What changed in this filing

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Item 2. Management’s Discussion and Analysis

2022-06-30 compared with 2022-04-05 · 97 added, 102 removed, 168 unchanged (54% of the section changed)

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The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Acuity Brands, Inc.

(referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries as of February 28, 2022 and for the three and six months ended February 28, 2022 and 2021.

(referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries as of May 31, 2022 and for the three and nine months ended May 31, 2022 and 2021.

The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included within this report.

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We use technology to solve problems in spaces and light.

Through our two business segments, Acuity Brands Lighting and Lighting Controls (“ABL”) and the Intelligent Spaces Group (“ISG”) we design, manufacture, and bring to market products and services that make the world more brilliant, productive, and connected.

We achieve growth through the development of innovative new products and services, including lighting, lighting controls, building management systems, and location-aware applications.

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We look to aggressively deploy capital to grow the business and to enter attractive new verticals.

The results of operations for the three and six months ended February 28, 2022 are not necessarily indicative of the results to be expected for the full fiscal 2022 year due primarily to continued uncertainty of general economic conditions that may impact our key end markets for fiscal 2022, seasonality, and the impact of any acquisitions, among other reasons.

The results of operations for the three and nine months ended May 31, 2022 are not necessarily indicative of the results to be expected for the full fiscal 2022 year due primarily to continued uncertainty of general economic conditions that may impact our key end markets for fiscal 2022, seasonality, and the impact of any acquisitions, among other reasons.

We are uncertain of the future impact of the ongoing COVID-19 pandemic or recovery of prior deterioration in economic conditions to our sales channels, supply chain, manufacturing, and distribution as well as overall construction, renovation, and consumer spending.

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We have numerous sources of capital, including cash on hand and cash flows generated from operations as well as various sources of financing.

Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to meet our capital allocation priorities, which are to reinvest in our organic growth, make strategic acquisitions and investments, pay dividends, and repurchase shares.

Sufficient cash flow generation is also critical to fund our operations in the short and long-term and to maintain compliance with covenants contained in our financing agreements

Our significant contractual cash requirements primarily include principal and interest on long-term debt, payments for operating lease liabilities, and certain purchase obligations incurred in the ordinary course of business that are enforceable and legally binding.

Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to meet our capital allocation priorities, which are to reinvest in our current business growth, make strategic acquisitions and investments, pay dividends, and repurchase shares.

Sufficient cash flow generation is also critical to fund our operations in the short and long terms and to maintain compliance with covenants contained in our financing agreements.

Our significant contractual cash requirements primarily include principal and interest on our unsecured notes and borrowings under our credit agreement, payments for operating lease liabilities, and certain purchase obligations incurred in the ordinary course of business that are enforceable and legally binding.

Our obligations related to these items are described further within Management’s Discussion and Analysis of Financial Condition and Results of Operations within our Annual Report filed on Form 10-K.

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In the event of a sustained market deterioration, we may need additional capital, which would require us to evaluate available alternatives and take appropriate actions.

Our cash position at February 28, 2022 was $475.5 million, a decrease of $15.8 million from August 31, 2021.

Our cash position at May 31, 2022 was $318.2 million, a decrease of $173.1 million from August 31, 2021.

Cash generated from operating activities and cash on hand were used during the current year to fund our capital allocation priorities as discussed below.

We generated $127.3 million of cash flows from operating activities during the six months ended February 28, 2022 compared with $212.6 million in the prior-year period, a decrease of $85.3 million.

This decline was due primarily to increased operating working capital, as we managed our inventory levels to support growth and insulate production facilities from inconsistent supply availability.

We generated $165.7 million of cash flows from operating activities during the nine months ended May 31, 2022 compared with $316.2 million in the prior-year period, a decrease of $150.5 million.

This decline was due primarily to increased operating working capital related primarily to higher inventory levels and increased income tax payments associated with our higher profit.

Financing Arrangements

See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of our various financing arrangements, including the terms of our $400.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”) as well as the $500.0 million aggregate principal amount of 2.150% senior unsecured notes due December 15, 2030 (the “Unsecured Notes”).

