# AZZ INC (AZZ) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AZZ INC's 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/8947/000000894722000034/azz-20220228.htm
Accession: 0000008947-22-000034
Filing date: 2022-04-22
Report date: 2022-02-28
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/AZZ/
All MD&A years: /company/AZZ/mda/
Next year: /company/AZZ/mda/fy2023/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion together with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements regarding our business and operations. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

A discussion regarding our financial condition and results of operations as well as our liquidity and capital resources for fiscal year 2021 compared to fiscal year 2020 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended February 28, 2021, which is available on the SEC’s website at www.sec.gov and our Investor Relations website at www.azz.com/investor-relations.

Overview

We are a global provider of galvanizing and a variety of metal coating solutions, welding solutions, specialty electrical equipment and highly engineered services to the power generation, transmission, distribution, refining and industrial markets. We operate two distinct business segments, the Metal Coatings segment and the Infrastructure Solutions segment. Our discussion and analysis of financial condition and results of operations is divided by each of our segments, along with corporate costs and other costs not specifically identifiable to a segment. For a reconciliation of segment operating income to consolidated operating income, see Note 12 to the consolidated financial statements. References herein to fiscal years are to the twelve-month periods that end in February of the relevant calendar year. For example, the twelve-month period ended February 28, 2022 is referred to as “fiscal 2022” or “fiscal year 2022.”

Coronavirus (COVID-19)

The continued uncertainty associated with COVID-19, and any of the ongoing variants, did not have a material adverse effect on our results of operations for the year ended February 28, 2022. While we continue to support our customers, there remain uncertainties regarding the duration and, to what extent, if any, that the COVID-19 pandemic, or newly identified variants, or additional regulatory requirements, will ultimately have on the demand for our products and services or with our supply chain or our employees.

The impact of COVID-19 to the Company's personnel and operations has been limited. During fiscal 2022, the Company continued to see improvement in sales and operating income in both of its operating segments. However, labor market and supply chain challenges increased during the third and fourth quarters, resulting in increased operating expenses as the constrained labor market and supply chain disruptions impacted the availability and cost of labor and materials.

Results of Operations

For the fiscal year ended February 28, 2022, we recorded sales of $902.7 million, compared to prior year’s sales of $838.9 million. Of total sales for fiscal 2022, approximately 57.5% were generated from the Metal Coatings segment and approximately 42.5% of sales were generated from the Infrastructure Solutions segment. Net income for fiscal 2022 was $84.0 million, compared to $39.6 million for fiscal 2021. Net income as a percentage of sales was 9.3% for fiscal 2022 as compared to 4.7% for fiscal 2021. Diluted earnings per share increased by 120.4%, to $3.35 per share for fiscal 2022, compared to $1.52 per share for fiscal 2021.

During fiscal 2022, we completed two acquisitions, both in our Metal Coatings segment.

Backlog

Our backlog relates entirely to our Infrastructure Solutions segment, consisting of our Electrical platform and Industrial platform, and is inclusive of transaction taxes for certain foreign subsidiaries. As of February 28, 2022, our backlog was $304.5 million, an increase of $118.4 million, or 63.6%, compared to fiscal 2021. The increase in backlog is due to an increase in orders in the Electrical platform, partially offset by the continued reduction of international backlog, including China, related to several non-recurring contracts and cancelled contracts, and, to a lesser extent, divestitures that occurred in fiscal year 2021. For the year ended February 28, 2022, net bookings increased $235.8 million, or 30.0%, to $1.02 billion, compared to same period of fiscal 2021, as a result of very strong bookings in our Electrical platform and continued strength within the Metal Coatings segment. The book to sales ratio increased in fiscal 2022 as compared to fiscal 2021, to 1.13 to 1.00 for fiscal 2022, compared to 0.94 to 1.00 for fiscal 2021.

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The following table reflects bookings and sales for fiscal 2022 and 2021 (in thousands, except ratios).

