# AZZ INC (AZZ) FY 2024 MD&A

Verbatim Item 7 Management's Discussion and Analysis from AZZ INC's 10-K for fiscal year 2024.

SEC filing source: https://www.sec.gov/Archives/edgar/data/8947/000000894724000044/azz-20240229.htm
Accession: 0000008947-24-000044
Filing date: 2024-04-22
Report date: 2024-02-29
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/
Previous year: /company/AZZ/mda/fy2023/ (FY 2023)
Next year: /company/AZZ/mda/fy2025/ (FY 2025)

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

You should read the following discussion together with "Item 8. Financial Statements and Supplementary Data." This discussion contains forward-looking statements regarding our business and operations; see "Forward-Looking Statements" at the beginning of this Annual Report on Form 10-K. Our actual results may differ materially from those we currently anticipate as a result of the factors we describe under "Item 1A. 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 2023 compared to fiscal year 2022 can be found under "Item 7. Management's Discussion and Analysis" in our Annual Report on Form 10-K for the fiscal year ended February 28, 2023, filed with the SEC on April 25, 2023, which such discussion is hereby incorporated by reference.

Overview

We are a provider of hot-dip galvanizing and coil coating solutions to a broad range of end-markets in North America. We operate three distinct business segments, the AZZ Metal Coatings segment, the AZZ Precoat Metals segment, and the AZZ Infrastructure Solutions segment, which consists of the Company's 40% investment in a joint venture, AIS Investment Holdings LLC (the "AVAIL JV"). On September 30, 2022, we contributed our AZZ Infrastructure Solutions business (the "AIS business"), excluding AZZ Crowley Tubing, to the AVAIL JV and sold a 60% interest to Fernweh AIS Acquisition LP. Following the transaction on September 30, 2022, we account for our retained investment in the AVAIL JV as an equity method investment, and our equity in the earnings of the AVAIL JV are included in continuing operations. Therefore, the results of operations for the AIS business for the period from March 1, 2022 through September 30, 2022 were reported as discontinued operations, and financial data was segregated and presented as discontinued operations for this period. Our discussion and analysis of financial condition and results of operations is presented for each of our segments, along with corporate costs and other costs not specifically identifiable to a segment. For a reconciliation of segment operating income (loss) from continuing operations to consolidated operating income, see "Item 8. Financial Statements and Supplementary Data—Note 18". 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 29, 2024 is referred to as "fiscal 2024," "fiscal year 2024", "current year" or "current period", and the twelve-month period ended February 28, 2023 is referred to as "fiscal 2023," "fiscal year 2023," "prior year" or "prior period."

Business Operations Update

Our results for the year ended February 29, 2024 were favorably impacted by the continued demand for our manufactured solutions in the construction, industrial, consumer and transportation industries, coupled with our value driven pricing strategy.

The demand for our manufactured solutions and continued strength in pricing were the primary contributors to us reporting $87.2 million of net income attributable to common shareholders for the year ended February 29, 2024. Our operating results for fiscal 2024, including operating results by segment, are described in the summary on the following page, and detailed descriptions can be found below under “Results of Operations.”

Our operations generated $244.5 million of cash in fiscal 2024, which includes $54.0 million generated from reduction in working capital. The cash flows were used to make $95.1 million of capital investments in our business and return $31.4 million to our common and preferred shareholders through dividend payments. In addition, we reduced our outstanding debt through $115.0 million in net payments on our Term Loan B and revolving credit facility. As a result of this and other activity, our cash and cash equivalents were $4.3 million as of February 29, 2024, an increase of $1.5 million from February 28, 2023. As of February 29, 2024, we had $355.5 million available under the revolving credit facility. The components of our liquidity and descriptions of our cash flows, capital investments, and other matters impacting our liquidity and capital resources can be found below under “Liquidity and Capital Resources.”

Outlook

While it is difficult to predict future North American economic activity and its impact on the demand for our galvanizing and coil coating solutions, as well the impact that political or regulatory developments may have on us, we have noted several factors below that have impacted or may impact our results of operations during the first quarter of fiscal 2025.

•Sales prices in our AZZ Metal Coatings segment are expected to remain consistent with current levels.

•Sales prices in our AZZ Precoat Metals segment are expected to remain consistent with current levels, with expected seasonal fluctuations in mix due to an increase in construction business, which may impact the average selling price.

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•Demand in our AZZ Metal Coatings and AZZ Precoat Metals segments is expected to follow our typical seasonal patterns.

•Customer inventories for our AZZ Metal Coatings segment remain constant, which should support the continued demand for our metal coatings solutions.

•Customer inventories for our AZZ Precoat Metals segment remain at historical levels, which should support the continued demand for our coil coating solutions.

