AZZ INC [AZZ] Filings

10-Q 1 azz-20240831.htm 10-Q azz-20240831

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended August 31, 2024


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number: 1-12777

AZZ Inc.

(Exact name of registrant as specified in its charter)


Texas		75-0948250
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

One Museum Place, Suite 500
3100 West 7th Street
Fort Worth,	Texas	76107
(Address of principal executive offices)		(Zip Code)

(817) 810-0095

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock

AZZ

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☐ No ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

As of October 4, 2024, the registrant had outstanding 29,876,952 shares of common stock; $1.00 par value per share.

Table of Contents


		PAGE NO.
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Balance Sheets	3
	Condensed Consolidated Statements of Operations	4
	Condensed Consolidated Statements of Comprehensive Income (Loss)	5
	Condensed Consolidated Statements of Cash Flows	6
	Condensed Consolidated Statements of Changes in Shareholders’ Equity	7
	Notes to Condensed Consolidated Financial Statements	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4.	Controls and Procedures	39

PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	39
Item 1A.	Risk Factors	40
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 5	Other Information	40
Item 6.	Exhibits	41

	SIGNATURES	42

Table of Contents

PART I. FINANCIAL INFORMATION

AZZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


	As of
	August 31, 2024		February 29, 2024

Assets
Current assets:
Cash and cash equivalents	$	2,152	$	4,349
Trade accounts receivable, net of allowance for credit losses of $(2,128) and $(2,347) at August 31, 2024 and February 29, 2024, respectively	153,108		142,246
Other receivables	22,804		15,599
Inventories	115,249		117,656
Contract assets	93,983		79,335
Prepaid expenses and other	13,860		7,814


Total current assets	401,156		366,999
Property, plant and equipment, net	569,732		541,652
Right-of-use assets	22,053		23,739
Goodwill	705,724		705,468
Deferred tax assets	5,616		5,606
Intangible assets, net	433,929		445,435
Investment in AVAIL joint venture	97,768		98,169
Other assets	4,352		8,437

Total assets	$	2,240,330	$	2,195,505
Liabilities, Mezzanine Equity and Shareholders’ Equity
Current liabilities:
Accounts payable	$	108,699	$	88,001
Income taxes payable	1,919		172
Accrued salaries and wages	24,947		30,823
Other accrued liabilities	74,991		68,651
Lease liability, short-term	6,574		6,659


Total current liabilities	217,130		194,306
Long-term debt, net	912,572		952,742
Lease liability, long-term	16,263		17,827
Deferred tax liabilities	42,261		38,567
Other long-term liabilities	52,348		57,572

Total liabilities	1,240,574		1,261,014
Commitments and contingencies (Note 16)
Mezzanine equity:
Series A Preferred Stock, $1,000 par value; 100,000 shares authorized; 240 shares issued and outstanding February 29, 2024; aggregate liquidation preference $312,520 at February 29, 2024	—		233,722
Shareholders’ equity:
Common stock, $1 par value; 100,000 shares authorized; 29,877 and 25,102 shares issued and outstanding at August 31, 2024 and February 29, 2024, respectively	29,877		25,102
Capital in excess of par value	411,263		103,330
Retained earnings	565,511		576,231
Accumulated other comprehensive loss	(6,895)		(3,894)
Total shareholders’ equity	999,756		700,769
Total liabilities, mezzanine equity and shareholders' equity	$	2,240,330	$	2,195,505

The accompanying notes are an integral part of the consolidated financial statements.

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share and dividend amounts)

(Unaudited)


	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Sales	$	409,007	$	398,542	$	822,215	$	789,415
Cost of sales	305,493		301,296		616,031		595,150
Gross margin	103,514		97,246		206,184		194,265

Selling, general and administrative	35,868		36,239		68,789		67,762

Operating income	67,646		61,007		137,395		126,503

Interest expense, net	(21,909)		(27,770)		(44,683)		(56,476)
Equity in earnings of unconsolidated subsidiaries	1,478		974		5,302		2,394
Other income, net	417		88		621		50
Income before income taxes	47,632		34,299		98,635		72,471
Income tax expense	12,213		5,967		23,614		15,617




Net income	35,419		28,332		75,021		56,854
Series A Preferred Stock Dividends	—		(3,600)		(1,200)		(7,200)
Redemption premium on Series A Preferred Stock	—		—		(75,198)		—
Net income (loss) available to common shareholders	$	35,419	$	24,732	$	(1,377)	$	49,654




Basic earnings (loss) per common share	$	1.19	$	0.99	$	(0.05)	$	1.99



Diluted earnings (loss) per common share	$	1.18	$	0.97	$	(0.05)	$	1.95

Weighted average shares outstanding - Basic	29,852		25,054		28,294		24,997
Weighted average shares outstanding - Diluted	30,057		29,210		28,294		29,196

Cash dividends declared per common share	$	0.17	$	0.17	$	0.34	$	0.34

The accompanying notes are an integral part of the consolidated financial statements.

