10-K
AZZ INC (AZZ)
Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 28, 2023
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number: 1-12777
AZZ Inc.
(Exact name of registrant as specified in its charter)
| Texas | 75-0948250 | |
|---|---|---|
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| One Museum Place, Suite 500 | ||
| 3100 West 7th Street | ||
| Fort Worth, | Texas | 76107 |
| (Address of principal executive offices) | (Zip Code) |
(817) 810-0095
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol | Name of each exchange on which registered |
|---|---|---|
| Common Stock | AZZ | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☒ | Accelerated filer | ☐ | Non-accelerated filer | ☐ | Smaller Reporting company | ☐ | Emerging growth company | ☐ |
|---|
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
If securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐
Indicate by check mark whether any of those error corrections are restatements that require a recovery analysis of incentive-based compensation received by any of the registrant's executive officers during the relevant recovery period pursuant to §240.10D-1(b). ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of August 31, 2022, the aggregate market value of the registrant’s common stock held by non-affiliates of the registrant was $1,036,100,664 based on the closing sale price as reported on the New York Stock Exchange. As of April 21, 2023, there were 24,912,363 shares of the registrant’s common stock ($1.00 par value) outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Proxy Statement for its 2023 Annual Meeting of Shareholders to be filed with the Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this Annual Report on Form 10-K are incorporated by reference into Part III, Items 10-14 of this Annual Report on Form 10-K.
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AZZ INC.
FORM 10-K
For the Fiscal Year Ended February 28, 2023
INDEX
| PART I | 3 | |
|---|---|---|
| Item 1. | Business | 3 |
| Item 1A. | Risk Factors | 9 |
| Item 1B. | Unresolved Staff Comments | 19 |
| Item 2. | Properties | 19 |
| Item 3. | Legal Proceedings | 19 |
| Item 4. | Mine Safety Disclosures | 19 |
| PART II | 20 | |
| Item 5. | Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 20 |
| Item 6. | [Reserved] | 21 |
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operation | 22 |
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk | 33 |
| Item 8. | Financial Statements and Supplementary Data | 34 |
| Item 9. | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure | 76 |
| Item 9A. | Controls and Procedures | 76 |
| Item 9B. | Other Information | 76 |
| Item 9C. | Disclosure Regarding Foreign Jurisdictions that Prevent Inspections | 76 |
| PART III | 77 | |
| Item 10. | Directors, Executive Officers and Corporate Governance | 77 |
| Item 11. | Executive Compensation | 77 |
| Item 12. | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 77 |
| Item 13. | Certain Relationships and Related Transactions, and Director Independence | 78 |
| Item 14. | Principal AccountantFees and Services | 78 |
| PART IV | 79 | |
| Item 15. | Exhibitand Financial Statement Schedules | 79 |
| Item 16. | Form 10-K Summary | 81 |
| SIGNATURES | 82 |
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Forward Looking Statements
Certain statements herein about our expectations of future events or results constitute forward-looking statements for purposes of the safe harbor provisions of The Private Securities Litigation Reform Act of 1995. You can identify forward-looking statements by terminology such as "may," "could," "should," "expects," "plans," "will," "might," "would," "projects," "currently," "intends," "outlook," "forecasts," "targets," "anticipates," "believes," "estimates," "predicts," "potential," "continue," or the negative of these terms or other comparable terminology. Such forward-looking statements are based on currently available competitive, financial and economic data and management’s views and assumptions regarding future events. Such forward-looking statements are inherently uncertain, and investors must recognize that actual results may differ from those expressed or implied in the forward-looking statements. Forward-looking statements speak only as of the date they are made and are subject to risks that could cause them to differ materially from actual results. Certain factors could affect the outcome of the matters described herein. This Annual Report on Form 10-K may contain forward-looking statements that involve risks and uncertainties including, but not limited to, changes in customer demand for our products and services, including demand by the construction markets, the industrial markets and the metal coatings markets. We could also experience additional increases in labor costs, components and raw materials including zinc and natural gas, which are used in our hot-dip galvanizing process; supply-chain vendor delays; customer requested delays of our products or services; delays in additional acquisition opportunities; currency exchange rates; an increase in our debt leverage and/or interest rates on our debt, of which a significant portion is tied to variable interest rates; availability of experienced management and employees to implement AZZ’s growth strategy; a downturn in market conditions in any industry relating to the products we inventory or sell or the services that we provide; economic volatility, including a prolonged economic downturn or macroeconomic conditions such as inflation or changes in the political stability in the United States and other foreign markets in which we operate; acts of war or terrorism inside the United States or abroad; and other changes in economic and financial conditions. You are urged to consider these factors carefully in evaluating the forward-looking statements herein and are cautioned not to place undue reliance on such forward-looking statements, which are qualified in their entirety by this cautionary statement. These statements are based on information as of the date hereof and AZZ assumes no obligation to update any forward-looking statements, whether as a result of new information, future events, or otherwise.
PART I
Item 1. Business
AZZ Inc. ("AZZ", the "Company", "our" or "we") was established in 1956 and incorporated under the laws of the state of Texas. We are a provider of hot-dip galvanizing and coil coating solutions to a broad range of end-markets, predominantly in North America. We have three distinct operating segments: the AZZ Metal Coatings segment, the AZZ Precoat Metals segment, and the AZZ Infrastructure Solutions segment. The Company's AZZ Metal Coatings segment is a leading provider of metal finishing solutions for corrosion protection, including hot-dip galvanizing, spin galvanizing, powder coating, anodizing and plating to the North American steel fabrication and other industries. The AZZ Precoat Metals segment provides aesthetic and corrosion protective coatings and related value-added services for steel and aluminum coil, primarily serving the construction; appliance; heating, ventilation, and air conditioning (HVAC); container; transportation and other end markets in the United States. The AZZ Infrastructure Solutions is dedicated to delivering safe and reliable transmission of power from generation sources to end customers, and automated weld overlay solutions for corrosion and erosion mitigation to critical infrastructure in markets worldwide. On September 30, 2022, AZZ contributed its AZZ Infrastructure Solutions segment, excluding AZZ Crowley Tubing ("AIS") to a joint venture, AIS Investment Holdings LLC (the "AIS JV") and sold a 60% interest in the AIS JV to Fernweh Group LLC ("Fernweh"). The AZZ Infrastructure Solutions segment is reported as discontinued operations, and financial data for the segment has been segregated and presented as discontinued operations for all periods presented.
On May 13, 2022, the Company completed the acquisition of the Precoat Metals business division ("Precoat Metals") of Sequa Corporation ("Sequa"), a portfolio company owned by Carlyle, a global private equity firm (the "Precoat Acquisition"). As a result of the Precoat Acquisition, the Company changed its reportable segments, and added AZZ Precoat Metals as a new reportable segment.
Strategy
We have a developed strategy and periodically review our performance, opportunities, market conditions and competitive threats. During fiscal year 2023, we completed our comprehensive, Board-led review of our portfolio capital allocation plans and utilized leading independent financial, legal and tax advisors in support of this review. On May 13, 2022, the Company completed the Precoat acquisition for approximately $1.3 billion. The transaction is further described in "AZZ
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Precoat Metals Segment — Recent Acquisitions" below. In addition, on September 30, 2022, AZZ contributed AIS to the AIS JV and sold a 60% interest in the AIS JV to Fernweh.
We believe the strategic actions we executed in fiscal 2023 will accelerate our strategy to become a predominantly metal coatings focused company, which we believe will more rapidly enhance shareholder value.
AZZ Metal Coatings Segment
The AZZ Metal Coatings segment provides hot-dip galvanizing, spin galvanizing, powder coating, anodizing and plating, and other surface coating applications to the steel fabrication and other industries through facilities located throughout the United States and Canada. Hot-dip galvanizing is a metallurgical process in which molten zinc reacts to steel. The zinc alloying provides corrosion protection and extends the life-cycle of fabricated steel for several decades. As of February 28, 2023, we operated 41 galvanizing plants, six surface technologies plants and one tubing plant, which are located in various locations throughout the United States and Canada.
Competition
Metal coating is a highly competitive business, and we compete with other galvanizing companies, captive galvanizing facilities operated by manufacturers, and alternate forms of corrosion protection such as material selection (stainless steel or aluminum) or alternative barrier protections such as paint and weathering steel. Our galvanizing markets are generally limited to areas within relatively close proximity to our metal coating plants as customers seek to minimize freight costs.
Zinc, the principal raw material used in the galvanizing process, is currently readily available, but can be subject to volatile pricing. We manage our exposure to commodity pricing of zinc by utilizing agreements with zinc suppliers that include fixed cost contracts to reduce the risk associated with escalating commodity prices. When possible, we also secure firm pricing for natural gas supplies with utilities. We may or may not continue to use these or other strategies to manage commodity risk in the future.
We typically serve fabricators or manufacturers that provide solutions to the electrical and telecommunications, bridge and highway, petrochemical and general industrial markets, and numerous original equipment manufacturers. We do not depend on any single customer for a significant amount of our sales, and we don't believe the loss of any single customer would have a material adverse effect on our consolidated sales or net income.
Recent Acquisitions
On February 28, 2022, we entered into an agreement to acquire all the outstanding shares of DAAM Galvanizing Co. Ltd. ("DAAM"), a privately held hot-dip galvanizing company based in Edmonton, Alberta Canada. The acquisition supported our goal of continued geographic expansion as well as portfolio expansion of our metal coatings solutions.
On December 31, 2021, we completed the acquisition of the assets of Steel Creek Galvanizing Company, LLC, a privately held hot-dip galvanizing company based in Blacksburg, South Carolina. The acquisition expanded our geographical reach in metal coating solutions and broadened our offerings in strategic markets.
In January 2021, we completed the acquisition of the assets of Acme Galvanizing, Inc., a privately held hot-dip galvanizing and zinc electroplating company based in Milwaukee, Wisconsin. The acquisition expanded our geographical reach in metal coating solutions and broadened our offerings in strategic markets.
Recent Divestitures
In fiscal 2021, we closed or disposed of certain AZZ Metal Coatings locations that were in under-performing and lower growth geographies or had previously been idle through the consolidation of operations.
In July 2020, we completed the sale of our Galvabar business, which was included in the AZZ Metal Coatings segment. We received net proceeds of $8.3 million and recognized a loss on the sale of $1.2 million. While Galvabar would normally be considered a core business for AZZ, we determined that this technology is better suited for a company with both rebar manufacturing and established rebar distribution capabilities. In accordance with the sale agreement, we may receive royalties associated with future sales for a three-year period following the sale.
For additional information on the AZZ Metal Coatings segment's operating results, see Results of Operations within Item 7. For additional financial information by segment, see Note 14 to the consolidated financial statements.
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AZZ Precoat Metals Segment
On May 13, 2022, the Company completed the Precoat acquisition for a net purchase price of approximately $1.3 billion. The acquisition supported our goal of continued geographic expansion as well as portfolio expansion of our metal coatings solutions.
The AZZ Precoat Metals segment provides advanced applications of protective and decorative coatings and related value-added services for steel and aluminum coil, primarily serving the construction; appliance; heating, ventilation, and air conditioning (HVAC); container; transportation and other end markets. AZZ Precoat Metals segment office is located in St. Louis, Missouri and operates through 13 plants located in the United States.
Competition
AZZ Precoat Metals operates in a highly competitive industry as an independent toll coater, where we compete with other independent toll coaters, captive toll coaters, completely captive coaters, and integrated steel and aluminum mills. Our customers, and us as their toll processor, also face competition from alternative forms of coated metal, like powder-coated metal, or from other potential substrates such as wood, plastics, or concrete that could be used in place of painted metal.
Paint and customer-owned substrate availability are important for our toll-coating process. Paint lead times and pricing have recently stabilized following increases related to recent supply chain concerns; we carry very limited risk associated with paint purchases as it is a pass-through to our customer base. There are currently no concerns regarding the availability of customer-owned bare substrate as an input to our coil coating process, despite recent increases in substrate price and lead times.
We primarily serve distributors, fabricators or manufacturers that ultimately provide manufactured paint and coatings solutions to construction, appliance, HVAC, transportation, container, and general industrial markets, as well as numerous original equipment manufacturers. We do not depend on any single customer for a significant amount of our sales, and we do not believe the loss of any single customer would have a material adverse effect on our consolidated sales or net income.
AZZ Infrastructure Solutions segment
AZZ's Infrastructure Solutions segment, is a leading provider of specialized products and services primarily designed to support industrial and electrical applications. On September 30, 2022, we contributed our AZZ Infrastructure Solutions business, excluding AZZ Crowley Tubing, to a joint venture and sold a 60% interest in the joint venture to Fernweh AIS Acquisition LP. Following the transaction on September 30, 2022, we account for our retained investment in the AZZ Infrastructure Solutions segment as an equity method investment, and the results of operations are included in continuing operations, in "Equity in earnings of unconsolidated subsidiaries" in our consolidated statements of operations.
The segment's product offerings included custom switchgear, electrical enclosures, medium and high voltage bus ducts, explosion proof and hazardous duty lighting. In addition to our product offerings, our AZZ Infrastructure Solutions segment focuses on life-cycle extension for the power generation, refining and industrial infrastructure, through providing automated weld overlay solutions for corrosion and erosion mitigation.
Competition
The markets for our AZZ Infrastructure Solutions segment products are highly competitive and consist of large multi-national companies, along with numerous small independent companies. Competition is based primarily on product quality, range of product line, price and service. While some of the segment's competitors are much larger than us, we believe our noncontrolling interest in AZZ Infrastructure Solutions segment offers some of the most technologically advanced solutions and engineering resources developed from a legacy of proven, reliable product options, allowing the segment to be well positioned to meet the most challenging application-specific demands.
Copper, aluminum, steel and nickel based alloys are the primary raw materials used by this segment. We do not foresee any availability issues for these materials; however, have experienced commodity pricing escalations over the past year. We do not contractually commit to minimum purchase volumes; increases in price for these items are normally managed through escalation clauses in our contracts with customers, which the customers may not always accept. In addition, we work to obtain firm pricing contracts from our suppliers for these materials at the time we receive orders from our customers in order to minimize price volatility risk. We work to re-price open quotations, after 30 days, to reduce inflationary risks on commodities utilized in our manufacturing processes.
For additional information regarding the AZZ Infrastructure Solutions financial results, see Note 6 in Item 8. Financial Statements and Supplementary Data.
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Human Capital Management
At AZZ, our culture is defined by trust, respect, accountability, integrity, teamwork and sustainability (T.R.A.I.T.S.). We value our employees by continuously investing in a healthy work-life balance, offering competitive compensation and benefit packages and a team-oriented environment centered on professional service and open communication amongst our employees. We are dedicated to our employees by fully training and equipping them and providing a safe environment to grow personally and professionally. We strive to build, maintain and create a work environment that attracts and retains employees who are high contributors, have outstanding skills, are engaged in our culture, and who embody our Company mission: to create superior value in a culture where people can grow both professionally, and personally and where T.R.A.I.T.S. matter.
Attracting, developing and retaining the best talent in our industry is important to all aspects of AZZ’s long-term strategy and continued success. We recognize that an engaged workforce directly contributes to our efforts to improve AZZ’s sustainability and performance.
Our Employees
As of February 28, 2023, we employed approximately 3,837 people worldwide, of which 3,594 were employed in the U.S. and 243 were employed in Canada. After the Precoat Metals acquisition, we welcomed approximately 1,119 Precoat employees to our workforce. The Company's total workforce consisted of approximately 85% hourly employees and 15% salaried employees. We believe our current relations with our workforce are strong.
Diversity and Inclusion
We embrace the diversity of our employees, customers, vendors, suppliers, stakeholders and consumers, including their unique backgrounds, experiences, creative solutions, skills and talents. Everyone is valued and appreciated for their distinct contributions to the growth and sustainability of our business.
Equal Opportunity Employment is a fundamental principle of our Company, where employment and applications for employment are evaluated based upon a person’s capabilities and qualifications without discrimination based on actual or perceived race, color, religion, sex, age, national origin, disability, genetic information, marital status, veteran status, sexual orientation, or any other protected characteristic as established by applicable local, state, federal law or international laws. This principle is incorporated into each of the Company's policies and procedures relating to recruitment, hiring, promotions, compensation, benefits, discipline, termination and all of AZZ’s other terms and conditions of employment. We seek to continuously improve our hiring, development, advancement and retention of diverse talent and our overall diversity representation.
As of February 28, 2023, our U.S. employees had the following race and ethnicity demographics:
| White | 44.7 | % |
|---|---|---|
| Hispanic | 33.5 | % |
| African American | 14.7 | % |
| Asian | 1.2 | % |
| Multi-Racial | 1.5 | % |
| American Indian or Alaska Native | 0.7 | % |
| Native Hawaiian or Other Pacific Islander | 0.1 | % |
| Not Stated | 3.8 | % |
Approximately 51.6% of our employees are diverse, as reported to the Equal Employment Opportunity Commission on an annual basis.
As of February 28, 2023, our employees had the following gender demographics:
| Women | Men | |
|---|---|---|
| U.S. Employees | 14.3% | 85.7% |
| Global Employees(1) | 13.8% | 86.2% |
| (1) Includes employees in Canada. |
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Additionally, 12.5% of the executive team and 22.2% of our independent directors are female.
Employee Compensation and Benefits
We are committed to paying our employees competitive and fair compensation that is commensurate with their position and performance and is competitive in the markets in which they work. We conduct regular surveys of the market rates for jobs to ensure that our compensation is competitive. We offer annual merit-based increases, as well as annual short- and long-term incentive packages that are aligned with the Company’s vision and key business objectives and are intended to motivate strong performance.
We believe our employees are critical to the success of our business and we structure our benefits package to attract and retain a highly talented and engaged workforce. We are continuously evolving our programs to adapt to our employees’ and their family’s needs, and to provide comprehensive health, wellness and quality of life coverage. Our programs vary by location, but most include the following benefits:
| Health | Financial | Work/Life |
|---|---|---|
| Medical, Dental and Vision | Competitive Base Salaries | Company/Voluntary Life Insurance |
| Medical Insurance Premium Reduction | Hourly Overtime and Shift Differential Pay | Compensated Time Off and Holiday Pay |
| Health Screenings | Cash Incentive Program (annual) | Accidental Death & Dismemberment |
| Prescription Drug Coverage | Employee Stock Purchase Plan | Paid Short-Term and Long-Term Disability |
| 24/7/365 Virtual and Telehealth Services | 100% 401(k) match for the first 1% and 50% match between 2% and 6% | Flexible Work Arrangements |
| Annual Flu Immunizations | Pre-tax Contributions to Eligible Savings Accounts | Family Emergency Leave |
| Employee Assistance Program | Tuition reimbursement | Military Leave |
Growth and Development
We invest in and provide ongoing development and continuous learning opportunities for all of our employees. AZZ supports enterprise-wide professional development by offering a variety of instructor-led and self-paced learning programs ranging in audience from individual contributors to supervisors and executive leadership. We also provide a variety of resources to help our employees grow professionally and personally and build new skills, including (i) online development courses containing unlimited access to more than 4,500 learning modules, (ii) continuing education credits, and (iii) learning preferences such as in-person seminars, videos and webinars. AZZ also provides tuition assistance for employees enrolled in higher education programs directed at improving their performance or helping them prepare for future leadership roles within the Company and emphasizes individual development training as part of our annual performance goal setting process.
Annually, all employees have the opportunity and are encouraged to provide feedback on their employee experience through an anonymous employee survey. The feedback received through this survey is used to drive actions to improve the overall experience for employees across the Company, as well as to support continuous improvement in leader effectiveness and to enhance our corporate culture.
Health and Safety
Core to our corporate values, AZZ emphasizes safeguarding our people and fostering a culture of safety awareness that promotes the wellbeing of our employees, contractors and business partners. We maintain a safety culture grounded on the premise of eliminating workplace incidents, risks and hazards, while operating and delivering our work responsibly and sustainably. AZZ has created and implemented training and audit processes and incident learning communications to help mitigate safety events and to reduce the frequency and severity of accidents. AZZ has safety teams and has a formal mentor training program that includes a diverse group of management and hourly employees that contribute to the overall safety culture of our facilities.
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The Company reviews and monitors safety performance closely. Our ultimate goal is to achieve zero serious injuries through continued investments in core safety programs and injury reduction initiatives. The Company utilizes a mixture of leading and lagging indicators to assess the health and safety performance of our operations. Lagging indicators include the Occupational Safety & Health Administration: (i) Total Recordable Incident Rate ("TRIR"); (ii) Lost Time (or Lost Workday) Incident Rate ("LTIR") based upon the number of incidents per 100 employees. (or per 200,000 work hours); and (iii) Days Away, Restricted or Transferred rate ("DART"). Leading indicators include reporting of all near miss events as well as Environmental, Health and Safety ("EHS") coaching and engagement. In fiscal year 2023, we continued to demonstrate excellence in safety across our 61 plants worldwide, and incident rates as indicated below:
| TRIR | LTIR | DART | |
|---|---|---|---|
| Metal Coatings Segment | 4.31 | 1.23 | 2.98 |
| Precoat Metals Segment | 2.41 | 0.64 | 1.35 |
Information About Our Executive Officers
| Name | Age | Business Experience of Executive Officers for Past Five Years<br>Position or Office with Registrant or Prior Employer | Held Since |
|---|---|---|---|
| Thomas E. Ferguson | 66 | President and Chief Executive Officer | 2013 |
| Philip Schlom | 58 | Senior Vice President, Chief Financial Officer<br>Vice President and Chief Accounting Officer/Interim Chief Financial Officer<br>Vice President - Finance, Audit, Controls and Continuous Improvement, Exterran Corporation | 2020<br>2019<br><br>2017-2019 |
| Tara D. Mackey | 53 | Chief Legal Officer and Secretary | 2014 |
| Matt Emery | 56 | Chief Information and Human Resource Officer | 2013 |
| Chris Bacius | 62 | Vice President, Corporate Development | 2014 |
| David Nark | 55 | Senior Vice President of Marketing, Communications and Investor Relations<br>Vice President of Marketing and Communications | 2019<br><br>2017-2019 |
| Bryan Stovall | 58 | Chief Operating Officer – Metal Coatings <br>President - AZZ Galvanizing Solutions<br>Senior Vice President - Metal Coatings | 2020<br>2019<br>2018-2019 |
| Kurt Russell | 52 | Chief Operating Officer - Precoat Metals<br>President - Precoat Metals Division of Sequa Corporation | 2022<br>2016-2022 |
Each executive officer was elected by the Board of Directors to hold office until the next Annual Meeting or until their successor is elected. No executive officer has any family relationships with any other executive officer of the Company.
Available Information
Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and, if applicable, amendments to those reports filed or furnished pursuant to Section 13(a) of the Securities Exchange Act of 1934, as amended, are available free of charge on or through our web site, www.azz.com/investor-relations, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or the SEC. The SEC’s website, www.sec.gov, contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. Our website and the information posted on our website is not a part of this Annual Report on Form 10-K.
Corporate Governance and Sustainability
Our Company’s Board of Directors (the "Board"), with the assistance of its Nominating and Corporate Governance Committee, has adopted Corporate Governance Guidelines that set forth the Board’s policies regarding corporate governance and its oversight of the Company's sustainability efforts. In connection with the Board’s responsibility to oversee our legal compliance and conduct business based upon a foundation of the highest business ethics and social responsibility, the Board has adopted the following policies:
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•Code of Conduct, which applies to the Company’s officers, directors and employees (including our Chief Executive Officer, Chief Financial Officer, Principle Accounting Officer, and Finance department members);
•Vendor Code of Business Conduct that applies to dealings with our customers, suppliers, vendors, third-party
representatives, including agents and business partners;
•Human Rights Policy; and
•Environmental Health and Safety Policy.
The Board has adopted charters for each of its Audit Committee, Compensation Committee and Nominating and Corporate Governance Committee. You may review the Corporate Governance Guidelines, Codes of Conduct or any of our sustainability or corporate social responsibility policies, and our Committee charters under the heading "Investor Relations," subheadings "Corporate Governance," or "Corporate Social Compliance" on our website at: www.azz.com. We intend to disclose future amendments to, or waivers from, certain provisions of this Code of Conduct on our website. Our website and the information posted on our website is not a part of this Annual Report on Form 10-K.
You may also obtain a copy of these documents by mailing a request to:
AZZ Inc.
Investor Relations
One Museum Place, Suite 500
3100 West 7th Street
Fort Worth, TX 76107
Item 1A. Risk Factors
Our business is subject to a variety of risks, including, but not limited to, the risks described below, which we believe are the most significant risks and uncertainties facing our business. Additional risks and uncertainties not known to us or not described below may also impair our business operations in the future. If any of the following risks actually occur, our business, financial condition and results of operations and future growth could be negatively or materially impacted.
Risks Related to Operations
Our business segments operate in highly competitive markets.
Competition is based on a number of factors, including price. Certain competitors may have lower cost structures or larger economies of scale on raw materials and may, therefore, be able to provide their products and services at lower prices than we are able to provide. If our response to competitor pricing actions is not timely, we could be impacted by loss of market share. We cannot be certain that our competitors will not develop the expertise, experience and resources to provide services or products that are superior in price, delivery time or quality in the future. Similarly, we cannot be certain that we will be able to maintain or enhance our competitive position within our industries, maintain our customer base at current levels or increase our customer base.
Our operating results may vary significantly from quarter to quarter.
Our quarterly results may be materially and adversely affected by:
•changes in political landscapes across the globe;
•unstable political economic conditions and public health issues delaying customer operations;
•timing and volume of work under new or existing agreements;
•general economic conditions;
•fluctuations in the budgetary spending of customers, including seasonality;
•increases in manufacturing or transportation costs;
•variations in margins, due to sales price or manufacturing complexities, of projects performed during any particular quarter;
•losses experienced in our operations not otherwise covered by insurance;
•delays of raw materials or component suppliers;
•a change in the demand or production of our products and our services caused by severe weather conditions;
•a change in the mix of our customers, contracts and business;
•modifications or changes in customer delivery schedules;
•ability or willingness of customers to timely pay their invoices when owed to us; and
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•changes in interest rates.
Accordingly, our operating results in any particular quarter may not be indicative of the results expected for any other quarter or for the entire year.
Our business requires skilled labor, and we may be unable to attract and retain qualified employees.
Our ability to maintain our productivity and profitability could be limited by an inability to employ, train and retain skilled personnel necessary to meet our labor requirements. We cannot be certain that we will be able to maintain an adequately skilled labor force necessary to operate efficiently and to support our growth strategy or that our labor costs will not increase as a result of a shortage in the supply of skilled personnel. Labor shortages or increased labor-related costs could impair our ability to maintain our profit margins or impact our ability to sustain and grow our sales.
Technological innovations by competitors may make existing products and production methods obsolete.
The manufactured products and services we sell require evolving technologies for success in the markets we serve. The competitive environments can be highly sensitive to technological innovation. It is possible for our competitors, or new market place entrants, both foreign and domestic, to develop new products, production methods or technology which could make existing products, services or methods obsolete or at least hasten their obsolescence or materially reduce our competitive advantage in the markets that we serve.
Our business segments are cyclical and are sensitive to economic downturns.
Our business often aligns with the economic environments that we operate within, and, especially in our Precoat Metals segment, is subject to seasonality within the annual operating cycle of the business. Our customers may delay or cancel new or previously planned projects. If there is a downturn in the general economies in which we operate, there could be a material adverse effect on price levels and the quantity of goods and services purchased by our customers, which could adversely impact our sales, consolidated results from operations and cash flows. A number of factors, including financing conditions and potential bankruptcies in the industries we serve, could adversely affect our customers and their ability or willingness to fund their internal projects in the future and pay for services or equipment. Certain economic conditions may also impact the financial condition of one or more of our key suppliers, which could affect our ability to secure raw materials and components to meet our customers’ demand for our products in the future. Other various factors impact demand for our products and services, including the price of commodities (such as zinc, natural gas or other commodities), paint, economic forecasts and financial markets. Uncertainty in the global economy and financial markets could impact our customers and could, in turn, severely impact the demand for corporate infrastructure projects that would result in a reduction in orders for our products and services. All of these factors combined together could materially impact our business, financial condition, cash flows and results of operations and potentially impact the trading price of our common stock.
International events and political issues may adversely affect our AZZ Metal Coatings segments.
A portion of the sales from our AZZ Metal Coatings and AZZ Infrastructure Solutions segments are from markets outside the U.S. The occurrence of any of the risks described below could have an adverse effect on our consolidated results of operations, cash flows and financial condition:
•political and economic instability in the country, Canada, we conduct business;
•social unrest, acts of war and terrorism, natural disasters, and global outbreaks of contagious diseases;
•inflation, or hyper-inflation;
•significant currency fluctuations, currency devaluations or restrictions on currency conversions;
•governmental activities that limit or disrupt markets, restrict payments or limit the movement of funds;
•trade restrictions, tariffs and economic embargoes by the United States or other countries; and
•travel restrictions placed upon personnel.
Catastrophic events could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
The occurrence of catastrophic events ranging from acts of war and terrorism, natural disasters such as earthquakes, tsunamis, hurricanes, or the outbreaks of epidemic, pandemic or contagious diseases could potentially cause future disruption in our business. At this time, the ongoing war between Russia and Ukraine has not materially impacted our operations. Any disruption of our customers or suppliers and their respective contract manufacturers could likely impact our future sales and operating results. In addition, the spread of contagious diseases, could adversely affect the economies and financial markets of many countries, and result in an economic downturn that could affect the demand for our products and services. These
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situations are outside of the Company’s control and any of these events could have a material adverse effect on our business, financial condition, results of operations, or cash flows.
Fluctuations in the price and supply of raw materials and natural gas for our business segments may adversely affect our operations.
Within our AZZ Metal Coatings segment, zinc and natural gas represent a large portion of our cost of sales. In our AZZ Precoat Metals segment, natural gas represents a large portion of our cost of sales. The prices of zinc and natural gas are subject to volatility and we have experienced commodity price escalation over the past year. Unanticipated commodity price increases could significantly increase production costs and potentially adversely affect profitability. The following factors, which are beyond our control, affect the price of natural gas for the AZZ Metal Coatings segment:
•supply and demand;
•freight costs and transportation availability;
•trade duties and taxes; and
•labor disputes.
We seek to maintain our operating margins by increasing the price of our products and services in response to increased costs, but may not be successful in passing these increased costs of operation through to our customers.
A failure in our operational information systems or cyber security attacks on any of our facilities, or those of third parties, may adversely affect our financial results.
Our business is heavily supported by operational systems to process large amounts of data and support complex transactions. If significant financial, operational, or other data processing systems fail, are attacked by intruders or have other significant shortcomings, our financial results could be adversely affected. Our financial results could also be adversely affected if an employee causes our operational systems to fail, either as a result of inadvertent error or by deliberately tampering with or manipulating our financial or operational systems. Due to increased technology advances, we are more reliant on technologies to support our operations. We use computer software and programs to run our financial and operational information, and this may subject our business to increased risks. Cyber-attacks are an ever-increasing risk to companies. Any significant cyber security attacks that affect our facilities, our customers, our key suppliers, or material financial data could have a material adverse effect on our business. In addition, cyber-attacks on our customers, suppliers and employee data may result in a financial loss, including potential fines for failure to safeguard data, and may negatively impact our reputation. Third-party systems on which we rely could also suffer operational system failure. Any of these occurrences could disrupt our business, result in potential liability or reputational damage or otherwise have an adverse effect on our financial results.
If we are unable to adequately protect our intellectual property, we may lose some of our competitive advantage.
We possess intellectual property, which is instrumental in our ability to compete and grow our business. If our intellectual property rights are not adequately protected, we could lose our competitive advantage. There can be no assurance that our patent applications will result in patents being issued or that current or additional patents will afford protection against competitors. We rely on a combination of patents, copyrights, trademarks and trade secret protection and contractual rights to establish and protect our intellectual property. Failure of our patents, copyrights, trademarks and trade secret protection, non-disclosure agreements and other measures to provide protection of our technology and our intellectual property rights could enable our competitors to more effectively compete with us and could result in an adverse effect on our business, financial condition and results of operations. In addition, our trade secrets and proprietary know-how may otherwise become known or be independently discovered by others. No guarantee can be given that others will not independently develop substantially equivalent proprietary information or manufacturing and service know-how and techniques, or otherwise gain access to our proprietary technology.
Product defects could increase our warranty costs and could result in product liability claims.
Our business exposes us to potential product liability risks that are inherent in the design, manufacture and sale of our products and the products of third-party vendors which we use or resell. Widespread product recalls could result in significant losses due to the costs of a recall, the destruction of product inventory, penalties, and lost sales due to the unavailability of a product for a period of time. We may also be liable if the use of any of our products causes harm and could suffer losses from a significant product liability judgment against us in excess of its insurance limits. We may not be able to obtain indemnity or reimbursement from our suppliers or other third parties for the warranty costs or liabilities associated with our supplier products. A significant product recall, warranty claim, or product liability case could also result in adverse publicity, damage to our business reputation, and a loss of consumer confidence in our products.
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Risks Related to Strategy
Our acquisition strategy involves a number of risks.
We intend to pursue continued growth through acquiring the assets of target companies that will enable us to (i) expand our product and service offerings and (ii) increase our geographic footprint. We routinely review potential acquisitions. However, we may be unable to implement this growth strategy if we are not able to reach agreement on mutually acceptable terms. Moreover, our acquisition strategy involves certain risks, including:
•risks and liabilities from our acquisitions that may not be discovered during the pre-acquisition due diligence process;
•difficulties in the post-acquisition integration of operations and systems;
•the termination of relationships with key personnel and customers of the acquired company;
•the potential failure to add additional employees to manage the increased volume of business;
•additional post-acquisition challenges and complexities in areas such as tax planning, treasury management, financial reporting and legal compliance;
•a disruption of our ongoing business or an inability of our ongoing business to receive sufficient management attention; and
•a failure to realize the cost savings or other financial benefits we anticipated prior to acquisition.
Future acquisitions may require us to obtain additional equity or debt financing, which may not be available to us, and may increase our leverage ratios.
We may be unsuccessful at implementing and generating internal growth from our Strategic Growth Initiatives.
Our ability to generate internal growth will be affected by, among other factors, our ability to:
•attract new customers, internationally and domestically;
•integrate regulatory changes;
•increase the number or size of projects performed for existing customers;
•hire and retain employees; and
•increase volume utilizing existing facilities.
Many of the factors affecting our ability to generate internal growth through our initiatives may be beyond our control, and we cannot be certain that our strategies will be successful or that we will be able to generate cash flow sufficient to fund our operations and to support internal growth. If we are unsuccessful, we may not be able to achieve internal growth, expand our operations or grow our business.
The departure of key personnel could disrupt our business.
We depend on the continued efforts of our executive officers and senior management team. We cannot be certain that any individual will continue in such capacity for any particular period of time. The future loss of key personnel, or the inability to hire and retain qualified employees, could negatively impact our ability to manage our business.
Risks Related to Legal Liability and Regulations
Actual and potential claims, lawsuits, and proceedings could ultimately reduce our profitability and liquidity and negatively impact our financial condition.
The Company could be named as a defendant in legal proceedings claiming damages from us in connection with the operation of our business. Most actions filed against our Company typically arise out of the normal course of business related to commercial disputes regarding equipment we manufacture or services we provide. We could potentially be a plaintiff in legal proceedings against our customers, in which we seek to recover payments of contractual amounts we believe are due to us, and indemnity claims for increased costs or damages incurred by our Company. Under applicable accounting literature, and when appropriate, we establish financial provisions for certain legal exposures meeting the criteria of being both probable and reasonably estimable. Where material, we may adjust any such financial provisions from time to time depending on developments related to each case. If our assumptions and estimates related to such exposures prove to be inadequate or incorrect, or we have material adverse claims or lawsuits, they could harm our business reputation, divert management resources away from operating our business, and result in a material adverse effect on our business, results of operations, cash flow or financial condition.
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Our operations could be adversely impacted by the effects of future changes to the law and government regulations regarding emissions, the global environment and other sustainability matters.
Various regulations have been implemented regarding emissions, the global environment and other sustainability matters. We cannot predict future changes in the law and government regulations regarding emissions, the global environment and other sustainability matters, or what actions may be taken by our customers or other industry participants in response to any future legislation. While the Company actively is engaged in building our environmental, social and governance programs, changes in laws or governmental regulations could negatively impact our business or the demand for our products and services by customers, other industry related participants, or our investors, and could result in a negative impact to our operations, profitability, or our ability to perform projects in the future.
Changes to U.S. trade policy, tariff and import/export regulations and foreign government regulations could adversely affect our business, operating results, foreign operations, sourcing and financial condition.
Changes in U.S. or international social, political, regulatory and economic conditions or in laws and policies governing foreign trade, manufacturing, development and investment in the territories or countries where we currently manufacture, distribute and/or sell our products or conduct our business, as well as any negative sentiment toward the U.S. as a result of such changes, could adversely affect our business. New tariffs, changes in existing tariffs and other changes in U.S. trade policy have the potential to adversely impact the economies in which we operate or certain sectors thereof, our industry and the global demand for our products, and as a result, could have a material adverse effect on our business, operating results and financial condition. In addition, we cannot predict the full impact trade policy changes that have been asserted by the U.S. presidential administration and Congress, including anticipated changes to current trade policies will be maintained or modified or whether the entry into new bilateral or multilateral trade agreements will occur, nor can we accurately predict the effects that any changes will have on our future business.
Our business is also subject to risks associated with U.S. and foreign legislation and regulations relating to imports, including quotas, duties, tariffs or taxes, and other charges or restrictions on imports, which could adversely affect our operations and our ability to import or export products at current or increased levels, and substantially all of our import operations are subject to customs duties on imported products imposed by the governments where our production facilities are located, including raw materials. We cannot predict whether additional U.S. and foreign customs quotas, duties (including antidumping or countervailing duties), tariffs, taxes or other charges or restrictions, requirements as to where raw materials must be purchased, reporting obligations pertaining to "conflict minerals" mined from certain countries, additional workplace regulations, or other restrictions on our imports will be imposed upon the importation or exportation of our products in the future or adversely modified, or what effect such actions would have on our costs of operations. Future quotas, duties, or tariffs may have a material adverse effect on our business, financial condition, and results of operations. Future trade agreements could also provide our competitors with an advantage over us, or increase our costs, either of which could potentially have a material adverse effect on our business, financial condition, and results of operations.
Regulations related to conflict minerals could adversely impact our business.
Pursuant to the Dodd-Frank Act, which established annual disclosure and reporting requirements for publicly-traded companies that use tin, tantalum, tungsten or gold (collectively, "conflict minerals") mined from the Democratic Republic of Congo and adjoining countries in their products, we are subject to certain annual disclosures and audit requirements. There are costs associated with complying with these disclosure requirements, including costs for due diligence to determine the source of any conflict minerals used in our products and other potential changes to products, processes, or sources of supply. Despite our continued due diligence efforts, in the future we may be unable to verify the origin of all conflict minerals used in our component products. As a result, we could potentially face reputational and other challenges with our customers that require that all of the components incorporated in our products be certified as conflict-free.
Adoption of new or revised employment and labor laws and regulations could make it easier for our employees to obtain union representation and our business could be adversely impacted.
As of February 28, 2023, approximately 668 of our full-time employees were represented by unions. Our U.S.-based employees have the right at any time under the National Labor Relations Act to form or affiliate with a union. If a large portion of our workforce were to become unionized and the terms of the collective bargaining agreement were significantly different from our current compensation arrangements, it could increase our operating costs and adversely impact our profitability. Any changes in regulations, the imposition of new regulations, or the enactment of new legislation could have an adverse impact on our business to the extent it becomes easier for workers to obtain union representation.
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Changes in labor or employment laws, including minimum wage rules, could increase our costs and may adversely affect our business.
Various federal, state and international labor and employment laws govern our relationship with employees and affect operating costs. These laws include minimum wage requirements, overtime, unemployment tax rates, workers’ compensation rates, leaves of absence, mandated health and other benefits, and citizenship requirements. Significant additional government-imposed increases or new requirements in these areas could materially affect our business, financial condition, operating results or cash flows.
Risks Related to Environmental Conditions
Climate change could impact our business.
Climate changes could result in an adverse impact on our operations, particularly in hurricane prone or low-lying areas near the ocean or heavy snowfall and ice regions. We cannot predict the potential timing or impact from potential global warming, winter storms and other natural disasters. We carry certain limits of insurance to mitigate the potential effects of events that could impact our businesses, as well as disaster recovery plans related to any potential natural disasters that might occur within regions in which we have operations, or at any of the Company locations.
Changes in environmental laws and regulations and heightened focus on corporate sustainability initiatives and practices are under increased scrutiny by both governmental and non-governmental bodies, which could cause a change in our business practices by increasing capital, compliance, operating and maintenance costs, which could impact our future operating results.
Over the past year there has been a heightened focus by both governmental and non-governmental bodies requesting disclosure of information relating to our corporate sustainable practices as well as customers are increasingly preferring to source from suppliers who have implemented effective sustainability initiatives. International agreements and national or regional legislation and regulatory measures to further reduce greenhouse gas emissions and require companies to more efficiently use energy, water and reduce waste, are in various stages of discussion and/or implementation across the globe. These laws, regulations and policies, as well other sustainability demands made by governmental and non-governmental bodies may result in the need for future capital, compliance, operating and maintenance costs. We cannot predict the level of expenditures or potential impact to the Company that may be required to comply with these evolving environmental and sustainability laws and regulations due to the uncertainties on the laws enacted in each jurisdiction in which we operate, and our activities in each one of these jurisdictions.
The financial impact of the heightened focus on sustainability practices for all companies to increase efficiencies in consumption of resources and future regulations regarding greenhouse gas emissions will depend on a number of factors including, but not limited to:
•the sectors covered;
•future permitted levels for greenhouse gas emissions;
•the extent to which we would be entitled to receive emission allowance allocations or would need to invest in additional compliance equipment or compliance instruments, either on the open market or through auctions;
•the price and availability of emission allowances and credits; and
•the impact of legislation or other regulation on our ability to recover the costs incurred through the pricing of our products and services.
Risks Related to Financial Matters
The Company’s flexibility to operate its business could be impacted by provisions in its debt obligations.
The Company’s debt instruments, consisting of a term loan and a revolving credit facility, contain covenants which restrict or prohibit certain actions ("negative covenants"), including, but not limited to, the Company's ability to incur debt, restrict or limit certain liens, capital spending limits, engage in certain merger, acquisition, or divestiture actions, or increase dividends beyond a specific level. The Company’s debt instruments also contain covenants requiring the Company to, among other things, maintain specified financial ratios ("affirmative covenants"). Failure to comply with these negative covenants and affirmative covenants could result in an event of default that, if not cured or waived, could restrict the Company’s access to liquidity and have a material adverse effect on the Company’s business or prospects. If the Company does not have enough cash to service its debt or fund other liquidity needs, the Company may be required to take actions such as requesting a waiver from lenders, reducing or delaying capital expenditures, selling assets, restructuring or refinancing all or part of the existing
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debt, or seeking additional equity capital. The Company cannot assure that any of these remedies can be effected on commercially reasonable terms or at all.
Our substantial indebtedness and restrictive debt covenants could materially adversely affect our financial condition, our ability to raise additional capital to fund our operations, our ability to operate our business, our ability to react to changes in he economy or our industry, our ability to meet our obligations under our outstanding indebtedness and could divert our cash flow from operations for debt payments.
Our consolidated indebtedness increased substantially following the completion of the Precoat Acquisition. This increased level of indebtedness could adversely affect us, including by decreasing our business flexibility. Our Credit Agreement contains a number of restrictive covenants that impose significant operating and financial restrictions on us. These covenants may limit our ability to optimally operate our business. In addition, our Credit Agreement requires that we meet certain financial tests, including a leverage ratio test. Our increased indebtedness and these restrictive covenants could adversely affect our ability to:
•finance our operations;
•make needed capital expenditures;
•make strategic acquisitions or investments or enter into joint ventures;
•withstand a future downturn in our business, the industry or the economy in general;
•engage in business activities, including future opportunities, that may be in our best interest; and
•plan for or react to market conditions or otherwise execute our business strategies.
The covenant restrictions related to our indebtedness could impact our ability to expand our business, which could have a material adverse effect on our business, financial condition and results of operations. As a result of these restrictions, we could be limited as to how we conduct our business and we may be unable to raise additional debt or equity financing to compete effectively or to take advantage of new business opportunities. The terms of any future indebtedness we may incur could include more restrictive covenants. We cannot assure you that we will be able to maintain compliance with these covenants in the future and, if we fail to do so, that we will be able to obtain waivers from the lenders and/or amend the covenants. Our failure to comply with the restrictive covenants described above and/or the terms of any future indebtedness from time to time could result in an event of default, which, if not cured or waived, could result in our being required to repay these borrowings before their due date and the termination of future funding commitments by our lenders. If we are forced to refinance these borrowings on less favorable terms or cannot refinance these borrowings, our results of operations and financial condition could be adversely affected. The Credit Agreement contains cross-default provisions that could result in the acceleration of all of our indebtedness. A breach of the covenants under our Credit Agreement could result in an event of default under the applicable indebtedness. Such a default may allow the creditors to accelerate the related indebtedness and may result in the acceleration of any other indebtedness to which across-acceleration or cross-default provision applies. In addition, an event of default under the Credit Agreement would permit the lenders under the Credit Agreement to terminate all commitments to extend further credit under that facility. Furthermore, if we were unable to repay amounts due and payable under the Credit Agreement, those lenders could proceed against the collateral granted to them to secure that indebtedness. In the event our lenders accelerate the repayment of our borrowings, we and our guarantors may not have sufficient assets to repay that indebtedness. Additionally, we may not be able to borrow money from other lenders to enable us to refinance our indebtedness. Increased levels of indebtedness could also create competitive disadvantages for us relative to other companies with lower debt levels.
Our investment in the AIS Joint Venture could be materially and adversely affected by our lack of sole decision-making authority over the majority of the strategic and operational decisions of the business, corporate governance matters, and our reliance on our AIS Joint Venture partner's financial condition.
On September 30, 2022, we completed a disposition of 60% of the equity of AIS Investment Holdings LLC, a Delaware limited liability company (the "AIS JV"), which consists of our former AZZ Infrastructure Solutions Segment (excluding AZZ Crowley Tubing) (the "AIS Business"), with Fernweh AIS Acquisition LP, a Delaware limited partnership. Pursuant to the terms of the agreement, AZZ no longer has a controlling interest in the AIS JV, and therefore the AIS JV is operating and will continue to operate independently. As the non-controlling interest holder in the AIS JV, our influence on all aspects of the AIS Business will continue to diminish. Accordingly, we might not be able to prevent the AIS JV from taking actions adverse to our interests in the AIS JV. We cannot exercise sole decision-making authority regarding the AIS Business, including, but not limited to, hiring and retaining employees and executive officers, management of and payments into its multiemployer pension plans, governance issues, entering into new markets or exiting existing markets, making certain acquisitions or dispositions, and other material strategic transactions, which in each case could create the potential risk of creating operational issues and/or impasses on decisions or decisions at the AIS JV-level not in our best interest. Additionally, investments in joint ventures or partnerships, such as the AIS JV, may, under certain circumstances, involve risks not present when a third-party is not involved, including the possibility that joint venture partners may become bankrupt, fail to fund their share of required capital contributions to various parties, or otherwise struggle operationally or financially. Disputes between AZZ Inc, and our joint venture partner could result in litigation or arbitration that would increase our expense and distract our
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executive officers and directors from focusing their time and efforts on AZZ Inc.'s business and could result in subjecting the AIS Business to additional risk.
Any of the foregoing operational risks could materially reduce the expected return of our prior investment in the AIS JV and materially and adversely affect our business, results of operations, financial condition and the trading price of our securities.
Adverse changes in the value of assets or obligations associated with our defined benefit pension plan could have a material adverse effect on our financial condition.
We have a defined benefit pension plan which is frozen with respect to benefits and the addition of participants. The funded status and our ability to satisfy the future obligations of the plan is affected by, among other things, changes in interest rates, returns from plan asset investments, and actuarial assumptions including the life expectancies of the plan’s participants. Our ability to adequately fund or meet our future obligations with respect to the plan could have a material adverse effect on our business, results of operations and financial condition.
A change in a customer’s creditworthiness could result in significant accounts receivable write-offs.
As a normal course of business, we extend credit to certain of our customers. The amount of credit extended to customers is based upon the due diligence performed, including, but not limited to, the review of the potential customer’s financial statements and banking information. The Company may perform various credit checks and evaluate the customer's previous payment history. While we do not believe we have significant concentration of sales with any one customer, we have certain larger customers, which could result in a significant amount of credit exposure if there is a sudden or severe change in the customer’s creditworthiness. We monitor our outstanding receivables on a regular basis; however, if a customer with large credit exposure is unable to make payment on its outstanding receivables, we could experience a significant write-off of accounts receivable.
If our goodwill or other indefinite-lived intangible assets were to become impaired, our net income and results of operations could be negatively affected.
As of February 28, 2023, we had goodwill totaling $702.5 million and indefinite-lived intangible assets totaling $1.5 million on our consolidated balance sheet. Goodwill represents the excess of cost over the fair market value of net assets acquired in business combinations. Indefinite-lived intangibles are comprised of certain tradenames. We test goodwill and intangible assets with an indefinite life for potential impairment annually, in 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 Company below its carrying amount. Factors that could indicate that our goodwill or indefinite-lived intangible assets are impaired include a decline in our stock price and market capitalization, lower than projected operating results and cash flows and economic downturns or slower growth rates in our industry, market downturns or major events like a global pandemic. Our stock price historically has shown volatility and often fluctuates significantly in response to market and other factors. Declines in our stock price, lower operating results and any decline in industry conditions in the future could increase the risk of impairment. The evaluation for impairment includes our estimates of future operating results and cash flows, estimates of allocations of certain assets and cash flows among reporting segments, estimates of future growth rates, and our judgment regarding the applicable discount rates used on estimated operating results and cash flows.
Should a review indicate impairment, a write-down of the carrying value of the goodwill or intangible asset would occur, resulting in a non-cash charge, which could have a material adverse effect on our financial statements, impact our creditability with our shareholders, or impact our relationships with our customers, suppliers or supporting banks.
We are exposed to exchange rate fluctuations in the international markets in which we operate.
We operate in the United States and Canada and anticipate that there will be instances in which sales and costs will not be exactly matched with respect to foreign currency denomination. Gains and losses from the remeasurement of assets and liabilities that are receivable or payable in currencies other than our subsidiaries’ functional currency are included in our consolidated statements of income. In addition, currency fluctuations cause the U.S. dollar value of our Canadian results of operations and net assets to vary with exchange rate fluctuations. A decrease in the value of the Canadian currency relative to the U.S. dollar could have a negative impact on our business, financial condition, results of operations or cash flows. As we continue to expand geographically, we could experience economic loss and a negative impact on earnings or net assets solely as a result of foreign currency exchange rate fluctuations. In the future, we may utilize derivative instruments to manage the risk of fluctuations in foreign currency exchange rates that could potentially impact our future earnings and forecasted cash flows. However, the markets in which we operate could restrict the removal or conversion of the local or foreign currency, resulting in our inability to hedge against some or all of these risks or increase our cost of conversion of local currency to U.S. dollar.
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Our operations entail inherent risks that may result in substantial liability. We do not insure against all potential losses and could be seriously harmed by unexpected liabilities.
Our manufacturing processes and services provided to our customers entail inherent risks, including equipment defects, malfunctions and failures. The insurance we carry to mitigate many of these risks may not be adequate to cover future claims or losses. In addition, we are substantially self-insured for workers’ compensation, employer’s liability, property, general liability and employee group health claims in view of the relatively high per-incident deductibles we absorb under our insurance arrangements for these risks. Further, insurance covering the risks we expect to face or in the amounts we desire may not be available in the future or, if available, the premiums may not be commercially justifiable. If we were to incur substantial liability and such damages were not covered by insurance or were in excess of policy limits, our business, financial condition and results of operations could be negatively impacted.
Tax legislation and administrative initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We operate in locations throughout the U.S. and Canada and, as a result, we are subject to the tax laws and regulations of U.S. federal, state, local and the Canadian governments. From time to time, various legislative or administrative initiatives may be proposed that could adversely affect our tax positions. In addition, U.S. federal, state, local and foreign tax laws and regulations are extremely complex and subject to varying interpretations. Moreover, economic and political pressures to increase tax revenue in various jurisdictions may make resolving any future tax disputes favorably more difficult. There can be no assurance that our tax positions will not be challenged by relevant tax authorities or that we would be successful in any such challenge. Changes to our tax positions resulting from future tax legislation and administrative initiatives or challenges from taxing authorities could adversely affect our results of operations and financial condition.
Interest Rate Risk
An increase in interest rates would increase interest costs on variable-rate debt and could adversely impact the ability to refinance existing debt.
We currently have $1.13 billion of gross debt outstanding that bears interest at variable rates that reset periodically and are generally based on the Secured Overnight Financing Rate ("SOFR") or Base Rate, as defined in the Credit Agreement. We utilize interest rate swaps to mitigate the interest rate risk, and we have hedged approximately one-half of our gross debt outstanding. However, approximately one-half of our gross debt outstanding is unhedged. If interest rates increase, so will the interest costs, which could adversely affect cash flow and the ability to pay principal and interest on our debt and the ability to make distributions to shareholders. In addition, rising interest rates could limit our ability to refinance existing debt when it matures. An increase in interest rates could also affect our ability to make new investments on favorable terms or at all.