At February 28, 2022, our outstanding debt balance was $494.7 million compared to our cash position of $475.5 million.

We were in compliance with all financial covenants under our financing arrangements as of February 28, 2022.

At February 28, 2022, we had additional borrowing capacity under the Revolving Credit Facility of $395.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility less the outstanding letters of credit of $4.1 million issued under the facility.

As of February 28, 2022, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled $871.4 million.

See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of our various financing arrangements, including the $500.0 million aggregate principal amount of 2.150% senior unsecured notes due December 15, 2030 (the “Unsecured Notes”) as well as the terms of our $400.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”).

The Revolving Credit Facility expires in June 2023;

however, we entered into a new agreement prior to this expiration.

See Subsequent Event footnote of the Notes to Consolidated Financial Statements for further details on the terms of the new agreement.

At May 31, 2022, our outstanding debt balance was $616.8 million compared to our cash position of $318.2 million.

We were in compliance with all financial covenants under our financing arrangements as of May 31, 2022.

At May 31, 2022, we had additional borrowing capacity under the Revolving Credit Facility of $273.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility less the outstanding letters of credit of $4.1 million issued under the facility and the $122.0 million of short-term borrowings outstanding under the Revolving Credit Facility.

As of May 31, 2022, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled $592.1 million.

The Unsecured Notes were issued by Acuity Brands Lighting, Inc., a wholly-owned subsidiary of Acuity Brands, Inc.

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The following tables present summarized financial information for Acuity Brands, Inc., Acuity Brands Lighting, Inc., and ABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in non-guarantors as of the dates and during the period presented (in millions):

Summarized Balance Sheet Information February 28, 2022 August 31, 2021

Summarized Balance Sheet Information May 31, 2022 August 31, 2021

Current assets $ 1,183.6 $ 1,172.0

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Non-current liabilities 817.6 815.7

Summarized Income Statement Information Six Months Ended February 28, 2022

Summarized Income Statement Information Nine Months Ended May 31, 2022

Net sales $ 2,452.9

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Capital Allocation Priorities

Our capital allocation priorities are to invest in our business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases.

Organic Growth Investments

We invested $24.1 million and $21.2 million during the six months ended February 28, 2022 and 2021, respectively, in property, plant, and equipment, primarily related to investments in new and enhanced information technology capabilities, tooling, equipment, and facility enhancements.

Our capital allocation priorities are to invest in our current business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases.

Investments in Current Business Growth

We invested $38.0 million and $30.6 million during the nine months ended May 31, 2022 and 2021, respectively, in property, plant, and equipment, primarily related to investments in new and enhanced information technology capabilities, tooling, equipment, and facility enhancements.

We currently expect to invest approximately 1.5% of net sales on capital expenditures during fiscal 2022.

Additionally, we increased our inventory levels to support growth and mitigate inconsistent supply availability at our production facilities.

Strategic Acquisitions and Investments

We seek opportunities to strategically expand and enhance our portfolio of solutions.

There were no acquisitions during the first half of fiscal 2022.

The $10.2 million of cash outflows reflected in the fiscal 2022 Consolidated Statements of Cash Flows relate to working capital settlements for fiscal 2021 acquisitions.

There were no acquisitions during the first nine months of fiscal 2022.

The $12.2 million of cash outflows reflected in the fiscal 2022 Consolidated Statements of Cash Flows relate to fiscal 2021 acquisitions primarily for working capital settlements.

Please refer to the Acquisitions footnote of the Notes to Consolidated Financial Statements for more information.

We paid dividends on our common stock of $9.3 million ($0.26 per share) and $9.7 million ($0.26 per share) during the six months ended February 28, 2022 and 2021, respectively.

We paid dividends on our common stock of $13.7 million ($0.39 per share) and $14.3 million ($0.39 per share) during the nine months ended May 31, 2022 and 2021, respectively.

All decisions regarding the declaration and payment of dividends are at the discretion of the Board of Directors (the “Board”) and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant.

Share Repurchases

During the first half of fiscal 2022, we repurchased 0.6 million shares of our outstanding common stock for $109.1 million.

Total cash outflows for share repurchases during the six months ended February 28, 2022 were $108.0 million.