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In thousands)

(Unaudited)


	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023

Net income (loss) available to common shareholders	$	35,419	$	24,732	$	(1,377)	$	49,654
Other comprehensive income (loss):
Unrealized translation gain	864		18		439		38
Unrealized translation loss for unconsolidated subsidiary(1)	(531)		(2,885)		(531)		(1,774)


Unrealized gain (loss) on derivatives qualified for hedge accounting:
Unrealized gain (loss) on interest rate swap, net of tax(2)	(3,062)		5,254		(842)		1,869
Amounts reclassified from accumulated other comprehensive income to earnings, net of tax(3)	(1,113)		(939)		(2,214)		(1,487)
Unrealized gain on interest rate swap, net of tax for unconsolidated subsidiary(4)	6		278		147		113
Other comprehensive income (loss)	(3,836)		1,726		(3,001)		(1,241)
Comprehensive income (loss)	$	31,583	$	26,458	$	(4,378)	$	48,413

(1) Unrealized translation loss for unconsolidated subsidiary is related to our unconsolidated investment in the AVAIL JV and represents our 40% interest in this amount. Net of tax benefit of $(210) for both the three and six months ended August 31, 2024 and $0 for both the three and six months ended August 31, 2023.
(2) Net of tax expense (benefit) of ($967) and $1,908 for the three months ended August 31,2024 and 2023, respectively. Net of tax expense (benefit) of ($342) and $679 for the six months ended August 31, 2024 and 2023, respectively.
(3) Net of tax benefit of ($351) and ($341) for the three months ended August 31,2024 and 2023, respectively. Net of tax benefit of $(699) and $(540) for the six months ended August 31, 2024 and 2023, respectively. See Note 8.
(4) Unrealized gain (loss) on interest rate swap, net of tax for unconsolidated subsidiary is related to our unconsolidated investment in the AVAIL JV and represents our 40% interest in this amount. Net of tax expense of $2 and $101 for the three months ended August 31,2024 and 2023, respectively. Net of tax expense of $46 and $41 for the six months ended August 31, 2024 and 2023, respectively.

The accompanying notes are an integral part of the consolidated financial statements.

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

(Unaudited)


	Six Months Ended August 31,
	2024		2023
Cash flows from operating activities
Net income (loss) available to common shareholders	$	(1,377)	$	49,654

Plus: Dividends on Series A Preferred Stock	1,200		7,200
Plus: Redemption premium on Series A Preferred Stock	75,198		—
Net income	75,021		56,854
Adjustments to reconcile net income to net cash provided by operating activities:
Bad debt expense	1		79
Depreciation and amortization	40,750		38,677
Deferred income taxes	4,881		(2,656)
Equity in earnings of unconsolidated entities	(5,302)		(2,394)
Distribution on investment in AVAIL joint venture	5,155		—





Net gain on sale of property, plant and equipment	(487)		(13)
Amortization of debt financing costs	6,219		6,062
Share-based compensation expense	7,448		4,019
Changes in current assets and current liabilities	(8,493)		21,385
Changes in other long-term assets and long-term liabilities	(5,763)		(3,672)
Net cash provided by operating activities	119,430		118,341
Cash flows from investing activities
Purchase of property, plant and equipment	(59,501)		(42,726)




Proceeds from sale of property, plant and equipment	761		20
Net cash used in investing activities	(58,740)		(42,706)
Cash flows from financing activities
Proceeds from issuance of common stock	310,237		1,464
Redemption of Series A Preferred Stock	(308,920)		—
Tax payments related to net share settlement of equity awards	(4,977)		(791)
Proceeds from Revolving Credit Facility	193,000		142,000
Payments on Revolving Credit Facility	(148,000)		(202,000)

Payments of debt financing costs	(715)		(1,203)
Payments on long term debt and finance lease liabilities	(90,432)		(162)

Payments of dividends	(12,943)		(15,688)
Net cash used in financing activities	(62,750)		(76,380)
Effect of exchange rate changes on cash	(137)		33




Net decrease in cash and cash equivalents	(2,197)		(712)
Cash and cash equivalents at beginning of period	4,349		2,820


Cash and cash equivalents at end of period	$	2,152	$	2,108

The accompanying notes are an integral part of the consolidated financial statements.