[[GREPCENT_TABLE]]
[["","","Period Ended","","Amount","","Period Ended","","Amount"],["Backlog","","2/28/2021","","$","186,119","","","2/28/2020","","$","243,799"],["Net bookings","","","","1,021,067","","","","","785,263"],["Disposed backlog","","","","\u2014","","","","","(4,026)"],["Sales recognized","","","","(902,664)","","","","","(838,917)"],["Backlog","","2/28/2022","","$","304,522","","","2/28/2021","","$","186,119"],["Book to sales ratio","","","","1.13","","","","","0.94"]]
[[/GREPCENT_TABLE]]

Sales

Our total sales for fiscal 2022 increased by $63.7 million, or 7.6%, as compared to fiscal 2021.

The following table reflects the breakdown of revenue by segment (in thousands): 

[[GREPCENT_TABLE]]
[["","","Year Ended February 28,"],["","","2022","","2021"],["Sales:"],["Metal Coatings","","$","519,000","","","$","457,791"],["Infrastructure Solutions","","383,664","","","381,126"],["Total sales","","$","902,664","","","$","838,917"]]
[[/GREPCENT_TABLE]]

Sales for the Metal Coatings segment increased $61.2 million, or 13.4%, to $519.0 million, from the prior year’s sales of $457.8 million. The increase in sales was primarily due to improved price realization for our superior quality and service and to a lesser extent, the acquisition of a metal coatings business during the fourth quarter of fiscal 2021. The acquisition of a galvanizing plant in the fourth quarter of fiscal 2022 did not materially impact sales for fiscal 2022.

Sales for the Infrastructure Solutions segment increased $2.5 million, or 0.7%, to $383.7 million for fiscal 2022, compared to $381.1 million for fiscal 2021. The increase in sales for fiscal 2022 was primarily due to sales increases in both domestic and international operations (as the prior year was significantly impacted by COVID-19) in the Industrial platform, partially offset by the divestiture of the low-margin SMS business in the third quarter of fiscal year 2021. The increase was partially offset by a decrease in the Electrical platform, which was primarily attributable to lower sales in China as several large projects were completed. In addition, the decrease was, to a lesser extent, due to delays in material receipts due to supply chain disruptions within our customer-base and the constrained labor market at several of our enclosure plants in our domestic operations. The decrease in our enclosure plants was partially offset by increases in our domestic high- and medium-bus duct, switchgear, lighting and tubing businesses.

Operating Income

The following table reflects the breakdown of operating income (loss) by segment (in thousands): 

[[GREPCENT_TABLE]]
[["","","Year Ended February 28, 2022","","Year Ended February 28, 2021"],["","","Metal Coatings","","Infrastructure Solutions","","Corporate","","Total","","Metal Coatings","","Infrastructure Solutions","","Corporate","","Total"],["Operating income (loss):"],["Sales","","$","519,000","","","$","383,664","","","$","\u2014","","","$","902,664","","","$","457,791","","","$","381,126","","","$","\u2014","","","$","838,917"],["Cost of sales","","374,900","","","302,541","","","\u2014","","","677,441","","","334,894","","","315,276","","","\u2014","","","650,170"],["Gross margin","","144,100","","","81,123","","","\u2014","","","225,223","","","122,897","","","65,850","","","\u2014","","","188,747"],["Selling, general and administrative","","16,765","","","47,377","","","49,538","","","113,680","","","16,155","","","50,160","","","40,819","","","107,134"],["Restructuring and impairment charges","","\u2014","","","(1,797)","","","\u2014","","","(1,797)","","","10,796","","","9,203","","","\u2014","","","19,999"],["Total operating income (loss)","","$","127,335","","","$","35,543","","","$","(49,538)","","","$","113,340","","","$","95,946","","","$","6,487","","","$","(40,819)","","","$","61,614"]]
[[/GREPCENT_TABLE]]

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Operating income for the Metal Coatings segment increased $31.4 million, or 32.7%, for fiscal 2022, to $127.3 million, as compared to $95.9 million for the prior year. Operating margins increased to 24.5% for fiscal 2022, as compared to 21.0% for fiscal 2021. The increase was primarily due to impairment and restructuring charges recognized in fiscal 2021 of $10.8 million, the increase in sales as described above and the achievement of operational efficiencies in our surface technologies platform.