Results of Operations

Net income (loss) from continuing operations by segment for fiscal 2024 and 2023 were as follows (in thousands):

[[GREPCENT_TABLE]]
[["","Year Ended February 29, 2024"],["","Metal Coatings(1)","","Precoat Metals","","Infrastructure Solutions(2)","","Corporate(3)(4)","","Total"],["Sales","$","656,189","","","$","881,400","","","$","\u2014","","","$","\u2014","","","$","1,537,589"],["Cost of sales","465,147","","","708,981","","","\u2014","","","\u2014","","","1,174,128"],["Gross margin","191,042","","","172,419","","","\u2014","","","\u2014","","","363,461"],["Selling, general and administrative","26,314","","","32,848","","","6,246","","","76,453","","","141,861"],["Operating income (loss) from continuing operations","164,728","","","139,571","","","(6,246)","","","(76,453)","","","221,600"],["Interest expense","\u2014","","","\u2014","","","\u2014","","","(107,065)","","","(107,065)"],["Equity in earnings of unconsolidated subsidiaries","\u2014","","","\u2014","","","15,407","","","\u2014","","","15,407"],["Other income","128","","","\u2014","","","\u2014","","","33","","","161"],["Income (loss) from continuing operations before income tax","$","164,856","","","$","139,571","","","$","9,161","","","(183,485)","","","130,103"],["Income tax expense","","","","","","","28,496","","","28,496"],["Net income (loss) from continuing operations","","","","","","","$","(211,981)","","","$","101,607"],["(1) For fiscal 2024, AZZ Metal Costings included expenses related to a legal matter of $5.5 million in \"Selling, general and administrative\"."],["(2) Infrastructure Solutions segment includes the equity in earnings from our investment in the AVAIL JV, as well as other expenses related to receivables and liabilities that were retained following the sale of the AIS business, including $5.8 million related to a legal settlement."],["(3) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments."],["(4) For fiscal year 2024, amortization expense for acquired intangible assets of $24.0 million is included in Corporate expenses in \"Selling, general and administrative\" expense as these expenses are not allocated to the segments. Fiscal year 2024 also includes an accrual related to a legal settlement of $5.8 million for the settlement of a litigation matter that was acquired as part of the Precoat Acquisition and relates to the business activities that were discontinued prior to our acquisition."]]
[[/GREPCENT_TABLE]]

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[[GREPCENT_TABLE]]
[["","Year Ended February 28, 2023"],["","Metal Coatings(1)","","Precoat Metals(2)","","Infrastructure Solutions(3)","","Corporate(4)","","Total"],["Sales","$","636,982","","","$","686,667","","","$","\u2014","","","$","\u2014","","","$","1,323,649"],["Cost of sales","462,473","","","565,233","","","\u2014","","","\u2014","","","1,027,706"],["Gross margin","174,509","","","121,434","","","\u2014","","","\u2014","","","295,943"],["Selling, general and administrative","18,556","","","41,925","","","\u2014","","","61,824","","","122,305"],["Operating income (loss) from continuing operations","155,953","","","79,509","","","\u2014","","","(61,824)","","","173,638"],["Interest expense","\u2014","","","\u2014","","","\u2014","","","(88,800)","","","(88,800)"],["Equity in earnings of unconsolidated subsidiaries","\u2014","","","\u2014","","","2,597","","","\u2014","","","2,597"],["Other income","101","","","765","","","\u2014","","","374","","","1,240"],["Income (loss) from continuing operations before income tax","$","156,054","","","$","80,274","","","$","2,597","","","(150,250)","","","88,675"],["Income tax expense","","","","","","","22,336","","","22,336"],["Net income (loss) from continuing operations","","","","","","","$","(172,586)","","","$","66,339"],["(1) For fiscal year 2023, amortization expense for acquired intangible assets of $7.1 million and $15.5 million is included in AZZ Metal Coatings expenses in \"Cost of sales\" and in AZZ Precoat Metals in \"Selling, general and administrative\" expense, respectively."],["(2) For the fiscal year 2023, AZZ Precoat Metals segment includes results from May 13, 2022 - February 28, 2023."],["(3) Infrastructure Solutions segment includes the equity in earnings from our investment in the AVAIL JV."],["(4) Interest expense and Income tax expense are included in the Corporate segment as these items are not allocated to the segments."]]
[[/GREPCENT_TABLE]]

For the fiscal year ended February 29, 2024, we recorded sales of $1,537.6 million, compared to prior year’s sales of $1,323.6 million. Of total sales for fiscal 2024, 42.7% were generated from the AZZ Metal Coatings segment and 57.3% of sales were generated from the AZZ Precoat Metals segment. Net income from continuing operations for fiscal 2024 was $101.6 million, compared to $66.3 million for fiscal 2023. Net income from continuing operations as a percentage of sales was 6.6% for fiscal 2024 as compared to 5.0% for fiscal 2023. Diluted earnings per common share from continuing operations increased by 48.5%, to $3.46 per share for fiscal 2024, compared to $2.33 per share for fiscal 2023.

On May 13, 2022, we completed the Precoat Acquisition.

Sales

Sales for the AZZ Metal Coatings segment increased $19.2 million, or 3.0%, to $656.2 million, from the prior year’s sales of $637.0 million. The increase in sales was primarily due to an increase in selling price, which contributed $13.3 million and a higher volume of steel processed, which contributed $9.5 million. This increase was partially offset by a net decrease of $3.6 million in sales of other products.

Sales for the AZZ Precoat Metals segment increased $194.7 million, or 28.4%, to $881.4 million, from the prior year's sales of $686.7 million, due primarily to a full twelve-month period in the current year, compared to the period from May 13, 2022 through February 28, 2023 for the prior year. This additional period contributed incremental sales of $178.4 million. The remaining increase was primarily due to an increase in sales price due to product mix.