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AZZ INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

(In thousands)

(Unaudited)


		Three Months Ended August 31, 2024
	Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total
		Shares									Amount
Balance at May 31, 2024		29,814	$	29,814	$	405,309	$	535,168	$	(3,059)		$	967,232
Share-based compensation		—	—		4,903		—		—			4,903

Common stock issued under stock-based plans and related tax expense		20	20		(420)		—		—			(400)
Common stock issued under employee stock purchase plan		43	43		1,526		—		—			1,569
Secondary public offering and issuance of additional common stock		—	—		(55)		—		—			(55)


Cash dividends paid on common stock		—	—		—		(5,076)		—			(5,076)

Net income		—	—		—		35,419		—			35,419
Other comprehensive loss		—	—		—		—		(3,836)			(3,836)
Balance at August 31, 2024		29,877	$	29,877	$	411,263	$	565,511	$	(6,895)		$	999,756


		Six Months Ended August 31, 2024
	Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total
		Shares									Amount
Balance at February 29, 2024		25,102	$	25,102	$	103,330	$	576,231	$	(3,894)		$	700,769
Share-based compensation		—	—		7,438		—		—			7,438

Common stock issued under stock-based plans and related tax expense		132	132		(5,099)		—		—			(4,967)
Common stock issued under employee stock purchase plan		43	43		1,526		—		—			1,569
Secondary public offering and issuance of additional common stock		4,600	4,600		304,068		—		—			308,668

Dividends on Series A Preferred Stock		—	—		—		(1,200)		—			(1,200)
Cash dividends paid on common stock		—	—		—		(9,343)		—			(9,343)
Redemption premium on Series A Preferred Stock		—	—		—		(75,198)		—			(75,198)
Net income		—	—		—		75,021		—			75,021
Other comprehensive loss		—	—		—		—		(3,001)			(3,001)
Balance at August 31, 2024		29,877	$	29,877	$	411,263	$	565,511	$	(6,895)		$	999,756

Table of Contents


		Three Months Ended August 31, 2023
	Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total

		Shares									Amount
Balance at May 31, 2023		25,013	$	25,013	$	93,449	$	526,729	$	(7,540)		$	637,651
Share-based compensation		—	—		2,115		—		—			2,115

Common stock issued under stock-based plans and related tax expense		22	22		898		—		—			920
Common stock issued under employee stock purchase plan		42	42		1,422		—		—			1,464

Dividends on Series A Preferred Stock		—	—		—		(3,600)		—			(3,600)
Cash dividends paid on common stock		—	—		—		(4,253)		—			(4,253)
Net income		—	—		—		28,332		—			28,332
Other comprehensive loss		—	—		—		—		1,726			1,726
Balance at August 31, 2023		25,077	$	25,077	$	97,884	$	547,208	$	(5,814)		$	664,355


		Six Months Ended August 31, 2023
	Common Stock		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total
		Shares									Amount
Balance at February 28, 2023		24,912	$	24,912	$	93,357	$	506,042	$	(4,573)		$	619,738
Share-based compensation		—	—		4,019		—		—			4,019

Common stock issued under stock-based plans and related tax expense		123	123		(914)		—		—			(791)
Common stock issued under employee stock purchase plan		42	42		1,422		—		—			1,464

Dividends on Series A Preferred Stock		—	—		—		(7,200)		—			(7,200)
Cash dividends paid on common stock		—	—		—		(8,488)		—			(8,488)
Net income		—	—		—		56,854		—			56,854
Other comprehensive loss		—	—		—		—		(1,241)			(1,241)
Balance at August 31, 2023		25,077	$	25,077	$	97,884	$	547,208	$	(5,814)		$	664,355

The accompanying notes are an integral part of the consolidated financial statements.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. The Company and Basis of Presentation

AZZ Inc. ("AZZ", the "Company", "our" or "we") was established in 1956 and incorporated under the laws of the state of Texas. We are a provider of hot-dip galvanizing and coil coating solutions to a broad range of end-markets in North America. We have three distinct operating segments: the AZZ Metal Coatings segment, the AZZ Precoat Metals segment, and the AZZ Infrastructure Solutions segment. Our AZZ Metal Coatings segment is a leading provider of metal finishing solutions for corrosion protection, including hot-dip galvanizing, spin galvanizing, powder coating, anodizing and plating to the North American steel fabrication industry and other industries. The AZZ Precoat Metals segment provides aesthetic and corrosion protective coatings and related value-added services for steel and aluminum coil, primarily serving the construction; appliance; heating, ventilation, and air conditioning (HVAC); container; transportation and other end markets in North America. The AZZ Infrastructure Solutions segment represents our 40% non-controlling interest in AIS Investment Holdings LLC (the "AVAIL JV"). AIS Investment Holdings LLC is primarily dedicated to delivering safe and reliable transmission of power from generation sources to end customers, and automated weld overlay solutions for corrosion and erosion mitigation to critical infrastructure in markets worldwide.

Presentation

The accompanying condensed consolidated balance sheet as of February 29, 2024 was derived from audited financial statements. The unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by U.S. GAAP for complete consolidated financial statements. These financial statements should be read in conjunction with the audited financial statements and related notes for the fiscal year ended February 29, 2024, included in our Annual Report on Form 10-K covering such period which was filed with the Securities and Exchange Commission ("SEC") on April 22, 2024. Certain previously reported amounts have been reclassified to conform to current period presentation.

