AZZ INC [AZZ] Filings

10-Q 1 azz-20230831.htm 10-Q azz-20230831

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, 2023


☐			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 September 30, 2023, the registrant had outstanding 25,076,871 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	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	38
Item 4.	Controls and Procedures	38

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

	SIGNATURES	41

Table of Contents

PART I. FINANCIAL INFORMATION

AZZ INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except par value)

(Unaudited)


	As of
	August 31, 2023		February 28, 2023
Assets
Current assets:
Cash and cash equivalents	$	2,108	$	2,820
Accounts receivable, net of allowance for credit losses of $2,137 and $5,752 at August 31, 2023 and February 28, 2023, respectively	183,951		183,412
Inventories:
Raw material	130,230		138,227
Work-in-process	2,186		1,558
Finished goods	4,061		4,135
Contract assets	76,799		79,273
Prepaid expenses and other	10,534		7,991


Total current assets	409,869		417,416
Property, plant and equipment, net	516,499		498,503
Right-of-use assets	24,273		26,392
Goodwill	705,531		702,512
Deferred tax assets	5,820		12,467
Intangibles and other assets, net	467,034		479,429
Investment in joint venture	85,535		84,760

Total assets	$	2,214,561	$	2,221,479
Liabilities and Shareholders’ Equity
Current liabilities:
Accounts payable	$	127,408	$	109,861
Income tax payable	46		272
Accrued salaries and wages	21,307		26,262
Other accrued liabilities	50,984		44,442
Lease liability, short-term	6,572		6,403


Total current liabilities	206,317		187,240
Long-term debt, net	1,002,364		1,058,120
Lease liability, long-term	18,434		20,704
Deferred tax liabilities	31,417		40,536
Other long-term liabilities	57,952		61,419

Total liabilities	1,316,484		1,368,019
Commitments and contingencies (Note 16)
Shareholders’ equity:
Series A Convertible Preferred Stock, $1 par, shares authorized 240; 240 and 240 shares issued and outstanding at August 31, 2023 and February 28, 2023, respectively	240		240
Common Stock, $1 par value; 100,000 shares authorized; 25,077 and 24,912 shares issued and outstanding at August 31, 2023 and February 28, 2023, respectively	25,077		24,912
Capital in excess of par value	331,366		326,839
Retained earnings	547,208		506,042
Accumulated other comprehensive loss	(5,814)		(4,573)
Total shareholders’ equity	898,077		853,460
Total liabilities and shareholders' equity	$	2,214,561	$	2,221,479

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 amounts)

(Unaudited)


	Three Months Ended August 31,				Six Months Ended August 31,
	2023		2022		2023		2022
Sales	$	398,542	$	406,710	$	789,415	$	613,844
Cost of sales	301,296		305,155		595,150		452,236
Gross margin	97,246		101,555		194,265		161,608

Selling, general and administrative	36,239		37,414		67,762		69,558

Operating income	61,007		64,141		126,503		92,050

Interest expense	27,770		28,144		56,476		35,615
Equity in (earnings) of unconsolidated subsidiaries	(974)		—		(2,394)		—
Other (income) expense, net	(88)		55		(50)		28
Income from continuing operations before income taxes	34,299		35,942		72,471		56,407
Income tax expense	5,967		10,822		15,617		15,922
Net income from continuing operations	28,332		25,120		56,854		40,485
Income from discontinued operations, net of tax	—		6,737		—		15,449
Loss on disposal of discontinued operations, net of tax	—		(89,427)		—		(89,427)
Net loss from discontinued operations	—		(82,690)		—		(73,978)
Net income (loss)	28,332		(57,570)		56,854		(33,493)
Dividends on preferred stock	(3,600)		(1,040)		(7,200)		(1,040)
Net income (loss) available to common shareholders	$	24,732	$	(58,610)	$	49,654	$	(34,533)
Basic earnings (loss) per share
Earnings per common share from continuing operations	$	0.99	$	0.97	$	1.99	$	1.59
Loss per common share from discontinued operations	$	—	$	(3.33)	$	—	$	(2.99)
Earnings (loss) per common share	$	0.99	$	(2.36)	$	1.99	$	(1.39)
Diluted earnings (loss) per share
Earnings per common share from continuing operations	$	0.97	$	0.93	$	1.95	$	1.57
Loss per common share from discontinued operations	$	—	$	(2.85)	$	—	$	(2.70)
Earnings (loss) per common share	$	0.97	$	(1.91)	$	1.95	$	(1.13)

