. See "Restructuring and Impairment charges" below. Coronavirus (COVID-19) InMarch 2020 , theWorld Health Organization declared the viral strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. The spread of COVID-19 resulted in virtually all governments issuing restrictive orders, including "shelter in place" orders around the globe to assist in mitigating the spread of the virus. 20 -------------------------------------------------------------------------------- Table of Contents Subsequently, inMarch 2020 , theDepartment of Homeland Security's Cybersecurity and Infrastructure Security Agency ("CISA") department issued guidance clarifying that critical infrastructure industries have a responsibility to maintain operations while these restrictive measures are in place. Based on input from the government and our customers, we continue to operate under the CISA guidelines in an effort to support critical infrastructure in the areas where we are either required to do so, or where we are able. We have been impacted by the inability for our Infrastructure Solutions Industrial Platform to access certain customer sites to perform services, temporary slow-downs in order placements in the Infrastructure Solutions Electrical Platform, and have incurred costs associated with maintaining safe operations across our entire business. We have been able to remain open during the entirety of the pandemic to service our customers. While we continue to support our customers, uncertainties remain regarding the duration, recurrence and, to what extent, if any, that the COVID-19 pandemic will ultimately have on the demand for our products and services or with our supply chain. As described above, the spread of COVID-19 and the resulting economic contraction has resulted in increased business uncertainty. The consequences of a prolonged economic decline could include, but are not limited to, reduced sales, increased instances of uncollectible customer receivables, and increased asset impairments in future periods. Accordingly, we cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may materially impact our consolidated balance sheet, statements of operations or statements of cash flows for fiscal year 2021 and beyond. In addition, inMarch 2020 , theU.S. government enacted the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act"), which among other things, provides employer payroll tax credits for wages paid to employees who are unable to work during the COVID-19 pandemic and options to defer payroll tax payments. Based on a preliminary evaluation of the CARES Act, we qualified for the deferral of payroll and other tax payments and we continue to evaluate certain employer payroll tax credits. Overview We have two distinct operating segments, the Metal Coatings segment and the Infrastructure Solutions segment (previously referred to as our Energy segment). 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 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. For a reconciliation of segment operating income to consolidated operating income, see Note 4 to our consolidated financial statements included in this Quarterly Report on Form 10-Q. Restructuring and Impairment Charges During the nine months endedNovember 30, 2020 , we have been executing a plan to divest certain non-core businesses. During the first nine months of fiscal 2021, we closed on the sale of two businesses, and the board of directors approved a plan to divest certain other businesses within the Company. As ofNovember 30, 2020 , one additional business in our Infrastructure Solutions segment and two non-operating locations in our Metal Coatings segment are classified as held for sale. The assets and liabilities of the businesses expected to be disposed of within the next twelve months are included in "Assets held for sale" in the accompanying consolidated balance sheet. In addition, we expect to close a small number of Metal Coatings locations that were in underperforming and lower growth geographies. During the nine months endedNovember 30, 2020 , we recorded certain charges related to these restructuring activities, which are summarized in the table below: Nine
Months Ended
Infrastructure
Metal Coatings Solutions Total
Write down on assets held for sale to
estimated sales price $ 2,930 $ 4,100 $ 7,030
Write down of assets expected to be abandoned 6,922 - 6,922
Loss on sale of subsidiaries 1,191 1,859 3,050
Write down of excess inventory - 2,511 2,511
Costs associated with assets held for sale - 756 756
Total charges $ 11,043 $ 9,226 $ 20,269
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Table of Contents Orders and Backlog Our backlog is exclusive of transaction taxes for certain foreign subsidiaries and relates entirely to our Infrastructure Solutions segment. As ofNovember 30, 2020 , backlog was$174.4 million , a decrease of$36.3 million , or 17.2%, as compared to$210.6 million as ofAugust 31, 2020 . Our backlog decreased$100.1 million , or 36.5%, as compared to the same period in the prior fiscal year. For the three months endedNovember 30, 2020 , our incoming net bookings decreased by$69.3 million , or 27.0%, when compared to same period of fiscal 2020 and our book-to-sales ratio decreased to 0.86 to 1 from 0.91 to 1. These decreases were primarily attributable to a decrease in net bookings related to lower overall demand for our electrical products, which was due primarily to the slowdown in the economy as a result of COVID-19. The reductions in backlog were also due to a decrease in net bookings compared to the nine months endedNovember 30, 2019 , related primarily to certain large international projects that were recorded in prior years with no corresponding sales in the current period.