During the first nine months of fiscal 2022, we repurchased 2.3 million shares of our outstanding common stock for $405.1 million.

Total cash outflows for share repurchases during the nine months ended May 31, 2022 were $403.5 million.

We expect to repurchase shares on an opportunistic basis subject to various factors including stock price, Company performance, market conditions, and other possible uses of cash.

As of February 28, 2022, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 3.2 million shares.

On March 31, 2022, the Board authorized the repurchase of additional shares of our common stock, bringing our total authorization to five million shares.

Refer to Part II, Item 5.

Other Information for further details.

As of May 31, 2022, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 3.5 million shares.

The COVID-19 Pandemic

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We remain committed to prioritizing the health and well-being of our associates and their families and ensuring that we operate effectively.

We have implemented policies to screen associates, contractors, and vendors for COVID-19 symptoms upon entering our manufacturing, distribution, and open-office facilities in the United States, Mexico, and other locations as permitted by law.

We have also implemented one-way traffic flows, additional cleaning requirements for common spaces, mandatory face coverings, hand sanitizer stations, socially-distanced workspaces, and self-serve pay stations within our cafeterias to mitigate the spread of the virus.

Additionally, we have required certain employees whose job functions can be performed remotely to work primarily from home.

We have implemented various health and safety policies and processes at our facilities in the United States, Mexico, Canada, and other locations as permitted by law.

The COVID-19 pandemic has had an adverse impact on our results of operations.

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Results of Operations

Second Quarter of Fiscal 2022 Compared with Second Quarter of Fiscal 2021

The following table sets forth information comparing the components of net income for the three months ended February 28, 2022 and 2021 (in millions except per share data):

Third Quarter of Fiscal 2022 Compared with Third Quarter of Fiscal 2021

The following table sets forth information comparing the components of net income for the three months ended May 31, 2022 and 2021 (in millions except per share data):

Three Months Ended

February 28, 2022 February 28, 2021 Increase (Decrease) Percent Change

May 31, 2022 May 31, 2021 Increase (Decrease) Percent Change

Net sales $ 1,060.6 $ 899.7 $ 160.9 17.9 %

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Net sales for the three months ended February 28, 2022 increased $132.5 million, or 17.1%, to $909.1 million compared with $776.6 million in the prior-year period.

Net sales for the three months ended May 31, 2022 increased $160.9 million, or 17.9%, to $1.06 billion compared with $899.7 million in the prior-year period.

Both our ABL and ISG segments benefited from recent price increases as well as higher volumes.

Revenues from acquired companies contributed an almost 4% increase in sales compared to the prior year.

Changes in foreign currency rates did not have a meaningful impact on net sales for the second quarter of fiscal 2022.

Gross profit for the second quarter of fiscal 2022 increased $42.6 million, or 12.7%, to $379.3 million compared with $336.7 million in the prior-year period, while gross profit margin decreased 170 basis points to 41.7% from 43.4%.

Throughout the current quarter, material and conversion costs as well as freight costs continued to escalate, which we were able to offset through price increases and product and productivity improvements.

Revenues from acquired companies contributed an approximately 3% increase to current quarter revenues compared to the prior year.

Changes in foreign currency rates did not have a meaningful impact on net sales for the third quarter of fiscal 2022.

Gross profit for the third quarter of fiscal 2022 increased $58.5 million, or 15.1%, to $445.1 million compared with $386.6 million in the prior-year period, while gross profit margin decreased 100 basis points to 42.0% from 43.0%.

In this inflationary environment, we continued to experience material, labor, and freight escalations while also taking pricing actions that mitigated these escalations.

Gross profit margin was also unfavorably impacted by the near-term dilutive effects of recent acquisitions.

Operating Profit

Selling, distribution, and administrative expenses ("SD&A") expenses for the three months ended February 28, 2022 were $277.0 million compared with $245.4 million in the prior-year period, an increase of $31.6 million, or 12.9%.

The increase in SD&A expense was due primarily to higher outbound freight and commissions costs associated with higher sales as well as increased employee-related costs due in part to recent acquisitions.

