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. The Company is a global provider of metal coating solutions, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. The Company has two distinct operating segments: the Metal Coatings segment and the Infrastructure Solutions segment (previously referred to as the Company's Energy segment). AZZ Metal Coatings provides hot dip 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. AZZ Infrastructure Solutions 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.
Presentation
The accompanying condensed consolidated balance sheet as of February 29, 2020, which was derived from audited 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 29, 2020, included in the Company’s Annual Report on Form 10-K 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 ending February 28, 2021 is referred to as fiscal 2021.
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, 2020, the results of its operations for the three and six months ended August 31, 2020 and 2019, and cash flows for the six months ended August 31, 2020 and 2019. These interim results are not necessarily indicative of results for a full year.
Coronavirus (COVID-19)
In March 2020, the World Health Organization declared the viral strain of coronavirus ("COVID-19") a global pandemic and recommended containment and mitigation measures worldwide. The spread of COVID-19 and the resulting economic contraction has resulted in increased business uncertainty. The Company was impacted by the inability for our Infrastructure Solutions Industrial Platform to access certain customer sites to perform services, temporary slow-downs in order placements in the Infrastructure Solutions Electrical Platform, and costs associated with maintaining safe operations across our entire business. The Company was able to remain open during the entirety of the pandemic to service our customers. The consequences of a prolonged economic decline could include, but are not limited to, reduced sales, increased instances of uncollectible customer receivables, and increased asset impairments in future periods. Accordingly, the Company cannot reasonably estimate the length or severity of this pandemic, or the extent to which the disruption may materially impact its consolidated balance sheet, statements of operations or statements of cash flows for fiscal year 2021.
Recently Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments, including the Company's accounts receivable and contract assets. The Company adopted ASU 2016-13 in the first quarter of its fiscal 2021 utilizing the modified retrospective transition method. The adoption of ASU 2016-13 did not have a material impact on its consolidated financial statements.
In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software, in
order to determine the applicable costs to capitalize and the applicable costs to expense as incurred. The Company adopted ASU 2018-15 in the first quarter of its fiscal 2021 and the adoption did not have a material impact on its consolidated financial statements.
Recently Issued Accounting Pronouncements
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes. This standard is intended to simplify the accounting and disclosure requirements for income taxes by eliminating various exceptions in accounting for income taxes as well as clarifying and amending existing guidance to improve consistency in the application of ASC 740. The standard will be effective for the Company in the first quarter of its fiscal 2022 and early adoption is permitted. The Company is currently evaluating the impact of adopting this new accounting guidance on its consolidated financial statements.
2.Earnings Per Share
Earnings per share is based on the weighted average number of shares outstanding during each period, adjusted for the dilutive effect of Company 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 August 31,
|
|
|
|
Six Months Ended August 31,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Numerator:
|
|
|
|
|
|
|
|
|
Net income (loss) for basic and diluted earnings per common share
|
|
$
|
(1,790)
|
|
|
$
|
15,558
|
|
|
$
|
3,751
|
|
|
$
|
36,842
|
|
Denominator:
|
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share–weighted average shares
|
|
26,175
|
|
|
26,197
|
|
|
26,166
|
|
|
26,161
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
Employee and director equity awards
|
|
—
|
|
|
75
|
|
|
32
|
|
|
72
|
|
Denominator for diluted earnings per common share
|
|
26,175
|
|
|
26,272
|
|
|
26,198
|
|
|
26,233
|
|
Earnings per share basic and diluted:
|
|
|
|
|
|
|
|
|
Basic income (loss) per common share
|
|
$
|
(0.07)
|
|
|
$
|
0.59
|
|
|
$
|
0.14
|
|
|
$
|
1.41
|
|
Diluted income (loss) per common share
|
|
$
|
(0.07)
|
|
|
$
|
0.59
|
|
|
$
|
0.14
|
|
|
$
|
1.40
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We had 28,319 and 15,863 restricted stock units and performance share units, respectively, that were not included in the calculation of diluted EPS for the three months ended August 31, 2020 because the effect would be antidilutive. These securities could be dilutive in future periods.
