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Item 7. Management’s Discussion and Analysis

2022-10-26 compared with 2021-10-27 · 93 added, 176 removed, 197 unchanged (58% 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 for the years ended August 31, 2021, 2020, and 2019 (“fiscal 2021,” “fiscal 2020,” and “fiscal 2019,” respectively).

(referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries for the fiscal years ended August 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.

A discussion of the year ended August 31, 2021 compared to the year ended August 31, 2020 can be found within Part II, Item 7.

Management's Discussion and Analysis within our fiscal 2021 Annual Report on Form 10-K filed with the Securities and Exchange Commission on October 27, 2021.

We are a market-leading industrial technology company.

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 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 a valuable difference in people's lives.

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.

Capital Resources and Liquidity

Financial Condition, Capital Resources, and Liquidity

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, to make required contributions to our employee benefit plans, and to maintain compliance with covenants contained in our financing agreements.

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 invest in our current business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases.

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 as of August 31, 2022 primarily include principal and interest on our unsecured notes and borrowings under our credit agreement as well as payments for operating lease liabilities.

Further details on our borrowings and operating lease liabilities are outlined in the Debt and Lines of Credit and Leases footnotes of the Notes to Consolidated Financial Statements , respectively, within this Form 10-K.

Additionally, we incur purchase obligations in the ordinary course of business that are enforceable and legally binding.

Contractual purchase obligations for years subsequent to August 31, 2022 include $533.1 million in fiscal 2023.

Contractual purchase obligations beyond fiscal 2023 are not significant.

We believe that we will be able to meet our liquidity needs over the next 12 months based on our cash on hand, current projections of cash flows from operations, and borrowing availability under financing arrangements.

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Our cash position at August 31, 2022 was $223.2 million, a decrease of $268.1 million from August 31, 2021.

Cash generated from operating activities, cash on-hand, and additional long-term debt borrowings were used during the current year to fund our capital allocation priorities as discussed below.

We generated $408.7 million of cash flows from operating activities during fiscal 2021 compared with $504.8 million in the prior-year period, a decrease of $96.1 million, due primarily to increased operating working capital requirements to support the improvement in year-over-year sales as well as higher payments for income taxes, partially offset by payroll tax deferrals under the Coronavirus Aid, Relief, and Economic Security Act of 2020 and lower interest payments on long-term borrowings due to timing.

Our significant contractual cash requirements as of August 31, 2021 include principal and interest on long-term debt as well as payments for operating lease liabilities.

Our obligations related to these items are outlined in the Debt and Lines of Credit and Leases footnotes of the Notes to Consolidated Financial Statements within this Form 10-K.

Additionally, we incur purchase obligations in the ordinary course of business that are enforceable and legally binding.

Contractual purchase obligations for years subsequent to August 31, 2021 include $451.1 million in fiscal 2022.

Contractual purchase obligations beyond fiscal 2022 are not significant.

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 $316.3 million of cash flows from operating activities during fiscal 2022 compared with $408.7 million in the prior-year period, a decrease of $92.4 million.

This decline was due primarily to higher working capital investments to support year-over-year growth as well as to mitigate inconsistent supply availability at our production facilities.

Financing Arrangements

During fiscal 2021, we received proceeds of $493.8 million through debt issuances and repaid $401.1 million of previously outstanding long-term debt, resulting in net proceeds of $92.7 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 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”).

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 $600.0 million five-year unsecured revolving credit facility (the “Revolving Credit Facility”).

At August 31, 2022, our outstanding debt balance was $513.0 million compared to our cash position of $223.2 million.

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At August 31, 2022, we had additional borrowing capacity under the revolving credit facility of $577.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the facility less the outstanding letters of credit of $4.1 million issued under the facility.

As of August 31, 2021, our cash on hand combined with the additional borrowing capacity under the revolving credit facility totaled approximately $0.9 billion.

As of August 31, 2022, our cash on hand combined with the additional borrowing capacity under the revolving credit facility totaled approximately $801.1 million.

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

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Capital Allocation Priorities

Effective capital allocation is a key driver of stockholder value.

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 $43.8 million and $54.9 million in fiscal 2021 and 2020, respectively, in property, plant, and equipment, primarily related to investments in tooling, new and enhanced information technology capabilities, equipment, and facility enhancements.

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

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 $56.5 million and $43.8 million in fiscal 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.