Operating income for the Infrastructure Solutions segment increased $29.1 million for fiscal 2022, to $35.5 million, as compared to $6.5 million for the prior year. Operating margins for this segment were 9.3% for fiscal 2022, as compared to 1.7% for fiscal 2021. Gross margins improved on operating leverage within both the Industrial and Electrical platforms compared to prior year, as well as a divestiture of an under-performing business in the Industrial platform in the third quarter of fiscal year 2021. In addition, in fiscal 2021, operating income was impacted by impairment charges of $9.2 million, See "Restructuring and Impairment charges" below. Selling, general and administrative costs decreased due to cost containment measures that were implemented due to COVID-19.

Corporate expenses increased $8.7 million, to $49.5 million for fiscal 2022, compared to $40.8 million for fiscal 2021. The increase is primarily due to increased payroll and benefits costs (see Note 10 in Item 8), acquisition costs and other administrative costs.

Restructuring and Impairment Charges

During fiscal 2022, the Company continued to execute on its plan to strategically review our business portfolio, continue to acquire metal coatings businesses, and divest certain non-core business. During the fourth quarter of fiscal 2022, the Company had a change to the plan of sale for one of its businesses in the Infrastructure Solutions segment. The Company recognized $3.9 million of impairment charges during fiscal 2021, which is included in in "Restructuring and impairment charges" in the consolidated statements of income. During fiscal 2022, in accordance with applicable accounting guidance, the Company reclassified a business previously held for sale to assets held and used. When there is a change to a plan of sale and the assets are reclassified from held for sale to held and used, the long-lived assets are reported at the lower of (i) the carrying amount before held for sale designation, adjusted for depreciation that would have been recognized if the assets had not been classified as held for sale, or (ii) the fair value at the date the assets no longer satisfy the criteria for classification as held for sale. Following an analysis of the long-lived assets for the business, the Company reversed a portion of the previously recognized impairment charges, and recognized income of $1.8 million in fiscal 2022 as a result of the change to the plan of sale, which is included in "Restructuring and Impairment charges" in the consolidated statements of operations.

As of February 28, 2022, one non-operating location in the Metal Coatings segment is classified as held for sale. The assets of the business expected to be disposed of within the next twelve months are included in "Assets held for sale" in the accompanying consolidated balance sheets.

During fiscal 2021, we closed on the sale of two businesses, one in each of our Metal Coatings and Infrastructure Solutions segments. We also sold one non-operating location in our Metal Coatings segment. In addition, we closed a small number of Metal Coatings locations that were in underperforming and lower growth geographies.

During fiscal 2021, we recorded certain charges related to these restructuring activities, which are summarized in the table below:

[[GREPCENT_TABLE]]
[["","","Year Ended February 28, 2021"],["","","Metal Coatings","","Infrastructure Solutions","","Total"],["Write down of assets held for sale to estimated sales price","","$","2,652","","","$","4,100","","","$","6,752"],["Write down of assets expected to be abandoned","","6,923","","","\u2014","","","6,923"],["Loss on sale of subsidiaries","","1,221","","","1,859","","","3,080"],["Write down of excess inventory","","\u2014","","","2,511","","","2,511"],["Costs associated with assets held for sale","","\u2014","","","733","","","733"],["Total charges","","$","10,796","","","$","9,203","","","$","19,999"]]
[[/GREPCENT_TABLE]]

Interest Expense

Interest expense for fiscal 2022 decreased $3.3 million, or 33.7%, to $6.4 million, as compared to $9.6 million in fiscal 2021. This decrease is primarily attributable to the Company's 2020 Senior Notes, which were funded in late fiscal 2021 and carried a much lower interest rate than the previously outstanding Senior Notes. While the borrowings under the 2020 Senior Notes increased $25.0 million to $150.0 million, they carry lower interest rates than the Company's previous senior notes. As of February 28, 2022, we had gross outstanding debt of $227.0 million, compared to $179.0 million at the end of fiscal 2021. AZZ's debt to equity ratio was 0.34 to 1 at the end of fiscal 2022, compared to 0.29 to 1 at the end of fiscal 2021, as we reduced

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debt during the year and refinanced our existing senior notes. For additional information on outstanding debt, see Note 6 to the consolidated financial statements.