3.Sales
Disaggregated Sales
The following table presents disaggregated sales by customer industry (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
Six Months Ended August 31,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Sales:
|
|
|
|
|
|
|
|
|
Industrial
|
|
$
|
67,112
|
|
|
$
|
139,352
|
|
|
$
|
197,220
|
|
|
$
|
304,152
|
|
Transmission and distribution
|
|
97,619
|
|
|
56,686
|
|
|
146,676
|
|
|
128,967
|
|
Power generation
|
|
38,641
|
|
|
40,152
|
|
|
72,768
|
|
|
92,194
|
|
Total sales
|
|
$
|
203,372
|
|
|
$
|
236,190
|
|
|
$
|
416,664
|
|
|
$
|
525,313
|
|
See Note 4 for sales information by segment.
Contract Liabilities
The following table shows the changes in contract liabilities for the six months ended August 31, 2020 and 2019, respectively (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2020
|
|
August 31, 2019
|
Balance at beginning of period
|
|
$
|
18,418
|
|
|
$
|
56,928
|
|
Contract liabilities added during the period
|
|
2,738
|
|
|
18,234
|
|
Sales recognized during the period
|
|
(7,400)
|
|
|
(51,504)
|
|
Balance at end of period
|
|
$
|
13,756
|
|
|
$
|
23,658
|
|
The Company did not record any sales for the six months ended August 31, 2020 or 2019 related to performance obligations satisfied in prior periods. The increases or decreases in accounts receivable, contract assets, and contract liabilities during the six months ended August 31, 2020 and 2019 were due primarily to normal timing differences between the Company’s performance and customer payments, somewhat impacted by customer inspection delays and effects of COVID-19 on our customers.
The Company expects to recognize sales, related to the $13.8 million balance of contract liabilities as of August 31, 2020 of approximately $5.9 million, $5.5 million, $2.2 million and $0.2 million in fiscal 2021, 2022, 2023 and 2024, respectively.
4.Segments
Segment Information
Sales and operating income (loss) by segment for each period were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
Six Months Ended August 31,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Sales:
|
|
|
|
|
|
|
|
|
Metal Coatings
|
|
$
|
117,037
|
|
|
$
|
124,843
|
|
|
$
|
236,027
|
|
|
$
|
246,997
|
|
Infrastructure Solutions
|
|
86,335
|
|
|
111,347
|
|
|
180,637
|
|
|
278,316
|
|
Total sales
|
|
$
|
203,372
|
|
|
$
|
236,190
|
|
|
$
|
416,664
|
|
|
$
|
525,313
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss):
|
|
|
|
|
|
|
|
|
Metal Coatings
|
|
$
|
15,600
|
|
|
$
|
28,673
|
|
|
$
|
40,684
|
|
|
$
|
58,065
|
|
Infrastructure Solutions
|
|
(4,310)
|
|
|
4,239
|
|
|
(5,358)
|
|
|
16,810
|
|
Corporate
|
|
(10,638)
|
|
|
(10,705)
|
|
|
(20,357)
|
|
|
(21,694)
|
|
Total operating income
|
|
$
|
652
|
|
|
$
|
22,207
|
|
|
$
|
14,969
|
|
|
$
|
53,181
|
|
Asset balances by segment for each period were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2020
|
|
February 29, 2020
|
Total assets:
|
|
|
|
|
Metal Coatings
|
|
$
|
474,011
|
|
|
$
|
504,632
|
|
Infrastructure Solutions
|
|
502,170
|
|
|
548,032
|
|
Corporate
|
|
23,771
|
|
|
21,167
|
|
Total
|
|
$
|
999,952
|
|
|
$
|
1,073,831
|
|
Financial Information About Geographical Areas
The following table presents sales by geographic region for each period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
Six Months Ended August 31,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Sales:
|
|
|
|
|
|
|
|
|
United States
|
|
$
|
170,651
|
|
|
$
|
210,668
|
|
|
$
|
359,733
|
|
|
$
|
441,005
|
|
International
|
|
32,721
|
|
|
25,522
|
|
|
56,931
|
|
|
84,308
|
|
Total
|
|
$
|
203,372
|
|
|
$
|
236,190
|
|
|
$
|
416,664
|
|
|
$
|
525,313
|
|
The following table presents fixed assets by geographic region for each period (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2020
|
|
February 29, 2020
|
Property, plant and equipment, net:
|
|
|
|
|
United States
|
|
$
|
178,485
|
|
|
$
|
190,365
|
|
Canada
|
|
16,117
|
|
|
16,385
|
|
Other countries
|
|
5,818
|
|
|
6,354
|
|
Total
|
|
$
|
200,420
|
|
|
$
|
213,104
|
|
5.Warranty Reserves
A reserve has been established to provide for the estimated future cost of warranties on certain delivered products. The warranty accrual is classified within other accrued liabilities on the condensed consolidated balance sheets. Management monitors established reserves and adjusts warranty estimates based upon the progression of resolution activities with our customers. Warranties typically cover non-conformance to specifications and defects in material and workmanship.