Additionally, we invested in working capital to support growth and to mitigate inconsistent supply availability at our production facilities.

Strategic Acquisitions and Investments

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

We invested in acquisitions of businesses, net of cash acquired, of $75.3 million and $303.0 million in fiscal 2021 and 2020, respectively.

These acquisitions primarily included the following transactions:

• On July 1, 2021, using cash on hand, we acquired certain assets and liabilities of ams OSRAM’s North American Digital Systems (“OSRAM DS”) business.

This acquisition is intended to enhance our light emitting diode (“LED”) driver and controls technology portfolio and accelerate our innovation, expand our access to market through a more fulsome OEM product offering, and give us more control over our supply chain.

• On May 18, 2021, using cash on hand, we acquired all of the equity interests of Rockpile Ventures, an accelerator of edge artificial intelligence startups.

Rockpile Ventures helps early-stage artificial intelligence companies drive co-engineering and co-selling partnerships with major cloud ecosystems, enabling faster adoption from proof-of-concept trials to market scale.

• On September 17, 2019, using cash on hand and borrowings under available existing credit arrangements at that time, we acquired all of the equity interests of The Luminaires Group (“TLG”), a leading provider of specification-grade luminaires for commercial, institutional, hospitality, and municipal markets, all of which complement our dynamic lighting portfolio.

TLG’s indoor and outdoor lighting fixtures are marketed to architects, landscape architects, interior designers, and engineers through five niche lighting brands:

A-light™, Cyclone™, Eureka ® , Luminaire LED™, and Luminis ® .

• On November 25, 2019, using cash on hand, we acquired all of the equity interests of LocusLabs, Inc (“LocusLabs”).

The LocusLabs software platform supports navigation applications used on mobile devices, web browsers, and digital displays in airports, event centers, multi-floor office buildings, and campuses.

There were no acquisitions during fiscal 2022.

The $12.9 million of cash outflows in fiscal 2022 reflected in Consolidated Statements of Cash Flows primarily relate to working capital settlements for fiscal 2021 acquisitions.

We invested in acquisitions of businesses, net of cash acquired, of $75.3 million in fiscal 2021.

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

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During fiscal 2022, we repurchased 2.9 million shares of our outstanding common stock for $511.7 million.

As of August 31, 2021, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 3.8 million shares.

Total cash outflows for share repurchases during fiscal 2022 were $514.8 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 August 31, 2022, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 2.8 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.

The pandemic has caused reduced construction and renovation spending as well as a disruption in our supply chain for certain components, both of which negatively impacted our fiscal 2021 sales.

In fiscal 2020 we experienced a limited number of temporary facility shutdowns due to government-mandated closures.

Although our facilities are open and government-mandated restrictions have been gradually lifted, a resurgence in COVID-19 cases may lead to the reimposition of previously lifted business closure requirements, the imposition of new restrictions, or the issuance of new or revised local or national health guidance.

The pandemic has caused reduced construction and renovation spending as well as a disruption in our supply chain for certain components, both of which negatively impacted our operating results.

Although our facilities are open, a resurgence in COVID-19 cases, including as a result of new variants, may lead to the reimposition of previously lifted business closure requirements, the imposition of new restrictions, or the issuance of new or revised local or national health guidance.

We also continue to incur additional health and safety costs including expenditures for personal protection equipment and facility enhancements to maintain proper distancing guidelines issued by the Centers for Disease Control and Prevention.

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Additionally, we elected to defer certain employer payroll taxes as allowable under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act) signed into law on March 27, 2020.

Half of these deferrals are due in December 2021, and the remaining deferrals are due in December 2022.

further government-mandated or voluntary shutdowns, general economic conditions, or other negative impacts of the COVID-19 pandemic.

Half of these deferrals were paid in December 2021, and the remaining deferrals are due in December 2022.

Although we have implemented significant measures to mitigate further spread of the virus, our employees, customers, suppliers, and contractors may continue to experience disruptions to business activities due to potential further government-mandated or voluntary shutdowns, general economic conditions, or other negative impacts of the COVID-19 pandemic.

We are continuously monitoring the adverse effects of the pandemic and identifying steps to mitigate those effects.

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Risk Factors for further details regarding the potential impacts of COVID-19 to our results of operations, financial position, and cash flows.