SD&A expenses for the second quarter of fiscal 2022 were 30.5% of net sales compared with 31.6% for the prior-year period due primarily to improved leveraging of our operating costs.

Operating profit for the second quarter of fiscal 2022 was $102.3 million (11.3% of net sales) compared with $91.0 million (11.7% of net sales) for the prior-year period, an increase of $11.3 million, or 12.4%.

The increase in

operating profit was due primarily to higher gross profit associated with the increase in sales, partially offset by higher SD&A expenses.

The operating profit margin decrease of 40 bps year over year was due primarily to our decline in gross profit margin as well as the unfavorable impact of acquisitions on our operating expenses.

These declines were partially offset by improved leveraging of operating costs.

Selling, distribution, and administrative expenses ("SD&A") expenses for the three months ended May 31, 2022 were $302.4 million compared with $268.0 million in the prior-year period, an increase of $34.4 million, or 12.8%.

The increase in SD&A expense was due primarily to higher outbound freight and commission costs associated with higher sales as well as increased employee-related costs due in part to recent acquisitions.

Operating profit for the third quarter of fiscal 2022 was $142.7 million (13.5% of net sales) compared with $118.1 million (13.1% of net sales) for the prior-year period, an increase of $24.6 million, or 20.8%.

The increase in operating profit was due primarily to higher gross profit associated with the increase in sales, partially offset by

higher SD&A expenses.

The operating profit margin increase of 40 bps year over year was due primarily to improved leveraging of our operating costs, partially offset by the decline in gross profit margin.

Other Expense

Other expense consists of net interest expense and net miscellaneous (income) expense, which includes non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses.

Interest expense, net, was $6.0 million and $6.6 million for the three months ended February 28, 2022 and 2021, respectively.

We reported net miscellaneous income of $1.9 million for the three months ended February 28, 2022 and net miscellaneous expense of $2.2 million for the three months ended February 28, 2021.

Interest expense, net, was $6.2 million for the three months ended May 31, 2022 and 2021.

We reported net miscellaneous income of $1.5 million for the three months ended May 31, 2022 and net miscellaneous expense of $2.7 million for the three months ended May 31, 2021.

The year-over-year change in net miscellaneous (income) expense was largely due to gains and losses on foreign currency-related transactions.

Income Taxes and Net Income

Our effective income tax rate was 23.3% and 23.5% for the three months ended February 28, 2022 and 2021, respectively.

We currently estimate that our blended consolidated effective income tax rate, before any discrete items, will be approximately 23% for fiscal 2022, assuming the rates in our taxing jurisdictions remain generally consistent throughout the year.

Net income for the three months ended February 28, 2022 increased $12.4 million, or 19.7%, to $75.3 million from $62.9 million reported for the prior-year period.

Our effective income tax rate was 23.4% and 21.5% for the three months ended May 31, 2022 and 2021, respectively.

The increase in the effective income tax rate was primarily due to favorable discrete items recognized in the third quarter of fiscal 2021.

Net income for the three months ended May 31, 2022 increased $20.0 million, or 23.3%, to $105.7 million from $85.7 million reported for the prior-year period.

The increase in net income resulted primarily from an increased operating profit compared to the prior-year period.

Diluted earnings per share for the three months ended February 28, 2022 increased $0.39, or 22.4%, to $2.13 compared with diluted earnings per share of $1.74 for the prior-year period.

Diluted earnings per share for the three months ended May 31, 2022 increased $0.70, or 29.5%, to $3.07 compared with diluted earnings per share of $2.37 for the prior-year period.

This increase reflects higher net income as well as lower outstanding diluted shares.

Segment Results

The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the three months ended February 28, 2022 and 2021 (in millions).

We have recast historical information to conform to the current segment structure.

The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the three months ended May 31, 2022 and 2021 (in millions).

Three Months Ended

February 28, 2022 February 28, 2021 Increase (Decrease) Percent Change

May 31, 2022 May 31, 2021 Increase (Decrease) Percent Change

Net sales $ 1,008.4 $ 850.0 $ 158.4 18.6 %

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Operating profit margin 15.8 % 13.0 % 280 bps

ABL net sales for the three months ended February 28, 2022 increased $126.3 million, or 17.1%, to $ 863.1 million compared with $ 736.8 million in the prior-year period.