We may increase our debt or raise additional capital in the future, which could affect our financial condition, may decrease our profitability or could dilute our shareholders.
We may increase our debt or raise additional capital in the future, subject to restrictions in our debt agreements. If our cash flow from operations is less than we anticipate, or if our cash requirements are more than we expect, we may require more financing. However, debt or equity financing may not be available on terms acceptable to us, if at all. If we incur additional debt or raise equity through the issuance of preferred stock, the terms of the debt or preferred stock issued may give the holders rights, preferences and privileges senior to those of holders of our common stock, particularly in the event of liquidation. The terms of the debt may also impose additional and more stringent restrictions on our operations than we currently have. If we raise funds through the issuance of additional equity, our shareholders’ ownership in us would be diluted. If we are unable to raise additional capital when needed, it could affect our financial health, which could negatively affect our shareholders.
General Risks Factors
The market price and trading volume of our common stock may be volatile.
The market price of our stock may be influenced by many factors, some of which are beyond our control, including the following:
•the inability to meet the financial estimates of analysts who follow our common stock;
•strategic actions by us or our competitors;
•announcements by us or our competitors of significant contracts, acquisitions, joint marketing relationships, joint ventures or capital commitments;
•variations in our quarterly operating results and those of our competitors;
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•general economic and stock market conditions;
•risks relating to our business and our industry, including those discussed above;
•changes in conditions or trends in our industry, markets or customers;
•cyber-attacks, terrorist acts or armed hostilities;
•future sales of our common stock or other securities;
•repurchases of our outstanding shares;
•material weaknesses in our internal control over financial reporting; and
•investor perceptions of the investment opportunity associated with our Company relative to other investment alternatives.
These broad market and industry factors may materially reduce the market price of our common stock, regardless of our operating performance. In addition, price volatility may be greater if the public float and trading volume of our common stock is low.
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Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The Company's headquarters and executive offices are located in leased office space in Fort Worth, Texas. We also lease office space in several locations related to our operations facilities. As of February 28, 2023, our office and manufacturing operations facilities were as follows:
| Square Footage | |||||
|---|---|---|---|---|---|
| Segment | Location | Number of Facilities | Total | Owned | Leased |
| Metal Coatings | United States | 44 | 3,179,193 | 2,801,118 | 378,075 |
| Canada | 4 | 193,952 | 186,645 | 7,307 | |
| Precoat Metals | United States | 14 | 3,443,732 | 2,686,472 | 757,260 |
| Corporate | United States | 1 | 46,939 | — | 46,939 |
| Total | 63 | 6,863,816 | 5,674,235 | 1,189,581 |
The Company believes that its current facilities are adequate to meet the requirements of its present and foreseeable future operations. See Note 7 to the consolidated financial statements included in Item 8 of this Form 10-K for additional information regarding the Company's lease obligations.
Item 3. Legal Proceedings
The Company and its subsidiaries are named defendants and plaintiffs in various routine lawsuits incidental to our business. These proceedings include labor and employment claims, use of the Company’s intellectual property, worker’s compensation, environmental matters, and various commercial disputes, all arising in the normal course of business. The outcome of these lawsuits or other proceedings cannot be predicted with certainty, and the amount of any potential liability that could arise with respect to such lawsuits or other matters cannot be predicted at this time. However, management, after consultation with legal counsel, believes it has strong defenses to all of these matters and does not expect liabilities, if any, from these claims or proceedings, either individually or in the aggregate, to have a material effect on the Company’s financial position, results of operations or cash flows.
Item 4. Mine Safety Disclosures
Not applicable.
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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
General
Our common stock, $1.00 par value, is traded on the New York Stock Exchange under the symbol "AZZ". As of April 21, 2023, we had approximately 334 holders of record of our common stock, not including those shares held in street or nominee name. Item 11 of this Annual Report on Form 10-K contains certain information related to our equity compensation plans.
Dividend Policy
The payment of dividends on common shares is within the discretion of our Board and is dependent on our earnings, capital requirements, operating and financial condition and other factors. The Company has a history of paying dividends on common shares on a quarterly basis. Dividends paid totaled $16.9 million, $16.9 million, and $17.6 million during fiscal 2023, 2022, and 2021, respectively. Under the Company’s credit agreement, the Company may make dividend payments in an aggregate amount per annum not to exceed 6.0% of market capitalization, so long as no default or event of default shall have occurred and be continuing or would result therefrom. The Company has the ability to make dividend payments under other provisions of the credit agreement as well, subject to the tests and restrictions outlined therein. Any future dividends payments will be reviewed each quarter and declared by the Board of Directors at its discretion.
Equity Compensation Plans
For information regarding securities authorized for issuance under our equity compensation plans, see Part III, Item 12, "Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters."
Purchases of Equity Securities
On November 10, 2020, our Board of Directors authorized a $100 million share repurchase program pursuant to which the Company 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 the Company might otherwise be precluded from doing so. Currently, share repurchases may not exceed 6% of the Company's market capitalization per fiscal year.
During fiscal 2023, to prioritize repayments of debt, including debt incurred to finance the Precoat Acquisition, the Company did not repurchase shares of common stock under the 2020 Share Authorization. During fiscal 2022, the Company repurchased 601,822 shares of common stock for $30.8 million, or $51.20 per share.
We also withhold common stock shares associated with net share settlements to cover employee tax withholding obligations upon the vesting of restricted stock unit awards under our employee equity incentive program. See Note 13 to the consolidated financial statements included in Item 8 of this Form 10-K for additional information regarding our equity incentive plans.
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Stock Performance Graph
The following graph illustrates the five-year cumulative total return on investments in our common stock, the S&P 1500 Building Products Index (U.S. Companies) and the S&P Small Cap 600 Index (U.S. Companies). These indices are prepared by Alliance Advisors. The Company's common stock is listed on the New York Stock Exchange and AZZ operates in two industry segments. The shareholder return shown below is not necessarily indicative of future performance. Total return, as shown, assumes $100 invested on February 28, 2018, in shares of AZZ common stock and each index, all with cash dividends reinvested. The calculations exclude trading commissions and taxes.
Comparison of Five Year-Cumulative Total Returns
Value of $100 Invested on February 28, 2018
For Fiscal Year Ended on the Last Day of February
| February 28/29, | ||||||
|---|---|---|---|---|---|---|
| 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | |
| AZZ Inc. | 100.00 | 105.00 | 84.00 | 117.00 | 113.00 | 93.00 |
| S&P Composite 1500 Building Products | 100.00 | 97.00 | 104.00 | 152.00 | 170.00 | 171.00 |
| S&P Small Cap 600 Index | 100.00 | 104.00 | 94.00 | 136.00 | 140.00 | 133.00 |
Notes:
A.The lines represent monthly index levels derived from compounded daily returns that include all dividends.
B.The indexes weights are calculated daily, using the market capitalization on the previous trading day.
C.If the monthly interval, based on the fiscal year-end, is not a trading day, the preceding trading day is used.
D.The index level for all series was set to $100 on February 28, 2018.
Item 6. Selected Financial Data
Reserved.
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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 2022 compared to fiscal year 2021 can be found under Item 7 in our Annual Report on Form 10-K for the fiscal year ended February 28, 2022, 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 provider of hot-dip galvanizing and coil coating solutions to a broad range of end-markets, predominantly 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 is now reported as discontinued operations, and financial data for this segment has been segregated and presented as discontinued operations for all periods presented. 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 14 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, 2023 is referred to as "fiscal 2023," "fiscal year 2023", "current year" or "current period", and the period ended February 28, 2022 is referred to as "fiscal 2022," "fiscal year 2022," "prior year" or "prior period."
Results of Operations
For the fiscal year ended February 28, 2023, we recorded sales of $1,323.6 million, compared to prior year’s sales of $525.6 million. Of total sales for fiscal 2023, approximately 48.1% were generated from the AZZ Metal Coatings segment and approximately 51.9% of sales were generated from the AZZ Precoat Metals segment. Net income (loss) for fiscal 2023 was $(61.2) million, compared to $84.0 million for fiscal 2022. Net income (loss) as a percentage of sales was (4.6)% for fiscal 2023 as compared to 16.0% for fiscal 2022. Diluted earnings (loss) per share from continuing operations increased by 17.1%, to $2.33 per share for fiscal 2023, compared to $1.99 per share for fiscal 2022.
During fiscal 2023, we completed the acquisition of Precoat Metals (the "Precoat Acquisition"). During fiscal 2022, we completed two acquisitions, both in our AZZ Metal Coatings segment.
Sales
Our total sales from continuing operations, for fiscal 2023 increased by $798.1 million, or 151.8%, as compared to fiscal 2022.
The following table reflects the breakdown of revenue from continuing operations by segment (in thousands):
| Year Ended February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Sales: | ||||
| Metal Coatings | $ | 636,982 | $ | 525,598 |
| Precoat Metals | 686,667 | — | ||
| Total sales | $ | 1,323,649 | $ | 525,598 |
Sales for the AZZ Metal Coatings segment increased $111.4 million, or 21.2%, to $637.0 million, from the prior year’s sales of $525.6 million. The increase in sales was primarily due to improved price realization for our superior quality and service. The volume of steel processed also increased in the current period, compared to the prior year period.
Sales for the AZZ Precoat Metals segment, which was acquired on May 13, 2022, were $686.7 million for the current year.
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Operating Income
The following table reflects the breakdown of operating income (loss) from continuing operations by segment (in thousands):
| Year Ended February 28, 2023 | Year Ended February 28, 2022 | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Metal Coatings | Precoat Metals | Corporate | Total | Metal Coatings | Precoat Metals | Corporate | Total | |||||||||
| Operating income (loss) from continuing operations: | ||||||||||||||||
| Sales | $ | 636,982 | $ | 686,667 | $ | — | $ | 1,323,649 | $ | 525,598 | $ | — | $ | — | $ | 525,598 |
| Cost of sales | 462,473 | 565,233 | — | 1,027,706 | 379,445 | — | — | 379,445 | ||||||||
| Gross margin | 174,509 | 121,434 | — | 295,943 | 146,153 | — | — | 146,153 | ||||||||
| Selling, general and administrative | 18,556 | 41,925 | 61,824 | 122,305 | 17,395 | — | 49,539 | 66,934 | ||||||||
| Total operating income (loss) from continuing operations | $ | 155,953 | $ | 79,509 | $ | (61,824) | $ | 173,638 | $ | 128,758 | $ | — | $ | (49,539) | $ | 79,219 |
Operating income for the AZZ Metal Coatings segment increased $27.2 million, or 21.1%, for fiscal 2023, to $156.0 million, as compared to $128.8 million for the prior year. Operating margins remained flat at 24.5% for fiscal 2023, as compared to fiscal 2022.
Operating income for the AZZ Precoat Metals segment, which was acquired on May 13, 2022, was $79.5 million for fiscal 2023.
Corporate expenses increased $12.3 million, to $61.8 million for fiscal 2023, compared to $49.5 million for fiscal 2022. The increase is primarily due to increases in acquisition costs related to the Precoat Acquisition, costs related to the AIS joint venture, and increased payroll and employee-related compensation costs related to both of these transactions , partially offset by income earned from a transition services agreement related to the AIS joint venture. See also Note 5 in Item 8.
Interest Expense
Interest expense for fiscal 2023 increased $82.4 million, to $88.8 million, as compared to $6.4 million in fiscal 2022. The significant increase in interest expense is primarily attributable to the additional debt that was obtained in conjunction with the Precoat Acquisition, including the Term Loan B of $1.3 billion and the Convertible Notes of $240.0 million. The Convertible Notes transitioned from subordinated debt (e.g., interest) to Preferred Equity (e.g., dividends) on August 5, 2022. As of February 28, 2023, we had gross outstanding debt of $1,125.3 million, compared to $227.0 million at the end of fiscal 2022. AZZ's debt to equity ratio was 1.24 to 1 at the end of fiscal 2023, compared to 0.34 to 1 at the end of fiscal 2022. For additional information on outstanding debt, see Note 8 in Item 8.
Equity in Earnings of Unconsolidated Entities
Equity in earnings of unconsolidated subsidiaries of $2.6 million represents our proportionate share of net income or loss from our investment in the AIS JV. We have a 40% equity interest in the AIS JV.
Other (Income) Expense, Net
For fiscal 2023, other income, net increased $1.0 million, to $1.2 million for fiscal 2023 compared to $0.2 million for fiscal 2022. The activity for fiscal 2023 consisted primarily of sublease income earned through the Company's sublease agreements in the Precoat Metals segment, as well as foreign currency losses resulting from unfavorable movements in exchange rates.
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Income Taxes
The provision for income taxes from continuing operations was 25.2% for fiscal 2023 compared to 31.8% for fiscal 2022. The decrease in the effective tax rate is the result of higher unfavorable adjustments related to management fees, recorded as a result of continuing operations versus discontinued operations reporting, in the prior year comparable period.
Income from Discontinued Operations, net of tax
Following the AIS JV agreement with Fernweh, the results of our AZZ Infrastructure Solutions segment were 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 and 2022 consist of the following (in thousands):
| Year Ended February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Sales | $ | 256,224 | $ | 377,066 |
| Cost of sales | 202,707 | 297,996 | ||
| Gross margin | 53,517 | 79,070 | ||
| Selling, general and administrative | 26,186 | 46,747 | ||
| Restructuring and impairment charges | — | (1,797) | ||
| Loss on disposal of discontinued operations | 159,910 | — | ||
| Operating income (loss) from discontinued operations | (132,579) | 34,120 | ||
| Interest expense | 8 | 32 | ||
| Other (income) expense, net | 6,270 | 774 | ||
| Income (loss) from discontinued operations before income tax | (138,857) | 33,314 | ||
| Income tax (benefit) expense | (19,544) | (891) | ||
| Net income (loss) from discontinued operations | $ | (119,313) | $ | 34,205 |
Sales for the AZZ Infrastructure Solutions segment decreased $120.8 million, or 32.0%, to $256.2 million for fiscal 2023, compared to $377.1 million for fiscal 2022. The decrease is primarily due to the divestiture of our AZZ Infrastructure Solutions segment on September 30, 2022, resulting in the inclusion of seven months of sales for the current year period, compared to a full year for the prior year period.
Operating income (loss) for the AZZ Infrastructure Solutions segment decreased $166.7 million, or 488.6% to a loss of $132.6 million, as compared to income of $34.1 million for the prior year. During fiscal 2023, the Company recognized a pre-tax non-cash loss on disposal of approximately $159.9 million, which included the derecognition of the cumulative translation adjustment related to its investment in foreign entities within the AIS segment, and is included in "Loss on disposal of discontinued operations" above. During the third quarter of fiscal 2023, the Company completed the sale of its 60% majority interest in AIS.
The provision for income taxes from discontinued operations reflects an effective tax rate of 14.1% for fiscal year 2023, compared to (2.7)% for fiscal year 2022. The increase is mainly attributable to a book loss with a tax benefit in the current year, compared to book income with a research and development credit in the prior year which more than offset the prior year tax expense. The current year effective tax rate also includes the impact of recognizing deferred taxes on the outside basis difference of foreign subsidiaries involved in the divestiture.
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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):
| Year Ended February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Net cash provided by operating activities of continuing operations | $ | 91,430 | $ | 60,598 |
| Net cash used in investing activities of continuing operations | (1,228,921) | (82,143) | ||
| Net cash provided by financing activities of continuing operations | 1,027,335 | 912 | ||
| Net cash provided by (used in) operating activities from discontinued operations | (21,275) | 25,412 | ||
| Net cash used in investing activities from discontinued operations | (1,336) | (4,692) | ||
| Net cash provided by financing activities from discontinued operations | 120,000 | — | ||
| Working Capital | 230,176 | 236,002 |
Net cash provided by operating activities of continuing operations for fiscal 2023 was $91.4 million, compared to $60.6 million for fiscal 2022. The increase in cash provided by operating activities for fiscal 2023 is primarily attributable to increases in net income from continuing operations and non-cash expenses, including depreciation and amortization and amortization of debt financing costs, partially offset by the impact of decreases in working capital, primarily due to changes in accounts payable, accounts receivable, prepaid expenses, contract assets and liabilities and other accrued liabilities. Net cash used in operating activities of discontinued operations for fiscal 2023 was $21.3 million, compared to cash provided by operating activities of $25.4 million for fiscal 2022.
Net cash used in investing activities of continuing operations for fiscal 2023 was $1,228.9 million, compared to $82.1 million for fiscal 2022. The increase in cash used during fiscal 2023 was primarily attributable to the Precoat Acquisition completed in the first quarter of fiscal 2023. Net cash used in investing activities of discontinued operations for fiscal 2023 was $1.3 million, compared to $4.7 million for fiscal 2022.
Net cash provided by financing activities of continuing operations for fiscal 2023 was $1,027.3 million, compared to $0.9 million for fiscal 2022. The increase in cash provided by financing activities during fiscal 2023 was primarily attributable to an increase in proceeds from long-term debt, as well as a decrease in repurchases of Company common stock, partially offset by an increase in net payments for long-term debt and payments of debt financing costs. Net cash provided by financing activities of discontinued operations for fiscal 2023 was $120.0 million, compared to zero for fiscal 2022.
See "Financing and Capital" sections below for additional information.
Financing and Capital
2021 Credit Agreement
On July 8, 2021, the Company entered into a five-year unsecured revolving credit facility under a credit agreement, 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 was scheduled to mature in July 2026 and included the following significant terms;
i.provided for a senior unsecured revolving credit facility with a principal amount of up to $400.0 million revolving loan commitments, and included 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,
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iii.included a letter of credit sub-facility up to $85.0 million for the issuance of standby and commercial letters of credit,
iv.included a $50.0 million sublimit for swing line loans,
v.included 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.included a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each were tested at quarter end.
On May 13, 2022, the 2021 Credit Agreement was repaid with proceeds from the 2022 Credit Agreement, which is described below.
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 that matured on January 20, 2021, as well as for general corporate purposes. Interest on the 2020 Senior Notes was paid semi-annually. In connection with the 2020 Senior Notes, the Company incurred debt issuance costs of approximately $0.6 million. These costs were allocated between the two tranches and were amortized over periods of seven and 12 years.
On May 13, 2022, the 2020 Senior Notes were repaid with proceeds from the 2022 Credit Agreement, which is described below.
2022 Credit Agreement and Term Loan B
On May 13, 2022, the Company replaced the 2021 Credit Agreement with a new Credit Agreement (the "2022 Credit Agreement") by and among the Company, borrower, Citibank, N.A., as administrative and collateral agent, and the other agents and lender parties thereto 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;
iv.borrowings under the Term Loan B and the Revolving Credit Facility each bear an interest rate of Secured Overnight Financing Rate ("SOFR") plus 4.25%;
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 at each quarter-end;
The Company utilizes proceeds from the Revolving Credit Facility primarily to finance working capital needs, capital improvements, dividends, acquisitions and for general corporate purposes. The proceeds of the Term Loan B were used to finance a portion of the Precoat Acquisition, pay transaction-related costs owed under the Securities Purchase Agreement (defined below) and refinance certain prior indebtedness, including the repayment of outstanding borrowings under the 2021 Credit Agreement. The proceeds were also utilized to redeem 100% of the Company’s 2020 Senior Notes on June 6, 2022.
As defined in the credit agreement, quarterly prepayments will be made 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. On September 30, 2022, $240.0 million was applied to the Term Loan B in connection with the sale of AIS. As a result of this
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prepayment, the quarterly mandatory principal payment requirement has been met, and the quarterly payments of $3.25 million are no longer required.
The effective interest rate for the Revolving Credit Facility and the Term Loan B was 8.81% at February 28, 2023.
The Company's credit agreement requires the Company 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 4.5. The leverage ratio as of February 28, 2023 was 5.75.
Convertible Subordinated Notes
On May 13, 2022, the Company 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. The Convertible Notes were exchanged for 240,000 shares of the Company's 6.0% Series A Convertible Preferred Stock on August 5, 2022, following the receipt of shareholder approval for the issuance of preferred shares. See Note 10 for a description of the Series A Convertible Preferred Stock.
The Company used the proceeds of the Convertible Notes, along with the Term Loan B, to fund the Company’s Precoat Acquisition.
Letters of Credit
As of February 28, 2023, we had total outstanding letters of credit in the amount of $16.7 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 using a mix of fixed and variable-rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable-rate debt.
On September 27, 2022, the Company entered into a fixed-rate interest rate swap agreement with banks that are parties to the 2022 Credit Agreement. On October 7, 2022, the agreement was amended to change the SOFR-based component of the interest rate on a portion of our variable-rate debt to a fixed rate of 4.277%, resulting in a total fixed rate of 8.627% (the "2022 Swap"). 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, for approximately one-half of the total amount of our variable-rate debt. 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.
AZZ Infrastructure Solutions (AIS) Joint Venture
On September 30, 2022, the Company completed the joint venture between the Company and Fernweh Group LLC ("Fernweh"). Under the agreement with Fernweh, AZZ contributed its AZZ Infrastructure Solutions segment ("AIS") to AIS Investment Holdings LLC (the "AIS JV"), and sold a 60% interest in the AIS JV to Fernweh at an implied enterprise value of AIS of $300.0 million. The AIS JV operates under the name "Avail Infrastructure Solutions" ("AVAIL"). The Company received proceeds from the sale of approximately $108.0 million, as well as $120.0 million that was funded by committed debt financing taken on by the AVAIL joint venture immediately prior to the closing of the divestiture of AZZ’s controlling interest. As a result of the transaction, AIS is deconsolidated and the Company's retained 40% interest in the AVAIL joint venture is accounted for under the equity method of accounting. See Note 6 of Item 8 for further information about the AIS segment. The Company used the cash received from the transaction to repay $210.0 million on the Term Loan B, $15.0 million on the Revolving Credit Facility and $3.0 million for working capital purposes.
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As of February 28, 2023, we had $1,125.3 million of floating- and fixed-rate notes outstanding with varying maturities through fiscal 2029 and we were in compliance with all of the covenants related to these outstanding borrowings. As of February 28, 2023, we had approximately $288.5 million of additional credit available for future draws or letters of credit.
During the year ended February 28, 2023, the Company utilized a significant portion of the cash received from the AIS JV to reduce the Term Loan B, and utilized the remaining cash received to reduce the Revolving Credit Facility and for general corporate purposes.
The Company's debt agreements require the Company to maintain certain financial ratios. As of February 28, 2023, the Company was in compliance with all covenants or other requirements set forth in the debt agreements.
Share Repurchase Program
On November 10, 2020, our Board of Directors authorized a $100 million share repurchase program pursuant to which the Company 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 the Company might otherwise be precluded from doing so. Currently, share repurchases may not exceed 6% of the Company's market capitalization per fiscal year.
During fiscal 2023, to prioritize repayments of debt, including debt incurred to finance the Precoat Acquisition, the Company did not repurchase shares of common stock under the 2020 Share Authorization. During fiscal 2022, the Company repurchased 601,822 shares of common stock for $30.8 million, or $51.20 per share.
Other Exposures
We have exposure to commodity price increases in our operating segments, primarily zinc, 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 through fixed cost contract purchases on zinc and 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 AIS JV.
Off Balance Sheet Arrangements and Contractual Commitments
As of February 28, 2023, 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.
As of February 28, 2023, the Company had non-cancelable forward contracts to purchase approximately $115.0 million of zinc at various volumes and prices. All such contracts expire in fiscal 2024. The Company had no other contracted commitments for any other commodities including steel, aluminum, natural gas, copper, zinc, nickel based alloys, except for those entered into under the normal course of business.
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. 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
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customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances could be required.
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.
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 goodwill's 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, then we use the income approach. 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.
Joint Venture
On September 30, 2022, the Company completed the joint venture between the Company and Fernweh Group LLC ("Fernweh"). Under the agreement with Fernweh, AZZ contributed its AZZ Infrastructure Solutions segment ("AIS") to AIS Investment Holdings LLC (the "AIS JV"), and sold a 60% interest in the AIS JV to Fernweh at an implied enterprise value of AIS of $300.0 million. Following the classification of the AIS segment as held for sale, the Company measured the AIS segment at the lower of its carrying amount or fair value. As a result, the Company recorded a loss on the sale of the AIS segment. The loss was determined by comparing the fair value of the consideration received for the sale of a 60% interest in the AIS JV and the fair value of the Company’s retained 40% investment in the AIS JV with the net assets of the AIS JV immediately prior to the transaction. The fair value of the Company’s retained investment in the AIS JV was determined in a manner consistent with the transaction price received for the sale of the 60% interest in the AIS JV. The determination of the estimated fair value of the Company's 40% interest in the AIS JV required significant judgement, including the utilization of assumptions and estimates, which were based on available information at the time of the assessment.
The Company accounts for its investment in a joint venture under the equity method of accounting, as we exercise significant influence over, but do not control the joint venture. Investments in unconsolidated joint ventures are initially recorded at fair value, and subsequently increased or decreased for allocations of net income and changes in cumulative translation adjustments. Equity in net income (loss) from the AIS JV is allocated based on our current 40% economic interest. We record our interest in the joint venture on a one-month lag to allow sufficient time to review and assess the joint venture’s effect on our reported results. We assess our investment in unconsolidated joint venture for recoverability when events and circumstances are present that suggest there has been a decline in value, and if it is determined that a loss in value of the investment is other than temporary, we write down the investment to its fair value.
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.
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Interest Rate Swap
The Company is exposed to interest rate risk on its floating-rate debt. On September 27, 2022, the Company entered into an interest rate swap agreement to effectively convert a portion of its floating-rate debt to a fixed-rate basis. The principal objective of this contract is to reduce the variability of the cash flows in interest payments associated with the Company’s floating-rate debt, thus reducing the impact of interest rate changes on future interest payment cash flows. The Company has elected to apply the hedge accounting rules in accordance with authoritative guidance for certain of these contracts. Changes in the fair value of interest rate swap agreements designated as cash flow hedges are recorded as a component of accumulated other comprehensive income (loss) within stockholders’ equity and are amortized to interest expense over the term of the related debt.
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"), we provided 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 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 earnings and adjusted earnings per share, 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 also provides Adjusted EBITDA, which is a non-GAAP measure. Management defines Adjusted EBITDA as earnings excluding depreciation, amortization, interest, provision for income taxes and acquisition and transaction related expenses. 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. Adjusted EBITDA is also useful to investors to help assess the Company's estimated enterprise value. In addition, management believes that the adjustments shown below are useful to investors in order to allow them to compare the Company's financial results during the periods shown without the effect of each of these adjustments.
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. These non-GAAP financial measures may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.
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The following tables provides a reconciliation for the years ended February 28, 2023 and February 28, 2022 between the various measures calculated in accordance with GAAP to the Adjusted Earnings Measures (dollars in thousands, except per share data):
Adjusted Earnings and Adjusted Earnings Per Share from Continuing Operations
| Year Ended February 28, | ||||||||
|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | |||||||
| Amount | Per<br><br>Diluted Share(1) | Amount | Per<br><br>Diluted Share(1) | |||||
| Net income from continuing operations | $ | 66,339 | 49,817 | |||||
| Less: Series A Preferred Stock dividends | (8,240) | — | ||||||
| Net income (loss) from continuing operations available to common shareholders | 58,099 | $ | 2.33 | 49,817 | $ | 1.99 | ||
| Net income available to common shareholders and diluted earnings per share from continuing operations | $ | 58,099 | $ | 49,817 | ||||
| Adjustments: | ||||||||
| Acquisition and transaction-related expenditures(2) | 15,320 | 0.61 | 1,554 | 0.06 | ||||
| Amortization of intangible assets | 22,613 | 0.91 | 6,658 | 0.27 | ||||
| Subtotal | 37,933 | 1.52 | 8,212 | 0.33 | ||||
| Tax impact(3) | (9,104) | (0.36) | (1,881) | (0.08) | ||||
| Total adjustments | 28,829 | 1.15 | 6,331 | 0.25 | ||||
| Adjusted earnings and adjusted earnings per share from continuing operations | $ | 86,928 | $ | 3.48 | $ | 56,148 | $ | 2.24 |
(1) Earnings per share amounts included in the table above may not sum due to rounding differences.
(2) Includes Corporate expenses related to the Precoat Metals acquisition, as well as the divestiture of AZZ Infrastructure Solutions business into the AIS JV.
(3) The non-GAAP effective tax rates for fiscal 2023 and 2022 were 24.0% and 22.9%, respectively.
Adjusted EBITDA from Continuing Operations
| Year Ended February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Net income from continuing operations | $ | 66,339 | $ | 49,817 |
| Interest expense | 88,800 | 6,363 | ||
| Income tax expense | 22,336 | 23,214 | ||
| Depreciation and amortization | 74,590 | 32,081 | ||
| Acquisition and transaction-related expenditures | 15,320 | 1,554 | ||
| Adjusted EBITDA from continuing operations | $ | 267,385 | $ | 113,029 |
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Adjusted EBITDA by Segment
| Year Ended February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Metal Coatings | ||||
| Operating income | $ | 155,954 | $ | 128,758 |
| Depreciation and amortization expense | 32,955 | 30,453 | ||
| Adjusted EBITDA | $ | 188,909 | $ | 159,211 |
| Precoat Metals | ||||
| Operating income | $ | 79,509 | $ | — |
| Depreciation and amortization expense | 40,199 | — | ||
| Adjusted EBITDA | $ | 119,708 | $ | — |
| Corporate | ||||
| Operating income | $ | (61,825) | $ | (49,539) |
| Consolidated operating income | $ | 173,638 | $ | 79,219 |
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
We are exposed to market risk from changes in commodity prices, interest rates and foreign currency exchange rates. We use derivative instruments principally to reduce our exposure to market risks from changes in foreign currency exchange rates and interest rates. We do not enter into or hold derivative instruments for speculative or trading purposes.
Commodity Prices
In our AZZ Metal Coatings segment, we have exposure to commodity price changes for zinc and natural gas, which are the primary inputs in the metal coatings process. In our Precoat Metals segment, we have exposure to commodity price changes for natural gas. We manage our exposure to changes in the price of zinc by entering into agreements with our zinc suppliers and such agreements generally include protective caps or other fixed prices. We also secure firm pricing for natural gas supplies with individual utilities when possible. We believe these agreements ensure adequate supplies and partially offset exposure to commodity price escalation.
Interest Rates
We had $1.125 billion of gross variable-rate debt outstanding at February 28, 2023 under our revolving credit facility and Term Loan B. We manage our exposure to fluctuations in interest rates using a mix of fixed and variable-rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable-rate debt. We have entered into an interest rate swap to eliminate the variability of cash flows in interest payments attributable to changes in benchmark one-month SOFR interest rates, for approximately one-half of the total amount of our variable-rate debt. The interest rate swap is designated as a cash flow hedge. We are subject to future interest rate fluctuations for the unhedged portion of our borrowings, which could potentially have a negative impact on our results of operations, financial position or cash flows.
Foreign Exchange Rates
The Company’s foreign exchange exposures result primarily from intercompany balances, sale of products in foreign currencies, foreign currency denominated purchases, employee-related and other costs of running operations in foreign countries. As of February 28, 2023, the Company had exposure to foreign currency exchange rates related to our operations in Canada.
Sensitivity Analysis
The Company had $578.0 million of borrowings under a variable interest rate at the end of February 28, 2023. We estimate that a hypothetical increase of 1% in interest rates would have increased interest expense by $5.8 million during fiscal 2023. We do not believe that a hypothetical change of 10% of the currency exchange rate that are currently in effect or a change of 10% of commodity prices would have a significant adverse effect on our results of operations, financial position, or cash flows, as long as we are able to pass along the increases in commodity prices to our customers.
However, there can be no assurance that either interest rates, exchange rates or commodity prices will not change in excess of the 10% hypothetical amount or that we would be able to pass along rising costs of commodity prices to our customers, and such hypothetical change, if it occurred, could have an adverse effect on our results of operations, financial position, and cash flows.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements and Schedules
| Page | ||
|---|---|---|
| 1. | Consolidated Financial Statements | |
| Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements (PCAOB ID Number248) | 35 | |
| Report of Independent Registered Public Accounting Firm - Internal Controls Over Financial Reporting | 37 | |
| Consolidated Balance Sheets | 40 | |
| Consolidated Statements of Income | 41 | |
| Consolidated Statements of Comprehensive Income | 42 | |
| Consolidated Statements of Cash Flows | 41 | |
| Consolidated Statements of Changes in Shareholders’ Equity | 42 | |
| Notes to Consolidated Financial Statements | 43 |
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
AZZ, Inc.
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of AZZ Inc. (a Texas corporation) and subsidiaries (the “Company”) as of February 28, 2023, and 2022, the related consolidated statements of operations, comprehensive income (loss), changes in shareholders equity, and cash flows for each of the three years in the period ended February 28, 2023, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 28, 2023, and 2022, and the results of its operations and its cash flows for each of the three years in the period ended February 28, 2023, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2022, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated April 25, 2023, expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Intangible assets acquired with the Precoat Metals acquisition
As described further in Note 5 to the consolidated financial statements, on May 13, 2022, the Company completed its acquisition of the Precoat Metals business division (“Precoat Metals”). The assets acquired and liabilities assumed in the business combination were measured at estimated fair values on the acquisition date. A total of $446.0 million was recorded for the fair value of acquired customer relationships, tradename and technology (collectively “intangible assets”). Determining the fair value of acquired intangible assets requires management to make judgments regarding what valuation models are appropriate in the circumstance and what inputs and assumptions to use in those valuation models to determine an estimate of the fair value of acquired intangible assets. Changes in key inputs and assumptions could materially affect the determination of the fair value of the acquired intangible assets. The Company utilized a third-party valuation firm to assist management in estimating the fair value of acquired intangible assets for the purpose of recording the business combination.
The principal considerations for our determination that the valuation of acquired intangible assets is a critical audit matter is the degree of judgment necessary to determine if certain key inputs to valuation models used by management to estimate the fair value of acquired intangible assets were reasonable in the circumstance. Specifically, those key inputs and assumptions which we determined require especially challenging, subjective, or complex judgments included: 1) forecasted cash flows attributable to acquired intangible assets, and 2) the discount rate applied to those net cash flows to measure the estimated fair values of the acquired intangible assets. Performing audit procedures to evaluate management’s assumptions required the need to involve valuation specialists.
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Our audit procedures related to the estimated fair value assigned to acquired intangible assets included the following, among others.
•We tested the design and operating effectiveness of relevant controls relating to management’s preparation and review of the forecasted cash flows and the discount rate applied, and review of the methodologies applied by third-party valuation specialists engaged by the Company.
•We assessed the reasonableness of the forecasted cash flows by comparing the forecasted cash flows with historical results.
•With the assistance of a valuation specialist, we evaluated the appropriateness of the valuation models used to estimate the value of acquired intangible assets and the reasonableness of the discount rates used in the models.
/s/ GRANT THORNTON LLP
We have served as the Company’s auditor since 2019.
Dallas, Texas
April 25, 2023
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Report of Independent Registered Public Accounting Firm
Board of Directors and Shareholders
AZZ Inc.
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of AZZ Inc. (a Texas corporation) and subsidiaries (the “Company”) as of February 28, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 28, 2023, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended February 28, 2023, and our report dated April 25, 2023 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Controls Over Financial Reporting (“Management’s Report”). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Our audit of, and opinion on, the Company’s internal control over financial reporting does not include the internal control over financial reporting of the Precoat Metals business division (“Precoat Metals”) whose financial statements reflect total assets and revenues constituting 67.0 and 51.9 percent, respectively, of the related consolidated financial statement amounts as of and for the year ended February 28, 2023. As indicated in Management’s Report, Precoat Metals was acquired during 2022. Management’s assertion on the effectiveness of the Company’s internal control over financial reporting excluded internal control over financial reporting of Precoat Metals.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Dallas, Texas
April 25, 2023
AZZ INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value)
| As of February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Assets | ||||
| Current assets: | ||||
| Cash and cash equivalents | $ | 2,820 | $ | 12,082 |
| Accounts receivable, net of allowance for credit losses of $5,752 and $5,395 at February 28, 2023 and February 28, 2022, respectively | 183,412 | 85,106 | ||
| Inventories: | ||||
| Raw material | 138,227 | 81,022 | ||
| Work-in-process | 1,558 | 840 | ||
| Finished goods | 4,135 | 1,135 | ||
| Contract assets | 79,273 | 2,866 | ||
| Prepaid expenses and other | 7,991 | 1,583 | ||
| Assets held for sale | — | 235 | ||
| Current assets of discontinued operations | — | 201,664 | ||
| Total current assets | 417,416 | 386,533 | ||
| Property, plant and equipment, net | 498,503 | 193,358 | ||
| Right-of-use assets | 26,392 | 13,954 | ||
| Goodwill | 702,512 | 190,391 | ||
| Deferred tax assets | 12,467 | 3,464 | ||
| Intangibles and other assets, net | 479,429 | 39,115 | ||
| Investment in joint venture | 84,760 | — | ||
| Non-current assets of discontinued operations | — | 306,212 | ||
| Total assets | $ | 2,221,479 | $ | 1,133,027 |
| Liabilities and Shareholders’ Equity | ||||
| Current liabilities: | ||||
| Accounts payable | $ | 109,861 | $ | 24,840 |
| Income tax payable | 272 | 3,828 | ||
| Accrued salaries and wages | 26,262 | 17,123 | ||
| Other accrued liabilities | 44,442 | 13,168 | ||
| Lease liability, short-term | 6,403 | 3,289 | ||
| Current liabilities of discontinued operations | — | 88,283 | ||
| Total current liabilities | 187,240 | 150,531 | ||
| Long-term debt, net | 1,058,120 | 226,484 | ||
| Lease liability, long-term | 20,704 | 11,403 | ||
| Deferred tax liabilities | 40,536 | 47,672 | ||
| Other long-term liabilities | 61,419 | 5,365 | ||
| Long-term liabilities of discontinued operations | — | 24,207 | ||
| Total liabilities | 1,368,019 | 465,662 | ||
| Commitments and contingencies (Note 18) | ||||
| Shareholders’ equity: | ||||
| Series A Convertible Preferred Stock, $1 par, shares authorized 240; 240 shares issued and outstanding at February 28, 2023 and 0 shares issued and outstanding at February 28, 2022 | 240 | — | ||
| Common Stock, $1 par value; 100,000 shares authorized; 24,912 and 24,688 shares issued and outstanding at February 28, 2023 and February 28, 2022, respectively | 24,912 | 24,688 | ||
| Capital in excess of par value | 326,839 | 85,847 | ||
| Retained earnings | 506,042 | 584,154 | ||
| Accumulated other comprehensive loss | (4,573) | (27,324) | ||
| Total shareholders’ equity | 853,460 | 667,365 | ||
| Total liabilities and shareholders' equity | $ | 2,221,479 | $ | 1,133,027 |
The accompanying notes are an integral part of the consolidated financial statements.
AZZ INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Sales | $ | 1,323,649 | $ | 525,598 | $ | 480,574 |
| Cost of sales | 1,027,706 | 379,445 | 357,675 | |||
| Gross margin | 295,943 | 146,153 | 122,899 | |||
| Selling, general and administrative | 122,305 | 66,934 | 59,317 | |||
| Restructuring and impairment charges | — | — | 16,105 | |||
| Operating income from continuing operations | 173,638 | 79,219 | 47,477 | |||
| Interest expense | 88,800 | 6,363 | 9,461 | |||
| Equity in (earnings) loss of unconsolidated subsidiaries | (2,597) | — | — | |||
| Other (income) expense, net | (1,240) | (175) | (415) | |||
| Income from continuing operations before income taxes | 88,675 | 73,031 | 38,431 | |||
| Income tax expense | 22,336 | 23,214 | 11,248 | |||
| Net income from continuing operations | 66,339 | 49,817 | 27,183 | |||
| Income from discontinued operations, net of tax | 12,770 | 34,205 | 12,431 | |||
| Loss on disposal of discontinued operations, net of tax | (132,083) | — | — | |||
| Net income (loss) from discontinued operations | (119,313) | 34,205 | 12,431 | |||
| Net income (loss) | (52,974) | 84,022 | 39,614 | |||
| Dividends on preferred stock | (8,240) | — | — | |||
| Net income (loss) available to common shareholders | $ | (61,214) | $ | 84,022 | $ | 39,614 |
| Basic earnings (loss) per share | ||||||
| Earnings (loss) per common share from continuing operations | $ | 2.34 | $ | 2.00 | $ | 1.05 |
| Earnings (loss) per common share from discontinued operations | $ | (4.81) | $ | 1.38 | $ | 0.48 |
| Earnings (loss) per common share | $ | (2.47) | $ | 3.38 | $ | 1.53 |
| Diluted earnings (loss) per share | ||||||
| Earnings (loss) per common share from continuing operations | $ | 2.33 | $ | 1.99 | $ | 1.04 |
| Earnings (loss) per common share from discontinued operations | $ | (4.78) | $ | 1.36 | $ | 0.48 |
| Earnings (loss) per common share | $ | (2.45) | $ | 3.35 | $ | 1.52 |
| Weighted average shares outstanding | ||||||
| Basic | 24,828 | 24,855 | 25,897 | |||
| Diluted | 24,978 | 25,077 | 26,045 | |||
| Cash dividends declared per common share | $ | 0.68 | $ | 0.68 | $ | 0.68 |
The accompanying notes are an integral part of the consolidated financial statements.
AZZ INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
| 2022 | 2021 | ||||
| Net income (loss) available to common shareholders | (61,214) | $ | 84,022 | $ | 39,614 |
| Other comprehensive income (loss): | |||||
| Unrealized translation gain (loss) | (2,310) | 5,865 | |||
| Reclassification of foreign currency translation adjustment from accumulated other comprehensive loss to loss on sale of discontinued operations | — | — | |||
| Net pension actuarial gain (loss), net of tax(1) | — | — | |||
| Unrealized gain (loss) on derivatives qualified for hedge accounting: | |||||
| Unrealized gain (loss) on interest rate swap, net of tax(2) | — | (50) | |||
| Amounts reclassified from accumulated other comprehensive income to earnings, net of tax(3) | — | — | |||
| Other comprehensive income (loss) | (2,310) | 5,815 | |||
| Comprehensive income (loss) | (38,463) | $ | 81,712 | $ | 45,429 |
| (1) Net of tax of 43 for 2023. | |||||
| (2) Net of tax expense (benefit) of 995 and (29) for 2023 and 2021, respectively. | |||||
| (3) Net of tax of 51 for 2023. |
All values are in US Dollars.
The accompanying notes are an integral part of the consolidated financial statements.
AZZ INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Cash flows from operating activities | ||||||
| Net income (loss) available to common shareholders | $ | (61,214) | $ | 84,022 | $ | 39,614 |
| Less: Net income (loss) from discontinued operations | (119,313) | 34,205 | 12,431 | |||
| Plus: accrued dividends on Preferred Stock | 8,240 | — | — | |||
| Net income from continuing operations | 66,339 | 49,817 | 27,183 | |||
| Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | ||||||
| Bad debt expense (recoveries) | (58) | 100 | 207 | |||
| Depreciation and amortization | 74,590 | 32,081 | 32,094 | |||
| Deferred income taxes | 7,007 | 3,201 | 387 | |||
| Equity in earnings of unconsolidated entities | (2,597) | — | — | |||
| Loss on disposal of business | — | 640 | 3,080 | |||
| Loss on abandonment of long-lived assets | 135 | — | 13,025 | |||
| Net (gain) loss on sale of property, plant and equipment | (1,032) | 666 | 183 | |||
| Amortization of debt financing costs | 11,271 | 455 | 545 | |||
| Share-based compensation expense | 8,382 | 9,449 | 7,330 | |||
| Effects of changes in assets and liabilities, net of acquisitions and dispositions: | ||||||
| Accounts receivable | (26,545) | (21,291) | 8,383 | |||
| Inventories | (17,198) | (18,765) | 1,044 | |||
| Prepaid expenses and other | (4,190) | 1,578 | (1,599) | |||
| Other assets | (3,677) | (1,406) | (5,648) | |||
| Net change in contract assets and liabilities | (4,404) | (37) | 13,283 | |||
| Accounts payable | (14,035) | 5,719 | 18,813 | |||
| Other accrued liabilities and income taxes payable | (2,558) | (1,609) | (9,202) | |||
| Net cash provided by operating activities of continuing operations | 91,430 | 60,598 | 109,108 | |||
| Cash flows from investing activities | ||||||
| Proceeds from sale or insurance settlements of property, plant and equipment | 4,121 | 2,666 | 84 | |||
| Acquisition of subsidiaries, net of cash acquired | (1,282,730) | (61,219) | (4,419) | |||
| Proceeds from divestiture | 106,808 | — | 12,444 | |||
| Purchase of property, plant and equipment | (57,120) | (23,590) | (27,179) | |||
| Net cash used in investing activities of continuing operations | (1,228,921) | (82,143) | (19,070) | |||
| Cash flows from financing activities | ||||||
| Proceeds from issuance of common stock | 2,372 | 2,788 | 2,832 | |||
| Payments for taxes related to net share settlement of equity awards | (3,000) | (2,187) | (712) | |||
| Proceeds from revolving loan | 380,000 | 296,000 | 228,000 | |||
| Payments on revolving loan | (362,000) | (248,000) | (277,000) | |||
| Proceeds from long term debt | 1,540,000 | — | 150,000 | |||
| Payments of debt financing costs | (87,548) | — | (592) | |||
| Payments on long term debt | (419,750) | — | (125,000) | |||
| Repurchase and retirement of treasury stock | — | (30,815) | (48,311) | |||
| Payments of dividends | (22,739) | (16,874) | (17,642) | |||
| Net cash provided by (used in) financing activities of continuing operations | 1,027,335 | 912 | (88,425) | |||
| Effect of exchange rate changes on cash | 505 | 158 | 3,133 | |||
| Net cash provided by (used in) operating activities from discontinued operations | (21,275) | 25,412 | (17,073) | |||
| Net cash used in investing activities from discontinued operations | (1,336) | (4,692) | (9,523) | |||
| Net cash provided by financing activities from discontinued operations | 120,000 | — | — | |||
| Cash provided by (used in) discontinued operations | 97,389 | 20,720 | (26,596) | |||
| Net increase (decrease) in cash and cash equivalents | (12,262) | 245 | (21,850) | |||
| Cash and cash equivalents at beginning of year | 15,082 | 14,837 | 36,687 | |||
| Cash and cash equivalents at end of year | $ | 2,820 | $ | 15,082 | $ | 14,837 |
| Less: Cash and cash equivalents from discontinued operations at end of year | — | (3,000) | (3,000) | |||
| Cash and cash equivalents from continuing operations at end of year | $ | 2,820 | $ | 12,082 | $ | 11,837 |
The accompanying notes are an integral part of the consolidated financial statements.
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AZZ INC.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
(in thousands)
| Series A Preferred Stock | Common Stock | Capital in Excess of Par<br>Value | Retained<br>Earnings | Accumulated<br>Other<br>Comprehensive<br>Loss | Total | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Shares | Amount | Shares | Amount | |||||||||||
| Balance at February 29, 2020 | — | $ | — | 26,148 | $ | 26,148 | $ | 66,703 | $ | 572,414 | $ | (30,899) | $ | 634,366 |
| Share-based compensation | — | — | — | — | 7,330 | — | — | 7,330 | ||||||
| Common stock issued under stock-based plans and related income tax expense | — | — | 83 | 83 | (795) | — | — | (712) | ||||||
| Common stock issued under employee stock purchase plan | — | — | 91 | 91 | 2,741 | — | — | 2,832 | ||||||
| Repurchase and retirement of common stock | — | — | (1,214) | (1,214) | — | (47,097) | — | (48,311) | ||||||
| Cash dividends paid on common shares | — | — | — | — | — | (17,642) | — | (17,642) | ||||||
| Net income (loss) | — | — | — | — | — | 39,614 | — | 39,614 | ||||||
| Foreign currency translation | — | — | — | — | — | — | 5,865 | 5,865 | ||||||
| Interest rate swap | — | — | — | — | — | — | (50) | (50) | ||||||
| Balance at February 28, 2021 | — | $ | — | 25,108 | $ | 25,108 | $ | 75,979 | $ | 547,289 | $ | (25,084) | $ | 623,292 |
| Share-based compensation | — | $ | — | — | $ | — | $ | 9,449 | $ | — | $ | — | $ | 9,449 |
| Common stock issued under stock-based plans and related income tax expense | — | — | 109 | 109 | (2,296) | — | — | (2,187) | ||||||
| Common stock issued under employee stock purchase plan | — | — | 73 | 73 | 2,715 | — | — | 2,788 | ||||||
| Repurchase and retirement of common stock | — | — | (602) | (602) | — | (30,213) | — | (30,815) | ||||||
| Cash dividends paid on common shares | — | — | — | — | — | (16,874) | — | (16,874) | ||||||
| Net income (loss) | — | — | — | — | — | 84,022 | — | 84,022 | ||||||
| Foreign currency translation | — | — | — | — | — | (70) | (2,240) | (2,310) | ||||||
| Balance at February 28, 2022 | — | $ | — | 24,688 | $ | 24,688 | $ | 85,847 | $ | 584,154 | $ | (27,324) | $ | 667,365 |
| Share-based compensation | — | $ | — | — | $ | — | $ | 8,362 | $ | — | $ | — | $ | 8,362 |
| Issuance of Class A convertible preferred stock in exchange for convertible debt | 240 | 240 | — | — | 233,482 | — | — | 233,722 | ||||||
| Common stock issued under stock-based plans and related income tax expense | — | — | 154 | 154 | (3,154) | — | — | (3,000) | ||||||
| Common stock issued under employee stock purchase plan | — | — | 70 | 70 | 2,302 | — | — | 2,372 | ||||||
| Dividends on preferred stock | — | — | — | — | — | (8,240) | — | (8,240) | ||||||
| Cash dividends paid on common shares | — | — | — | — | — | (16,898) | — | (16,898) | ||||||
| Net income (loss) | — | — | — | — | — | (52,974) | — | (52,974) | ||||||
| Foreign currency translation | — | — | — | — | — | — | (7,997) | (7,997) | ||||||
| Reclassification of foreign currency translation adjustment | — | — | — | — | — | — | 27,750 | 27,750 | ||||||
| Pension actuarial gain (loss) | — | — | — | — | — | — | 119 | 119 | ||||||
| Interest rate swap | — | — | — | — | — | — | 2,879 | 2,879 | ||||||
| Balance at February 28, 2023 | 240 | $ | 240 | 24,912 | $ | 24,912 | $ | 326,839 | $ | 506,042 | $ | (4,573) | $ | 853,460 |
The accompanying notes are an integral part of the consolidated financial statements.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-
Summary of Significant Accounting Policies
Organization
AZZ Inc. (the "Company," "AZZ" or "we") operates primarily in the United States of America and Canada. The Company has three operating segments: AZZ Metal Coatings, AZZ Precoat Metals, and AZZ Infrastructure Solutions. Through September 30, 2022, the Company also had operations in Brazil, China, the Netherlands, Poland, Singapore, and India through its AZZ Infrastructure Solutions segment ("AIS"). On September 30, 2022, the Company contributed AIS to AIS Investment Holdings LLC (the "AIS JV"), and sold a 60% interest in the AIS JV to Fernweh. See Note 6 for further discussion of the divestiture. See Note 14 for information about the Company's operations by segment.
On May 13, 2022, the Company completed the acquisition of the Precoat Metals business division ("Precoat Metals") of Sequa Corporation ("Sequa"), a portfolio company owned by Carlyle, a global private equity firm. See Notes 5 and 12 for further discussion about Precoat. As a result of the Precoat Acquisition, the Company changed its operating segments, and added AZZ Precoat Metals as a new operating segment.
Basis of consolidation
The consolidated financial statements were prepared in accordance with the accounting principles generally accepted in the United States of America and include the accounts of the Company and its wholly owned subsidiaries. All material inter-company accounts and transactions have been eliminated in consolidation. Certain previously reported amounts have been reclassified to conform to current period presentation. See Note 6 for more information about results of operations reported in discontinued operations in the consolidated balance sheets, statements of operations and statements of cash flows as of February 28, 2022 and as of and for the year ended February 28, 2022 and 2021.
Use of estimates
The preparation of the financial statements in conformity with generally accepted accounting principles in the United States of America ("GAAP") requires management to make estimates and assumptions that affect the amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Concentrations of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents and trade accounts receivable. As of February 28, 2023, the Company had $9.3 million in excess of the Federal Deposit Insurance Corporation ("FDIC") limits.
The Company maintains cash and cash equivalents with various financial institutions. The Company's policy is designed to limit exposure to any one institution. The Company performs periodic evaluations of the relative credit standing of those financial institutions that are considered in the Company's banking relationships, and has not experienced any losses in such accounts. We believe we are not exposed to any significant credit risk related to cash and cash equivalents.
The Company has limited concentrations of credit risk with respect to trade accounts receivable due to its multiple operating segments, large and diversified customer base and its geographic diversification. The Company performs ongoing evaluations of its customers' financial condition. Collateral is usually not required from customers as a condition of sale.