Russia and Ukraine Conflict

The current conflict between Russia and Ukraine and the related sanctions and other penalties imposed by countries across the globe against Russia are creating substantial uncertainty in the global economy.

While we do not have operations in Russia or Ukraine and do not have significant direct exposure to customers and vendors in those countries, we are unable to predict the impact that these actions will have on the global economy or on our financial condition, results of operations, and cash flows as of the date of these financial statements.

Results of Operations

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Interest expense, net 24.9 23.2 1.7 7.3 %

Miscellaneous expense, net 8.2 5.9 2.3 NM

Miscellaneous (income) expense, net (9.1) 8.2 (17.3) NM

Total other expense 15.8 31.4 (15.6) (49.7) %

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NM - not meaningful

Net sales increased $134.7 million, or 4.0%, to $3.46 billion for the year ended August 31, 2021 compared with $3.33 billion reported for the year ended August 31, 2020.

For the year ended August 31, 2021, we reported net income of $306.3 million compared with $248.3 million for the year ended August 31, 2020, an increase of $58.0 million, or 23.4%.

For fiscal 2021, diluted earnings per share increased 33.7% to $8.38 from $6.27 for the prior-year period.

The following table reconciles certain U.S.

generally accepted accounting principles (“U.S.

GAAP”) financial measures to the corresponding non-U.S.

GAAP measures referred to in the discussion of our results of operations, which exclude the impact of acquisition-related items, amortization of acquired intangible assets, share-based payment expense, special charges associated primarily with continued efforts to streamline the organization, and impairments of investments in unconsolidated affiliates.

Although the impacts of these items have been recognized in prior periods and could recur in future periods, management typically excludes these items during internal reviews of performance and uses these non-U.S.

GAAP measures for baseline comparative operational analysis, decision making, and other activities.

These non-U.S.

GAAP financial measures, including adjusted gross profit and margin, adjusted selling, distribution, and administrative (“SD&A”) expenses and adjusted SD&A expenses as a percent of net sales, adjusted operating profit and margin, adjusted other expense, adjusted net income, and adjusted diluted earnings per share, are provided to enhance the user’s overall understanding of our current financial performance.

Specifically, we believe these non-U.S.

GAAP measures provide greater comparability and

enhanced visibility into our results of operations.

GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, results prepared in accordance with U.S.

(In millions, except per share data) Year Ended August 31,

2021 2020 Increase (Decrease) Percent Change

Gross profit $ 1,475.0 $ 1,402.4 $ 72.6 5.2 %

Percent of net sales 42.6 % 42.2 % 40 bps

Acquisition-related items (1)

Adjusted gross profit $ 1,475.0 $ 1,403.6 $ 71.4 5.1 %

Percent of net sales 42.6 % 42.2 % 40 bps

Selling, distribution, and administrative expenses $ 1,044.1 $ 1,028.5 $ 15.6 1.5 %

Percent of net sales 30.2 % 30.9 % (70) bps

Amortization of acquired intangible assets (40.7) (41.7)

Share-based payment expense (32.5) (38.2)

Acquisition-related items (1)

Adjusted selling, distribution, and administrative expenses $ 968.7 $ 947.3 $ 21.4 2.3 %

Percent of net sales 28.0 % 28.5 % (50) bps

Operating profit $ 427.6 $ 353.9 $ 73.7 20.8 %

Percent of net sales 12.4 % 10.6 % 180 bps

Amortization of acquired intangible assets 40.7 41.7

Share-based payment expense 32.5 38.2

Acquisition-related items (1)

Special charges 3.3 20.0

Adjusted operating profit $ 506.3 $ 456.3 $ 50.0 11.0 %

Percent of net sales 14.6 % 13.7 % 90 bps

Other expense $ 31.4 $ 29.2 $ 2.2 7.5 %

Impairments of investments (6.0) —

Adjusted other expense $ 25.4 $ 29.2 $ (3.8) (13.0) %

Net income $ 306.3 $ 248.3 $ 58.0 23.4 %

Amortization of acquired intangible assets 40.7 41.7

Share-based payment expense 32.5 38.2

Acquisition-related items (1)

Special charges 3.3 20.0

Impairments of investments 6.0 —

Total pre-tax adjustments to net income 84.7 102.4

Income tax effect (19.3) (23.4)

Adjusted net income $ 371.7 $ 327.3 $ 44.4 13.6 %

Diluted earnings per share $ 8.38 $ 6.27 $ 2.11 33.7 %

Adjusted diluted earnings per share $ 10.17 $ 8.27 $ 1.90 23.0 %

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(1) Acquisition-related items include profit in inventory and professional fees.