Weighted average shares outstanding - Basic	25,054		24,836		24,997		24,772
Weighted average shares outstanding - Diluted	29,210		29,059		29,196		27,428

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,
	2023		2022		2023		2022

Net income (loss) available to common shareholders	$	24,732	$	(58,610)	$	49,654	$	(34,533)
Other comprehensive income (loss):
Unrealized translation loss	(2,867)		(3,370)		(1,736)		(2,746)


Unrealized gain (loss) on derivatives qualified for hedge accounting:
Unrealized gain (loss) on interest rate swap, net of tax(1)	5,531		—		1,982		—
Amounts reclassified from accumulated other comprehensive income to earnings, net of tax(2)	(938)		—		(1,487)		—
Other comprehensive income (loss)	1,726		(3,370)		(1,241)		(2,746)
Comprehensive income (loss)	$	26,458	$	(61,980)	$	48,413	$	(37,279)


(1) Net of tax expense of $2,009 and $720 for the three and six months ended August 31, 2023, respectively.
(2) Net of tax benefit of $(341) and $(540) for the three and six months ended August 31, 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,
	2023		2022
Cash flows from operating activities
Net income (loss) available to common shareholders	$	49,654	$	(34,533)
Less: Net loss from discontinued operations	—		73,978
Plus: Dividends on preferred stock	7,200		1,040
Net income from continuing operations	56,854		40,485
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities:
Bad debt expense	79		(1)
Depreciation and amortization	38,677		33,875
Deferred income taxes	(2,656)		(21,823)
Equity in earnings of unconsolidated entities	(2,394)		—




Impairment of long-lived assets	—		135
Net (gain) on sale of property, plant and equipment	(13)		(2,742)
Amortization of debt financing costs	6,062		4,661
Share-based compensation expense	4,019		4,770
Changes in current assets and current liabilities	21,384		(12,679)
Changes in other long-term assets and long-term liabilities	(3,672)		(4,670)
Net cash provided by operating activities of continuing operations	118,340		42,011
Cash flows from investing activities
Purchase of property, plant and equipment	(42,726)		(18,696)
Acquisition of subsidiaries, net of cash acquired	—		(1,298,513)
Other investing activities	20		4,089



Net cash used in investing activities of continuing operations	(42,706)		(1,313,120)
Cash flows from financing activities
Proceeds from issuance of common stock	1,464		1,767
Payments for taxes related to net share settlement of equity awards	(791)		(2,306)
Proceeds from revolving loan	142,000		175,000
Payments on revolving loan	(202,000)		(225,000)
Proceeds from long term debt	—		1,540,000
Payments of debt financing costs	(1,203)		(82,697)
Payments on long term debt and finance leases	(162)		(153,250)

Payments of dividends	(15,687)		(8,418)
Net cash provided by (used in) financing activities of continuing operations	(76,379)		1,245,096
Effect of exchange rate changes on cash	33		2,501

Net cash provided by operating activities from discontinued operations	—		25,098
Net cash used in investing activities from discontinued operations	—		(2,328)

Net cash provided by discontinued operations	—		22,770
Net decrease in cash and cash equivalents	(712)		(742)
Cash and cash equivalents at beginning of period	2,820		15,082
Cash and cash equivalents at end of period	$	2,108	$	14,340
Less: Cash and cash equivalents from discontinued operations at end of period	—		(3,000)
Cash and cash equivalents from continuing operations at end of period	$	2,108	$	11,340

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, 2023
	Series A Preferred Stock			Common Stock			Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total
	Shares	Amount		Shares	Amount
Balance at May 31, 2023	240	$	240	25,013	$	25,013	$	326,931	$	526,729	$	(7,540)	$	871,373
Share-based compensation	—	—		—	—		2,115		—		—		2,115

