Item 1. Financial Statements
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except par value)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
February 28, 2017
|
|
|
(Restated)
|
|
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
6,337
|
|
|
$
|
11,302
|
|
Accounts receivable (net of allowance for doubtful accounts of $412 as of May 31, 2017 and $347 as of February 28, 2017)
|
|
152,545
|
|
|
138,470
|
|
Inventories:
|
|
|
|
|
Raw material
|
|
84,967
|
|
|
80,169
|
|
Work-in-process
|
|
8,956
|
|
|
6,832
|
|
Finished goods
|
|
7,103
|
|
|
7,006
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
57,198
|
|
|
50,262
|
|
Deferred income taxes
|
|
—
|
|
|
249
|
|
Prepaid expenses and other
|
|
8,380
|
|
|
2,762
|
|
Total current assets
|
|
325,486
|
|
|
297,052
|
|
Deferred income taxes
|
|
208
|
|
|
—
|
|
Property, plant and equipment, net
|
|
230,127
|
|
|
228,610
|
|
Goodwill
|
|
306,031
|
|
|
306,579
|
|
Intangibles and other assets, net
|
|
142,888
|
|
|
146,113
|
|
|
|
$
|
1,004,740
|
|
|
$
|
978,354
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
Current liabilities:
|
|
|
|
|
Accounts payable
|
|
$
|
47,484
|
|
|
$
|
49,816
|
|
Income tax payable
|
|
524
|
|
|
778
|
|
Accrued salaries and wages
|
|
14,811
|
|
|
23,429
|
|
Other accrued liabilities
|
|
25,375
|
|
|
24,042
|
|
Customer deposits
|
|
1,711
|
|
|
1,459
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
22,539
|
|
|
20,617
|
|
Debt due within one year
|
|
14,286
|
|
|
16,629
|
|
Total current liabilities
|
|
126,730
|
|
|
136,770
|
|
Debt due after one year, net
|
|
285,478
|
|
|
254,800
|
|
Deferred income taxes
|
|
53,823
|
|
|
53,648
|
|
Total liabilities
|
|
466,031
|
|
|
445,218
|
|
Commitments and contingencies
|
|
|
|
|
Shareholders’ equity:
|
|
|
|
|
Common stock, $1 par, shares authorized 100,000; 25,994 shares issued and outstanding at May 31, 2017 and 25,964 shares issued and outstanding at February 28, 2017
|
|
25,994
|
|
|
25,964
|
|
Capital in excess of par value
|
|
36,654
|
|
|
37,739
|
|
Retained earnings
|
|
506,166
|
|
|
498,527
|
|
Accumulated other comprehensive loss
|
|
(30,105
|
)
|
|
(29,094
|
)
|
Total shareholders’ equity
|
|
538,709
|
|
|
533,136
|
|
|
|
$
|
1,004,740
|
|
|
$
|
978,354
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(In thousands, except per share data)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
(Restated)
|
|
(Restated)
|
Net sales
|
|
$
|
205,283
|
|
|
$
|
250,366
|
|
Cost of sales
|
|
157,901
|
|
|
185,238
|
|
Gross margin
|
|
47,382
|
|
|
65,128
|
|
|
|
|
|
|
Selling, general and administrative
|
|
27,359
|
|
|
28,819
|
|
Operating income
|
|
20,023
|
|
|
36,309
|
|
|
|
|
|
|
Interest expense
|
|
3,360
|
|
|
3,925
|
|
Net gain on sale of property, plant and equipment and insurance proceeds
|
|
(100
|
)
|
|
(110
|
)
|
Other income - net
|
|
(85
|
)
|
|
(122
|
)
|
Income before income taxes
|
|
16,848
|
|
|
32,616
|
|
Income tax expense
|
|
4,786
|
|
|
10,427
|
|
Net income
|
|
$
|
12,062
|
|
|
$
|
22,189
|
|
Earnings per common share
|
|
|
|
|
Basic earnings per share
|
|
$
|
0.46
|
|
|
$
|
0.86
|
|
Diluted earnings per share
|
|
$
|
0.46
|
|
|
$
|
0.85
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
(Restated)
|
|
(Restated)
|
Net income
|
|
$
|
12,062
|
|
|
$
|
22,189
|
|
Other comprehensive loss:
|
|
|
|
|
Foreign currency translation adjustments
|
|
|
|
|
Unrealized translation gains (losses)
|
|
(997
|
)
|
|
2,479
|
|
Interest rate swap, net of income tax of $7 and $7, respectively.