Our fiscal year ends on the last day of February and is identified as the fiscal year for the calendar year in which it ends. For example, the fiscal year ending February 28, 2025 is referred to as fiscal 2025.

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, consisting only of normal recurring adjustments, which are necessary to present fairly the financial position of the Company as of August 31, 2024, the results of its operations and cash flows for the three and six months ended August 31, 2024 and 2023. The interim results reported herein are not necessarily indicative of results for a full year.

Accounting Pronouncements Not Yet Adopted

In December 2023, the FASB issued Accounting Standards Update ("ASU") 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures ("ASU 2023-09"), which expands disclosures in an entity’s income tax rate reconciliation table and regarding cash taxes paid both in the U.S. and foreign jurisdictions. The update will be effective for annual periods beginning after December 15, 2024. We expect to adopt ASU 2023-09 for the annual period ending February 28, 2025 and the adoption will not affect our financial position or our results of operations, but will result in additional disclosures.

In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures ("ASU 2023-07"), which expands disclosures about a public entity’s reportable segments and requires more enhanced information about a reportable segment’s expenses, interim segment profit or loss, and how a public entity’s chief operating decision maker uses reported segment profit or loss information in assessing segment performance and allocating resources. ASU 2023-07 is effective for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. We do not expect the adoption of ASU 2023-07 to affect our financial position or our results of operations, but will result in additional disclosures for our annual reporting period ending February 28, 2025 and interim reporting periods in fiscal 2026.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

2. Inventories

The following table summarizes the components of inventory (in thousands):


	As of
	August 31, 2024		February 29, 2024
Raw material	$	111,728	$	111,674
Work in process	552		898
Finished goods	2,969		5,084
Total inventories	$	115,249	$	117,656

Our inventory reserves were $3.5 million and $4.5 million as of August 31, 2024 and February 29, 2024, respectively. Inventory cost is determined principally using the first-in-first-out (FIFO) method for the AZZ Metal Coatings segment and the specific identification method for the Precoat Metals segment.

3. Earnings Per Share

Basic earnings per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the year.

On April 30, 2024, we completed a secondary public offering in which we issued 4.6 million common shares. The weighted average number of shares for the period outstanding for the six months ended August 31, 2024 are included in weighted average shares outstanding for basic earnings per share. See Note 14. As of August 31, 2024, there were 29.9 million common shares outstanding, which includes the shares from the secondary public offering.

The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):


	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Numerator:
Net income	$	35,419	$	28,332	$	75,021	$	56,854
Series A Preferred Stock Dividends	—		(3,600)		(1,200)		(7,200)
Redemption premium on Series A Preferred Stock	—		—		(75,198)		—
Numerator for basic earnings per share	$	35,419	$	24,732	$	(1,377)	$	49,654

Series A Preferred Stock Dividends	—		3,600		—		7,200
Numerator for diluted earnings per share	$	35,419	$	28,332	$	(1,377)	$	56,854








Denominator:
Weighted average shares outstanding for basic earnings per share	29,852		25,054		28,294		24,997
Effect of dilutive securities:
Employee and director stock awards	205		39		—		82

Series A Preferred Stock	—		4,117		—		4,117
Denominator for diluted earnings per share	30,057		29,210		28,294		29,196




Basic earnings (loss) per common share	$	1.19	$	0.99	$	(0.05)	$	1.99



Diluted earnings (loss) per common share	$	1.18	$	0.97	$	(0.05)	$	1.95

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

For the three months ended August 31, 2024 and 2023, there were 76,068 and 126,882 shares, respectively, related to employee equity awards that were excluded from the computation of diluted earnings per share, as their effect would have been anti-dilutive. For the six months ended August 31, 2024 and 2023, 70,455 and 125,793 shares, respectively, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive. For the six months ended August 31, 2024, all shares related to the Series A Preferred Stock (1.6 million weighted average shares) were excluded from the computation of diluted earnings per share, as their effect would be anti-dilutive. These shares could be dilutive in future periods.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

4. Disaggregated Sales

The following table presents disaggregated sales by customer industry (in thousands):


	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Sales:
Construction	$	233,196	$	216,807	$	461,691	$	422,337
Industrial	36,691		42,245		76,767		82,889
Transportation	36,550		35,869		74,913		72,626
Consumer	31,408		34,673		65,169		70,258
Utilities	30,731		25,905		59,346		51,312
Other (1)	40,431		43,043		84,329		89,993
Total Sales	$	409,007	$	398,542	$	822,215	$	789,415

(1) Other includes less significant markets, such as agriculture, recreation, petro-chem, AZZ Tubular products and sales from recycling.