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

Dividends on preferred stock	—	—		—	—		—		(3,600)		—		(3,600)
Dividends paid on common shares	—	—		—	—		—		(4,253)		—		(4,253)
Net income	—	—		—	—		—		28,332		—		28,332
Foreign currency translation	—	—		—	—		—		—		(2,867)		(2,867)


Interest rate swap	—	—		—	—		—		—		4,593		4,593
Balance at August 31, 2023	240	$	240	25,077	$	25,077	$	331,366	$	547,208	$	(5,814)	$	898,077


	Six Months Ended August 31, 2023
	Series A Preferred Stock			Common Stock			Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total
	Shares	Amount		Shares	Amount
Balance at February 28, 2023	240	$	240	24,912	$	24,912	$	326,839	$	506,042	$	(4,573)	$	853,460
Share-based compensation	—	—		—	—		4,019		—		—		4,019

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

Dividends on preferred stock	—	—		—	—		—		(7,200)		—		(7,200)
Dividends paid on common shares	—	—		—	—		—		(8,488)		—		(8,488)
Net income	—	—		—	—		—		56,854		—		56,854
Foreign currency translation	—	—		—	—		—		—		(1,736)		(1,736)


Interest rate swap	—	—		—	—		—		—		495		495
Balance at August 31, 2023	240	$	240	25,077	$	25,077	$	331,366	$	547,208	$	(5,814)	$	898,077

Table of Contents


	Three Months Ended August 31, 2022
	Series A Preferred Stock			Common Stock			Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total

	Shares	Amount		Shares	Amount
Balance at May 31, 2022	—	$	—	24,788	$	24,788	$	85,432	$	604,039	$	(26,700)	$	687,559
Share-based compensation	—	—		—	—		2,772		—		—		2,772
Issuance of Class A convertible preferred stock in exchange for convertible debt	240	240		—	—		233,482		—		—		233,722
Common stock issued under stock-based plans and related income tax expense	—	—		22	22		(14)		—		—		8
Common stock issued under employee stock purchase plan	—	—		52	52		1,714		—		—		1,766

Dividends on preferred stock	—	—		—	—		—		(1,040)		—		(1,040)
Dividends paid on common shares	—	—		—	—		—		(4,226)		—		(4,226)
Net loss	—	—		—	—		—		(57,570)		—		(57,570)
Foreign currency translation	—	—		—	—		—		—		(3,370)		(3,370)



Balance at August 31, 2022	240	$	240	24,862	$	24,862	$	323,386	$	541,203	$	(30,070)	$	859,621


	Six Months Ended August 31, 2022
	Series A Preferred Stock			Common Stock			Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Loss		Total
	Shares	Amount		Shares	Amount
Balance at February 28, 2022	—	$	—	24,688	$	24,688	$	85,847	$	584,154	$	(27,324)	$	667,365
Share-based compensation	—	—		—	—		4,770		—		—		4,770
Issuance of Class A convertible preferred stock in exchange for convertible debt	240	240		—	—		233,482		—		—		233,722
Common stock issued under stock-based plans and related income tax expense	—	—		122	122		(2,428)		—		—		(2,306)
Common stock issued under employee stock purchase plan	—	—		52	52		1,715		—		—		1,767

Dividends on preferred stock	—	—		—	—		—		(1,040)		—		(1,040)
Dividends paid on common shares	—	—		—	—		—		(8,418)		—		(8,418)
Net loss	—	—		—	—		—		(33,493)		—		(33,493)
Foreign currency translation	—	—		—	—		—		—		(2,746)		(2,746)



Balance at August 31, 2022	240	$	240	24,862	$	24,862	$	323,386	$	541,203	$	(30,070)	$	859,621

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. The Company's 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 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 consists of the Company's 40% interest in AIS Investment Holdings LLC (the "AVAIL JV"). AIS Investment Holdings LLC is 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. AIS Investment Holdings LLC was wholly-owned by the Company until September 30, 2022, when AZZ contributed its' AZZ Infrastructure Solutions segment, excluding AZZ Crowley Tubing and excluding certain receivables retained by AZZ ("AIS"), to the AVAIL JV and sold a 60% interest in the AVAIL JV to Fernweh Group LLC ("Fernweh"). For the three and six months ended August 31, 2022, financial data for the AZZ Infrastructure Solutions segment is segregated and reported as discontinued operations.