Operating Income

Operating income for the AZZ Metal Coatings segment increased $8.7 million, or 5.6%, for fiscal 2024, to $164.7 million, as compared to $156.0 million for the prior year. The increase was due to improved sales as described above, partially offset by higher cost of sales and higher selling, general and administrative expenses. Cost of sales increased $2.7 million, primarily due to higher labor and overhead costs, partially offset by a decrease in zinc costs and a change in classification of amortization of intangible assets of $7.1 million to the Corporate segment, from the AZZ Metal Coatings segment. Selling, general and administrative expense increased due to the recognition of $5.5 million for a legal accrual and related expenses, and the change in classification of certain compensation and information technology costs of $2.7 million to the AZZ Metal Coatings segment, from the Corporate segment.

Operating income for the AZZ Precoat Metals segment, which was acquired on May 13, 2022, increased $60.1 million, or 75.6%, for fiscal 2024, to $139.6 million, as compared to $79.5 million for the prior year. The increase is primarily due to the inclusion of a full first quarter of fiscal 2024 compared to a partial fiscal quarter of 2023, which contributed $31.0 million to operating income. The increases in the remaining quarters were due to: an increase in sales, as described above, lower

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freight costs and lower selling, general and administrative expense, primarily due to the change in classification of amortization of intangible assets of $15.5 million. These increases to operating income were partially offset by an increase in cost of sales, primarily driven by higher cost of labor and materials (primarily due to higher volume), higher employee related costs, travel, other indirect costs and the change in classification of certain compensation costs to the AZZ Precoat Metals segment, from the Corporate segment.

Operating loss for the AZZ Infrastructure solutions segment for fiscal 2024 was $6.2 million, due to legal and other expenses related to receivables that were retained following the sale of the AIS business, including $5.8 million related to a legal settlement.

Corporate Expenses

Corporate expenses increased $14.7 million, to $76.5 million for fiscal 2024, compared to $61.8 million for fiscal 2023. The increase is primarily due to amortization expense of $24.0 million related to intangible assets, which is included in corporate expense in the current year period and allocated to the segments in the prior year period; an increase due to a legal settlement in the current year period of $5.8 million; a decrease in transition services agreement fees associated with the AVAIL JV; and employee-related costs. These increases were offset by a decrease in acquisition costs of $15.3 million incurred in the prior year period and the allocation of certain compensation and information technology costs to the segments in the current year period, that were previously included in corporate expenses. See also "Item 8. Financial Statements and Supplementary Data—Note 7".

Interest Expense

Interest expense for fiscal 2024 increased $18.3 million, to $107.1 million, as compared to $88.8 million in fiscal 2023. The increase is primarily attributable a full year of interest expense on the debt we obtained in conjunction with the Precoat Acquisition, partially offset by a decrease due to $2.1 million of higher capitalized interest in the current period associated with the new facility under construction in Washington, MO. See "Liquidity and Capital Resources—Greenfield Aluminum Coil Coating Facility" below for more information.

Equity in Earnings of Unconsolidated Entities

Equity in earnings of unconsolidated subsidiaries for the current period increased $12.8 million, to $15.4 million, compared to $2.6 million in the prior year period. The increase is primarily due to higher earnings from the AVAIL JV, and a full year of equity in earnings in the current period, compared to one month in the prior year period. See "Item 8. Financial Statements and Supplementary Data—Note 19" for more information about the AVAIL JV.

Other (Income) Expense, Net

For fiscal 2024, other income, net decreased $1.1 million, to $0.2 million for fiscal 2024 compared to $1.2 million for fiscal 2023. The decrease is primarily due to the reclassification in the current year of sublease income earned through the Company's sublease agreements in the Precoat Metals segment, which is netted against lease expense in the current year, as well as foreign currency losses resulting from unfavorable movements in exchange rates.

Income Taxes

The provision for income taxes from continuing operations was 21.9% for fiscal 2024 compared to 25.2% for fiscal 2023. The decrease in the effective tax rate is the result of favorable changes to our state footprint following the divestiture of the AIS business, as well as an increase in tax credits that were generated in the current year compared to the prior year.

Income from Discontinued Operations, net of tax

The results of our AZZ Infrastructure Solutions segment are classified as discontinued operations in our condensed consolidated statements of operations and excluded from continuing operations for all periods presented. The results of operations from discontinued operations for fiscal 2023 consist of the following (in thousands):

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[[GREPCENT_TABLE]]
[["","","","Year Ended February 28,"],["","","","2023"],["Sales","","","$","256,224"],["Cost of sales","","","202,707"],["Gross margin","","","53,517"],["Selling, general and administrative","","","26,186"],["Restructuring and impairment charges","","","\u2014"],["Loss on disposal of discontinued operations","","","159,910"],["Operating loss from discontinued operations","","","(132,579)"],["Interest expense","","","(8)"],["Other expense, net","","","(6,270)"],["Loss from discontinued operations before income tax","","","(138,857)"],["Income tax benefit","","","(19,544)"],["Net loss from discontinued operations","","","$","(119,313)"]]
[[/GREPCENT_TABLE]]

See "Item 8. Financial Statements and Supplementary Data—Note 9" for more information.

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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 generally include cash dividend payments, capital improvements, debt repayment and acquisitions. Based on our current financial condition and current operations, 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 next twelve months and beyond.