Sales within the independent and direct network channels increased due primarily to benefits from recent price increases as well as higher volumes.

ABL net sales for the three months ended May 31, 2022 increased $158.4 million, or 18.6%, to $1.01 billion compared with $850.0 million in the prior-year period.

Sales within the independent sales network channel increased due to benefits from recent price increases as well as higher volumes.

Additionally, sales within the corporate accounts channel increased year over year as some large accounts began previously deferred maintenance and renovations.

Acquisitions contributed an almost 4% increase in sales compared to the prior year and are reflected within the other sales channel in ABL's disaggregated revenue.

Operating profit for ABL was $116.5 million (13.5% of ABL net sales) for the three months ended February 28, 2022 compared to $102.0 million (13.8% of ABL net sales) in the prior-year period, an increase of $14.5 million.

The increase in operating profit was due primarily to contributions from higher sales partially offset by increased materials and freight costs as well as higher operating costs to support the increase in sales.

ISG net sales for the three months ended February 28, 2022 increased $6.7 million, or 15.5%, to $ 50.0 million compared with $ 43.3 million in the prior-year period driven primarily by strong demand for building and heating, ventilation, and air-conditioning controls as well as price increases.

ISG operating profit was $1.2 million for the three months ended February 28, 2022 compared to $0.8 million in the prior-year period, an increase of $0.4 million.

Sales within the retail sales channel increased as sales began to return to normal levels after the customer inventory rebalancing experienced in previous quarters.

Acquisitions contributed an approximately 3% increase in sales compared to the prior year and are reflected within the other sales channel in ABL's disaggregated revenue.

Sales in our direct sales network channel were approximately flat year over year as products supporting this channel were impacted by component shortages.

Operating profit for ABL was $149.6 million (14.8% of ABL net sales) for the three months ended May 31, 2022 compared to $126.5 million (14.9% of ABL net sales) in the prior-year period, an increase of $23.1 million.

The increase in operating profit was due primarily to contributions from higher sales partially offset by increased materials, labor, and freight costs as well as higher operating costs to support the increase in sales.

ISG net sales for the three months ended May 31, 2022 increased $2.9 million, or 5.2%, to $58.3 million compared with $55.4 million in the prior-year period driven primarily by strong demand for building and heating, ventilation, and air-conditioning controls as well as price increases.

ISG operating profit was $9.2 million for the three months ended May 31, 2022 compared to $7.2 million in the prior-year period, an increase of $2.0 million.

This increase was due primarily to contributions from higher sales, partially offset by increased employee costs.

First Six Months of Fiscal 2022 Compared with First Six Months of Fiscal 2021

The following table sets forth information comparing the components of net income for the six months ended February 28, 2022 and 2021 (in millions except per share data):

Six Months Ended

February 28, 2022 February 28, 2021 Increase (Decrease) Percent Change

First Nine Months of Fiscal 2022 Compared with First Nine Months of Fiscal 2021

The following table sets forth information comparing the components of net income for the nine months ended May 31, 2022 and 2021 (in millions except per share data):

Nine Months Ended

May 31, 2022 May 31, 2021 Increase (Decrease) Percent Change

Net sales $ 2,895.8 $ 2,468.3 $ 427.5 17.3 %

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Net sales for the six months ended February 28, 2022 increased $266.6 million, or 17.0%, to $1.84 billion compared with $1.57 billion in the prior-year period.

Net sales for the nine months ended May 31, 2022 increased $427.5 million, or 17.3%, to $2.90 billion compared with $2.47 billion in the prior-year period.

Both our ABL and ISG segments benefited from recent price increases as well as higher volumes.

Revenues from acquired companies contributed an almost 4% increase in sales compared to the prior year.

Changes in foreign currency rates did not have a meaningful impact on net sales for the first six months of fiscal 2022.

Gross profit for the six months ended February 28, 2022 increased $96.0 million, or 14.3%, to $765.1 million compared with $669.1 million in the prior-year period.