Other (Income) Expense, Net

For fiscal 2022, other expense, net decreased $0.4 million, to $0.6 million for fiscal 2022 compared to $1.0 million for fiscal 2021. The activity for both years consisted primarily of foreign currency losses resulting from unfavorable movements in exchange rates.

Provision for Income Taxes

The provision for income taxes reflected an effective tax rate of 21.0% for fiscal 2022 and 22.3% for fiscal 2021. The decrease is due primarily to certain nonrecurring state income tax items in the prior year.

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Liquidity and Capital Resources

We have historically met our cash needs through a combination of cash flows from operating activities along with bank and bond market debt. Our cash requirements are generally for operating activities, cash dividend payments, capital improvements, debt repayment and acquisitions. We believe that our cash position, cash flows from operating activities and our expectation of continuing availability to draw upon our credit facilities are sufficient to meet our cash flow needs for the foreseeable future.

Cash Flows

The following table summarizes our cash flows by category for the periods presented (in thousands):

[[GREPCENT_TABLE]]
[["","","Year Ended"],["","","February 28, 2022","","February 28, 2021"],["Net cash provided by operating activities","","$","86,010","","","$","92,035"],["Net cash used in investing activities","","(86,835)","","","(28,593)"],["Net cash provided by (used in) financing activities","","912","","","(88,425)"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities for fiscal 2022 was $86.0 million, compared to $92.0 million for fiscal 2021. The decrease in cash provided by operating activities for fiscal 2022 is primarily attributable to the impact of decreases in working capital, primarily due to changes in accounts receivable and inventories, partially offset by accounts payable and other accrued liabilities. Cash flow from operations also decreased due to the loss on disposal of businesses and other impairment charges in the prior year. These net decreases were partially offset by an increase in net income in the current year.

Net cash used in investing activities for fiscal 2022 was $86.8 million, compared to $28.6 million for fiscal 2021. The increase in cash used during fiscal 2022 was primarily attributable to the acquisition of two businesses in our Metal Coatings segment during the fourth quarter, partially offset by lower capital expenditures. The breakdown of capital spending by segment for fiscal 2022, 2021 and 2020 can be found in Note 12 to the consolidated financial statements.

Net cash provided by financing activities for fiscal 2022 was $0.9 million, compared to net cash used in financing activities of $88.4 million for fiscal 2021. The decrease in cash used in financing activities during fiscal 2022 was primarily attributable to an increase in net proceeds from the revolver, as well as a decrease in repurchases of Company common stock, partially offset by a decrease in net proceeds for long term debt. See "Financing and Capital" and “Share Repurchases” sections below for additional information.

Financing and Capital

2017 Revolving Credit Facility

On March 21, 2017, the Company executed the Amended and Restated Credit Agreement (the “2017 Credit Agreement”) with Bank of America and other lenders, which amended its previous credit agreement. The 2017 Credit Agreement was scheduled to mature on March 21, 2022, and included the following provisions: (i) providing for a senior revolving credit facility in a principal amount of up to $450 million, with an additional $150 million accordion, (ii) including a $75 million sublimit for the issuance of standby and commercial letters of credit, (iii) including a $30 million sublimit for swing line loans, (iv) restricting indebtedness incurred with respect to capital leases, synthetic lease obligations and purchase money obligations not to exceed $20 million, (v) restricting investments in any foreign subsidiaries not to exceed $50 million in the aggregate, and (vi) including various financial covenants and certain restricted payments relating to dividends and share repurchases as specifically set forth in the 2017 Credit Agreement. The balance due on the $75.0 million term facility under the previous Credit Agreement was paid in full as a result of the execution of the 2017 Credit Agreement.

The financial covenants, as defined in the 2017 Credit Agreement, require the Company 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 Line of Credit 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

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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 July 8, 2021, the 2017 Credit Agreement was replaced with the 2021 Credit Agreement, which is described below.