Cash Flows

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

[[GREPCENT_TABLE]]
[["","","Year Ended February 29/28,"],["","","2024","","2023"],["Net cash provided by operating activities of continuing operations","","$","244,468","","","$","91,430"],["Net cash used in investing activities of continuing operations","","(95,064)","","","(1,228,921)"],["Net cash provided by (used in) financing activities of continuing operations","","(147,888)","","","1,027,335"],["Net cash used in operating activities from discontinued operations","","\u2014","","","(21,275)"],["Net cash used in investing activities from discontinued operations","","\u2014","","","(1,336)"],["Net cash provided by financing activities from discontinued operations","","\u2014","","","120,000"]]
[[/GREPCENT_TABLE]]

Net cash provided by operating activities of continuing operations for fiscal 2024 was $244.5 million, driven primarily by net income from continuing operations of $101.6 million, adjusted to exclude non-cash charges, net of non-cash income of $90.4 million, an increase in cash resulting from a reduction in working capital of $54.0 million, and a cash distribution on the investment in the AVAIL JV of $3.1 million. The reduction in working capital is due primarily to a reduction in accounts receivable, other receivables and inventories due to improved management of collections of trade and other receivables, and due to improved management of inventory needs. Net cash provided by operating activities was used to fund $95.1 million of capital expenditures, make net payments on long term debt and finance leases liabilities of $115.4 million and make dividend payments of $31.4 million.

Net cash provided by operating activities of continuing operations for fiscal 2023 was $91.4 million, driven primarily by net income from continuing operations of $66.3 million, adjusted to exclude non-cash charges, net of non-cash income, of $97.7 million, and a decrease in cash resulting from an increase in working capital of $67.1 million and a decrease in cash from changes in other long-term assets and liabilities of $5.5 million. The increase in working capital is due primarily to an increase in accounts receivable, other receivables and inventories and a decrease in accounts payable and accrued expenses. Net cash provided by operating activities was used to fund $57.1 million of capital expenditures, and make dividend payments of $22.7 million. The Company obtained proceeds from long-term debt of $1.6 billion, of which $1.3 billion was used to fund the Precoat Acquisition during fiscal 2023. The divestiture of the AIS business provided $106.8 million of cash. The proceeds were also used to repay $419.8 million of long-term debt.

See "Financing and Capital" section below for additional information.

Financing and Capital

2022 Credit Agreement and Term Loan B

We have a credit agreement with a syndicate of financial institutions as lenders that was entered into on May 13, 2022 (the "2022 Credit Agreement"). The 2022 Credit Agreement includes the following significant terms:

i.provides for a senior secured initial term loan in the aggregate principal amount of $1.3 billion (the "Term Loan B"), due May 13, 2029, which is secured by substantially all of the assets of the Company;

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

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

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iv.borrowings under the Term Loan B bear a rate of Secured Overnight Financing Rate ("SOFR") plus 3.75% (following the repricing on August 17, 2023 as described below) and the Revolving Credit Facility bears a leverage-based rate between 2.75% and 3.50%; as of February 29, 2024, the rate was SOFR plus 3.50% (following the repricing on December 20, 2023, as described below);

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

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

During fiscal 2024, we repriced our Revolving Credit Facility and Term Loan B, which amended the 2022 Credit Agreement as follows:

i.On August 17, 2023, we repriced the Term Loan B. The repricing reduced the interest rate margin by 50 basis points to an interest rate of SOFR plus 3.75% and removed the Credit Spread Adjustment, as defined in the 2022 Credit Agreement, of 10 basis points.

ii.On December 20, 2023, we repriced its $400.0 million Revolving Credit Facility. The repricing reduced the interest rate margin on all leveraged-based pricing tiers, to a range of SOFR plus 2.75% to 3.50% and removed the Credit Spread Adjustment, as defined in the 2022 Credit Agreement, of 10 basis points.

On March 20, 2024, the Company repriced the Term Loan B, for which $980.3 million was outstanding as of February 29, 2024 under the 2022 Credit Agreement. The repricing converted from a rate of SOFR plus 3.75% to SOFR plus 3.25%.

We utilize proceeds from the Revolving Credit Facility primarily to finance working capital needs, capital improvements, dividends, acquisitions and for general corporate purposes.

As defined in the 2022 Credit Agreement, quarterly prepayments are due against the outstanding principal of the Term Loan B and are payable on the last business day of each May, August, November and February, beginning August 31, 2022, in a quarterly aggregate principal amount of $3.25 million, with the entire remaining principal amount due on May 13, 2029, the maturity date. Additional prepayments made against the Term Loan B contribute to these required quarterly payments. Due to a prepayment of $210.0 million that we made on the Term Loan B during fiscal year 2023 in connection with the sale of the AIS business, the quarterly mandatory principal payment requirement has been met, and the quarterly payments of $3.25 million are not required at this time.

The weighted average interest rate for our outstanding debt, including the Revolving Credit Facility and the Term Loan B, was 8.58% at February 29, 2024. Our credit agreement required us to maintain a maximum Total Net Leverage Ratio (as defined in the loan agreement) no greater than 6.25 through November 2022. For each subsequent quarter, the maximum ratio decreases by 25 basis points through May 31, 2024, when the maximum Total Net Leverage Ratio reaches 4.50. As of February 29, 2024, we were in compliance with all covenants and other requirements set forth in the debt agreement.