Gross profit margin decreased 100 basis points to 41.7% for the six months ended February 28, 2022 compared with 42.7% in the prior-year period.

Throughout the first six months of fiscal 2022, material and conversion costs as well as freight costs continued to escalate, which we were able to offset through price increases and product and productivity improvements.

Revenues from acquired companies contributed an approximately 3% increase in sales compared to the prior year.

Changes in foreign currency rates did not have a meaningful impact on net sales for the first nine months of fiscal 2022.

Gross profit for the nine months ended May 31, 2022 increased $154.5 million, or 14.6%, to $1.21 billion compared with $1.06 billion in the prior-year period.

Gross profit margin decreased 100 basis points to 41.8% for the nine months ended May 31, 2022 compared with 42.8% in the prior-year period.

In this inflationary environment, we continued to experience material, labor, and freight escalations while also taking pricing actions that mitigated these escalations.

Gross profit margin was also unfavorably impacted by the near-term dilutive effects of recent acquisitions.

Operating Profit

SD&A expenses for the six months ended February 28, 2022 were $547.7 million compared with $491.4 million in the prior-year period, an increase of $56.3 million, or 11.5%.

The increase in SD&A expense was due primarily to higher outbound freight and commissions costs associated with higher sales as well as increased employee-related

costs due in part to recent acquisitions.

SD&A expenses for the first six months of fiscal 2022 were 29.8% of net sales compared with 31.3% for the prior-year period due primarily to improved leveraging of our operating costs.

Operating profit for the first six months of fiscal 2022 was $217.4 million (11.8% of net sales) compared with $176.7 million (11.3% of net sales) for the prior-year period, an increase of $40.7 million, or 23.0%.

SD&A expenses for the nine months ended May 31, 2022 were $850.1 million compared with $759.4 million in the prior-year period, an increase of $90.7 million, or 11.9%.

The increase in SD&A expense was due primarily to higher outbound freight and commissions costs associated with higher sales as well as increased employee-related costs

due in part to recent acquisitions.

Operating profit for the first nine months of fiscal 2022 was $360.1 million (12.4% of net sales) compared with $294.8 million (11.9% of net sales) for the prior-year period, an increase of $65.3 million, or 22.2%.

The increase in operating profit was due primarily to higher gross profit associated with the increase in sales, partially offset by higher SD&A expenses.

The operating profit margin increase of 50 bps year over year was the result of improved leveraging of operating costs, partially offset by lower gross profit margin.

The operating profit margin increase of 50 bps year over year was the result of improved leveraging of our operating costs, partially offset by lower gross profit margin.

Other Expense

Interest expense, net, was $11.9 million and $11.5 million for the six months ended February 28, 2022 and 2021, respectively.

We reported net miscellaneous income of $1.6 million for the six months ended February 28, 2022 and net miscellaneous expense of $3.8 million for the six months ended February 28, 2021.

During the first six months of fiscal 2021, we recorded an impairment charge of $4.0 million for an unconsolidated equity investment.

Interest expense, net, was $18.1 million and $17.7 million for the nine months ended May 31, 2022 and 2021, respectively.

We reported net miscellaneous income of $3.1 million for the nine months ended May 31, 2022 and net miscellaneous expense of $6.5 million for the nine months ended May 31, 2021.

During the first nine months of fiscal 2021, we recorded an impairment charge of $4.0 million for an unconsolidated equity investment.

Further details regarding the impairment charge are included in the Fair Value Measurements footnote of the Notes to Consolidated Financial Statements .

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Income Taxes and Net Income

Our effective income tax rate was 21.3% and 24.1% for the six months ended February 28, 2022 and 2021, respectively.

Our effective income tax rate was 22.2% and 23.1% for the nine months ended May 31, 2022 and 2021, respectively.

The decrease in the effective income tax rate was primarily due to favorable discrete items recognized in the first quarter of fiscal 2022 related to excess tax benefits on share-based payments.

Net income for the first six months of fiscal 2022 increased $40.4 million, or 33.0%, to $162.9 million from $122.5 million reported for the prior-year period.

Net income for the first nine months of fiscal 2022 increased $60.4 million, or 29.0%, to $268.6 million from $208.2 million reported for the prior-year period.