The table below includes the progression of backlog (dollars in thousands):
Period Ended Period Ended
Backlog 2/29/2020 $ 243,799 2/28/2019 $ 332,894
Net bookings 174,865 256,344
Sales recognized (213,293) (289,123)
Backlog 5/31/2020 $ 205,371 5/31/2019 $ 300,115
Book to sales ratio 0.82 0.89
Net bookings 208,627 238,007
Sales recognized (203,372) (236,190)
Backlog 8/31/2020 210,626 8/31/2019 301,932
Book to sales ratio 1.03 1.01
Net bookings 194,376 263,695
Backlog adjusted due to divestiture (4,026) -
Sales recognized (226,623) (291,139)
Backlog 11/30/2020 174,353 11/30/2019 274,488
Book to Sales ratio 0.86 0.91
Segment Sales
The following table reflects the breakdown of sales by segment (dollars in
thousands):
Three Months Ended November 30, Nine Months Ended November 30,
2020 2019 2020 2019
Sales:
Metal Coatings $ 115,616 $ 129,196 $ 351,643 $ 376,193
Infrastructure Solutions 111,007 161,943 291,644 440,259
Total sales $ 226,623 $ 291,139 $ 643,287 $ 816,452
For the three months ended November 30, 2020 , consolidated sales decreased $64.5
million , or 22.2%, as compared to the same period in fiscal 2020. Sales for the
Metal Coatings segment decreased $13.6 million , or 10.5%, for the three months
ended November 30, 2020 as compared to the same period in fiscal 2020. The
decrease was related to lower volumes of steel processed, due primarily to the
slowdown in the economy as a result of COVID-19. Sales for the Infrastructure
Solutions segment decreased $50.9 million , or 31.5%, for the three months ended
November 30, 2020 as compared to the same period in fiscal 2020. In the
Industrial Platform, the decrease was due to lower sales from certain large
international electrical projects recognized in the prior period with no
corresponding sales in the current period and lower sales related to oil and gas
markets.
For the nine months ended November 30, 2020 , consolidated sales decreased $173.2
million , or 21.2%, as compared to the year-to-date period in fiscal 2020. Sales
for the Metal Coatings segment decreased $24.6 million , or 6.5%, for the nine
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months ended November 30, 2020 as compared to the same period in fiscal 2020.
The decrease was related to lower volumes of steel processed, primarily due to
the slowdown in the economy as a result of COVID-19. Sales for the
Infrastructure Solutions segment decreased $148.6 million , or 33.8%, for the
nine months ended November 30, 2020 as compared to the same period in fiscal
2020. In the Industrial Platform, the decrease was due to lower sales from
certain large international electrical projects recognized in the prior period
with no corresponding sales in the current period and lower sales related to oil
and gas markets. The decrease is also due to the Westinghouse bankruptcy
settlement amounts received in the prior year-to-date period that did not repeat
in fiscal year 2021.
Segment Operating Income
The following table reflects the breakdown of operating income by segment
(dollars in thousands):
Three Months Ended November 30, Nine Months Ended November 30,
2020 2019 2020 2019
Operating income:
Metal Coatings $ 28,671 $ 27,258 $ 69,355 $ 85,323
Infrastructure Solutions 8,722 17,421 3,364 34,231
Corporate (9,522) (11,251) (29,879) (32,945)
Total operating income $ 27,871 $ 33,428 $ 42,840 $ 86,609
Operating income for the Metal Coatings segment increased $1.4 million , or 5.2%,
for the three months ended November 30, 2020 , as compared to the same period in
fiscal 2020. The increase was primarily due to a decrease in zinc costs, which
led to an increase in gross margin. The increase was partially offset by a lower
volume of steel processed, as described above. Operating income for the
Infrastructure Solutions segment decreased by $8.7 million , or 49.9%, for the
three months ended November 30, 2020 as compared to the same period in fiscal
2020. The decrease was primarily related to the decrease in sales as noted
above, as well as the loss on the sale of a subsidiary of $1.9 million for the
three months ended November 30, 2020 . See "Restructuring and Impairment charges"
above.