See also Note 6 for sales information by operating segment.

Contract Assets and Liabilities

The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets (unbilled receivables), and contract liabilities (customer advances and deposits) on the consolidated balance sheets. Our contract assets and contract liabilities are primarily related to the AZZ Precoat Metals segment. Customer billing can occur subsequent to revenue recognition, resulting in contract assets. In addition, we can receive advances from our customers, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.

The increases or decreases in contract assets and contract liabilities during the six months ended August 31, 2024 were primarily due to normal timing differences between AZZ's performance and customer payments. As of August 31, 2024 and February 29, 2024, the balance for contract assets was $94.0 million and $79.3 million, respectively, primarily related to the AZZ Precoat Metals segment. The increase was primarily due to the timing differences noted above, as well as the increase in the volume of coil coated for the six months ended August 31, 2024. Contract liabilities of $0.7 million and $1.0 million as of August 31, 2024 and February 29, 2024, respectively, are included in "Other accrued liabilities" in the consolidated balance sheets.

As of August 31, 2023 and February 28, 2023, the balance for contract assets was $76.8 million and $79.3 million, respectively, primarily related to the AZZ Precoat Metals segment. Contract liabilities were $1.1 million and $1.3 million as of August 31, 2023 and February 28, 2023, respectively.

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5. Supplemental Cash Flow Information

To arrive at net cash provided by operating activities, net income is adjusted by, among other things, changes in current assets and current liabilities as follows (in thousands):


	Six Months Ended August 31,
	2024		2023
Decrease (increase) in current assets:
Accounts receivable, net	$	(10,813)	$	(13,711)
Other receivables	(7,186)		13,101
Inventories	2,454		7,460
Contract assets	(14,648)		57
Prepaid expenses and other	(6,041)		(2,544)
Increase (decrease) in current liabilities:
Accounts payable	23,269		15,037
Income taxes payable	1,747		(226)
Accrued expenses	2,725		2,211
Changes in current assets and current liabilities	$	(8,493)	$	21,385

Cash flows related to interest and income taxes were as follows (in thousands):


	Six Months Ended August 31,
	2024		2023
Cash paid for interest	$	41,227	$	51,539
Cash paid for income taxes	13,703		12,930

Supplemental disclosures of non-cash investing and financing activities were as follows (in thousands):


	Six Months Ended August 31,
	2024		2023

Accrued dividends on Series A Preferred Stock	$	—	$	2,400
Accruals for capital expenditures	5,379		5,579

6. Operating Segments

Segment Information

Our Chief Executive Officer, who is the chief operating decision maker ("CODM"), reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Sales and operating income are the primary measures used by the CODM to evaluate segment operating performance and to allocate resources to the AZZ Metal Coatings and the AZZ Precoat Metals segments, and net income is the primary measure used by the CODM to evaluate performance and allocate resources to the AZZ Infrastructure Solutions segment. Expenses related to certain centralized administration or executive functions that are not specifically related to an operating segment are included in Corporate.

A summary of each of our operating segments is as follows:

AZZ Metal Coatings — provides hot-dip galvanizing, spin galvanizing, powder coating, anodizing and plating, and other metal coating applications to the steel fabrication industry and other industries through facilities located throughout North America. Hot-dip galvanizing is a metallurgical manufacturing process in which molten zinc reacts with steel, which provides corrosion protection and extends the lifecycle of fabricated steel for several decades.

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AZZ Precoat Metals — provides coil coating application of protective and decorative coatings and related value-added downstream processing for steel and aluminum coils. Primarily serving the construction, appliance, heating, ventilation, and air conditioning (HVAC), container, transportation, and other end markets, the coil coating process emphasizes sustainability and enhanced product lifecycles. It involves cleaning, treating, painting, and curing metal coils as a flat material before they are cut, formed, and fabricated into finished products. This highly efficient method optimizes waste through tight film control and improves final product performance by painting and curing the substrates under conditions unmatched by other application processes.

AZZ Infrastructure Solutions — consists of the equity in earnings of our 40% investment in the AVAIL JV, as well as other expenses directly related to AIS receivables and liabilities that were retained following the divestiture of the AIS business. The AVAIL JV is a global provider of application-critical equipment, highly engineered technologies, and specialized services to the power generation, transmission, distribution, oil and gas, and industrial markets.