Series A Convertible Preferred Stock

In connection with the Precoat Acquisition, on May 13, 2022, we completed the issuance of $240.0 million aggregate principal amount of 6.00% convertible subordinated notes due June 30, 2030 (the "Convertible Notes") pursuant to the Securities Purchase Agreement (the "Securities Purchase Agreement") with BTO Pegasus Holdings DE L.P., a Delaware limited partnership (together with its assignees, "Blackstone"), an investment vehicle of funds affiliated with Blackstone Inc. Interest on the Convertible Notes was payable on June 30 and December 31. On August 5, 2022, we exchanged our $240.0 million 6.00% convertible subordinated notes due June 30, 2030 for 240,000 shares of 6.0% Series A Convertible Preferred Stock ("Series A Preferred Stock"), following the receipt of shareholder approval for the issuance of preferred stock. The Series A Preferred Stock has a $1.00 par value per share and ranks senior to the common stock of the Company, including with respect to both income and capital, but junior to our indebtedness. The Series A Preferred Stock is classified as "Mezzanine equity" in the consolidated balance sheets.

Liquidation Preference

If we undergo a change of control, bankruptcy, insolvency, liquidation or de-listing of AZZ’s common stock (a “Fundamental Change Event”), holders of Series A Preferred Stock may elect to (i) receive the as-converted value of AZZ’s common stock at the then-current Conversion Price, (ii) require us to redeem the Series A Preferred Stock in cash for the Redemption Amount (as defined below) or (iii) retain their shares of Series A Preferred Stock if the Fundamental Change Event is a non-cash change of control.

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The Series A Preferred Stock has a liquidation preference, as defined by GAAP, equal to the Redemption Amount. Under GAAP, the liquidation preference is defined as the amount that would be required to be paid to the shareholders upon liquidation or dissolution of the Company. As of February 29, 2024 and February 28, 2023, the holders of the shares of Series A Preferred Stock were entitled to a liquidation preference of approximately $312.5 million and $326.9 million, respectively, in the event of any liquidation, dissolution or winding up of the Company as of such year end.

The Certificate of Designation for the Series A Preferred Stock defines "liquidation preference" as $1,000 per share plus any unpaid dividends, which we refer to herein as the "Series A Base Amount."

Dividends

The Series A Preferred Stock accumulates a 6.0% dividend per annum, or $15.00 per share per quarter. Dividends are payable in cash or in kind, by accreting and increasing the Series A Base Amount (“PIK Dividends”). Dividends are payable on the sum of (i) the aggregate liquidation preference amount of $240.0 million plus (ii) any PIK Dividends. Dividends are accrued daily and paid quarterly in arrears, on March 31, June 30, September 30 and December 31 of each year. Following the calendar quarter ending June 30, 2027, we may not elect PIK Dividends and dividends on the Series A Preferred Stock must be paid in cash. All dividends have been paid in cash through February 29, 2024. The dividend will increase annually by one percentage point, beginning with the dividend payable for the calendar quarter ending September 30, 2028. Dividends declared and paid for the year ended February 29, 2024 and February 28, 2023 were $14.4 million and $8.1 million, respectively. As of February 29, 2024, the 240,000 shares of outstanding Series A Convertible Preferred Stock had accrued dividends of $2.4 million. We currently intend to pay such dividends in cash when due.

Redemption Features

AZZ will have the right to redeem the Series A Preferred Stock at a price equal to the greater of (i) the Series A Base Amount plus accrued but unpaid dividends; (ii) the initial Series A Base Amount (excluding any prior PIK dividends) multiplied by the Return Factor less all dividends paid through the redemption date; or (iii) the amount the holder of such share of convertible preferred stock would have received had such holder, immediately prior to such redemption date, converted such shares of convertible preferred stock into common shares (such greater amount, the “Redemption Amount”).

The redemption price under option (ii) contains a "Return Factor," which will be equal to 1.4 until May 13, 2024 and, (a) in each of the three years thereafter, will increase by 0.15, (b) will increase by an additional 0.15 after May 13, 2024 (the second anniversary of the issuance date of the Series A Preferred Stock) if (i) our ratio of net debt to earnings before interest, taxes, depreciation and amortization (“EBITDA”) (as defined in the 2022 Credit Agreement) on the second anniversary of the issuance date of the Series A Preferred Stock is greater than 3.5-to-1 and (ii) prior to May 13, 2024,we have not consummated dispositions of assets that, in the aggregate, resulted in proceeds in excess of $200.0 million and (c) will increase by an additional 0.20 on May 13, 2028, (the sixth anniversary of the issuance date of the Series A Preferred Stock) and each anniversary thereafter.

The redemption price under option (iii) is subject to provisions of the Certificate of Designation that limits the Company’s right to redeem to the period following the two year anniversary of the initial issuance, limits the quarterly conversion to up to 25% of the number of shares of convertible preferred stock outstanding, and requires the Company’s market price per share of common stock to exceed 185% of the conversion price.

As of February 29, 2024 and February 28, 2023, the Redemption Amount for the Series A Preferred stock was $312.5 million and $326.9 million, respectively.

At February 29, 2024, the outstanding shares of Series A Preferred Stock were not redeemable at the election of the holder, and we determined that the events outside of our control that would trigger the holders' right to redemption were not probable.