The increase in net income was due primarily to an increased operating profit.

Diluted earnings per share for the six months ended February 28, 2022 increased $1.30 to $4.60 compared with diluted earnings per share of $3.30 for the prior-year period.

Diluted earnings per share for the nine months ended May 31, 2022 increased $2.00 to $7.66 compared with diluted earnings per share of $5.66 for the prior-year period.

This increase reflects higher net income as well as lower outstanding diluted shares.

Segment Results

The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the six months ended February 28, 2022 and 2021 (in millions).

We have recast historical information to conform to the current segment structure.

Six Months Ended

February 28, 2022 February 28, 2021 Increase (Decrease) Percent Change

The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the nine months ended May 31, 2022 and 2021 (in millions).

Nine Months Ended

May 31, 2022 May 31, 2021 Increase (Decrease) Percent Change

Net sales $ 2,755.1 $ 2,340.4 $ 414.7 17.7 %

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Operating profit margin 8.0 % 5.7 % 230 bps

ABL net sales for the six months ended February 28, 2022 increased 17.2% compared with the prior-year period.

ABL net sales for the nine months ended May 31, 2022 increased 17.7% compared with the prior-year period.

Sales within the independent and direct network channels increased due primarily to benefits from recent price increases as well as higher volumes.

Additionally, sales within the corporate accounts channel increased year over year as some large accounts began previously deferred maintenance and renovations.

Acquisitions contributed an

almost 4% increase in sales compared to the prior year and are reflected within the other sales channel in ABL's disaggregated revenue.

These increases were partially offset by declines in the retail sales channel.

Operating profit for ABL was $244.6 million (14.0% of ABL net sales) for the six months ended February 28, 2022 compared to $200.4 million (13.4% of ABL net sales) in the prior-year period, an increase of $44.2 million.

ISG net sales for the six months ended February 28, 2022 increased 14.6% compared with the prior-year period primarily driven by strong demand for building and heating, ventilation, and air-conditioning controls as well as price increases.

ISG operating profit was $3.2 million for the six months ended February 28, 2022 compared with $0.7 million in the prior-year period, an increase of $2.5 million.

Sales within the retail channel were relatively flat compoared to the prior period.

Acquisitions contributed an approximately 3% increase in sales compared to the prior year and are reflected within the other sales channel in ABL's disaggregated revenue.

Operating profit for ABL was $394.2 million (14.3% of ABL net sales) for the nine months ended May 31, 2022 compared to $326.9 million (14.0% of ABL net sales) in the prior-year period, an increase of $67.3 million.

The increase in operating profit was due primarily to contributions from higher sales partially offset by increased material, labor, and freight costs as well as higher operating costs to support the increase in sales.

ISG net sales for the nine months ended May 31, 2022 increased 10.9% compared with the prior-year period primarily driven by strong demand for building and heating, ventilation, and air-conditioning controls as well as price increases.

ISG operating profit was $12.4 million for the nine months ended May 31, 2022 compared with $7.9 million in the prior-year period, an increase of $4.5 million.

This increase was due primarily to contributions from higher sales, partially offset by increased employee costs.

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(g) our ability to achieve our long-term financial goals and measures;

(h) our expectations about the resolution of securities class action and other legal matters;

(i) our expectations about our ability to enter into a new credit agreement prior to the expiration of the current agreement as well as any impacts of the phase out of the London Inter-Bank Offered Rate (“LIBOR”);

and (j) our expectations of the impact of the ongoing COVID-19 pandemic and the conflict between Russia and Ukraine.

(h) our expectations about the resolution of legal matters;

and (i) our expectations of the impact of the ongoing COVID-19 pandemic and the conflict between Russia and Ukraine.

You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this quarterly report.

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Our forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and management’s present expectations or projections.

risks and uncertainties that could cause our actual results to differ materially from those expressed in our forward-looking statements are discussed in Part I, Item 1a.

These risks and uncertainties that could cause our actual results to differ materially from those expressed in our forward-looking statements are discussed in Part I, Item 1a.

Risk Factors of our Form 10-K.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis