XML 65 R10.htm IDEA: XBRL DOCUMENT
v3.20.1

Summary of Significant Accounting Policies (Notes) | 12 Months Ended
--- | ---
Feb. 29, 2020
Accounting Policies [Abstract] |
Summary of significant accounting policies | Note 1 – Summary of Significant Accounting Policies Organization AZZ Inc. (the “Company” “AZZ” or “We”) operates primarily in the United States of America and Canada and also has operations in China, Brazil, Poland and the Netherlands. Information about the Company's operations by segment is included in Note 12 to the consolidated financial statements. 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 significant inter-company accounts and transactions have been eliminated in consolidation. Immaterial Error Corrections During the preparation of the consolidated financial statements for the year ended February 29, 2020, the Company identified two immaterial errors in its prior year consolidated financial statements and those financial statements have been revised to reflect the correction of such errors. In the consolidated statements of cash flows, payments for employee taxes related to net share settlement of equity awards and proceeds from the issuance of shares under the Company's Employee Stock Purchase Plan aggregating to $3.2 million and $2.1 million for the years ended February 28, 2019 and 2018, respectively, have been reclassified from operating activities to financing activities. In addition, the excess over par value related to repurchases of the Company's common stock were incorrectly reflected as a reduction of capital in excess of par value and should have been recorded as a reduction to retained earnings. The correction resulted in an increase to capital in excess of par value and a decrease in retained earnings of $12.6 million as of February 28. 2019 and 2018 and $5.2 million as of February 28, 2017, which has been corrected in the in the consolidated statement of shareholders’ equity and consolidated balance sheet for the applicable periods. Management evaluated the impact of such error corrections and concluded they were not material to any prior period. 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. The Company maintains cash and cash equivalents with various financial institutions. These financial institutions are located throughout the United States and Canada, as well as Europe, China and Brazil. 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. Concentrations of credit risk with respect to trade accounts receivable are limited due to the Company’s diversity by virtue of its two operating segments, the number of customers, and the absence of a concentration of trade accounts receivable in a small number of customers. The Company performs continuous evaluations of its ability to collect trade accounts receivable and allowance for doubtful accounts based upon historical losses, economic conditions and customer specific events. After all collection efforts are exhausted and an account is deemed uncollectible, it is written off against the allowance for doubtful accounts. Recoveries, unless material, are recorded against amounts written off in a period. Collateral is usually not required from customers as a condition of sale. Revenue recognition The Company determines revenue recognition through the following steps: 1)Identification of the contract with a customer, 2)Identification of the performance obligations in the contract, 3)Determination of the transaction price, 4)Allocation of the transaction price to performance obligations in the contract, and 5)Recognition of revenue when, or as, the Company satisfies a performance obligation. 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. 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 combines contracts for revenue recognition purposes that are executed with the same customer within a short timeframe from each other and that purport to be for a single commercial objective. The Company recognizes revenue 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. Energy Segment AZZ's Energy segment is a provider of specialized products and services designed to support industrial, electrical and nuclear applications. Within this segment, the contract is governed by a customer purchase order and an executed product or services agreement. The contract generally specifies the delivery of what constitutes a single performance obligation consisting of either custom built products, custom services, or off-the-shelf products. When the Company does enter into an arrangement with multiple performance obligations, the transaction price is allocated to each performance obligation based on the relative standalone selling prices of the goods or services being provided to the customer and revenue is recognized upon the satisfaction of each performance obligation. The Company combines contracts for revenue recognition purposes that are executed with the same customer within a short timeframe from each other and that purport to be for a single commercial objective. For custom built products, the Company recognizes revenues over time provided that the goods do not have an alternative use to the Company and the Company has an unconditional right to payment for work completed to date plus a reasonable margin. For custom services, which