Letters of Credit

As of February 29, 2024, we had total outstanding letters of credit in the amount of $14.5 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, performance periods and insurance collateral.

Interest Rate Swap

We manage our exposure to fluctuations in interest rates by utilizing interest rate swaps to convert the variable interest rate to a fixed rate on approximately one-half of our variable-rate debt.

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On September 27, 2022, we entered into a fixed-rate interest rate swap agreement with banks that are parties to the 2022 Credit Agreement, which was subsequently amended on October 7, 2022, to change the SOFR-based component of the interest rate. The interest rate swap fixes the SOFR portion of our variable-rate debt to a fixed rate of 4.277% (the "2022 Swap"). On August 17, 2023, the Company repriced its Term Loan B to SOFR plus 3.75%, resulting in a total fixed rate of 8.027%. The 2022 Swap had an initial notional amount of $550.0 million and a maturity date of September 30, 2025. The notional amount of the interest rate swap decreases by a pro-rata portion of any quarterly principal payments made on the Term Loan B. The objective of the 2022 Swap is to eliminate the variability of cash flows in interest payments attributable to changes in benchmark one-month SOFR interest rates. The hedged risk is the interest rate risk exposure to changes in interest payments, attributable to changes in benchmark one-month SOFR interest rates over the interest rate swap term. The changes in cash flows of the interest rate swap are expected to exactly offset changes in cash flows of the variable-rate debt. We designated the 2022 Swap as a cash flow hedge at inception. Cash settlements, in the form of cash payments or cash receipts, of the 2022 Swap are recognized in interest expense.

Other

We plan to contribute $8.0 million to our pension plan during fiscal 2025. See "Item 8. Financial Statements and Supplementary Data—Note 16" for a discussion of our employee benefit plan.

As of February 29, 2024, we had $1.01 billion of floating-rate and fixed-rate debt outstanding on the Revolving Credit Facility and the Term Loan B, with varying maturities through fiscal 2029. We had approximately $355.5 million of additional credit available for future draws or letters of credit as of February 29, 2024.

Greenfield Aluminum Coil Coating Facility

We are expanding our coatings capabilities through the construction of a 215,000 square foot aluminum coil coating facility in Washington, Missouri that is expected to be operational in fourth quarter of fiscal 2025. The new facility will be included in the AZZ Precoat Metals segment and is supported by a contractual commitment for approximately 75% of the output from the new plant. We expect to spend approximately $125.8 million for the land building and equipment. As of February 29, 2024, we have capital commitments of approximately $43.2 million, which are expected to be funded through cash flows from operations and borrowings under the Revolving Credit Facility. The project is expected to result in an increase to our earnings and cash flows.

Share Repurchase Program

On November 10, 2020, our Board of Directors authorized a $100 million share repurchase program pursuant to which we may repurchase our common stock (the "2020 Authorization"). Repurchases under the 2020 Authorization will be made through open market 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 we might otherwise be precluded from doing so. Currently, share repurchases may not exceed 6% of our market capitalization per fiscal year.

During fiscal 2024 and 2023, to prioritize repayments of debt, including debt incurred to finance the Precoat Acquisition, we did not repurchase shares of common stock under the 2020 Share Authorization. As of February 29, 2024, there was $53.2 million remaining to repurchase shares under the 2020 Authorization.

Other Exposures

We have exposure to commodity price increases in all three of our operating segments, primarily zinc and natural gas in the AZZ Metal Coatings segment, and natural gas, steel and aluminum in the AZZ Precoat Metals segment. We attempt to minimize these increases by entering into agreements with our zinc suppliers and such agreements generally include fixed premiums, and through fixed cost contract purchases on natural gas. 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. We have indirect exposure to copper, aluminum, steel and nickel-based alloys in the AZZ Infrastructure Solutions segment through our 40% investment in the AVAIL JV.

Off Balance Sheet Arrangements and Contractual Commitments

As of February 29, 2024, 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.

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As of February 29, 2024, the Company had non-cancelable forward contracts to purchase approximately $47.4 million of zinc at fixed premiums, and $8.2 million of natural gas. All such contracts expire in fiscal 2025. The Company had no other contracted commitments for any other commodities including steel, aluminum, copper, zinc, nickel based alloys, except for those entered into under the normal course of business.

As of February 29, 2024, we had outstanding letters of credit in the amount of $14.5 million. These letters of credit are issued for a number of reasons, but are most commonly issued to support collateral requirements with insurance companies.

As of February 29, 2024, we have contractual commitments related to the construction of the coil coating facility in Washington, Missouri of $43.2 million that are expected to be paid in the next 12 months. See "Greenfield Aluminum Coil Coating Facility" section above. See "Item 8. Consolidated Financial Statements and Supplementary Data—Note 22" for a discussion of our contractual commitments related to our leases.

Critical Accounting Policies and Estimates

The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires us to make judgments, assumptions, and estimates that affect the amounts reported in the condensed consolidated financial statements and the accompanying notes. Actual results may differ from these estimates under different assumptions or conditions. The SEC defines critical accounting estimates as those made in accordance with U.S. GAAP that involve a significant level of estimation uncertainty and have had or are reasonably likely to have a material impact on a company's financial condition or results of operations. We consider the following accounting estimates to meet this definition because they are dependent on our judgement and assumptions about matters that are inherently uncertain and represent our more critical estimates.