Accounts receivable, net of allowance for credit losses
Accounts receivable are stated amounts due from customers. The Company maintains an allowance for credit losses for estimated losses resulting from the inability of customers to make required payments. The Company treats trade accounts receivable as one portfolio and records an allowance based on a combination of management’s knowledge of its customer base, historical losses, current economic conditions and customer specific events. The Company adjusts this allowance based on specific information in connection with aged receivables. Accounts receivable are considered to be past due when payment is not received in accordance with the customer’s credit terms. Accounts are written off when management determines the account is uncollectible. Recoveries, unless material, are recorded against the allowance in the period received.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table shows the changes in the allowance for credit losses for fiscal 2023, 2022 and 2021 (in thousands):
| 2022 | 2021 | ||||
|---|---|---|---|---|---|
| Balance at beginning of year | 5,395 | $ | 5,378 | $ | 5,551 |
| Adjustment based on aged receivables analysis | 100 | 207 | |||
| Charge-offs, net of recoveries | (85) | (572) | |||
| Other | — | 116 | |||
| Effect of exchange rate changes | 2 | 76 | |||
| Balance at end of year(1) | 5,752 | $ | 5,395 | $ | 5,378 |
| (1) For fiscal 2023, 2022 and 2021, the allowance for credit losses includes 5.4 million of reserves related to the AZZ Infrastructure Solutions segment that were retained following the AIS divestiture. |
All values are in US Dollars.
Revenue recognition
Revenue is recognized when control of the promised goods or services is transferred to the Company’s customers, in an amount that reflects the consideration that it expects to be entitled to in exchange for those goods or services. The amount and timing of revenue recognition varies by segment, based on the nature of the goods or services provided and the terms and conditions of the customer contract.
AZZ Metal Coatings Segment
AZZ's Metal Coatings segment is a provider of hot-dip galvanizing, powder coating, anodizing and plating, and other metal coating applications to the steel fabrication and other industries. Within this segment, the contract is typically governed by a customer purchase order or work order. The contract generally specifies the delivery of what constitutes a single performance obligation consisting of metal coating services. The Company recognizes sales over time as the metal coating is applied to customer provided material as the process enhances a customer controlled asset. Contract modifications are rare within this segment and most contracts are on a fixed price basis with no variable consideration.
AZZ Precoat Metals Segment
AZZ Precoat Metals provides advanced applications of protective and decorative coatings and related value-added services for steel and aluminum coil, primarily serving the construction; appliance; heating, ventilation, and air conditioning (HVAC); container; transportation and other end markets.
Within this segment, the contract is typically governed by a customer purchase order. The contract generally specifies the delivery of a performance obligation consisting of coating services, and may also include secondary services, such as slitting, embossing or cut to length. The Company recognizes sales over time as the coil coating is applied to customer provided material as the process enhances a customer controlled asset. Contract modifications are rare within this segment. In certain cases, the Company may offer volume discounts, which are recorded as a reduction to sales, and recognized over time in the same manner as the related revenue.
Contract Assets and Liabilities
The timing of revenue recognition, billings and cash collections results in accounts receivable, contract assets (unbilled receivables), and contract liabilities (customer advances and deposits) on the consolidated balance sheets, primarily related to the Company’s Precoat Metals segment. Billing can occur subsequent to revenue recognition, resulting in contract assets. In addition, the Company can receive advances or deposits from its customers, before revenue is recognized, resulting in contract liabilities. These assets and liabilities are reported on the consolidated balance sheets on a contract-by-contract basis at the end of each reporting period.
The increases or decreases in accounts receivable, contract assets and contract liabilities from continuing operations during fiscal year 2023 were primarily due to the Precoat acquisition, as well as normal timing differences between the Company’s performance and customer payments. Contract liabilities of $1.3 million as of February 28, 2023 are included in "Other accrued liabilities" in the consolidated balance sheets. There were no contract liabilities as of February 28, 2022. As of February 28, 2023, the balance for contract assets was $79.3 million, primarily related to the AZZ Precoat Metals segment, and $2.9 million as of February 28, 2022.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Other
No general rights of return exist for customers; however, the Company provides assurance-type warranties and has established a provision for estimated warranties. The Company generally does not sell extended warranties. Revenue is recognized net of applicable sales and other taxes. The Company does not adjust the contract price for the effects of a significant financing component if the Company expects, at contract inception, that the period between when the Company transfers a good or service to a customer and when the customer pays for that good or service will be one year or less, which is generally the case. Shipping and handling is treated as a fulfillment obligation instead of a separate performance obligation and such costs are expensed as incurred.
Disaggregated Revenue
Revenue by segment and geography is disclosed in Note 14. In addition, the following table presents disaggregated revenue, from continuing operations, by customer industry for fiscal years 2023, 2022 and 2021 (in thousands):
| 2023 | 2022 | 2021 | ||||
|---|---|---|---|---|---|---|
| Sales: | ||||||
| Construction | $ | 667,852 | $ | 119,294 | $ | 106,166 |
| Industrial | 152,731 | 113,561 | 128,886 | |||
| Consumer | 105,587 | — | — | |||
| Transportation | 135,319 | 98,106 | 87,562 | |||
| Electrical/Utility | 94,188 | 71,073 | 69,151 | |||
| Other (1) | 167,972 | 123,564 | 88,809 | |||
| Total sales | $ | 1,323,649 | $ | 525,598 | $ | 480,574 |
| (1) Other includes less significant markets, such as agriculture, recreation, petro-chem, AZZ Tubular products and sales from recycling and other. |
Cash and cash equivalents
The Company considers cash and cash equivalents to include cash on hand, deposits with banks and all highly liquid investments with an original maturity of three months or less.
Supplemental cash flow disclosures
The Company recorded the following supplemental cash flow disclosures for fiscal 2023, 2022 and 2021 (in thousands):
| 2023 | 2022 | 2021 | ||||
|---|---|---|---|---|---|---|
| Cash paid for interest | $ | 77,989 | $ | 6,062 | $ | 8,999 |
| Cash paid for income taxes | 24,489 | 31,660 | 16,118 | |||
| Non-cash investing and financing activities: | ||||||
| Issuance of preferred stock in exchange for convertible notes | 233,722 | — | — | |||
| Accrued dividends on Series A Preferred Stock | 2,400 | — | — | |||
| Accruals for capital expenditures | 1,748 | 864 | 1,446 |
Inventories
Inventories are stated at the lower of cost or market value. Cost is determined principally using the first-in-first-out (FIFO) method for the AZZ Metal Coatings and Precoat Metals segments. The Company determines the reserves for excess quantities and obsolescence based on forecasted demand within specific time horizons, technological obsolescence, and an assessment of any inventory that is not in sellable condition, and records a charge to reduce inventory to its net realizable value. The Company's inventory reserve was $7.3 million and $1.1 million as of February 28, 2023 and February 28, 2022, respectively.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Property, plant and equipment
Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives of the related assets as follows:
| Buildings and structures | 10-27 years |
|---|---|
| Machinery and equipment | 3-15 years |
| Furniture and fixtures | 3-15 years |
| Automotive equipment | 3-5 years |
| Computers and software | 3-7 years |
Repairs and maintenance are charged to expense as incurred; renewals and betterments that significantly extend the useful life of the asset are capitalized.
Amortizable intangible and long-lived assets
Intangible assets on the consolidated balance sheets are comprised of customer relationships, non-compete agreements, trademarks, technology and certifications. Such intangible assets (excluding indefinite-lived intangible assets) are amortized on a straight-line basis over the estimated useful lives of the assets ranging from three to 30 years. Long-lived assets, such as 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. Recoverability is measured by a comparison of their 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, the Company records impairment losses for the excess of their carrying value over the estimated fair value. The Company did not recognize any impairment charges for fiscal year 2023 or 2022 since there were no changes in events or circumstances that would suggest amounts were not recoverable. For fiscal year 2021, the Company recorded charges of $9.6 million to write-down certain property, plant and equipment and other intangible assets that were held for sale or abandoned in the Metal Coatings segment. See Note 6 for additional information about these impairment charges.
Goodwill and other indefinite-lived intangible assets
Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in a business combination. Other indefinite-lived intangible assets consist of certain tradenames that were obtained through acquisitions. The Company tests goodwill and other indefinite-lived intangibles for potential impairment annually as of December 31, or more frequently, if events or circumstances change that would more-likely-than-not reduce the fair value of the reporting unit below its carrying amount. If no impairment indicators are present, the Company may first perform a qualitative assessment of goodwill to determine whether a quantitative assessment is necessary. If the Company performs a quantitative assessment for its annual goodwill impairment test, then the Company uses the income approach and market approach. The income approach and market approach use Level 3 fair value inputs, as described in "fair value measurements" below. Based on the results of its analysis, the Company determines whether an impairment may exist. A significant change in projected cash flows or cost of capital for future years could result in an impairment of goodwill in future years. 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 in the markets in which we operate; changes in economic conditions of these markets; raw material and natural gas costs and availability of experienced labor and management to implement our growth strategies. For fiscal year 2023, the Company elected to perform a qualitative analysis and determined that no conditions existed that would make it more-likely-than-not that the goodwill or indefinite-lived intangible assets were impaired. Therefore, no further quantitative testing was required. For fiscal years 2023, 2022 and 2021, no impairment losses were recognized for goodwill or indefinite-lived intangible assets.
Investment in Unconsolidated Joint Venture
The Company accounts for its investment in a joint venture under the equity method of accounting, as we exercise significant influence over, but do not control the joint venture. Investments in unconsolidated joint ventures are initially recorded at fair value, and subsequently increased or decreased for allocations of net income and changes in cumulative translation adjustments. Equity in net income (loss) from the AIS JV is allocated based on our current 40% economic interest. We record our interest in the joint venture on a one-month lag to allow sufficient time to review and assess the joint venture’s
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
effect on our reported results. We assess our investment in unconsolidated joint venture for recoverability when events and circumstances are present that suggest there has been a decline in value, and if it is determined that a loss in value of the investment is other than temporary, we write down the investment to its fair value. The company does not believe that the value of its equity investment was impaired as of February 28, 2023.
Debt issuance costs
Debt issuance costs that are incurred by the Company in connection with the issuance of debt are amortized to interest expense using the effective interest rate method over the term of the debt. Costs related to the Company’s revolving credit facility are included in "Intangibles and other assets, net" on the consolidated balance sheets. Costs related to the Company's senior notes are presented as a reduction to long-term debt on the consolidated balance sheets.
Related Party Transactions
Following the close of the AIS JV, the Company entered into a transition services agreement with AIS Investment Holdings LLC, which is considered a related party. In conjunction with the transition services agreement ("TSA"), the Company recognized $3.4 million of TSA fees for fiscal year 2023, which are included as a reduction to "Selling, general and administrative" expense in the consolidated statements of operations. In addition, as of February 28, 2023, the Company has recorded related party receivables and payables of $8.4 million and $6.3 million, which are included in "Accounts receivable" and "Other accrued liabilities," respectively, in the consolidated balance sheets.
Income taxes
The Company accounts 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. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax bases of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date.
The Company recognizes a valuation allowance against net deferred tax assets to the extent that the Company believes those net assets are not more likely than not to be realized. In making such a determination, the Company considers 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. If the Company determines that it would be able to realize its deferred tax assets in the future in excess of their net recorded amount, the Company would make an adjustment to the deferred tax asset valuation allowance, which would reduce the provision for income taxes.
As applicable, the Company records uncertain tax positions on the basis of a two-step process whereby (1) the Company determines 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, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority.
The Company is subject to taxation in the U.S. and various state, provincial, local, and foreign jurisdictions. With few exceptions, as of February 28, 2023, the Company is no longer subject to U.S. federal or state examinations by tax authorities for years before fiscal 2019.
Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), certain of the Company’s assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
See Note 17 for more information.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Foreign Currency Translation
The local currency is the functional currency for the Company’s foreign operations. Related assets and liabilities are translated into United States dollars at exchange rates existing at the balance sheet date, and revenues and expenses are translated at weighted-average exchange rates. The foreign currency translation adjustment is recorded as a separate component of shareholders’ equity and is included in accumulated other comprehensive income (loss).
Accruals for Contingent Liabilities
The Company is subject to the possibility of various loss contingencies arising in the normal course of business. The amounts the Company may record for estimated claims, such as self-insurance programs, warranty, environmental, legal, and other contingent liabilities, requires the Company to make judgments regarding the amount of expenses that will ultimately be incurred. The Company uses 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.
Leases
The Company is a lessee under various leases for facilities and equipment. For such leases, the Company recognizes a right-of-use ("ROU") asset and lease liability on the consolidated balance sheet as of the lease commencement date based on the present value of the future minimum lease payments. An ROU asset represents the Company's right to use an underlying asset during the lease term and a lease liability represents the Company's obligation to make lease payments. However, for short-term leases with an initial term of twelve months or less that do not contain an option to purchase that is likely to be exercised, the Company does not record ROU assets or lease liabilities on the consolidated balance sheet.
The Company uses its incremental borrowing rate to determine the present value of future payments unless the implicit rate in the lease is readily determinable. The incremental borrowing rate is calculated based on what the Company would pay to borrow on a collateralized basis, over a similar term, based on information available at lease commencement. In determining the future minimum lease payments, the Company incorporates options to extend or terminate the lease when it is reasonably certain that such options will be exercised. The ROU asset includes any initial direct costs incurred and is recorded net of any lease incentives received. Leasehold improvements are capitalized and depreciated over the term of the lease, including any options for which the Company is reasonably certain will be exercised, with a maximum of 10 years.
Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term, as the ROU asset is amortized and the lease liability is accreted. For its facility leases, the Company accounts for lease and non-lease components on a combined basis, and for its equipment leases, lease and non-lease components are accounted for separately.
Some of the Company's lease agreements may include rental payments that adjust periodically for inflation or are based on an index rate which are included as variable lease payments. The Company's lease agreements do not contain any material residual value guarantees or material restrictive covenants.
The Company subleases multiple buildings in Columbia, South Carolina to multiple subtenants. The sublease agreements are by and between Precoat Metals and multiple subtenants. Sublease income is recognized over the term of the sublease on a straight-line basis and is reported in the consolidated statement of operations in "Other (income) expense." The Company recognized $0.8 million of income from subleases during fiscal year 2023.
Defined Benefit Pension Plan
In the Company's Precoat Metals segment, certain current and past employees participate in a defined benefit pension plan sponsored and administered by the Company. The pension plan calls for benefits to be paid to eligible employees at retirement, based primarily upon years of service and compensation rates near retirement. The plan was frozen prior to acquisition of Precoat Metals, and new employees are not eligible to participate.
The Company incurs expenses in connection with the defined benefit pension plan. The Company uses various assumptions to measure expense and the related benefit obligation, including discount rates used to value the obligation, expected return on plan assets used to fund these expenses, and estimated future inflation rates. These assumptions are based on historical experience as well as current facts and circumstances. An actuarial analysis is used to measure the expense and liability associated with pension benefits. The Company recognizes the overfunded or underfunded status of defined benefit pension as an asset or liability in the consolidated balance sheets. Changes in the funded status are recognized in Accumulated
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
other comprehensive income, in the year in which the changes occur. As of February 28, 2023, the Company recognized underfunded status of the plan of 31.3 million in other long-term liabilities in the accompanying consolidated balance sheet.
Recently Adopted Accounting Pronouncements
In March 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update No. ("ASU") 2020-04, "Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting" ("ASU 2020-04"), which provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by the discontinuation of the London Interbank Offered Rate ("LIBOR") or by another reference rate expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, "Reference Rate Reform", ("ASU 2021-01"), which clarifies the scope and application of certain optional expedients and exceptions regarding the original guidance. In December 2022, the FASB issued ASU 2022-06, Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848 ("ASU 2022-06"), which defers the sunset date of the reference rate reform guidance to December 31, 2024. The amendments in these ASUs were effective upon issuance. As the Company no longer has any LIBOR-based contracts, these ASUs did not have a material effect on the Company's current financial position, results of operations or cash flows as of February 28, 2023.
In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740), Simplifying the Accounting for Income Taxes ("ASU 2019-12"). This standard is intended to simplify the accounting and disclosure requirements for income taxes by eliminating various exceptions in accounting for income taxes as well as clarifying and amending existing guidance to improve consistency in the application of ASC 740. ASU 2019-12 was effective for the Company in the first quarter of its fiscal 2022. The Company adopted ASU 2019-12 in the first quarter of fiscal 2022, and the adoption did not have a material impact on its consolidated financial statements.
In October 2021, the FASB issued ASU 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract liabilities from Contracts with Customers ("ASU 2021-08"), which requires contract assets and contract liabilities acquired in a business combination in accordance with ASC Topic 606, Revenue from Contracts with Customers ("ASC 606") at the acquisition date as if the acquirer had originated the contracts rather than adjust them to fair value. The standard is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company adopted ASU 2021-08 in fiscal 2023 and the adoption did not have a material impact on the Company's financial condition, results of operations or cash flows.
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Property, Plant and Equipment
Property, plant and equipment consisted of the following as of February 28, 2023 and February 28, 2022 (in thousands):
| As of February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Land | $ | 52,322 | $ | 21,831 |
| Building and structures | 291,254 | 154,982 | ||
| Machinery and equipment | 391,786 | 225,824 | ||
| Furniture, fixtures, software and computers | 28,906 | 29,824 | ||
| Automotive equipment | 2,757 | 3,807 | ||
| Construction in progress | 24,681 | 8,545 | ||
| 791,706 | 444,813 | |||
| Less accumulated depreciation | (293,203) | (251,455) | ||
| Property, plant, and equipment, net | $ | 498,503 | $ | 193,358 |
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table outlines the classification of depreciation expense from continuing operations in the consolidated statements of income for fiscal 2023, 2022, and 2021 (in thousands):
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Cost of sales | $ | 49,413 | $ | 23,795 | $ | 23,619 |
| Selling, general and administrative | 2,564 | 1,628 | 1,694 | |||
| Total depreciation expense | $ | 51,977 | $ | 25,423 | $ | 25,313 |
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Goodwill and Intangible Assets
Goodwill and indefinite-lived intangible assets are not amortized but are subject to annual impairment tests. Other intangible assets are amortized over their estimated useful lives.
Changes in goodwill by segment for fiscal years 2023 and 2022 were as follows (in thousands):
| 2023 | ||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Segment | Beginning Balance | Acquisitions | Divestiture | Other | Currency Translation Adjustment | Ending Balance | ||||||
| Metal Coatings(1) | $ | 190,391 | $ | — | $ | — | $ | (10,783) | $ | (1,912) | $ | 177,696 |
| Precoat Metals | — | 524,816 | — | — | — | 524,816 | ||||||
| Total | $ | 190,391 | $ | 524,816 | $ | — | $ | (10,783) | $ | (1,912) | $ | 702,512 |
| (1) The decrease in Other for fiscal year 2023 represents purchase price adjustments during the measurement period for the DAAM acquisition, which occurred in fiscal year 2022. | ||||||||||||
| 2022 | ||||||||||||
| --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- | --- |
| Segment | Beginning Balance | Acquisitions | Divestiture | Other | Currency Translation Adjustment | Ending Balance | ||||||
| Metal Coatings | $ | 158,659 | $ | 32,389 | $ | — | $ | (477) | $ | (180) | $ | 190,391 |
Amortizable intangible assets consisted of the following as of February 28, 2023 and February 28, 2022 (in thousands):
| Weighted-Average Life (Years) | 2023 | 2022 | |||
|---|---|---|---|---|---|
| Customer related intangibles | 22 | $ | 475,457 | $ | 89,029 |
| Non-compete agreements | 15 | 6,795 | 6,799 | ||
| Trademarks / Tradenames | 33 | 35,774 | 3,773 | ||
| Technology | 15 | 36,000 | — | ||
| Gross intangible assets | 554,026 | 99,601 | |||
| Less accumulated amortization | (86,139) | (64,282) | |||
| Total amortizable intangible assets, net | $ | 467,887 | $ | 35,319 |
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table outlines the classification of amortization expense from continuing operations in the statements of income for fiscal 2023, 2022, and 2021 (in thousands):
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Cost of sales | $ | 7,124 | $ | 6,658 | $ | 6,781 |
| Selling, general and administrative | 15,489 | — | — | |||
| Total amortization expense | $ | 22,613 | $ | 6,658 | $ | 6,781 |
In addition to its amortizable intangible assets, the Company has recorded indefinite-lived intangible assets of $1.5 million on the consolidated balance sheets as of February 28, 2023 and February 28, 2022, related to certain tradenames acquired as part of prior business acquisitions.
The following summarizes the estimated amortization expense for the next five fiscal years and beyond (in thousands):
| 2024 | $ | 23,346 |
|---|---|---|
| 2025 | 22,847 | |
| 2026 | 22,817 | |
| 2027 | 22,726 | |
| 2028 | 21,637 | |
| Thereafter | 354,514 | |
| Total | $ | 467,887 |
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Other Accrued Liabilities
Other accrued liabilities consisted of the following as of February 28, 2023 and February 28, 2022 (in thousands):
| As of February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Accrued interest | $ | 850 | $ | 789 |
| Accrued warranty | 2,852 | — | ||
| Personnel expenses | 6,960 | 4,438 | ||
| Group medical insurance | 4,389 | 2,575 | ||
| Sales and other taxes payable | 3,943 | 2,248 | ||
| Environmental | 3,760 | 493 | ||
| Accrued utilities | 3,245 | — | ||
| Due to related party | 6,260 | — | ||
| Other | 12,183 | 2,625 | ||
| Total | $ | 44,442 | $ | 13,168 |
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Acquisitions
Precoat Acquisition
On May 13, 2022, the Company acquired Precoat Metals for a purchase price of approximately $1.3 billion (the "Precoat Acquisition"). Based in St. Louis, Missouri, Precoat is the leading independent provider of metal coil coating solutions in North America. Precoat engages in the advanced application of protective and decorative coatings and related value-added services for steel and aluminum coil primarily serving the construction; appliance; heating, ventilation and air conditioning (HVAC); container; transportation and other end markets. The acquisition represents a continued transition of the Company to a focused provider of coating and galvanizing services for critical applications.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Precoat Acquisition was funded primarily with proceeds from a term loan and convertible debt. See Note 8 for a description of these debt instruments. The Company incurred acquisition costs of $13.2 million for fiscal year 2023, which are included in "Selling, general and administrative" expense in the accompanying condensed consolidated statements of operations. AZZ Precoat Metals contributed revenue of $686.7 million and operating income of $79.5 million to the Company's condensed consolidated statements of operations from May 13, 2022 through February 28, 2023.
The Company accounted for the Precoat Acquisition as a business combination under the acquisition method of accounting. Goodwill from the acquisition of $524.8 million represents the excess purchase price over the estimated value of net tangible and intangible assets and liabilities assumed, and is expected to be deductible for income tax purposes. The Company's chief operating decision maker assesses performance and allocates resources to Precoat separately from the AZZ Metal Coatings segment; therefore, Precoat is accounted for as a separate segment, the AZZ Precoat Metals segment. See Note 14 for more information about the Company's operating segments. Goodwill from the acquisition was allocated to the AZZ Precoat Metals segment. Assets acquired and liabilities assumed in the Precoat Acquisition were recorded at their estimated fair values as of the acquisition date. See Note 18 for additional information regarding certain environmental liabilities assumed as part of the Precoat Acquisition.
The Company has not finalized these estimates as of the date of this report; therefore, the fair value estimates set forth below are subject to adjustment during the measurement period following the acquisition date. The final allocation of purchase consideration could include changes in the estimated fair value of property, plant and equipment and other long-term liabilities. Adjustments in the purchase price allocation may require a change in the amount allocated to goodwill during the period in which the adjustments are determined.
When determining the fair values of assets acquired and liabilities assumed, management made significant estimates, judgments and assumptions. The Company has engaged third-party valuation experts to assist in determination of fair value of property and equipment, intangible assets, pension benefit obligation and certain other assets and liabilities. Preliminary estimates from third-party experts along with the analysis and expertise of management have formed the basis for the preliminary allocation. Detailed analysis and review of the condition, existence and utility of assets acquired, and assumptions inherent in the estimation of fair value of intangible assets and pension obligation is currently ongoing. Management believes that the current information provides a reasonable basis for estimating fair values of assets acquired and liabilities assumed. These estimates, judgments and assumptions are subject to change and should be treated as preliminary values as there could be significant changes upon final valuation. The Company expects to complete the final valuations during the first quarter of fiscal 2024.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the preliminary summary of the assets acquired and liabilities assumed, in aggregate, related to the Precoat Acquisition, as of the date of the acquisition (in thousands):
| May 13, 2022 | ||
|---|---|---|
| Assets | ||
| Accounts receivable | $ | 77,422 |
| Inventories | 43,369 | |
| Contract assets | 70,731 | |
| Prepaid expenses and other | 2,247 | |
| Property, plant and equipment | 305,503 | |
| Right-of-use asset | 13,753 | |
| Goodwill | 524,816 | |
| Deferred tax asset - LT | 8,660 | |
| Intangibles and other assets | 446,546 | |
| Total fair value of assets acquired | $ | 1,493,047 |
| Liabilities | ||
| Accounts payable | (99,223) | |
| Accrued expenses | (31,201) | |
| Other accrued liabilities | (5,330) | |
| Lease liability, short-term | (2,440) | |
| Lease liability, long-term | (11,313) | |
| Other long-term liabilities | (60,091) | |
| Total fair value of liabilities assumed | $ | (209,598) |
| Total purchase price, net of cash acquired | $ | 1,283,449 |
DAAM Acquisition
On February 28, 2022, the Company entered into an agreement to acquire all the outstanding shares of DAAM Galvanizing Co. Ltd. ("DAAM"), a privately held hot-dip galvanizing company based in Edmonton, Alberta Canada, for approximately $35.5 million. DAAM currently operates two galvanizing facilities in Canada; one located in Edmonton, Alberta and a second in Saskatoon, Saskatchewan, as well as a service depot in Calgary, Alberta. The addition of DAAM expanded the Company's geographical coverage in the Northwest and enhanced the scope of metal coatings solutions offered in Canada. The business is included in the Company's AZZ Metal Coatings segment. The goodwill arising from this acquisition was allocated to the AZZ Metal Coatings segment, and the Company estimates that approximately 50% of the goodwill amount is expected to be deductible for income tax purposes.
The Company engaged third-party valuation experts to assist with the purchase price allocation, the recorded valuation of property, plant and equipment, intangible assets and certain other assets and liabilities. Estimates from third-party experts along with the analysis and expertise of management have formed the basis for the allocation. During the third quarter of fiscal 2023, the purchase price allocation was finalized. The Company settled the working capital adjustment and received cash of $0.7 million during fiscal 2023, and adjusted other acquired assets and liabilities, which resulted in net decrease in the purchase price.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table represents the summary of the assets acquired and liabilities assumed, in aggregate, related to the DAAM acquisition, as of the date of the acquisition (in thousands):
| February 28, 2022 | ||
|---|---|---|
| Assets | ||
| Accounts receivable | $ | 3,253 |
| Inventories | 2,451 | |
| Property, plant and equipment | 11,462 | |
| Goodwill | 13,691 | |
| Intangibles and other assets | 9,975 | |
| Total fair value of assets acquired | $ | 40,832 |
| Liabilities | ||
| Accounts payable and other accrued liabilities | (3,910) | |
| Deferred tax liabilities | (1,422) | |
| Total fair value of liabilities assumed | $ | (5,332) |
| Total purchase price, net of cash acquired | $ | 35,500 |
Unaudited Pro Forma Information
The following unaudited pro forma financial information for fiscal 2023 and 2022 combines the historical results of the Company and the acquisitions of Precoat Metals and DAAM, assuming that the companies were combined as of March 1, 2021 and include business combination accounting effects from the Precoat Acquisition, including amortization charges from acquired intangible assets, depreciation expense on acquired property, plant and equipment, interest expense on the financing transactions used to fund the Precoat Acquisition, acquisition-related transaction costs and tax-related effects. The pro forma information as presented below is for informational purposes only and is not indicative of the results of operations that would have been achieved if the acquisitions of Precoat Metals and DAAM had taken place on March 1, 2021 (the beginning of fiscal year 2022) or of future operating performance.
| 2023 | 2022 | |||
|---|---|---|---|---|
| Revenue | $ | 1,516,669 | $ | 1,265,953 |
| Net income from continuing operations | $ | 56,335 | $ | 76,997 |
Steel Creek Acquisition
In January 2022, the Company completed the acquisition of all the assets of Steel Creek Galvanizing Company, LLC ("Steel Creek"), a privately held hot-dip galvanizing company based in Blacksburg, South Carolina, for approximately $25.0 million. The acquisition expanded the Company's geographical reach in metal coatings solutions and extends its ability to support customers in the Southeast region of the United States. The business is included in the Company's AZZ Metal Coatings segment. The goodwill arising from this acquisition was allocated to the AZZ Metal Coatings segment and is expected to be deductible for income tax purposes.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The purchase price allocation was finalized during fiscal 2023. The following table summarizes the fair values of the allocation of assets acquired and liabilities assumed, in aggregate, related to the Steel Creek acquisition, as of the date of the acquisition (in thousands):
| January 3, 2022 | ||
|---|---|---|
| Assets | ||
| Accounts receivable | $ | 575 |
| Inventories | 3,593 | |
| Property, plant and equipment | 15,796 | |
| Intangibles | 872 | |
| Goodwill | 7,755 | |
| Total fair value of assets acquired | $ | 28,591 |
| Liabilities | ||
| Accounts payable and other accrued liabilities | (765) | |
| Contingent consideration | (2,826) | |
| Total fair value of liabilities assumed | $ | (3,591) |
| Total purchase price, net of cash acquired | $ | 25,000 |
In addition to the initial cash payment upon closing, contingent consideration of up to $2.8 million is payable based on the achievement of specified operating results over the three-year period following completion of the acquisition.
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Discontinued Operations and Other Divestitures
Discontinued Operations
In fiscal 2023, the Company continued to execute its plan to divest of non-core businesses. On September 30, 2022, AZZ contributed its AZZ Infrastructure Solutions segment, excluding AZZ Crowley Tubing ("AIS") to a joint venture, AIS Investment Holdings LLC (the "AIS JV") and sold a 60% interest in the AIS JV to Fernweh Group LLC ("Fernweh" at an implied enterprise value of AIS of $300.0 million.
Management previously committed to a plan to divest substantially all of the AIS segment. As part of recognizing the business as held for sale in accordance with GAAP, the Company was required to measure AIS at the lower of its carrying amount or fair value less cost to sell. As a result of this analysis, during fiscal 2023, the Company recognized an estimated non-cash, pre-tax loss on disposal of $159.9 million, which is included in "Loss on disposal of discontinued operations" in the consolidated statements of operations. The loss was determined by comparing the fair value of the consideration received for the sale of a 60% interest in the AIS JV and the fair value of the Company’s retained 40% investment in the AIS JV with the net assets of the AIS JV immediately prior to the transaction and includes $27.8 million from the derecognition of the cumulative translation adjustment related to its investment in foreign entities within the AIS segment. The fair value of the Company’s retained investment in the AIS JV was determined in a manner consistent with the transaction price received for the sale of the 60% interest in the AIS JV.
On September 30, 2022, when the AIS JV transaction closed, the joint venture was deconsolidated. The Company retained a 40% interest in the joint venture, which is now accounted for under the equity method of accounting. The proceeds from the sale consisted of approximately $108.0 million, as well as $120.0 million that was funded by committed debt financing taken on by the AIS JV immediately prior to the closing of the sale. The debt financing of the AIS JV did not impact the Company's existing credit facility. The Company used the cash received from the AIS JV to repay a portion of the Term Loan B, the Revolving Credit Facility and for general corporate purposes. See Note 8.
The divestiture of the AZZ Infrastructure Solutions segment represents an intentional strategic shift in our operations and will allow the Company to become a focused provider of coating and galvanizing solutions for critical applications. As a result, the results of the AIS segment were classified as discontinued operations in our condensed statements of operations and excluded from both continuing operations and segment results for all periods presented.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
We have separately reported the assets and liabilities of the discontinued operations in the consolidated balance sheets. The assets and liabilities have been reflected as discontinued operations in the consolidated balance sheets as of February 28, 2022, and consist of the following (in thousands):
| As of February 28, | |||
|---|---|---|---|
| 2022 | |||
| Current assets of discontinued operations: | |||
| Cash and cash equivalents | $ | 3,000 | |
| Accounts receivable | 81,911 | ||
| Inventories | |||
| Raw materials | 36,581 | ||
| Work-in-process | 6,445 | ||
| Finished goods | 77 | ||
| Contract assets | 71,762 | ||
| Prepaid expenses and other | 1,888 | ||
| Total current assets of discontinued operations | 201,664 | ||
| Long-term assets of discontinued operations: | |||
| Property, plant and equipment | 37,490 | ||
| Right-of-use asset | 29,332 | ||
| Goodwill | 195,222 | ||
| Intangibles and other assets, net | 42,442 | ||
| Deferred tax asset | 1,726 | ||
| Total non-current assets of discontinued operations | 306,212 | ||
| Total assets of discontinued operations | $ | 507,876 | |
| Current liabilities of discontinued operations: | |||
| Accounts payable | 19,146 | ||
| Income tax payable | (264) | ||
| Accrued salaries and wages | 11,301 | ||
| Other accrued liabilities | 54,071 | ||
| Lease liability, short-term | 4,029 | ||
| Total current liabilities of discontinued operations | 88,283 | ||
| Long-term liabilities of discontinued operations: | |||
| Lease liability, long-term | 24,207 | ||
| Total long-term liabilities of discontinued operations | 24,207 | ||
| Total liabilities of discontinued operations | $ | 112,490 |
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The results of operations from discontinued operations for the fiscal years 2023, 2022 and 2021, have been reflected as discontinued operations in the consolidated statements of operations and consist of the following (in thousands):
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Sales | $ | 256,224 | $ | 377,066 | $ | 358,343 |
| Cost of sales | 202,707 | 297,996 | 292,496 | |||
| Gross margin | 53,517 | 79,070 | 65,847 | |||
| Selling, general and administrative | 26,186 | 46,747 | 47,817 | |||
| Restructuring and impairment charges | — | (1,797) | 3,894 | |||
| Loss on disposal of discontinued operations | 159,910 | — | — | |||
| Operating income (loss) from discontinued operations | (132,579) | 34,120 | 14,136 | |||
| Interest expense | 8 | 32 | 187 | |||
| Other (income) expense, net | 6,270 | 774 | 1,383 | |||
| Income (loss) from discontinued operations before income tax | (138,857) | 33,314 | 12,566 | |||
| Income tax (benefit) expense | (19,544) | (891) | 135 | |||
| Net income (loss) from discontinued operations | $ | (119,313) | $ | 34,205 | $ | 12,431 |
| Earnings per common share from discontinued operations: | ||||||
| Basic earnings (loss) per share | $ | (4.81) | $ | 1.38 | $ | 0.48 |
| Diluted earnings (loss) per share | $ | (4.78) | $ | 1.36 | $ | 0.48 |
We have included the net cash provided by discontinued operations in the consolidated statements of cash flows. The depreciation, amortization, capital expenditures, and significant operating and investing non-cash items of the discontinued operation for the following fiscal years 2023, 2022 and 2021, consists of the following (in thousands):
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Amortization and depreciation | $ | 7,279 | $ | 12,584 | $ | 12,508 |
| Purchase of property, plant and equipment | 4,831 | 4,815 | 9,901 | |||
| Non-cash loss on disposal of discontinued operations | 159,910 | — | — | |||
| Loss on disposal group held for sale | — | (1,797) | — | |||
| Loss on sale of property, plant and equipment | — | 147 | 36 | |||
| Write down of assets held for sale to estimated sales price | — | — | 3,161 |
Other Divestitures
During fiscal 2021, the Company executed a plan to divest certain non-core businesses. The Company closed on the sale of its Galvabar business and its AZZ SMS, LLC ("SMS") business. The Company recorded net proceeds of $8.3 million and a loss on the sale of the Galvabar business, which is included in the AZZ Metal Coatings segment, of $1.2 million. During fiscal 2021, the Company completed the sale of SMS, which is included in the AZZ Infrastructure Solutions segment, for net proceeds of $4.1 million. The Company recognized impairment charges of $0.9 million for SMS during the second quarter, and an additional loss on sale of $1.9 million during the third quarter of fiscal 2021. The loss of the sale of these businesses are included in "Restructuring and impairment charges" in the consolidated statements of income.
In addition, the Company closed a small number of AZZ Metal Coatings locations that were in underperforming and lower growth geographies during fiscal 2021.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During fiscal 2021, the Company recognized certain charges related to the businesses sold, assets held for sale and assets that were abandoned, which are summarized in the table below:
| Year Ended February 28, 2021 | ||||||
|---|---|---|---|---|---|---|
| Metal Coatings | Infrastructure Solutions | Total | ||||
| Write down of assets held for sale to estimated sales price | $ | 2,652 | $ | 939 | $ | 3,591 |
| Write down of assets expected to be abandoned | 6,923 | — | 6,923 | |||
| Loss on sale of subsidiaries | 1,221 | 1,859 | 3,080 | |||
| Write down of excess inventory | 2,511 | — | 2,511 | |||
| Total charges | $ | 13,307 | $ | 2,798 | $ | 16,105 |
As of February 28, 2023 and February 28, 2022, the Company had no restructuring liabilities outstanding.
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Leases
The Company is a lessee under various leases for facilities and equipment. See Note 1 for a description of the Company's accounting policy for leases.
As of February 28, 2023, the Company was the lessee for 153 operating leases with terms of 12 months or more and 14 finance leases. Many of the operating leases either have renewal options of between one and five years or convert to month-to-month agreements at the end of the specified lease term.
The Company’s operating leases are primarily for (i) operating facilities, (ii) vehicles and equipment used in operations, (iii) facilities used for back-office functions and (iv) equipment used for back-office functions, and (v) temporary storage. The majority of the Company’s long-term lease expenses have both a fixed and variable component.
Leases with an initial term of 12 months or less are not recorded on the consolidated balance sheets and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. The Company has a significant number of short-term leases, including month-to-month agreements. The Company's short-term lease agreements include expenses incurred hourly, daily, monthly and for other durations of time of one year or less.
The Company’s future lease commitments as of February 28, 2023 do not reflect all of the Company’s short-term lease commitments.
The following table outlines the classification of the Company's right-of-use asset and lease liabilities in the balance sheets for fiscal 2023 and 2022 (in thousands):
| Balance Sheet Classification | As of February 28, | ||||||
|---|---|---|---|---|---|---|---|
| 2023 | 2022 | ||||||
| Assets | |||||||
| Right-of-use assets | Right-of-use assets | $ | 26,392 | $ | 13,954 | ||
| Liabilities | |||||||
| Operating lease liabilities ― short-term | Lease liability - short-term | $ | 6,119 | $ | 3,131 | ||
| Operating lease liabilities ― long-term | Lease liability - long-term | 19,659 | 10,798 | ||||
| Finance lease liabilities ― short-term | Lease liability - short-term | 284 | 158 | ||||
| Finance lease liabilities ― long-term | Lease liability - long-term | 1,045 | 605 |
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Supplemental information related to the Company's portfolio of operating leases was as follows (in thousands, except years and percentages):
| 2023 | 2022 | |||||
|---|---|---|---|---|---|---|
| Operating cash flows from operating leases included in lease liabilities | $ | 5,832 | $ | 3,965 | ||
| Lease liabilities obtained from new ROU assets - operating | $ | 3,986 | $ | 491 | ||
| Weighted-average remaining lease term - operating leases | 5.04 years | 5.29 years | ||||
| Weighted-average discount rate - operating leases | 4.31 | % | 4.22 | % | ||
| Operating and financing cash flows from financing leases included in lease liabilities | $ | 219 | $ | 104 | ||
| Lease liabilities obtained from new ROU assets - financing | $ | 420 | $ | 216 | ||
| Weighted-average remaining lease term - financing leases | 4.61 years | 4.87 years | ||||
| Weighted-average discount rate - financing leases | 5.15 | % | 2.90 | % |
The following table outlines the classification of lease expense related to operating leases from continuing operations in the statements of income for fiscal 2023, 2022, and 2021 (in thousands):
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Cost of sales | $ | 12,409 | $ | 6,837 | $ | 7,254 |
| Selling, general and administrative | 1,858 | 1,264 | 1,619 | |||
| Total lease cost | $ | 14,267 | $ | 8,101 | $ | 8,873 |
As of February 28, 2023, maturities of the Company's lease liabilities, excluding lease liabilities associated with our discontinued operations, were as follows (in thousands):
| Fiscal year: | Operating Leases | Finance Leases | Total | |||
|---|---|---|---|---|---|---|
| 2024 | $ | 7,079 | $ | 344 | $ | 7,423 |
| 2025 | 6,267 | 344 | 6,611 | |||
| 2026 | 5,392 | 300 | 5,692 | |||
| 2027 | 4,242 | 268 | 4,510 | |||
| 2028 | 2,201 | 195 | 2,396 | |||
| Thereafter | 3,438 | 43 | 3,481 | |||
| Total lease payments | $ | 28,619 | $ | 1,494 | $ | 30,113 |
| Less imputed interest | (2,841) | (165) | (3,006) | |||
| Total | $ | 25,778 | $ | 1,329 | $ | 27,107 |
The Company subleases multiple buildings in Columbia, South Carolina to multiple subtenants. The sublease agreements are by and between Precoat Metals and multiple subtenants. Sublease income is recognized over the term of the sublease on a straight-line basis and is reported in the consolidated statement of operations in "Other (income) expense." The Company recognized $0.8 million of income from subleases during fiscal year 2023.
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Debt
The Company’s long-term debt instruments and balances outstanding as of February 28, 2023 and February 28, 2022 were as follows (in thousands):
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Table of Contents
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Revolving Credit Facility | $ | 95,000 | $ | 77,000 |
| 2020 Senior Notes | — | 150,000 | ||
| Term Loan B | 1,030,250 | — | ||
| Total debt, gross | $ | 1,125,250 | $ | 227,000 |
| Unamortized debt issuance costs | (67,130) | (516) | ||
| Long-term debt, net | $ | 1,058,120 | $ | 226,484 |
2021 Credit Agreement
On July 8, 2021, the Company entered into a five-year unsecured revolving credit facility under a credit agreement, 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 was scheduled to mature in July 2026 and included the following significant terms;
i.provided for a senior unsecured revolving credit facility with a principal amount of up to $400.0 million revolving loan commitments, and included 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.included a letter of credit sub-facility up to $85.0 million for the issuance of standby and commercial letters of credit,
iv.included a $50.0 million sublimit for swing line loans,
v.included 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.included a maximum leverage ratio financial covenant and an interest coverage ratio financial covenant, each were tested at quarter end.
On May 13, 2022, the 2021 Credit Agreement was repaid with proceeds from the 2022 Credit Agreement, which is described below.
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 that matured on January 20, 2021, as well as for general corporate purposes. Interest on the 2020 Senior Notes was paid semi-annually. In connection with the 2020 Senior Notes, the Company incurred debt issuance costs of approximately $0.6 million. These costs were allocated between the two tranches and were amortized over periods of seven and 12 years.
On May 13, 2022, the 2020 Senior Notes were repaid with proceeds from the 2022 Credit Agreement, which is described below.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2022 Credit Agreement and Term Loan B
On May 13, 2022, the Company replaced the 2021 Credit Agreement with a new Credit Agreement (the "2022 Credit Agreement") by and among the Company, borrower, Citibank, N.A., as administrative and collateral agent, and the other agents and lender parties thereto 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;
iv.borrowings under the Term Loan B and the Revolving Credit Facility each bear an interest rate of Secured Overnight Financing Rate ("SOFR") plus 4.25%;
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 at each quarter-end;
The Company utilizes proceeds from the Revolving Credit Facility primarily to finance working capital needs, capital improvements, dividends, acquisitions and for general corporate purposes. The proceeds of the Term Loan B were used to finance a portion of the Precoat Acquisition, pay transaction-related costs owed under the Securities Purchase Agreement (defined below) and refinance certain prior indebtedness, including the repayment of outstanding borrowings under the 2021 Credit Agreement. The proceeds were also utilized to redeem 100% of the Company’s 2020 Senior Notes on June 6, 2022.
As defined in the credit agreement, quarterly prepayments will be made 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. On September 30, 2022, $240.0 million was applied to the Term Loan B in connection with the sale of AIS. As a result of this prepayment, the quarterly mandatory principal payment requirement has been met, and the quarterly payments of $3.25 million are no longer required.
The effective interest rate for the Revolving Credit Facility and the Term Loan B was 8.81% at February 28, 2023.
The Company's credit agreement requires the Company 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 4.5. The leverage ratio as of February 28, 2023 was 5.75.
Convertible Subordinated Notes
On May 13, 2022, the Company 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. The Convertible Notes were exchanged for 240,000 shares of the Company's 6.0% Series A Convertible Preferred Stock on August 5, 2022, following the receipt of shareholder approval for the issuance of preferred shares. See Note 10 for a description of the Series A Convertible Preferred Stock.
The Company used the proceeds of the Convertible Notes, along with the Term Loan B, to fund the Company’s Precoat Acquisition.
As of February 28, 2023, we had $1,125.3 million of floating- and fixed-rate notes outstanding with varying maturities through fiscal 2029 and we were in compliance with all of the covenants related to these outstanding borrowings. As of February 28, 2023, we had approximately $288.5 million of additional credit available for future draws or letters of credit.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended February 28, 2023, the Company utilized a significant portion of the cash received from the AIS JV to reduce the Term Loan B, and utilized the remaining cash received to reduce the Revolving Credit Facility and for general corporate purposes.
The Company's debt agreements require the Company to maintain certain financial ratios. As of February 28, 2023, the Company was in compliance with all covenants or other requirements set forth in the debt agreements.
Letters of Credit
As of February 28, 2023, we had total outstanding letters of credit in the amount of $16.7 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.
For each of the five years after February 28, 2023, required principal payments under the terms of the long-term debt are as follows (dollars in thousands):
| Fiscal Year: | Future Debt Maturities | |
|---|---|---|
| 2024 | $ | — |
| 2025 | — | |
| 2026 | — | |
| 2027 | 95,000 | |
| 2028 | — | |
| Thereafter | 1,030,250 | |
| Total | $ | 1,125,250 |
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Income Taxes
The provision for income taxes for continuing and discontinued operations for fiscal year 2023, 2022 and 2021 consisted of the following (in thousands):
| 2023 | 2022 | 2021 | |||||
|---|---|---|---|---|---|---|---|
| Income from continuing operations before income taxes | |||||||
| Domestic | $ | 80,508 | $ | 67,697 | $ | 36,087 | |
| Foreign | 8,167 | 5,334 | 2,344 | ||||
| Income from continuing operations before income taxes | $ | 88,675 | $ | 73,031 | $ | 38,431 | |
| Current provision: | |||||||
| Federal | $ | (1,848) | $ | 17,994 | $ | 11,003 | |
| Foreign | 2,127 | 2,003 | 177 | ||||
| State and local | 5,918 | 2,761 | 2,292 | ||||
| Total current provision for income taxes | $ | 6,197 | $ | 22,758 | $ | 13,472 | |
| Deferred provision (benefit): | |||||||
| Federal | $ | 17,273 | $ | 933 | $ | (3,331) | |
| Foreign | (24) | (491) | (775) | ||||
| State and local | (1,110) | 14 | 1,882 | ||||
| Total deferred provision for (benefit from) income taxes for continuing operations | $ | 16,139 | $ | 456 | $ | (2,224) | |
| Total provision for income taxes for continuing operations | $ | 22,336 | $ | 23,214 | $ | 11,248 | |
| Income taxes (benefit) on discontinued operations | (19,544) | (891) | 135 | ||||
| Total provision for income taxes | $ | 2,792 | $ | 22,323 | $ | 11,383 |
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation from the federal statutory income tax rate to the effective income tax rate for continuing operations is as follows for the prior three fiscal years:
| 2023 | 2022 | 2021 | ||||
|---|---|---|---|---|---|---|
| Statutory federal income tax rate | 21.0 | % | 21.0 | % | 21.0 | % |
| Permanent differences | 0.6 | (0.2) | (12.5) | |||
| State income taxes, net of federal income tax benefit | 4.4 | 3.0 | 7.3 | |||
| Stock compensation | 0.1 | 0.1 | 1.5 | |||
| Tax credits | (0.0) | (0.3) | (1.8) | |||
| Foreign tax rate differential | 0.4 | 0.4 | — | |||
| Uncertain tax positions | (1.5) | (1.7) | 1.1 | |||
| Audit settlement | — | 0.6 | 2.5 | |||
| Management fee | 3.2 | 6.2 | 10.0 | |||
| Outside basis - AIS JV | (3.7) | — | — | |||
| Other | 0.7 | 2.8 | 0.2 | |||
| Effective income tax rate | 25.2 | % | 31.9 | % | 29.3 | % |
Deferred federal and state income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial accounting purposes and the amounts used for income tax purposes. Significant components of the Company’s net deferred income tax liability for continuing operations are as follows for fiscal year 2023 and 2022 (in thousands):
| 2023 | 2022 | |||
|---|---|---|---|---|
| Deferred income tax assets: | ||||
| Employee related items | $ | 12,607 | $ | 3,750 |
| Inventories | 6,639 | 6,536 | ||
| Accrued warranty | 761 | 459 | ||
| Accounts receivable | 1,603 | — | ||
| Lease liabilities | 6,643 | 7,981 | ||
| Net operating loss and other credit carry-forwards | 1,842 | 5,575 | ||
| Research and experiment expense | 5,222 | — | ||
| Interest expense limitation | 15,362 | 686 | ||
| Outside basis difference - JV | 3,471 | — | ||
| Other deferred income tax assets | 860 | 92 | ||
| $ | 55,010 | $ | 25,079 | |
| Less: valuation allowance | — | — | ||
| Total deferred income tax assets | 55,010 | 25,079 | ||
| Deferred income tax liabilities: | ||||
| Depreciation methods and property basis differences | $ | (48,604) | $ | (20,723) |
| Right-of-use lease assets | (6,384) | (7,596) | ||
| Accounts receivable | — | (619) | ||
| Other assets and tax-deductible goodwill | (28,091) | (40,358) | ||
| Total deferred income tax liabilities | (83,079) | (69,296) | ||
| Net deferred income tax liabilities | $ | (28,069) | $ | (44,217) |
The decrease in the net deferred tax liability is primarily related to the impact of increases in certain deferred tax assets related to the current deductibility of interest, additional capitalized research and development expenditures, due to recently effective tax legislation and increased limitations on the current deductibility of certain employee related costs, partially offset by overall net increases in deferred tax liabilities principally associated with property, plant and equipment. As of February 28, 2023, the Company had pretax state NOL carry-forwards of $15.1 million which, if unused, will begin to expire in 2023 and pretax foreign NOL carry-forwards of $0.3 million, which, if unused, will begin to expire in 2043.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of fiscal year end 2023 and 2022, a portion of the Company's deferred tax assets were the result of state and foreign jurisdiction NOL carry-forwards and state credit carry-forwards. The Company believes that it is more-likely-than-not that the benefit from certain foreign NOL carry-forwards and state credit carry-forwards will be realized. Therefore, the Company has not provided a valuation allowance for fiscal year 2023.
The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax laws and regulations in a multitude of jurisdictions across the Company's operations. Generally accepted accounting principles in the United States of America ("GAAP") states that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, on the basis of the technical merits. The Company may (1) record unrecognized tax benefits as liabilities in accordance with GAAP and (2) adjust these liabilities when the Company's judgment changes as a result of the evaluation of new information not previously available. 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.
A reconciliation of the beginning and ending balance of total unrecognized tax benefits, which is included in "Other long-term liabilities" in the consolidated balance sheets for the years ended February 28, 2023 and 2022 is as follows (in thousands):
| 2023 | 2022 | |||
|---|---|---|---|---|
| Balance at beginning of period | $ | 2,294 | $ | 3,350 |
| Increase for tax positions related to current periods: | ||||
| Gross increases | 195 | 513 | ||
| Gross decreases | — | (260) | ||
| Increase for tax positions related to prior periods: | ||||
| Gross increases | 2,653 | 997 | ||
| Gross decreases | (729) | (356) | ||
| Decreases related to settlements with taxing authorities | (175) | (691) | ||
| Lapse of statute of limitations | (571) | (1,259) | ||
| Balance at end of period | $ | 3,667 | $ | 2,294 |
Current year increases to our Uncertain Tax Positions ("UTPs") primarily relate to matters related to research and development credits and filing positions in certain jurisdictions. Current year decreases primarily relate to the lapse of the statute of limitations in certain jurisdictions and settlements with taxing authorities.
The Company recognizes accrued interest and penalties related to unrecognized tax benefits in income tax expense. Penalties and interest credited for fiscal 2023 and 2022 were $0.1 million and $(0.2) million, respectively.
The Company has prior year tax returns currently being examined in one state and does not have any other returns currently being examined by taxing authorities. The Company believes that it has provided adequate reserves for its income tax uncertainties in all open tax years. As the outcome of any tax audits cannot be predicted with certainty, if any issues addressed in the Company's tax audits are resolved in a manner inconsistent with management's expectations, the Company could adjust its provision for income taxes in the future.
As of February 28, 2023, the Company has operations and taxable presence in the U.S. and Canada. The tax positions of the Company and its subsidiaries are subject to income tax audits by multiple tax jurisdictions. The Company currently considers U.S. federal and state and Canada, to be significant tax jurisdictions. The Company’s U.S. federal and state tax returns since February 28, 2020 remain open to examination. The Company's Canada tax returns since February 28, 2019 remain open to examination. The statute of limitations for fiscal year 2020 for US and fiscal year 2019 for Canada will expire in December 2023. The Company anticipates it is reasonably possible that a decrease of unrecognized tax benefits related to various federal, foreign and state positions of $3.1 million may be resolved in the next 12 months.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to enactment of H.R. 1, formerly known as the Tax Cuts and Jobs Act of 2017 (the "Tax Act"), the Company asserted that all unremitted earnings of its foreign subsidiaries were considered indefinitely reinvested. As a result of the Tax Act, the Company reported and paid U.S. tax on the majority of its previously unremitted foreign earnings. As of February 28, 2023, the Company continues to be indefinitely reinvested with respect to investments in its foreign subsidiaries. Additionally, the Company has not recorded deferred tax liabilities associated with the remaining unremitted earnings that are considered indefinitely reinvested. It is impracticable for the Company to determine the amount of unrecognized deferred tax liabilities on these indefinitely reinvested earnings, due to the complexities associated with the hypothetical calculation.
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Equity
Share Repurchases
On January 19, 2012, the Company's Board of Directors authorized the repurchase of up to ten percent of the then outstanding shares of the Company's common stock (the "2012 Authorization"). The 2012 Authorization did not have an expiration date, and the amount and prices paid for any future share purchases under the authorization were to be based on market conditions and other factors at the time of the purchase. Repurchases under the 2012 Authorization were made through open market purchases or private transactions.
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 Share Authorization"). Repurchases under the 2020 Share 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.
During fiscal 2023, to prioritize repayments of debt, including debt incurred to finance the Precoat Acquisition, the Company did not repurchase shares of common stock under the 2020 Share Authorization. During fiscal 2022, the Company repurchased 601,822 shares of common stock for $30.8 million, or $51.20 per share. During fiscal 2021, the Company repurchased 330,829 shares of common stock for $16.0 million, or $48.36 per share under the 2020 Share Authorization, and repurchased 882,916 shares of common stock for $32.3 million, or $36.60 per share under the Company's previous share authorization from 2012.
Series A Convertible Preferred Stock
On August 5, 2022, the Company exchanged the Convertible Notes for 240,000 shares of 6.0% Series A Convertible Preferred Stock, following the receipt of shareholder approval for the issuance of preferred stock. The Series A Convertible Preferred Stock is convertible by the holder at any time into shares of the Company's common stock at a conversion price of $58.30 per common share. The preferred stock accumulates a 6.0% dividend per annum. Dividends are payable quarterly on March 31, June 30, September 30 and December 31 of each year. In addition, the preferred shares are subject to a minimum conversion threshold of 1,000 shares per conversion, and customary anti-dilution and dividend adjustments. The preferred shares have full voting rights as if converted and have a fully participating liquidation preference.
As of February 28, 2023, the 240,000 shares of outstanding Series A Convertible Preferred Stock had accrued dividends of $2.4 million and could be converted into 4.1 million shares of common stock, at the option of the holder.
As of February 28, 2022, there were no shares of outstanding preferred stock and no accrued dividends.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accumulated Other Comprehensive Income
The components of accumulated other comprehensive gain (loss), after tax, consisted of the following as of February 28, 2023, 2022 and 2021 (in thousands):
| Foreign Currency Translation Gain (Loss) | Net Actuarial Gain (Loss), Net of Tax | Interest Rate Swap, Net of Tax | Total | |||||
|---|---|---|---|---|---|---|---|---|
| Balance as of February 29, 2020 | $ | (30,949) | $ | — | $ | 50 | $ | (30,899) |
| Other comprehensive income (loss) before reclassification | 5,865 | — | (50) | 5,815 | ||||
| Amounts reclassified from AOCI | — | — | — | — | ||||
| Net change in AOCI | 5,865 | — | (50) | 5,815 | ||||
| Balance as of February 28, 2021 | $ | (25,084) | $ | — | $ | — | $ | (25,084) |
| Other comprehensive income (loss) before reclassification | (2,240) | — | — | (2,240) | ||||
| Amounts reclassified from AOCI | — | — | — | — | ||||
| Net change in AOCI | (2,240) | — | — | (2,240) | ||||
| Balance at February 28, 2022 | $ | (27,324) | $ | — | $ | — | $ | (27,324) |
| Other comprehensive income (loss) before reclassification | (7,997) | 119 | 2,740 | (5,138) | ||||
| Amounts reclassified from AOCI | 27,750 | — | 139 | 27,889 | ||||
| Net change in AOCI | 19,753 | 119 | 2,879 | 22,751 | ||||
| Balance as of February 28, 2023 | $ | (7,571) | $ | 119 | $ | 2,879 | $ | (4,573) |
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Earnings Per Share
Basic earnings per share is based on the weighted average number of common shares outstanding during each year. Diluted earnings per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the year.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets forth the computation of basic and diluted earnings per share for fiscal years 2023, 2022 and 2021 (in thousands, except per share data):
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Numerator: | ||||||
| Net income from continuing operations | $ | 66,339 | $ | 49,817 | $ | 27,183 |
| Dividends on preferred stock | (8,240) | — | — | |||
| Net income from continuing operations available to common shareholders | $ | 58,099 | $ | 49,817 | $ | 27,183 |
| Net income (loss) from discontinued operations | $ | (119,313) | $ | 34,205 | $ | 12,431 |
| Net income (loss) available to common shareholders | $ | (61,214) | $ | 84,022 | $ | 39,614 |
| Denominator: | ||||||
| Weighted average shares outstanding for basic earnings per share | 24,828 | 24,855 | 25,897 | |||
| Effect of dilutive securities: | ||||||
| Employee and director stock awards | 150 | 222 | 148 | |||
| Denominator for diluted earnings per share | 24,978 | 25,077 | 26,045 | |||
| Basic earnings (loss) per share | ||||||
| Earnings (loss) per common share from continuing operations | $ | 2.34 | $ | 2.00 | $ | 1.05 |
| Earnings (loss) per common share from discontinued operations | $ | (4.81) | $ | 1.38 | $ | 0.48 |
| Earnings (loss) per common share | $ | (2.47) | $ | 3.38 | $ | 1.53 |
| Diluted earnings (loss) per share | ||||||
| Earnings (loss) per common share from continuing operations | $ | 2.33 | $ | 1.99 | $ | 1.04 |
| Earnings (loss) per common share from discontinued operations | $ | (4.78) | $ | 1.36 | $ | 0.48 |
| Earnings (loss) per common share | $ | (2.45) | $ | 3.35 | $ | 1.52 |
For fiscal 2023, 2022 and 2021, approximately $0.1 million, $0.1 million and $0.2 million employee equity awards were excluded from the computation of diluted earnings per share as their effect would have been anti-dilutive. All shares related to the Series A Convertible Preferred Stock (2.3 million weighted average shares) were excluded from the computation of diluted earnings per share as their effect would be anti-dilutive. These shares could be dilutive in future periods.
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Employee Benefit Plans
401(k) Retirement Plan
The Company has a 401(k) retirement plan covering substantially all of its employees. Company contributions to the 401(k) retirement plan were $5.6 million, $3.1 million, and $2.8 million for fiscal 2023, 2022, and 2021, respectively.
Pension and Employee Benefit Obligations
As of February 28, 2023, the Company has a defined benefit pension plan for certain employees employed by Precoat Metals as of May 13, 2022 (the "Plan"). Prior to acquisition, benefit accruals were frozen for all participants. After the freeze, participants did not accrue any benefits under the Plan, and any new hires are not eligible to participate in the Plan. The fair value of Plan assets, projected benefit obligation and funding status of the Plan as of the date of acquisitions was $112.4 million, $144.9 million and $32.5 million, respectively. As of February 28, 2023, the fair value of Plan assets, projected benefit obligation and funding status of the Plan was $100.5 million, $131.8 million and $31.3 million, respectively. Changes in funding status since May 13, 2022, consisted of interest cost of $5.3 million, expected return on plan assets of $4.7 million, actuarial gain of $0.2 million and employer contributions of $1.6 million. Assumptions used to determine benefit obligations as of May 13, 2022, and February 28, 2023, included weighted average discount rates of 4.76% and 5.59%, respectively.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company’s investment strategy is to build an efficient, well diversified portfolio based on a long-term strategic outlook of the investment markets. The investment markets outlook utilizes both the historical based and forward-looking return forecasts to establish future return expectations for various asset classes. These return expectations are used to develop a core asset allocation based on the specific needs of the plan. The core asset allocation utilizes investment portfolios of various asset classes and investment managers in order to maximize the plan’s return while providing layers of diversification to minimize risk. Plan assets of $100.5 million as of February 28, 2023, consisted of 2.2% cash, 34.8% equity and 63.0% fixed income and debt.
Net periodic benefit costs related to plan was $0.6 million for fiscal 2023. Weighted-average assumptions used to determine net periodic benefit cost included discount rate and expected long-term return on plan assets of 4.76% and 5.50%, respectively.
In fiscal 2024, the Company expects to contribute $1.1 million to the Plan. Future benefit payments are expected to be $12.2 million, $11.7 million, $11.6 million, $11.4 million, $11.2 million and $51.0 million in fiscal years 2024, 2025, 2026, 2027, 2028 and fiscal years 2029 through 2033, respectively.
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Share-based Compensation
The Company has one share-based compensation plan, the 2014 Long Term Incentive Plan (the "2014 Plan"). The Company terminated its previous plan, the Amended and Restated 2005 Long Term Incentive Plan (the "2005 Plan"), upon the effective date of the 2014 Plan, and no future grants may be made under the 2005 Plan. The 2005 Plan permitted the granting of stock appreciation rights and other equity-based awards to certain employees.
The 2014 Plan provides for broad-based equity grants to employees, including executive officers, and members of the board of directors and permits the granting of restricted shares, restricted stock units, performance awards, stock appreciation rights and other stock-based awards. The maximum number of shares that may be issued under the 2014 Plan is 1.5 million shares and, as of February 28, 2023, the Company had approximately 0.4 million shares reserved for future issuance under this plan. There were stock appreciation rights granted under the 2005 Plan prior to its termination. All outstanding stock appreciation rights were exercised during fiscal year 2022.
The Company accounts for its share-based employee compensation plans in accordance with ASC 718, Compensation—Stock Compensation. The Company recognizes compensation expense over the requisite service period, which is in line with the applicable vesting period for each share-based award.
Restricted Stock Unit Awards
Restricted stock unit ("RSU") awards are valued at the market price of the Company's common stock on the grant date. Awards generally vest ratably over a period of three years, but these awards may vest earlier in accordance with the Plan’s accelerated vesting provisions. RSU awards have dividend equivalent rights ("DERs"), which entitle holders of RSUs to the same dividend value per share as holders of common stock. DERs are subject to the same vesting and other terms and conditions as the corresponding unvested RSUs. DERs are accumulated and paid when the awards vest and shares are issued.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A summary of the Company's RSU award activity (including DERs) for fiscal years 2023, 2022, and 2021 is as follows:
| Year Ended February 28, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | |||||||
| Restricted Stock Units | Weighted Average Grant Date Fair Value | Restricted Stock Units | Weighted Average Grant Date Fair Value | Restricted Stock Units | Weighted Average Grant Date Fair Value | ||||
| Outstanding at beginning of year | 214,098 | $ | 41.24 | 226,446 | $ | 35.66 | 194,946 | $ | 44.34 |
| Granted | 148,595 | 44.60 | 77,787 | 51.23 | 131,120 | 28.78 | |||
| Vested | (136,197) | 41.16 | (84,060) | 35.78 | (70,913) | 45.67 | |||
| Forfeited | (25,527) | 43.72 | (6,075) | 39.02 | (28,707) | 36.59 | |||
| Outstanding at end of year | 200,969 | $ | 43.50 | 214,098 | $ | 41.24 | 226,446 | $ | 35.66 |
| Vested and expected to vest at end of year | 200,969 | $ | 43.50 | 214,098 | $ | 41.24 | 224,807 | $ | 35.56 |
The total fair value of RSU awards vested during fiscal years 2023, 2022, and 2021 was $6.1 million, $4.6 million and $2.3 million, respectively.
Performance Share Unit Awards
The Company grants performance share unit ("PSU") awards to certain employees, which also include DERs as described above. These PSU awards have a three-year performance cycle and will vest and become issuable, if at all, on the third anniversary from the award date. The PSU awards are based on the Company's total shareholder return during the three-year period, in comparison to a defined specific industry peer group and include certain vesting multipliers. The Company estimates the fair value of PSU awards with performance and service conditions using the value of the Company's common stock on the date of grant. The Company estimates the fair value of PSU awards with market conditions using a Monte Carlo simulation model on the date of grant.
A summary of the Company’s PSU award activity (including DERs) for fiscal years 2023, 2022, and 2021 is as follows:
| Year Ended February 28, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | |||||||
| Performance Stock Units | Weighted Average Grant Date Fair Value | Performance Stock Units | Weighted Average Grant Date Fair Value | Performance Stock Units | Weighted Average Grant Date Fair Value | ||||
| Outstanding at the beginning of year | 154,455 | $ | 44.05 | 143,584 | $ | 39.96 | 109,936 | $ | 47.75 |
| Granted | 76,020 | 38.42 | 55,114 | 63.39 | 69,955 | 33.22 | |||
| Vested | (63,021) | 43.22 | (44,243) | 54.00 | — | — | |||
| Forfeited | (14,908) | 48.41 | — | — | (36,307) | 50.57 | |||
| Outstanding at the end of year | 152,546 | $ | 48.51 | 154,455 | $ | 44.05 | 143,584 | $ | 39.96 |
The PSU awards in the table above are presented at the face value of the respective grants. However, the number of PSU awards that may ultimately vest can vary in a range 0% to 200% of the face amount of such awards, depending on the outcome of the performance or market vesting conditions, as applicable.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Stock Appreciation Rights
Stock appreciation rights ("SARs") are granted with an exercise price equal to the market value of the Company's common stock on the date of grant. These awards generally have a contractual term of seven years and vested ratably over a period of three years, although some vested immediately on issuance. These awards were valued using the Black-Scholes option pricing model. The Company did not grant any SARs in fiscal year 2023, 2022 or 2021. As of February 28, 2023, there were no SARs outstanding.
A summary of the Company’s SAR activity for fiscal years 2023, 2022 and 2021 is as follows:
| Year Ended February 28, | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | |||||||
| SARs | Weighted Average Exercise Price | SARs | Weighted Average Exercise Price | SARs | Weighted Average Exercise Price | ||||
| Outstanding at beginning of year | — | $ | — | 5,435 | $ | 45.25 | 94,826 | $ | 44.58 |
| Granted | — | — | — | — | — | — | |||
| Exercised | — | — | (5,435) | 45.25 | (45,902) | 44.00 | |||
| Forfeited | — | — | — | — | (43,489) | 45.10 | |||
| Outstanding at end of year | — | $ | — | — | $ | — | 5,435 | $ | 45.25 |
| Exercisable at the end of year | — | $ | — | — | $ | — | 5,435 | $ | 45.25 |
Directors Grants
The Company granted each of its independent directors a total of 2,619, 1,976 and 3,174 shares of its common stock during fiscal years 2023, 2022 and 2021, respectively. These common stock grants were valued at $40.09, $53.13 and $33.08 per share for fiscal years 2023, 2022 and 2021, respectively, which was the market price of the Company's common stock on the respective grant dates.
Employee Stock Purchase Plan
The Company has an employee stock purchase plan ("ESPP"), which is open to all employees. The ESPP allows employees of the Company to purchase common stock of the Company through accumulated payroll deductions. Offerings under this plan have a duration of 24 months (the "Offering Period"). On the first day of an Offering Period (the "Enrollment Date") the participant is granted the option to purchase shares on each exercise date at the lower of 85% of the market value of a share of our common stock on the Enrollment Date or the exercise date. The participant’s right to purchase common stock under the plan is restricted to no more than $25,000 per calendar year, and the participant may not purchase more than 5,000 shares during any Offering Period. Participants may terminate their interest in a given offering or a given exercise period by withdrawing all of their accumulated payroll deductions at any time prior to the end of the Offering Period. An aggregate of 1.5 million shares of common stock are authorized for issuance under the ESPP. Of this amount, 1.1 million shares were available for issuance as of February 28, 2023. The Company issues new shares upon purchase through the ESPP.
Share-based Compensation Expense
The following table shows share-based compensation expense and the related income tax benefit included in the consolidated statements of income for fiscal years 2023, 2022 and 2021 (in thousands):
| 2023 | 2022 | 2021 | ||||
|---|---|---|---|---|---|---|
| Compensation expense | $ | 8,382 | $ | 9,449 | $ | 7,330 |
| Income tax benefits | $ | 1,539 | $ | 1,984 | $ | 1,539 |
Unrecognized compensation cost related to unvested stock awards at February 28, 2023 was $9.2 million, which is expected to be recognized over a weighted average period of 1.57 years.
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The actual tax benefit/(expense) realized from share-based compensation during fiscal years 2023, 2022 and 2021 was $(0.1) million, $(0.4) million and $(0.4) million, respectively.
The Company’s policy is to issue shares under these plans from the Company’s authorized but unissued shares. The Company has no formal or informal plan to repurchase shares on the open market to satisfy these requirements.
-
Operating Segments
Segment Information
The Company’s Chief Executive Officer, who is the chief operating decision maker ("CODM"), reviews financial information presented on an operating segment basis for purposes of making operating decisions and assessing financial performance. Sales and operating income (loss) are the primary measures used by the CODM to evaluate segment operating performance and to allocate resources to segments. Expenses related to certain centralized administration or executive functions that are not specifically related to an operating segment are included in Corporate. As presented in Note 6, the AIS joint venture operating results for the period prior to deconsolidation are included within discontinued operations, with the exception of AZZ Crowley Tubing, which was retained by the Company and merged into the AZZ Metal Coatings segment. See Note 6 for the results of operations related to the AZZ Infrastructure Solutions segment.
A summary of each of the Company's operating segments is as follows:
AZZ Metal Coatings — provides hot-dip galvanizing, spin galvanizing, powder coating, anodizing and plating, and other metal coating applications to the steel fabrication and other industries through facilities located throughout the United States and Canada. Hot-dip galvanizing is a metallurgical process in which molten zinc reacts to steel. The zinc alloying provides corrosion protection and extends the life-cycle of fabricated steel for several decades.
AZZ Precoat Metals — engages in the advanced application of protective and decorative coatings and related value-added services for steel and aluminum coil primarily serving the construction; appliance; heating, ventilation and air conditioning (HVAC); container; transportation and other end markets.
AZZ Infrastructure Solutions — provides specialized products and services designed to support primarily industrial and electrical applications. The product offerings include custom switchgear, electrical enclosures, medium and high voltage bus ducts, explosion proof and hazardous duty lighting and tubular products. The Infrastructure Solutions segment also focuses on life-cycle extension for the power generation, refining and industrial infrastructure, through providing automated weld overlay solutions for corrosion and erosion mitigation. Fiscal 2021 includes eight months of financial results from AZZ SMS through October 26, 2020, when it was divested.
The following tables show information by reportable segment for fiscal years 2023, 2022 and 2021 (in thousands):
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Sales: | ||||||
| Metal Coatings | $ | 636,982 | $ | 525,598 | $ | 461,693 |
| Precoat Metals | 686,667 | — | — | |||
| Infrastructure Solutions | — | — | 18,881 | |||
| Total sales | $ | 1,323,649 | $ | 525,598 | $ | 480,574 |
| Operating income (loss): | ||||||
| Metal Coatings | $ | 155,953 | $ | 128,758 | $ | 92,778 |
| Precoat Metals | 79,509 | — | — | |||
| Infrastructure Solutions | — | — | (4,482) | |||
| Corporate | (61,824) | (49,539) | (40,819) | |||
| Total operating income | $ | 173,638 | $ | 79,219 | $ | 47,477 |
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
| Year Ended February 28, | ||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||||||||||
| Depreciation and amortization: | ||||||||||||||
| Metal Coatings | $ | 32,955 | $ | 30,453 | $ | 30,273 | ||||||||
| Precoat Metals | 40,199 | — | — | |||||||||||
| Infrastructure Solutions | — | — | 127 | |||||||||||
| Corporate | 1,436 | 1,628 | 1,694 | |||||||||||
| Total | $ | 74,590 | $ | 32,081 | $ | 32,094 | Year Ended February 28, | |||||||
| --- | --- | --- | --- | --- | --- | --- | ||||||||
| 2023 | 2022 | 2021 | ||||||||||||
| Expenditures for acquisitions, net of cash, and property, plant and equipment: | ||||||||||||||
| Metal Coatings | $ | 23,639 | $ | 82,736 | $ | 29,024 | ||||||||
| Precoat Metals | 1,315,414 | — | — | |||||||||||
| Corporate | 797 | 2,073 | 2,574 | |||||||||||
| Total | $ | 1,339,850 | $ | 84,809 | $ | 31,598 |
Asset information by segment was as follows as of February 28, 2023 and February 28, 2022 (in thousands):
| February 28, | ||||
|---|---|---|---|---|
| 2023 | 2022 | |||
| Assets: | ||||
| Metal Coatings | $ | 588,337 | $ | 578,885 |
| Precoat Metals | 1,488,810 | — | ||
| Infrastructure Solutions - Investment in Joint Venture | 84,760 | — | ||
| Corporate | 59,572 | 46,266 | ||
| Discontinued Operations: | ||||
| Infrastructure Solutions | — | 507,876 | ||
| Total assets | $ | 2,221,479 | $ | 1,133,027 |
Financial Information About Geographical Areas
Financial information about geographical areas for the periods presented was as follows for fiscal years 2023, 2022 and 2021 (in thousands):
| Year Ended February 28, | ||||||
|---|---|---|---|---|---|---|
| 2023 | 2022 | 2021 | ||||
| Sales: | ||||||
| United States | $ | 1,279,890 | $ | 494,012 | $ | 450,904 |
| Canada | 43,759 | 31,586 | 29,670 | |||
| Total | $ | 1,323,649 | $ | 525,598 | $ | 480,574 |
| February 28, | ||||||
| --- | --- | --- | --- | --- | ||
| 2023 | 2022 | |||||
| Property, plant and equipment, net: | ||||||
| United States | $ | 478,722 | $ | 167,634 | ||
| Canada | 19,781 | 25,724 | ||||
| Total | $ | 498,503 | $ | 193,358 |
Table of Contents
AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
-
Investment in Unconsolidated Entity
AZZ Infrastructure Solutions (AIS) Joint Venture
Following the sale of its 60% controlling interest in the AIS JV to Fernweh, AIS is deconsolidated and the Company's retained 40% interest in the AIS JV is accounted for under the equity method of accounting. As a change of control occurred with the transaction, a new basis of accounting will occur at the AIS JV when AVAIL completes its business combination accounting for the transaction. AZZ has not presented summarized financial statements, as those statements are incomplete at this time and do not include adjustments to asset values, depreciation, or amortization that may be required once AVAIL completes its business combination accounting. We record our interest in the joint venture on a one-month lag to allow sufficient time to review and assess the joint venture’s effect on our reported results. Our investment in the AIS JV is $84.8 million, which includes an excess of $12.8 million over the underlying value of the net assets of the AIS JV. The difference will be amortized through equity in earnings of unconsolidated subsidiaries for a period of seven years. The excess basis amount may change once AVAIL completes its business combination accounting. Since the transaction closed on September 30, 2022, we recorded $2.6 million of equity in earnings during fiscal 2023. Once AVAIL completes the business combination accounting, the reported results will reflect the effects of the business combination accounting as though such values were recorded at the time the transaction closed.
-
Derivative Instruments
Interest Rate Swap Derivative
As a policy, the Company does not hold, issue or trade derivative instruments for speculative purposes. The Company may periodically enter into forward sale contracts to purchase a specified volume of zinc at fixed prices. These contracts are not accounted for as derivatives because they meet the criteria for the normal purchases and normal sales scope exception in ASC 815.
We manage our exposure to fluctuations in interest rates using a mix of fixed and variable-rate debt. We utilize fixed-rate interest rate swap agreements to change the variable interest rate to a fixed rate on a portion of our variable-rate debt.
On September 27, 2022, the Company entered into a fixed-rate interest rate swap agreement with banks that are parties to the 2022 Credit Agreement. On October 7, 2022, the agreement was amended to change the SOFR-based component of the interest rate on a portion of our variable-rate debt to a fixed rate of 4.277%, resulting in a total fixed rate of 8.627% (the "2022 Swap"). 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, for approximately one-half of the total amount of our variable-rate debt. 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.
At February 28, 2023, changes in fair value attributable to the effective portion of the 2022 Swap were included on the condensed consolidated balance sheets in accumulated other comprehensive income. For derivative instruments that qualify for hedge accounting treatment, the fair value is recognized on our condensed consolidated balance sheets as derivative assets or liabilities with offsetting changes in fair value, to the extent effective, recognized in accumulated other comprehensive income until reclassified into earnings when the interest expense on the underlying debt is reflected in earnings. The portion of a cash flow hedge that does not offset the change in the fair value of the transaction being hedged, which is commonly referred to as the ineffective portion, is immediately recognized in earnings. During fiscal 2023, we reclassified $0.2 million from other comprehensive income to earnings.
-
Fair Value Measurement
Recurring Fair Value Measurements
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. In accordance with ASC 820, Fair Value Measurements and Disclosures ("ASC 820"), certain of the Company’s assets and liabilities, which are carried at fair value, are classified in one of the following three categories:
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AZZ INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
•Level 1: Quoted market prices in active markets for identical assets or liabilities.
•Level 2: Observable market-based inputs, other than Level 1, or unobservable inputs corroborated by market data.
•Level 3: Unobservable inputs that are not corroborated by market data and reflect the Company’s own assumptions.
The carrying amount of the Company's financial instruments (cash equivalents, accounts receivable, accounts payable, accrued liabilities and the revolving credit facility) approximates the fair value of these instruments based upon either their short-term nature or their variable market rate of interest.
Interest Rate Swap Agreement
The Company’s derivative instrument consists of an interest rate swap contract, which is a Level 2 of the fair value hierarchy and included in "Intangibles and other assets, net" in the condensed consolidated balance sheet as of February 28, 2023. See Note 16 for more information.
The Company’s financial instruments that is measured at fair value on a recurring basis as of February 28, 2023 and February 28, 2022 is as follows (dollars in thousands):
| Carrying Value | Carrying Value | |||||||||
|---|---|---|---|---|---|---|---|---|---|---|
| February 28, | Fair Value Measurements Using | February 28, | Fair Value Measurements Using | |||||||
| 2023 | Level 1 | Level 2 | Level 3 | 2022 | Level 1 | Level 2 | Level 3 | |||
| Assets: | ||||||||||
| Interest Rate Swap Agreement | 3,925 | — | 3,925 | — | — | — | — | — | ||
| Total Assets | $ | 3,925 | $ | — |
Non-recurring Fair Value Measurements
Investment in Joint Venture
The fair value of the investment in joint venture that is accounted for under the equity method was determined using the income approach. The income approach uses discounted cash flow models that require various observable and non-observable inputs, such as operating margins, revenues, product costs, operating expenses, capital expenditures, terminal-year values and risk-adjusted discount rates. These valuations resulted in Level 3 nonrecurring fair value measurements. The carrying value of our investment in joint venture, which approximates the fair value, was $84.8 million at February 28, 2023.
Long-Term Debt
The fair values of the Company’s long-term debt instruments are estimated based on market values for debt issues with similar characteristics or rates currently available for debt with similar terms. These valuations are Level 2 fair value measurements.
The principal amount of our outstanding debt was $1,125.3 million and $227.0 million at February 28, 2023 and February 28, 2022. The estimated fair value of our outstanding debt was $1,133.2 million and $227.0 million at February 28, 2023 and February 28, 2022, excluding unamortized issuance costs. The estimated fair values of our outstanding debt were determined based on the present value of future cash flows using model-derived valuations that use observable inputs such as interest rates and credit spreads. These valuations resulted in Level 2 nonrecurring fair value measurements.
-
Commitments and Contingencies
Legal
The Company and its subsidiaries are named defendants and plaintiffs in various routine lawsuits incidental to our business. These proceedings include labor and employment claims, use of the Company’s intellectual property, worker’s compensation, environmental matters, and various commercial disputes, all arising in the normal course of business. As discovery progresses on all outstanding legal matters, the Company will continue to evaluate opportunities to either settle the disputes for nuisance value or potentially enter into mediation as a way to resolve the disputes prior to trial. As the pending
cases progress through additional discovery and potential mediation, our assessment of the likelihood of an unfavorable outcome on the pending lawsuits may change. Although the outcome of these lawsuits or other proceedings cannot be predicted with certainty, and the amount of any potential liability that could arise with respect to such lawsuits or other matters cannot be predicted at this time, management, after consultation with legal counsel believes it has strong defenses to all of these matters and does not expect liabilities, if any, from these claims or proceedings, either individually or in the aggregate, to have a material effect on the Company’s financial position, results of operations or cash flows.
Environmental
The Company assumed certain environmental liabilities as part of the Precoat Acquisition described in Note 5. As of February 28, 2023, the reserve balance for environmental liabilities was $23.5 million, of which $3.4 million is classified as current. Environmental remediation liabilities include costs directly associated with site investigation and clean up, such as materials, external contractor costs, legal and consulting expenses and incremental internal costs directly related to ongoing remediation plans. Estimates used to record environmental remediation liabilities are based on the Company's best estimate of probable future costs based on site-specific facts and circumstances known at the time of the estimate and these estimates are updated on a quarterly basis. Estimates of the cost for the potential or ongoing remediation plans are developed using internal resources and third-party environmental engineers and consultants.
The Company accrues the anticipated cost of environmental remediation when the obligation is probable and the amount can be reasonably estimated. If a range of amounts can be reasonably estimated and no amount within the range is a better estimate than any other amount, then the minimum of the range is accrued. While any revisions to the Company's environmental remediation liabilities could be material to the operating results of any fiscal quarter or fiscal year, the Company does not expect such additional remediation expenses to have an adverse material effect on its financial position, results of operations, or cash flows.
Commodity pricing
As of February 28, 2023, the Company had non-cancelable forward contracts to purchase approximately $115.0 million of zinc at various volumes and prices. All such contracts expire in fiscal 2024. The Company had no other contracted commitments for any other commodities including steel, aluminum, natural gas, copper, zinc, nickel based alloys, except for those entered into under the normal course of business.
Other
As of February 28, 2023, the Company had total outstanding letters of credit in the amount of $16.7 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. In addition, as of February 28, 2023, a warranty reserve in the amount of $2.9 million was established to offset any future warranty claims.
Item 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company's management, with the participation of its principal executive officer and principal financial officer, have evaluated, as required by Rule 13a-15(e) under the Securities Exchange Act of 1934 ("the Exchange Act"), the effectiveness of the Company's disclosure controls and procedures. Based on that evaluation, the principal executive officer and principal financial officer concluded that the Company's disclosure controls and procedures were effective as of the end of the period covered by this Form 10-K to provide reasonable assurance that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and were effective as of the end of the period covered by this Form 10-K to provide reasonable assurance that such information is accumulated and communicated to the Company's management, including the principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure.
Management’s Report on Internal Controls Over Financial Reporting
The Company's management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Exchange Act. Management, with the participation of its principal executive officer and principal financial officer assessed the effectiveness of the Company's internal control over financial reporting based on the criteria for effective internal control over financial reporting established in "Internal Control - Integrated Framework (2013)," issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon its assessment, management concluded that the Company maintained effective internal control over financial reporting as of February 28, 2023. On May 13, 2022, the Company completed the acquisition of the Precoat Metals business division ("Precoat Metals") of Sequa Corporation ("Sequa"), a portfolio company owned by Carlyle, a global private equity firm (the "Precoat Acquisition"). The scope of the assessment of the effectiveness of our disclosure controls and procedures did not include internal control over financial reporting of Precoat Metals. The assets and revenues for Precoat Metals represented approximately 67.0% of the Company's total assets and 51.9% of its total revenues (from continuing operations) as of and for the fiscal year ended February 28, 2023.
Other
Because of its inherent limitations, internal control over financial reporting may not prevent or detect all misstatements or fraud. Any control system, no matter how well designed and operated, is based upon certain assumptions and can provide only reasonable, not absolute, assurance that its objectives will be met.
The Company’s independent registered public accounting firm, Grant Thornton, LLP, has issued an audit report on the Company’s internal control over financial reporting, which is included in Item 8 of this Form 10-K.
Changes in Internal Controls Over Financial Reporting
There have been no changes in the Company's internal control over financial reporting during the three months ended February 28, 2023, that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
Item 9B. Other Information
Effective as of April 6, 2023, in connection with a periodic review of the Company's Bylaws, the Company’s Board of Directors reviewed the Bylaws, as previously amended and restated on October 8, 2021 (the “Bylaws”), and adopted certain amendments to the Bylaws (as amended, the "Amended Bylaws") to update certain provisions related to the Company's advance notice provision to include additional requirements regarding the information shareholders must submit and representations shareholders must make in connection with providing advance notice of shareholder meeting proposals and director nominations, require any shareholder submitting a proposal or a nomination to represent whether such shareholder intends to solicit proxies in support of director nominations or other business, reserve use of the white proxy card to the Company’s Board of Directors, and make certain administrative, modernizing, clarifying and conforming changes. The foregoing description of the Amended Bylaws does not purport to be complete and is qualified in its entirety by reference to the full text of the Amended Bylaws, a copy of which is filed as Exhibit 3.1 to this Annual Report on Form 10-K.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections
Not applicable.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item with regard to executive officers is included in Part I, Item 1 of this Annual Report on Form 10-K under the heading "Information About our Executive Officers."
For a discussion of changes to procedures for shareholders to recommend nominees to our Board of Directors, see discussion of our Amended Bylaws in Item 9B. Other Information of this Annual Report on Form 10-K.
Other information required in response to this Item 10 is set forth in our definitive Proxy Statement for the 2023 Annual Meeting of Shareholders (the “Proxy Statement”) as noted below and is incorporated by reference:
•information about our Directors is set forth under "Proposal 1: Election of Directors";
•information about our Audit Committee, including members of the committee, and our designated "audit committee financial experts" is set forth under "Matters Relating to Corporate Governance and Board Structure - Board Committees - Audit Committee"; and
•information about Section 16(a) beneficial ownership reporting compliance is set forth under "Delinquent Section 16(a) Reports" (if any to disclose).
We have adopted a Code of Conduct, which applies to the Company's officers, directors and employees (including our Chief Executive Officer, Chief Financial Officer, Principal Accounting Officer, and finance department members). The full text of our Code of Conduct is published on our website, www.azz.com, under "Investor Relations." We intend to disclose future amendments to, or waivers from, certain provisions of this Code of Conduct on our website. The information on our website is not part of this Annual Report on Form 10-K.
Item 11. Executive Compensation
Information required in response to this Item 11 is set forth under "Director Compensation," "Executive Compensation" and "Executive Compensation Tables" in our Proxy Statement and is incorporated by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain information required in response to this Item 12 is set forth under "Security Ownership of Management and Directors" and "Security Ownership of Certain Beneficial Owners" in our Proxy Statement and is incorporated by reference.
Equity Compensation Plan Information
The following table provides a summary of information as of February 28, 2023, relating to our equity compensation plans in which our common stock is authorized for issuance.
| (a)<br>Number of securities<br>to be issued upon<br>exercise of<br>outstanding options,<br>warrants and rights | (b)<br>Weighted average<br>exercise price of<br>outstanding<br>options, warrants<br>and rights | (c)<br>Number of securities<br>remaining available for<br>future issuance under<br>equity compensation<br>plans (excluding shares<br>reflected in column (a)) | ||||
|---|---|---|---|---|---|---|
| Equity compensation plans approved by shareholders(1) | 353,515 | '(2) | $ | — | 1,551,407 | '(3) |
__________________________________
(1)Consists of the 2014 Long-Term Incentive Plan ("2014 Plan") and the 2018 Employee Stock Purchase Plan ("2018 ESPP"). See Note 13 to the consolidated financial statements included in Part II. Item 8 of this Annual Report on Form 10-K for further information.
(2)Consists of outstanding awards, including 200,969 RSUs and 152,546 PSUs.
(3)Consists of (i) 401,929 shares remaining available for future issuance under the 2014 Plan; and (ii) 1,149,478 shares remaining available for issuance under the 2018 ESPP.
For further discussion of the 2014 Plan and 2018 ESPP, see Note 13 to the consolidated financial statements included in this Annual Report on Form 10-K.
Item 13. Certain Relationships and Related transactions, and Director Independence
Information required in response to this Item 13 is set forth under "Certain Relationships and Related Party Transactions" and "Matters Relating to Corporate Governance and Board Structure - Director Independence" in our Proxy Statement and is incorporated by reference.
Item 14. Principal Accounting Fees and Services
Information set forth under the caption “Independent Registered Public Accounting Firm” in our Proxy Statement is incorporated by reference in response to this Item 14.
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report
1.Consolidated Financial Statements
| Report of Independent Registered Public Accounting Firm - Consolidated Financial Statements | 35 |
|---|---|
| Report of Independent Registered Public Accounting Firm - Internal Controls Over Financial Reporting | 37 |
| Consolidated Balance Sheets | 38 |
| Consolidated Statements of Income | 39 |
| Consolidated Statements of Comprehensive Income | 40 |
| Consolidated Statements of Cash Flows | 41 |
| Consolidated Statements of Changes in Shareholders’ Equity | 42 |
| Notes to Consolidated Financial Statements | 43 |
- Financial Statement Schedules
All schedules have been omitted because they are not required, not applicable, or the required information is otherwise included.
- Exhibits
**Schedules and exhibits have been omitted pursuant to Item 601(b)(2) of Regulation S-K. The Company hereby undertakes to furnish supplemental copies of any of the omitted schedules and exhibits upon request by the Securities and Exchange Commission. The Company may request confidential treatment pursuant to Rule 24b-2 of the Securities Exchange Act of 1934, as amended, for any schedules and exhibits so furnished.
* Indicates management contract, compensatory plan or arrangement.
- Indicates filed herewith.
Item 16. Form 10-K Summary
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| AZZ Inc. | ||
|---|---|---|
| (Registrant) | ||
| April 25, 2023 | By: | /s/ Thomas E. Ferguson |
| Thomas E. Ferguson,<br>President and Chief Executive Officer |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of AZZ and in the capacities and on the dates indicated.
| April 25, 2023 | /s/ Daniel R. Feehan |
|---|---|
| Daniel R. Feehan<br>Chairman of the Board of Directors | |
| April 25, 2023 | /s/ Thomas E. Ferguson |
| Thomas E. Ferguson<br>President, Chief Executive Officer and Director (Principal Executive Officer) | |
| April 25, 2023 | /s/ Philip A. Schlom |
| Philip A Schlom<br>Senior Vice President and Chief Financial Officer (Principal Financial Officer) | |
| April 25, 2023 | /s/ Daniel E. Berce |
| Daniel E. Berce<br>Director | |
| April 25, 2023 | /s/ Paul Eisman |
| Paul Eisman<br>Director | |
| April 25, 2023 | /s/ Venita McCellon-Allen |
| Venita McCellon-Allen<br>Director | |
| April 25, 2023 | /s/ Ed McGough |
| Ed McGough<br>Director | |
| April 25, 2023 | /s/ Steven R. Purvis |
| Steven R. Purvis<br>Director | |
| April 25, 2023 | /s/ Carol R. Jackson |
| Carol R. Jackson<br>Director | |
| April 25, 2023 | /s/ Clive A. Grannum |
| Clive A. Grannum<br>Director | |
| April 25, 2023 | /s/ David Kaden |
| David Kaden<br>Director |
Document
Exhibit 3.1
AZZ INC.
BYLAWS
(Amended and Restated as of April 24, 2023)
Contents
Article. 1: Offices
1.01 Principal Office
1.02 Registered Office
1.03 Other Offices
Article. 2: Meetings of Shareholders
2.01 Place of Meetings
2.02 Annual Meeting
2.03 Special Meetings
2.04 Notice of Meetings
2.05 Voting Lists
2.06 Quorum
2.07 Organization of Meetings
2.08 Business to be Conducted
2.09 Proxies
2.10 Voting of Shares
2.11 Voting of Shares by Certain Holders
2.12 Record Date; Closing Transfer Books
Article. 3: Directors
3.01 Management
3.02 Number; Qualification; Election; Term
3.03 Change in Number
3.04 Resignation
3.05 Removal
3.06 Vacancies
3.07 Election of Directors
3.08 Nomination of Directors
3.09 Place of Meetings
3.10 First Meetings
3.11 Regular Meetings
3.12 Special Meetings
3.13 Quorum; Majority Vote
3.14 Compensation
3.15 Procedure
3.16 Interested Directors, Officers and Shareholders
3.17 Committees of the Board
3.18 Advisory Directors
Article. 4: Notice and Attendance through Use of Electronic Equipment
4.01 Method
4.02 Waiver
4.03 Telephone and Similar Meetings
Article. 5: Officers and Agents
5.01 Number; Qualification; Election; Term
5.02 Removal
5.03 Vacancies
5.04 Authority
5.05 Compensation
5.06 Chairman of the Board
5.07 Chief Executive Officer
5.08 President
5.09 Vice President and Other Officers
5.10 Secretary
5.11 Assistant Corporate Officers
5.12 Treasurer
Article. 6: Certificates and Shareholders
6.01 Certificates
6.02 Replacement of Lost or Destroyed Certificates
6.03 Transfer of Shares
6.04 Registered Shareholders
6.05 Pre-Emptive Rights
6.06 Repurchased and Treasury Stock
6.07 Dividends and Reserves
Article. 7: General Provisions
7.01 Books and Records
7.02 Annual Statement
7.03 Contracts
7.04 Loans
7.05 Checks, drafts, etc.
7.06 Deposits
7.07 Fiscal Year
7.08 Seal
7.09 Resignation
7.10 Amendment of Bylaws
7.11 Construction
7.12 Relation to Laws and Certificate
7.13 Dispute Resolution
Article. 8: Indemnification
8.01 Indemnification; Insurance
Article. 9: Transition Provisions
9.01 Prior Bylaws
9.02 Directors and Officers
9.03 Effect of Article 9
Article 1: Offices
Section 1.01. Principal Office. The principal office of AZZ Inc. (the “Corporation”) shall be maintained in Tarrant County, Texas.
Section 1.02. Registered Office. The registered office of the Corporation shall be maintained in the State of Texas as required by law. The registered office of the Corporation may be, but need not be, the same as the principal office. The address of the registered office may be changed from time to time by the Board of Directors of the Corporation (the “Board”) in the manner provided by law.
Section 1.03. Other Offices. The Corporation may also have offices at such other places, both within and without the State of Texas, as the Board may from time to time determine or the business of the Corporation may require.
Article 2: Meetings of Shareholders
Section 2.01. Place of Meetings. The Board may designate any place, either within or without the State of Texas, as the place of meeting for any annual meeting or for any special meeting called by the Board. If no designation is made, or if a special meeting is called other than by the Board, the place of meeting shall be the principal office of the Corporation.
Section 2.02. Annual Meeting. (a) The annual meeting of shareholders shall be held each year at a time and on a day as may be selected by the Board. At the meeting, the shareholders shall elect Directors and transact such other business as may properly come before the meeting.
(b) If an annual meeting is omitted by oversight or otherwise and not held as provided herein, an annual meeting may be called at a later date in the manner provided for special meetings, and business transacted at such a meeting shall be valid as if transacted at an annual meeting held as provided herein.
Section 2.03. Special Meetings. (a) Unless otherwise prescribed by law or by the Amended and Restated Certificate of Formation of the Corporation (the “Certificate”) or these Bylaws, special meetings of the shareholders may be called for any purpose by (i) the Chairman of the Board (ii) the President, if no Chairman of the Board has been elected, (iii) the Board, or (iv) the holders of at least fifteen percent of all of the shares entitled to vote at the meetings.
(b) Business transacted at any special meetings shall be confined to the purpose or purposes stated in the notice of the meeting.
Section 2.04. Notice of Meetings. (a) Written or printed notice of all meetings of shareholders stating the place, day and hour thereof, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered by personal delivery by mail or other permissible electronic transmissions, not less than ten (10) days nor more than sixty (60) days before the date of the meeting, to each shareholder entitled to vote at the meeting. If mailed, notice shall be deemed delivered when deposited in the United States mail addressed to the shareholder at their address as it appears on the share transfer records of the Corporation, with postage thereon prepaid.
(b) Delivery of any notice of a shareholder meeting to any officer or manager of a corporation, company or association, or to any member of a partnership or limited liability company, shall constitute delivery of the notice to the corporation, company, association or partnership.
Section 2.05. Voting Lists. (a) At least ten (10) days before each meeting of shareholders, the officer or agent having charge of the share transfer records of the Corporation shall make a
complete list of shareholders entitled to vote at the meeting. The list shall be arranged in alphabetical order and show the address of each shareholder and the number of shares held by each. For a period of ten (10) days prior to the meeting, the list shall be kept on file at the registered office or principal place of business of the Corporation and shall be subject to inspection by any shareholder at any time during usual business hours. The list shall also be produced and kept open at the time and place of the meeting and shall be subject to the inspection of any shareholder during the whole time of the meeting. The original share transfer records shall be prima facie evidence as to who are the shareholders entitled to examine such list or share transfer records or to vote at any meeting of shareholders.
(b) Failure to comply with the requirements of this Section 2.05 with respect to any meeting of shareholders shall not affect the validity of any action taken at such meeting.
Section 2.06. Quorum. (a) The holders of a majority of the shares issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at any meeting of shareholders except as otherwise provided by law, the Certificate or these Bylaws. Once a quorum is present, the shareholders may continue to transact business properly brought before the meeting until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum.
(b) If a quorum is not present at any meeting of shareholders, the shareholders entitled to vote at the meeting, present in person or represented by proxy may, by majority vote, adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. At an adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting under the notice of the meeting as originally provided.
(c) For the purposes of determining the presence of a quorum, abstentions and broker non-votes, as defined in Section 2.10(c), shall be treated as shares present and entitled to vote.
Section 2.07. Organization of Meetings. (a) The Chairman of the Board shall preside at all meetings of the shareholders. In the absence of the Chairman of the Board or if no Chairman has been elected, the President or, in his or her absence, such other designated officer shall preside. In the absence of all of these officers, any shareholder or the duly appointed proxy of any shareholder may call the meeting to order and a chairman shall be elected from among the shareholders present.
(b) The Secretary of the Corporation shall act as secretary at all meetings of the shareholders. In the absence of the Secretary, an Assistant Secretary shall so act, or, in the absence of all of these officers, the person presiding at a meeting may appoint any person to act as secretary of the meeting.
Section 2.08. Business to be Conducted. (a) Only such business may be conducted at an annual or special meeting of the shareholders as shall have been properly brought before the meeting in accordance with this Section 2.08. To be properly brought before an annual meeting or before a special meeting called by shareholders pursuant to Section 2.03(a)(iv), business must be (i) specified in the notice of meeting given by or at the direction of the Board, (ii) otherwise properly brought before the meeting by or at the direction of the Board, or (iii) properly brought before the meeting by a shareholder of record entitled to vote at such meeting. The fact that business is being properly brought before a meeting by or at the direction of the Board shall not excuse or eliminate the need of a shareholder to comply with this Section 2.08 in order to properly bring business before such meeting. To be properly brought before a special meeting called pursuant to Section 2.03(a)(i), (ii) or (iii), business must be (i) specified in the notice of meeting given by or at the direction of the Board or (ii) otherwise properly brought before the meeting by or at the direction of the Board.
(b) In addition to any other applicable requirements, for business to be properly brought before an annual or special meeting by a shareholder, the shareholder must give the Secretary of the Corporation timely written notice as required by this Section 2.08(b). To be timely, a shareholder’s notice must be received at the principal office of the Corporation not less than ninety (90) days nor more than one-hundred twenty (120) days prior to the annual meeting.
(c) A shareholder’s notice to the Secretary must set forth the following information regarding the matters proposed to be brought before the annual or special meeting: (i) a brief description of each business matter which the shareholder proposed to bring before the meeting, the text of the proposal or business and the text of any resolutions proposed for consideration, (ii) the reasons for bringing each such business matter before the meeting, (iii) in the event that the proposed business includes a proposal to amend these Bylaws, the complete text of the proposed amendment, and (iv) any material interest of the proposing shareholder in such business, including, without limitation, any anticipated benefit to the shareholder from the approval of such business.
(d) A shareholder’s notice to the Secretary with respect to an annual or special meeting must set forth certain information regarding such shareholder giving the notice and the beneficial owner, if any, on whose behalf the proposal is made, including (i) the name and record address of the shareholder giving such notice, (ii) the class and number of shares of the Corporation which are beneficially owned by the shareholder, (iii) any derivative, short, hedged or other economic interest in the shares of the Corporation held by such shareholder (which information shall be required to be supplemented by such shareholder not later than ten (10) calendar days after the record date for the meeting to disclose such ownership as of the record date), (iv) whether and to what extent any agreement, arrangement or understanding has been made, the effect or intent of which is to increase or decrease the voting power of such shareholder with respect to any shares of the capital stock of the Corporation, without regard to whether such transaction is required to be reported or disclosed to the United States Securities and Exchange Commission (the “SEC”), (v) a representation as to whether the shareholder intends to solicit proxies, (vi) a representation as to whether such shareholder intends to appear in person or by proxy at the meeting to bring the proposal before the meeting, (vii) a description of all agreements, arrangements or understandings (whether oral or in writing) with respect to the nomination or proposal between such shareholder and/or such beneficial owner, any of their respective affiliates or associates, and any other person or persons (each of the foregoing, a “Shareholder Associated Person”), including, in the case of a nomination, the nominee, including any agreements, arrangements or understandings relating to any compensation or payments to be paid to any such proposed nominee, pertaining to the nomination or other business proposed to be brought before the meeting of shareholders (which description shall identify the name of each other person who is a party to such agreement, arrangement or understanding), (viii) the names and addresses of other shareholders and beneficial owners known by any shareholder giving the notice (and/or beneficial owner, if any, on whose behalf the nomination or proposal is made) to support such nomination or proposal, and to the extent known, the class and number of all shares of the capital stock of the Corporation owned beneficially and/or of record by such other shareholder(s) and/or beneficial owner(s), (ix) any material interest of the shareholder in such business, (x) such other information regarding the shareholder in his or her capacity as a proponent of a shareholder proposal that would be required to be disclosed in a proxy statement or other filing with the SEC required to be made in connection with the contested solicitation of proxies pursuant to the SEC’s proxy rules and (xi) a statement as to whether or not such shareholder or any Shareholder Associated Person will (a) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the Corporation’s voting shares reasonably believed by such party, as the case may be, to be sufficient under applicable law to approve or adopt the proposal or elect the nominee, (b) otherwise solicits proxies or votes from shareholders in support of such proposal or nomination and/or (c) solicit proxies in support of any proposed nominee in accordance with Rule 14a-19 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
(e) Notwithstanding anything in these Bylaws to the contrary, no business shall be conducted at an annual or special meeting unless properly brought before the meeting in accordance with this Section 2.08, irrespective of whether the shareholder bringing such business before the meeting is seeking to have the proposal for such business included in the Corporation’s proxy statement filed on Schedule 14A with respect to an annual or special meeting pursuant to Rule 14a-8 of the Exchange Act, or whether such shareholder intends to prepare and mail his or her own proxy statement. If the chairman of a meeting should find that the facts warrant a determination that a business matter is not properly brought before the meeting in accordance with this Section 2.08, he shall so declare to the meeting, and the matter shall not be considered at the meeting.
Section 2.09. Proxies. (a) At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy executed in writing by the shareholder or by his or her duly authorized attorney-in-fact. No proxy shall be valid after eleven (11) months from the date of its execution unless otherwise provided in the proxy. Each proxy shall be revocable unless the proxy form expressly and conspicuously states that the proxy is irrevocable and the proxy is coupled with an interest. All proxies shall be filed with the Secretary of the Corporation prior to or at the time of the meeting at which they are to be voted. Any stockholder directly or indirectly soliciting proxies from other stockholders must use a proxy card color other than white, which shall be reserved for the exclusive use by the Board.
(b) In the event that any instrument in writing shall designate two or more persons to act as proxies, a majority of such persons present at the meeting or, if only one shall be present, then that one, shall have and may exercise all of the powers conferred by such written instrument upon all the persons so designated unless the instrument shall otherwise provide.
Section 2.10. Voting of Shares. (a) Subject to Section 2.12, each holder of record of any class or series of the Corporation’s stock, shall be entitled at each meeting of shareholders to one vote for each share of such stock, in each case registered in such holder’s name on the books of the Corporation on the record date designated by the Board, on each matter submitted to a vote at the meeting. Once a quorum is present at any meeting of shareholders, the vote of the holders of a majority of shares entitled to vote and present in person or represented by proxy shall decide any question brought before the meeting unless the question is one upon which, by express provision of law or the Certificate or these Bylaws, a different vote is required in which case such express provision shall control the decision of the question.
(b) For the purpose of determining whether a majority, or any different required vote of shares present and entitled to vote, has voted affirmatively on a particular question, only those shares voted “for” or “against” such questions shall be included in the count. Abstentions and broker non-votes shall not be counted even though such shares shall be considered present and entitled to vote for the purposes of determining the presence of a quorum under Section 2.06.