Net sales of $4.01 billion for the year ended August 31, 2022 increased by $545.1 million, or 15.7%, compared with the prior-year period.

This increase was driven by improved sales performance in the second half of fiscal 2021.

Sales in our ABL segment of $3.29 billion increased $106.4 million, or 3.3%, compared to the prior year.

Within our ABL segment, sales through the independent sales network and direct sales network increased 5% and 9%, respectively, due primarily to these channels continuing to benefit from improved service levels and an improving economy.

However, corporate accounts sales for fiscal 2021 were 12% lower year over year due to fewer nonessential renovations from large retailers in the first half of the fiscal year, and retail sales declined 17% due primarily to a customer inventory rebalancing in fiscal 2021.

Sales within our ISG segment increased 21% to $190.0 million due primarily to strong demand for building and HVAC controls.

Changes in foreign currency rates and revenues from acquired companies did not have a meaningful impact on net sales for fiscal 2021.

Gross profit for fiscal 2021 increased $72.6 million, or 5.2%, to $1.48 billion compared with $1.40 billion for the prior year due.

The increase in gross profit and margin was due primarily to increased sales as well as product and productivity improvements, partially offset by higher component and freight costs.

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

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

Changes in foreign currency rates did not have a meaningful impact on net sales for the year ended August 31, 2022.

Gross profit for the year ended August 31, 2022 increased $197.7 million, or 13.4%, to $1.67 billion compared with $1.48 billion for the prior year.

Gross profit margin decreased 80 basis points to 41.8% for fiscal 2022 compared with 42.6% 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 of $1.04 billion for the year ended August 31, 2021 increased $15.6 million, or 1.5%, compared with the prior year.

The increase in SD&A expense was due primarily to higher outbound freight to support the increase in sales as well as increased employee-related costs, partially offset by lower travel expense and sales and marketing costs due to cost control and travel restrictions that have continued since the start of the COVID-19 pandemic.

Additionally, share-based payment expense decreased in fiscal 2021 due to the discontinuation of certain retirement provisions in the equity incentive program that resulted in the acceleration of share-based payment expense for fiscal 2020 grants.

Compared with the prior-year period, SD&A expenses as a percent of net sales decreased 70 basis points to 30.2% for fiscal 2021 from 30.9% in fiscal 2020.

Adjusted SD&A expenses were $968.7 million, or 28.0% of net sales, in fiscal 2021 compared to $947.3 million, or 28.5% of net sales, in the year-ago period.

During the year ended August 31, 2021, we recognized pre-tax special charges of $3.3 million compared with pre-tax special charges of $20.0 million recorded during the year ended August 31, 2020.

Further details regarding our special charges are included in the Special Charges footnote of the Notes to Consolidated Financial Statements .

Selling, distribution, and administrative expenses of $1.16 billion for the year ended August 31, 2022 increased $118.9 million, or 11.4%, compared with the prior year.

This increase was due primarily to higher commissions and freight costs associated with higher sales as well as increased employee-related costs due, in part, to recent acquisitions.

Operating profit for fiscal 2022 was $509.7 million compared with $427.6 million reported for the prior-year period, an increase of $82.1 million, or 19.2%.

Operating profit margin increased 180 basis points to 12.4% for fiscal 2021 compared with 10.6% for fiscal 2020.

The increase in operating profit margin reflects favorable gross profit margin, a decline in special charges, and our ability to leverage our operating costs.

Adjusted operating profit increased $50.0 million, or 11.0%, to $506.3 million compared with $456.3 million for fiscal 2020.

Adjusted operating profit margin was 14.6% and 13.7% for fiscal 2021 and 2020, respectively.

Operating profit margin increased 30 basis points to 12.7% for fiscal 2022

compared with 12.4% for fiscal 2021.

The increase in operating profit margin was primarily the result of improved leveraging of our operating costs as well as lower special charges, partially offset by a lower gross profit margin.

Other Expense

Other expense consists of net interest expense and net miscellaneous 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.

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 $24.9 million and $23.2 million for the years ended August 31, 2022 and 2021, respectively.

We reported net miscellaneous expense of $8.2 million in fiscal 2021 compared with $5.9 million in fiscal 2020.

We reported net miscellaneous income of $9.1 million in fiscal 2022 compared with net miscellaneous expense of $8.2 million in fiscal 2021.

During fiscal 2021, we recorded impairment charges totaling $6.0 million for certain unconsolidated equity investments.

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

Excluding the impairments, the year-over-year change in net miscellaneous (income) expense was largely due to changes in pension cost as well as foreign currency-related transactions.

Income Taxes and Net Income

Our effective income tax rate was 22.3% and 22.7% for the years ended August 31, 2022 and 2021, respectively.

The change in our effective income tax rate year over year is due primarily to the impacts of discrete items.

Further details regarding income taxes are included in the Income Taxes footnote of the Notes to Consolidated Financial

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

The change in our effective income tax rate year over year is due primarily to the impact of discrete items.

Further details regarding income taxes are included in the Income Taxes footnote of the Notes to Consolidated Financial Statements .

Net income for fiscal 2022 increased $77.7 million, or 25.4%, to $384.0 million from $306.3 million reported for the prior year.

The increase in net income resulted primarily from an increase in operating profit compared to the prior-year period partially offset by higher income tax expense related to the increase in profit.

Adjusted net income for fiscal 2021 increased 13.6% to $371.7 million compared with $327.3 million in the year-ago period.

Diluted earnings per share for fiscal 2022 was $11.08 compared with $8.38 for the prior-year period, an increase of $2.70, or 32.2%.

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

Adjusted diluted earnings per share for fiscal 2021 was $10.17 compared with $8.27 for the prior-year period, an increase of $1.90, or 23.0%.

Segment Results

The following tables set forth information comparing the operating results of our segments, ABL and ISG, for the year ended August 31, 2022 with the year ended August 31, 2021 (in millions):

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

Year Ended August 31,

ABL 2021 2020 Increase (Decrease) Percent Change

2022 2021 Increase (Decrease) Percent Change

Net sales $ 3,810.1 $ 3,287.3 $ 522.8 15.9 %

Operating profit 545.6 476.2 69.4 14.6 %

Amortization of acquired intangible assets 27.9 27.4

Share-based payment expense 11.0 13.4

Acquisition-related items (1)

Adjusted operating profit $ 515.1 $ 467.8 $ 47.3 10.1 %

Operating profit margin 14.3 % 14.5 % (20) bps

Adjusted operating profit margin 15.7 % 14.7 % 100 bps

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(1) Acquisition-related items include profit in inventory.

ABL net sales for the year ended August 31, 2021 increased 3.3% compared with the prior-year period due primarily to improvements within the independent sales network and direct sales network channels as our go-to-market activities leveraged improvements in the construction market and wider economy.

These gains were partially offset by lower sales in the retail channel due to a customer inventory rebalancing and in the corporate accounts channel due to fewer nonessential renovations from large retailers in the first half of the fiscal year.

Operating profit for ABL was $476.2 million (14.5% of ABL net sales) for the year ended August 31, 2021 compared to $425.8 million (13.4% of ABL net sales) in the prior-year period, an increase of $50.4 million.

The increase in operating profit was due primarily to higher sales as well as product and productivity improvements, partially offset by higher component, freight, and operating costs.

The operating profit margin increase year over year reflects higher sales as well as our ability to successfully leverage our operating costs.

Adjusted operating profit for ABL increased $47.3 million to $515.1 million for the year ended August 31, 2021 compared with the prior year period.

Year Ended August 31,

ISG 2021 2020 Increase (Decrease) Percent Change

Net sales $ 216.1 $ 190.0 $ 26.1 13.7 %

Operating profit (loss) $ 9.9 $ (3.9) $ 13.8 NM

Amortization of acquired intangible assets 12.8 14.3

Share-based payment expense 2.9 4.5

Adjusted operating profit $ 25.6 $ 14.9 $ 10.7 71.8 %

Operating profit (loss) margin 5.2 % (2.5) % 770 bps

Adjusted operating profit margin 13.5 % 9.5 % 400 bps

ISG net sales for the year ended August 31, 2021 increased 21.0% compared with the prior-year period driven primarily by strong demand for building and HVAC controls.