In the Metal Coatings segment, operating income decreased $16.0 million , or
18.7%, for the nine months ended November 30, 2020 , as compared to the same
period in fiscal 2020, primarily related to the lower volumes noted above,
partially offset by a decrease in zinc costs. Operating income was also
significantly impacted by the loss on sale of a subsidiary and impairment and
restructuring charges, which impacted operating income in the year-to-date
period by $11.0 million , of which the majority was recognized in the second
quarter of fiscal 2021. Operating income for the Infrastructure Solutions
segment decreased by $30.9 million , or 90.2%, for the nine months ended
November 30, 2020 as compared to the same period in fiscal 2020. The decrease
was primarily related to the decrease in sales as noted above, as well as
impairment charges and the loss on the sale of a subsidiary, which totaled $9.2
million for the year-to-date period. See "Restructuring and Impairment charges"
above.
Corporate Expenses
Corporate expenses decreased $1.7 million , or 15.4%, for the three months ended
November 30, 2020 , as compared to the same period in fiscal 2020. The decrease
is primarily due to lower payroll and administrative costs.
On a year-to-date basis, corporate expenditures decreased $3.1 million , or 9.3%,
to $29.9 million , compared to the same period in the prior year, primarily
driven by lower payroll, travel and other administrative costs.
Other (income) expense, net
Other income was flat at $0.7 million for the three months ended November 30,
2020 , as compared to the same period in fiscal 2020.
Other expense increased $0.4 million , to $0.8 million , for the nine months ended
November 30, 2020 , as compared to expense of $0.4 million in the comparable
prior year. The increase was primarily due to miscellaneous revenue received in
the prior year with no corresponding revenue in the current year, coupled with
miscellaneous expense in the current year with no corresponding expense in the
prior year. The increase in expense was partially offset by a decrease in
foreign currency transaction loss.
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Interest Expense
Interest expense for the three months ended November 30, 2020 was $2.3 million ,
as compared to $3.3 million for the respective prior period. Interest expense
decreased by $1.0 million , or 31.2% for the three months ended November 30,
2020 . The decrease was primarily attributable to lower average outstanding debt
balances and favorable interest rates on our variable rate debt on the revolving
credit facility.
Interest expense for the nine months ended November 30, 2020 was $7.4 million ,
as compared to $10.4 million for the respective prior period. Interest expense
decreased by $3.1 million , or 29.3%, for the nine months ended November 30,
2020 . The decrease was primarily attributable to lower average outstanding debt
balances and favorable interest rates on our variable rate debt on the revolving
credit facility. Our gross debt to equity ratio was 0.29 to 1 as of November 30,
2020 , compared to 0.39 to 1 as of November 30, 2019 , as we reduced debt during
the year-to-date period.
Income Taxes
The provision for income taxes reflects an effective tax rate of 25.1% for the
three months ended November 30, 2020 , as compared to 28.6% for the respective
prior year comparable period. The decrease in the effective tax rate was
primarily attributable to unfavorable adjustments recorded in the prior year
comparable period related to tax return to tax provision adjustments, as well as
an India tax audit settlement that was recorded in the prior year quarter.
For the nine months ended November 30, 2020 , the effective tax rate was 32.3%,
compared to 22.3% for the prior year comparable period. The increase in the
effective tax rate is primarily attributable to the fiscal 2021 restructuring
charges impact on book income, coupled with the recognition of uncertain tax
positions in the first quarter, as well as losses in foreign jurisdictions for
which the Company does not expect to recognize the benefit.
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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
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.