Impairment of 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 for potential impairment annually as of December 31 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.

An entity may first assess qualitative factors to determine if a quantitative impairment test is necessary. Further testing is only required if the entity determines, based on the qualitative assessment, that it is more-likely-than-not that the fair value is less than the carrying amount. If no impairment indicators are present, we may first perform a qualitative assessment of goodwill to determine whether a quantitative assessment is necessary. If we perform a quantitative assessment for our annual goodwill impairment test, we use the income approach. The income approach uses Level 3 fair value inputs, such as 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 manufactured solutions we offer to the construction, industrial, consumer, transportation, electrical, and utility markets, 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.

Long-lived assets and Intangible assets

Long-lived assets, including property and equipment and intangible assets, are evaluated for impairment whenever events or changes in circumstances indicate that their carrying value may not be recoverable. Indefinite-lived intangible assets are evaluated for impairment on an annual basis, as of December 31. Impairment is measured by a comparison of the carrying amount to the estimated undiscounted cash flows to be generated by those assets. If the undiscounted cash flows are less than the carrying amount, we record impairment losses for the excess of their carrying value over the estimated fair value.

We make estimates of projected cash flows when performing our impairment evaluation. These estimates include, but are not limited to, assumptions about future sales, zinc and natural gas prices, operating costs, margins, the use or disposition of the asset, the asset's estimated remaining useful life, and future expenditures necessary to maintain the asset's existing service potential. Due to the significant subjectivity of the assumptions used to test for recoverability, changes in market conditions could result in significant impairment charges in the future, which would impact our earnings.

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Accruals for Contingent Liabilities

We are subject to the possibility of various loss contingencies arising in the normal course of business. The amounts we may record for estimated claims, such as self-insurance programs, warranty, environmental, legal, and other contingent liabilities, requires us to make judgments regarding the amount of expenses that will ultimately be incurred. We use past history and experience and other specific circumstances surrounding these claims in evaluating the amount of liability that should be recorded. Due to the inherent limitations in estimating future events, actual amounts paid or transferred may differ from those estimates.

Income taxes

We account for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements. We recognize a valuation allowance against net deferred tax assets to the extent that we believe those net assets are not more-likely-than-not to be realized. In making such a determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary differences, projected future taxable income, tax-planning strategies, and results of recent operations.

As applicable, we record uncertain tax positions on the basis of a two-step process whereby (1) we determine whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, we recognize the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. Because of the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the Company's current estimate of the unrecognized tax benefit liabilities. These differences will be reflected as increases or decreases to income tax expense in the period in which new information becomes available.

Business Combinations

Assets acquired and liabilities assumed as part of a business acquisition are generally recorded at their fair value at the date of acquisition. The excess of purchase price over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to utilize assumptions and estimates, which are based upon available information that may be subject to further refinement over the purchase accounting period of one year.

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 Disclosures

In addition to reporting financial results in accordance with Generally Accepted Accounting Principles in the United States ("GAAP"), we provide adjusted net income, adjusted earnings per share and adjusted EBITDA (collectively, the "Adjusted Earnings Measures"), which are non-GAAP measures. Management believes that the presentation of these measures provides investors with greater transparency when comparing operating results across a broad spectrum of companies, which provides a more complete understanding of our financial performance, competitive position and prospects for future capital investment and debt reduction. Management also believes that investors regularly rely on non-GAAP financial measures, such as adjusted net income, adjusted earnings per share and adjusted EBITDA to assess operating performance and that such measures may highlight trends in our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP.

Management defines adjusted net income and adjusted earnings per share to exclude intangible asset amortization, acquisition expenses, transaction related expenses and certain legal settlements and accruals, from the reported GAAP measure. Management defines Adjusted EBITDA as earnings excluding depreciation, amortization, interest, provision for income taxes, acquisition expenses, transaction related expenses and certain legal settlements and accruals. Management believes Adjusted EBITDA is used by investors to analyze operating performance and evaluate the Company's ability to incur and service debt and its capacity for making capital expenditures in the future.

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Management provides non-GAAP financial measures for informational purposes and to enhance understanding of the Company’s GAAP consolidated financial statements. Readers should consider these measures in addition to, but not instead of or superior to, the Company's financial statements prepared in accordance with GAAP, and undue reliance should not be placed on these non-GAAP financial measures. Additionally, these non-GAAP financial measures may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.

The following tables provides a reconciliation for the years ended February 29, 2024 and February 28, 2023 between the non-GAAP Adjusted Earnings Measures to the most comparable measures calculated in accordance with GAAP (dollars in thousands, except per share data):

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Adjusted Net Income and Adjusted Earnings Per Share from Continuing Operations