The following tables contain operating segment data for the three and six months ended August 31, 2024 and 2023 by segment, for the Company's corporate operations and on a consolidated basis (in thousands):


	Three Months Ended August 31, 2024
	Metal Coatings		Precoat Metals		Infrastructure Solutions(1)		Corporate(2)		Total
Sales	$	171,500	$	237,507	$	—	$	—	$	409,007
Cost of sales	118,193		187,300		—		—		305,493
Gross margin	53,307		50,207		—		—		103,514

Selling, general and administrative	5,619		7,677		9		22,563		35,868

Operating income (loss)	47,688		42,530		(9)		(22,563)		67,646

Interest expense	—		—		—		(21,909)		(21,909)
Equity in earnings of unconsolidated subsidiaries	—		—		1,478		—		1,478
Other (expense) income	(7)		—		—		424		417
Income (loss) before income tax	$	47,681	$	42,530	$	1,469	(44,048)		47,632
Income tax expense							12,213		12,213
Net income (loss)							$	(56,261)	$	35,419

See notes below tables.


	Six Months Ended August 31, 2024
	Metal Coatings		Precoat Metals		Infrastructure Solutions(1)		Corporate(2)		Total
Sales	$	348,152	$	474,063	$	—	$	—	$	822,215
Cost of sales	240,929		375,102		—		—		616,031
Gross margin	107,223		98,961		—		—		206,184

Selling, general and administrative	11,602		16,338		38		40,811		68,789

Operating income (loss)	95,621		82,623		(38)		(40,811)		137,395

Interest expense	—		—		—		(44,683)		(44,683)
Equity in earnings of unconsolidated subsidiaries	—		—		5,302		—		5,302
Other income	49		—		—		572		621
Income (loss) before income tax	$	95,670	$	82,623	$	5,264	(84,922)		98,635
Income tax expense							23,614		23,614
Net income (loss)							$	(108,536)	$	75,021

See notes below tables.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


	Three Months Ended August 31, 2023
	Metal Coatings		Precoat Metals		Infrastructure Solutions(1)		Corporate(2)		Total
Sales	$	169,837	$	228,705	$	—	$	—	$	398,542
Cost of sales	119,471		181,825		—		—		301,296
Gross margin	50,366		46,880		—		—		97,246

Selling, general and administrative	5,285		7,874		5,932		17,148		36,239

Operating income (loss)	45,081		39,006		(5,932)		(17,148)		61,007

Interest expense	—		—		—		(27,770)		(27,770)
Equity in earnings of unconsolidated subsidiaries	—		—		974		—		974
Other income	13		—		—		75		88
Income (loss) before income tax	$	45,094	$	39,006	$	(4,958)	(44,843)		34,299
Income tax expense							5,967		5,967
Net income (loss)							$	(50,810)	$	28,332

See notes below tables.


	Six Months Ended August 31, 2023
	Metal Coatings		Precoat Metals(4)		Infrastructure Solutions(1)		Corporate(2)		Total
Sales	$	338,631	$	450,784	$	—	$	—	$	789,415
Cost of sales	237,328		357,822		—		—		595,150
Gross margin	101,303		92,962		—		—		194,265

Selling, general and administrative	10,751		16,266		5,954		34,791		67,762

Operating income (loss)	90,552		76,696		(5,954)		(34,791)		126,503

Interest expense	—		—		—		(56,476)		(56,476)
Equity in earnings of unconsolidated subsidiaries	—		—		2,394		—		2,394
Other income (expense)	(11)		—		—		61		50
Income (loss) before income tax	$	90,541	$	76,696	$	(3,560)	(91,206)		72,471
Income tax expense							15,617		15,617
Net income (loss)							$	(106,823)	$	56,854

(1) Infrastructure Solutions segment includes the equity in earnings from our investment in the AVAIL JV as well as other expenses related to

receivables and liabilities that were retained following the sale of the AIS business.

(2) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Asset balances by operating segment for each period were as follows (in thousands):


	As of
	August 31, 2024		February 29, 2024
Assets:
Metal Coatings	$	550,394	$	553,505
Precoat Metals	1,557,895		1,500,122
Infrastructure Solutions - Investment in Joint Venture	97,768		98,169
Corporate	34,273		43,709


Total assets	$	2,240,330	$	2,195,505

Financial Information About Geographical Areas

Financial information about geographical areas for the periods presented was as follows (in thousands). The geographic area is based on the location of the operating facility and no customer accounted for 10 percent or more of consolidated sales.


	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Sales:
United States	$	398,658	$	388,538	$	801,709	$	769,860
Canada	10,349		10,004		20,506		19,555

Total	$	409,007	$	398,542	$	822,215	$	789,415


	As of
	August 31, 2024		February 29, 2024
Property, plant and equipment, net:
United States	$	550,761	$	522,693
Canada	18,971		18,959

Total	$	569,732	$	541,652

7. Investments in Unconsolidated Entity

AVAIL JV

We account for our 40% interest in the AVAIL JV under the equity method of accounting and include our equity in earnings as part of the AZZ Infrastructure Solutions segment. We record our equity in earnings in the AVAIL JV on a one-month lag, and we recorded $5.3 million in equity in earnings for the six months ended August 31, 2024. As of August 31, 2024, our investment in the AVAIL JV was $97.8 million, which includes an excess of $10.2 million over the underlying value of the net assets of the AVAIL JV. The excess is accounted for as equity method goodwill.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