Presentation

The accompanying condensed consolidated balance sheet as of February 28, 2023 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 28, 2023, included in the Company’s Annual Report on Form 10-K covering such period. Certain previously reported amounts have been reclassified to conform to current period presentation. See Note 3 for more information about results of operations reported in discontinued operations in the consolidated statement of operations and statement of cash flows for the three and six months ended August 31, 2022.

The Company's 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 29, 2024 is referred to as fiscal 2024.

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, 2023, the results of its operations for the three and six months ended August 31, 2023 and 2022, and cash flows for the six months ended August 31, 2023 and 2022. The interim results reported herein are not necessarily indicative of results for a full year.

2. Acquisitions

Precoat Acquisition

On May 13, 2022, the Company acquired Precoat Metals for a purchase price of approximately $1.3 billion (the "Precoat Acquisition"). Precoat is the leading independent provider of metal coil coating solutions in North America. The acquisition represented a continued transition of the Company to a focused provider of coating and galvanizing services for critical applications. The Company completed the final purchase accounting valuation during the first quarter of fiscal year 2024.

The Company accounted for the Precoat Acquisition as a business combination under the acquisition method of accounting. Goodwill from the acquisition of $527.8 million represents the excess purchase price over the estimated value of net tangible and intangible assets and liabilities assumed, and is expected to be deductible for income tax purposes. The Company's chief operating decision maker assesses performance and allocates resources to Precoat separately from the AZZ Metal Coatings segment; therefore, Precoat is accounted for as a separate segment, the AZZ Precoat Metals segment. See Note 7 for more information about the Company's operating segments. Goodwill from the acquisition was allocated to the AZZ

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Precoat Metals segment. Assets acquired and liabilities assumed in the Precoat Acquisition were recorded at their estimated fair values as of the acquisition date. See Note 16 for additional information regarding certain environmental liabilities assumed as part of the Precoat Acquisition.

When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. The Company engaged third-party valuation experts to assist in determination of fair value of property and equipment, intangible assets, pension benefit obligation and certain other assets and liabilities. Management believes that the current information provides a reasonable basis for the fair values of assets acquired and liabilities assumed. During the first quarter of fiscal 2024, the Company made purchase price allocation adjustments that impacted goodwill, contract assets and accrued expenses.

The following table represents the summary of the assets acquired and liabilities assumed, in aggregate, related to the Precoat Acquisition, as of the date of the acquisition (in thousands):


	May 13, 2022
Assets

Accounts receivable	$	77,422
Inventories	43,369
Contract assets	68,314
Prepaid expenses and other	2,247
Property, plant and equipment	305,503
Right-of-use asset	13,753
Goodwill	527,793
Deferred tax asset	8,660
Intangibles and other assets	446,546
Total fair value of assets acquired	$	1,493,607
Liabilities
Accounts payable	(99,223)
Accrued expenses	(31,761)
Other accrued liabilities	(5,330)
Lease liability, short-term	(2,440)
Lease liability, long-term	(11,313)

Other long-term liabilities	(60,091)
Total fair value of liabilities assumed	$	(210,158)
Total purchase price, net of cash acquired	$	1,283,449

Intangible assets include customer relationships, tradenames and technology. Other long-term liabilities include the Company's pension obligation and certain environmental liabilities. See Notes 15 and 16 for more information about these long-term liabilities.

Unaudited Pro Forma Information

The following unaudited pro forma financial information for the three and six months ended August 31, 2023 and 2022 combines the historical results of the Company and the acquisition of Precoat Metals, assuming that the companies were combined as of March 1, 2022. The pro forma financial information includes business combination accounting effects from the Precoat Acquisition, including amortization expense from acquired intangible assets, depreciation expense from acquired property, plant and equipment, interest expense from financing transactions which occurred to fund the Precoat Acquisition, acquisition-related transaction costs and tax-related effects. The pro forma information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisition of Precoat Metals had taken place on March 1, 2022 or of future operating performance.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Three Months Ended August 31,				Six Months Ended August 31,
	2023		2022		2023	2022
Revenue	$	398,542	$	406,710	789,415	806,864
Net income from continuing operations(1)	$	28,332	$	25,120	56,854	25,015

(1) Net income for the six months ended August 31, 2022 includes acquisition costs of approximately $45.0 million, of which $11.5 million was incurred by AZZ and $33.5 million was incurred by Precoat Metals prior to the acquisition.