|
|
(14
|
)
|
|
(14
|
)
|
Other comprehensive income (loss)
|
|
(1,011
|
)
|
|
2,465
|
|
Comprehensive income
|
|
$
|
11,051
|
|
|
$
|
24,654
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
(Restated)
|
|
(Restated)
|
Cash Flows From Operating Activities:
|
|
|
|
|
Net income
|
|
$
|
12,062
|
|
|
$
|
22,189
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
Provision (recovery) for doubtful accounts
|
|
63
|
|
|
(87
|
)
|
Amortization and depreciation
|
|
12,423
|
|
|
12,634
|
|
Deferred income taxes
|
|
261
|
|
|
2,830
|
|
Net gain on sale of property, plant & equipment and insurance proceeds
|
|
(100
|
)
|
|
(110
|
)
|
Amortization of deferred borrowing costs
|
|
154
|
|
|
323
|
|
Share-based compensation expense
|
|
1,194
|
|
|
1,112
|
|
Effects of changes in assets & liabilities:
|
|
|
|
|
Accounts receivable
|
|
(14,114
|
)
|
|
(20,976
|
)
|
Inventories
|
|
(6,976
|
)
|
|
1,131
|
|
Prepaid expenses and other
|
|
(5,619
|
)
|
|
(4,833
|
)
|
Other assets
|
|
(1,019
|
)
|
|
74
|
|
Net change in billings related to costs and estimated earnings on uncompleted contracts
|
|
(4,940
|
)
|
|
71
|
|
Accounts payable
|
|
(2,405
|
)
|
|
7,747
|
|
Other accrued liabilities and income taxes payable
|
|
(6,788
|
)
|
|
(12,237
|
)
|
Net cash (used in) provided by operating activities
|
|
(15,804
|
)
|
|
9,868
|
|
Cash Flows From Investing Activities:
|
|
|
|
|
Proceeds from sale or insurance settlement of property, plant, and equipment
|
|
171
|
|
|
127
|
|
Purchase of property, plant and equipment
|
|
(10,141
|
)
|
|
(10,503
|
)
|
Acquisition of subsidiaries, net of cash acquired
|
|
—
|
|
|
(22,679
|
)
|
Net cash used in investing activities
|
|
(9,970
|
)
|
|
(33,055
|
)
|
Cash Flows From Financing Activities:
|
|
|
|
|
Proceeds from revolving loan
|
|
128,000
|
|
|
61,000
|
|
Payments on revolving loan
|
|
(36,500
|
)
|
|
(46,000
|
)
|
Payments on long term debt
|
|
(63,504
|
)
|
|
(16,160
|
)
|
Purchases of treasury shares
|
|
(2,683
|
)
|
|
—
|
|
Payments of dividends
|
|
(4,423
|
)
|
|
(3,888
|
)
|
Net cash (used in) provided by financing activities
|
|
20,890
|
|
|
(5,048
|
)
|
Effect of exchange rate changes on cash
|
|
(81
|
)
|
|
119
|
|
Net decrease in cash & cash equivalents
|
|
(4,965
|
)
|
|
(28,116
|
)
|
Cash & cash equivalents at beginning of period
|
|
11,302
|
|
|
40,191
|
|
Cash & cash equivalents at end of period
|
|
$
|
6,337
|
|
|
$
|
12,075
|
|
Supplemental disclosures
|
|
|
|
|
Cash paid for interest
|
|
$
|
2,286
|
|
|
$
|
2,573
|
|
Cash paid for income taxes
|
|
$
|
7,097
|
|
|
$
|
6,966
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Capital in
Excess of
Par Value
|
|
Retained
Earnings
(Restated)
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
Total
(Restated)
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Balance at February 28, 2017
|
|
25,964
|
|
|
$
|
25,964
|
|
|
$
|
37,739
|
|
|
$
|
498,527
|
|
|
$
|
(29,094
|
)
|
|
$
|
533,136
|
|
Stock compensation
|
|
—
|
|
|
—
|
|
|
1,194
|
|
|
—
|
|
|
—
|
|
|
1,194
|
|
Restricted stock units
|
|
42
|
|
|
42
|
|
|
(1,240
|
)
|
|
—
|
|
|
—
|
|
|
(1,198
|
)
|
Stock issued for SARs
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Employee stock purchase plan
|
|
35
|
|
|
35
|
|
|
1,597
|
|
|
—
|
|
|
—
|
|
|
1,632
|
|
Retirement of treasury shares
|
|
(47
|
)
|
|
(47
|
)
|
|
(2,636
|
)
|
|
—
|
|
|
—
|
|
|
(2,683
|
)
|
Cash dividends paid
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4,423
|
)
|
|
—
|
|
|
(4,423
|
)
|
Net income, as restated
|
|
—
|
|
|
—
|
|
|
—
|
|
|
12,062
|
|
|
—
|
|
|
12,062
|
|
Foreign currency translation
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(997
|
)
|
|
(997
|
)
|
Interest rate swap, net of $7 income tax
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(14
|
)
|
|
(14
|
)
|
Balance at May 31, 2017, as restated
|
|
25,994
|
|
|
$
|
25,994
|
|
|
$
|
36,654
|
|
|
$
|
506,166
|
|
|
$
|
(30,105
|
)
|
|
$
|
538,709
|
|
The accompanying notes are an integral part of the condensed consolidated financial statements.
AZZ Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
|
|
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 global provider of galvanizing services, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. We have two distinct operating segments: the Energy Segment and Metal Coatings Segment. AZZ Metal Coatings is a leading provider of metal finishing solutions for corrosion protection, including hot dip galvanizing to the North American steel fabrication industry. AZZ Energy 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 the energy markets worldwide.
As of March 1, 2017, our Galvanizing Segment was rebranded to the Metal Coatings Segment to more closely align the description of the segment with its current offerings and served markets. There have been no changes to the underlying information reported under this operating segment for prior periods, however, the new description will be included in the operating results for future filings and include the new powder coating offerings for the current and future periods.
Presentation
The accompanying condensed consolidated balance sheet as of
February 28, 2017
, which was derived from audited restated financial statements, and 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, 2017
, included in the Company’s Annual Report on Form 10-K/A covering such period.
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 ended February 28, 2018 is referred to as fiscal 2018.
In the opinion of management, the accompanying unaudited 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
May 31, 2017
, the results of its operations and cash flows for the three months ended
May 31, 2017
and
2016
. These interim results are not necessarily indicative of results for a full year.
Accounting Standards Recently Adopted
In November 2015, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” ASU 2015-17 simplifies the presentation of deferred taxes in a classified statement of financial position and was adopted by the Company on March 1, 2017. As a result of the adoption, the Company is required to offset deferred tax liabilities and assets, as well as any related valuation allowance, and present as a single noncurrent amount. However, the Company shall not offset deferred tax liabilities and assets attributable to different tax-paying components of the entity or to different tax jurisdictions. The adoption was on a prospective basis and therefore had no impact on prior year.
New Accounting Pronouncements
In February 2016, the FASB issued ASU 2016-02, "Leases." The standard requires a lessee to recognize a liability to make lease payments and a right-of-use asset representing a right to use the underlying asset for the lease term on the balance sheet. The ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted. We are currently evaluating the impact that this standard will have on our consolidated financial statements.
In May 2014, the FASB issued ASU 2014-09, "Revenue from Contracts with Customers", issued as a new Topic, Accounting Standards Codification (ASC) Topic 606 ("ASU 2014-09"). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The premise of the guidance is that a Company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ASU 2014-09 can be adopted by the Company either retrospectively or as a cumulative-effect adjustment as of the date of adoption. This ASU is effective for public entities for reporting periods beginning after December 15, 2017. This standard will be effective for the Company beginning in fiscal 2019. The Company is planning on adopting this standard retrospectively. We believe this standard will impact the current accounting for contracts accounted for under the percentage of completion method of revenue recognition, however the overall impact to the prior year financial results is still under review.
|
|
2.
|
Restatement of Previously Issued Financial Statements
|
As previously disclosed, the Company determined that for certain contracts within its Energy Segment for which revenue was historically recognized upon contract completion and transfer of title, the Company instead should have applied the percentage-of-completion method in accordance with the FASB’s Accounting Standards Codification No. 605-35,
Construction-Type and Production-Type Contracts
. In general, the percentage-of-completion method results in a revenue recognition pattern over time as a project progresses as opposed to deferring revenues until contract completion.