Summarized Balance Sheet
	As of
	August 31, 2024(1)
Current assets	$	281,937
Long-term assets	177,926
Total assets	$	459,863

Current liabilities	139,333
Long-term liabilities	124,359
Total liabilities	$	263,692
Total partners' capital	196,171
Total liabilities and partners' capital	$	459,863


Summarized Operating Data
	Three Months Ended		Six Months Ended
	August 31, 2024(1)		August 31, 2024(1)
Sales	$	119,584	$	249,300
Gross profit	27,569		59,086
Net income	2,780		10,955

(1) We report our equity in earnings on a one-month lag basis; therefore, amounts in the summarized financials above are as of and for the three and six months ended July 31, 2024. Amounts in the table above exclude certain adjustments made by us to record equity in earnings of the AVAIL JV under U.S GAAP for public companies, primarily to reverse the amortization of goodwill.

8. Derivative Instruments

Interest Rate Swap Derivative

As a policy, we do not hold, issue or trade derivative instruments for speculative purposes. We periodically enter into forward sale contracts to purchase a specified volume of zinc and natural gas at fixed prices. These contracts are not accounted for as derivatives because they meet the criteria for the normal purchases and normal sales scope exception in Accounting Standards Codification ("ASC") 815, Derivatives and Hedging.

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%. See Note 17 for information related to the repricing of the Company's Term Loan B on September 24, 2024. 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 $539.0 million as of August 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.

At August 31, 2024, changes in fair value attributable to the effective portion of the 2022 Swap were included on the condensed consolidated balance sheets in accumulated other comprehensive income. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on our condensed consolidated balance sheets as derivative assets or liabilities with offsetting changes in fair value, to the extent effective, recognized in accumulated other comprehensive income

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

until reclassified into earnings when the interest expense on the underlying debt is reflected in earnings. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. During the six months ended August 31, 2024, we reclassified $2.9 million before income tax, or $2.2 million net of tax, from other comprehensive income to earnings.

9. Debt

Our long-term debt instruments and balances outstanding for each of the periods presented (in thousands):


	As of
	August 31, 2024		February 29, 2024
Revolving Credit Facility	$	75,000	$	30,000

Term Loan B	890,250		980,250
Total debt, gross	965,250		1,010,250
Unamortized debt issuance costs	(52,678)		(57,508)


Long-term debt, net	$	912,572	$	952,742

2022 Credit Agreement and Term Loan B

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"). See Note 17 for information related to the repricing of the Company's Term Loan B on September 24, 2024.

The 2022 Credit Agreement includes the following significant terms:

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 August 31, 2024, the outstanding balance of the Term Loan B was $890.3 million;

ii.provides for a maximum senior secured Revolving Credit Facility in the aggregate principal amount of $400.0 million (the "Revolving Credit Facility"), which matures on May 13, 2027;

iii.includes a letter of credit sub-facility of up to $100.0 million, which is part of, and not in addition to, the Revolving Credit Facility;

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 August 31, 2024, the interest rate was SOFR plus 2.75%;

v.includes customary affirmative and negative covenants, and events of default; including restrictions on the incurrence of non-ordinary course debt, investment and dividends, subject to various exceptions; and,

vi.includes a maximum quarterly leverage ratio financial covenant, with reporting requirements to our banking group at each quarter-end.

On March 20, 2024, we entered the term loan market and repriced our existing Term Loan B. The repricing reduced the Term Loan B spread from a rate of SOFR plus 3.75% to SOFR plus 3.25%.

On September 24, 2024, we completed our third repricing of the Term Loan B, for which $890.3 million was outstanding as of August 31, 2024. The repricing reduced the margin from SOFR plus 3.25% to SOFR plus 2.50%, for a total reduction of 75 basis points.

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.

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 no longer required.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The weighted average interest rate for our outstanding debt, including the Revolving Credit Facility and the Term Loan B, was 8.03% and 8.56% for the six months ended August 31, 2024 and 2023, respectively.

Debt Compliance, Outstanding Borrowings and Letters of Credit

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 August 31, 2024, we were in compliance with all covenants and other requirements set forth in the 2022 Credit Agreement.

As of August 31, 2024, we had $965.3 million of debt outstanding on the Revolving Credit Facility and the Term Loan B, with varying maturities through fiscal 2029. We had approximately $310.7 million of additional credit available as of August 31, 2024.

As of August 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.

Other Disclosures

Interest expense is comprised as follows (in thousands):


	Three Months Ended August 31,				Six Months Ended August 31,
	2024		2023		2024		2023
Gross Interest expense	$	23,621	$	28,298	$	47,827	$	57,260
Less: Capitalized interest	(1,712)		(528)		(3,144)		(784)
Interest expense, net	$	21,909	$	27,770	$	44,683	$	56,476

Capitalized interest for the three and six months ended August 31, 2024 and 2023 relates to interest cost on the construction of the greenfield aluminum coil coating facility in Washington, Missouri. The increase for the six months ended August 31, 2024 compared to the prior year period was due to the higher average construction work in process.