The following table shows the changes in the warranty reserves for the six month period ended August 31, 2020 (in thousands):
|
|
|
|
|
|
Beginning of period
|
$
|
3,702
|
|
Warranty costs incurred
|
(889)
|
|
Transfers to liabilities held for sale
|
(552)
|
|
Additions charged to income
|
760
|
|
End of period
|
$
|
3,021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.Debt
The Company's debt consisted of the following for each of the periods presented (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2020
|
|
February 29, 2020
|
2017 Revolving Credit Facility
|
$
|
47,000
|
|
|
$
|
78,000
|
|
|
|
|
|
|
|
|
|
2011 Senior Notes
|
125,000
|
|
|
125,000
|
|
Total debt, gross
|
172,000
|
|
|
203,000
|
|
Unamortized debt issuance costs
|
(55)
|
|
|
(122)
|
|
Total debt, net
|
171,945
|
|
|
202,878
|
|
Less amount due within one year
|
(125,000)
|
|
|
(125,000)
|
|
Debt due after one year, net
|
$
|
46,945
|
|
|
$
|
77,878
|
|
|
|
|
|
|
|
|
|
See also footnote 12- Subsequent Event for a discussion on the Company's recent deferred financing transaction related to borrowings where the proceeds from the transaction will be partially utilized to repay the existing Senior Notes maturing in January 2021.
7.Leases
The Company is a lessee under various operating leases for facilities and equipment. Supplemental information related to the Company's portfolio of operating leases was as follows (in thousands, except years and percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
Six Months Ended August 31,
|
|
|
|
|
2020
|
|
2019
|
|
2020
|
|
2019
|
Operating lease cost
|
|
$
|
3,698
|
|
|
$
|
4,648
|
|
|
$
|
8,168
|
|
|
$
|
8,914
|
|
Operating cash flows from operating leases included in lease liabilities
|
|
2,216
|
|
|
2,131
|
|
|
4,335
|
|
|
4,406
|
|
ROU assets obtained in exchange for new operating lease liabilities
|
|
1,324
|
|
|
643
|
|
|
1,528
|
|
|
3,149
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2020
|
|
February 29, 2020
|
Weighted-average remaining lease term - operating leases
|
|
7.23 years
|
|
7.94 years
|
Weighted-average discount rate - operating leases
|
|
4.83
|
%
|
|
4.89
|
%
|
As of August 31, 2020, maturities of the Company's lease liabilities were as follows (in thousands):
|
|
|
|
|
|
Fiscal year:
|
|
2021 (remaining 6 months)
|
$
|
4,284
|
|
2022
|
8,325
|
|
2023
|
7,830
|
|
2024
|
6,959
|
|
2025
|
6,086
|
|
Thereafter
|
16,071
|
|
Total lease payments
|
49,555
|
|
Less imputed interest
|
(8,408)
|
|
Total
|
$
|
41,147
|
|
8.Income Taxes
In response to the COVID-19 pandemic, many governments have enacted or are contemplating measures to provide aid and economic stimulus. These measures include deferring the due dates of tax payments and other changes to their income and non-income-based tax laws as well as providing direct government assistance through grants and forgivable loans. The CARES Act, which was enacted on March 27, 2020 in the U.S., includes measures to assist companies, including temporary changes to income and non-income-based tax laws. With respect to the CARES Act, the Company currently expects to benefit from the deferral of certain payroll taxes through the end of calendar year 2020 and the technical correction with respect to qualified improvement property. The Company continues to monitor U.S. and international governmental mandates and programs for applicability to the Company.