The Company concluded that the impact of applying the percentage-of-completion method to its revenue contracts was materially different from its previously reported results under its historical practice. As a result, the Company is restating its condensed consolidated financial statements for the periods impacted. The following financial tables reconcile the previously reported amounts to the restated amounts for each condensed consolidated financial statement
.
The table below sets forth the condensed consolidated balance sheet, including the balances originally reported, corrections and the as restated balances for each restated period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
|
As
Reported
|
|
Correction
|
|
As
Restated
|
Assets
|
|
|
Inventories - net
|
|
$
|
131,187
|
|
|
$
|
(30,161
|
)
|
|
$
|
101,026
|
|
Costs and estimated earnings in excess of billings on uncompleted contracts
|
|
27,295
|
|
|
29,903
|
|
|
57,198
|
|
Total current assets
|
|
325,744
|
|
|
(258
|
)
|
|
325,486
|
|
Total assets
|
|
$
|
1,004,998
|
|
|
$
|
(258
|
)
|
|
$
|
1,004,740
|
|
Liabilities and Shareholders’ Equity
|
|
|
|
|
|
|
Other accrued liabilities
|
|
$
|
22,067
|
|
|
$
|
3,308
|
|
|
$
|
25,375
|
|
Customer deposits
|
|
23,629
|
|
|
(21,918
|
)
|
|
1,711
|
|
Billings in excess of costs and estimated earnings on uncompleted contracts
|
|
7,898
|
|
|
14,641
|
|
|
22,539
|
|
Total current liabilities
|
|
130,699
|
|
|
(3,969
|
)
|
|
126,730
|
|
Deferred income tax liabilities
|
|
52,431
|
|
|
1,392
|
|
|
53,823
|
|
Total liabilities
|
|
468,608
|
|
|
(2,577
|
)
|
|
466,031
|
|
Shareholders’ equity:
|
|
|
|
|
|
|
Retained earnings
|
|
503,847
|
|
|
2,319
|
|
|
506,166
|
|
Total shareholders’ equity
|
|
536,390
|
|
|
2,319
|
|
|
538,709
|
|
Total liabilities and shareholders' equity
|
|
$
|
1,004,998
|
|
|
$
|
(258
|
)
|
|
$
|
1,004,740
|
|
The table below sets forth the condensed consolidated statements of income, including the balances originally reported, corrections and the as restated balances for each restated period (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
As
Reported
|
|
Correction
|
|
As
Restated
|
|
As
Reported
|
|
Correction
|
|
As
Restated
|
Net Sales
|
|
$
|
208,551
|
|
|
$
|
(3,268
|
)
|
|
$
|
205,283
|
|
|
$
|
242,667
|
|
|
$
|
7,699
|
|
|
$
|
250,366
|
|
Cost of Sales
|
|
159,285
|
|
|
(1,384
|
)
|
|
157,901
|
|
|
179,340
|
|
|
5,898
|
|
|
185,238
|
|
Gross Profit
|
|
49,266
|
|
|
(1,884
|
)
|
|
47,382
|
|
|
63,327
|
|
|
1,801
|
|
|
65,128
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Income
|
|
21,907
|
|
|
(1,884
|
)
|
|
20,023
|
|
|
34,508
|
|
|
1,801
|
|
|
36,309
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income Before Income Taxes
|
|
18,732
|
|
|
(1,884
|
)
|
|
16,848
|
|
|
30,815
|
|
|
1,801
|
|
|
32,616
|
|
Income Tax Expense
|
|
5,492
|
|
|
(706
|
)
|
|
4,786
|
|
|
9,752
|
|
|
675
|
|
|
10,427
|
|
Net Income
|
|
$
|
13,240
|
|
|
$
|
(1,178
|
)
|
|
$
|
12,062
|
|
|
$
|
21,063
|
|
|
$
|
1,126
|
|
|
$
|
22,189
|
|
Earnings Per Common Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic Earnings Per Share
|
|
$
|
0.51
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.46
|
|
|
$
|
0.81
|
|
|
$
|
0.05
|
|
|
$
|
0.86
|
|
Diluted Earnings Per Share
|
|
$
|
0.51
|
|
|
$
|
(0.05
|
)
|
|
$
|
0.46
|
|
|
$
|
0.81
|
|
|
$
|
0.04
|
|
|
$
|
0.85
|
|
The table below sets forth the condensed consolidated statements of comprehensive income, including the balances originally reported, corrections and the as restated balances for each restated period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
As
Reported
|
|
Correction
|
|
As
Restated
|
|
As
Reported
|
|
Correction
|
|
As
Restated
|
Net Income
|
|
$
|
13,240
|
|
|
$
|
(1,178
|
)
|
|
$
|
12,062
|
|
|
$
|
21,063
|
|
|
$
|
1,126
|
|
|
$
|
22,189
|
|
Comprehensive Income
|
|
12,229
|
|
|
(1,178
|
)
|
|
11,051
|
|
|
23,528
|
|
|
1,126
|
|
|
24,654
|
|
The table below sets forth the condensed consolidated statements of cash flows from operating activities, including the balances originally reported, corrections and the as restated balances for each restated period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
As
Reported
|
|
Correction
|
|
As
Restated
|
|
As
Reported
|
|
Correction
|
|
As
Restated
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
13,240
|
|
|
$
|
(1,178
|
)
|
|
$
|
12,062
|
|
|
$
|
21,063
|
|
|
$
|
1,126
|
|
|
$
|
22,189
|
|
Deferred income taxes
|
|
967
|
|
|
(706
|
)
|
|
261
|
|
|
2,155
|
|
|
675
|
|
|
2,830
|
|
Inventories
|
|
(7,936
|
)
|
|
960
|
|
|
(6,976
|
)
|
|
(5,547
|
)
|
|
6,678
|
|
|
1,131
|
|
Net change in billings related to costs and estimated earnings on uncompleted contracts
|
|
(10,725
|
)
|
|
5,785
|
|
|
(4,940
|
)
|
|
5,447
|
|
|
(5,376
|
)
|
|
71
|
|
Other accrued liabilities and income taxes payable
|
|
(1,927
|
)
|
|
(4,861
|
)
|
|
(6,788
|
)
|
|
(9,134
|
)
|
|
(3,103
|
)
|
|
(12,237
|
)
|
Net cash (used in) provided by operating activities:
|
|
$
|
(15,804
|
)
|
|
$
|
—
|
|
|
$
|
(15,804
|
)
|
|
$
|
9,868
|
|
|
$
|
—
|
|
|
$
|
9,868
|
|
The restatement had no impact on cash flows from investing activities or financing activities.
The table below sets forth the condensed consolidated statement of shareholders' equity, including the balances originally reported, corrections and the as restated balances for each restated period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Retained
Earnings
|
|
Total Stockholders' Equity
|
Balance at May 31, 2017, as reported
|
|
$
|
503,847
|
|
|
$
|
536,390
|
|
Correction
|
|
2,319
|
|
|
2,319
|
|
Balance at May 31, 2017, as restated
|
|
$
|
506,166
|
|
|
$
|
538,709
|
|
In addition to the restated consolidated financial statements, the information contained in Notes 3 and 5 has been restated.
Earnings per share is based on the weighted average number of shares outstanding during each period, adjusted for the dilutive effect of stock awards.
The following table sets forth the computation of basic and diluted earnings per share (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months ended May 31,
|
|
|
2017
|
|
2016
|
|
|
(Restated)
|
|
(Restated)
|
Numerator:
|
|
|
|
|
Net income for basic and diluted earnings per common share
|
|
$
|
12,062
|
|
|
$
|
22,189
|
|
Denominator:
|
|
|
|
|
Denominator for basic earnings per common share–weighted average shares
|
|
26,012
|
|
|
25,913
|
|
Effect of dilutive securities:
|
|
|
|
|
Employee and director stock awards
|
|
81
|
|
|
130
|
|
Denominator for diluted earnings per common share
|
|
26,093
|
|
|
26,043
|
|
Earnings per share basic and diluted:
|
|
|
|
|
Basic earnings per common share
|
|
$
|
0.46
|
|
|
$
|
0.86
|
|
Diluted earnings per common share
|
|
$
|
0.46
|
|
|
$
|
0.85
|
|
|
|
4.
|
Share-based Compensation
|
The Company has
one
share-based compensation plan, the 2014 Long Term Incentive Plan (the “Plan”). The purpose of the Plan is to promote the growth and prosperity of the Company by permitting the Company to grant to its employees, directors and advisors various types of restricted stock unit awards, performance share units, stock options, and stock appreciation rights to purchase common stock of the Company. The maximum number of shares that may be issued under the Plan is
1,500,000
shares. As of
May 31, 2017
the Company has approximately
1,228,174
shares available for future issuance under the Plan.
Restricted Stock Unit Awards
Restricted stock unit awards are valued at the market price of our common stock on the grant date. Awards issued prior to fiscal 2015 generally have a
three
year cliff vesting schedule and awards issued subsequent to fiscal 2015 generally vest ratably over a period of three years but these awards may vest early in accordance with the Plan’s accelerated vesting provisions.
The activity of our non-vested restricted stock unit awards for the
three months ended
May 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
Weighted
Average Grant
Date Fair Value
|
Non-Vested Balance as of February 28, 2017
|
|
134,547
|
|
$
|
51.10
|
|
Granted
|
|
43,377
|
|
59.99
|
|
Vested
|
|
(61,361
|
)
|
47.09
|
|
Forfeited
|
|
(1,248
|
)
|
52.68
|
|
Non-Vested Balance as of May 31, 2017
|
|
115,315
|
|
$
|
56.56
|
|
Performance Share Unit Awards
Performance share unit awards are valued at the market price of our common stock on the grant date. These awards have a three year performance cycle and will vest and become payable, if at all, on the third anniversary of the award date. The awards are subject to the Company’s degree of achievement of a target annual average adjusted return on assets during these three year periods. In addition, a multiplier may be applied to the total awards granted which is based on the Company’s total shareholder return during such
three
year period in comparison to a defined specific industry peer group as set forth in the plan.
The activity of our non-vested performance share unit awards for the
three months ended
May 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
Performance
Stock Units
|
Weighted
Average Grant
Date Fair Value
|
Non-Vested Balance as of February 28, 2017
|
|
51,426
|
|
$
|
51.70
|
|
Granted
|
|
23,745
|
|
60.20
|
|
Vested
|
|
—
|
|
—
|
|
Forfeited
|
|
—
|
|
—
|
|
Non-Vested Balance as of May 31, 2017
|
|
75,171
|
|
$
|
54.39
|
|
Stock Appreciation Rights
Stock appreciation rights are granted with an exercise price equal to the market value of our common stock on the date of grant. These awards generally have a contractual term of
7
years and vest ratably over a period of
three
years although some may vest immediately on issuance. These awards are valued using the Black-Scholes option pricing model.
A summary of the Company’s stock appreciation rights activity for the
three months ended
May 31, 2017
is as follows:
|
|
|
|
|
|
|
|
|
|
SAR’s
|
Weighted Average
Exercise Price
|
Outstanding as of February 28, 2017
|
|
170,139
|
|
$
|
42.02
|
|
Granted
|
|
—
|
|
—
|
|
Exercised
|
|
(1,490
|
)
|
44.46
|
|
Forfeited
|
|
(2,145
|
)
|
45.36
|
|
Outstanding as of May 31, 2017
|
|
166,504
|
|
$
|
41.96
|
|
Exercisable as of May 31, 2017
|
|
156,504
|
|
$
|
41.74
|
|
The average remaining contractual term for those stock appreciation rights outstanding at
May 31, 2017
is
3.27
years, with an aggregate intrinsic value of
$2.0 million
. The average remaining contractual terms for those stock appreciation rights that are exercisable as of
May 31, 2017
is
3.26
years, with an aggregate intrinsic value of
$2.0 million
.