2021 Credit Agreement

On July 8, 2021, the Company refinanced the 2017 Credit Agreement, which was scheduled to mature in March 2022, with a new five-year unsecured revolving credit facility under a credit agreement, dated July 8, 2021 by and among the Company, borrower, Citibank, N.A., as administrative agent and the other agents and lender parties thereto (the “2021 Credit Agreement”). The 2021 Credit Agreement matures in July 2026 and includes the following significant terms;

i.provides for a senior unsecured revolving credit facility with a principal amount of up to $400.0 million revolving loan commitments, and includes an additional $200.0 million uncommitted incremental accordion facility,

ii.interest rate margin ranges from 87.5 bps to 175 bps for Eurodollar Rate loans, and from 0.0 bps to 75 bps for Base Rate loans, depending on leverage ratio of the Company and its consolidated subsidiaries as a group,

iii.includes a letter of credit sub-facility up to $85.0 million for the issuance of standby and commercial letters of credit,

iv.includes a $50.0 million sublimit for swing line loans,

v.includes customary representations and warranties, affirmative covenants and negative covenants, and events of default, including restrictions on incurrence of non-ordinary course debt, investment and dividends, subject to various exceptions, carve-outs and baskets, and

vi.includes a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each to be tested at quarter end.

The effective interest rate for the 2021 Credit Agreement was 2.49% as of February 28, 2022.

The proceeds of the loans under the 2021 Credit Agreement are used primarily to finance working capital needs, capital improvements, dividends, future acquisitions and general corporate purposes.

As of February 28, 2022, we had $77.0 million of outstanding debt against the 2021 Credit Agreement and letters of credit outstanding under the 2021 Credit Agreement in the amount of $9.7 million, which left approximately $313.3 million of additional credit available.

2020 Senior Notes

On October 9, 2020, the Company completed a private placement transaction and entered into a Note Purchase Agreement, whereby the Company agreed to borrow $150.0 million of senior unsecured notes (the “2020 Senior 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 $80.0 million tranche was funded on December 17, 2020. The $70.0 million tranche was funded in January 2021. The Company used the proceeds to repay the existing $125.0 million 5.42% Senior Notes maturing on January 20, 2021, as well as for general corporate purposes. Interest on the 2020 Senior Notes is paid semi-annually.

The Company's debt agreements require the Company to maintain certain financial ratios. As of February 28, 2022, the Company was in compliance with all covenants or other requirements set forth in the debt agreements.

Precoat Acquisition

On March 7, 2022, the Company and Sequa, a portfolio company of global investment firm Carlyle, jointly announced the signing of a definitive agreement whereby the Company intends to acquire Sequa's Precoat Metals business division ("Precoat") for a net purchase price of approximately $1.3 billion (the "Precoat Acquisition"). The Precoat Acquisition, which is subject to certain normal and customary closing conditions, is expected to close during the first quarter of the Company's fiscal year 2023. The Company has obtained financing commitments required to complete the transaction, consisting of a $400.0 million revolving credit facility, and a $1.525 billion senior secured term loan facility. As part of the transaction, we also expect to repay our current 2020 Senior Notes, which will include an early termination premium. Our new financing will have interest rates that are higher than our current notes, resulting in higher interest expense.

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Share Repurchases

On November 10, 2020, the Company's Board of Directors authorized a $100 million share repurchase program pursuant to which the Company may repurchase its common stock (the “2020 Authorization”). Repurchases under the 2020 Authorization will be made through open market and/or private transactions, in accordance with applicable federal securities laws, and could include repurchases pursuant to Rule 10b5-1 trading plans, which allows stock repurchases when the Company might otherwise be precluded from doing so.

The Company purchased 601,822 of its common shares in the amount of $30.8 million at an average purchase price of $51.20 under the 2020 Authorization during fiscal 2022.

Other Exposures

We have exposure to commodity price increases in both segments of our business, primarily copper, aluminum, steel and nickel-based alloys in the Infrastructure Solutions segment and zinc and natural gas in the Metal Coatings segment. We attempt to minimize these increases through escalation clauses in customer contracts for copper, aluminum, steel and nickel-based alloys, when market conditions allow and through fixed cost contract purchases on zinc. In addition to these measures, we attempt to recover other cost increases through improvements to our manufacturing process, supply chain management, and through increases in prices where competitively feasible.

Letters of Credit

As of February 28, 2022, we had total outstanding letters of credit in the amount of $22.0 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.