The provision (benefit) for income taxes reflects an effective tax rate of 6.2% and 54.9% for the three and six months ended August 31, 2020, respectively, as compared to 13.4% and 18.0% for the respective prior year comparable periods. The decreases and increases respectively in the effective tax rates are primarily attributable to the restructuring charges impact on book income, losses in foreign jurisdictions for which the Company does not anticipate being able to recognize the benefit and additional uncertain tax positions that were recorded in the first quarter of fiscal year 2021 related to research and development tax credits.
9.Share-based Compensation
The Company has two share-based compensation plans, the 2014 Long Term Incentive Plan (the "2014 Plan") and the Amended and Restated 2005 Long Term Incentive Plan (the “2005 Plan”).
The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and members of the board of directors and permits the granting of restricted shares, restricted stock units, performance awards, stock appreciation rights and other stock-based awards. The maximum number of shares that may be issued under the 2014 Plan is 1.5 million shares and, as of August 31, 2020, the Company had approximately 1.2 million shares reserved for future issuance under this plan.
The 2005 Plan permitted the granting of stock appreciation rights and other equity-based awards to certain employees. This plan was terminated upon the effective date of the 2014 Plan and no future grants may be made under the 2005 Plan. There were stock appreciation rights granted under the 2005 Plan prior to its termination that remain outstanding, and if exercised, such awards will be settled from the balance of shares available for issuance under the 2005 Plan. As of August 31, 2020, there were 0.1 million shares available for issuance under the 2005 Plan. The 2005 Plan will be formally retired when all remaining outstanding stock appreciation rights are exercised, forfeited or expire. All outstanding stock appreciation rights will expire on or before March 1, 2021.
Restricted Stock Unit Awards
Restricted stock unit ("RSU") awards are valued at the market price of our common stock on the grant date. Awards generally vest ratably over a period of three years but these awards may vest earlier in accordance with the Plan’s vesting provisions. RSU awards have dividend equivalent rights (“DERs”), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the underlying awards vest.
A summary of the Company’s non-vested restricted stock unit award activity (including DERs) for the six month period ended August 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
Outstanding at beginning of period
|
|
194,946
|
|
|
$
|
44.34
|
|
Granted
|
|
129,620
|
|
|
28.61
|
|
Vested
|
|
(63,621)
|
|
|
45.95
|
|
Forfeited
|
|
(22,492)
|
|
|
37.24
|
|
Outstanding at end of period
|
|
238,453
|
|
|
$
|
35.94
|
|
Performance Share Unit Awards
The Company grants performance share unit ("PSU") awards to certain employees, which also include DERs as described above. These PSU awards have a three year performance cycle and will vest on the third anniversary of the grant date subject to various vesting conditions. Certain PSU awards have vesting conditions based on the Company’s degree of achievement of a target annual average adjusted return on assets during these three year periods relative to the performance of a predetermined group of peer companies. In addition, these PSU awards may have vesting conditions or certain vesting multipliers, which are based on the Company’s total shareholder return ("TSR) during such three years in comparison to a defined specific industry peer group. For fiscal 2021, the Company's annual PSU awards are subject to the Company's TSR relative to its proxy peer group and will not be subject to any multiplier. The Company estimates the grant date value of PSU awards using a Monte Carlo simulation model on the date of grant.
A summary of the Company’ non-vested performance share unit award activity (including DERs) for the six month period ended August 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance
Stock Units
|
|
Weighted Average
Grant Date Fair
Value Per Share
|
Outstanding at the beginning of the period
|
|
109,936
|
|
|
$
|
47.75
|
|
Granted
|
|
69,955
|
|
|
33.22
|
|
Vested
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(36,307)
|
|
|
54.00
|
|
Outstanding at the end of the period
|
|
143,584
|
|
|
$
|
39.09
|
|
The PSU awards in the table above are presented at the face value of the respective grants. However, the PSU awards prior to fiscal 2021 that may ultimately vest can vary in a range 0% to 250%, and 0% to 200% thereafter, of the face amount of such awards depending on the outcome of the performance or market vesting conditions.
Stock Appreciation Rights
Stock appreciation rights ('SARs") were 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 generally vest ratably over a period of three years from the date of grant although some may vest immediately on issuance. These awards are valued using the Black-Scholes option-pricing model.