3. Discontinued Operations

On September 30, 2022, AZZ contributed its AZZ Infrastructure Solutions ("AIS") segment, excluding AZZ Crowley Tubing, to a joint venture, AIS Investment Holdings LLC (the "AVAIL JV") and sold a 60% interest in the AVAIL JV to Fernweh Group LLC ("Fernweh"). On September 30, 2022, the AVAIL JV was deconsolidated. Beginning October 1, 2022, the Company began accounting for its 40% interest in the AVAIL JV under the equity method of accounting. The AVAIL JV is included in the AZZ Infrastructure Solutions segment.

The divestiture of the AZZ Infrastructure Solutions segment represents an intentional strategic shift in our operations and will allow the Company to become a focused provider of coating and galvanizing solutions for critical applications. As a result, the results of the AIS segment were classified as discontinued operations in our condensed statements of operations and excluded from both continuing operations and segment results for the three and six months ended August 31, 2022.

As part of recognizing the business as held for sale in accordance with GAAP, the Company was required to measure AIS at the lower of its carrying amount or fair value less cost to sell. As a result of this analysis, during fiscal 2023, the Company recognized an estimated non-cash, pre-tax loss on disposal of $159.9 million, of which $114.9 million was recognized during the three months ended August 31, 2022, and $27.8 million was recognized during the third quarter of fiscal 2023. The loss is included in "Loss on disposal of discontinued operations" in the consolidated statements of operations. The loss was determined by comparing the fair value of the consideration received for the sale of a 60% interest in the AIS JV and the fair value of the Company’s retained 40% investment in the AIS JV with the net assets of the AIS JV immediately prior to the transaction. The fair value of the Company’s retained investment in the AIS JV was determined in a manner consistent with the transaction price received for the sale of the 60% interest in the AIS JV.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

The results of operations from discontinued operations for the three and six months ended August 31, 2022, have been reflected as discontinued operations in the consolidated statements of operations and consist of the following (in thousands):


	Three Months Ended			Six Months Ended
		August 31, 2022		August 31, 2022
Sales		$	106,660	$	213,924
Cost of sales		84,826		167,686
Gross margin		21,834		46,238

Selling, general and administrative		9,710		22,114

Loss on disposal of discontinued operations		114,900		114,900
Operating loss from discontinued operations		(102,776)		(90,776)

Interest expense		5		6
Other (income) expense, net		3,443		4,268
Loss from discontinued operations before income tax		(106,224)		(95,050)
Income tax benefit		(23,534)		(21,072)
Net loss from discontinued operations		$	(82,690)	$	(73,978)
Loss per common share from discontinued operations:
Basic loss per share		$	(3.33)	$	(2.99)
Diluted loss per share		$	(2.85)	$	(2.70)

The depreciation, amortization, capital expenditures, and significant operating and investing non-cash items of the discontinued operations consist of the following (in thousands):


	Six Months Ended August 31, 2022
Depreciation and amortization	$	6,248
Purchase of property, plant and equipment	2,878

Loss on discontinued operations	(114,900)

4. 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.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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,
	2023		2022		2023		2022
Numerator:
Net income from continuing operations	$	28,332	$	25,120	$	56,854	$	40,485
Dividends on preferred stock	(3,600)		(1,040)		(7,200)		(1,040)
Numerator for basic earnings per share continuing operations	$	24,732	$	24,080	$	49,654	$	39,445
After-tax interest expense for Convertible Notes	—		2,006		—		2,554
Dividends on preferred stock	3,600		1,040		7,200		1,040
Numerator for diluted earnings per share continuing operations	$	28,332	$	27,126	$	56,854	$	43,039

Net loss from discontinued operations	$	—	$	(82,690)	$	—	$	(73,978)

Net income (loss) available to common shareholders	$	24,732	$	(58,610)	$	49,654	$	(34,533)
After-tax interest expense for Convertible Notes	—		2,006		—		2,554
Dividends on preferred stock	3,600		1,040		7,200		1,040
Numerator for diluted earnings per share—net income (loss) available to common shareholders	$	28,332	$	(55,564)	$	56,854	$	(30,939)