Off Balance Sheet Arrangements and Contractual Commitments

As of February 28, 2022, the Company did not have any off-balance sheet arrangements as defined under SEC rules. Specifically, there were no off-balance sheet transactions, arrangements, obligations (including contingent obligations), or other relationships with unconsolidated entities or other persons that have, or may have, a material effect on the financial condition, changes in financial condition, sales or expenses, results of operations, liquidity, capital expenditures or capital resources of the Company.

Critical Accounting Policies and Estimates

The preparation of the consolidated financial statements requires us to make estimates that affect the reported value of assets, liabilities, sales and expenses. Our estimates are based on historical experience and various other factors that we believe are reasonable under the circumstances and form the basis for our conclusions. We continually evaluate the information used to make these estimates. Accounting policies and estimates considered most critical are allowances for doubtful accounts, revenue recognition, impairment of long-lived assets, identifiable intangible assets and goodwill, including purchase accounting and accounting for income taxes. Actual results may differ from these estimates under different assumptions or conditions. The following accounting policies involve critical accounting estimates because they are dependent on our judgement and assumptions about matters that are inherently uncertain.

Allowance for Credit Losses

The carrying value of our accounts receivable is periodically evaluated based on the likelihood of collection. An allowance is maintained for estimated credit losses resulting from our customers’ inability to make contracted payments. The allowance is determined by historical experience of uncollected accounts, the level of past due accounts, overall level of outstanding accounts receivable, information about specific customers with respect to their inability to make payments and future expectations of conditions that might impact the collectability of accounts receivable. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.

Revenue recognition - Infrastructure Solutions segment

Our Infrastructure Solutions segment is a provider of specialized products and services designed to support industrial, electrical and other industrial applications. For custom built products, we recognize sales over time. For custom services, which consist of specialized welding and other professional services, we recognize sales over time as the services are rendered due to the fact that the services enhance a customer owned asset. For off-the-shelf products, which consist of tubing and lighting products, we recognize sales upon the transfer of the goods to the customer.

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For sales recognized over time, we generally use the cost-to-cost method of revenue recognition. Under this approach, the extent of progress towards completion is measured based on the ratio of costs incurred to date compared with the total estimated costs upon completion of the project. This method requires the estimation of total contract sales, project costs and margin, which involves significant management judgment. As a significant change in one or more of these estimates could affect the profitability of our contracts, management reviews and updates its contract related estimates regularly.

Total contract cost estimates are based on current contract specifications and expected engineering requirements and require us to make estimates on expected profit. The estimates for profit margin are based on judgments we make to project the outcome of future events, and can sometimes span more than one year. We estimate labor productivity and availability, the complexity of the work to be performed, change orders issued by our customers, and other specialized engineering and production related activities. Our cost estimation process is based on historical data, including historical actuals to original estimates, and the application of the professional knowledge and experience of engineers, general managers and finance professionals to these historical results. We review and update our estimates of costs regularly, or more frequently when circumstances significantly change, which can affect the profitability of our contracts.

In addition to fixed consideration, the contracts within our Infrastructure Solutions segment can include variable consideration, including claims, incentive fees, liquidated damages or other penalties. We recognize revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. We estimate the amount of revenue to be recognized on variable consideration using the expected value or the most likely amount method, whichever is expected to better predict the amount. Management’s estimates of variable consideration and the determination of whether to include estimated amounts in transaction prices are based largely on historical experience, professional knowledge and experience, and all other relevant information that is reasonably available at the time of the estimate.

Impairment of Long-Lived Assets, Identifiable Intangible Assets and Goodwill

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination and is not amortized. We test goodwill and intangible assets with an indefinite life for potential impairment annually during the fourth quarter and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below its carrying amount, which would result in impairment.

We use the income approach to complete our annual goodwill assessment. The income approach uses future cash flows and estimated terminal values for our reporting units that are discounted using a market participant perspective to determine the fair value of the reporting unit, which is then compared to the carrying value of that reporting unit to determine if there is impairment. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates, discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. A significant change in events, circumstances or any of these assumptions could result in an impairment of long-lived assets, including identifiable intangible assets. Variables impacting future cash flows include, but are not limited to, the level of customer demand for and response to products and services we offer to the power generation market, the electrical transmission and distribution markets, the general industrial market and the hot-dip galvanizing market, changes in economic conditions of these various markets, changes in costs of raw material and natural gas, and the availability of experienced labor and management to implement our growth strategies.