Employee Stock Purchase Plan
The Company also has an employee stock purchase plan, which allows employees of the Company to purchase common stock of the Company through accumulated payroll deductions. Offerings under this plan have a duration of
24 months
(the "offering period"). On the first day of an offering period (the “enrollment date”) the participant is granted the option to
purchase shares on each exercise date at the lower of
85%
of the market value of a share of our common stock on the enrollment date or the exercise date. The participant’s right to purchase common stock under the plan is restricted to no more than
$25,000
per calendar year and the participant may not purchase more than
5,000
shares during any offering period. Participants may terminate their interest in a given offering or a given exercise period by withdrawing all of their accumulated payroll deductions at any time prior to the end of the offering period. The fair value of the estimated number of shares to be issued under each offering is determined using the Black-Scholes option pricing model. For the
three months ended
May 31, 2017
, the Company issued
35,447
shares under the Employee Stock Purchase Plan.
Share-based compensation expense and related income tax benefits related to all the plans listed above were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three months ended May 31,
|
|
2017
|
|
2016
|
Compensation Expense
|
|
$
|
1,194
|
|
|
$
|
1,112
|
|
Income tax benefits
|
|
$
|
382
|
|
|
$
|
356
|
|
Unrecognized compensation cost related to restricted stock units, performance share unit awards, stock appreciation rights, and the employee stock purchase plan at
May 31, 2017
totals
$10.0 million
.
The Company’s policy is to issue shares required under these plans from the Company’s treasury shares or from the Company’s authorized but unissued shares.
Information regarding operations and assets by segment was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
(Restated)
|
|
(Restated)
|
Net Sales:
|
|
|
|
|
Energy
|
|
$
|
113,206
|
|
|
$
|
145,801
|
|
Metal Coatings
|
|
92,077
|
|
|
104,565
|
|
Total net sales
|
|
205,283
|
|
|
250,366
|
|
|
|
|
|
|
Operating Income:
|
|
|
|
|
Energy
|
|
6,711
|
|
|
20,554
|
|
Metal Coatings
|
|
21,242
|
|
|
24,302
|
|
Corporate
|
|
(7,930
|
)
|
|
(8,547
|
)
|
Total operating income
|
|
20,023
|
|
|
36,309
|
|
|
|
|
|
|
Interest expense
|
|
3,360
|
|
|
3,925
|
|
Net gain on sale of property, plant and equipment and insurance proceeds
|
|
(100
|
)
|
|
(110
|
)
|
Other income, net
|
|
(85
|
)
|
|
(122
|
)
|
Income before income taxes
|
|
$
|
16,848
|
|
|
$
|
32,616
|
|
|
|
|
|
|
|
|
As of
|
|
|
May 31, 2017
|
|
February 28, 2017
|
|
|
(Restated)
|
|
|
Total Assets:
|
|
|
|
|
Energy
|
|
$
|
558,123
|
|
|
$
|
536,557
|
|
Metal Coatings
|
|
432,516
|
|
|
428,330
|
|
Corporate
|
|
14,101
|
|
|
13,467
|
|
|
|
$
|
1,004,740
|
|
|
$
|
978,354
|
|
Financial Information About Geographical Areas
Below is a breakdown of selected financial information by geographical area (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended May 31,
|
|
|
2017
|
|
2016
|
|
|
(Restated)
|
|
(Restated)
|
Net Sales:
|
|
|
|
|
U.S.
|
|
$
|
166,730
|
|
|
$
|
196,359
|
|
International
|
|
38,553
|
|
|
54,163
|
|
Eliminations
|
|
—
|
|
|
(156
|
)
|
Total Net Sales
|
|
$
|
205,283
|
|
|
$
|
250,366
|
|
|
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
February 28, 2017
|
Property, Plant and Equipment, Net:
|
|
|
|
|
|
|
U.S.
|
|
$
|
207,149
|
|
|
$
|
205,079
|
|
Canada
|
|
17,369
|
|
|
18,002
|
|
Other Countries
|
|
5,609
|
|
|
5,529
|
|
Total Property, Plant and Equipment, Net
|
|
$
|
230,127
|
|
|
$
|
228,610
|
|
A reserve has been established to provide for the estimated future cost of warranties on a portion of the Company’s delivered products and is classified within accrued liabilities on the consolidated balance sheet. Management periodically reviews the reserves and makes adjustments accordingly. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. The following table shows changes in the warranty reserves since the end of fiscal 2017 (in thousands):
|
|
|
|
|
|
Warranty Reserve
|
Balance at February 28, 2017
|
$
|
2,098
|
|
Warranty costs incurred
|
(453
|
)
|
Additions charged to income
|
112
|
|
Balance at May 31, 2017
|
$
|
1,757
|
|
Our debt consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
As of
|
|
May 31, 2017
|
|
February 28, 2017
|
Senior Notes, due in balloon payment in January 2021
|
$
|
125,000
|
|
|
$
|
125,000
|
|
Senior Notes, due in annual installments of $14,286 beginning in March 2012 through March 2018
|
14,286
|
|
|
28,571
|
|
Term Note, due in quarterly installments beginning in June 2013 through March 2018
|
—
|
|
|
49,219
|
|
Revolving line of credit with bank
|
161,000
|
|
|
69,500
|
|
Total debt
|
300,286
|
|
|
272,290
|
|
Unamortized debt issuance costs for Senior Notes and Term Note
|
(522
|
)
|
|
(861
|
)
|
Total debt, net
|
299,764
|
|
|
271,429
|
|
Less amount due within one year
|
(14,286
|
)
|
|
(16,629
|
)
|
Debt due after one year, net
|
$
|
285,478
|
|
|
$
|
254,800
|
|
On March 21, 2017, we executed the Amended and Restated Credit Agreement (the “2017 Credit Agreement”) with Bank of America and other lenders. The 2017 Credit Agreement amended the Credit Agreement entered into on March 27, 2013 by the following: (i) extending the maturity date until March 21, 2022, (ii) providing for a senior revolving credit facility in a principal amount of up to $450 million, with an additional $150 million accordion, (iii) including a $75 million sublimit for the issuance of standby and commercial letters of credit, (iv) including a $30 million sublimit for swing line loans, (v) restricting indebtedness incurred in respect of capital leases, synthetic lease obligations and purchase money obligations not to exceed $20 million, (vi) restricting investments in any foreign subsidiaries not to exceed $50 million in the aggregate, and (vii) including various financial covenants and certain restricted payments relating to dividends and share repurchases as specifically set forth in the 2017 Credit Agreement. The financial covenants, as defined in the 2017 Credit Agreement, require us to maintain on a consolidated basis a Leverage Ratio not to exceed 3.25:1.0 and an Interest Coverage Ratio of at least 3.00:1.0. The 2017 Credit Agreement will be used to finance working capital needs, capital improvements, dividends, future acquisitions, letter of credit needs and share repurchases.