ISG operating profit was $9.9 million for the year ended

August 31, 2021 compared with a $3.9 million operating loss in the prior-year period, an increase of $13.8 million.

Operating profit 22.7 9.9 12.8 129.3 %

Operating profit margin 10.5 % 5.2 % 530 bps

ABL net sales for the year ended August 31, 2022 increased 15.9% compared with the prior-year period.

Sales within the independent and direct sales 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 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 $545.6 million (14.3% of ABL net sales) for the year ended August 31, 2022 compared to $476.2 million (14.5% of ABL net sales) in the prior-year period, an increase of $69.4 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 year ended August 31, 2022 increased 13.7% compared with the prior-year period driven primarily by strong demand for building and heating, ventilation, and air conditioning controls as well as price

ISG operating profit was $22.7 million (10.5% of ISG net sales) for the year ended August 31, 2022 compared with $9.9 million (5.2% of ISG net sales) in the prior-year period, an increase of $12.8 million.

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

Adjusted operating profit for ISG increased $10.7 million to $25.6 million for the year ended August 31, 2021 compared with the prior-year period.

We expect the challenging global supply chain environment to continue into fiscal 2022.

We currently expect ABL to grow net sales in the high single digits for the full year of 2022 and ISG to deliver net sales growth in the mid-teens.

Additionally, we expect a 42% plus annualized gross profit margin for the full year of 2022, and we believe that we can continue to leverage our operating costs as we increase net sales.

Accounting Standards Adopted in Fiscal 2022 and Accounting Standards Yet to Be Adopted

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Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition and results of operations as reflected in our Consolidated Financial Statements , which have been prepared in accordance with U.S.

generally accepted accounting principles (“U.S.

As discussed in the Description of Business and Basis of Presentation footnote of the Notes to Consolidated Financial Statements , the preparation of financial statements in conformity with U.S.

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Please refer to the Revenue Recognition footnote of the Notes to Consolidated Financial Statements for additional information regarding estimates related to revenue recognition.

Inventories include materials, direct labor, in-bound freight, customs, duties, tariffs, and related manufacturing overhead and are stated at the lower of cost (on a first-in, first-out or average-cost basis) and net realizable value.

Inventories include materials, direct labor, inbound freight, customs, duties, tariffs, and related manufacturing overhead.

Inventories are stated on a first-in, first-out basis at the lower of cost and net realizable value.

We review inventory quantities on hand and record a provision for excess or obsolete inventory primarily based on estimated future demand and current market conditions.

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Goodwill is calculated as the residual value of an acquisition's purchase price less the value of the identifiable net assets and is thus dependent on the appropriate identification and valuation of the net assets obtained in an acquisition.

We also review goodwill and indefinite-lived intangible assets for impairment on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that would more likely than not indicate that the fair value of the goodwill or an indefinite-lived asset is below its carrying value.

We review goodwill and indefinite-lived intangible assets for impairment on an annual basis in the fiscal fourth quarter and on an interim basis if an event occurs or circumstances change that would more likely than not indicate that the fair value of the goodwill or an indefinite-lived asset is below its carrying value.

An impairment loss for goodwill or an indefinite-lived intangible asset would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or another appropriate fair value method.

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Such charges could have a material adverse effect on our results of operations and financial position but not our cash flows from operations.

We perform our goodwill impairment analysis at the reporting unit level using a combination of discounted future cash flows and relevant market multiples.

We perform our annual goodwill impairment analysis on the first day of our fiscal fourth quarter (June 1).

Goodwill is tested for impairment at the reporting unit level using a combination of discounted future cash flows and relevant market multiples.

Our discounted cash flow analyses required significant assumptions about discount rates, short and long-term growth rates, and future profitability.

We utilized estimated discount rates ranging from 9.0% to 12.0% as of June 1, 2021, based on the Capital Asset Pricing Model, which considers the risk-free interest rate, beta, market risk premium, and size premium to determine an appropriate discount rate for a reporting unit.

We utilized estimated discount rates ranging from 9% to 13% as of June 1, 2022, based on the Capital Asset Pricing Model, which considers a risk-free interest rate, beta, market risk premium, and size premium to determine an appropriate discount rate for a reporting unit.

Short-term growth rates were based on management’s forecasted financial results, which consider key business drivers such as specific revenue growth initiatives, market share changes, growth in our addressable market, and general economic factors such as macroeconomic conditions, credit availability, and interest rates.

