AZZ Inc. Form 8-K Summary: Financial Restatement
Business Context and Reporting Period
AZZ Inc. filed this Current Report on Form 8-K on March 26, 2018, to announce a material accounting error requiring the restatement of previously issued financial statements. The restatement covers the "Relevant Periods," defined as the fiscal years ended February 28, 2015, February 29, 2016, and February 28, 2017, as well as the interim quarters ended May 31, 2017, and August 31, 2017. The error stems from the incorrect application of revenue recognition methods for certain contracts within the Company's Energy Segment.
Key Financial Metrics and Restatement Impacts
The filing details anticipated adjustments to Net Sales, Net Income, and Balance Sheet items. The following table summarizes the impact on the most recent fiscal year (ended February 28, 2017) and the most recent interim quarter (ended August 31, 2017). All figures are in thousands, except per share data.
| Metric | Period | As Reported | Correction | As Restated |
|---|---|---|---|---|
| Net Sales | Year Ended Feb 28, 2017 | $858,930 | $4,608 | $863,538 |
| Net Income | Year Ended Feb 28, 2017 | $60,921 | $(114) | $60,807 |
| Diluted EPS | Year Ended Feb 28, 2017 | $2.33 | $0.00 | $2.33 |
| Net Sales | Qtr Ended Aug 31, 2017 | $190,407 | $7,195 | $197,602 |
| Net Income | Qtr Ended Aug 31, 2017 | $8,329 | $991 | $9,320 |
| Diluted EPS | Qtr Ended Aug 31, 2017 | $0.32 | $0.04 | $0.36 |
Balance Sheet Adjustments (Year Ended Feb 28, 2017):
- Inventories - net: Decreased by $35,583 (from $123,208 to $87,625).
- Costs and estimated earnings in excess of billings: Increased by $29,716 (from $20,546 to $50,262).
- Total Assets: Decreased by $5,867 (from $977,839 to $971,972).
- Total Liabilities: Decreased by $8,907 (from $448,200 to $439,293).
- Retained Earnings: Increased by $3,040 (from $495,030 to $498,070).
The filing does not provide updated cash flow statements, debt covenants, or liquidity ratios for the restated periods.
Material Changes and Accounting Error
The material change is the correction of the revenue recognition method for specific contracts in the Energy Segment. The Company previously recognized revenue upon contract completion and transfer of title. It has determined it should have applied the percentage-of-completion method under ASC 605-35. This change results in revenue being recognized over time as projects progress rather than being deferred until completion. Consequently, previously reported results for the Relevant Periods are no longer reliable.
Management Commentary, Risks, and Outlook
Management Commentary: Management, in consultation with its independent auditor BDO USA, LLP, concluded that the previously issued audited and unaudited financial statements should no longer be relied upon. The Audit Committee concurred with this conclusion.
Internal Controls: The Company identified a material weakness in its internal controls over financial reporting related to revenue recognition on certain contracts. As a result, the auditor's report on internal controls as of February 28, 2017, is no longer valid. Management has initiated a plan to remediate this weakness.
Outlook and Filing Timeline: The Company intends to file amended Annual Reports on Form 10-K and Quarterly Reports on Form 10-Q for the Relevant Periods. While a specific completion date is not provided, the Company aims to file these amendments prior to submitting its Quarterly Report for the quarter ended November 30, 2017.
Investor Verification Checklist
- Verify the final amended 10-K and 10-Q filings to confirm the exact restated financial figures once filed.
- Review the Company's disclosure regarding the remediation plan for the identified material weakness in internal controls.
- Assess the impact of the restatement on any debt covenants or financial ratios that may have been based on the previously reported numbers.
- Monitor future filings for any additional restatements or changes in accounting policies for the Energy Segment.