[[GREPCENT_TABLE]]
[["","Year Ended February 29/28,"],["","2024","","2023"],["","Amount","","Per Diluted Share(1)","","Amount","","Per Diluted Share(1)"],["Net income from continuing operations","$","101,607","","","","","$","66,339"],["Less: preferred stock dividends","(14,400)","","","","","(8,240)"],["Net income from continuing operations available to common shareholders","87,207","","","","","58,099"],["Impact of preferred stock dividends","14,400","","","","","8,240"],["Net income and diluted earnings per share from continuing operations for Adjusted net income calculation(2)","101,607","","","$","3.46","","","66,339","","","$","2.35"],["Adjustments:"],["Acquisition and transaction-related expenditures(3)","\u2014","","","\u2014","","","15,320","","","0.54"],["Amortization of intangible assets","23,960","","","0.83","","","22,613","","","0.79"],["Legal settlement and accrual(4)","17,043","","","0.58","","","\u2014","","","\u2014"],["Subtotal","41,003","","","1.41","","","37,933","","","1.33"],["Tax impact(5)","(9,841)","","","(0.34)","","","(9,104)","","","(0.32)"],["Total adjustments","31,162","","","1.07","","","28,829","","","1.01"],["Adjusted net income and adjusted earnings per share from continuing operations (non-GAAP)","$","132,769","","","$","4.53","","","$","95,168","","","$","3.36"],["Weighted average shares outstanding - Diluted","","","29,326","","","","","28,283"]]
[[/GREPCENT_TABLE]]

See notes on page 37.

Adjusted EBITDA from Continuing Operations

[[GREPCENT_TABLE]]
[["","Year Ended February 29/28,"],["","2024","","2023"],["Net income from continuing operations","$","101,607","","","$","66,339"],["Interest expense","107,065","","","88,800"],["Income tax expense","28,496","","","22,336"],["Depreciation and amortization(6)","79,423","","","74,590"],["Adjustments:"],["Acquisition and transaction-related expenditures(3)","\u2014","","","15,320"],["Legal settlement and accrual(4)","17,043","","","\u2014"],["Adjusted EBITDA from continuing operations (non-GAAP)","$","333,634","","","$","267,385"]]
[[/GREPCENT_TABLE]]

See notes on page 37.

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Adjusted EBITDA by Segment

[[GREPCENT_TABLE]]
[["","Year Ended February 29, 2024"],["","Metal Coatings","","Precoat Metals","","Infra- structure Solutions","","Corporate","","Total"],["Net income (loss) from continuing operations","$","164,856","","","$","139,571","","","$","9,161","","","$","(211,981)","","","$","101,607"],["Interest expense","\u2014","","","\u2014","","","\u2014","","","107,065","","","107,065"],["Income tax expense","\u2014","","","\u2014","","","\u2014","","","28,496","","","28,496"],["Depreciation and amortization(6)","26,353","","","27,941","","","\u2014","","","25,129","","","79,423"],["Adjustments:"],["Legal settlement and accrual(4)","5,450","","","\u2014","","","5,750","","","5,843","","","17,043"],["Adjusted EBITDA from continuing operations (non-GAAP)","$","196,659","","","$","167,512","","","$","14,911","","","$","(45,448)","","","$","333,634"]]
[[/GREPCENT_TABLE]]

See notes on page 37.

[[GREPCENT_TABLE]]
[["","Year Ended February 28, 2023"],["","Metal Coatings","","Precoat Metals","","Infra- structure Solutions","","Corporate","","Total"],["Net income (loss) from continuing operations","$","156,054","","","$","80,274","","","$","2,597","","","$","(172,586)","","","$","66,339"],["Interest expense","\u2014","","","\u2014","","","\u2014","","","88,800","","","88,800"],["Income tax expense","\u2014","","","\u2014","","","\u2014","","","22,336","","","22,336"],["Depreciation and amortization(6)","32,955","","","40,199","","","\u2014","","","1,436","","","74,590"],["Adjustments:"],["Acquisition and transaction-related expenditures(3)","\u2014","","","\u2014","","","\u2014","","","15,320","","","15,320"],["Adjusted EBITDA from continuing operations (non-GAAP)","$","189,009","","","$","120,473","","","$","2,597","","","$","(44,694)","","","$","267,385"]]
[[/GREPCENT_TABLE]]

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

(2) For the year ended February 29, 2024 and February 28, 2023, the calculation of diluted earnings per share is based on weighted average shares outstanding of

25,209 and 24,978, respectively, as the preferred shares are anti-dilutive for these calculations. The calculation of adjusted diluted earnings per share is based

on weighted average shares outstanding of 29,326 and 28,283, respectively, as the preferred shares are dilutive for these calculations. Adjusted net income

for adjusted earnings per share also includes the addback of preferred dividends for the periods noted above.

(3) Includes Corporate expenses related to the Precoat Acquisition and the divestiture of AZZ Infrastructure Solutions business into the AVAIL JV.

(4) For the year ended February 29, 2024, represents a legal accrual related to the Metal Coatings segment of $5.5 million, $5.8 million for the settlement of a

litigation matter related to the AIS segment that was retained following the sale of the AIS business, and $5.8 million for the settlement of a litigation matter

that was acquired as part of the Precoat Acquisition and relates to the business activities that were discontinued prior to our acquisition. See "Item 8.

Financial Statements and Supplementary Data—Note 22."

(5) The non-GAAP effective tax rate for each of the periods presented is estimated at 24.0%.

(6) For fiscal year 2024, amortization expense for acquired intangible assets of $24.0 million is included in Corporate expenses in "Selling, general and

administrative" expense as these expenses are not allocated to the segments. For fiscal year 2023, amortization expense for acquired intangible assets of

$7.1 million and $15.5 million are included in AZZ Metal Coatings expenses in "Cost of sales" and in AZZ Precoat Metals in "Selling, general and administrative"

expense, respectively.

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