consist of specialized welding and other professional services, the Company recognizes revenues over time as the services are rendered due to the fact that the services enhance a customer owned asset. For off-the-shelf products, which consist of tubing and lighting products, the Company recognizes revenue at a point-in-time upon the transfer of the goods to the customer. For revenues recognized over time, the Company generally uses the cost-to-cost method of revenue recognition. Under this approach, the extent of progress towards completion is measured based on the ratio of costs incurred to date versus the total estimated costs upon completion of the project. This requires the Company to estimate the total contract revenues, project costs and margin, which can involve significant management judgment. As a significant change in one or more of these estimates could affect the profitability of the Company’s contracts, management reviews and updates its contract related estimates regularly. The Company recognizes adjustments in estimated margin on contracts under a cumulative catch-up basis and subsequent revenues are recognized using the adjusted estimate. If the estimate of contract margin indicates an anticipated loss on the contract, the Company recognizes the total estimated loss in the period it is identified. Due to the custom nature of the goods and services provided, contracts within the Energy segment are often modified to account for changes in contract specifications and requirements. A contract modification exists when the modification either creates new, or changes the existing, enforceable rights and obligations in the contract. For the Company, most contract modifications are related to goods or services that are not distinct from those in the original contract due to the significant interrelationship or interdependencies between the deliverables. Such modifications are accounted for as if they were part of the original contract. As a result, the transaction price and the measure of progress for the performance obligation to which it relates, is recognized as an adjustment to revenue on a cumulative catch-up basis. In addition to fixed consideration, the Company’s contracts within its Energy segment can include variable consideration, including claims, incentive fees, liquidated damages or other penalties. The Company recognizes revenue for variable consideration when it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur. The Company estimates the amount of revenue to be recognized on variable consideration using the expected value or the most likely amount method, whichever is expected to better predict the amount. 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 Energy segment. Amounts are billed as work progresses in accordance with agreed upon contractual terms, either at periodic intervals (e.g., weekly or monthly) or upon achievement of contractual milestones. 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 following table shows the changes in contract liabilities for fiscal year 2020 and 2019 (in thousands):
|  | 2020 |  | 2019
Balance at beginning of period |  | $ | 56,928 |  |  | $ | 22,698 |
Contract liabilities added during the period |  | 14,292 |  |  | 54,331 |
Revenue recognized during the period |  | (52,802 | ) |  | (20,101 | )
Balance at end of period |  | $ | 18,418 |  |  | $ | 56,928 |
The Company expects to recognize revenues of approximately $14.9 million, $1.7 million, and $1.8 million in fiscal 2021, 2022 and 2023, respectively, related to the $18.4 million balance of contract liabilities as of February 29, 2020. The increases or decreases in accounts receivable, contract assets and contract liabilities during fiscal year 2020 were due primarily to normal timing differences between the Company’s performance and customer payments. The acquisitions for fiscal year 2020 described in Note 15 had no impact on contract assets or liabilities as of the date of acquisition. Other No general rights of return exist for customers and the Company establishes provisions 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. Sales commissions are deferred and recognized over the same period as the related revenues. 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 12. In addition, the following table presents disaggregated revenue by customer industry (in thousands):
|  | 2020 |  | 2019 |  | 2018
Net sales: |  |  |  |  |  |
Industrial - oil and gas, construction, and general |  | $ | 605,236 |  |  | $ | 526,465 |  |  | $ | 461,945 |
Transmission and distribution |  | 254,836 |  |  | 212,433 |  |  | 194,503 |
Power generation |  | 201,745 |  |  | 188,189 |  |  | 153,982 |
Total net sales |  | $ | 1,061,817 |  |  | $ | 927,087 |  |  | $ | 810,430 |
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. Inventories Inventory is stated at the lower of cost or net realizable value. Cost is determined principally using a weighted-average method for the Energy segment and the first-in-first-out (FIFO) method for the Metal Coatings segment. The Company periodically evaluates inventories 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 establishes reserves for obsolescence until inventories are formally disposed of, then the Company writes-down disposed inventories. 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 | 10-25 years
Machinery and equipment | 3-15 years
Furniture and fixtures | 3-15 years
Automotive equipment | 3 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 Purchased intangible assets on the consolidated balance sheets are comprised of customer relationships, backlogs, engineering drawings and non-compete agreements. 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 two to nineteen years. The Company records impairment losses on long-lived assets, including identifiable intangible assets, when events and circumstances indicate that the assets might be impaired and the undiscounted projected cash flows associated with those assets are less than their carrying amount. In those situations, impairment loss on a long-lived asset is measured based on the excess of the carrying amount of the asset over the asset’s fair value, which is determined using Level 3 fair value inputs. For fiscal year 2020, 2019 and 2018 the Company recorded impairment losses of $9.2 million, $0.8 million and $10.8 million respectively, related to the impairment of certain property, plant and equipment and other intangible assets. See note 5 for more information about the 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. Goodwill is not subject to amortization but is subject to an annual impairment test during December of each fiscal year, or earlier if indicators of potential impairment exist. Goodwill is tested for impairment at the reporting unit level. A reporting unit is an operating segment or a component of an operating segment. The test is calculated using an income approach and market approach, which are Level 3 fair value inputs. 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 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; raw material and natural gas costs and availability of experienced labor and management to implement our growth strategies. For fiscal years 2020, 2019 and 2018 no goodwill impairment loss was recorded. See note 8 for information about the goodwill write-off related to the divestiture of the nuclear logistics business. Other indefinite-lived intangible assets consist of certain tradenames acquired as part prior acquisitions. The Company tests the carrying value of these tradenames during December of each fiscal year, or more frequently when an event occurs or circumstances change that indicates the carrying value may not be recoverable by comparing the asset's fair value to its carrying value. Fair value, using Level 3 inputs, is measured using a relief-from-royalty approach, which assumes the fair value of the tradename is the discounted cash flows of the amount that would be paid had the Company not owned the tradename and instead licensed the tradename from another company. For fiscal 2020, 2019 and 2018, no impairment losses related to these indefinite-lived intangible assets were recorded. Debt issuance costs Debt issue costs related to the revolver are deferred within other assets and are amortized using the effective interest rate method over the term of the debt. Debt issue costs related to debt other than the revolver are deferred within total debt due after one year and are amortized using the effective interest rate method over the term of the debt. 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 these 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 and local and foreign jurisdictions. With few exceptions, as of February 29, 2020, the Company is no longer subject to U.S. federal or state examinations by tax authorities for years before fiscal 2017. Financial instruments Fair value is an exit price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. Hierarchy Levels 1, 2, or 3 are terms for the priority of inputs to valuation techniques used to measure fair value. Hierarchy Level 1 inputs are quoted prices in active markets for identical assets or liabilities. Hierarchy Level 2 inputs are inputs other than quoted prices included with Level 1 that are directly or indirectly observable for the asset or liability. Hierarchy Level 3 inputs are inputs that are not observable in the market. The carrying amount of the Company's financial instruments (cash equivalents, accounts receivable, accounts payable, accrued liabilities and debt), excluding the Senior Notes, approximates the fair value of these instruments based upon either their short-term nature or their variable market rate of interest. As of February 29, 2020 and February 28, 2019 the fair value of the outstanding Senior Notes, as described in Note 11, was approximately $125.3 million and $127.4 million, respectively. These fair values were determined using the discounted cash flow at the market rate as well as the applicable market interest rates classified as Level 2 inputs. Derivative financial instruments From time to time, the Company uses derivatives to manage interest rate risk. The Company’s policy is to use derivatives for risk management purposes only, which includes maintaining the ratio between the Company’s fixed and floating rate debt obligations that management deems appropriate, and prohibits entering into such contracts for trading purposes. The Company enters into derivatives only with counterparties (primarily financial institutions) which have substantial financial wherewithal to minimize credit risk. The amount of gains or losses from the use of derivative financial instruments has not been and is not expected to be material to the Company’s consolidated financial statements. As of February 29, 2020, the Company had no derivative financial instruments. Warranty reserves Within other accrued liabilities, a reserve has been established to provide for the estimated future cost of warranties on a portion of the Company’s delivered products. Warranties cover such factors as non-conformance to specifications and defects in material and workmanship. A provision for warranty on products is made on the basis of the Company's historical experience and identified warranty issues. Warranties typically arise after the product has been accepted by the customer. Management periodically reviews the individual claims and related reserves, and adjustments are made according to the warranty work performed or with agreements reached with customers after fully addressing their claims. The following table shows the changes in the Company’s accrued warranties for fiscal year 2020, 2019 and 2018 (in thousands):
| 2020 |  | 2019 |  | 2018
Balance at beginning of period | $ | 1,751 |  |  | $ | 2,013 |  |  | $ | 2,098 |
Warranty costs incurred | (2,118 | ) |  | (2,195 | ) |  | (2,225 | )
Additions charged to income | 4,069 |  |  | 1,933 |  |  | 2,140 |
Balance at end of period | $ | 3,702 |  |  | $ | 1,751 |  |  | $ | 2,013 |
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). Accumulated Other Comprehensive Loss The components of accumulated other comprehensive loss consisted of the following as of February 29, 2020 and February 28, 2019 (in thousands):
|  | 2020 |  | 2019
Foreign currency translation adjustments |  | $ | (30,949 | ) |  | $ | (28,856 | )
Interest rate swap |  | 50 |  |  | 104 |
Accumulated other comprehensive loss |  | $ | (30,899 | ) |  | $ | (28,752 | )
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 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 operating 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's uses its incremental borrowing rate to determine the present value of future payments unless the implicit rate in the lease is readily determinable. 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. 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 facilities leases, the Company accounts for lease and non-lease components on a combined basis, while for equipment leases, the 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. Recently Issued Accounting Pronouncements Not Yet Adopted In June 2016, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") No. 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instrument s (“ASU 2016-13”), which modifies the measurement of expected credit losses of certain financial instruments, including the Company's accounts receivable and contract assets. The Company will adopt ASU 2016-13 in the first quarter of its fiscal 2021 utilizing the modified retrospective transition method. Based on the composition of the Company’s accounts receivable and contract assets, current market conditions, and historical credit loss activity, the adoption of ASU 2016-13 is not expected to have a material impact on its consolidated financial statements. In August 2018, the FASB issued ASU No. 2018-15, Intangibles—Goodwill and Other— Internal-Use Software (Subtopic 350-40) - Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract ("ASU 2018-15"), which aligns the accounting for implementation costs incurred in a hosting arrangement that is a service contract with the accounting for implementation costs incurred to develop or obtain internal-use software, in order to determine the applicable costs to capitalize and the applicable costs to expense as incurred. The Company will adopt ASU 2018-15 in the first quarter of its fiscal 2021. The standard can be applied either prospectively to implementation costs incurred after the date of adoption or retrospectively to all arrangements. The Company intends to adopt ASU 2018-15 using the prospective approach and the adoption is not expected to have a material impact on its consolidated financial statements. In December 2019, the FASB issued Accounting Standard Update No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes ("ASU 2019-12"), which simplifies the accounting for income taxes. The Company will adopt ASU 2019-12 in the first quarter of its fiscal year 2022 on a prospective basis and early adoption is permitted. The Company is currently evaluating the impact of the new guidance on its consolidated financial statements.

X
- References No definition available. + Details
Name: | us-gaap_AccountingPoliciesAbstract
Namespace Prefix: | us-gaap_
Data Type: | xbrli:stringItemType
Balance Type: | na
Period Type: | duration

X
- Definition The entire disclosure for all significant accounting policies of the reporting entity. + References Reference 1: http://fasb.org/us-gaap/role/ref/legacyRef -Publisher FASB -Name Accounting Standards Codification -Topic 235 -URI http://asc.fasb.org/topic&trid=2122369 + Details
Name: | us-gaap_SignificantAccountingPoliciesTextBlock
Namespace Prefix: | us-gaap_
Data Type: | nonnum:textBlockItemType
Balance Type: | na
Period Type: | duration