Denominator:
Weighted average shares outstanding for basic earnings per share	25,054		24,836		24,997		24,772
Effect of dilutive securities:
Employee and director stock awards	39		106		82		172
Convertible Notes	—		2,953		—		1,902
Series A Convertible Preferred Stock	4,117		1,164		4,117		582
Denominator for diluted earnings per share	29,210		29,059		29,196		27,428

Basic earnings (loss) per share
Earnings per common share from continuing operations	$	0.99	$	0.97	$	1.99	$	1.59
Loss per common share from discontinued operations	$	—	$	(3.33)	$	—	$	(2.99)
Earnings (loss) per common share	$	0.99	$	(2.36)	$	1.99	$	(1.39)
Diluted earnings (loss) per share
Earnings per common share from continuing operations	$	0.97	$	0.93	$	1.95	$	1.57
Loss per common share from discontinued operations	$	—	$	(2.85)	$	—	$	(2.70)
Earnings (loss) per common share	$	0.97	$	(1.91)	$	1.95	$	(1.13)

For the three months ended August 31, 2023 and 2022, approximately 126,882 and 102,616 shares related to employee equity awards, 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, 2023 and 2022, 125,793 and 57,025 shares, respectively, were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

5. Sales

Disaggregated Sales

The following table presents disaggregated sales, for continuing operations, by customer industry (in thousands):


	Three Months Ended August 31,				Six Months Ended August 31,
	2023		2022		2023		2022
Sales:
Construction	$	216,807	$	220,657	$	422,337	$	289,882
Industrial	42,245		41,214		82,889		79,182
Consumer	34,673		38,340		70,258		45,421
Transportation	35,869		36,825		72,626		69,097
Electrical/Utility	25,905		24,172		51,312		46,452
Other (1)	43,043		45,502		89,993		83,810
Total Sales	$	398,542	$	406,710	$	789,415	$	613,844

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

See also Note 7 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 Company’s Precoat Metals segment. Customer billing can occur subsequent to revenue recognition, resulting in contract assets. In addition, the Company can receive advances or deposits from its 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.

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 of $1.1 million and $1.3 million as of August 31, 2023 and February 28, 2023, respectively, are included in "Other accrued liabilities" in the consolidated balance sheets.

6. Supplemental Cash Flow Information

In order to determine 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,
	2023		2022
Decrease (increase) in current assets:
Accounts receivable, net	$	(610)	$	(35,813)
Inventories	7,460		(16,081)
Contract assets	57		(7,751)
Prepaid expenses and other	(2,544)		(9,238)
Increase (decrease) in current liabilities:
Accounts payable	15,036		32,842
Income taxes payable	(226)		7,388
Accrued expenses	2,211		15,974
Changes in current assets and current liabilities	$	21,384	$	(12,679)

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	Six Months Ended August 31,
	2023		2022
Cash paid for interest	$	51,539	$	23,888
Cash paid for income taxes	12,930		10,065

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


	Six Months Ended August 31,
	2023		2022
Issuance of preferred stock in exchange for convertible notes	$	—	$	233,722
Accrued dividends on preferred stock	2,400		1,040
Accruals for capital expenditures	5,579		—

7. Operating Segments

Segment Information

The Company’s 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. As presented in Note 3, the AVAIL JV operating results for the period prior to deconsolidation are included within discontinued operations, with the exception of AZZ Crowley Tubing, which was retained by the Company and merged into the AZZ Metal Coatings segment. See Note 3 for the results of operations related to the AZZ Infrastructure Solutions segment.

A summary of each of the Company's 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 and other industries through facilities located throughout the United States and Canada. Hot-dip galvanizing is a metallurgical manufacturing process in which molten zinc reacts to steel. The zinc alloying provides corrosion protection and extends the life-cycle of fabricated steel for several decades.

AZZ Precoat Metals — engages in the advanced application of protective and decorative coatings and related value-added manufacturing for steel and aluminum coil primarily serving the construction; appliance; heating, ventilation and air conditioning (HVAC); container; transportation and other end markets.