10. Fair Value Measurements

Recurring Fair Value Measurements

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In accordance with ASC 820, Fair Value Measurement ("ASC 820"), certain of our assets and liabilities, which are carried at fair value, are classified in one of the following three categories:

•Level 1: Quoted market prices in active markets for identical assets or liabilities.

•Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs corroborated by market data.

•Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.

The carrying amount of our financial instruments (cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities) approximates the fair value of these instruments based upon either their short-term nature or their variable market rate of interest. We have not made an option to elect fair value accounting for any of our financial instruments.

Interest Rate Swap Agreement

Our derivative instrument consists of the 2022 Swap, which is considered a Level 2 of the fair value hierarchy and included in "Other long-term liabilities" in the condensed consolidated balance sheets as of August 31, 2024 and in "Other assets" as of February 29, 2024. The valuation of the 2022 Swap is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of the derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including swap rates, spread and/or index levels and interest rate curves. See Note 8 for more information about the 2022 Swap.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our financial instruments that are measured at fair value on a recurring basis as of August 31, 2024 and February 29, 2024 are as follows (dollars in thousands):


			Fair Value Measurements Using								Fair Value Measurements Using
	Carrying Value						Assets measured		Carrying Value						Assets measured
	August 31, 2024		Level 1		Level 2		at Net Asset Value		February 29, 2024		Level 1		Level 2		at Net Asset Value
Assets:
Interest Rate Swap Agreement(1)	$	—	$	—	$	—	$	—	$	3,410	$	—	$	3,410	$	—
Total Assets	$	—							$	3,410
Liabilities:
Interest Rate Swap Agreement(1)	687		—		687		—		—		—		—		—
Net Pension Obligation	26,007		—		—		26,007		31,148		—		—		31,148
Total Liabilities	$	26,694							$	31,148

(1) The fair value of the Company's interest rate swap agreement was an asset at February 29, 2024 and a liability at August 31, 2024.

(2) The Plan was underfunded with a pension obligation of $26.0 million as of August 31, 2024, which is included in 'Other long-term

liabilities' on the consolidated balance sheets.

Non-recurring Fair Value Measurements

Investment in Joint Venture

The fair value of our investment in the unconsolidated AVAIL JV was determined using the income approach at the date on which we entered into the joint venture. The income approach uses discounted cash flow models that require various observable and non-observable inputs, such as operating margins, revenues, product costs, operating expenses, capital expenditures, terminal-year values and risk-adjusted discount rates. These valuations resulted in Level 3 non-recurring fair value measurements.

We assess our investment in the unconsolidated AVAIL JV for recoverability when events and circumstances are present that suggest there has been a decline in value, and if it is determined that a loss in value of the investment is other than temporary, the investment is written down to its fair value.

Long-Term Debt

The fair values of our long-term debt instruments are estimated based on market values for debt issued with similar characteristics or rates currently available for debt with similar terms. These valuations are Level 2 non-recurring fair value measurements.

The principal amount of our outstanding debt was $965.3 million and $1,010.3 million at August 31, 2024 and February 29, 2024, respectively. The estimated fair value of our outstanding debt was $972.5 million and $1,010.3 million at August 31, 2024 and February 29, 2024, excluding unamortized debt issuance costs. The estimated fair values of our outstanding debt were determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates and credit spreads.

11. Leases

We are a lessee under various leases for facilities and equipment. As of August 31, 2024, we were the lessee for 148 operating leases and 55 finance leases with terms of 12 months or more. These leases are reflected on our balance sheet in "Right-of-use assets," "Lease liability - short-term" and "Lease liability - long-term."

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Our leases are primarily for (i) operating facilities, (ii) vehicles and equipment used in operations, (iii) facilities used for back-office functions, (iv) equipment used for back-office functions, and (v) temporary storage. The majority of our vehicle and equipment leases have both a fixed and variable component.

Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and we recognize lease expense for these leases on a straight-line basis over the lease term. We have a significant number of short-term leases, including month-to-month agreements. Our short-term lease agreements include expenses incurred hourly, daily, monthly and for other durations of time of one year or less. Our future lease commitments as of August 31, 2024 do not reflect all of our short-term lease commitments.

The following table outlines the classification of right-of-use ("ROU") asset and lease liabilities in the consolidated balance sheets as of August 31, 2024 and February 29, 2024 (in thousands):

Balance Sheet Classification

As of

August 31, 2024

February 29, 2024

Assets

Operating right-of-use assets

Right-of-use assets

17,194

19,808