Recent Accounting Pronouncements

See Part II, Item 8. Consolidated Financial Statements and Supplementary Data, Note 1, Summary of Significant Account Policies, of the Notes to the Consolidated Financial Statements of this Annual Report on Form 10-K, for a full description of recent accounting pronouncements, including the actual and expected dates of adoption and estimated effects on our consolidated results of operations and financial condition, which is incorporated herein by reference.

Non-GAAP Disclosure

In addition to reporting financial results in accordance with Generally Accepted Accounting Principles in the United States (“GAAP”), the Company has provided adjusted operating income, adjusted earnings and adjusted earnings per share (collectively, the “Adjusted Earnings Measures”), which are non-GAAP measures. Management believes that the presentation of these measures provides investors with a greater transparency comparison of operating results across a broad spectrum of companies, which provides a more complete understanding of the Company’s financial performance, competitive position and prospects for the future. Management also believes that investors regularly rely on non-GAAP financial measures, such as adjusted operating income, adjusted earnings and adjusted earnings per share, to assess operating performance and that such

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measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP.

The following tables provides a reconciliation for the years ended February 28, 2022 and February 28, 2021 between the various measures calculated in accordance with GAAP to the Adjusted Earnings Measures (dollars in thousands, except per share data):

[[GREPCENT_TABLE]]
[["","","Year Ended February 28,"],["","","2022","","2021"],["Operating income","","$","113,340","","","$","61,614"],["Restructuring and impairment charges(1)","","(1,797)","","","19,999"],["Acquisition costs(2)","","1,554","","","\u2014"],["Adjusted operating income","","$","113,097","","","$","81,613"],["(1) See \"Results of Operations-Restructuring and Impairment Charges\" for further discussion on fiscal 2022 restructuring and impairment charges."],["(2) Acquisition costs represent costs related to the Precoat Acquisition. See \"Precoat Acquisition\" above."]]
[[/GREPCENT_TABLE]]

[[GREPCENT_TABLE]]
[["","Year Ended"],["","February 28, 2022","","February 28, 2021","","February 29, 2020"],["","Amount","","Per Diluted Share(1)","","Amount","","Per Diluted Share(1)","","Amount","","Per Diluted Share(1)"],["Net income and diluted earnings per share","$","84,022","","","$","3.35","","","$","39,614","","","$","1.52","","","$","48,234","","","$","1.84"],["Adjustments (net of tax):"],["Restructuring and impairment charges:"],["Metal Coatings","\u2014","","","\u2014","","","10,796","","","0.41","","","\u2014","","","\u2014"],["Infrastructure Solutions(2)","(1,797)","","","(0.07)","","","9,203","","","0.35","","","27,789","","","1.07"],["Acquisition related expenditures(3)","1,554","","","0.06","","","\u2014","","","\u2014"],["Subtotal","(243)","","","(0.01)","","","19,999","","","0.77","","","27,789","","","1.07"],["Tax provision (benefit) related to restructuring and impairment charges(4)","56","","","\u2014","","","(4,584)","","","(0.18)","","","(4,777)","","","(0.18)"],["Total adjustments","(187)","","","(0.01)","","","15,415","","","0.59","","","23,012","","","0.88"],["Adjusted earnings and adjusted earnings per share","$","83,835","","","$","3.34","","","$","55,029","","","$","2.11","","","$","71,246","","","$","2.71"]]
[[/GREPCENT_TABLE]]

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(1) Earnings per share amounts included in the table above may not sum due to rounding differences.

(2) See "Results of Operations-Restructuring and Impairment Charges" for further discussion on fiscal 2022 restructuring and impairment charges.

(3) Acquisition related expenditures represents expenses related to the Precoat Acquisition.

(4) The non-GAAP effective tax rates for fiscal 2022, 2021 and 2020 were 22.9%, 22.9% and 17.2%, respectively.

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