(c) As used in these Bylaws, the term “abstention” means shares which are not voted “for” or “against” a question by a holder or holders present in person or represented by proxy at the meeting and entitled to vote such shares on the question, and the term “broker non-votes” means shares represented at a meeting by proxies held by brokers or nominees as to which instructions have not been received from the beneficial owner or persons entitled to vote and as to which the broker or nominee does not have discretionary power to vote on the question.
(d) Any vote at a shareholders meeting may be taken by voice vote or by show of hands unless a shareholder or the duly appointed proxy of a shareholder entitled to vote on the question objects in which case the vote shall be taken by written ballets.
Section 2.11. Voting of Shares by Certain Holders. (a) Shares standing in the name of another corporation may be voted by such officer, agent or proxy as the bylaws of such corporation
may authorize or, in the absence of such authorization, as the board of directors of such corporation may determine.
(b) Shares held by an administrator, executor, guardian or conservator may be voted by him so long as the shares are part of the estate being served by him, either in person or by proxy, without a transfer of such shares into his or her name. Shares standing in the name of a trustee may be voted by him, either in person or by proxy, but no trustee shall be entitled to vote shares held by him without a transfer of such shares into his or her name as trustee.
(c) Shares standing in the name of a receiver may be voted by the receiver, and shares held by or under the control of a receiver may be voted by such receiver without the transfer into the receiver’s name if authority to do so has been given in an appropriate order of the court by which the receiver was appointed.
(d) A shareholder whose shares are pledged may vote the shares until the shares have been transferred into the name of the pledgee, and thereafter the pledgee may vote the shares so transferred.
(e) Shares of the Corporation’s stock either (i) owned by the Corporation itself, (ii) owned by another corporation, the majority of the voting stock of which is owned or controlled by the Corporation, or (iii) held by the Corporation in a fiduciary capacity shall not be voted, directly or indirectly, at any meeting, and shall not be counted in determining the total number of outstanding shares at any given time.
Section 2.12. Record Date; Closing Transfer Books. (a) The Board may fix in advance a record date for the purpose of determining shareholders entitled to notice of or to vote at a meeting of the shareholders, the record date to be not less than ten (10) nor more than sixty (60) days prior to the meeting, or the Board may close the stock transfer books for such purpose for a period of not less than ten (10) nor more than 60 days prior to such meeting.
(b) In the absence of action by the Board fixing a record date, the date upon which the notice of the meeting is mailed shall be the record date for the purpose of determining shareholders entitled to vote at the meeting.
Article 3: Directors
Section 3.01. Management. The business and affairs of the Corporation shall be managed by the Board of Directors, which may exercise all such powers of the Corporation and do all such lawful acts and things as are not, by law, the Certificate or these Bylaws, required to be exercised or done by the shareholders.
Section 3.02. Number; Qualification; Election; Term. The Board of Directors shall consist of up to twelve (12) Directors, none of whom need be shareholders of the Corporation or residents of the State of Texas. At each annual shareholders meeting, Directors shall be elected, and the Directors so elected shall hold office until the immediately succeeding annual shareholders meeting after their election and until their successors are elected and qualified.
Section 3.03. Change in Number. The number of Directors may be increased or decreased from time to time by amendment to these Bylaws, but no decrease shall have the effect of shortening the term of any incumbent Director. Any directorship to be filled by reason of an increase in the number of Directors may be filled by the Board or by election at an annual meeting of shareholders or at a special meeting of shareholders called for that purpose. Any Director elected to the Board to fill a directorship resulting in an increase in the number of Directors shall hold office for a term continuing only until the next election of Directors by shareholders.
Section 3.04. Resignation. Any Director may resign at any time by giving written notice to the Chairman of the Board, the President or the Secretary. A Director’s resignation shall take effect at the time specified in the resignation. Unless otherwise provided in the resignation, the acceptance of a resignation shall not be necessary to make it effective.
Section 3.05. Removal. Any Director may be removed, either with or without cause, at any meeting of shareholders expressly called for that purpose by the affirmative vote of more than two-thirds in number of shares of the shareholders present in person or represented by proxy at such meeting and entitled to vote for the election of Directors.
Section 3.06. Vacancies. (a) Any vacancy occurring in the Board by death, resignation or removal of a Director may be filled by an affirmative vote of a majority of the remaining Directors though less than a quorum of the Board. A Director elected to fill such a vacancy shall be elected for the unexpired term of his or her predecessor in office.
(b) Any vacancy resulting from an increase in the number of directors shall be filled as provided in Section 3.03.
Section 3.07. Election of Directors. Each Director shall be elected by the vote of the majority of the votes cast with respect to the Director at any meeting for the election of Directors at which a quorum is present, provided that if the number of nominees exceeds the number of Directors to be elected, the Directors shall be elected by the vote of a plurality of the shares represented in person or by proxy at any such meeting and entitled to vote on the election of Directors. Cumulative voting shall not be permitted. For purposes of this Section 3.07, a majority of the votes cast means that the number of shares voted “for” a Director must exceed the number of votes cast “against” that Director. If a Director is not elected, the Director shall offer to tender his or her resignation to the Board, subject to acceptance by the Board. The Nominating and Corporate Governance Committee will make a recommendation to the Board on whether to accept or reject such a resignation or whether other action should be taken. The Board will act on such Committee's recommendation and publicly disclose its decision and the rationale behind it within 90 days from the date of the certification of the election results. A Director who tenders his or her resignation will not participate in the Board's decision with respect thereto. If, in any election of Directors in which the number of Director nominees to be elected to the Board is equal to the number of Director positions to be filled by such election, the whole slate of Director nominees for election to the Board includes incumbent Directors who are not elected by a majority of the votes cast, such Directors are not required to submit a resignation in accordance herewith and shall continue to hold office until their successors are elected, which shall be as soon thereafter as convenient at a special meeting of shareholders called in accordance with these Bylaws for such purposes.
Section 3.08. Nomination of Directors. (a) Only those persons who are nominated in accordance with this Section 3.08 shall be eligible for election as Directors. Nomination of persons for election to the Board of the Corporation may be made at a meeting of shareholders (i) by or at the direction of the Board, (ii) by a nominating committee appointed by the Board, or (iii) by any shareholder of the Corporation entitled to vote at the meeting for the election of Directors but only if the shareholder complies with Section 2.08 and this Section 3.08. The number of nominees a shareholder may nominate for election at the annual meeting (or in the case of one or more shareholders giving the notice on behalf of a beneficial owner, the number of nominees such shareholders may collectively nominate for election at the annual meeting on behalf of such beneficial owner) shall not exceed the number of directors to be elected at such annual meeting. The fact that any person is properly nominated for election to the Board of the Corporation by or at the direction of the Board or a committee thereof shall not excuse or eliminate the need of a shareholder to comply with this Section 3.08 in order to properly nominate any person for election to the Board of the Corporation.
(b) In addition to other applicable requirements, for a nomination to be made by a shareholder, the shareholder must give the Secretary of the Corporation timely written notice as required by this Section 3.08(b). To be timely, a shareholder’s notice must be received at the principal office of the Corporation not less than ninety (90) days nor more than one-hundred twenty (120) days prior to the meeting at which the nomination is to be made. A shareholder’s notice to the Secretary must set forth as to each person whom the shareholder proposes to nominate (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the Corporation which are owned, beneficially or of record, by the person, (iv) such person’s executed written consent to being named as a nominee in the Corporation’s proxy statement filed on Schedule 14A with respect to the election of Directors and representation that such person will serve as a Director for the full term if elected, (v) a description of any derivative, short, hedged, borrowed, loaned or other economic interest in the shares of the Corporation held by such person (which information shall be required to be supplemented by such shareholder not later than ten (10) calendar days after the record date for the meeting to disclose such ownership as of the record date), (vi) a description of all direct and indirect compensation or other material monetary agreements, arrangements and understandings during the past three years, and any other material relationships, between or among such shareholder, or other person on whose behalf the nomination is made, and their respective affiliates and associates, or other persons acting in concert therewith, on the one hand, and each proposed nominee and his or her respective affiliates and associates or other persons acting in concert therewith, on the other hand, including without limitation all information that would be required to be disclosed pursuant to Rule 404 promulgated under Regulation S-K if shareholder making the nomination or other person on whose behalf the nomination is made, or any affiliate or associate thereof or other person acting in concert therewith, were the “registrant” for purposes of such rule and the nominee were a director or executive officer of such registrant, (vii) such person’s executed written representations that such person (A) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a “Voting Commitment”) that has not been disclosed therein or (2) any Voting Commitment that could limit or interfere with such person’s ability to comply, if elected as a director of the Corporation, with such person’s fiduciary duties under applicable law, (B) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, and (C) in such person’s individual capacity and on behalf of any person or entity on whose behalf the nomination is being made, would be in compliance, if elected as a director of the Corporation, and will comply with all applicable publicly disclosed corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation, and (viii) any other information relating to the person that would be required to be disclosed in a solicitation for proxies for election of Directors pursuant to Regulation 14A of the Exchange Act or any other filing with the SEC required to be made in connection with the solicitation of proxies for the election of Directors in a contested election pursuant to the SEC’s proxy rules. For the avoidance of doubt, a shareholder’s notice to the Secretary must also set forth the information required to be provided pursuant to Section 2.08(d) above. The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as a Director of the Corporation.
(c) Notwithstanding anything in these Bylaws to the contrary, no person shall be eligible for election as a Director unless nominated in accordance with this Section 3.08, and, to the extent that a person is nominated for election as a Director by a shareholder of the Corporation, Section 2.08. Notwithstanding the foregoing provisions of this Section 3.08, unless otherwise required by law, if the shareholder (or a qualified representative of the shareholder) does not appear at the annual or special meeting of shareholders of the Corporation to present a nomination or
proposed business advanced by such shareholder, such nomination shall be disregarded and such proposed business shall not be transacted, notwithstanding that such proposal is set forth in the Corporation’s proxy statement or proxy card, notice of meeting or other proxy materials and notwithstanding that proxies in respect of such vote may have been received by the Corporation. For purposes of this Section 3.08, to be considered a qualified representative of the shareholder, a person must be a duly authorized officer, manager, partner or agent of such shareholder as set forth in a writing executed by such shareholder or an electronic transmission delivered by such shareholder to act for such shareholder as proxy at the meeting of shareholders and such person must produce such writing or electronic transmission, or a reliable reproduction of the writing or electronic transmission, at the meeting of shareholders. Notwithstanding anything in these Bylaws to the contrary, unless otherwise required by law, if any shareholder or Shareholder Associated Person (i) provides notice pursuant to Rule 14a-19(b) promulgated under the Exchange Act with respect to any proposed nominee and (ii) subsequently (A) fails to comply with the requirements of Rule 14a-19(a)(2) or Rule 14a-19(a)(3) promulgated under the Exchange Act (or fails to timely provide reasonable evidence sufficient to satisfy the Corporation that such shareholder has met the requirements of Rule 14a-19(a)(2) or Rule 14a-19(a)(3) promulgated under the Exchange Act in accordance with the following sentence) or (B) fails to inform the Corporation that they no longer plan to solicit proxies in accordance with the requirements of Rule 14a-19 under the Exchange Act by delivering a written notice to the Secretary at the principal offices of the Corporation within two (2) business days after the occurrence of such change in plans or intent, then the nomination of each such proposed nominee shall be disregarded, notwithstanding that the nominee is included as a nominee in the Corporation’s proxy statement or proxy card, notice of meeting or other proxy materials for any annual meeting (or any supplement thereto) and notwithstanding that proxies or votes in respect of the election of such proposed nominees may have been received by the Corporation (which proxies and votes shall be disregarded). Upon request by the Corporation, if any shareholder or Shareholder Associated Person provides notice pursuant to Rule 14a-19(b) promulgated under the Exchange Act, such shareholder shall deliver to the Corporation, no later than five (5) business days prior to the applicable meeting, reasonable evidence that it or such Shareholder Associated Person has met the requirements of Rule 14a-19(a)(3) promulgated under the Exchange Act. Notwithstanding anything to the contrary set forth herein, and for the avoidance of doubt, the nomination of any person whose name is included as a nominee in the Corporation’s proxy statement or proxy card, notice of meeting or other proxy materials for any annual meeting (or any supplement thereto) as a result of any notice provided by any Shareholder Associated Person pursuant to Rule 14a-19(b) promulgated under the Exchange Act with respect to such proposed nominee and whose nomination is not made by or at the direction of the Board or any authorized committee thereof shall not be deemed (for purposes of this Section 3.08 or otherwise) to have been made pursuant to the Corporation’s notice of meeting (or any supplement thereto) and any such nominee may only be nominated by a shareholder of the Corporation in full compliance with this Section 3.08 and Section 2.08. If the chairman of the meeting at which a nomination is made should find that the facts warrant a determination that the nomination is not made in accordance with this Section 3.08 or Section 2.08, as applicable, he shall so declare to the meeting, and the nomination shall be disregarded.
Section 3.09. Place of Meetings. Meetings of the Board, regular or special, may be held either within or without the State of Texas.
Section 3.10. First Meetings. The first meeting of a Board after Directors are elected at an annual meeting of shareholders shall be held, without further notice, immediately following the annual meeting of shareholders. The meeting shall be held at the same place as the annual shareholders meeting unless by written unanimous consent the time or place for the meeting shall be changed by the Directors serving after the shareholders meeting.
Section 3.11. Regular Meetings. Regular meetings of the Board may be held without notice at such time and place as shall, from time to time, be determined by the Board.
Section 3.12. Special Meetings. (a) Special meetings of the Board may be called by the Chairman of the Board, the President or the Secretary. Special meetings shall be called by the Chairman, the President or the Secretary in like manner and on like notice upon the written request of any Director.
(b) Written notice of the place, day and hour of any special meeting of the Board shall be delivered to each Director not less than twenty-four (24) hours before the date of the meeting, delivery to be by personal delivery, mail, telecopier, facsimile or electronic transmission, or a national recognized overnight delivery service. If mailed or sent by overnight delivery service, notice shall be deemed delivered when deposited in the United States mail or given to the delivery service. Notice by telecopier, facsimile or electronic transmission shall be deemed delivered when sent.
(c) Except as otherwise expressly provided by law or by the Certificate or these Bylaws, neither the business to be transacted at, nor the purpose of, any special meeting of the Board need be specified in a notice or waiver of notice.
Section 3.13. Quorum; Majority Vote. (a) At all meetings of the Board of Directors, a majority of the Board fixed by these Bylaws shall constitute a quorum for the transaction of business. The act of a majority of the Directors present at any meeting at which a quorum is present shall be the act of the Board, except as otherwise specifically provided by law or by the Certificate or these Bylaws.
(b) Anything herein to the contrary notwithstanding, any alteration, amendment, or repeal of subsections (a), (b) or (c) of Section 2.10 or of Sections 3.02, 3.03, 3.04, 3.07, 3.13 or 7.10 of these Bylaws, or adoption of any bylaw provision inconsistent therewith, by the Board shall require the affirmative vote of two-thirds of the full Board.
(c) If a quorum is not present at a meeting of the Board, the Directors present thereat may adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present.
Section 3.14. Compensation. The Board shall have authority to establish policies for the compensation, including fees and reimbursement of expenses, for services that the Directors provide to the Corporation. No such payments nor any equity grants shall preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor.
Section 3.15. Procedure. (a) The Board shall cause regular minutes of its proceedings to be kept. The minutes shall be placed in the minute book of the Corporation.
(b) A Director who is present at a meeting of the Board at which action on any corporate matter is taken shall be presumed to have assented to the action unless his or her dissent shall be entered in the minutes of the meeting or unless he or she shall file his written dissent with the secretary of the meeting before the adjournment thereof or send his or her dissent by registered or certified mail to the Secretary of the Corporation immediately after adjournment of the meeting. A Director who voted in favor of any action may not thereafter dissent from such action.
Section 3.16. Interested Directors, Officers and Shareholders. (a) Any contract or other transaction between the Corporation and any of its Directors, officers or shareholders (or any corporation or firm which any of them are directly or indirectly interested) shall be valid for all purposes notwithstanding the presence of such Director, officer or shareholder at the meeting at which such contract or transaction is authorized, or his or her participation in such meeting or authorization.
(b) Subsection (a) of this Section 3.16 shall, however, apply only if the interest of each Director, officer or shareholder is known or disclosed:
(1) to the Board of Directors and the Board, nevertheless, authorizes or ratifies the contract or transaction by a majority of the Directors present, each such interested person to be counted in determining whether a quorum is present but not in calculating the majority necessary to carry the vote; or
(2) to the shareholders and they, nevertheless, authorize or ratify the contract or transaction by a majority of the shares present, each such interested person to be counted for quorum and voting purposes.
(c) This Section 3.16 shall not be construed to invalidate any contract or transaction which would be valid in the absence of this provision.
Section 3.17. Committees of the Board. (a) By resolution adopted by a majority of the full Board of Directors, the Board may designate from among its members one or more committees, each of which, to the extent provided in the resolution, shall have and may exercise all of the authority of the Board in the business and affairs of the Corporation except were action by the Board is required by law, the Certificate or these Bylaws.
(b) Each committee shall consist of one or more Directors appointed by resolution adopted by a majority of the full Board. Each committee member shall serve as such until the expiration of his or her term as a Director or their earlier resignation unless sooner removed as a committee member or as a Director.
(c) The number of members of any committee may be increased or decreased from time to time by resolution adopted by a majority of the full Board. The Board shall have the power at any time to fill any vacancy in, to change the membership of, or to dissolve, any committee.
(d) Regular meetings of any committee may be held without notice at such time and place as may be designated from time to time by resolution of the committee and communicated to all committee members.
(e) A special meeting of any committee may be held whenever called by any committee member at such time and place that such committee member shall designate in the notice of such special meeting. The committee member calling any such special meeting shall cause notice of such special meeting to be given to each committee member at least twelve (12) hours before such special meeting. Notice may be either written or oral. Neither the business to be transacted at, nor the purpose of, any special meeting of any committee need be specified in the notice or waiver of notice of any special meeting.
(f) At all meetings of any committee a majority of the number of committee members designated by the Board of Directors shall constitute a quorum for the transaction of business. The act of a majority of the committee members present at any meeting at which a quorum is present shall be the act of the committee, except as otherwise specifically provided by law, the Certificate or these Bylaws. If a quorum is not present at a meeting of any committee, the members present may adjourn the meeting from time to time, without notice other than an announcement at the meeting, until a quorum is present.
(g) Each committee shall keep regular minutes of its proceedings and report the same to the Board of Directors upon the request of the Board. The minutes of the proceedings of each committee shall be placed in the minute book of the Corporation.
(h) Any action required or permitted to be taken at any meeting of a committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the committee. Such consent shall have the same force and effect as a unanimous vote at a meeting. The signed consent shall be placed in the minute book.
(i) Members of any committee designated by the Board may participate in or hold a meeting by use of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other.
(j) The designation of any committee and the delegation of authority to it shall not operate to relieve the Board, or any member thereof, of any responsibility imposed upon it or him by law.
Section 3.18. Advisory Directors. (a) The Board, by resolution adopted by not less than a majority of the Directors then in office, may from time to time appoint such number of individuals as it may deem appropriate to serve as Advisory Directors at the pleasure of the Board. Advisory Directors may be given such designations (including without limitation “Advisory Director,” “Director Emeritus” or “Honorary Directors”) as the Board may from time to time designate. Advisory Directors are not, and shall not have the duties and responsibilities of, Directors of the Corporation, and the terms “Directors” or “members of the Board of Directors” as used in these Bylaws shall not be deemed to mean or include Advisory Directors.
(b) Without limiting the generality of the foregoing, Advisory Directors shall not be entitled (i) to receive any notice of any meeting of the Board of Directors, (ii) to attend any meeting of the Board of Directors except at the invitation of the Board, (iii) to vote on any matter presented for action by the Board of Directors or, except at the invitation of the Board, to participate in the consideration of any such matter or the formulation or determination of corporate policy, (iv) to receive any non-public information regarding the business or affairs of the Corporation or any matters presented for action or consideration by the Board of Directors, or (v) to receive any compensation for serving as an Advisory Director except as the Board of Directors may otherwise determine by resolution.
(c) At the discretion of the Board of Directors, an Advisory Director may be deemed a Director as that term is used in any equity plan of the Corporation, in order to qualify such Advisory Director for the continued holding of equity, the term of which would otherwise expire as a result of the termination of Director status.
Article 4: Notice and Attendance through Use of Electronic Equipment
Section 4.01. Method. Whenever by law or the Certificate or these Bylaws, notice is required to be given to a Director, shareholder or committee member and no provision is made as to how the notice shall be given, notice may be given (i) in writing, by mail, postage prepaid, addressed to the Director, committee member or shareholder at the address appearing on the books of the Corporation, (ii) by facsimile or other electronic transmission of the same, or (iii) in any other method permitted by law. Any notice given by mail shall be deemed given at the time when the same is thus deposited in the United States mails.
Section 4.02. Waiver. (a) Whenever, by law or the Certificate or these Bylaws, notice to a Director, committee member or shareholder is required, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated in such notice, shall be equivalent to the giving of such notice.
(b) Attendance of a Director or committee member at a meeting shall constitute a waiver of notice of such meeting, except where a Director or member attends for the express purpose
of objecting to the transaction of any business on the ground that the meeting is not lawfully called or convened.
Section 4.03. Telephone and Similar Meetings. Directors and committee members may participate in and hold a meeting by means of telephone conference, video conferencing, or similar communications equipment by means of which all persons participating in the meeting can hear each other. Participation in such meeting shall constitute presence in person at the meeting except where a person participates in the meeting for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called or convened.
Article 5: Officers and Agents
Section 5.01. Number; Qualification; Election; Term. (a) The Corporation shall have:
(1) a President, a Vice President, a Secretary and a Treasurer, and
(2) such other officers (including additional vice presidents) and assistant officers and agents as the Board may think necessary.
(b) No officer or agent need be a shareholder or a Director of the Corporation or a resident of Texas.
(c) Officers named in Section 5.01(a)(1) shall be elected by the Board on the expiration of an officer’s term or whenever a vacancy exists. Officers and agents named in Section 5.01(a)(2) may be elected by the Board at any meeting.
(d) Unless otherwise specified by the Board at the time of election or appointment, or in an employment contract approved by the Board, each officer’s term shall end at the first meeting of Directors after the next annual meeting of shareholders. Each officer shall serve until the end of his term or his earlier death, resignation or removal.
(e) Any two or more offices may be held by the same person, except that the President and the Secretary shall not be the same person.
Section 5.02. Removal. Any officer or agent elected or appointed by the Board may be removed by the Board whenever in its judgment the best interests of the Corporation will be served thereby. Removal shall be without prejudice to the contract rights, if any, of the person so removed. Election or appointment of an officer or agent shall not of itself create contract rights.
Section 5.03. Vacancies. Any vacancy occurring in any office of the Corporation may be filled by the Board.
Section 5.04. Authority. Officers and agents shall have such authority and perform such duties in the management of the Corporation as are provided in these Bylaws or as may be determined by resolution of the Board not inconsistent with these Bylaws.
Section 5.05. Compensation. The compensation of officers and agents shall be fixed from time to time by the Board.
Section 5.06. Chairman of the Board. The Corporation may have an executive chairman of the Board. If a Chairman of the Board is elected, he or she shall support and assist the Company’s Chief Executive Officer in the areas of corporate planning and development and shall preside at all meetings of the Shareholders and the Board. The Chairman shall also perform such other duties as
may be prescribed by the Board from time to time. If no Chairman is elected, the duties of that office shall be performed by the President unless the Board provides otherwise.
Section 5.07. Chief Executive Officer. The Corporation may have a Chief Executive Officer. If a Chief Executive Officer is appointed, such person shall supervise, control and have general and active management of the day-to-day business and affairs of the Corporation and shall perform such other duties as may be prescribed by the Board from time to time. If no Chief Executive Officer is appointed, the duties of that office shall be performed by the President unless the Board provides otherwise.
Section 5.08. President. The President shall have such powers and responsibilities and shall perform such duties as delineated by the Board or the Chief Executive Officer.
Section 5.09. Vice President and Other Officers. Subject to such limitations as the Board may from time to time prescribe, all of the other officers of the Corporation shall each have such powers and duties as generally pertain to their respective offices, as well as such powers as from time to time may be conferred by the Chief Executive Officer or the Board.
Section 5.10. Secretary. (a) The Secretary shall attend all meetings of the Board and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose.
(b) The Secretary shall give, or cause to be given, notice of all meetings of the shareholders and special meetings of the Board.
(c) The Secretary shall keep in safe custody the seal of the Corporation and, when authorized by the Board, affix the same to any instrument requiring it and, when so affixed, it shall be attested by his or her signature or by the signature of the Treasurer or an Assistant Secretary.
(d) The Secretary shall be under the supervision of the President. Such person shall perform such other duties and have such other authority and powers as the Board may from time to time prescribe or as the President may from time to time delegate.
Section 5.11. Assistant Corporate Officers. (a) The Board may elect an Assistant Secretary and Assistant Treasurer and such additional assistant corporate officers as it may from time to time find necessary.
(b) Each assistant corporate officer shall perform the duties of the principal officer to whom he or she is an assistant if the principal office is vacant or if the principal officer is absent or unable to act, as well as such other duties as the Board may from time to time prescribe.
Section 5.12. Treasurer. (a) The Treasurer shall have the custody of the corporate funds and securities and shall keep full and accurate accounts of receipts and disbursements of the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board.
(b) The Treasurer shall disburse the funds of the Corporation as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the President and Directors, at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as treasurer and of the financial condition of the Corporation.
(c) If required by the Board, the Treasurer shall give the Corporation a bond in such form, in such sum, and with such surety or sureties as shall be satisfactory to the board for the faithful performance of the duties of his or her office and for the restoration to the Corporation, in
case of death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in his or her possession or under their control belonging to the corporation.
(d) The Treasurer shall perform such other duties and have such other authority and powers as the Board may from time to time prescribe or as the Chief Executive Officer or President may from time to time delegate.
Article 6: Certificates and Shareholders
Section 6.01. Certificates. Certificates in the form determined by the Board shall be delivered representing all shares to which shareholders are entitled, provided that the Board may provide by resolution or resolutions that some or all of any or all classes or series of the Corporation’s shares shall be uncertificated shares. Any such resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Certificates representing shares of the Corporation shall be consecutively numbered and shall be entered in the books of the Corporation as they are issued. Each certificate shall state on the face thereof the holder’s name, the number and class of shares, the par value of shares or a statement that such shares are without par value, and such other matters as may be required by law. Certificates shall be signed by the Chairman of the Board, the President or a Vice President and such other officer or officers as the Board shall designate from time to time, and may be sealed with the seal of the Corporation or a facsimile thereof. If the Corporation has a transfer agent or registrar acting on its behalf, the signature of such officer or representative thereof may be delivered via facsimile or other acceptable electronic transmission.
Section 6.02. Replacement of Lost or Destroyed Certificates. The Board may direct (i) a new certificate or certificates or (ii) uncertificated shares to be issued in place of any certificate previously issued by the Corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the loss or destruction. In so doing the Board may, in its discretion and as a condition precedent to the issuance, (i) require the owner of the lost or destroyed certificate, or his legal representative, to advertise the same in such manner as it shall require and/or (ii) to give the Corporation a bond (with a surety or sureties satisfactory to the Corporation) in such sum as it may direct, as indemnity against any claim, or expense resulting from any claim, that may be made against the Corporation with respect to the certificate alleged to have been lost or destroyed.
Section 6.03. Transfer of Shares. Shares of the Corporation shall be transferable only on the books of the Corporation by the holder thereof in person or by his duly authorized attorney. Upon surrender to the Corporation or its transfer agent of a certificate representing shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, the Corporation or its transfer agent shall issue a new certificate or evidence of the issuance of uncertificated shares to the person entitled thereto, cancel the old certificate and record the transaction upon its books. Upon the receipt of proper transfer instructions from the registered owner of uncertificated shares, such uncertificated shares shall be cancelled, issuance of new equivalent uncertificated shares or certificated shares shall be made to the shareholder entitled thereto and the transaction shall be recorded upon the books of the Corporation. The Board may appoint a transfer agent and one or more co-transfer agents and registrar and one or more co-registrars and may make or authorize such agent to make all such rules and regulations deemed expedient concerning the issue, transfer and registration of shares of stock.
Section 6.04. Registered Shareholders. The Corporation shall be entitled to treat the holder of record of any share or shares as the holder in fact thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part of any other person, whether or not it has express or other notice thereof, except as otherwise provided by law.
Section 6.05. Pre-Emptive Rights. No shareholder shall have pre-emptive rights.
Section 6.06. Repurchased and Treasury Stock. The Board and the officers and agents of the Corporation shall be authorized at any time to purchase any outstanding shares or bonds of the Corporation from the surplus of the Corporation or from the net profits arising from its business, and that the officers or agents of the Corporation shall be permitted to consider repurchased shares of the Corporation as cancelled or as treasury shares or to otherwise dispose of them upon such terms as the officers or agents of the corporation in their discretion may determine is in the best interests of the Corporation.
Section 6.07. Dividends and Reserves. (a) Subject to statute and the Articles, dividends may be declared by the Board at any regular or special meeting and may be paid in cash, in property, or in shares of the Corporation. The declaration shall be at the discretion of the Board.
(b) The Board may fix in advance a record date for the purpose of determining shareholders entitled to receive payment of any dividend, the record date to be not more than fifty (50) days prior to the payment date of such dividend, or the Board may close the stock transfer books for such purpose for a period of not more than fifty (50) days prior to the payment date of such dividend. In the absence of any action by the Board, the date upon which the Board adopts the resolution declaring the dividend shall be the record date.
(c) By resolution the Board may create such reserve or reserves out of the earned surplus of the Corporation as the Directors from time to time, in their discretion, think proper to provide for contingencies, or to equalize dividends, or to repair or maintain any property of the Corporation, or for any other purpose they think beneficial to the Corporation. The Board may modify or abolish any such reserve in the manner in which it was created.
Article 7: General Provisions
Section 7.01. Books and Records. The Corporation shall keep correct and complete books and records of account and shall keep minutes of the proceedings of its shareholders and the Board of Directors, and shall keep at its registered office or principal place of business, or at the office of its transfer agent or registrar, a record of its shareholders, giving the names and addresses of all shareholders and the number and class of the shares held by each.
Section 7.02. Annual Statement. The Board shall present at each annual meeting of shareholders a full and clear statement of the business and condition of the Corporation, including a reasonably detailed balance sheet, income statement, and surplus statement.
Section 7.03. Contracts. The Board may authorize any officer or officers, agent or agents, to enter into any contract or execute and deliver any instrument in the name of and on behalf of the Corporation, and such authority may be general or confined to a specific instance.
Section 7.04. Loans. No loans shall be contracted on behalf of the Corporation and no evidences of indebtedness shall be issued in its name unless authorized by a resolution of the Board. Such authority may be delegated to certain officers of the Corporation in general or confined to a specific instance.
Section 7.05. Checks, drafts, etc. All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by such officer or officers, agent or agents of the Corporation and in such manner as shall from time to time be determined by resolution of the Board.
Section 7.06. Deposits. All funds of the Corporation not otherwise employed shall be deposited from time to time to the credit of the Corporation in such banks, trust companies, or other depositories as the Board may select.
Section 7.07. Fiscal Year. The fiscal year of the Corporation shall be fixed by resolution of the Board.
Section 7.08. Seal. The seal of the Corporation (of which there may be one or more exemplars) shall contain the name of the Corporation and the name of the state of incorporation. The seal may be used by impressing it or reproducing a facsimile of it, or otherwise.
Section 7.09. Resignation. Any officer or agent may resign by giving written notice to the President or the Secretary. The resignation shall take effect at the time specified therein, or immediately if no time is specified therein. Unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective.
Section 7.10. Amendment to Bylaws. (a) Subject to Section 7.10(b), these Bylaws may be altered, amended or repealed or new bylaws may be adopted (subject to the shareholders repealing or changing the action of the Board, or making new bylaws, at an annual or special meeting called and held as provided in these Bylaws) at any meeting of the Board of Directors at which a quorum is present, by the affirmative vote of a majority of the Directors present at such meeting, provided notice of the proposed alteration, amendment or repeal is contained in the notice of such meeting.
(b) The Board of Directors may not amend or repeal a particular Bylaw if the shareholders, in amending, repealing or adopting that particular Bylaw, expressly provide that the Directors may not amend or repeal that Bylaw.
Section 7.11. Construction. (a) Unless context requires otherwise, as used in these Bylaws:
(1) words of the masculine gender include the feminine, and words in the singular number include the plural and in the plural number include the singular, and
(2) references to a “Section” or an “Article” are to the given section or article of these Bylaws.
(b) Article and section headings are used in these Bylaws primarily for convenience and shall not be construed as limiting the effect any provision would otherwise have.
(c) If any provision of these Bylaws is held by a court of competent jurisdiction to be invalid, such invalidity shall not impair or invalidate any remaining provision of these Bylaws and, insofar as reasonable and possible, effect shall be given to the intent manifested by the provision held to be invalid.
Section 7.12. Relation to Laws and Certificate. These Bylaws shall be subject to all valid and applicable laws, including specifically (but without limitations) the Texas Business Corporation Act, as now or hereafter amended, and the Corporation’s Certificate.
Section 7.13. Dispute Resolution.
(a) Unless the Corporation consents in writing to the selection of an alternative forum, the district courts of the State of Texas in Tarrant County shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of the Corporation, (b) any action asserting a claim of breach of a fiduciary duty owed by any
current or former director, officer or other employee of the Corporation to the Corporation’s shareholders, (c) any action asserting a claim arising pursuant to the Texas Business Organizations Code or the Corporation’s Certificate of Formation or Bylaws, or (d) any action asserting a claim governed by the internal affairs doctrine of the State of Texas; provided, however, that, in the event that the district courts of the State of Texas in Tarrant County lack jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another state or federal court located within the State of Texas in Tarrant County. Failure to enforce the foregoing provisions would cause the Corporation irreparable harm, and the Corporation shall be entitled to equitable relief, including injunctive relief and specific performance, to enforce the foregoing provisions. Any person or entity having, purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section 7.13(a). Further, the district courts of the State of Texas in Tarrant County (or, in the event that the district courts of the State of Texas in Tarrant County lack jurisdiction over any such action or proceeding, the state and federal courts located within the State of Texas in Tarrant County) shall have exclusive jurisdiction to determine any dispute, claim or action brought against the Corporation by any current or former director, officer or other person entitled or purported to be entitled to indemnification from the Corporation by reason of the fact that he or she (or a person for whom he or she is a representative) is or was a director or an officer of the Corporation or is or was serving at the request of the Corporation in any position or capacity for any other corporation, partnership, joint venture, trust, employee benefit plan or other enterprise, whether pursuant to the Corporation’s Certificate of Formation, these Bylaws or contractual agreement, with respect to any claims thereunder.
(b) Unless the Corporation consents in writing to the selection of an alternative forum, the U.S. District Court for the Northern District of Texas, Fort Worth Division shall be the sole and exclusive forum for (a) any action asserting a claim arising under the U.S. Securities Act of 1933, as amended, or the rules and regulations thereunder, the U.S. Securities Exchange Act of 1934, as amended, or the rules and regulations thereunder or any other federal securities law, or the rules and regulations thereunder against the Corporation or any current or former director, officer or other employee of the Corporation; provided, however, that, in the event that the U.S. District Court for the Northern District of Texas, Fort Worth Division lacks jurisdiction or proper venue over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another U.S. District Court having such jurisdiction. Failure to enforce the foregoing provisions would cause the Corporation irreparable harm, and the Corporation shall be entitled to equitable relief, including injunctive relief and specific performance, to enforce the foregoing provisions. Any person or entity having, purchasing or otherwise acquiring any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section 7.13(b).
Article 8: Indemnification
Section 8.01. Indemnification; Insurance. The Corporation shall indemnify to the full extent permitted by law any person who is made or threatened to be made a defendant or respondent in any action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, or in any appeal in such an action, suit or proceeding, by reason of the fact that he or she is or was a Director, advisory director or officer of the Corporation or of any other company at the request of the Corporation or is or was serving at the Corporation’s request as an officer, managing partner or in any other position of authority in the operation of a partnership, limited partnership or joint venture in which the Corporation has or had a substantial direct or indirect interest (collectively referred to hereinafter as “Indemnified Persons”), against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Indemnified Persons in connection with any such action, suit or proceeding. The Corporation shall advance, pay and
reimburse (as applicable) expenses to Indemnified Persons to the full extent permitted by law. The Corporation may, to the extent permitted by law, purchase and maintain insurance, create a trust fund, establish any form of self-insurance, secure its indemnity obligation by grant of a security interest or other lien on the assets of the Corporation, establish a letter of credit, guaranty or surety arrangement, or other arrangement on behalf of Indemnified Persons against any liability asserted against such persons in their capacities as described above, whether or not the Corporation would have the power to indemnify such Indemnified Persons against such liability. No amendment to or rescission of this Article shall affect the rights of any of the Indemnified Persons to indemnification or the advancement, payment or reimbursement of expenses required by this bylaw growing out of any act, transaction, event or circumstance which occurred before such amendment or rescission.
Article 9: Transition Provisions
Section 9.01. Prior Bylaws. (a) The Bylaws of the Corporation (the “Prior Bylaws”) in effect upon adoption of these Bylaws are hereby amended and, as amended, restated in their entirety by these Bylaws.
(b) Action validly taken under the Prior Bylaws remains valid.
Section 9.02. Directors and Officers. Each Director, officer and committee member elected or appointed pursuant to the Prior Bylaws and in office upon adoption of these Bylaws shall continue in office for the term to which elected or appointed pursuant to the Prior Bylaws subject to resignation or removal as provided by these Bylaws.
Section 9.03. Effect of Article 9. The provisions of this Article 9 control over any contrary provision of other Articles of these Bylaws.
20
Document
Exhibit 3.2
AMENDED AND RESTATED CERTIFICATE OF FORMATION
OF
AZZ INC.
Pursuant to Section 21.056 of the Texas Business Organizations Code (the “Code”), the undersigned corporation hereby amends and restates its Articles of Incorporation and all amendments thereto that are in effect to date, as follows:
1. The name of the corporation is AZZ incorporated (the “Corporation”). The original Articles of Incorporation (the “Articles”) of the Corporation were filed with the Secretary of State of Texas on March 29, 1956.
2. This Amended and Restated Certificate of Formation (“Certificate”) accurately states the text of the Articles being restated and all amendments thereto that are in effect to date, as further amended by this Certificate. This Certificate does not contain any other change in the Articles being hereby amended and restated except for the information permitted to be omitted under Section 3.059(b) of the Code.
3. Each new amendment to the Articles has been made in accordance with the provisions of the Code. This Certificate and the amendments to the Articles have been approved in the manner required by the Code and by the governing documents of the Corporation. This Certificate and the amendments to the Articles were duly adopted by the affirmative vote of two-thirds (2/3) of the shareholders of the Corporation at the 2022 annual meeting of shareholders effective July 12, 2022. As of May 13, 2022, there were 24,732,809 shares outstanding and entitled to vote.
4. The Articles of the Corporation are amended by this Certificate as follows:
a)Article IV is amended to add a second class of shares, the 6.0% Series A Convertible Preferred Stock, as described further in Article IV.
b)The Certificate of Designations, Preferences, Rights and Limitations of the 6.0% Series A Convertible Preferred Stock is attached hereto as Exhibit A.
c)Article VI and is amended to reflect the current Board of Directors and the names and addresses of the persons who currently are serving as directors.
5. The Articles of the Corporation and all amendments and supplements thereto are hereby replaced and superseded in their entirety by the following Amended and Restated Certificate of Formation.
ARTICLE I
The name of the corporation is AZZ Inc.
ARTICLE II
The period of its duration is perpetual.
ARTICLE III
The purpose of the corporation is to engage in any lawful act or activity for which a corporation may be organized under the Texas Business Organizations Code.
ARTICLE IV
The aggregate number of shares which the corporation shall have authority to issue shall be One Hundred Million (100,000,000) of the par value of One Dollar ($1.00) each of common stock, and Two Hundred and Forty Thousand (240,000) shares of the par value of One Dollar ($1.00) each of 6.0% Series A Convertible Preferred Stock (the “Series A Preferred Stock”), with such terms and conditions as set forth in the Certificate of Designations, Preferences, Rights and Limitations of 6.0% Series A Convertible Preferred Stock attached hereto as Exhibit A (the “Series A Certificate of Designation”).
ARTICLE V
The post office address of its registered office is 1999 Bryan St., Ste. 900, Dallas, Texas 75201, and the name of its registered agent at such address is CT Corporation System.
ARTICLE VI
The number of directors constituting the Board of Directors is up to twelve (12), and the names and addresses of the persons who currently are serving as directors are:
| NAME | ADDRESS |
|---|---|
| Daniel E. Berce | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| Paul Eisman | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| Daniel R. Feehan | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| Thomas E. Ferguson | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| Clive A. Grannum | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| Carol R. Jackson | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| David M. Kaden | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| Venita McCellon-Allen | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| Ed McGough | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
| Steven Purvis | One Museum Place, 3100 W. 7th Street, Suite 500<br><br>Fort Worth, Texas 76107 |
ARTICLE VII
No shareholder or other person shall have any pre-emptive rights whatsoever.
ARTICLE VIII
The shareholders of the corporation shall not be entitled to cumulate their votes in the election of Directors.
ARTICLE IX
To the fullest extent permitted by applicable law, no director of this corporation shall be liable to this corporation, or its shareholders, for monetary damages for an act or omission in such director's capacity as a director of this corporation, except that this provision does not eliminate or limit the liability of a director of this corporation for:
1.a breach of such director's duty of loyalty to this corporation or its shareholders;
2.an act or omission not in good faith or that involves intentional misconduct or a knowing violation of the law;
3.a transaction from which such director received an improper benefit, whether or not the benefit resulted from an action taken within the scope of such director's office;
4.an act or omission for which the liability of such director is expressly provided for by statute; or
5.an act related to an unlawful stock repurchase or payment of a dividend.
The foregoing provisions shall not eliminate or limit the liability of a director for any act or omission occurring prior to the addition of this Article to the corporation's Certificate of Formation. Any repeal or amendment of this Article by the shareholders of this corporation shall be prospective only, and shall not adversely affect any limitation on the personal liability of a director of this corporation existing at the time of such repeal or amendment. In addition to the circumstances in which a director of this corporation is not personally liable as set forth in the foregoing provisions, a director shall not be liable to the fullest extent permitted by any amendment to the Texas Business Organization Code hereafter enacted that further limits the liability of a director.
ARTICLE X
The corporation shall indemnify to the full extent permitted by law any person who is made or threatened to be made a defendant or respondent in any action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, or in any appeal in such an action, suit or proceeding, by reason of the fact that he or she is or was a director, advisory director or officer of the corporation or of any other company at the request of the corporation or is or was serving at the corporation's request as an officer, managing partner or in any other position of authority in the operation of a partnership, limited partnership or joint venture in which the corporation has or had a substantial direct or indirect interest (collectively referred to hereinafter as “Indemnified Persons”), against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Indemnified Persons in connection with any such action, suit or proceeding. The corporation shall advance, pay and reimburse (as applicable) expenses to Indemnified Persons to the full extent permitted by law. The corporation may, to the extent permitted by law, purchase and maintain insurance, create a trust fund, establish any form of self- insurance, secure its indemnity obligation by grant of a security interest or other lien on the assets of the corporation, establish a letter of credit, guaranty or surety arrangement, or other arrangement on behalf of Indemnified Persons against any liability asserted against such persons in their capacities as described above, whether or not the corporation would have the power to indemnify such Indemnified Persons against such liability. No amendment to or rescission of this Article shall affect the rights of any of the Indemnified Persons to indemnification or the advancement, payment or reimbursement of expenses required by this article growing out of any act, transaction, event or circumstance which occurred before such amendment or rescission.
Dated: July 12, 2022 AZZ INC.
By: /s/ Tara D. Mackey
Tara D. Mackey, Secretary
Document
Exhibit 4.1
DESCRIPTION OF THE REGISTRANT’S SECURITIES
REGISTERED PURSUANT TO SECTION 12 OF THE SECURITIES
EXCHANGE ACT OF 1934
As of February 28, 2023, AZZ Inc. (the “Company” or “AZZ”) has the one class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”): our common stock, $1.00 par value per share (“Common Stock”).
The following summary of certain provisions of the Company securities does not purport to be complete and is subject to and qualified in its entirety by reference to the Company’s Amended and Restated Certificate of Formation (the “Certificate of Formation”), as may be amended from time to time, the Company’s Amended and Restated Bylaws (the “Bylaws”), as may be amended from time to time, and the certificate of designations for the 6.0% Series A Convertible Preferred Stock (“Series A Preferred Stock”) of the Company, copies of which are incorporated by reference as exhibits to the Company’s Annual Report on Form 10-K. The summary below is also qualified by reference to the provisions of the Texas Business Organizations Code (“TBOC”), as applicable.
Authorized Capitalization
The total amount of our authorized capital stock consists of 100,000,000 shares of Common Stock, par value $1.00 per share and 240,000 shares of our Series A Preferred Stock, par value $1.00 per share.
Common Stock
Voting rights. Each holder of AZZ Common Stock will be entitled to one (1) vote for each share of AZZ Common Stock held of record by such holder, regardless of class. The holders of shares of AZZ Common Stock will not have cumulative voting rights. Except as otherwise required in the Certificate of Formation or by applicable law, the holders of Common Stock and Series A Preferred Stock will vote together as a single class on all matters on which stockholders are generally entitled to vote.
Dividend rights. Subject to any other provisions of the Certificate of Formation, as it may be amended from time to time, dividends may be declared by the Company’s Board of Directors (the “Board of Directors”) at any regular or special meeting and may be paid in cash, in property, or in shares of the Company. Any declaration of dividends shall be at the discretion of the Board of Directors.
Liquidation rights. Upon our dissolution or liquidation or the sale of all or substantially all of our assets, after payment in full of all amounts required to be paid to creditors and to the holders of preferred stock having liquidation preferences, if any, the holders of shares of our Common Stock will be entitled to receive our remaining assets available for distribution.
No Preemptive, Subscription, or Conversion Rights; No Redemption or Sinking Fund Provisions. Holders of shares of our Common Stock do not have preemptive, subscription or conversion rights. There are no redemption or sinking fund provisions applicable to our Common Stock.
Listing. Currently, our Common Stock is listed on the NYSE under the ticker symbol “AZZ”.
Series A Preferred Stock
Ranking and Liquidation Preference. The Series A Preferred Stock ranks senior to AZZ’s Common Stock, including with respect to both income and capital, but it will be considered junior to the Company’s indebtedness. The Series A Preferred Stock has a liquidation preference equal to the greater of (i) the Original Purchase Price (as defined below) plus accrued but unpaid dividends and (ii) the amount that would have been received had the shares of Series A Preferred Stock been converted immediately prior to liquidation (or other event giving rise to the payment).
Dividend rights. Holders of Series A Preferred Stock are entitled to receive dividends at a rate of 6.0% per annum of the then applicable Series A Base Amount (defined as the sum of (i) $1,000 per share of Series A Preferred Stock (the “Original Purchase Price”) plus (ii) all PIK Dividends (as defined below) that have been paid with respect to such share as of such date), payable in cash or, at the Company’s election, in kind by accreting and increasing the then-applicable Series A Base Amount (the “PIK Dividend”), accruing daily and paid quarterly in arrears; provided that, following the calendar quarter ending June 30, 2027, the Company may not elect PIK Dividends and dividends on the Series A Preferred Stock must be paid in cash. The dividend will increase annually beginning with the dividend payable for the calendar quarter ending September 30, 2028 by one percentage point.
Holders of Series A Preferred Stock may participate equally and ratably with the holders of the Company’s Common Stock in any dividends paid on the Company’s Common Stock when, as and if declared by the Board of Directors as if such shares of Series A Preferred Stock had been converted to shares of Common Stock immediately prior to the record date for the payment of such dividend.
Conversion rights. Subject to a minimum conversion threshold of 1,000 shares of Series A Preferred Stock per conversion and customary anti-dilution and dividend adjustments, the Series A Preferred Stock is convertible by the holder at any time into shares of the Company’s Common Stock based on the Series A Base Amount at a price per share of the Company’s Common Stock (the “Conversion Price”) equal to a 25% premium to the volume-weighted average price of the Company’s Common Stock over the trailing 30 trading days prior to the issuance date of the Series A Preferred Stock.
In addition, following the second anniversary of the issuance date of the Series A Preferred Stock, the Company is entitled to provide holders of Series A Preferred Stock with notice of a mandatory conversion of a portion of the Series A Preferred Stock (which may not exceed 25% of the amount of Series A Preferred Stock issued in any single quarter) at the Conversion Price if the closing price of the Company’s Common Stock exceeds 185% of the Conversion Price for 20 consecutive trading days prior to the date of such notice and if an effective shelf registration statement covering resales of the converted Common Stock is in place.
Fundamental Changes. If the Company undergoes a change of control, bankruptcy, insolvency, liquidation or de-listing of the Company’s Common Stock (each, a “Fundamental Change Event”), holders of Series A Preferred Stock may elect to (i) receive the as-converted value of the Company’s Common Stock at the then-current Conversion Price, (ii) require the Company to redeem the Series A Preferred Stock in cash for the Redemption Amount (as defined below) or (iii) if a non-cash change of control, retain their shares of Series A Preferred Stock.
Redemption rights. The Company has the right to redeem the Series A Preferred Stock at a price equal to the greater of (i) the Original Purchase Price per share plus accrued but unpaid dividends and (ii) the Original
Purchase Price per share multiplied by the Return Factor (such greater amount, the “Redemption Amount”). The “Return Factor” is equal to 1.4 during the first two years after the issuance date of the Series A Preferred Stock and, in each of the three years thereafter, will increase by 0.15 and, in each year after the first five years after the issuance date, such amount will increase by 0.20, and the “Return Factor” will also be subject to additional increases under certain circumstances. Notwithstanding the foregoing, in each case, holders of Series A Preferred Stock will have the right to convert the Series A Preferred Stock into Common Stock prior to any redemption.
Voting rights. Holders of Series A Preferred Stock will be entitled to a number of votes on all matters presented to holders of voting capital stock of the Company equal to the number of shares of the Company’s Common Stock then issuable upon conversion of such holders’ Series A Preferred Stock.
The vote or consent of the holders of at least a majority of the outstanding shares of Series A Preferred Stock will be required for certain actions, including:
•issuances by the Company of equity securities that are senior to, or equal in priority with, the Series A Preferred Stock, including any additional shares of Series A Preferred Stock;
•incurrence of any additional indebtedness (including refinancings of existing indebtedness) by the Company unless the Company’s ratio of net debt to EBITDA does not exceed 5.5x;
•refinancings of the Company’s credit agreement, subject to certain exceptions;
•dividends or distributions upon, or redemptions of, shares of the Company’s Common Stock unless the Company’s ratio of net debt to EBITDA does not exceed 5.5x;
•any acquisition, investment, sale, disposition or similar transaction (whether of an entity, business, equity interests or assets) that has total consideration (including assumption of liabilities) of at least $250 million (or, when the Company’s market capitalization is $2 billion or greater, has total consideration (including assumption of liabilities) of at least $500 million) (a “Material Transaction”);
•amendments to the Company’s organizational documents that would have an adverse effect on the holders of Series A Preferred Stock;
•any affiliate transaction except those on arms’-length terms; and
•any voluntary dissolution, liquidation, bankruptcy, winding up or deregistration or delisting of the Company’s Common Stock.
Miscellaneous. The holders of Series A Preferred Stock will also have customary information and preemptive rights, and the Series A Preferred Stock will be subject to customary anti-dilution provisions. The Series A Preferred Stock and all shares of Common Stock issuable upon conversion of the Series A Preferred Stock will have customary demand and piggyback registration rights pursuant to the Registration Rights Agreement.
Holders of Series A Preferred Stock will also be prohibited from transferring shares of Series A Preferred Stock to any competitor of the Company or activist investors, subject to certain exceptions.
Except as set forth under “Voting,” as noted above, there is no restriction on the repurchase or redemption of shares by the Company while there is any arrearage in the payment of dividends or sinking fund installments.
Anti-Takeover Effects of Our Certificate of Formation and Our Bylaws and Certain Provisions of Texas Law
SEC rules require disclosure of the possible anti-takeover effects of provisions of the Company’s charter or bylaws that could have an anti-takeover effect. Our Certificate of Formation and Bylaws and certain provisions of the TBOC may have an anti-takeover effect. These provisions may delay, defer or prevent a tender offer or takeover attempt that a stockholder would consider in its best interest. This includes an attempt that might result in a premium over the market price for the shares held by stockholders. These provisions are expected to discourage certain types of coercive takeover practices and inadequate takeover bids. They are also expected to encourage persons seeking to acquire control of us to negotiate first with the Board of Directors. We believe that the benefits of these provisions outweigh the potential disadvantages of discouraging takeover proposals because, among other things, negotiation of takeover proposals might result in an improvement of their terms.