A summary of the Company’s SARs activity for the six month period ended August 31, 2020 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SARs
|
|
Weighted Average
Exercise Price
|
Outstanding at beginning of period
|
|
94,826
|
|
|
$
|
44.58
|
|
Granted
|
|
—
|
|
|
—
|
|
Exercised
|
|
—
|
|
|
—
|
|
Forfeited
|
|
(2,539)
|
|
|
44.69
|
|
Outstanding at end of the period
|
|
92,287
|
|
|
$
|
44.58
|
|
Exercisable at the ending of the period
|
|
92,287
|
|
|
$
|
44.58
|
|
|
|
|
|
|
The average remaining contractual term for SARs outstanding and SARs that were exercisable as of August 31, 2020 was 0.38 years and such awards had no intrinsic value.
Employee Stock Purchase Plan
The Company also has an Employee Stock Purchase Plan ("ESPP"), which allows employees of the Company to purchase common stock of the Company through accumulated payroll deductions. Offerings under the ESPP have a duration of 24 months (the "offering period") and commence on each January 1 and July 1, and ending on June 30 and December 31, respectively. 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 the Company's 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. The Company issued 58,080 and 51,438 shares from the ESPP during the six month period ended August 31, 2020 and 2019, respectively.
Share-based Compensation Expense
Share-based compensation expense and related income tax benefits related to all the plans listed above were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended August 31,
|
|
|
|
|
2020
|
|
2019
|
Compensation expense
|
|
$
|
4,083
|
|
|
$
|
3,086
|
|
Income tax benefits
|
|
$
|
453
|
|
|
$
|
648
|
|
Unrecognized compensation cost related to the Company's employee equity grants at August 31, 2020 totals $10.9 million and is expected to be recognized over a period of 1.63 years.
The Company’s policy is to issue shares required under these plans from the Company’s authorized but unissued shares.
10. Goodwill and Intangible Assets
Goodwill is evaluated for impairment on at least an annual basis, or more frequently if indicators of impairment exist. The impairment tests are based on Level 3 fair value inputs. Fair value is an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Hierarchy Levels 1, 2, or 3 are terms for the priority of inputs to valuation techniques used to measure fair value. Hierarchy Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Hierarchy Level 2 inputs are input other than quoted prices included with level 1 that are directly or indirectly observable for the asset or liability. Hierarchy Level 3 are
inputs that are not observable in the market. During the second quarter of 2021, the Company continued to execute its strategy to divest of non-core businesses, which began in the last quarter of 2020 with the planned exit of most of our business serving customers in the nuclear power businesses. We closed certain transactions in the second quarter of 2021 and we classified other businesses as held-for-sale in the accompanying consolidated balance sheet. In connection with the divestitures, we allocated goodwill to the businesses disposed of or held for sale based on the relative fair value of those businesses compared with the fair value of the reporting unit where goodwill was recorded. The determination of the amount of goodwill to allocate to the disposal group as opposed to the ongoing operations required significant management judgment regarding future cash flows, discount rates and other market relevant data.
In addition, we performed goodwill impairment tests for those reporting units following the allocation of goodwill to the divested or held for sale businesses. No goodwill impairment charges have been recorded during fiscal 2021. The changes in the carrying amounts of goodwill by reportable segment as of August 31, 2020 and February 29, 2020 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal Coatings
|
|
Infrastructure Solutions
|
|
Total
|
Balance as of February 29, 2020
|
$
|
157,048
|
|
|
$
|
199,177
|
|
|
$
|
356,225
|
|
Allocated to Galvabar
|
(1,132)
|
|
|
—
|
|
|
(1,132)
|
|
Allocated to disposal group
|
—
|
|
|
(3,955)
|
|
|
(3,955)
|
|
Foreign currency translation adjustment
|
617
|
|
|
—
|
|
|
617
|
|
Balance as of August 31, 2020
|
$
|
156,533
|
|
|
$
|
195,222
|
|
|
$
|
351,755
|
|
11. Restructuring and Impairment Charges
As described in Note 10, the Company has been executing a plan to divest certain non-core businesses in the last half of 2020. In the second quarter of 2021, the Company closed on the sale of its Galvabar business within the Metal Coatings segment and the board of directors approved a plan to divest certain other businesses within the Company. We recorded a loss on the sale of our Galvabar business of $1.2 million. The businesses we expect to sell are two businesses in our Infrastructure Solutions segment and two non-operating locations in our Metal Coatings segment. The assets and liabilities of the businesses expected to be disposed of within the next twelve months are classified as held-for-sale in the accompanying consolidated balance sheet. In addition, we expect to close a small number of Metal Coatings locations that were in underperforming and lower growth geographies.
In the second quarter of 2021, we recorded certain earnings charges related to our restructuring activities, which are summarized in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Metal Coatings
|
|
Infrastructure Solutions
|
|
Total
|
Write down on assets held for sale to estimated sales price
|
$
|
3,161
|
|
|
$
|
4,100
|
|
|
$
|
7,261
|
|
Write down of assets expected to be abandoned
|
6,965
|
|
|
—
|
|
|
6,965
|
|
Loss on sale of subsidiary
|
1,198
|
|
|
—
|
|
|
1,198
|
|
Write down of excess inventory
|
—
|
|
|
2,511
|
|
|
2,511
|
|
Costs associated with assets held for sale
|
—
|
|
|
758
|
|
|
758
|
|
Total charges
|
$
|
11,324
|
|
|
$
|
7,369
|
|
|
$
|
18,693
|
|
Assets Held for Sale
The strategic decision to divest of these businesses reflects the Company's longer term strategy to focus on core businesses within its Metal Coatings and Infrastructure Solutions segments. The historical annual sales, operating profit and net assets of these businesses were not significant enough to qualify as discontinued operations.
Assets and liabilities allocated to the disposal group are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets
|
|
|
|
Accounts receivable
|
|
$
|
5,917
|
|
|
Inventories
|
|
2,882
|
|
|
Contract assets
|
|
|
4,140
|
|
Other current assets
|
|
141
|
|
|
Property, plant and equipment
|
|
5,562
|
|
|
Other assets
|
|
|
1,580
|
|
Goodwill
|
|
3,955
|
|
|
|
|
|
|
Liabilities
|
|
|
|
Accounts payable
|
|
1,289
|
|
|
Contract liabilities
|
|
1,861
|
|
|
Other accrued liabilities
|
|
1,593
|
|
|
Lease liability – long term
|
|
1,354
|
|
|
Total carrying value
|
|
$
|
18,080
|
|
Less: Impairment of carrying value
|
|
|
7,261
|
|
Fair value of disposal group
|
|
$
|
10,819
|
|
|
Infrastructure Solutions Segment
In the second quarter of fiscal year 2021, as a result of the continued market pressures in the oil and gas services market, the Company undertook an evaluation of inventory within the tubular products business. As a result of the evaluation, the Company determined certain inventories to be in excess of their net realizable value, and recorded an inventory write down of $2.5 million to record the inventory at its current fair value.
Metal Coatings Segment
In the second quarter of fiscal year 2021, the Company approved a plan to close certain locations within the Metal Coatings segment in future periods. Management performed an analysis of the assets at each location expected to be closed. For assets that will not be transferred to another location for use in operations, management wrote the assets down to reflect a shortened useful life and lower value to the Company
The Company recognized the following charges to income from operations related to locations expected to be closed:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended August 31,
|
|
|
|
|
|
Six months ended August 31,
|
|
|
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
Inventory write down
|
|
$
|
336
|
|
|
$
|
—
|
|
$
|
336
|
|
|
$
|
—
|
Property & equipment write downs
|
|
|
2,999
|
|
|
|
—
|
|
|
2,999
|
|
|
|
—
|
Intangible write down
|
|
|
3,258
|
|
|
|
—
|
|
|
|
3,258
|
|
|
|
—
|
|
Other
|
|
|
372
|
|
|
|
|
|
|
372
|
|
|
|
|
Total
|
|
$
|
6,965
|
|
|
$
|
—
|
|
$
|
6,965
|
|
|
$
|
—
|
12. Subsequent Event
The Company, on October 9, 2020, completed a private placement transaction whereby the Company borrowed $150.0 million of senior unsecured notes (the “Notes”) consisting of two separate tranches:
•7-year borrowing: $70.0 million priced at 2.77% coupon, and
•12-year borrowing: $80.0 million priced at 3.17% coupon.
The new borrowing includes a three month delayed funding free of charge, and a four month delayed funding available at a 2 basis point premium. The proceeds of the borrowing will be funded in December 2020 and January 2021, and will be utilized to repay the existing $125.0 million 5.42% Senior Notes maturing on January 20, 2021 as well as being available for general corporate purposes. Interest on the outstanding Notes will be paid semi-annually.