AZZ Infrastructure Solutions — consists of the equity in earnings of the Company's 40% investment in the AVAIL JV, as well as other expenses directly related to AIS receivables that were retained following the divestiture of the AIS business. The AVAIL JV provides specialized products and services designed to support primarily industrial and electrical applications. The product offerings include custom switchgear, electrical enclosures, medium- and high-voltage bus ducts, explosion proof and hazardous duty lighting products. The AZZ Infrastructure Solutions segment also focuses on life-cycle extension for the power generation, refining and industrial infrastructure, through providing automated weld overlay solutions for corrosion and erosion mitigation.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

Net income from continuing operations by segment for the three and six months ended August 31, 2023 and 2022 was as follows (in thousands):


	Three Months Ended August 31, 2023
	Metal Coatings		Precoat Metals		Infrastructure Solutions(1)		Corporate(2)(3)		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) from continuing operations	$	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) expense					—		(88)		(88)
Income (loss) from continuing operations before income tax					$	(4,958)	(44,830)		34,299
Income tax expense							5,967		5,967
Net income (loss) from continuing operations							$	(50,797)	$	28,332


	Six Months Ended August 31, 2023
	Metal Coatings		Precoat Metals		Infrastructure Solutions(1)		Corporate(2)(3)		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) from continuing operations	$	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					—		(50)		(50)
Income (loss) from continuing operations before income tax					$	(3,560)	(91,217)		72,471
Income tax expense							15,617		15,617
Net income (loss) from continuing operations							$	(106,834)	$	56,854

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)


	Three Months Ended August 31, 2022
	Metal Coatings		Precoat Metals		Infrastructure Solutions(1)		Corporate(2)(3)		Total
Sales	$	165,849	$	240,861	$	—	$	—	$	406,710
Cost of sales	116,437		188,718		—		—		305,155
Gross margin	49,412		52,143		—		—		101,555

Selling, general and administrative	4,416		15,930		—		17,068		37,414

Operating income (loss) from continuing operations	$	44,996	$	36,213	—		(17,068)		64,141

Interest expense					—		28,144		28,144

Other (income) expense					—		55		55
Income (loss) from continuing operations before income tax					$	—	(45,267)		35,942
Income tax expense							10,822		10,822
Net income (loss) from continuing operations							$	(56,089)	$	25,120


	Six Months Ended August 31, 2022
	Metal Coatings		Precoat Metals		Infrastructure Solutions(1)		Corporate(2)(3)		Total
Sales	$	329,293	$	284,551	$	—	$	—	$	613,844
Cost of sales	230,018		222,218		—		—		452,236
Gross margin	99,275		62,333		—		—		161,608

Selling, general and administrative	9,009		19,472		—		41,077		69,558

Operating income (loss) from continuing operations	$	90,266	$	42,861	—		(41,077)		92,050

Interest expense					—		35,615		35,615

Other (income) expense					—		28		28
Income (loss) from continuing operations before income tax					$	—	(76,720)		56,407
Income tax expense							15,922		15,922
Net income (loss) from continuing operations							$	(92,642)	$	40,485

(1) Infrastructure Solutions segment includes the Company’s equity in (earnings) loss from its investment in the AVAIL JV, as well as other expenses related to receivables and liabilities that were retained by the Company following the sale of the AIS business. See Note 16 for a description of a legal settlement recognized during the three months ended August 31, 2023 related to AIS business.
(2) Interest expense, Other (income) expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments.
(3) For fiscal year 2024, amortization expense for acquired intangible assets is included in Corporate expenses in "Selling, general and administrative" expense as these expenses are not allocated to the segments.

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AZZ INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)

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


	As of
	August 31, 2023		February 28, 2023
Assets:
Metal Coatings	$	575,330	$	588,337
Precoat Metals	1,504,940		1,488,810
Infrastructure Solutions - Investment in Joint Venture	85,535		84,760
Corporate	48,756		59,572


Total assets	$	2,214,561	$	2,221,479

Financial Information About Geographical Areas

Financial information about geographical areas for the periods presented was as follows (in thousands):


	Three Months Ended August 31,				Six Months Ended August 31,
	2023		2022		2023	2022
Sales:
United States	$	388,538	$	393,835	$