Series A Preferred Stock. In connection with certain fundamental changes with respect to the Company, including a change of control, holders of Series A Preferred Stock would have the right to (i) receive the as-converted value of the Company’s Common Stock at the then-current Conversion Price, (ii) require the Company to redeem the Series A Preferred Stock in cash for the Redemption Amount or (iii) if a non-cash change of control, retain their shares of Series A Preferred Stock. The potential need to redeem the Series A Preferred Stock at a significant premium could result in an anti-takeover effect. In addition, conversion of the Series A Preferred Stock could dilute the stock ownership or voting rights of persons seeking to obtain control of the Company and thereby have the effect of making it more difficult to remove directors or members of management by diluting the stock ownership or voting rights of persons seeking to effect such a removal.
Additionally, as described above in the above section titled “Voting”, any Material Transaction will require the vote or consent of at least a majority of the outstanding shares of Series A Preferred Stock. Accordingly, if the proposed Certificate of Formation and authorization of Series A Preferred Stock is approved, the Series A Preferred Stock may render more difficult or discourage a merger, tender offer or proxy contest, the assumption of control by a holder of a large block of Common Stock, or the replacement or removal of a member of the Board of Directors or management.
Election of Directors and Vacancies. Our Bylaws, as amended, provide that the Board of Directors will consist of up to 12 members, each serving a one-year term. The number of directors is currently fixed at ten. Pursuant to the Securities Purchase Agreement entered into with Blackstone in connection with the issuance of Convertible Notes to fund in part the Precoat Transaction, as more fully described in our quarterly and annual filings, Blackstone has the right to nominate one director to serve on our Board of Directors.
Our Bylaws require that, in an uncontested election, each director will be elected by a majority of the votes cast. If a nominee in an uncontested election does not receive a majority of the votes cast, he or she is required to promptly tender a resignation to the Board of Directors that is subject to acceptance or rejection by the Board of Directors within 90 days from the date of the certification of the election results. In the event an election of directors is contested, the voting standard will be a plurality of votes cast.
Each of the director nominees consent to serve if elected. If for any unforeseen reason a nominee is unable to serve if elected, the shareholders of AZZ as of the Record Date of the Annual Meeting may exercise their discretion to vote for a substitute nominee selected by the Board of Directors.
The Board of Directors is responsible for recommending director candidates for election by the Company’s shareholders and for electing directors to fill vacancies or newly created directorships. The Board of Directors delegates the screening and evaluation process for director candidates to the Company’s Nominating and Corporate Governance Committee who identifies, evaluates and recruits highly qualified director candidates and recommends them to the Board of Directors.
Quorum. The holders of a majority of the shares issued and outstanding and entitled to vote, present in person or represented by proxy, shall constitute a quorum for the transaction of business at any meeting of shareholders except as otherwise provided by law, the Certificate of Formation or the Bylaws. Once a quorum is present, the shareholders may continue to transact business properly brought before the meeting until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum. If a quorum is not present at any meeting of shareholders, the shareholders entitled to vote at the meeting, present in person or represented by proxy may, by majority vote, adjourn the meeting from time to time, without notice other than announcement at the meeting, until a quorum is present. At an adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting under the notice of the meeting as originally provided. For the purposes of determining the presence of a quorum, abstentions and broker non-votes, as defined in the Bylaws, shall be treated as shares present and entitled to vote.
Special Meeting, Action by Written Consent and Advance Notice Requirements for Stockholder Proposals. Unless otherwise prescribed by law or by AZZ’s Certificate of Formation or the Bylaws, special meetings of the shareholders may be called for any purpose by (i) the Chairman of the Board of Directors (ii) the President, if no Chairman of the Board of Directors has been elected, (iii) the Board of Directors, or (iv) the holders of at least fifteen percent of all of the shares entitled to vote at the meetings. Business transacted at any special meetings shall be confined to the purpose or purposes stated in the notice of the meeting. Written or printed notice of all meetings of shareholders stating the place, day and hour thereof, and, in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered by personal delivery by mail or other permissible electronic transmissions, not less than ten (10) days nor more than sixty (60) days before the date of the meeting, to each shareholder entitled to vote at the meeting. If mailed, notice shall be deemed delivered when deposited in the United States mail addressed to the shareholder at their address as it appears on the share transfer records of the Company, with postage thereon prepaid. Delivery of any notice of a shareholder meeting to any officer or manager of a corporation, company or association, or to any member of a partnership or limited liability company, shall constitute delivery of the notice to the corporation, company, association or partnership.
AZZ’s Bylaws also provide that unless otherwise restricted by the Certificate of Formation or the Bylaws, any action required or permitted to be taken at any meeting of a committee may be taken without a meeting if a consent in writing, setting forth the action so taken, is signed by all the members of the prospective committee of the Board of Directors. Such consent shall have the same force and effect as a unanimous vote at a meeting. The signed consent shall be placed in the minute book.
Amendment to Certificate of Formation and Bylaws. The TBOC provides generally that the affirmative vote of two-thirds of the outstanding stock entitled to vote on amendments to a corporation’s certificate of formation or bylaws is required to approve such amendment, unless a corporation’s certificate of formation or bylaws, as the case may be, requires a greater percentage.
Limitations on Liability and Indemnification of Officers and Directors. The Bylaws state that AZZ shall indemnify to the full extent permitted by law any person who is made or threatened to be made a defendant or respondent in any action, suit or proceeding, whether civil, criminal, administrative, arbitrative or investigative, or in any appeal in such an action, suit or proceeding, by reason of the fact that he or she is or was a director, advisory director or officer of AZZ or of any other company at the request of AZZ or is or was serving at AZZ’s request as an officer, managing partner or in any other position of authority in the operation of a partnership, limited partnership or joint venture in which AZZ has or had a substantial direct or indirect interest (collectively referred to hereinafter as “Indemnified Persons”), against all expenses (including attorneys’ fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such Indemnified Persons in connection with any such action, suit or proceeding. AZZ shall advance, pay and reimburse (as applicable) expenses to Indemnified Persons to the full extent permitted by law. AZZ may, to the extent permitted by law, purchase and maintain insurance, create a trust fund, establish any form of self-insurance, secure its indemnity obligation by grant of a security interest or other lien on the assets of AZZ, establish a letter of credit, guaranty or surety arrangement, or other arrangement on behalf of Indemnified Persons against any liability asserted against such persons in their capacities as described above, whether or not AZZ would have the power to indemnify such Indemnified Persons against such liability. Furthermore, no amendment to or rescission of this section of the Bylaws shall affect the rights of any of the Indemnified Persons to indemnification or the advancement, payment or circumstance which occurred before such amendment or rescission.
Exclusive Jurisdiction of Certain Actions. Unless the Company consents in writing to the selection of an alternative forum, the district courts of the State of Texas in Tarrant County shall be the sole and exclusive forum for (a) any derivative action or proceeding brought on behalf of AZZ, (b) any action asserting a claim of breach of a fiduciary duty owed by any current or former director, officer or other employee of AZZ to AZZ’s shareholders, (c) any action asserting a claim arising pursuant to the TBOC or AZZ’s Certificate of Formation or Bylaws, or (d) any action asserting a claim governed by the internal affairs doctrine of the State of Texas; provided, however, that, in the event that the district courts of the State of Texas in Tarrant County lack jurisdiction over any such action or proceeding, the sole and exclusive forum for such action or proceeding shall be another state or federal court located within the State of Texas in Tarrant County.
Transfer Agent and Registrar. The transfer agent and registrar for the Company’s Common Stock is Computershare Trust Company, N.A.
6
Document
Exhibit 4.3
FORM OF CONVERTIBLE PREFERRED STOCK CERTIFICATE
[Insert Restricted Stock Legend, if applicable]
AZZ Inc.
6.0% Series A Convertible Preferred Stock
Certificate No. [___]
AZZ Inc., a Texas corporation (the “Company”), certifies that [___] is the registered owner of [___] shares of the Company’s 6.0% Series A Convertible Preferred Stock (the “Convertible Preferred Stock”) evidenced by this certificate (this “Certificate”). The special rights, preferences and voting powers of the Convertible Preferred Stock are set forth in the Certificate of Designations of the Company establishing the Convertible Preferred Stock (the “Certificate of Designations”). Capitalized terms used in this Certificate without definition have the respective meanings ascribed to them in the Certificate of Designations.
Additional terms of this Certificate are set forth on the other side of this Certificate.
[The Remainder of This Page Intentionally Left Blank; Signature Page Follows]
IN WITNESS WHEREOF, AZZ Inc. has caused this instrument to be duly executed as of the date set forth below.
AZZ Inc.
Date: By:
Name:
Title:
Date: By:
Name:
Title:
Document
Exhibit 4.4
Certificate of Designations, Preferences, Rights and Limitations of
6.0% Series A Convertible Preferred Stock
of
AZZ Inc.
(Texas Secretary of State File Number 13190700)
Pursuant to Sections 21.155 and 21.156 of the Texas Business Organizations Code
Table of Contents
Page
| Section 1. Definitions | 1 |
|---|---|
| Section 2. Rules of Construction | 14 |
| Section 3. The Convertible Preferred Stock | 14 |
| (a) Designation; Par Value | 14 |
| (b) Number of Authorized Shares | 14 |
| (c) Form, Dating and Denominations | 15 |
| (d) Execution, Countersignature and Delivery | 15 |
| (e) Method of Payment; Delay When Payment Date is Not a Business Day | 16 |
| (f) Transfer Agent, Registrar, Paying Agent and Conversion Agent | 17 |
| (g) Legends | 17 |
| (h) Transfers and Exchanges; Transfer Taxes; Certain Transfer Restrictions | 18 |
| (i) Exchange and Cancellation of Convertible Preferred Stock to Be Converted or to Be Repurchased Pursuant to a Repurchase Upon Fundamental Change or a Redemption | 21 |
| (j) Status of Retired or Treasury Shares | 21 |
| (k) Replacement Certificates | 22 |
| (l) Registered Holders | 22 |
| (m) Cancellation | 22 |
| (n) Shares Held by the Company or its Subsidiaries | 22 |
| (o) Outstanding Shares | 22 |
| (p) Repurchases by the Company and its Subsidiaries | 23 |
| (q) Notations and Exchanges | 24 |
| Section 4. Ranking | 24 |
| Section 5. Dividends | 24 |
| (a) Regular Dividends | 24 |
| (b) Calculation of Regular Dividends | 25 |
| (c) Participating Dividends. | 25 |
| (d) Treatment of Dividends Upon Redemption, Repurchase Upon Fundamental Change or Conversion | 26 |
| Section 6. Rights Upon Liquidation, Dissolution or Winding Up | 26 |
| (a) Generally | 26 |
| (b) Certain Business Combination Transactions Deemed Not to Be a Liquidation | 27 |
| Section 7. Redemption at the Option of the Company | 27 |
| (a) Right to Redeem | 27 |
| (b) Redemption Date | 28 |
| (c) Redemption Price | 28 |
| (d) Redemption Notice | 28 |
| (e) Payment of the Redemption Price | 28 |
| (f) Partial Redemption | 28 |
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| (g) Redemption Prohibited in Certain Circumstances | 29 |
|---|---|
| Section 8. Right of Holders to Require the Company to Repurchase Convertible Preferred Stock upon a Fundamental Change | 29 |
| (a) Fundamental Change Repurchase Right | 29 |
| (b) Funds Legally Available for Payment of Fundamental Change Repurchase Price; Covenant Not to Take Certain Actions | 29 |
| (c) Fundamental Change Repurchase Date | 30 |
| (d) Fundamental Change Repurchase Price | 30 |
| (e) Initial Fundamental Change Notice | 30 |
| (f) Final Fundamental Change Notice | 31 |
| (g) Procedures to Exercise the Fundamental Change Repurchase Right | 32 |
| (h) Payment of the Fundamental Change Repurchase Price | 33 |
| (i) Third Party May Conduct Repurchase Offer In Lieu of the Company | 33 |
| (j) Fundamental Change Agreements | 33 |
| Section 9. Voting Rights | 33 |
| (a) Voting and Consent Rights with Respect to Specified Matters | 33 |
| (b) Right to Vote with Holders of Common Stock on an As-Converted Basis | 36 |
| (c) Procedures for Voting and Consents | 36 |
| Section 10. Conversion | 37 |
| (a) Generally | 37 |
| (b) Conversion at the Option of the Holders | 37 |
| (c) Mandatory Conversion at the Company’s Election | 38 |
| (d) Conversion Procedures | 39 |
| (e) Settlement upon Conversion | 40 |
| (f) Conversion Price Adjustments | 41 |
| (g) Voluntary Conversion Price Decreases | 50 |
| (h) Restriction on Conversions | 50 |
| (i) Effect of Common Stock Change Event | 51 |
| Section 11. Certain Provisions Relating to the Issuance of Common Stock | 53 |
| (a) Equitable Adjustments to Prices | 53 |
| (b) Status of Shares of Common Stock | 53 |
| (c) Taxes Upon Issuance of Common Stock | 53 |
| (d) Limit of Issuance of Shares of Common Stock upon Conversion | 53 |
| Section 12. Taxes | 53 |
| Section 13. Term | 54 |
| Section 14. Calculations | 54 |
| (a) Responsibility; Schedule of Calculations | 54 |
| (b) Calculations Aggregated for Each Holder | 54 |
| Section 15. Notices | 54 |
| Section 16. Facts Ascertainable | 54 |
| Section 17. Waiver | 55 |
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| Section 18. Severability | 55 |
|---|---|
| Section 19. No Other Rights | 55 |
| Section 20. Effectiveness of Filing | 55 |
Exhibits
Exhibit A: Form of Convertible Preferred Stock Certificate A-1
Exhibit B: Form of Restricted Stock Legend B-1
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Certificate of Designations
6.0% Series A Convertible Preferred Stock
On May 13, 2022, the Board of Directors of AZZ Inc., a Texas corporation (the “Company”), adopted the following resolution designating and creating, out of the authorized and unissued shares of preferred stock of the Company, 240,000 authorized shares of a series of preferred stock of the Company titled the “6.0% Series A Convertible Preferred Stock” in accordance with the provisions of Sections 21.155 and 21.156 of the Texas Business Organizations Code and all necessary action on the part of the Company:
RESOLVED that, pursuant to the authority of the Board of Directors pursuant to the Certificate of Formation, the Bylaws and applicable law, a series of preferred stock of the Company titled the “6.0% Series A Convertible Preferred Stock,” and having a par value of $1.00 per share and an initial number of authorized shares equal to two hundred and forty thousand (240,000), is hereby designated and created out of the authorized and unissued shares of preferred stock of the Company, which series has the rights, designations, preferences, voting powers and other provisions set forth below:
Section 1. Definitions.
“Affiliate” of any Person means any Person, directly or indirectly, Controlling, Controlled by or under common Control with such Person; provided, however, that (i) the Company and its Subsidiaries, on the one hand, and any Purchaser Party or any of its Affiliates, on the other hand, shall not be deemed to be Affiliates, (ii) “portfolio companies” (as such term is customarily used among institutional investors) in which any Purchaser Party or any of its Affiliates has an investment (whether as debt or equity) shall not be deemed an Affiliate of such Purchaser Party and (iii) the Excluded Sponsor Parties shall not be deemed to be Affiliates of any Purchaser Party, the Company or any of the Company’s Subsidiaries.
“Board of Directors” means the Company’s board of directors or a committee of such board duly authorized to act with the authority of such board.
“Business Day” means any day other than a Saturday, a Sunday or any day on which the Federal Reserve Bank of New York is authorized or required by law or executive order to close or be closed.
“Bylaws” means the Amended and Restated Bylaws of the Company, as amended and restated on October 8, 2021, as the same may be further amended or restated.
“Capital Stock” of any Person means any and all shares of, interests in, rights to purchase, warrants or options for, participations in, or other equivalents of, in each case, however designated, the equity of such Person, but excluding any debt securities convertible into such equity.
“Certificate” means a Physical Certificate or an Electronic Certificate.
“Certificate of Designations” means this Certificate of Designations, as amended from time to time.
“Certificate of Formation” means the Company’s Amended and Restated Certificate of Formation, as the same has been and may be further amended or restated.
“Close of Business” means 5:00 p.m., New York City time.
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“Common Stock” means the common stock, $1.00 par value per share, of the Company, subject to Section 10(i).
“Common Stock Change Event” has the meaning set forth in Section 10(i)(i).
“Common Stock Mandatory Conversion Conditions” will be satisfied with respect to a Mandatory Conversion if:
(a) the offer and sale of such share of Common Stock by such Holder are registered pursuant to an effective registration statement under the Securities Act and such registration statement is, at the time of such determination, reasonably expected by the Company to remain effective and usable, by the Holder to sell such share of Common Stock, continuously during the period from, and including, the date the related Mandatory Conversion Notice is sent to, and including, the one (1) year anniversary after the date such share of Common Stock is issued;
(b) each share of Common Stock referred to in clause (a) above (i) will, when issued and when sold or otherwise transferred pursuant to the registration statement referred to in such clause (a) (1) be admitted for book-entry settlement through The Depository Trust Company with an “unrestricted” CUSIP number; and (2) unless sold to the Company or an Affiliate of the Company, not be evidenced by any Certificate that bears a legend referring to transfer restrictions under the Securities Act or other securities laws; and (ii) will, when issued, be listed and admitted for trading, without suspension or material limitation on trading, on any of The New York Stock Exchange, The NYSE American, The NASDAQ Capital Market, The NASDAQ Global Market or The NASDAQ Global Select Market (or any of their respective successors);
(c) (i) the Company has not received any written threat or notice of delisting or suspension by the applicable exchange referred to in clause (b)(ii) above with a reasonable prospect of delisting, after giving effect to all applicable notice and appeal periods; and (ii) no such delisting or suspension is reasonably likely to occur or is pending based on the Company falling below the minimum listing maintenance requirements of such exchange; and
(d) the conversion of all shares of Convertible Preferred Stock pursuant to such Mandatory Conversion would not be limited or otherwise restricted by Section 10(h) or Section 11(d).
“Common Stock Participating Dividend” has the meaning set forth in Section 5(c)(i).
“Company” has the meaning set forth in the preliminary paragraph hereto.
“Consolidated EBITDA” has the meaning set forth in the Credit Agreement.
“Consolidated Indebtedness” has the meaning set forth in the Credit Agreement.
“Continuing Share Reserve Requirement” means, as of any time, a number of shares of Common Stock equal to the product of (a) two (2); and (b) the number of shares of Common Stock that would be issuable (without regard to Section 10(h) or Section 11(d)) upon conversion of all Convertible Preferred Stock outstanding as of such time (assuming such conversion occurred as of such time).
“Control” (including its correlative meanings “under common Control with” and “Controlled by”) means, with respect to any Person, the possession, directly or indirectly, of the
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power to direct or cause the direction of the management or policies of such Person, whether through ownership of securities or partnership or other interests, by contract or otherwise.
“Conversion Agent” has the meaning set forth in Section 3(f)(i).
“Conversion Consideration” means, with respect to the conversion of any Convertible Preferred Stock, the type and amount of consideration payable to settle such conversion, determined in accordance with Section 10.
“Conversion Date” means an Optional Conversion Date or a Mandatory Conversion Date.
“Conversion Price” initially means $58.30 per share of Common Stock; provided, however, that the Conversion Price is subject to adjustment pursuant to Sections 10(f) and 10(g). Each reference in this Certificate of Designations to the Conversion Price as of a particular date without setting forth a particular time on such date will be deemed to be a reference to the Conversion Price immediately before the Close of Business on such date.
“Conversion Share” means any share of Common Stock issued or issuable upon conversion of any Convertible Preferred Stock.
“Conversion Share Cap” means, as of any Conversion Date, a number of shares of Common Stock equal to 19.9995% of the number of shares of Common Stock outstanding as of May 13, 2022 minus the aggregate number of shares of Common Stock previously issued in settlement of conversions of the Convertible Preferred Stock. The Conversion Share Cap will be adjusted at the same time and in the same manner as the Conversion Price as provided in Sections 10(f) and 10(g).
“Convertible Notes” means the $240,000,000 in aggregate principal amount of the Company’s 6.00% Convertible Subordinated Notes due 2030, issued pursuant to that certain Indenture, entered into as of the Initial Issue Date, by and between the Company and the trustee named therein.
“Convertible Preferred Stock” has the meaning set forth in Section 3(a).
“Credit Agreement” means that certain Credit Agreement by and between the Company, the lenders from time to time party thereto, the L/C Issuers from time to time party thereto and Citibank, N.A., as administrative agent and collateral agent, dated as of May 13, 2022, as it may be amended, supplemented or otherwise modified from time to time.
“Default Accrued Dividends” mean all Default Dividend Accruals which have been added to the Liquidation Preference pursuant to Section 5(b) to the extent not paid pursuant to Section 5.1(d) prior to the time of determination.
“Default Dividend Accrual” has the meaning set forth in Section 5(b).
“Default Dividend Rate” means, with respect to the Convertible Preferred Stock, as of any time of determination, the then-applicable Regular Dividend Rate plus 200 basis points (i.e. adding two percentage points to the then-applicable Regular Dividend Rate).
“Deficit Shares” has the meaning set forth in Section 10(h)(i)(1).
“Distributed Entity” means any Subsidiary of the Company distributed in a Distribution Transaction.
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“Distribution Transaction” means any transaction by which an Affiliate or Subsidiary of the Company ceases to be an Affiliate or Subsidiary of the Company by reason of the distribution of such Affiliate’s or Subsidiary’s equity securities to holders of Common Stock, whether by means of a spin-off, split-off, redemption, reclassification, exchange, stock dividend, share distribution, rights offering or similar transaction.
“Distribution Transaction Valuation Period” has the meaning set forth in Section 10(f)(i)(3)(B).
“Dividend” means any Regular Dividend or Participating Dividend.
“Dividend Junior Securities” means any equity securities issued by the Company, the terms of which would result in such securities ranking junior to the Convertible Preferred Stock with respect to the payment of dividends (without regard to whether or not dividends accumulate cumulatively). Dividend Junior Securities includes the Common Stock. For the avoidance of doubt, Dividend Junior Securities will not include any securities of the Company’s Subsidiaries.
“Dividend Parity Securities” means any equity securities issued by the Company (other than the Convertible Preferred Stock), the terms of which would result in such securities ranking equally with the Convertible Preferred Stock with respect to the payment of dividends (without regard to whether or not dividends accumulate cumulatively). For the avoidance of doubt, Dividend Parity Securities will not include any securities of the Company’s Subsidiaries.
“Dividend Payment Date” means each Regular Dividend Payment Date with respect to a Regular Dividend and each date on which any declared Participating Dividend is scheduled to be paid on the Convertible Preferred Stock with respect to a Participating Dividend.
“Dividend Senior Securities” means any equity securities issued by the Company, the terms of which would result in such securities ranking senior to the Convertible Preferred Stock with respect to the payment of dividends (without regard to whether or not dividends accumulate cumulatively). For the avoidance of doubt, Dividend Senior Securities will not include any securities of the Company’s Subsidiaries.
“Electronic Certificate” means any electronic book entry maintained by the Transfer Agent that evidences any share(s) of Convertible Preferred Stock.
“Equity Treatment Limitation” has the meaning set forth in Section 10(h)(i)(1).
“Ex-Dividend Date” means, with respect to an issuance, dividend or distribution on the Common Stock, the first date on which shares of Common Stock trade on the applicable exchange or in the applicable market, regular way, without the right to receive such issuance, dividend or distribution (including pursuant to due bills or similar arrangements required by the relevant stock exchange). For the avoidance of doubt, any alternative trading convention on the applicable exchange or market in respect of the Common Stock under a separate ticker symbol or CUSIP number will not be considered “regular way” for this purpose.
“Exchange Act” means the U.S. Securities Exchange Act of 1934, as amended.
“Exchange Preferred Stock” means a series of convertible preferred stock issued by the Company and having terms, conditions, designations, dividend rights, voting powers, rights on liquidation and other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof that are identical, or as nearly so as is practicable in the good faith judgment of the Board of Directors, to those of the Convertible Preferred Stock,
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except that the Liquidation Preference and the Conversion Price thereof will be determined as provided herein.
“Excluded Sponsor Parties” means Blackstone Inc. or any of its Affiliates, other than the Purchaser Parties, in their businesses distinct from the Tactical Opportunities business of such Persons.
“Expiration Date” has the meaning set forth in Section 10(f)(i)(4).
“Expiration Time” has the meaning set forth in Section 10(f)(i)(4).
“Final Fundamental Change Notice” has the meaning set forth in Section 8(f).
“Fundamental Change” means any of the following events, whether in a single transaction or a series of related transactions:
(a) a “person” or “group” (within the meaning of Section 13(d) and 14(d) of the Exchange Act), other than the Company or its Wholly Owned Subsidiaries, or their respective employee benefit plans, files (or is required to file) any report with the SEC indicating that such person or group, has become the direct or indirect “beneficial owner” (as defined below) of shares of the Common Stock representing more than fifty percent (50%) of the voting power of all of the Company’s Common Stock in a transaction or series of related transactions;
(b) the consummation of (i) any sale, lease or other transfer, in one transaction or a series of transactions, of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any Person other than one of the Company’s Wholly Owned Subsidiaries; or (ii) any transaction or series of related transactions in connection with which (whether by means of merger, consolidation, share exchange, combination, reclassification, recapitalization, acquisition, liquidation or otherwise) a majority of the Common Stock is exchanged for, converted into, acquired for, or constitutes solely the right to receive, other securities, cash or other property; provided, however, that any merger, consolidation, share exchange, combination, reclassification or recapitalization of the Company pursuant to which the Persons that directly or indirectly “beneficially owned” (as defined below) all classes of the Company’s common equity immediately before such transaction directly or indirectly “beneficially own,” immediately after such transaction, more than fifty percent (50%) of all classes of common equity of the surviving, continuing or acquiring company, as applicable, or the parent thereof, in substantially the same proportions vis-à-vis each other as immediately before such transaction, will be deemed not to be a Fundamental Change pursuant to this clause (b); or
(c) neither shares of Common Stock nor shares of any other Capital Stock into which the Convertible Preferred Stock is convertible are listed for trading on any United States national securities exchange or all such shares cease to be traded in contemplation of a de-listing (other than as a result of a transaction described in clause (b) above); or
(d) the adoption of a plan relating to the liquidation or dissolution of the Company; or
(e) the Company becomes the subject of a bankruptcy or insolvency proceeding, or has had a receiver, conservator, trustee, administrator, custodian, assignee for the benefit of creditors or similar Person charged with the reorganization or liquidation of its business appointed for it, or has taken any action for the purpose of
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effecting, in furtherance of, or indicating its consent to, approval of, or acquiescence in, any such proceeding or appointment.
For the purposes of this definition, whether a Person is a “beneficial owner”, whether shares are “beneficially owned”, and percentage beneficial ownership, will be determined in accordance with Rules 13d-3 and 13d-5 under the Exchange Act.
“Fundamental Change Repurchase Date” means the date fixed, pursuant to Section 8(c), for the repurchase of any Convertible Preferred Stock by the Company pursuant to a Repurchase Upon Fundamental Change.
“Fundamental Change Repurchase Notice” means a notice (including a notice substantially in the form of the “Fundamental Change Repurchase Notice” set forth in Exhibit A) containing the information, or otherwise complying with the requirements, set forth in Section 8(g)(i) and Section 8(g)(ii).
“Fundamental Change Repurchase Price” means the cash price payable by the Company to repurchase any share of Convertible Preferred Stock upon its Repurchase Upon Fundamental Change, calculated pursuant to Section 8(d).
“Fundamental Change Repurchase Right” has the meaning set forth in Section 8(a).
“Holder” means a person in whose name any Convertible Preferred Stock is registered on the Registrar’s books.
“Indebtedness” has the meaning set forth in the Credit Agreement.
“Initial Issue Date” means May 13, 2022.
“Initial Fundamental Change Notice” has the meaning set forth in Section 8(e).
“Initial Liquidation Preference” means one thousand dollars ($1,000.00) per share of Convertible Preferred Stock.
“Initial Share Reserve Requirement” means a number of shares of Common Stock equal to the product of (a) two (2); and (b) the number of shares of Common Stock that would be issuable (without regard to Section 10(h) or Section 11(d)) upon conversion of all Convertible Preferred Stock outstanding as of the Initial Issue Date (assuming such conversion occurred on the Initial Issue Date).
“Last Reported Sale Price” of the Common Stock for any Trading Day means the closing sale price per share (or, if no closing sale price is reported, the average of the last bid price and the last ask price per share or, if more than one in either case, the average of the average last bid prices and the average last ask prices per share) of the Common Stock on such Trading Day as reported in composite transactions for the principal U.S. national or regional securities exchange on which the Common Stock is then listed. If the Common Stock is not listed on a U.S. national or regional securities exchange on such Trading Day, then the Last Reported Sale Price will be the last quoted bid price per share of Common Stock on such Trading Day in the over-the-counter market as reported by OTC Markets Group Inc. or a similar organization. If the Common Stock is not so quoted on such Trading Day, then the Last Reported Sale Price will be the average of the mid-point of the last bid price and the last ask price per share of Common Stock on such Trading Day from a nationally recognized independent investment banking firm the Company selects.
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“Liquidation Event” has the meaning set forth in Section 6(a).
“Liquidation Junior Securities” means any equity securities issued by the Company, the terms of which would result in such securities ranking junior to the Convertible Preferred Stock with respect to the distribution of assets upon the Company’s liquidation, dissolution or winding up. Liquidation Junior Securities includes the Common Stock. For the avoidance of doubt, Liquidation Junior Securities will not include any securities of the Company’s Subsidiaries.
“Liquidation Parity Securities” means any equity securities issued by the Company (other than the Convertible Preferred Stock), the terms of which would result in such securities ranking equally with the Convertible Preferred Stock with respect to the distribution of assets upon the Company’s liquidation, dissolution or winding up. For the avoidance of doubt, Liquidation Parity Securities will include any Mirror Preferred Stock issued in accordance with the terms hereof, but does not include any securities of the Company’s Subsidiaries.
“Liquidation Preference” means, with respect to the Convertible Preferred Stock, an amount initially equal to the Initial Liquidation Preference per share of Convertible Preferred Stock; provided, however, that the Liquidation Preference is subject to adjustment pursuant to Section 5(b).
“Liquidation Senior Securities” means any equity securities issued by the Company, the terms of which would result in such securities ranking senior to the Convertible Preferred Stock with respect to the distribution of assets upon the Company’s liquidation, dissolution or winding up. For the avoidance of doubt, Liquidation Senior Securities will not include any securities of the Company’s Subsidiaries.
“Majority Holders” has the meaning set forth in Section 10(f)(iv)(1).
“Mandatory Conversion” has the meaning set forth in Section 10(c)(i).
“Mandatory Conversion Date” means a Conversion Date designated with respect to any Convertible Preferred Stock pursuant to Section 10(c)(i) and 10(c)(iii).
“Mandatory Conversion Notice” has the meaning set forth in Section 10(c)(iv).
“Mandatory Conversion Notice Date” means, with respect to a Mandatory Conversion, the date on which the Company sends the Mandatory Conversion Notice for such Mandatory Conversion pursuant to Section 10(c)(iv).
“Mandatory Conversion Right” has the meaning set forth in Section 10(c)(i).
“Market Capitalization” means an amount equal to (a) the total number of issued and outstanding shares of Common Stock on the date on which the relevant transaction is consummated pursuant to Section 9(a)(6) multiplied by (b) (i) the arithmetic mean of the Last Reported Sale Price of the Common Stock for the twenty (20) consecutive Trading Days ending on, and including, the Trading Day immediately before the date on which the relevant transaction is consummated or (ii) at the election of the Company, the Last Reported Sale Price of the Common Stock for the date on which the definitive agreement for the relevant transaction is executed.
“Market Disruption Event” means, with respect to any date, the occurrence or existence, during the one-half hour period ending at the scheduled close of trading on such date on the principal U.S. national or regional securities exchange or other market on which the
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Common Stock is listed for trading or trades, of any material suspension or limitation imposed on trading (by reason of movements in price exceeding limits permitted by the relevant exchange or otherwise) in the Common Stock or in any options contracts or futures contracts relating to the Common Stock.
“Mirror Preferred Stock” means a series of convertible preferred stock issued by the Distributed Entity and having terms, conditions, designations, dividend rights, voting powers, rights on liquidation and other preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof that are identical, or as nearly so as is practicable in the good faith judgment of the Board of Directors, to those of the Convertible Preferred Stock, except that the Liquidation Preference and the Conversion Price thereof will be determined as provided herein.
“Net Debt” means Consolidated Indebtedness minus Unrestricted Cash.
“Number of Reserved Shares” means, as of any time, the number of shares of Common Stock that, at such time, the Company has reserved (out of its authorized but unissued shares of Common Stock that are not reserved for any other purpose) for delivery upon conversion of the Convertible Preferred Stock.
“Officer” means the Chairman of the Board of Directors, the Chief Executive Officer, the President, the Chief Operating Officer, the Chief Financial Officer, the Treasurer, any Assistant Treasurer, the Controller, the Secretary or any Vice-President of the Company.
“Open of Business” means 9:00 a.m., New York City time.
“Optional Conversion” means the conversion of any Convertible Preferred Stock other than pursuant to a Mandatory Conversion.
“Optional Conversion Date” means, with respect to the Optional Conversion of any Convertible Preferred Stock, the first Business Day on which the requirements set forth in Section 10(d)(ii) for such conversion are satisfied.
“Optional Conversion Notice” means a notice substantially in the form of the “Optional Conversion Notice” set forth in Exhibit A.
“Participating Dividend” has the meaning set forth in Section 5(c)(i).
“Paying Agent” has the meaning set forth in Section 3(f)(i).
“Permitted Transferee” means, with respect to any Person, (i) any Affiliate of such Person, (ii) any successor entity of such Person and (iii) with respect to any Person that is an investment fund, vehicle or similar entity, any other investment fund, vehicle or similar entity of which such Person or an Affiliate, advisor or manager of such Person serves as the general partner, managing member, manager or advisor.
“Person” or “person” means any individual, corporation, partnership, limited liability company, joint venture, association, joint-stock company, trust, unincorporated organization or government or other agency or political subdivision thereof. Any division or series of a limited liability company, limited partnership or trust will constitute a separate “person” under this Certificate of Designations.
“Physical Certificate” means any certificate (other than an Electronic Certificate) evidencing any share(s) of Convertible Preferred Stock, which certificate is substantially in the
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form set forth in Exhibit A, registered in the name of the Holder of such share(s) and duly executed by the Company and countersigned by the Transfer Agent.
“Prior Dividends” means, with respect to any share of Convertible Preferred Stock, as of the date of determination, any prior cash distributions in respect of such share, and any dividends or other prior cash payments made in respect of the Convertible Note for which such share was exchanged.
“Purchase Agreement” means that certain Securities Purchase Agreement by and between the Company and BTO Pegasus Holdings DE L.P., dated as of May 13, 2022, as it may be amended, supplemented or otherwise modified from time to time, with respect to certain terms and conditions concerning, among other things, the rights of and restrictions on the Holders.
“Purchaser” means BTO Pegasus Holdings DE L.P. and its Permitted Transferees.
“Purchaser Parties” means the Purchaser and each Permitted Transferee of the Purchaser to whom shares of Convertible Preferred Stock or Common Stock issued upon conversion of shares of Convertible Preferred Stock or Convertible Notes are transferred.
“Record Date” means, with respect to any dividend or distribution on, or issuance to holders of, Convertible Preferred Stock or Common Stock, the date fixed (whether by law, contract or the Board of Directors or otherwise) to determine the Holders or the holders of Common Stock, as applicable, that are entitled to such dividend, distribution or issuance.
“Redemption” has the meaning set forth in Section 7(a).
“Redemption Convertibility Conditions” will be satisfied with respect to a Redemption if:
(a) unless a Fundamental Change has occurred and (x) the Company has ceased to be listed or admitted for trading on any of The New York Stock Exchange, The NYSE American, The NASDAQ Capital Market, The NASDAQ Global Market or The NASDAQ Global Select Market (or any of their respective successors) and (y) the Common Stock has ceased to be registered under Section 12 of the Exchange Act or the Company has otherwise validly filed a Form 15 with respect to the Common Stock (in which case this clause (a) will not apply):
(i) the offer and sale of any shares of Common Stock that would be issued upon an Optional Conversion of Convertible Preferred Stock subject to such Redemption by such Holder are registered pursuant to an effective registration statement under the Securities Act and such registration statement is, at the time of such determination, reasonably expected by the Company to remain effective and usable, by the Holder to sell such share of Common Stock, continuously during the period from, and including, the Redemption Notice Date to, and including, the one (1) year anniversary after the date such share of Common Stock is issued;
(ii) each share of Common Stock referred to in clause (a)(i) above (A) will, when issued and when sold or otherwise transferred pursuant to the registration statement referred to in such clause (a)(i) (1) be admitted for book-entry settlement through The Depository Trust Company with an “unrestricted” CUSIP number; and (2) unless sold to the Company or an Affiliate of the Company, not be evidenced by any Certificate that bears a legend referring to
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transfer restrictions under the Securities Act or other securities laws; and (B) will, when issued, be listed and admitted for trading, without suspension or material limitation on trading, on any of The New York Stock Exchange, The NYSE American, The NASDAQ Capital Market, The NASDAQ Global Market or The NASDAQ Global Select Market (or any of their respective successors);
(iii) (A) the Company has not received any written threat or notice of delisting or suspension by the applicable exchange referred to in clause (a)(ii)(B) above with a reasonable prospect of delisting, after giving effect to all applicable notice and appeal periods; and (B) no such delisting or suspension is reasonably likely to occur or is pending based on the Company falling below the minimum listing maintenance requirements of such exchange; and
(b) the conversion of all shares of Convertible Preferred Stock subject to such Redemption would not be limited or otherwise restricted by Section 10(h) or Section 11(d).
“Redemption Date” means the date fixed, pursuant to Section 7(b), for the settlement of the repurchase of the Convertible Preferred Stock by the Holder pursuant to a Redemption.
“Redemption Notice” has the meaning set forth in Section 7(d).
“Redemption Notice Date” means, with respect to a Redemption, the date on which the Holder sends the Redemption Notice for such Redemption pursuant to Section 7(d).
“Redemption Price” means the consideration payable by the Company to repurchase any Convertible Preferred Stock upon its Redemption, calculated pursuant to Section 7(c).
“Reference Property” has the meaning set forth in Section 10(i)(i).
“Reference Property Unit” has the meaning set forth in Section 10(i)(i).
“Register” has the meaning set forth in Section 3(f)(ii).
“Registrar” has the meaning set forth in Section 3(f)(i).
“Regular Dividend Payment Date” means, with respect to any share of Convertible Preferred Stock, each March 31, June 30, September 30 and December 31 of each year, beginning on the first such date occurring after the Initial Issue Date (or beginning on such other date specified in the Certificate evidencing such share).
“Regular Dividend Period” means each period from, and including, a Regular Dividend Payment Date (or, in the case of the first Regular Dividend Period, from, and including, the Initial Issue Date) to, but excluding, the next Regular Dividend Payment Date.
“Regular Dividend Rate” means (x) six percent (6.0%) per annum, which shall increase by one percentage point on each anniversary of the Initial Issue Date from and after the sixth anniversary of the Initial Issue Date or (y) to the extent and during the period with respect to which such rate has been adjusted as provided in Section 8(b), such adjusted rate; provided, if there are Default Accrued Dividends on an applicable Regular Dividend Record Date, the Regular Dividend Rate for the Regular Dividend Period ending on, but excluding, such Regular Dividend Payment Date shall be the Default Dividend Rate (with such Default Dividend Rate being determined prior to giving effect to this proviso).
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“Regular Dividend Record Date” has the following meaning: (a) March 15th, in the case of a Regular Dividend Payment Date occurring on March 31st; (b) June 15th, in the case of a Regular Dividend Payment Date occurring on June 30th; (c) September 15th, in the case of a Regular Dividend Payment Date occurring on September 30th; and (d) December 15th, in the case of a Regular Dividend Payment Date occurring on December 31st.
“Regular Dividends” has the meaning set forth in Section 5(a)(i).
“Repurchase Upon Fundamental Change” means the repurchase of any Convertible Preferred Stock by the Company pursuant to Section 8.
“Restricted Stock Legend” means a legend substantially in the form set forth in Exhibit B.
“Return Factor” means 140%, and such percentage shall increase (a) on the second anniversary of the Initial Issue Date and on each anniversary of the Initial Issue Date thereafter until (and including) the fifth anniversary by 15 percentage points on each such anniversary, (b) on the second anniversary of the Initial Issue Date by an additional 15 percentage points if (i) the Company’s ratio of Net Debt to Consolidated EBITDA on the second anniversary of the Initial Issue Date is greater than 3.5-to-1 and (ii) between the Initial Issue Date and the second anniversary of the Initial Issue Date, the Company has not consummated dispositions of assets that, in the aggregate, resulted in proceeds in excess of $200,000,000, and (c) on the sixth anniversary of the Initial Issue Date and on each anniversary of the Initial Issue Date thereafter by 20 percentage points on each such anniversary. For reference, an illustrative table setting forth the “Return Factor” is included as Schedule A.
“Rule 144” means Rule 144 under the Securities Act (or any successor rule thereto), as the same may be amended from time to time.
“SEC” means the U.S. Securities and Exchange Commission.
“Securities Act” means the Securities Act of 1933, as amended, and the rules and regulations of the SEC promulgated thereunder.
“Security” means any Convertible Preferred Stock or Conversion Share.
“Share Agent” means the Transfer Agent or any Registrar, Paying Agent or Conversion Agent.
“Spin-Off Exchange Offer” has the meaning set forth in Section 10(f)(iv)(1).
“Subsidiary” means, with respect to any Person, (a) any corporation, association or other business entity (other than a partnership or limited liability company) of which more than 50% of the total voting power of the Capital Stock entitled (without regard to the occurrence of any contingency, but after giving effect to any voting agreement or stockholders’ agreement that effectively transfers voting power) to vote in the election of directors, managers or trustees, as applicable, of such corporation, association or other business entity is owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person; and (b) any partnership or limited liability company where (x) more than fifty percent (50%) of the capital accounts, distribution rights, equity and voting interests, or of the general and limited partnership interests, as applicable, of such partnership or limited liability company are owned or controlled, directly or indirectly, by such Person or one or more of the other Subsidiaries of such Person, whether in the form of membership, general, special or limited partnership or limited liability company interests or otherwise; and (y) such Person or any one or more of the other
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Subsidiaries of such Person is a controlling general partner of, or otherwise controls, such partnership or limited liability company.
“Successor Person” has the meaning set forth in Section 10(i)(ii).
“Tender/Exchange Offer Valuation Period” has the meaning set forth in Section 10(f)(i)(4).
“Trading Day” means any day on which (a) trading in the Common Stock generally occurs on the principal U.S. national or regional securities exchange on which the Common Stock is then listed or, if the Common Stock is not then listed on a U.S. national or regional securities exchange, on the principal other market on which the Common Stock is then traded; and (b) there is no Market Disruption Event. If the Common Stock is not so listed or traded, then “Trading Day” means a Business Day.
“Transfer Agent” means Computershare Trust Company, N.A. or its successor.
“Transfer-Restricted Security” means any Security that constitutes a “restricted security” (as defined in Rule 144); provided, however, that such Security will cease to be a Transfer-Restricted Security upon the earliest to occur of the following events:
(a) such Security is sold or otherwise transferred to a Person (other than the Company or an Affiliate of the Company) pursuant to a registration statement that was effective under the Securities Act at the time of such sale or transfer;
(b) such Security is sold or otherwise transferred to a Person (other than the Company or an Affiliate of the Company) pursuant to an available exemption (including Rule 144) from the registration and prospectus-delivery requirements of, or in a transaction not subject to, the Securities Act and, immediately after such sale or transfer, such Security ceases to constitute a “restricted security” (as defined in Rule 144); and
(c) (i) such Security is eligible for resale, by a Person that is not an Affiliate of the Company and that has not been an Affiliate of the Company during the immediately preceding three (3) months, pursuant to Rule 144 without any limitations thereunder as to volume, manner of sale, availability of current public information or notice; and (ii) the Company has received such certificates or other documentation or evidence as the Company may reasonably require to determine that the Holder, holder or beneficial owner of such Security is not, and has not been during the immediately preceding three (3) months, an Affiliate of the Company.
“Unrestricted Cash” has the meaning set forth in the Credit Agreement.
“Wholly Owned Subsidiary” of a Person means any Subsidiary of such Person all of the outstanding Capital Stock or other ownership interests of which (other than directors’ qualifying shares) are owned by such Person or one or more Wholly Owned Subsidiaries of such Person.
Section 2. Rules of Construction. For purposes of this Certificate of Designations:
(a) “or” is not exclusive;
(b) “including” means “including without limitation”;
(c) “will” expresses a command;
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(d) the “average” of a set of numerical values refers to the arithmetic average of such numerical values;
(e) a merger involving, or a transfer of assets by, a limited liability company, limited partnership or trust will be deemed to include any division of or by, or an allocation of assets to a series of, such limited liability company, limited partnership or trust, or any unwinding of any such division or allocation;
(f) words in the singular include the plural and in the plural include the singular, unless the context requires otherwise;
(g) “herein,” “hereof” and other words of similar import refer to this Certificate of Designations as a whole and not to any particular Section or other subdivision of this Certificate of Designations, unless the context requires otherwise;
(h) references to currency mean the lawful currency of the United States of America, unless the context requires otherwise; and
(i) the exhibits, schedules and other attachments to this Certificate of Designations are deemed to form part of this Certificate of Designations.
Section 3. The Convertible Preferred Stock.
(a) Designation; Par Value. A series of stock of the Company titled the “6.0% Series A Convertible Preferred Stock” (the “Convertible Preferred Stock”) is hereby designated and created out of the authorized and unissued shares of preferred stock of the Company. The par value of the Convertible Preferred Stock is $1.00 per share.
(b) Number of Authorized Shares. The total authorized number of shares of Convertible Preferred Stock is two hundred and forty thousand (240,000); provided, however that, by resolution of the Board of Directors, the total number of authorized shares of Convertible Preferred Stock may be increased or reduced to a number that is not less than the number of shares of Convertible Preferred Stock then outstanding.
(c) Form, Dating and Denominations.
(i) Form and Date of Certificates Evidencing Convertible Preferred Stock. Each Certificate evidencing any Convertible Preferred Stock will (1) be substantially in the form set forth in Exhibit A and (2) bear the legends required by Section 3(g) and may bear notations, legends or endorsements required by law, stock exchange rule or usage or the depositary.
(ii) Electronic Certificates; Physical Certificates. The Convertible Preferred Stock will be originally issued initially in the form of one or more Electronic Certificates. Electronic Certificates may be exchanged for Physical Certificates, and Physical Certificates may be exchanged for Electronic Certificates, upon request by the Holder thereof pursuant to customary procedures, subject to Section 3(h).
(iii) Electronic Certificates; Interpretation. For purposes of this Certificate of Designations, (1) each Electronic Certificate will be deemed to include the text of the stock certificate set forth in Exhibit A; (2) any legend or other notation that is required to be included on a Certificate will be deemed to be affixed to any Electronic Certificate notwithstanding that such Electronic Certificate may be in a form that does not permit affixing legends thereto; (3) any reference in this
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Certificate of Designations to the “delivery” of any Electronic Certificate will be deemed to be satisfied upon the registration of the electronic book entry representing such Electronic Certificate in the name of the applicable Holder; (4) upon satisfaction of any applicable requirements of the Texas Business Organizations Code, the Certificate of Formation and the Bylaws of the Company, and any related requirements of the Transfer Agent, in each case, for the issuance of Convertible Preferred Stock in the form of one or more Electronic Certificates, such Electronic Certificates will be deemed to be executed by the Company and countersigned by the Transfer Agent.
(iv) Appointment of Depositary. If any Convertible Preferred Stock is admitted to the book-entry clearance and settlement facilities of any electronic depositary, then, notwithstanding anything to the contrary in this Certificate of Designations, each reference in this Certificate of Designations to the delivery of, or payment on, any such Convertible Preferred Stock, or the delivery of any related notice or demand, will be deemed to be satisfied to the extent the applicable procedures of such depositary governing such delivery or payment, as applicable, are satisfied.
(v) No Bearer Certificates; Denominations. The Convertible Preferred Stock will be issued only in registered form and only in whole numbers of shares.
(vi) Registration Numbers. Each Certificate evidencing any share of Convertible Preferred Stock will bear a unique registration number that is not affixed to any other Certificate evidencing any other then-outstanding shares of Convertible Preferred Stock.
(d) Execution, Countersignature and Delivery.
(i) Due Execution by the Company. At least two (2) duly authorized Officers will sign each Certificate evidencing any Convertible Preferred Stock on behalf of the Company by manual, facsimile or electronic signature. The validity of any Convertible Preferred Stock will not be affected by the failure of any Officer whose signature is on any Certificate evidencing such Convertible Preferred Stock to hold, at the time such Certificate is countersigned by the Transfer Agent, the same or any other office at the Company.
(ii) Countersignature by Transfer Agent. No Certificate evidencing any share of Convertible Preferred Stock is valid until such Certificate is countersigned by the Transfer Agent. Each Certificate will be deemed to be duly countersigned only when an authorized signatory of the Transfer Agent (or a duly appointed agent thereof) signs (by manual, facsimile or electronic signature) the countersignature block set forth in such Certificate.
(e) Method of Payment; Delay When Payment Date is Not a Business Day.
(i) Method of Payment.
(1) Electronic Certificates. The Company will pay (or cause the Paying Agent to pay) all cash amounts due on any Convertible Preferred Stock evidenced by an Electronic Certificate, out of funds legally available therefor, by wire transfer of immediately available funds.
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(2) Physical Certificates. The Company will pay (or cause the Paying Agent to pay) all cash amounts due on any Convertible Preferred Stock evidenced by a Physical Certificate, out of funds legally available therefor, as follows:
(A) if the aggregate Liquidation Preference of the Convertible Preferred Stock evidenced by such Physical Certificate is at least five million dollars ($5,000,000.00) (or such lower amount as the Company may choose in its sole and absolute discretion) and the Holder of such Convertible Preferred Stock entitled to such cash Dividend or amount has delivered to the Paying Agent, no later than the time set forth in the next sentence, a written request to receive payment by wire transfer to an account of such Holder within the United States, by wire transfer of immediately available funds to such account; and
(B) in all other cases, by check mailed to the address of such Holder set forth in the Register.
To be timely, such written request must be delivered no later than the Close of Business on the following date: (x) with respect to the payment of any declared cash Dividend due on a Dividend Payment Date for the Convertible Preferred Stock, the related Record Date; and (y) with respect to any other payment, the date that is fifteen (15) calendar days immediately before the date such payment is due.
(ii) Delay of Payment when Payment Date is Not a Business Day. If the due date for a payment on any Convertible Preferred Stock as provided in this Certificate of Designations is not a Business Day, then, notwithstanding anything to the contrary in this Certificate of Designations, such payment may be made on the immediately following Business Day and no interest, dividend or other amount will accrue or accumulate on such payment as a result of the related delay. Solely for purposes of the immediately preceding sentence, a day on which the applicable place of payment is authorized or required by law or executive order to close or be closed will be deemed not to be a “Business Day.”
(f) Transfer Agent, Registrar, Paying Agent and Conversion Agent.
(i) Generally. The Company designates its principal U.S. executive offices, and any office of the Transfer Agent in the continental United States, as an office or agency where Convertible Preferred Stock may be presented for (1) registration of transfer or for exchange (the “Registrar”); (2) payment (the “Paying Agent”); and (3) conversion (the “Conversion Agent”). At all times when any Convertible Preferred Stock is outstanding, the Company will maintain an office in the continental United States constituting the Registrar, Paying Agent and Conversion Agent.
(ii) Maintenance of the Register. The Company will keep, or cause there to be kept, a record (the “Register”) of the names and addresses of the Holders, the number of shares of Convertible Preferred Stock held by each Holder and the transfer, exchange, repurchase, Redemption and conversion of the Convertible Preferred Stock. Absent manifest error, the entries in the Register will be conclusive and the Company and the Transfer Agent may treat each Person whose name is recorded as a Holder in the Register as a Holder for all purposes. The Register will be in written form or in any form capable of being converted into written form reasonably promptly. The Company will promptly provide a copy of the Register to any Holder upon its request.
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(iii) Subsequent Appointments. By notice to each Holder, the Company may, at any time, appoint any Person (including any Subsidiary of the Company) to act as Registrar, Paying Agent or Conversion Agent.
(iv) If the Company or any of its Subsidiaries acts as Paying Agent or Conversion Agent, then (1) it will segregate for the benefit of the Holders all money and other property held by it as Paying Agent or Conversion Agent; and (2) references in this Certificate of Designations to the Paying Agent or Conversion Agent holding cash or other property, or to the delivery of cash or other property to the Paying Agent or Conversion Agent, in each case, for payment or delivery to any Holders or with respect to the Convertible Preferred Stock, will be deemed to refer to cash or other property so segregated, or to the segregation of such cash or other property, respectively.
(g) Legends.
(i) Restricted Stock Legend.
(1) Each Certificate evidencing any share of Convertible Preferred Stock that is a Transfer-Restricted Security will bear the Restricted Stock Legend.
(2) If any share of Convertible Preferred Stock is issued in exchange for, in substitution of, or to effect a partial conversion of, any other share(s) of Convertible Preferred Stock (such other share(s) being referred to as the “old share(s)” for purposes of this Section 3(g)(i)(2)), including pursuant to Section 3(i) or 3(k), then the Certificate evidencing such share will bear the Restricted Stock Legend if the Certificate evidencing such old share(s) bore the Restricted Stock Legend at the time of such exchange or substitution, or on the related Conversion Date with respect to such conversion, as applicable; provided, however, that the Certificate evidencing such share need not bear the Restricted Stock Legend if such share does not constitute a Transfer-Restricted Security immediately after such exchange or substitution, or as of such Conversion Date, as applicable.
(ii) Other Legends. The Certificate evidencing any Convertible Preferred Stock may bear any other legend or text, not inconsistent with this Certificate of Designations, as may be required by applicable law, by the rules of any applicable depositary for the Convertible Preferred Stock or by any securities exchange or automated quotation system on which such Convertible Preferred Stock is traded or quoted or as may be otherwise reasonably determined by the Company to be appropriate.
(iii) Acknowledgement and Agreement by the Holders. A Holder’s acceptance of any Convertible Preferred Stock evidencing by a Certificate bearing any legend required by this Section 3(g) will constitute such Holder’s acknowledgement of, and agreement to comply with, the restrictions set forth in such legend.
(iv) Legends on Conversion Shares.
(1) Each Conversion Share will bear a legend substantially to the same effect as the Restricted Stock Legend if the Convertible Preferred Stock upon the conversion of which such Conversion Share was issued was (or would have been had it not been converted) a Transfer-Restricted Security at the time such Conversion Share was issued; provided, however, that such Conversion Share need not bear such a legend if the Company determines, in its reasonable discretion, that such Conversion Share need not bear such a legend.
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(2) Notwithstanding anything to the contrary in Section 3(g)(iv)(1), a Conversion Share need not bear a legend pursuant to Section 3(g)(iv)(1) if such Conversion Share is issued in an uncertificated form that does not permit affixing legends thereto, provided the Company takes measures (including the assignment thereto of a “restricted” CUSIP number) that it reasonably deems appropriate to enforce the transfer restrictions referred to in such legend.
(h) Transfers and Exchanges; Transfer Taxes; Certain Transfer Restrictions.
(i) Provisions Applicable to All Transfers and Exchanges.
(1) Generally. Subject to this Section 3(h), Convertible Preferred Stock evidenced by any Certificate may be transferred or exchanged from time to time and the Company will cause the Registrar to record each such transfer or exchange in the Register.
(2) No Services Charge; Transfer Taxes. The Company and the Share Agents will not impose any service charge on any Holder for any transfer, exchange or conversion of any Convertible Preferred Stock, but the Company, the Transfer Agent, the Registrar and the Conversion Agent may require payment of a sum sufficient to cover any transfer tax or similar governmental charge that may be imposed in connection with any transfer, exchange or conversion of Convertible Preferred Stock, other than exchanges pursuant to Section 3(i) or Section 3(q) not involving any transfer (and; provided, that (A) any such taxes or charges incurred in connection with the original issuance of the Convertible Preferred Stock shall be paid and borne by the Company; and (B) any such taxes or charges incurred in connection with a conversion of the Convertible Preferred Stock pursuant to Section 10 shall be paid and borne as provided in Section 11(c)).
(3) No Transfers or Exchanges of Fractional Shares. Notwithstanding anything to the contrary in this Certificate of Designations, all transfers or exchanges of Convertible Preferred Stock must be in an amount representing a whole number of shares of Convertible Preferred Stock, and no fractional share of Convertible Preferred Stock may be transferred or exchanged.
(4) Legends. Each Certificate evidencing any share of Convertible Preferred Stock that is issued upon transfer of, or in exchange for, another share of Convertible Preferred Stock will bear each legend, if any, required by Section 3(g).
(5) Settlement of Transfers and Exchanges. Upon satisfaction of the requirements of this Certificate of Designations to effect a transfer or exchange of any Convertible Preferred Stock, the Company will cause such transfer or exchange to be effected as soon as reasonably practicable but in no event later than the second (2nd) Business Day after the date of such satisfaction.
(6) Exchanges to Remove Transfer Restrictions. For the avoidance of doubt, and subject to the terms of this Certificate of Designations, as used in this Section 3(h), an “exchange” of a Certificate includes an exchange effected for the sole purpose of removing any Restricted Stock Legend affixed to such Certificate.
(ii) Transfers and Exchanges of Convertible Preferred Stock.
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(1) Subject to this Section 3(h), a Holder of any Convertible Preferred Stock evidenced by a Certificate may (x) transfer any whole number of shares of such Convertible Preferred Stock to one or more other Person(s); and (y) exchange any whole number of shares of such Convertible Preferred Stock for an equal number of shares of Convertible Preferred Stock evidenced by one or more other Certificates; provided, however, that, to effect any such transfer or exchange, such Holder must, if such Certificate is a Physical Certificate, surrender such Physical Certificate to the office of the Transfer Agent or the Registrar, together with any endorsements or transfer instruments reasonably required by the Company, the Transfer Agent or the Registrar.
(2) Upon the satisfaction of the requirements of this Certificate of Designations to effect a transfer or exchange of any whole number of shares of a Holder’s Convertible Preferred Stock evidenced by a Certificate (such Certificate being referred to as the “old Certificate” for purposes of this Section 3(h)(ii)(2)):
(A) such old Certificate will be promptly cancelled pursuant to Section 3(m);
(B) if fewer than all of the shares of Convertible Preferred Stock evidenced by such old Certificate are to be so transferred or exchanged, then the Company will issue, execute and deliver, and cause the Transfer Agent to countersign, in each case, in accordance with Section 3(d), one or more Certificates that (x) each evidence a whole number of shares of Convertible Preferred Stock and, in the aggregate, evidence a total number of shares of Convertible Preferred Stock equal to the number of shares of Convertible Preferred Stock evidenced by such old Certificate not to be so transferred or exchanged; (y) are registered in the name of such Holder; and (z) bear each legend, if any, required by Section 3(g);
(C) in the case of a transfer to a transferee, the Company will issue, execute and deliver, and cause the Transfer Agent to countersign, in each case, in accordance with Section 3(d), one or more Certificates that (x) each evidence a whole number of shares of Convertible Preferred Stock and, in the aggregate, evidence a total number of shares of Convertible Preferred Stock equal to the number of shares of Convertible Preferred Stock to be so transferred; (y) are registered in the name of such transferee; and (z) bear each legend, if any, required by Section 3(g); and
(D) in the case of an exchange, the Company will issue, execute and deliver, and cause the Transfer Agent to countersign, in each case, in accordance with Section 3(d), one or more Certificates that (x) each evidence a whole number of shares of Convertible Preferred Stock and, in the aggregate, evidence a total number of shares of Convertible Preferred Stock equal to the number of shares of Convertible Preferred Stock to be so exchanged; (y) are registered in the name of the Person to whom such old Certificate was registered; and (z) bear each legend, if any, required by Section 3(g).
(iii) Transfers of Shares Subject to Redemption, Repurchase or Conversion. Notwithstanding anything to the contrary in this Certificate of Designations, the Company, the Transfer Agent and the Registrar will not be required to register the transfer of or exchange any share of Convertible Preferred Stock that has been called for
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Redemption, subject to a Repurchase upon Fundamental Change or surrendered for conversion.
(i) Exchange and Cancellation of Convertible Preferred Stock to Be Converted or to Be Repurchased Pursuant to a Repurchase Upon Fundamental Change or a Redemption.
(i) Partial Conversions of Physical Certificates and Partial Repurchases of Physical Certificates Pursuant to a Repurchase Upon Fundamental Change or a Redemption. If fewer than all of the shares of Convertible Preferred Stock evidenced by a Physical Certificate (such Physical Certificate being referred to as the “old Physical Certificate” for purposes of this Section 3(i)(i)) are to be converted pursuant to Section 10 or repurchased pursuant to a Repurchase Upon Fundamental Change or a Redemption, then, as soon as reasonably practicable after such Physical Certificate is surrendered for such conversion or repurchase, as applicable, the Company will cause such Physical Certificate to be exchanged, pursuant and subject to Section 3(h), for (1) one or more Physical Certificates that each evidence a whole number of shares of Convertible Preferred Stock and, in the aggregate, evidence a total number of shares of Convertible Preferred Stock equal to the number of shares of Convertible Preferred Stock evidenced by such old Physical Certificate that are not to be so converted or repurchased, as applicable, and deliver such Physical Certificate(s) to such Holder; and (2) a Physical Certificate evidencing a whole number of shares of Convertible Preferred Stock equal to the number of shares of Convertible Preferred Stock evidenced by such old Physical Certificate that are to be so converted or repurchased, as applicable, which Physical Certificate will be converted or repurchased, as applicable, pursuant to the terms of this Certificate of Designations; provided, however, that the Physical Certificate referred to in this clause (2) need not be issued at any time after which such shares subject to such conversion or repurchase, as applicable, are deemed to cease to be outstanding pursuant to Section 3(o).
(ii) Cancellation of Convertible Preferred Stock that Is Converted and Convertible Preferred Stock that Is Repurchased Pursuant to a Repurchase Upon Fundamental Change or a Redemption. If shares of Convertible Preferred Stock evidenced by a Certificate (or any portion thereof that has not theretofore been exchanged pursuant to Section 3(i)(i)) (such Certificate being referred to as the “old Certificate” for purposes of this Section 3(i)(ii)) are to be converted pursuant to Section 10 or repurchased pursuant to a Repurchase Upon Fundamental Change or a Redemption, then, promptly after the later of the time such Convertible Preferred Stock is deemed to cease to be outstanding pursuant to Section 3(o) and the time such old Certificate is surrendered for such conversion or repurchase, as applicable, (1) such old Certificate will be cancelled pursuant to Section 3(m); and (2) in the case of a partial conversion or repurchase, the Company will issue, execute and deliver to such Holder, and cause the Transfer Agent to countersign, in each case, in accordance with Section 3(d), one or more Certificates that (x) each evidence a whole number of shares of Convertible Preferred Stock and, in the aggregate, evidence a total number of shares of Convertible Preferred Stock equal to the number of shares of Convertible Preferred Stock evidenced by such old Certificate that are not to be so converted or repurchased, as applicable; (y) are registered in the name of such Holder; and (z) bear each legend, if any, required by Section 3(g).
(j) Status of Retired or Treasury Shares. Upon any share of Convertible Preferred Stock ceasing to be outstanding, such share will be deemed, automatically and without any further action of the Board of Directors, to be retired and to resume the status of an authorized and unissued share of preferred stock of the Company, and such share cannot thereafter be reissued as Convertible Preferred Stock.
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(k) Replacement Certificates. If a Holder of any Convertible Preferred Stock claims that the Certificate(s) evidencing such Convertible Preferred Stock have been mutilated, lost, destroyed or wrongfully taken, then the Company will issue, execute and deliver, and cause the Transfer Agent to countersign, in each case, in accordance with Section 3(c), a replacement Certificate evidencing such Convertible Preferred Stock upon surrender to the Company or the Transfer Agent of such mutilated Certificate, or upon delivery to the Company or the Transfer Agent of evidence of such loss, destruction or wrongful taking reasonably satisfactory to the Transfer Agent and the Company. In the case of a lost, destroyed or wrongfully taken Certificate evidencing Convertible Preferred Stock, the Company and the Transfer Agent may require the Holder thereof to provide such security or indemnity that is reasonably satisfactory to the Company and the Transfer Agent to protect the Company and the Transfer Agent from any loss that any of them may suffer if such Certificate is replaced. Every replacement Certificate evidencing Convertible Preferred Stock issued pursuant to this Section 3(j) will, upon such replacement, be deemed to be evidence of outstanding Convertible Preferred Stock, entitled to all of the benefits of this Certificate of Designations equally and ratably with all other Convertible Preferred Stock then outstanding.
(l) Registered Holders. Only the Holder of any share of Convertible Preferred Stock will have rights under this Certificate of Designations as the owner of such share of Convertible Preferred Stock.
(m) Cancellation. The Company may at any time deliver Certificates evidencing Convertible Preferred Stock, if any, to the Transfer Agent for cancellation. The Registrar, the Paying Agent and the Conversion Agent will forward to the Transfer Agent each share of Convertible Preferred Stock duly surrendered to them for transfer, exchange, payment or conversion. The Company will cause the Transfer Agent to promptly cancel all Certificates evidencing shares of Convertible Preferred Stock so surrendered to it in accordance with its customary procedures.
(n) Shares Held by the Company or its Subsidiaries. Without limiting the generality of Section 3(j) and Section 3(o), in determining whether the Holders of the required number of outstanding shares of Convertible Preferred Stock have concurred in any direction, waiver or consent, shares of Convertible Preferred Stock owned by the Company or any of its Subsidiaries will be deemed not to be outstanding.
(o) Outstanding Shares.
(i) Generally. The shares of Convertible Preferred Stock that are outstanding at any time will be deemed to be those shares indicated as outstanding in the Register (absent manifest error), excluding those shares of Convertible Preferred Stock that have theretofore been (1) cancelled by the Transfer Agent or delivered to the Transfer Agent for cancellation in accordance with Section 3(m); (2) paid in full upon their conversion or upon their repurchase pursuant to a Repurchase Upon Fundamental Change or a Redemption in accordance with this Certificate of Designations; or (3) deemed to cease to be outstanding to the extent provided in, and subject to, clause (ii), (iii), (iv) or (v) of this Section 3(o).
(ii) Replaced Shares. If any Certificate evidencing any share of Convertible Preferred Stock is replaced pursuant to Section 3(k), then such share will cease to be outstanding at the time of such replacement, unless the Transfer Agent and the Company receive proof reasonably satisfactory to them that such share is held by a “bona fide purchaser” under applicable law.
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(iii) Shares to Be Repurchased Pursuant to a Redemption. If, on a Redemption Date, the Paying Agent holds consideration in kind and amount that is sufficient to pay the aggregate Redemption Price due on such date, then (unless there occurs a default in the payment of the Redemption Price) (1) the Convertible Preferred Stock to be redeemed on such date will be deemed, as of such date, to cease to be outstanding (without limiting the Company’s obligations pursuant to Section 5(d)); and (2) the rights of the Holders of such Convertible Preferred Stock, as such, will terminate with respect to such Convertible Preferred Stock, other than the right to receive the Redemption Price as provided in Section 7 (and, if applicable, Dividends as provided in Section 5(d)).
(iv) Shares to Be Repurchased Pursuant to a Repurchase Upon Fundamental Change. If, on a Fundamental Change Repurchase Date, the Paying Agent holds consideration in kind and amount that is sufficient to pay the aggregate Fundamental Change Repurchase Price due on such date, then (unless there occurs a default in the payment of the Fundamental Change Repurchase Price) (1) the Convertible Preferred Stock to be repurchased on such date will be deemed, as of such date, to cease to be outstanding (without limiting the Company’s obligations pursuant to Section 5(d)); and (2) the rights of the Holders of such Convertible Preferred Stock, as such, will terminate with respect to such Convertible Preferred Stock, other than the right to receive the Fundamental Change Repurchase Price as provided in Section 8 (and, if applicable, Dividends as provided in Section 5(d)).
(v) Shares to Be Converted. If any Convertible Preferred Stock is to be converted, then, at the Close of Business on the Conversion Date for such conversion (unless there occurs a default in the delivery of the Conversion Consideration due pursuant to Section 10 upon such conversion): (1) such Convertible Preferred Stock will be deemed to cease to be outstanding (without limiting the Company’s obligations pursuant to Section 5(d)); and (2) the rights of the Holders of such Convertible Preferred Stock, as such, will terminate with respect to such Convertible Preferred Stock, other than the right to receive such Conversion Consideration as provided in Section 10 (and, if applicable, Dividends as provided in Section 5(d)).
(p) Repurchases by the Company and its Subsidiaries. Without limiting the generality of Section 3(m) and the next sentence, the Company and its Subsidiaries may, from time to time, repurchase Convertible Preferred Stock in open market purchases or in negotiated transactions without delivering prior notice to Holders. The Company will promptly deliver to the Transfer Agent for cancellation all Convertible Preferred Stock that the Company or any of its Subsidiaries have purchased or otherwise acquired.
(q) Notations and Exchanges. Without limiting any rights of Holders pursuant to Section 9, if any amendment, supplement or waiver to the Certificate of Formation (including this Certificate of Designations) changes the terms of any Convertible Preferred Stock, then the Company may, in its discretion, require the Holder of the Certificate evidencing such Convertible Preferred Stock to deliver such Certificate to the Transfer Agent so that the Transfer Agent may place an appropriate notation prepared by the Company on such Certificate and return such Certificate to such Holder. Alternatively, at its discretion, the Company may, in exchange for such Convertible Preferred Stock, issue, execute and deliver, and cause the Transfer Agent to countersign, in each case, in accordance with Section 3(c), a new Certificate evidencing such Convertible Preferred Stock that reflects the changed terms. The failure to make any appropriate notation or issue a new Certificate evidencing any Convertible Preferred Stock pursuant to this Section 3(q) will not impair or affect the validity of such amendment, supplement or waiver.
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Section 4. Ranking. The Convertible Preferred Stock will rank (a) senior to (i) Dividend Junior Securities with respect to the payment of dividends; and (ii) Liquidation Junior Securities with respect to the distribution of assets upon the Company’s liquidation, dissolution or winding up; (b) equally with (i) Dividend Parity Securities with respect to the payment of dividends; and (ii) Liquidation Parity Securities with respect to the distribution of assets upon the Company’s liquidation, dissolution or winding up; and (c) junior to (i) Dividend Senior Securities with respect to the payment of dividends; and (ii) Liquidation Senior Securities with respect to the distribution of assets upon the Company’s liquidation, dissolution or winding up.
Section 5. Dividends.
(a) Regular Dividends.
(i) Accumulation and Payment of Regular Dividends. The Convertible Preferred Stock will accumulate cumulative dividends at a rate per annum equal to the Regular Dividend Rate on the Liquidation Preference plus any accrued and unpaid dividends in respect of the Convertible Preferred Stock, whether or not declared (and including, for the avoidance of doubt, any previously accrued and unpaid dividends in respect of the Convertible Preferred Stock which have been added to the Liquidation Preference pursuant to Section 5(b)) (calculated in accordance with Section 5(a)(ii)), regardless of whether or not declared or funds are legally available for their payment (such dividends that accumulate on the Convertible Preferred Stock pursuant to this sentence, “Regular Dividends”). Subject to the other provisions of this Section 5 (including, for the avoidance of doubt, Section 5(b)), such Regular Dividends will be payable when, as and if declared by the Board of Directors, quarterly in arrears on each Regular Dividend Payment Date, to the Holders as of the Close of Business on the immediately preceding Regular Dividend Record Date. Regular Dividends on the Convertible Preferred Stock will accumulate daily from, and including, the last date on which Regular Dividends have been paid (or, if no Regular Dividends have been paid, from, and including, the Initial Issue Date) to, but excluding, the next Regular Dividend Payment Date.
(ii) Computation of Accumulated Regular Dividends. Accumulated Regular Dividends will be computed on the basis of a 360-day year comprised of twelve 30-day months. Regular Dividends on each share of Convertible Preferred Stock will accrue on the Liquidation Preference (plus any accrued and unpaid dividends in respect of the Convertible Preferred Stock, whether or not declared (and including, for the avoidance of doubt, any previously accrued and unpaid dividends in respect of the Convertible Preferred Stock which have been added to the Liquidation Preference pursuant to Section 5(b))) of such share as of immediately before the Close of Business on the preceding Regular Dividend Payment Date (or, if there is no preceding Regular Dividend Payment Date, on the Initial Issue Date of such share).
(b) Calculation of Regular Dividends. With respect to any Regular Dividend Payment Date on or prior to the five (5) year anniversary of the Initial Issue Date, dividends may be paid in cash or, at the Company’s option, instead the dollar amount (expressed as an amount per share of Convertible Preferred Stock) of each Regular Dividend on the Convertible Preferred Stock (whether or not declared) that has accumulated on the Convertible Preferred Stock in respect of the Regular Dividend Period ending on, but excluding, a Regular Dividend Payment Date, will be added, effective immediately before the Close of Business on the related Regular Dividend Payment Date, to the Liquidation Preference of each share of Convertible Preferred Stock outstanding as of such time. Such addition (if any) will occur automatically, without the need for any action on the part of the Company or any other Person, and any such Regular Dividends added to the Liquidation Preference of any share of Convertible Preferred Stock shall, without
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duplication, be deemed to reduce any accrued and unpaid dividends on such share of Convertible Preferred Stock for purposes hereof. With respect to any Regular Dividend Payment Date after the five (5) year anniversary of the Initial Issue Date, Regular Dividends shall only be payable in cash, out of funds legally available therefor, when and if declared by the Board of Directors; provided that, to the extent that the Board of Directors fails to declare any such Regular Dividends and pay in cash, such Regular Dividend shall accrue at the then-applicable Default Dividend Rate, in which case the dollar amount (expressed as an amount per share of Convertible Preferred Stock) of each Regular Dividend on the Convertible Preferred Stock (whether or not declared) that has accumulated on the Convertible Preferred Stock at the then-applicable Default Dividend Rate in respect of the Regular Dividend Period ending on, but excluding, a Regular Dividend Payment Date, will be added, effective immediately before the Close of Business on the related Regular Dividend Payment Date (and shall remain until declared and paid in cash), to the Liquidation Preference of each share of Convertible Preferred Stock outstanding as of such time (it being understood that such addition will occur automatically, without the need for any action on the part of the Company or any other Person) (such addition described in this proviso, a “Default Dividend Accrual”).
(c) Participating Dividends.
(i) Generally. Subject to Section 5(c)(ii), no dividend or other distribution on the Common Stock (whether in cash, securities (including rights or options) or other property, or any combination of the foregoing) will be declared or paid on the Common Stock (other than a regular quarterly dividend of up to $0.17 per share of Common Stock) unless, at the time of such declaration and payment, both (x) no Default Accrued Dividends are outstanding and (y) an equivalent dividend or distribution is declared and paid, respectively, on the Convertible Preferred Stock (such a dividend or distribution on the Convertible Preferred Stock, a “Participating Dividend,” and such corresponding dividend or distribution on the Common Stock, the “Common Stock Participating Dividend”), such that (1) the Record Date and the payment date for such Participating Dividend occur on the same dates as the Record Date and payment date, respectively, for such Common Stock Participating Dividend; and (2) the kind and amount of consideration payable per share of Convertible Preferred Stock in such Participating Dividend is the same kind and amount of consideration that would be payable in the Common Stock Participating Dividend in respect of a number of shares of Common Stock equal to the number of shares of Common Stock that would be issuable (determined in accordance with Section 10 but without regard to Section 10(h) or Section 11(d)) in respect of one (1) share of Convertible Preferred Stock that is converted with a Conversion Date occurring on such Record Date (subject to the same arrangements, if any, in such Common Stock Participating Dividend not to issue or deliver a fractional portion of any security or other property, but with such arrangement applying separately to each Holder and computed based on the total number of shares of Convertible Preferred Stock held by such Holder on such Record Date).
(ii) Stockholder Rights Plans, Common Stock Change Events and Stock Splits, Dividends and Combinations. Section 5(c)(i) will not apply to, and no Participating Dividend will be required to be declared or paid in respect of, (1) a Common Stock Change Event, as to which Section 10(i) will apply; (2) an event for which an adjustment to the Conversion Price is required pursuant to Section 10(f)(i), as to which the applicable provision of Section 10(f)(i) will apply (provided, however, that the Holders may elect, by written action of the Majority Holders delivered to the Company prior to the relevant Record Date, to receive a Participating Dividend in lieu of an adjustment to the Conversion Price pursuant to Section 10(f)(i)(2) through (3)); (3) a Distribution Transaction where the Majority Holders elect to engage in a Spin-Off Exchange Offer,
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and such Spin-Off Exchange Offer is completed pursuant to Section 10(f)(iv), and (4) rights issued pursuant to a stockholder rights plan.
(d) Treatment of Dividends Upon Redemption, Repurchase Upon Fundamental Change or Conversion. If the Redemption Date, Fundamental Change Repurchase Date or Conversion Date (as applicable) of any share of Convertible Preferred Stock is after a Record Date for a declared Dividend on the Convertible Preferred Stock and on or before the next Dividend Payment Date, then the Holder of such share at the Close of Business on such Record Date will be entitled, notwithstanding the related Redemption, Repurchase Upon Fundamental Change or conversion (as applicable) to receive, on or, at the Company’s election, before such Dividend Payment Date, such declared Dividend on such share. Regular Dividends on any share of Convertible Preferred Stock will cease to accumulate from and after the Redemption Date, Fundamental Change Repurchase Date or Conversion Date (as applicable) for such share, unless the Company defaults in the payment of the applicable redemption price or conversion consideration, in which case Regular Dividends shall continue to accrue at the Default Dividend Rate.
Section 6. Rights Upon Liquidation, Dissolution or Winding Up.
(a) Generally. If the Company liquidates, dissolves or winds up, whether voluntarily or involuntarily (any such event, a “Liquidation Event”), then, subject to the rights of any of the Company’s creditors or holders of any outstanding Liquidation Senior Securities, each share of Convertible Preferred Stock will entitle the Holder thereof to receive payment for the greatest of the amounts set forth in clauses (i), (ii) and (iii) below out of the Company’s assets or funds legally available for distribution to the Company’s stockholders, before any such assets or funds are distributed to, or set aside for the benefit of, any Liquidation Junior Securities:
(i) the Liquidation Preference, plus any accrued and unpaid dividends in respect of the Convertible Preferred Stock, whether or not declared;
(ii) the sum of (A) the product of (x) the Initial Liquidation Preference, multiplied by (y) the Return Factor as of the date of the Liquidation Event minus (B) the cumulative amount of Prior Dividends paid in respect of such share prior to the date of the Liquidation Event; and
(iii) the amount such Holder would have received in respect of the number of shares of Common Stock that would be issuable upon conversion of such share of Convertible Preferred Stock in connection with an Optional Conversion assuming the Conversion Date of such conversion occurs on the date of such payment.
Upon payment of such amount in full on the outstanding Convertible Preferred Stock, Holders of the Convertible Preferred Stock will have no rights to the Company’s remaining assets or funds, if any. If such assets or funds are insufficient to fully pay such amount on all outstanding shares of Convertible Preferred Stock and the corresponding amounts payable in respect of all outstanding shares of Liquidation Parity Securities, if any, then, subject to the rights of any of the Company’s creditors or holders of any outstanding Liquidation Senior Securities, such assets or funds will be distributed ratably on the outstanding shares of Convertible Preferred Stock and Liquidation Parity Securities in proportion to the full respective distributions to which such shares would otherwise be entitled.
(b) Certain Business Combination Transactions Deemed Not to Be a Liquidation. For purposes of Section 6(a), the Company’s consolidation or combination with, or merger with or into, or the sale, lease or other transfer of all or substantially all of the Company’s assets (other than a sale, lease or other transfer in connection with the Company’s liquidation, dissolution or
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winding up) to, another Person will not, in itself, constitute the Company’s liquidation, dissolution or winding up, even if, in connection therewith, the Convertible Preferred Stock is converted into, or is exchanged for, or represents solely the right to receive, other securities, cash or other property, or any combination of the foregoing.
Section 7. Redemption at the Option of the Company.
(a) Right to Redeem. Subject to the terms of this Section 7 and the right of a Holder to effect an Optional Conversion prior to any Redemption, the Company has the right, at its election, to repurchase, by irrevocable, written notice to each Holder, all or any portion (but in no less than $10,000,000.00 increments based on the Liquidation Preference as of the date of the Redemption Notice (or such lesser amount to the extent the Redemption Notice relates to all of the outstanding shares of the Convertible Preferred Stock)) of the then-outstanding shares of Convertible Preferred Stock, at any time, on a Redemption Date, out of funds legally available therefor, for a cash purchase price equal to the Redemption Price (each such redemption, a “Redemption”).
(b) Redemption Date. The Redemption Date for any Redemption will be a Business Day of the Company’s choosing that is no more than thirty (30), nor less than ten (10), Business Days after the Redemption Notice Date for such Redemption.
(c) Redemption Price. The Redemption Price for any share of Convertible Preferred Stock to be repurchased pursuant to a Redemption is an amount in cash equal to the greatest of (i) the Liquidation Preference of such share, plus any accrued and unpaid dividends in respect of the Convertible Preferred Stock, whether or not declared, up to but not including the Redemption Date of such share; (ii) the sum of (A) the product of (x) the Initial Liquidation Preference, multiplied by (y) the Return Factor as of the Redemption Date minus (B) (x) the cumulative amount of Prior Dividends paid in respect of such share prior to the Redemption Date for such Redemption and (y) any amounts of cash paid to the Holder in respect of such share on the Redemption Date pursuant to Section 5(d); and (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 Stock pursuant to Section 10(a), without regard to any of the limitations on convertibility contained in Section 10(h) or Section 11(d).
(d) Redemption Notice. To call any share of Convertible Preferred Stock for Redemption, the Company must send to the Holder of such share a notice of such Redemption (a “Redemption Notice”), which Redemption Notice must state:
(i) that such share has been called for Redemption;
(ii) the Redemption Date for such Redemption;
(iii) the aggregate number of shares subject to Redemption;
(iv) the number of such Holder’s shares subject to Redemption;
(v) the Redemption Price per share of Convertible Preferred Stock;
(vi) if the Redemption Date is after a Record Date for a declared Dividend on the Convertible Preferred Stock and on or before the next Dividend Payment Date, that such Dividend will be paid in accordance with Section 5(d); and
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(vii) the name and address of the Transfer Agent, as well as instructions whereby the Holder may surrender such share to the Transfer Agent.
(e) Payment of the Redemption Price. The Company will cause the Redemption Price for each share of Convertible Preferred Stock subject to Redemption to be paid to the Holder thereof on or before the applicable Redemption Date.
(f) Partial Redemption. In case of Redemption of less than all then-outstanding shares of Convertible Preferred Stock, the shares to be redeemed by the Company shall be allocated among all Holders pro rata on the basis of the aggregate Liquidation Preference of the shares of Convertible Preferred Stock owned by each such Holder.
(g) Redemption Prohibited in Certain Circumstances. The Company will not effect a Redemption, or otherwise send a Redemption Notice, with respect to any Convertible Preferred Stock pursuant to this Section 7 unless the Redemption Convertibility Conditions are satisfied between the date a Redemption Notice is sent and the proposed date of Redemption. Notwithstanding anything to the contrary in this Section 7, the Company’s election to effect a Redemption, and any related Redemption Notice, will not apply to any share of Convertible Preferred Stock as to which an Optional Conversion Notice has been duly delivered, and not withdrawn.
Section 8. Right of Holders to Require the Company to Repurchase Convertible Preferred Stock upon a Fundamental Change.
(a) Fundamental Change Repurchase Right. Subject to the other terms of this Section 8, if a Fundamental Change occurs, then each Holder may, at its election, either (i) effective as of immediately prior to the Fundamental Change, convert all or a portion of its shares of Convertible Preferred Stock pursuant to Section 10 at the then-current Conversion Price or (ii) require the Company to repurchase (the “Fundamental Change Repurchase Right”) all, or any whole number of shares that is less than all, of such Holder’s Convertible Preferred Stock that have not been converted pursuant to clause (i) on the Fundamental Change Repurchase Date for such Fundamental Change, out of funds legally available therefor, for a cash purchase price equal to the Fundamental Change Repurchase Price.
(b) Funds Legally Available for Payment of Fundamental Change Repurchase Price; Covenant Not to Take Certain Actions. If the Company does not have sufficient funds legally available to pay the Fundamental Change Repurchase Price of all shares of Convertible Preferred Stock that are to be repurchased pursuant to a Repurchase Upon Fundamental Change, then the Company shall (1) pay the maximum amount of such Fundamental Change Repurchase Price that can be paid out of funds legally available for payment, which payment will be made pro rata to each Holder based on the total number of shares of Convertible Preferred Stock of such Holder that were otherwise to be repurchased pursuant to such Repurchase Upon Fundamental Change; and (2) purchase any shares of Convertible Preferred Stock not purchased because of the foregoing limitations at the applicable Fundamental Change Repurchase Price as soon as practicable after the Company is able to make such purchase out of assets legally available for the purchase of such shares of Convertible Preferred Stock. The inability of the Company (or its successor) to make a purchase payment for any reason shall not relieve the Company (or its successor) from its obligation to effect any required purchase when, as and if permitted by applicable law. If the Company fails to pay the Fundamental Change Repurchase Price in full when due in accordance with this Section 8 in respect of some or all of the shares of Convertible Preferred Stock to be repurchased pursuant to the Fundamental Change Repurchase Right, the Company will pay Dividends on such shares not repurchased at the Default Dividend Rate until such shares are repurchased, payable quarterly in arrears, out of funds legally available, on each Dividend Payment Date, for the period from and including the first Dividend Payment Date (or
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the Initial Issue Date, as applicable) upon which the Company fails to pay the Fundamental Change Repurchase Price in full when due in accordance with this Section 8 through but not including the latest of the day upon which the Company pays the Fundamental Change Repurchase Price in full in accordance with this Section 8. Notwithstanding the foregoing, in the event a Holder exercises a Fundamental Change Repurchase Right pursuant to this Section 8 at a time when the Company is restricted or prohibited (contractually or otherwise) from repurchasing some or all of the Convertible Preferred Stock subject to the Fundamental Change Repurchase Right, the Company will use its commercially reasonable efforts to obtain the requisite consents to remove or obtain an exception or waiver to such restrictions or prohibition. Nothing herein shall limit a Holder’s right to pursue any other remedies available to it hereunder, at law or in equity, including, without limitation, a decree of specific performance and/or injunctive relief with respect to the Company’s failure to comply with its obligations under this Section 8. The Company will not voluntarily take any action, or voluntarily engage in any transaction, that would result in a Fundamental Change unless the Company in good faith believes that it (or, in the event of a sale of the Company, its acquiror) will have sufficient funds legally available to fully pay the maximum aggregate Fundamental Change Repurchase Price that would be payable in respect of such Fundamental Change on all shares of Convertible Preferred Stock then outstanding.
(c) Fundamental Change Repurchase Date. The Fundamental Change Repurchase Date for any Fundamental Change will be a Business Day of the Company’s choosing that is no later than the anticipated effective date of such Fundamental Change (subject to extension by the Company in the event of a change in the anticipated effective date of such Fundamental Change).
(d) Fundamental Change Repurchase Price. The Fundamental Change Repurchase Price for any share of Convertible Preferred Stock to be repurchased upon a Repurchase Upon Fundamental Change following a Fundamental Change is an amount in cash equal to the greatest of (i) the Liquidation Preference, plus any accrued and unpaid dividends in respect of the Convertible Preferred Stock, whether or not declared, (ii) the sum of (A) the product of (x) the Initial Liquidation Preference, multiplied by (y) the Return Factor as of the Redemption Date minus (B) (x) the cumulative amount of Prior Dividends paid in respect of such share prior to the Fundamental Change Repurchase Date for such Fundamental Change and (y) in any amounts of cash paid to the Holder in respect of such share on the Fundamental Change Repurchase Date pursuant to Section 5(d); and (iii) the amount the Holder of such share of Convertible Preferred Stock would have received had such Holder, immediately prior to such Fundamental Change, converted such shares of Convertible Preferred Stock into Common Stock pursuant to Section 10(a), without regard to any of the limitations on convertibility contained in Section 10(h) or Section 11(d).
(e) Initial Fundamental Change Notice. On or before the twentieth (20th) Business Day prior to the date on which the Company anticipates consummating a Fundamental Change (or, if later, promptly after the Company discovers that a Fundamental Change may occur), a written notice shall be sent by or on behalf of the Company to the Holders as they appear in the records of the Company, which notice shall contain the date on which the Fundamental Change is anticipated to be effected (or, if applicable, the date on which a Schedule TO or other schedule, form or report disclosing a Fundamental Change was filed) (the “Initial Fundamental Change Notice”). No later than ten (10) Business Days prior to the date on which the Company anticipates consummating the Fundamental Change as set forth in the Initial Fundamental Change Notice (or, if the Fundamental Change has already occurred as provided in the Initial Fundamental Change Notice, promptly, but no later than the tenth (10th) Business Day following receipt thereof), any Holder that desires to exercise its rights pursuant to Section 8(a) shall notify the Company in writing thereof and shall specify (x) whether such Holder is electing to exercise its rights pursuant to clause (i) or (ii) of Section 8(a) and (y) the number of shares of Convertible Preferred Stock subject thereto.
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(f) Final Fundamental Change Notice. If a Holder elects pursuant to Section 8(e) to exercise its Fundamental Change Repurchase Right pursuant to Section 8(a)(ii), on or before the fifth (5th) Business Day prior to the anticipated effective date of a Fundamental Change, the Company will send to each Holder a notice of such Fundamental Change (a “Final Fundamental Change Notice”). To the extent not specific in the Initial Fundamental Change Notice, such Final Fundamental Change Notice must state:
(i) briefly, the events causing such Fundamental Change;
(ii) the anticipated effective date of such Fundamental Change;
(iii) the procedures that a Holder must follow to require the Company to repurchase its Convertible Preferred Stock pursuant to this Section 8, including the deadline for exercising the Fundamental Change Repurchase Right and the procedures for submitting and withdrawing a Fundamental Change Repurchase Notice;
(iv) the Fundamental Change Repurchase Date for such Fundamental Change;
(v) the Fundamental Change Repurchase Price per share of Convertible Preferred Stock, including reasonable detail of the calculation thereof;
(vi) if the Fundamental Change Repurchase Date is after a Record Date for a declared Dividend on the Convertible Preferred Stock and on or before the next Dividend Payment Date, that such Dividend will be paid in accordance with Section 5(d);
(vii) the name and address of the Transfer Agent and the Conversion Agent;
(viii) the Conversion Price in effect on the date of such Final Fundamental Change Notice and a description and quantification of any adjustments to the Conversion Price that may result from such Fundamental Change;
(ix) that Convertible Preferred Stock may be converted pursuant to Section 10 at any time before the Close of Business on the second Business Day immediately before the related Fundamental Change Repurchase Date (or, if the Company fails to pay the Fundamental Change Repurchase Price due on such Fundamental Change Repurchase Date in full, at any time until such time as the Company pays such Fundamental Change Repurchase Price in full);
(x) that shares of Convertible Preferred Stock for which a Fundamental Change Repurchase Notice has been duly tendered and not duly withdrawn must be delivered to the Paying Agent for the Holder thereof to be entitled to receive the Fundamental Change Repurchase Price; and
(xi) that shares of Convertible Preferred Stock that are subject to a Fundamental Change Repurchase Notice that has been duly tendered may be converted only if such Fundamental Change Repurchase Notice is withdrawn in accordance with this Certificate of Designations.
(g) Procedures to Exercise the Fundamental Change Repurchase Right.
(i) Delivery of Fundamental Change Repurchase Notice and Shares of Convertible Preferred Stock to Be Repurchased. To exercise its Fundamental Change
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Repurchase Right for any share(s) of Convertible Preferred Stock following a Fundamental Change, the Holder thereof must deliver to the Paying Agent:
(1) before the Close of Business on the second Business Day immediately before the related Fundamental Change Repurchase Date (or such later time as may be required by law), a duly completed, written Fundamental Change Repurchase Notice with respect to such share(s); and
(2) such share(s), duly endorsed for transfer (to the extent such share(s) are evidenced by one or more Physical Certificates).
(ii) Contents of Fundamental Change Repurchase Notices. Each Fundamental Change Repurchase Notice with respect to any share(s) of Convertible Preferred Stock must state:
(1) if such share(s) are evidenced by one or more Physical Certificates, the certificate number(s) of such Physical Certificate(s);
(2) the number of shares of Convertible Preferred Stock to be repurchased, which must be a whole number; and
(3) that such Holder is exercising its Fundamental Change Repurchase Right with respect to such share(s).
(iii) Withdrawal of Fundamental Change Repurchase Notice. A Holder that has delivered a Fundamental Change Repurchase Notice with respect to any share(s) of Convertible Preferred Stock may withdraw such Fundamental Change Repurchase Notice by delivering a written notice of withdrawal to the Paying Agent at any time before the Close of Business on the Business Day immediately before the related Fundamental Change Repurchase Date. Such withdrawal notice must state:
(1) if such share(s) are evidenced by one or more Physical Certificates, the certificate number(s) of such Physical Certificate(s);
(2) the number of shares of Convertible Preferred Stock to be withdrawn, which must be a whole number; and
(3) the number of shares of Convertible Preferred Stock, if any, that remain subject to such Fundamental Change Repurchase Notice, which must be a whole number.
If any Holder delivers to the Paying Agent any such withdrawal notice withdrawing any share(s) of Convertible Preferred Stock from any Fundamental Change Repurchase Notice previously delivered to the Paying Agent, and such share(s) have been surrendered to the Paying Agent, then such share(s) will be returned to the Holder thereof.
(h) Payment of the Fundamental Change Repurchase Price. Subject to Section 8(b), the Company will cause the Fundamental Change Repurchase Price for each share of Convertible Preferred Stock to be repurchased pursuant to a Repurchase Upon Fundamental Change to be paid to the Holder thereof on or before the applicable Fundamental Change Repurchase Date (or, if later in the case such share is evidenced by a Physical Certificate, the date the Physical Certificate evidencing such share is delivered to the Paying Agent).
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(i) Third Party May Conduct Repurchase Offer In Lieu of the Company. Notwithstanding anything to the contrary in this Section 8, the Company will be deemed to satisfy its obligations under this Section 8 if one or more third parties conduct any Repurchase Upon Fundamental Change and related offer to repurchase Convertible Preferred Stock otherwise required by this Section 8 in a manner that would have satisfied the requirements of this Section 8 if conducted directly by the Company.
(j) Fundamental Change Agreements. The Company shall not enter into any agreement for a transaction constituting a Fundamental Change (which, for the avoidance of doubt, shall not include a Fundamental Change of the types specified in clause (e) of the definition thereof that is involuntary) unless (i) such agreement provides for, or does not interfere with or prevent (as applicable), the exercise by the Holders of their Fundamental Change Repurchase Right in a manner that is consistent with, and gives effect to, this Section 8 and (ii) the acquiring or surviving Person in such Fundamental Change represents and covenants, in form and substance reasonably satisfactory to the Board of Directors acting in good faith, that at the closing of such Fundamental Change that such Person shall have sufficient funds (which may include, without limitation, cash and cash equivalents on the Company’s balance sheet, the proceeds of any debt or equity financing, available lines of credit or uncalled capital commitments) to consummate such Fundamental Change and the payment the Fundamental Change Repurchase Price in respect of shares of Convertible Preferred Stock that have not been converted into Common Stock prior to the Fundamental Change Repurchase Date pursuant to this Section 8 or Section 10, as applicable.
Section 9. Voting Rights. The Convertible Preferred Stock will have no voting rights except as set forth in this Section 9 or as otherwise provided in the Certificate of Formation or required by the Texas Business Organizations Code.
(a) Voting and Consent Rights with Respect to Specified Matters.
(i) Generally. Subject to the other provisions of this Section 9(a), each following event will require, and cannot be effected without, the affirmative vote or consent of (x) while any share of the Convertible Preferred Stock is outstanding with respect to Section 9(a)(i)(1), Section 9(a)(i)(2) and Section 9(a)(i)(8), and (y) while at least twenty-five percent (25%) of the Convertible Preferred Stock issued on the Initial Issue Date is outstanding with respect to Section 9(a)(i)(3), Section 9(a)(i)(4), Section 9(a)(i)(5), Section 9(a)(i)(6) and Section 9(a)(i)(7) (but treating any shares of Convertible Preferred Stock that have been redeemed as still outstanding unless more than 75% of the shares of Convertible Preferred Stock have been redeemed), Majority Holders:
(1) any amendment, modification or repeal of any provision of the Certificate of Formation (including this Certificate of Designations) or Bylaws that adversely affects the rights, preferences or voting powers of the Convertible Preferred Stock (other than an amendment, modification or repeal permitted by Section 9(a)(ii)) as determined by the Board of Directors in good faith;
(2) any issuances by the Company (including refinancings or exchanges) of shares of, or other securities convertible into, Dividend Parity Securities, Liquidation Parity Securities, Dividend Senior Securities or Liquidation Senior Securities;
(3) the Company or any of its subsidiaries, directly or indirectly, creating, incurring, issuing, assuming, guarantying or otherwise becoming liable, contingently or otherwise, with respect to any Indebtedness issued in exchange
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for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, Indebtedness of the Company or any of its subsidiaries incurred under the Credit Agreement (ignoring any amendments, supplements or modifications thereto occurring after the Initial Issue Date) and outstanding on the Initial Issue Date (a “Refinancing”); provided, no Holder shall unreasonably withhold their vote or consent under this Section 9(a)(i)(3) if doing so would reasonably be expected to result in the Company filing for bankruptcy or the occurrence of an Event of Default (as defined in the Credit Agreement), unless such Holder has proposed (or caused a third party to propose) to the Company a reasonable alternative to the Company’s proposed Refinancing;
(4) any voluntary dissolution, liquidation, bankruptcy or winding up of the Company or any deregistration or delisting of the Common Stock of the Company;
(5) the Company or any of its subsidiaries, directly or indirectly, creating, incurring, issuing, assuming, guarantying or otherwise becoming liable, contingently or otherwise, with respect to any Indebtedness, including any Indebtedness of the Company or its subsidiaries issued in exchange for, or the net proceeds of which are used to extend, refinance, renew, replace, defease or refund, other Indebtedness of the Company, unless the Company and its subsidiaries’ ratio of Net Debt to Consolidated EBITDA would be less than a ratio of 5.50 to 1.00 on a pro forma basis giving effect to such incurrence and the use of proceeds therefrom; provided, no vote or consent of the Convertible Preferred Stock shall be required for the Company to make a Revolving Credit Borrowing (as defined in the Credit Agreement) to the extent such Revolving Credit Borrowing is not prohibited by the Credit Agreement (without taking into account any waiver thereunder in respect of such borrowing);
(6) any dividends or distributions upon, or redemptions of, shares of Common Stock unless the Company and its subsidiaries’ ratio of Net Debt to Consolidated EBITDA would be less than a ratio of 5.5;
(7) any acquisition, investment, sale, disposition or similar transaction (whether of an entity, business, equity interests or assets) by the Company or any of its subsidiaries, directly or indirectly, and whether in a single transaction or series or related transactions, that has total consideration (whether in the form of cash, indebtedness, equity interests or other securities and treating the assumption of liabilities as consideration) of at least $250,000,000 (or, when the Company’s Market Capitalization is $2,000,000,000 or greater, has total consideration (including assumption of liabilities) of at least $500,000,000); or
(8) any arrangement or transaction between the Company and its subsidiaries, on the one hand, and any Affiliate of the Company or any of its subsidiaries, on the other hand, except for any such arrangement or transaction on arms’-length terms as determined by the Board of Directors in good faith;
provided, however, that each of the following will be deemed not to adversely affect the special rights, preferences or voting powers of the Convertible Preferred Stock and will not require any vote or consent pursuant to Section 9(a)(i)(1) and Section 9(a)(i)(2):
(I) any increase in the number of the authorized but unissued shares of the Company’s undesignated preferred stock;
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(II) any increase in the number of authorized shares of Convertible Preferred Stock as necessary with respect to issuances of shares of Convertible Preferred Stock in respect of Convertible Preferred Stock that was issued on the Initial Issue Date;
(III) the creation and issuance, or increase in the authorized or issued number, of any shares of any class or series of stock that is both Dividend Junior Securities and Liquidation Junior Securities; and
(IV) the application of Section 10(i), including the execution and delivery of any supplemental instruments pursuant to Section 10(i)(ii) solely to give effect to such provision.
(ii) Certain Amendments Permitted Without Consent. Notwithstanding anything to the contrary in Section 9(a)(i)(1), the Company may amend, modify or repeal any of the terms of the Convertible Preferred Stock without the vote or consent of any Holder to (x) amend or correct this Certificate of Designations to cure any ambiguity or correct any omission, defect or inconsistency or (y) make any other change to the Certificate of Formation, this Certificate of Designations or the Certificates representing the Convertible Preferred Stock that does not, individually or in the aggregate with all other such changes, adversely affect the rights of any Holder (other than any Holders that have consented to such change), as such (as determined by the Board of Directors in good faith).
(b) Right to Vote with Holders of Common Stock on an As-Converted Basis. Subject to the other provisions of, and without limiting the other voting rights provided in, this Section 9, and except as provided in the Certificate of Formation or restricted by the Texas Business Organizations Code, the Holders will have the right to vote together as a single class with the holders of the Common Stock on each matter submitted for a vote or consent by the holders of the Common Stock, and, for these purposes, (i) the Convertible Preferred Stock of each Holder will entitle such Holder to be treated as if such Holder were the holder of record, as of the record or other relevant date for such matter, of a number of shares of Common Stock equal to the number of shares of Common Stock that would be issuable (determined in accordance with Section 10(e), including Section 10(e)(ii)) upon conversion of such Convertible Preferred Stock assuming such Convertible Preferred Stock were converted with a Conversion Date occurring on such record or other relevant date; and (ii) the Holders will be entitled to notice of all stockholder meetings or proposed actions by written consent in accordance with the Certificate of Formation, the Bylaws of the Company, and the Texas Business Organizations Code as if the Holders were holders of Common Stock. Notwithstanding the foregoing, the aggregate voting power of the Convertible Preferred Stock when voting with the holders of the Common Stock shall be limited to the extent necessary to comply with the NYSE Listed Company Manual, and any resulting limitation on the voting rights of the Convertible Preferred Stock shall apply pro rata among the Holders thereof. Notwithstanding the above provisions, until the HSR Date (as defined below) with respect to any HSR Holder (as defined below), such HSR Holder shall only be entitled to vote a number of shares of Series A Preferred Stock on any matters relating to the election, designation, removal or replacement of members of the Board of Directors to the extent that such number of shares of Series A Preferred Stock together with such HSR Holder’s other shares of Common Stock and any other securities of the Company that vote on any matters relating to the election, designation, removal or replacement of members of the Board of Directors does not exceed the HSR Amount in the aggregate. For purposes of this Section 9(b), (A) “HSR Act” means the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations promulgated thereunder, and any successor to such statute, rules or regulations, (B) “HSR Amount” means the number of voting securities of the Company that may be obtained by an Acquiring Person (as defined by the HSR Act, including the ultimate parent entity and all
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entities included within it, and taking into account any applicable exemptions) prior to the HSR Date, without incurring a notification obligation under the HSR Act, with the number and class(es) of voting securities constituting the HSR Amount to be determined by the HSR Holder in consultation with its legal counsel, (C) “HSR Date” means the date on which all applicable approvals, clearances or waiting periods under the HSR Act (if any) shall have been obtained, expired or been terminated and (C) “HSR Holder” means a shareholder that is an Acquiring Person (as defined under the HSR Act) whose ability to acquire voting securities of the Company in excess of the HSR Amount is restricted by the HSR Act prior to the HSR Date.
(c) Procedures for Voting and Consents.
(i) Rules and Procedures Governing Votes and Consents. If any vote or consent of the Holders will be held or solicited, including at an annual meeting or a special meeting of stockholders, then (1) the Board of Directors will adopt customary rules and procedures at its discretion to govern such vote or consent, subject to the other provisions of this Section 9; and (2) such rules and procedures may include fixing a record date to determine the Holders that are entitled to vote or provide consent, as applicable, rules governing the solicitation and use of proxies or written consents and customary procedures for the nomination and designation, by Holders, of directors for election; provided, however, that with respect to any voting rights of the Holders pursuant to Section 9(b), such rules and procedures will be the same rules and procedures that apply to holders of the Common Stock with respect to the applicable matter referred to in Section 9(b).
(ii) Voting Power of the Convertible Preferred Stock. Each share of Convertible Preferred Stock outstanding as of the applicable record date will be entitled to one vote on each matter on which the Holders of the Convertible Preferred Stock are entitled to vote separately as a class and not together with the holders of any other class or series of stock.
(iii) Written Consent in Lieu of Stockholder Meeting. Notwithstanding anything to the contrary otherwise set forth in the Certificate of Formation, the Bylaws or otherwise, a consent or affirmative vote of the Holders pursuant to Section 9(a) may be given or obtained in writing without a meeting.
Section 10. Conversion.
(a) Generally. Subject to the provisions of this Section 10, the Convertible Preferred Stock may be converted only pursuant to a Mandatory Conversion or an Optional Conversion.
(b) Conversion at the Option of the Holders.
(i) Conversion Right; When Shares May Be Submitted for Optional Conversion. Holders will have the right to submit all, or any whole number of shares that is less than all, of their shares of Convertible Preferred Stock pursuant to an Optional Conversion at any time (but in no less than $100,000.00 increments based on the Liquidation Preference as of the date of the Optional Conversion (or such lesser amount to the extent the Optional Conversion relates to all of the outstanding shares of the such Holder)); provided, however, that, notwithstanding anything to the contrary in this Certificate of Designations,
(1) if a Fundamental Change Repurchase Notice is validly delivered pursuant to Section 8(g)(i) with respect to any share of Convertible Preferred Stock, then such share may not be submitted for Optional Conversion after the
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Business Day prior to the consummation of the Fundamental Change, except to the extent (A) such share is not subject to such notice; (B) such notice is withdrawn in accordance with Section 8(g)(iii); or (C) the Company fails to pay the Fundamental Change Repurchase Price for such share in accordance with this Certificate of Designations;
(2) no Convertible Preferred Stock may be submitted for Optional Conversion to the extent limited by Section 10(h) or Section 11(d);
(3) shares of Convertible Preferred Stock that are called for Redemption may not be submitted for Optional Conversion after the Close of Business on the Business Day immediately before the related Redemption Date (or, if the Company fails to pay the Redemption Price due on such Redemption Date in full, at any time until such time as the Company pays such Redemption Price in full); and
(4) shares of Convertible Preferred Stock that are subject to Mandatory Conversion may not be submitted for Optional Conversion after the Close of Business on the Business Day immediately before the related Mandatory Conversion Date.
(ii) Conversions of Fractional Shares Not Permitted. Notwithstanding anything to the contrary in this Certificate of Designations, in no event will any Holder be entitled to convert a number of shares of Convertible Preferred Stock that is not a whole number.
(c) Mandatory Conversion at the Company’s Election.
(i) Mandatory Conversion Right. Subject to the provisions of this Section 10, in any given fiscal quarter of the Company beginning on or after the two (2) year anniversary of the Initial Issue Date, the Company has the right (the “Mandatory Conversion Right”), exercisable at its election, to designate any Business Day in such fiscal quarter as a Conversion Date for the conversion (such a conversion, a “Mandatory Conversion”) of up to 25% of the number of shares of Convertible Preferred Stock outstanding on the Initial Issue Date, but only if the Last Reported Sale Price per share of Common Stock exceeds one hundred and eighty five percent (185%) of the Conversion Price on each of the last twenty (20) Trading Days ending on, and including, the Trading Day immediately before the Mandatory Conversion Notice Date for such Mandatory Conversion.
(ii) Mandatory Conversion Prohibited in Certain Circumstances. The Company will not exercise its Mandatory Conversion Right, or otherwise send a Mandatory Conversion Notice, with respect to any Convertible Preferred Stock pursuant to this Section 10(c) unless the Common Stock Mandatory Conversion Conditions are satisfied with respect to the Mandatory Conversion. Notwithstanding anything to the contrary in this Section 10(c), the Company’s exercise of its Mandatory Conversion Right, and any related Mandatory Conversion Notice, will not apply to any share of Convertible Preferred Stock as to which a Fundamental Change Repurchase Notice has been duly delivered, and not withdrawn, pursuant to Section 8(g). Notwithstanding anything to the contrary in this Section 10(c), the Company cannot exercise its Mandatory Conversion Right with respect to any shares of Convertible Preferred Stock to the extent limited by Section 10(h) or Section 11(d).
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(iii) Mandatory Conversion Date. The Mandatory Conversion Date for any Mandatory Conversion will be a Business Day of the Company’s choosing that is no more than twenty (20), nor less than ten (10), Business Days after the Mandatory Conversion Notice Date for such Mandatory Conversion.
(iv) Mandatory Conversion Notice. To exercise its Mandatory Conversion Right with respect to any shares of Convertible Preferred Stock, the Company must send to each Holder of such shares a written notice of such exercise (a “Mandatory Conversion Notice”).
(v) Such Mandatory Conversion Notice must state:
(1) that the Company has exercised its Mandatory Conversion Right to cause the Mandatory Conversion of the shares of Convertible Preferred Stock, briefly describing the Company’s Mandatory Conversion Right under this Certificate of Designations;
(2) the Mandatory Conversion Date for such Mandatory Conversion and the date scheduled for the settlement of such Mandatory Conversion;
(3) the name and address of the Paying Agent and the Conversion Agent, as well as instructions whereby the Holder may surrender such share to the Transfer Agent or Conversion Agent;
(4) that shares of Convertible Preferred Stock subject to Mandatory Conversion may be converted earlier at the option of the Holders thereof pursuant to an Optional Conversion at any time before the Close of Business on the Business Day immediately before the Mandatory Conversion Date; and
(5) the Conversion Price in effect on the Mandatory Conversion Notice Date for such Mandatory Conversion, the number of shares of Common Stock to be issued to such Holder upon conversion of each share of Convertible Preferred Stock held by such Holder and, if applicable, the amount of accumulated and unpaid Regular Dividends, whether or not declared, in respect of such share of Convertible Preferred Stock as of the Mandatory Conversion Date.
(d) Conversion Procedures.
(i) Mandatory Conversion. If the Company duly exercises, in accordance with Section 10(c), its Mandatory Conversion Right with respect to any share of Convertible Preferred Stock, then (1) the Mandatory Conversion of such share will occur automatically and without the need for any action on the part of the Holder(s) thereof; (2) the shares of Common Stock due upon such Mandatory Conversion will be registered in the name of, and, if applicable, the cash due upon such Mandatory Conversion will be delivered to, the Holder(s) of such share of Convertible Preferred Stock as of the Close of Business on the related Mandatory Conversion Date; and (3) if less than all of the outstanding shares of Convertible Preferred Stock are subject to such Mandatory Conversion, the number of shares of Convertible Preferred Stock of each Holder subject to Mandatory Conversion shall be allocated pro rata among each Holder based on the number of shares of Convertible Preferred Stock held by such Holder.
(ii) Requirements for Holders to Exercise Optional Conversion Right.
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(1) Generally. To convert any share of Convertible Preferred Stock evidenced by a Certificate pursuant to an Optional Conversion, the Holder of such share must (w) complete, sign (by manual, facsimile or electronic signature) and deliver to the Conversion Agent an Optional Conversion Notice (at which time, in the case such Certificate is an Electronic Certificate, such Optional Conversion will become irrevocable); (x) if such Certificate is a Physical Certificate, deliver such Physical Certificate to the Conversion Agent (at which time such Optional Conversion will become irrevocable); (y) furnish any endorsements and transfer documents that the Company or the Conversion Agent may require; and (z) if applicable, pay any documentary or other taxes that are required to be paid by the Company as a result of a Holder requesting that shares be registered in a name other than such Holders’ name as described in Section 11(c).
(2) Optional Conversion Permitted only During Business Hours. Convertible Preferred Stock will be deemed to be surrendered for Optional Conversion only after the Open of Business and before the Close of Business on a day that is a Business Day.
(iii) Treatment of Accumulated Dividends upon Conversion.
(1) No Adjustments for Accumulated Regular Dividends. Without limiting the operation of Section 5(b), Section 5(d) and Section 10(e)(i), the Conversion Price will not be adjusted to account for any accumulated and unpaid Regular Dividends on any Convertible Preferred Stock being converted.
(2) Conversions Between A Record Date and a Dividend Payment Date. If the Conversion Date of any share of Convertible Preferred Stock to be converted is after a Record Date for a declared Dividend on the Convertible Preferred Stock and on or before the next Dividend Payment Date, then such Dividend will be paid pursuant to Section 5(d) notwithstanding such conversion.
(iv) When Holders Become Stockholders of Record of the Shares of Common Stock Issuable Upon Conversion. The Person in whose name any share of Common Stock is issuable upon conversion of any Convertible Preferred Stock will be deemed to become the holder of record of such share as of the Close of Business on the Conversion Date for such conversion.
(e) Settlement upon Conversion.
(i) Generally. Subject to Section 10(e)(ii), Section 10(h), Section 11(d) and Section 14(b), the consideration due upon settlement of the conversion of each share of Convertible Preferred Stock will consist of a number of shares of Common Stock equal to the quotient obtained by dividing (I) the Liquidation Preference (plus any accrued and unpaid dividends in respect of the Convertible Preferred Stock, whether or not declared (and including, for the avoidance of doubt, any previously accrued and unpaid dividends in respect of the Convertible Preferred Stock which have been added to the Liquidation Preference pursuant to Section 5(b)), on such shares of Convertible Preferred Stock to, but excluding, the Conversion Date) for such shares of Convertible Preferred Stock subject to conversion by (II) the Conversion Price, in each case, as of immediately before the Close of Business on such Conversion Date.
(ii) Payment of Cash in Lieu of any Fractional Share of Common Stock. Subject to Section 14(b), in lieu of delivering any fractional share of Common Stock otherwise due upon conversion of any Convertible Preferred Stock, the Company will, to
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the extent it is legally able to do so and permitted under the terms of its indebtedness for borrowed money, pay cash based on the Last Reported Sale Price per share of Common Stock on the Conversion Date for such conversion (or, if such Conversion Date is not a Trading Day, the immediately preceding Trading Day).
(iii) Company’s Right to Settle Optional Conversion in Cash. If any Convertible Preferred Stock is to be converted pursuant to an Optional Conversion, then the Company will have the right to settle such Optional Conversion of such Convertible Preferred Stock (or any portion thereof that represents a whole number of shares) solely in cash in an amount equal to the product of (1) the number of shares of Common Stock that would be issuable upon such Optional Conversion of such Convertible Preferred Stock (or such portion thereof), determined in accordance with this Section 10 (but without regard to Section 10(e)(ii) or this Section 10(e)(iii)); and (2) the Last Reported Sale Price per share of Common Stock on the Conversion Date for such Optional Conversion. Such right can be exercised by the Company solely by providing written notice to the Holder of such Convertible Preferred Stock no later than the Business Day after such Conversion Date, which notice states (x) that the Company has elected to cash settle such Optional Conversion; and (y) the number of shares of such Convertible Preferred Stock as to which such election is made. Once such written notice is so provided exercising such right, such exercise will be irrevocable with respect to such Optional Conversion (without affecting the Company’s right to exercise or not exercise such right with respect to any other Optional Conversion). Notwithstanding anything to the contrary in this Section 10(e)(iii), the Company will not be entitled to exercise its right to settle any Optional Conversion of Convertible Preferred Stock in cash pursuant to this Section 10(e)(iii) unless the Company has sufficient funds legally available, and is permitted under the terms of its indebtedness for borrowed money, to fully pay the cash amounts that would be payable in respect of such election.
(iv) Delivery of Conversion Consideration. Except as provided in Sections 10(f)(i)(3)(B), 10(f)(i)(4) and 10(i), the Company will pay or deliver, as applicable, the Conversion Consideration due upon conversion of any Convertible Preferred Stock on or before the second (2nd) Business Day immediately after the Conversion Date for such conversion.
(f) Conversion Price Adjustments.
(i) Events Requiring an Adjustment to the Conversion Price. The Conversion Price will be adjusted from time to time as follows:
(1) Stock Dividends, Splits and Combinations. If the Company issues solely shares of Common Stock as a dividend or distribution on all or substantially all shares of the Common Stock, or if the Company effects a stock split or a stock combination of the Common Stock (in each case, excluding an issuance solely pursuant to a Common Stock Change Event, as to which Section 10(i) will apply), then the Conversion Price will be adjusted based on the following formula:
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where:
CP0 = the Conversion Price in effect immediately before the Close of Business on the Record Date for such dividend or distribution, or immediately before the Close of Business on the effective date of such stock split or stock combination, as applicable;
CP1 = the Conversion Price in effect immediately after the Close of Business on such Record Date or effective date, as applicable;
OS0 = the number of shares of Common Stock outstanding immediately before the Close of Business on such Record Date or effective date, as applicable, without giving effect to such dividend, distribution, stock split or stock combination; and
OS1 = the number of shares of Common Stock outstanding immediately after giving effect to such dividend, distribution, stock split or stock combination.
If any dividend, distribution, stock split or stock combination of the type described in this Section 10(f)(i)(1) is declared or announced, but not so paid or made, then the Conversion Price will be readjusted, effective as of the date the Board of Directors, or any Officer acting pursuant to authority conferred by the Board of Directors, determines not to pay such dividend or distribution or to effect such stock split or stock combination, to the Conversion Price that would then be in effect had such dividend, distribution, stock split or stock combination not been declared or announced.
(2) Rights, Options and Warrants. If the Company distributes, to all or substantially all holders of Common Stock, rights, options or warrants (other than rights issued or otherwise distributed pursuant to a stockholder rights plan, as to which Section 10(f)(i)(3)(A) and Section 10(f)(iii) will apply) entitling such holders, for a period of not more than sixty (60) calendar days after the Record Date of such distribution, to subscribe for or purchase shares of Common Stock at a price per share that is less than the average of the Last Reported Sale Prices per share of Common Stock for the ten (10) consecutive Trading Days ending on, and including, the Trading Day immediately before the date such distribution is announced, then the Conversion Price will be decreased based on the following formula:
where:
CP0 = the Conversion Price in effect immediately before the Close of Business on such Record Date;
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CP1 = the Conversion Price in effect immediately after the Close of Business on such Record Date;
OS = the number of shares of Common Stock outstanding immediately before the Close of Business on such Record Date;
Y = a number of shares of Common Stock obtained by dividing (x) the aggregate price payable to exercise such rights, options or warrants by (y) the average of the Last Reported Sale Prices per share of Common Stock for the ten (10) consecutive Trading Days ending on, and including, the Trading Day immediately before the date such distribution is announced; and
X = the total number of shares of Common Stock issuable pursuant to such rights, options or warrants.
To the extent such rights, options or warrants are not so distributed, the Conversion Price will be readjusted to the Conversion Price that would then be in effect had the decrease to the Conversion Price for such distribution been made on the basis of only the rights, options or warrants, if any, actually distributed. In addition, to the extent that shares of Common Stock are not delivered after the expiration of such rights, options or warrants (including as a result of such rights, options or warrants not being exercised), the Conversion Price will be readjusted to the Conversion Price that would then be in effect had the decrease to the Conversion Price for such distribution been made on the basis of delivery of only the number of shares of Common Stock actually delivered upon exercise of such rights, option or warrants.
For purposes of this Section 10(f)(i)(2), in determining whether any rights, options or warrants entitle holders of Common Stock to subscribe for or purchase shares of Common Stock at a price per share that is less than the average of the Last Reported Sale Prices per share of Common Stock for the ten (10) consecutive Trading Days ending on, and including, the Trading Day immediately before the date the distribution of such rights, options or warrants is announced, and in determining the aggregate price payable to exercise such rights, options or warrants, there will be taken into account any consideration the Company receives for such rights, options or warrants and any amount payable on exercise thereof, with the value of such consideration, if not cash, to be determined by the Board of Directors.
(3) Distribution Transactions and Other Distributed Property.
(A) Distributions Other than Distribution Transactions. If the Company distributes shares of its Capital Stock, evidences of the Company’s indebtedness or other assets or property of the Company, or rights, options or warrants to acquire the Company’s Capital Stock or other securities, to all or substantially all holders of the Common Stock, excluding:
(I) dividends, distributions, rights, options or warrants for which an adjustment to the Conversion Price is required pursuant to Section 10(f)(i)(1) or 10(f)(i)(2);
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(II) dividends or distributions paid exclusively in cash in which the Convertible Preferred Stock participate to the extent required pursuant to Section 5(c);
(III) rights issued or otherwise distributed pursuant to a stockholder rights plan, except to the extent provided in Section 10(f)(iii);
(IV) Distribution Transactions for which an adjustment to the Conversion Price is required pursuant to Section 10(f)(i)(3)(B);
(V) a distribution solely pursuant to a tender offer or exchange offer for shares of Common Stock, as to which Section 10(f)(i)(2) will apply; and
(VI) a distribution solely pursuant to a Common Stock Change Event, as to which Section 10(i) will apply,
then the Conversion Price will be decreased based on the following formula:
where:
CP0 = the Conversion Price in effect immediately before the Close of Business on the Record Date for such distribution;
CP1 = the Conversion Price in effect immediately after the Close of Business on such Record Date;
SP = the average of the Last Reported Sale Prices per share of Common Stock for the ten (10) consecutive Trading Days ending on, and including, the Trading Day immediately before the Ex-Dividend Date for such distribution; and
FMV = the fair market value (as determined by the Board of Directors), as of such Record Date, of the shares of Capital Stock, evidences of indebtedness, assets, property, rights, options or warrants distributed per share of Common Stock pursuant to such distribution;
provided, however, that, if FMV is equal to or greater than SP, then, in lieu of the foregoing adjustment to the Conversion Price, each Holder will receive, for each share of Convertible Preferred Stock held by such Holder on such Record Date, at the same time and on the same terms as holders of Common Stock, the amount and kind of shares of Capital Stock, evidences of indebtedness, assets, property, rights, options or warrants that such Holder would have received in such distribution if such Holder had owned, on such Record Date, a number of shares of Common Stock equal
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to the number of shares of Common Stock that would be issuable (determined in accordance with Section 10(e) but without regard to Section 10(e)(ii), 10(h), 10(e)(iii) or 11(d)) in respect of one (1) share of Convertible Preferred Stock that is converted with a Conversion Date occurring on such Record Date (subject to the same arrangements, if any, in such distribution not to issue or deliver a fractional portion of any Capital Stock, evidences of indebtedness, assets, property, rights, options or warrants, but with such arrangement applying separately to each Holder and computed based on the total number of shares of Convertible Preferred Stock held by such Holder on such Record Date).
To the extent such distribution is not so paid or made, the Conversion Price will be readjusted to the Conversion Price that would then be in effect had the adjustment been made on the basis of only the distribution, if any, actually made or paid.
(B) Distribution Transactions. If the Company engages in a Distribution Transaction in which it distributes or dividends shares of Capital Stock of any class or series, or similar equity interests, of or relating to an Affiliate or Subsidiary or other business unit of the Company to all or substantially all holders of the Common Stock (other than solely pursuant to (x) a Common Stock Change Event, as to which Section 10(i) will apply; or (y) a tender offer or exchange offer for shares of Common Stock, as to which Section 10(f)(i)(2) will apply), and such Capital Stock or equity interests are listed or quoted (or will be listed or quoted upon the consummation of the transaction) on a U.S. national securities exchange, then the Conversion Price will be decreased based on the following formula:
where:
CP0 = the Conversion Price in effect immediately before the Close of Business on the Record Date for such Distribution Transaction;
CP1 = the Conversion Price in effect immediately after the Close of Business on such Record Date;
SP = the average of the Last Reported Sale Prices per share of Common Stock for each Trading Day in the Distribution Transaction Valuation Period (as defined below); and
FMV = the product of (x) the average of the Last Reported Sale Prices per share or unit of the Capital Stock or equity interests distributed in such Distribution Transaction over the ten (10) consecutive Trading Day period (the “Distribution Transaction Valuation Period”) beginning on, and including, the Ex-Dividend Date for such Distribution Transaction (such average to be determined as
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if references to Common Stock in the definitions of “Last Reported Sale Price,” “Trading Day” and “Market Disruption Event” were instead references to such Capital Stock or equity interests); and (y) the number of share or units of such Capital Stock or equity interests distributed per share of Common Stock in such Distribution Transaction.
provided, however, that in the event of a Distribution Transaction where the Majority Holders elect to engage in a Spin-Off Exchange Offer, and such Spin-Off Exchange Offer is completed pursuant to Section 10(f)(iv), then no adjustment to the Conversion Price shall be made pursuant to this Section 10(f)(i)(3)(B).
The adjustment to the Conversion Price pursuant to this Section 10(f)(i)(3)(B) will be calculated as of the Close of Business on the last Trading Day of the Distribution Transaction Valuation Period that will be given effect immediately after the Close of Business of the Record Date for the Distribution Transaction, with retroactive effect. If the Conversion Date for any share of Convertible Preferred Stock to be converted occurs during the Distribution Transaction Valuation Period, then, notwithstanding anything to the contrary in this Certificate of Designations, the Company will, if necessary, delay the settlement of such conversion until the second (2nd) Business Day after the Last Trading Day of the Distribution Transaction Valuation Period.
To the extent any dividend or distribution of the type described in Section 10(f)(i)(3)(B) is declared but not made or paid, the Conversion Price will be readjusted to the Conversion Price that would then be in effect had the adjustment been made on the basis of only the dividend or distribution, if any, actually made or paid.
(4) Tender Offers or Exchange Offers. If the Company or any of its Subsidiaries makes a payment in respect of a tender offer or exchange offer for shares of Common Stock (other than solely pursuant to an odd-lot tender offer pursuant to Rule 13e-4(h)(5) under the Exchange Act), and the value (determined as of the Expiration Time by the Board of Directors) of the cash and other consideration paid per share of Common Stock in such tender or exchange offer exceeds the Last Reported Sale Price per share of Common Stock on the Trading Day immediately after the last date (the “Expiration Date”) on which tenders or exchanges may be made pursuant to such tender or exchange offer (as it may be amended), then the Conversion Price will be decreased based on the following formula:
where:
CP0 = the Conversion Price in effect immediately before the time (the “Expiration Time”) such tender or exchange offer expires;
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CP1 = the Conversion Price in effect immediately after the Expiration Time;
SP = the average of the Last Reported Sale Prices per share of Common Stock over the ten (10) consecutive Trading Day period (the “Tender/Exchange Offer Valuation Period”) beginning on, and including, the Trading Day immediately after the Expiration Date;
OS0 = the number of shares of Common Stock outstanding immediately before the Expiration Time (including all shares of Common Stock accepted for purchase or exchange in such tender or exchange offer);
AC = the aggregate value (determined as of the Expiration Time by the Board of Directors) of all cash and other consideration paid for shares of Common Stock purchased or exchanged in such tender or exchange offer; and
OS1 = the number of shares of Common Stock outstanding immediately after the Expiration Time (excluding all shares of Common Stock accepted for purchase or exchange in such tender or exchange offer);
provided, however, that the Conversion Price will in no event be adjusted up pursuant to this Section 10(f)(i)(4), except to the extent provided in the immediately following paragraph. The adjustment to the Conversion Price pursuant to this Section 10(f)(i)(4) will be calculated as of the Close of Business on the last Trading Day of the Tender/Exchange Offer Valuation Period but will be given effect immediately after the Expiration Time, with retroactive effect. If the Conversion Date for any share of Convertible Preferred Stock to be converted occurs on the Expiration Date or during the Tender/Exchange Offer Valuation Period, then, notwithstanding anything to the contrary in this Certificate of Designations, the Company will, if necessary, delay the settlement of such conversion until the second (2nd) Business Day after the last Trading Day of the Tender/Exchange Offer Valuation Period.
To the extent such tender or exchange offer is announced but not consummated (including as a result of being precluded from consummating such tender or exchange offer under applicable law), or any purchases or exchanges of shares of Common Stock in such tender or exchange offer are rescinded, the Conversion Price will be readjusted to the Conversion Price that would then be in effect had the adjustment been made on the basis of only the purchases or exchanges of shares of Common Stock, if any, actually made, and not rescinded, in such tender or exchange offer.
(ii) No Adjustments in Certain Cases. Without limiting the operation of Section 5(b) and 10(e)(i), the Company will not be required to adjust the Conversion Price except pursuant to Section 10(f)(i). Without limiting the foregoing, the Company will not be required to adjust the Conversion Rate on account of:
(A) except as otherwise provided in Section 10(f)(i), the sale of shares of Common Stock for a purchase price that is less than the market price per share of Common Stock or less than the Conversion Price;
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(B) the issuance of any shares of Common Stock pursuant to any present or future plan providing for the reinvestment of dividends or interest payable on the Company’s securities and the investment of additional optional amounts in shares of Common Stock under any such plan;
(C) the issuance of any shares of Common Stock or options or rights to purchase shares of Common Stock pursuant to any present or future employee, director or consultant benefit plan or program of, or assumed by, the Company or any of its Subsidiaries;
(D) the issuance of any shares of Common Stock pursuant to any option, warrant, right or convertible or exchangeable security of the Company outstanding as of the Initial Issue Date; or
(E) solely a change in the par value of the Common Stock.
(iii) Stockholder Rights Plans. If any shares of Common Stock are to be issued upon conversion of any Convertible Preferred Stock and, at the time of such conversion, the Company has in effect any stockholder rights plan, then the Holder of such Convertible Preferred Stock will be entitled to receive, in addition to, and concurrently with the delivery of, the consideration otherwise due upon such conversion, the rights set forth in such stockholder rights plan, unless such rights have separated from the Common Stock at such time, in which case, and only in such case, the Conversion Price will be adjusted pursuant to Section 10(f)(i)(3)(A) on account of such separation as if, at the time of such separation, the Company had made a distribution of the type referred to in such Section 10(f)(i)(3)(A) to all holders of Common Stock, subject to readjustment pursuant to Section 10(f)(i)(3)(A) if such rights expire, terminate or are redeemed.
(iv) Distribution Transactions.
(1) In the event the Company proposes to effect a Distribution Transaction, then, by written action of the Holders constituting at least a majority of the outstanding voting power of the Convertible Preferred Stock (the “Majority Holders”) delivered to the Company prior to the relevant Record Date, the Company will negotiate in good faith with such Majority Holders the terms and conditions of an exchange offer described herein (the “Spin-Off Exchange Offer”), and in the event the Spin-Off Exchange Offer is completed, then no adjustment to the Conversion Price shall be made pursuant to Section 10(f)(i)(3)(B).
(2) In connection with the Spin-Off Exchange Offer, each share of Convertible Preferred Stock will be exchanged by the Company for one share of Mirror Preferred Stock and one share of Exchange Preferred Stock. The Liquidation Preference of the Convertible Preferred Stock will be allocated between the shares of Mirror Preferred Stock and Exchange Preferred Stock in accordance with the relative fair market value of the assets and businesses to be held by the Distributed Entity and the assets and businesses to be retained by the Company, as determined in good faith by the Board of Directors after consultation with the Majority Holders.
(3) The Company and the Majority Holders will negotiate reasonably and in good faith and each will use its reasonable best efforts to agree on mutually agreeable terms for the Spin-Off Exchange Offer, including, without limitation,
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the certificate of designations with respect to the Mirror Preferred Stock and the certificate of designations with respect to the Exchange Preferred Stock, to reflect the fact that following the completion of the Spin-Off Exchange Offer the adjustments to the Conversion Price will be based upon the common stock of the Company and the common stock of the Distributed Entity, and that the rights, benefits, obligations and economic characteristics of the Series A Preferred Stock will not be expanded or diminished as a result of the exchange of shares of Convertible Preferred Stock for shares of Mirror Preferred Stock and Exchange Preferred Stock. The exchange of Convertible Preferred Stock for Exchange Preferred Stock in the Spin-Off Exchange Offer shall be structured in a manner so as to qualify as a tax-free recapitalization within the meaning of Section 368(a) of the Code to the maximum extent permitted by applicable law.
(v) Determination of the Number of Outstanding Shares of Common Stock. For purposes of Section 10(f)(i), the number of shares of Common Stock outstanding at any time will (1) include shares issuable in respect of scrip certificates issued in lieu of fractions of shares of Common Stock; and (2) exclude shares of Common Stock held in the Company’s treasury (unless the Company pays any dividend or makes any distributions on shares of Common Stock held in its treasury).
(vi) Calculations. All calculations with respect to the Conversion Price and adjustments thereto will be made to the nearest 1/100th of a cent (with 5/1,000ths rounded upward).
(vii) Notice of Conversion Price Adjustments. Upon the effectiveness of any adjustment to the Conversion Price pursuant to Section 10(f)(i), the Company will promptly send notice to the Holders containing (1) a brief description of the transaction or other event on account of which such adjustment was made; (2) the Conversion Price in effect immediately after such adjustment; and (3) the effective time of such adjustment.
(g) Voluntary Conversion Price Decreases.
(i) Generally. To the extent permitted by law and applicable stock exchange rules, the Company, from time to time, may (but is not required to) decrease the Conversion Price by any amount if (1) the Board of Directors determines that such decrease is in the Company’s best interest or that such decrease is advisable to avoid or diminish any income tax imposed on holders of Common Stock or rights to purchase Common Stock as a result of any dividend or distribution of shares (or rights to acquire shares) of Common Stock or any similar event; (2) such decrease is in effect for a period of at least twenty (20) Business Days; and (3) such decrease is irrevocable during such period; provided, however, that any such decrease that would be reasonably expected to result in any income tax imposed on holders of Convertible Preferred Stock shall require the affirmative vote or consent of Majority Holders.
(ii) Notice of Voluntary Decrease. If the Board of Directors determines to decrease the Conversion Price pursuant to Section 10(g)(i), then, no later than the first Business Day of the related twenty (20) Business Day period referred to in Section 10(g)(i), the Company will send notice to each Holder, the Transfer Agent and the Conversion Agent of such decrease to the Conversion Price, the amount thereof and the period during which such decrease will be in effect.
(h) Restriction on Conversions.
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(i) Equity Treatment Limitation.
(1) Generally. Notwithstanding anything to the contrary in this Certificate of Designations, the Company will in no event be required to deliver any shares of Common Stock in settlement of the conversion of any Convertible Preferred Stock to the extent, but only to the extent, the Company does not then have sufficient authorized and unissued shares of Common Stock that are not reserved for other purposes (the limitation set forth in this sentence, the “Equity Treatment Limitation,” and any shares of Common Stock that would otherwise be deliverable in excess of the number of such authorized and unissued shares, the “Deficit Shares”). If any Deficit Shares are withheld pursuant to the Equity Treatment Limitation and, at any time thereafter, some or all of such Deficit Shares could be delivered without violating the Equity Treatment Limitation, then (A) the Company will deliver such Deficit Shares to the extent, but only to the extent, such delivery is permitted by the Equity Treatment Limitation; and (B) the provisions of this sentence will continue to apply until there are no remaining Deficit Shares.
(2) Share Reserve Provisions. On the Initial Issue Date, the Number of Reserved Shares is not less than the Initial Share Reserve Requirement. The Company shall at all times reserve and keep available a Number of Reserved Shares to be no less than the Continuing Share Reserve Requirement at any time when any Convertible Preferred Stock is outstanding (including, if applicable, by seeking the approval of its stockholders to amend the Certificate of Formation to increase the number of authorized shares of Common Stock).
(3) Limitation on Certain Transactions. The Company will not, without the prior written consent of Majority Holders, effect any transaction that would require an adjustment to the Conversion Price pursuant to Section 10(f)(i) if the settlement of the conversion of all Convertible Preferred Stock then outstanding (assuming such conversion occurred immediately after giving effect to such adjustment) would result in any Deficit Shares pursuant to the Equity Treatment Limitation.
(i) Effect of Common Stock Change Event.
(i) Generally. If there occurs any:
(1) recapitalization, reclassification or change of the Common Stock, other than (x) changes solely resulting from a subdivision or combination of the Common Stock, (y) a change only in par value or from par value to no par value or no par value to par value or (z) stock splits and stock combinations that do not involve the issuance of any other series or class of securities;
(2) consolidation, merger, combination or binding or statutory share exchange involving the Company;
(3) sale, lease or other transfer of all or substantially all of the assets of the Company and its Subsidiaries, taken as a whole, to any Person; or
(4) other similar event,
and, as a result of which, the Common Stock is converted into, or is exchanged for, or represents solely the right to receive, other securities, cash or other property, or any
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combination of the foregoing (such an event, a “Common Stock Change Event,” and such other securities, cash or property, the “Reference Property,” and the amount and kind of Reference Property that a holder of one (1) share of Common Stock would be entitled to receive on account of such Common Stock Change Event (without giving effect to any arrangement not to issue or deliver a fractional portion of any security or other property), a “Reference Property Unit”), then, notwithstanding anything to the contrary in this Certificate of Designations,
(A) from and after the effective time of such Common Stock Change Event, (I) the consideration due upon conversion of any Convertible Preferred Stock will be determined in the same manner as if each reference to any number of shares of Common Stock in this Section 10 or in Section 11, or in any related definitions, were instead a reference to the same number of Reference Property Units; (II) for purposes of Section 8 and Section 10(c), each reference to any number of shares of Common Stock in such Sections (or in any related definitions) will instead be deemed to be a reference to the same number of Reference Property Units; and (III) for purposes of the definitions of “Fundamental Change,” the terms “Common Stock” and “common equity” will be deemed to mean the common equity (including depositary receipts representing common equity), if any, forming part of such Reference Property; and
(B) if such Reference Property Unit consists entirely of cash, then the Company will pay the cash due in respect of all conversions whose Conversion Date occurs on or after the effective date of such Common Stock Change Event no later than the tenth (10th) Business Day after the relevant Conversion Date.
If the Reference Property consists of more than a single type of consideration to be determined based in part upon any form of stockholder election, then the composition of the Reference Property Unit will be deemed to be the weighted average of the types and amounts of consideration actually received, per share of Common Stock, by the holders of Common Stock. The Company will notify the Holders of such weighted average as soon as practicable after such determination is made.
(i) Compliance Covenant. The Company will not become a party to any Common Stock Change Event unless its terms are consistent with this Section 10(i).
(ii) Execution of Supplemental Instruments. On or before the date the Common Stock Change Event becomes effective, the Company and, if applicable, the resulting, surviving or transferee Person (if not the Company) of such Common Stock Change Event (the “Successor Person”) will execute and deliver such supplemental instruments, if any, as the Company reasonably determines are necessary or desirable to (1) provide for subsequent adjustments to the Conversion Price pursuant to Section 10(f)(i) in a manner consistent with this Section 10(i); and (2) give effect to such other provisions, if any, as the Company reasonably determines are appropriate to preserve the economic interests of the Holders and to give effect to Section 10(i)(i). If the Reference Property includes shares of stock or other securities or assets of a Person other than the Successor Person, then such other Person will also execute such supplemental instrument(s), if any, and such supplemental instrument(s) will contain such additional provisions, if any, that the Company reasonably determines are appropriate to preserve the economic interests of Holders.
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(iii) Notice of Common Stock Change Event. The Company will provide notice of each Common Stock Change Event to Holders as promptly as possible after the effective date of the Common Stock Change Event.
Section 11. Certain Provisions Relating to the Issuance of Common Stock.
(a) Equitable Adjustments to Prices. Whenever this Certificate of Designations requires the Company to calculate the average of the Last Reported Sale Prices, or any function thereof, over a period of multiple days (including to calculate an adjustment to the Conversion Price), the Company will make appropriate adjustments, if any, to those calculations to account for any adjustment to the Conversion Price pursuant to Section 10(f)(i) that becomes effective, or any event requiring such an adjustment to the Conversion Price where the Ex-Dividend Date, effective date or Expiration Date, as applicable, of such event occurs, at any time during such period.
(b) Status of Shares of Common Stock. Each share of Common Stock delivered upon conversion of the Convertible Preferred Stock of any Holder will be a newly issued share and will be duly authorized and validly issued, fully paid, non-assessable, free from preemptive rights and free of any lien or adverse claim (except to the extent of any lien or adverse claim created by the action or inaction of such Holder or the Person to whom such share of Common Stock will be delivered). If the Common Stock is then listed on any securities exchange, or quoted on any inter-dealer quotation system, then the Company will cause each such share of Common Stock, when so delivered, to be admitted for listing on such exchange or quotation on such system.
(c) Taxes Upon Issuance of Common Stock. The Company will pay any documentary, stamp or similar issue or transfer tax or duty due on the issue of any shares of Common Stock upon conversion of the Convertible Preferred Stock of any Holder, except any such tax or duty that is due because such Holder requests those shares to be registered in a name other than such Holder’s name.
(d) Limit of Issuance of Shares of Common Stock upon Conversion. Notwithstanding anything to the contrary in this Certificate of Designations, to the extent that the listing standards of The New York Stock Exchange require shareholder approval to issue upon conversion of the Convertible Preferred Stock more than 19.9995% of the number of shares of Common Stock outstanding as of May 13, 2022, then unless and until the Company obtains such shareholder approval, the number of shares of Common Stock, if any, deliverable upon conversion of the Convertible Preferred Stock shall not exceed the Conversion Share Cap, and any shares of Convertible Preferred Stock that cannot be converted as a result of the Conversion Share Cap shall continue to remain outstanding.
Section 12. Taxes. The Company shall pay any and all stock transfer, documentary, stamp and similar taxes that may be payable in respect of any issuance or delivery of shares of Convertible Preferred Stock or shares of Common Stock or other securities issued on account of Convertible Preferred Stock pursuant hereto or certificates evidencing such shares or securities. However, in the case of conversion of Convertible Preferred Stock, the Company shall not be required to pay any such tax that may be payable in respect of any transfer involved in the issuance or delivery of shares of Convertible Preferred Stock, shares of Common Stock or other securities to a beneficial owner other than the beneficial owner of the Convertible Preferred Stock immediately prior to such conversion, and shall not be required to make any such issuance, delivery or payment unless and until the Person otherwise entitled to such issuance, delivery or payment has paid to the Company the amount of any such tax or has established, to the satisfaction of the Company, that such tax has been paid or is not payable.
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Section 13. Term. Except as expressly provided in this Certificate of Designations, the shares of Convertible Preferred Stock shall not be redeemable or otherwise mature and the term of the Convertible Preferred Stock shall be perpetual.
Section 14. Calculations.
(a) Responsibility; Schedule of Calculations. Except as otherwise provided in this Certificate of Designations, the Company will be responsible for making all calculations called for under this Certificate of Designations or the Convertible Preferred Stock, including determinations of the Conversion Price, the Last Reported Sale Prices and accumulated Regular Dividends, whether or not declared, on the Convertible Preferred Stock. The Company will make all calculations in good faith, and, absent manifest error, its calculations will be final and binding on all Holders. The Company will provide a schedule of such calculations to any Holder upon written request.
(b) Calculations Aggregated for Each Holder. The composition of the Conversion Consideration due upon conversion of the Convertible Preferred Stock of any Holder will be computed based on the total number of shares of Convertible Preferred Stock of such Holder being converted with the same Conversion Date. For these purposes, any cash amounts due to such Holder in respect thereof will be rounded to the nearest cent.
Section 15. Notices. The Company will send all notices or communications to Holders pursuant to this Certificate of Designations in writing and delivered personally, by facsimile or e-mail (with confirmation of receipt requested from the recipient, in the case of e-mail), or sent by a nationally recognized overnight courier service guaranteeing next day delivery, to the Holders’ respective addresses shown on the Register. Unless otherwise specified herein, all notices and communications hereunder shall be deemed to have been given upon the earlier of receipt thereof or three (3) Business Days after the mailing thereof if sent by registered or certified mail with postage prepaid, or by private courier service.
Section 16. Facts Ascertainable. When the terms of this Certificate of Designations refers to a specific agreement or other document to determine the meaning or operation of a provision hereof, the Secretary of the Company shall maintain a copy of such agreement or document at the principal executive offices of the Company and a copy thereof shall be provided free of charge to any Holder who makes a request therefor. The Secretary of the Company shall also maintain a written record of the Initial Issue Date, the number of shares of Convertible Preferred Stock issued to a Holder and the date of each such issuance, and shall furnish such written record free of charge to any Holder who makes a request therefor.
Section 17. Waiver. Notwithstanding any provision in this Certificate of Designations to the contrary, any provision contained herein and any right of the Holders of Convertible Preferred Stock granted hereunder may be waived as to all shares of Convertible Preferred Stock (and the Holders thereof) upon the vote or written consent of the Majority Holders.
Section 18. Severability. If any term of the Convertible Preferred Stock set forth herein is invalid, unlawful or incapable of being enforced by reason of any rule of law or public policy, all other terms set forth herein which can be given effect without the invalid, unlawful or unenforceable term will, nevertheless, remain in full force and effect, and no term herein set forth will be deemed dependent upon any other such term unless so expressed herein.
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Section 19. No Other Rights. The Convertible Preferred Stock will have no rights, preferences or voting powers except as provided in this Certificate of Designations or the Certificate of Formation or as required by applicable law.
Section 20. Effectiveness of Filing. This Certificate of Designations becomes effective when it is filed with the Texas Secretary of State.
[The Remainder of This Page Intentionally Left Blank; Signature Page Follows]
- 50 -
IN WITNESS WHEREOF, subject to the penalties imposed by law for the submission of a materially false or fraudulent instrument the Company has caused this Certificate of Designations to be duly executed as of May 13, 2022.
AZZ Inc.
By: /s/ Tara D. Mackey
Name: Tara D. Mackey
Title: Chief Legal Officer and Secretary
[Signature Page to Certificate of Designations]
EXHIBIT A
FORM OF CONVERTIBLE PREFERRED STOCK CERTIFICATE
[Insert Restricted Stock Legend, if applicable]
AZZ Inc.
6.0% Series A Convertible Preferred Stock
Certificate No. [___]
AZZ Inc., a Texas corporation (the “Company”), certifies that [___] is the registered owner of [___] shares of the Company’s 6.0% Series A Convertible Preferred Stock (the “Convertible Preferred Stock”) evidenced by this certificate (this “Certificate”). The special rights, preferences and voting powers of the Convertible Preferred Stock are set forth in the Certificate of Designations of the Company establishing the Convertible Preferred Stock (the “Certificate of Designations”). Capitalized terms used in this Certificate without definition have the respective meanings ascribed to them in the Certificate of Designations.
Additional terms of this Certificate are set forth on the other side of this Certificate.
[The Remainder of This Page Intentionally Left Blank; Signature Page Follows]
A-1
IN WITNESS WHEREOF, AZZ Inc. has caused this instrument to be duly executed as of the date set forth below.
AZZ Inc.
Date: By:
Name:
Title:
Date: By:
Name:
Title:
A-2
TRANSFER AGENT’S COUNTERSIGNATURE
[legal name of Transfer Agent], as Transfer Agent, certifies that this Certificate evidences shares of Convertible Preferred Stock referred to in the within-mentioned Certificate of Designations.
Date: By:
Authorized Signatory
A-3
AZZ Inc.
6.0% Series A Convertible Preferred Stock
This Certificate evidences duly authorized, issued and outstanding shares of Convertible Preferred Stock. Notwithstanding anything to the contrary in this Certificate, to the extent that any provision of this Certificate conflicts with the provisions of the Certificate of Designations or the Certificate of Formation, the provisions of the of the Certificate of Designations or the Certificate of Formation, as applicable, will control.
1. Countersignature. This Certificate will not be valid until countersigned by the Transfer Agent.
2. Abbreviations. Customary abbreviations may be used in the name of a Holder or its assignee, such as TEN COM (tenants in common), TEN ENT (tenants by the entireties), JT TEN (joint tenants with right of survivorship and not as tenants in common), CUST (custodian), and U/G/M/A (Uniform Gift to Minors Act).
* * *
To request a copy of the Certificate of Designations, which the Company will provide to any Holder at no charge, please send a written request to the following address:
AZZ Inc.
One Museum Place, Suite 500
3100 West 7th Street
Fort Worth, Texas 76107
Attention: General Counsel
A-4
OPTIONAL CONVERSION NOTICE
AZZ Inc.
6.0% Series A Convertible Preferred Stock
Subject to the terms of the Certificate of Designations, by executing and delivering this Optional Conversion Notice, the undersigned Holder of the Convertible Preferred Stock identified below directs the Company to convert (check one):
all of the shares of Convertible Preferred Stock
1 shares of Convertible Preferred Stock
evidenced by Certificate No. .
Date:
(Legal Name of Holder)
By:
Name:
Title:
1 Must be a whole number.
A-5
REDEMPTION NOTICE
AZZ Inc.
6.0% Series A Convertible Preferred Stock
Subject to the terms of the Certificate of Designations, by executing and delivering this Redemption Notice, the undersigned Holder of the Convertible Preferred Stock identified below directs the Company to redeem (check one):
all of the shares of Convertible Preferred Stock
2 shares of Convertible Preferred Stock
evidenced by Certificate No.
on .
Date:
(Legal Name of Holder)
By:
Name:
Title:
2 Must be a whole number.
A-6
FUNDAMENTAL CHANGE REPURCHASE NOTICE
AZZ Inc.
6.0% Series A Convertible Preferred Stock
Subject to the terms of the Certificate of Designations, by executing and delivering this Fundamental Change Repurchase Notice, the undersigned Holder of the Convertible Preferred Stock identified below is exercising its Fundamental Change Repurchase Right with respect to (check one):
all of the shares of Convertible Preferred Stock
3 shares of Convertible Preferred Stock
evidenced by Certificate No. .
The undersigned acknowledges that Certificate identified above, duly endorsed for transfer, must be delivered to the Paying Agent before the Fundamental Change Repurchase Price will be paid.
Date:
(Legal Name of Holder)
By:
Name:
Title:
3 Must be a whole number.
A-7
ASSIGNMENT FORM
AZZ Inc.
6.0% Series A Convertible Preferred Stock
Subject to the terms of the Certificate of Designations, the undersigned Holder of the within Convertible Preferred Stock assigns to:
Name:
Address:
Social security or
tax identification
number:
the within Convertible Preferred Stock and all rights thereunder irrevocably appoints:
as agent to transfer the within Convertible Preferred Stock on the books of the Company. The agent may substitute another to act for him/her.
Date:
(Legal Name of Holder)
By:
Name:
Title:
A-8
EXHIBIT B
FORM OF RESTRICTED STOCK LEGEND
THE OFFER AND SALE OF THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE “SECURITIES ACT”), AND THIS SECURITY AND SUCH SHARES MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED EXCEPT (A) PURSUANT TO A REGISTRATION STATEMENT THAT IS EFFECTIVE UNDER THE SECURITIES ACT; OR (B) PURSUANT TO AN EXEMPTION FROM, OR IN A TRANSACTION NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE SECURITIES ACT.
[THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO RESTRICTIONS ON TRANSFER SET FORTH IN A SECURITIES PURCHASE AGREEMENT. THE COMPANY WILL GIVE TO THE HOLDER OF THIS CERTIFICATE A COPY OF SUCH SECURITIES PURCHASE AGREEMENT, AS IN EFFECT ON THE DATE OF THE GIVING OF SUCH COPY, WITHOUT CHARGE, PROMPTLY AFTER RECEIPT OF A WRITTEN REQUEST THEREFOR.]
Schedule A
| Months from<br>Initial Issue Date4 | Return Factor<br>If the Company’s ratio of Net Debt to Consolidated EBITDA on the second anniversary of the Initial Issue Date is: | |||
|---|---|---|---|---|
| less than or equal to 3.5-to-1 | greater than 3.5-to-1 | |||
| 1-12 | 140% | 140% | ||
| 13-24 | 140% | 140% | ||
| 25-36 | 155% | 170% | ||
| 37-48 | 170% | 185% | ||
| 49-60 | 185% | 200% | ||
| 61-72 | 205% | 220% | ||
| 73-84 | 225% | 240% |
4 For the avoidance of doubt, the Initial Issue Date is in the first month from the Initial Issue Date. For convenience, the Return Factor for months 85 and beyond are not included here.
Document
Exhibit 21.1
Subsidiaries*
| Name of Subsidiary | Jurisdiction of Formation |
|---|---|
| 101132119 Saskatchewan Ltd. | Canada |
| AAA Galvanizing – Chelsea, LLC | Delaware |
| AAA Galvanizing – Dixon, Inc. | Delaware |
| AAA Galvanizing – Hamilton, LLC | Delaware |
| AAA Galvanizing – Joliet, Inc. | Delaware |
| AAA Galvanizing – Peoria, Inc. | Delaware |
| AAA Galvanizing – Winsted, Inc. | Delaware |
| Arbor-Crowley, LLC | Delaware |
| Arizona Galvanizing, Inc. | Arizona |
| ArkGalv, LLC | Arkansas |
| Atkinson Holding Company LLC | Delaware |
| Atlantic Research, LLC | Delaware |
| Automatic Processing Incorporated | Mississippi |
| Aztec Industries, Inc. | Mississippi |
| Aztec Manufacturing – Waskom LLC | Texas |
| Aztec Manufacturing LLC | Texas |
| AZZ Acquisition Sub, LLC | Delaware |
| AZZ Canada Limited | Canada |
| AZZ Financial, LLC | Delaware |
| AZZ Galvanizing – Big Spring, LLC | Delaware |
| AZZ Galvanizing - Bristol LLC | Delaware |
| AZZ Galvanizing – Chattanooga LLC | Tennessee |
| AZZ Galvanizing – Kennedale, LLC | Delaware |
| AZZ Galvanizing – Louisiana LLC | Delaware |
| AZZ Galvanizing – Morgan City, LLC | Delaware |
| AZZ Galvanizing – Nashville | Delaware |
| AZZ Galvanizing – Nebraska, LLC | Delaware |
| AZZ Galvanizing – Reno, LLC | Delaware |
| AZZ Galvanizing – Rockford LLC | Delaware |
| AZZ Galvanizing – San Antonio, LLC | Delaware |
| AZZ Galvanizing – South Carolina LLC | Delaware |
| AZZ Galvanizing and Plating – Milwaukee LLC | Delaware |
| AZZ Galvanizing Calgary Ltd. | Canada |
| AZZ Galvanizing Canada Limited | Canada |
| AZZ Galvanizing Co. Ltd. | Canada |
| AZZ Galvanizing Edmonton Ltd. | Canada |
| AZZ Galvanizing Saskatoon Ltd. | Canada |
| --- | --- |
| AZZ Group LLC | Delaware |
| AZZ Holdings LLC | Delaware |
| AZZ Surface Technologies LLC | Delaware |
| AZZ Surface Technologies – Crowley LLC | Delaware |
| AZZ Surface Technologies – Gainesville LLC | Delaware |
| AZZ Surface Technologies – Garland North LLC | Delaware |
| AZZ Surface Technologies – Garland South LLC | Delaware |
| AZZ Surface Technologies – Rowlett LLC | Delaware |
| AZZ Surface Technologies – Tampa LLC | Tampa |
| AZZ Surface Technologies – Terrell LLC | Delaware |
| Casco Investors LLC | Delaware |
| Gulf Coast Galvanizing, LLC | Alabama |
| International Galvanizers LLC | Texas |
| Midwest Metal Coatings, LLC | Delaware |
| NAGALV-Ohio, Inc. | Delaware |
| NAGALV-WV, Inc. | Delaware |
| North American Galvanizing & Coatings, Inc. | Delaware |
| North American Galvanizing Company, LLC | Delaware |
| Precoat Elk Ridge Holdings Corporation | Delaware |
| Precoat Holdings I LLC | Delaware |
| Precoat Holdings II LLC | Delaware |
| Precoat LLC | Delaware |
| Precoat Metal Coatings LLC | Delaware |
| Precoat Metal Acquisition, LLC | Delaware |
| Precoat Metals Corp. | Indiana |
| Precoat Metals Holdings, LLC | Delaware |
| Precoat Metals Washington LLC | Delaware |
| Precoat Mezzanine LLC | Delaware |
| Rogers Galvanizing Company – Kansas City | Oklahoma |
| Sabine Towing & Transportation, LLC | Delaware |
| Sequa Can Machinery, Inc. | Ohio |
| The Valley Line, LLC | Delaware |
| Witt Galvanizing – Cincinnati, LLC | Delaware |
| Witt Galvanizing – Muncie, LLC | Delaware |
| Witt Galvanizing – Plymouth, LLC | Delaware |
| Zalk Steel & Supply Co. | Delaware |
Document
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued our reports dated April 25, 2023, with respect to the consolidated financial statements and internal control over financial reporting included in the Annual Report of AZZ Inc. on Form 10-K for the fiscal year ended February 28, 2023. We consent to the incorporation by reference of said reports in the Registration Statements of AZZ Inc. on Form S-3 (File No. 333-66294 and 333-268178) and on Forms S-8 (File Nos. 333-229487, 333-226379, 333-92377, 333-31716, 333-38470, 333-48886, 333-90968, 333-131068, 333-152960, 333-152958, 333-197323 and 333-229487).
/s/ GRANT THORNTON LLP
Dallas, Texas
April 25, 2023
Document
Exhibit 31.1
Certification by Thomas E. Ferguson
Pursuant to Securities Exchange Act Rule 13a-14(a)
I, Thomas E. Ferguson, certify that:
I have reviewed this Annual Report on Form 10-K of AZZ Inc. for the period ended February 28, 2023;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
- The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
| Dated: | April 25, 2023 | /s/ Thomas E. Ferguson |
|---|---|---|
| Thomas E. Ferguson | ||
| President and Chief Executive Officer |
Document
Exhibit 31.2
Certification by Philip A. Schlom
Pursuant to Securities Exchange Act Rule 13a-14(a)
I, Philip A. Schlom, certify that:
I have reviewed this Annual Report on Form 10-K of AZZ Inc. for the period ended February 28, 2023;
Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and
- The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):
a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls over financial reporting.
| Dated: | April 25, 2023 | /s/ Philip A. Schlom |
|---|---|---|
| Philip A. Schlom | ||
| Senior Vice President and Chief Financial Officer |
Document
EXHIBIT 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Thomas E. Ferguson, has executed this certification in connection with the filing of AZZ Inc.’s (the "Company") Annual Report on Form 10-K for the period ended February 28, 2023 (the “Report”). The undersigned hereby certifies pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.to my knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | April 25, 2023 | /s/ Thomas E. Ferguson |
|---|---|---|
| Thomas E. Ferguson | ||
| President and Chief Executive Officer |
Document
EXHIBIT 32.2
CERTIFICATION OF CHIEF FINANCIAL OFFICER
PURSUANT TO 18 U.S.C. SECTION 1350 AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
The undersigned, Philip A. Schlom, has executed this certification in connection with the filing of AZZ Inc.’s (the "Company") Annual Report on Form 10-K for the period ended February 28, 2023 (the “Report”). The undersigned hereby certifies pursuant to U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that:
1.to my knowledge the Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
2.the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Dated: | April 25, 2023 | /s/ Philip A. Schlom |
|---|---|---|
| Philip A. Schlom | ||
| Senior Vice President and | ||
| Chief Financial Officer |