Interest rates for borrowings under the 2017 Credit Agreement are based on either a Eurodollar Rate or a Base Rate plus a margin ranging from 0.875% to 1.875% depending on our Leverage Ratio (as defined in the 2017 Credit Agreement). The Eurodollar Rate is defined as LIBOR for a term equivalent to the borrowing term (or other similar interbank rates if LIBOR is unavailable). The Base Rate is defined as the highest of the applicable Fed Funds rate plus 0.50%, the Prime rate, or the Eurodollar Rate plus 1.0% at the time of borrowing. The 2017 Credit Agreement also carries a Commitment Fee for the unfunded portion ranging from 0.175% to 0.30% per annum, depending on our Leverage Ratio.
On June 30, 2017, we completed the acquisition of the assets of Enhanced Powder Coating Ltd., (“EPC”), a privately held, high specification, NADCAP certified provider of powder coating, plating and anodizing services based in Gainesville, Texas. EPC, founded in 2003, offers a full spectrum of finish technology including powder coating, abrasive blasting and plating for heavy industrial, transportation, aerospace and light commercial industries. The acquisition of EPC is consistent with our strategic initiative to grow our Metal Coatings segment with products and services that complement our industry-leading galvanizing business.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
FORWARD LOOKING STATEMENTS
Certain statements herein about our expectations of future events or results constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by terminology such as “may,” “should,” “expects,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue,” or the negative of these terms or other comparable terminology. Such forward-looking statements are based on currently available competitive, financial and economic data and management’s views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. In addition, certain factors could affect the outcome of the matters described herein. This Quarterly Report on Form 10-Q/A may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand and response to products and services offered by AZZ, including demand by the power generation markets, electrical transmission and distribution markets, the industrial markets, and the hot dip galvanizing markets; prices and raw material cost, including zinc and natural gas which are used in the hot dip galvanizing process; changes in the political stability and economic conditions of the various markets that AZZ serves, foreign and domestic, customer requested delays of shipments, acquisition opportunities, currency exchange rates, adequacy of financing, and availability of experienced management and employees to implement AZZ’s continued growth strategy; a downturn in market conditions in any industry relating to the products we inventory or sell or the services that we provide; the continuing economic volatility in the U.S. and other markets in which we operate; acts of war or terrorism inside the United States or abroad; and other changes in economic and financial conditions. AZZ has provided additional information regarding risks associated with the business in AZZ’s Annual Report on Form 10-K/A for the fiscal year ended
February 28, 2017
and other filings with the SEC, available for viewing on AZZ’s website at www.azz.com and on the SEC’s website at www.sec.gov.
You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
The following discussion should be read in conjunction with management’s discussion and analysis contained in our Annual Report on Form 10-K/A for the fiscal year ended
February 28, 2017
, and with the condensed consolidated financial statements and notes thereto included in this Quarterly Report on Form 10-Q/A.
Restatement of Previously Issued Financial Statements
As previously disclosed, we determined that for certain contracts within our Energy Segment for which revenue was historically recognized upon contract completion and transfer of title, we instead should have applied the percentage-of-completion method in accordance with the FASB’s Accounting Standards Codification No. 605-35,
Construction-Type and Production-Type Contracts
. In general, the percentage-of-completion method results in a revenue recognition pattern over time as a project progresses as opposed to deferring revenues until contract completion.
We concluded that the impact of applying the percentage-of-completion method to our revenue contracts was materially different from its previously reported results under our historical practice. As a result, we are restating our consolidated financial statements for the periods impacted. See Note 2 to the Condensed Consolidated Financial Statements within Item 1 for additional information and a reconciliation of the previously reported amounts to the restated amounts.
RESULTS OF OPERATIONS
We have two distinct operating segments, the Energy Segment and the Metal Coatings Segment, as defined in our Annual Report on Form 10-K/A for the fiscal year ended
February 28, 2017
. Management believes that the most meaningful analysis of our results of operations is to analyze our performance by segment. We use revenue and operating income by segment to evaluate our segments. Segment operating income consists of net sales less cost of sales and selling, general and administrative expenses that are specifically identifiable to a segment. For a reconciliation of segment operating income to income before income taxes, see Note 5 to our quarterly consolidated financial statements included in this Quarterly Report on Form 10-Q/A.
Orders and Backlog
Our entire backlog relates to our Energy Segment and was
$306.4 million
as of
May 31, 2017
, a decrease of
$11.5 million
, or
3.6%
, as compared to
$317.9 million
as of
February 28, 2017
. Our backlog decreased
$16.2 million
, or
5.0%
, as compared to the same period in the prior fiscal year. Both of these decreases were primarily the result of a softer market in the first quarter of fiscal 2018. For the three months ended
May 31, 2017
, our book-to-ship ratio decreased from
1.00
to 1 to
0.94
to 1 when compared to same period of fiscal 2017 and our incoming orders decreased by
$56.7 million
, or
22.6%
. The table below includes the progression of the backlog:
Backlog Table
(in thousands)(unaudited)
(Restated)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period Ended
|
|
|
|
Period Ended
|
|
|
Backlog
|
|
2/28/2017
|
|
$
|
317,922
|
|
|
02/29/2016
|
|
$
|
310,623
|
|
Bookings
|
|
|
|
193,754
|
|
|
|
|
250,479
|
|
Acquired Backlog
|
|
|
|
—
|
|
|
|
|
11,903
|
|
Shipments
|
|
|
|
205,283
|
|
|
|
|
250,366
|
|
Backlog
|
|
5/31/2017
|
|
306,393
|
|
|
5/31/2016
|
|
322,639
|
|
Book to Ship Ratio
|
|
|
|
0.94
|
|
|
|
|
1.00
|
|
Segment Revenues
For the three months ended
May 31, 2017
, consolidated revenues decreased
$45.1 million
, or
18.0%
, as compared to the same period in fiscal 2017.
The following table reflects the breakdown of revenue by segment:
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
|
5/31/2017
|
|
5/31/2016
|
|
|
(Restated)
|
|
(Restated)
|
|
|
(In thousands)(unaudited)
|
Revenue:
|
|
|
|
|
Energy
|
|
$
|
113,206
|
|
|
$
|
145,801
|
|
Metal Coatings
|
|
92,077
|
|
|
104,565
|
|
Total Revenue
|
|
$
|
205,283
|
|
|
$
|
250,366
|
|
Revenues for the Energy Segment decreased
22.4%
for the three months ended
May 31, 2017
, to
$113.2 million
as compared to the same period in fiscal 2017. The decrease in revenue during the quarter was caused by several factors including reduced turnarounds in the U.S. refinery market, continued softness in the petrochemical market, and delays in the release of several large projects in the U.S. and overseas.
Revenues for the Metal Coatings Segment decreased
11.9%
for the three months ended
May 31, 2017
, to
$92.1 million
as compared to the same period in fiscal 2017. The decline was a result of a volume decrease in steel processed caused by softness in the solar, petrochemical, and the oil and gas markets which more than offset higher pricing during the period.
Segment Operating Income
Operating income for the Energy Segment decreased by
$13.8 million
, or
67.3%
, to
$6.7 million
for the three months ended
May 31, 2017
as compared to the same period in fiscal 2017. This decrease is attributable to the reduction in refinery turnarounds described above, which typically carry a higher margin, coupled with generally lower margin projects in the balance of the segment.
Operating income for the Metal Coatings Segment decreased by
$3.1 million
, or
12.6%
, for the three months ended
May 31, 2017
as compared to the same period in fiscal 2017. This decrease was primarily attributable to lower volumes in fiscal 2018.
Corporate Expenses
Corporate expenses decreased by
$0.6 million
, or
7.2%
, for the three months ended
May 31, 2017
as compared to the same period in fiscal 2017. This decrease is primarily attributable to lower employee incentive compensation costs in fiscal 2018.
Interest Expense
Interest expense for the three months ended
May 31, 2017
was
$3.4 million
as compared to
$3.9 million
for the three months ended
May 31, 2016
. The decrease in interest expense in comparison to the same period in the prior year was the result of a lower average outstanding debt balance. As of
May 31, 2017
, our gross outstanding debt was
$300.3 million
, compared to
$0.3 million
outstanding as of
May 31, 2016
. Our gross debt to equity ratio was
0.56
to 1 as of
May 31, 2017
, compared to
0.64
to 1 as of
May 31, 2016
.
Net Gain On Sale of Property, Plant and Equipment and Insurance Proceeds
For the three months ended
May 31, 2017
and 2016, the Company recorded an insignificant net gain due to sales from miscellaneous equipment.
Other Income, Net
For the three months ended
May 31, 2017
and 2016, the amounts recorded to other income were insignificant and primarily attributable to foreign exchange transactions and royalty income.
Income Taxes
The provision for income taxes reflects an effective tax rate of
28.4%
for the three months ended
May 31, 2017
, as compared to
32.0%
for the same period in fiscal 2017.
Westinghouse Electric Company Bankruptcy Case
The Calvert Company, Inc. and Nuclear Logistics LLC, have existing contracts with subsidiaries of Westinghouse Electric Company (“WEC”). WEC and the relevant subsidiaries filed relief under Chapter 11of the Bankruptcy Code on March 29, 2017 in the United States Bankruptcy Court for the Southern District of New York, jointly administered as In re Westinghouse Electric Company, et al., Case No. 17-10751 (the "Bankruptcy Case"). To date, WEC has continued to operate under a Debtor-in-Possession Financing Facility (“DIP Financing”) and our subsidiaries continue to honor their executory contracts and have not received a response to their application for critical vendor status with WEC. The Company has been collecting on post-petition amounts due and owed, and we have not yet determined which contracts WEC has chosen to assume and which to reject as part of its reorganization process. The Company estimates it had approximately $7.2 million mostly in pre-petition exposure with WEC to the Company’s two subsidiaries as of March 29, 2017.
LIQUIDITY AND CAPITAL RESOURCES
We have historically met our cash needs through a combination of cash flows from operating activities along with bank and bond market debt. Our cash requirements are generally for operating activities, cash dividend payments, capital improvements, debt repayment, acquisitions and share repurchases. We believe that our cash position, cash flows from operating activities and our expectation of continuing availability to draw upon our credit facilities are sufficient to meet our cash flow needs for the foreseeable future.
For the
three months ended
May 31, 2017
, net cash used in operating activities was
$15.8 million
, net cash used in investing activities was
$10.0 million
, net cash provided by financing activities was
$20.9 million
, and a decrease of
$0.1 million
from the net effect of exchange rate changes on cash resulting in a net decrease in cash and cash equivalents of
$5.0 million
. In comparison to fiscal 2017, the results in the statement of cash flows for operating activities for the three months ended
May 31, 2017
, are attributable to a decrease in net income and a less favorable impact of changes in working capital. The Company's use of cash for investing activities was lower due to fewer acquisitions year over year. Cash provided by financing activities was higher during the three months ended
May 31, 2017
due to increased net borrowings, however, this is partially offset by purchases of treasury shares.
Our working capital was
$198.8 million
as of
May 31, 2017
, as compared to $168.9 million at
May 31, 2016
.
On March 21, 2017, we executed the Amended and Restated Credit Agreement (the “2017 Credit Agreement”) with Bank of America and other lenders. The 2017 Credit Agreement amended the Credit Agreement entered into on March 27, 2013 by the following: (i) extending the maturity date until March 21, 2022, (ii) providing for a senior revolving credit facility in a principal amount of up to $450 million, with an additional $150 million accordion, (iii) including a $75 million sublimit for the issuance of standby and commercial letters of credit, (iv) including a $30 million sublimit for swing line loans, (v) restricting indebtedness incurred in respect of capital leases, synthetic lease obligations and purchase money obligations not to exceed $20 million, (vi) restricting investments in any foreign subsidiaries not to exceed $50 million in the aggregate, and (vii) including various financial covenants and certain restricted payments relating to dividends and share repurchases as specifically set forth in the 2017 Credit Agreement. The financial covenants, as defined in the 2017 Credit Agreement, require us to maintain on a consolidated basis a Leverage Ratio not to exceed 3.25:1.0 and an Interest Coverage Ratio of at least 3.00:1.0. The 2017 Credit Agreement will be used to finance working capital needs, capital improvements, dividends, future acquisitions, letter of credit needs and share repurchases.