Cash Flows
The following table summarizes our cash flows by category for the periods
presented (dollars in thousands):
Nine
Months Ended
2020 2019
Net cash provided by operating activities $ 59,394 $ 72,054
Net cash used in investing activities (14,987) (82,834)
Net cash (used in) provided by financing
activities (64,229) 1,209
For the nine months ended November 30, 2020 , net cash provided by operating
activities was $59.4 million , net cash used in investing activities was $15.0
million , net cash used in financing activities was $64.2 million , and the net
effect of exchange rate changes on cash was an increase of $2.3 million ,
resulting in a net decrease in cash and cash equivalents of $17.5 million . In
comparison to the comparable period in fiscal 2020, the decrease in cash
provided by operating activities for the nine months ended November 30, 2020 ,
are primarily attributable to changes in working capital as a result of lower
sales. The Company's use of cash for investing activities was lower due to lower
spend on acquisitions and the sale of two businesses during the current
year-to-date period. Net cash used in financing activities increased during the
nine months ended November 30, 2020 as compared to the prior year comparable
period, primarily due to net repayments on the revolving loan in the current
year, compared to net proceeds from the revolving loan in the prior year, as
well as share repurchases in the current year.
Our working capital was $201.3 million as of November 30, 2020 , as compared to
$73.9 million as of February 29, 2020 .
On October 9, 2020 , we completed a private placement transaction and entered
into a Note Purchase Agreement, whereby we agreed to borrow $150.0 million of
senior unsecured notes (the "Notes"), consisting of two separate tranches:
•7-year borrowing:
The proceeds of the$80.0 million tranche was funded onDecember 17, 2020 . The$70.0 million tranche will be funded inJanuary 2021 . The proceeds will be utilized to repay the existing$125.0 million 5.42% Senior Notes maturing onJanuary 20, 2021 , as well as being available for general corporate purposes. Interest on the outstanding Notes will be paid semi-annually. Financing and Capital As ofNovember 30, 2020 , we had$182.0 million of floating and fixed rate notes outstanding with varying maturities through fiscal 2023 and we were in compliance with all of the covenants related to these outstanding borrowings. As ofNovember 30, 2020 , we had approximately$383.2 million of additional credit available for future draws or letters of credit. For additional information on the Company's outstanding borrowings see Note 6 of the consolidated financial statements and further below under Contractual Obligations. Share Repurchase Program OnJanuary 19, 2012 , our Board of Directors authorized the repurchase of up to ten percent of the then outstanding shares of our Common Stock (the "2012 Share Repurchase Program"). The 2012 Share Repurchase Program did not have an expiration date, and the amount and prices paid for any future share purchases under the authorization were to be based on market conditions and other factors at the time of the purchase. Repurchases under the 2012 Share Repurchase Program were made through open market purchases or private transactions in accordance with applicable federal securities laws, including Rule 10b-18 under the Exchange Act. 25
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Table of Contents OnNovember 10, 2020 , our Board of Directors authorized a$100 million share repurchase program pursuant to which the Company may repurchase its Common Stock (the "2020 Share Repurchase Program"). Repurchases under the 2020 Share Repurchase Program will be made through open market and/or private transactions, in accordance with applicable federal securities laws, and could include repurchases pursuant to Rule 10b5-1 trading plans, which allows stock repurchases when the Company might otherwise be precluded from doing so. During the nine months endedNovember 30, 2020 , the Company repurchased 852,452 of its common shares in the amount of$31.0 million at an average purchase price of$36.31 under the 2012 Share Repurchase Program. The Company did not purchase any shares under the 2020 Share Repurchase Program during the nine months endedNovember 30, 2020 . For additional information regarding our share repurchases during the current year-to-date period, see Part II, "Item 2. Unregistered Sales ofEquity Securities and Use of Proceeds." Other Exposures We have exposure to commodity price increases in both segments of our business, primarily copper, aluminum, steel and nickel based alloys in the Infrastructure Solutions segment and zinc and natural gas in the Metal Coatings 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 Arrangements and Contractual Obligations As ofNovember 30, 2020 , we did not have any off-balance sheet arrangements as defined underSEC 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. The following summarizes our operating lease obligations, purchase commitments, debt principal payments, and interest payments for the remainder of the next five fiscal years and beyond (in thousands):
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