Interest rates for borrowings under the 2017 Credit Agreement are based on either a Eurodollar Rate or a Base Rate plus a margin ranging from 0.875% to 1.875% depending on our Leverage Ratio (as defined in the Credit Agreement). The Eurodollar Rate is defined as LIBOR for a term equivalent to the borrowing term (or other similar interbank rates if LIBOR is unavailable). The Base Rate is defined as the highest of the applicable Fed Funds rate plus 0.50%, the Prime rate, or the Eurodollar Rate plus 1.0% at the time of borrowing. The Credit Agreement also carries a Commitment Fee for the unfunded portion ranging from 0.175% to 0.30% per annum, depending on our Leverage Ratio.
As of
May 31, 2017
, we had $161.0 million of outstanding debt against the revolving credit facility provided and letters of credit outstanding in the amount of $22.1 million, which left approximately $266.9 million of additional credit available under the 2017 Credit Agreement.
On March 31, 2008, the Company entered into a Note Purchase Agreement (the “Note Purchase Agreement”) pursuant to which the Company issued $100.0 million aggregate principal amount of its 6.24% unsecured Senior Notes (the “2008 Notes”) due March 31, 2018 through a private placement (the “2008 Note Offering”). Pursuant to the Note Purchase Agreement, the Company’s payment obligations with respect to the 2008 Notes may be accelerated upon any Event of Default, as defined in the Note Purchase Agreement.
The Company entered into an additional Note Purchase Agreement on January 21, 2011 (the “2011 Agreement”), pursuant to which the Company issued $125.0 million aggregate principal amount of its 5.42% unsecured Senior Notes (the “2011 Notes”), due in January of 2021, through a private placement (the “2011 Note Offering”). Pursuant to the 2011 Agreement, the Company's payment obligations with respect to the 2011 Notes may be accelerated under certain circumstances.
The 2008 Notes and the 2011 Notes each provide for various financial covenants requiring us, among other things, to a) maintain on a consolidated basis net worth (as defined in the Note Purchase Agreement) equal to at least the sum of $116.9 million plus 50.0% of future net income; b) maintain a ratio of indebtedness to EBITDA (as defined in Note Purchase Agreement) not to exceed 3.25:1.00; c) maintain on a consolidated basis a Fixed Charge Coverage Ratio (as defined in the Note Purchase Agreement) of at least 2.0:1.0; d) not at any time permit the aggregate amount of all Priority Indebtedness (as defined in the Note Purchase Agreement) to exceed 10.0% of Consolidated Net Worth.
As of
May 31, 2017
, the Company is in compliance with all of its debt covenants.
Historically, we have not experienced a significant impact on our operations from increases in general inflation other than for specific commodities. We have exposure to commodity price increases in both segments of our business, primarily copper, aluminum, steel and nickel based alloys in the Energy Segment and zinc and natural gas in the Metal Coatings Segment. We attempt to minimize these increases through escalation clauses in customer contracts for copper, aluminum, steel and nickel based alloys, when market conditions allow and through fixed cost contract purchases on zinc. In addition to these measures, we attempt to recover other cost increases through improvements to our manufacturing process, supply chain management, and through increases in prices where competitively feasible.
OFF BALANCE SHEET TRANSACTIONS AND RELATED MATTERS
Other than operating leases discussed below, there are no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.
CONTRACTUAL COMMITMENTS
Leases
We lease various facilities under non-cancelable operating leases with an initial term in excess of one year.
Commodity pricing
The Company manages its exposure to commodity prices through the use of the following:
In the Energy Segment, we have exposure to commodity pricing for copper, aluminum, steel, and nickel based alloys. Because the Energy Segment does not commit contractually to minimum volumes, increases in price for these items are normally managed through escalation clauses in customer contracts, although during difficult market conditions these escalation clauses may not be obtainable. In addition, we attempt to enter into firm pricing contracts with our vendors on material at the time we receive orders from our customers to minimize risk.
In the Metal Coatings Segment, we utilize contracts with our zinc suppliers that include protective caps and fixed cost contracts to guard against rising zinc prices. We also secure firm pricing for natural gas supplies with individual utilities when possible. Management believes these agreements ensure adequate supplies and partially offset exposure to commodity price swings.
We have no contracted commitments for any commodities including steel, aluminum, natural gas, nickel based alloys, copper, zinc or any other commodity, except for those entered into under the normal course of business.
Other
As of
May 31, 2017
,
w
e had outstanding letters of credit in the amount of $22.1 million. These letters of credit are issued for a number of reasons, but are most commonly issued in lieu of customer retention withholding payments covering warranty or performance periods.
The following summarizes our operating leases, debt principal payments, and interest payments for the remainder of the next five years and beyond.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Leases
|
|
Long-Term
Debt
|
|
Interest
|
|
Total
|
Fiscal:
|
|
(In thousands)
|
2018
|
|
$
|
5,226
|
|
|
$
|
—
|
|
|
$
|
10,379
|
|
|
$
|
15,605
|
|
2019
|
|
6,142
|
|
|
14,286
|
|
|
11,432
|
|
|
31,860
|
|
2020
|
|
3,918
|
|
|
—
|
|
|
10,987
|
|
|
14,905
|
|
2021
|
|
3,210
|
|
|
125,000
|
|
|
10,987
|
|
|
139,197
|
|
2022
|
|
3,091
|
|
|
—
|
|
|
4,212
|
|
|
7,303
|
|
Thereafter
|
|
10,980
|
|
|
161,000
|
|
|
423
|
|
|
172,403
|
|
Total
|
|
$
|
32,567
|
|
|
$
|
300,286
|
|
|
$
|
48,420
|
|
|
$
|
381,273
|
|