Short-term growth rates used in the fiscal 2021 impairment analysis reflected additional estimation uncertainty as a result of the COVID-19 pandemic.

We calculated the discounted cash flows attributable to our reporting units for a 10-year discrete period with a terminal value and compared this calculation to the discounted cash flows generated over a 40-year period to corroborate the reasonableness of assumptions used.

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We also reconcile the sum of the fair values for each reporting unit to our market capitalization at the testing date, including consideration of a control premium.

Any reasonably likely change in the assumptions used in these analyses, including revenue growth rates, the discount rates, long-term growth rates, or relevant multiples would not cause the carrying value of any reporting unit to exceed its estimated fair value as determined under the goodwill impairment analysis.

Any reasonably likely change in the assumptions used in these analyses, including revenue growth rates, discount rates, long-term growth rates, or relevant multiples would not cause the carrying value of any reporting unit to exceed its estimated fair value as determined under the goodwill impairment analysis.

See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for further details.

Indefinite-Lived Intangible Assets

We perform our annual indefinite-lived intangible asset impairment analyses on the first day of our fiscal fourth quarter (June 1).

Our indefinite-lived intangible assets consist of 13 trade names with an aggregate carrying value of $173.7 million at August 31, 2022.

We utilized significant assumptions to estimate the fair value of these indefinite-lived trade names using a fair value model based on discounted future cash flows (“fair value model”) in accordance with Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”).

Future cash flows associated with each of our indefinite-lived trade names are calculated by multiplying a theoretical royalty rate a willing third party would pay for use of the particular trade name by estimated future net sales attributable to the relevant trade name.

The present values of the resulting after-tax cash flows is our current estimate of the fair value of each trade name.

relevant trade name.

The present value of the resulting after-tax cash flows is our current estimate of the fair value of each trade name.

This fair value model requires us to make several significant assumptions, including specific estimated future net sales (including short and long-term growth rates), the royalty rate, and the discount rate for each trade name.

Future net sales and short-term growth rates are estimated for each particular trade name based on management’s financial forecasts, which consider key business drivers, such as specific revenue growth initiatives, market share changes, expected growth in our addressable market, and general economic factors, such as macroeconomic conditions, credit availability, and interest rates.

Short-term growth rates used in the fiscal 2021 impairment analysis reflected additional estimation uncertainty as a result of the COVID-19 pandemic.

The long-term growth rate used in determining terminal value was estimated at 3.5% and was based primarily on our understanding of projections for expected long-term growth for our addressable market and historical long-term performance.

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If future operating results are unfavorable compared with forecasted amounts, we may be required to reduce the theoretical royalty rate used in the fair value model, which would result in lower expected future after-tax cash flows in the fair value model.

We utilized a range of estimated discount rates between 9% and 12% as of June 1, 2021, based on the Capital Asset Pricing Model, which considers the current risk-free interest rate, beta, market risk premium, and size premium appropriate for each intangible.

We utilized a range of estimated discount rates between 9% and 13% as of June 1, 2022, based on the Capital Asset Pricing Model, which considers a current risk-free interest rate, beta, market risk premium, and size premium appropriate for each intangible.

During fiscal 2022, we performed an evaluation of the fair values of our indefinite-lived trade names.

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We recognize compensation cost for share-based payment transactions in the financial statements under the provisions of ASC Topic 718, Compensation—Stock Compensation (“ASC 718”).

Restricted stock awards, performance stock awards, and director stock units representing certain deferrals into the Director Deferred Compensation Plan are valued based on the fair value of our common stock on the grant date.

Restricted stock awards, performance stock awards, and director stock units representing certain deferrals into the Nonemployee Director Deferred Compensation Plan (the “Director Plan”) are valued based on the fair value of our common stock on the grant date.

We review the values of our performance awards on a frequent and recurring basis and adjust those values based on the probability that the related performance metric will be satisfied.

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Estimated future warranty costs are primarily based on historical experience of identified warranty claims.

Estimated costs related to product warranty and recall costs outside of our historical experience, which could include significant product recalls or formal campaigns soliciting repair or return of a product, are accrued when they are deemed to be probable and can be reasonably estimated.

Any estimated or actual loss recoveries that offset our costs and payments are reflected as assets based on the timing of receipt of recovery.

We are fully self-insured for product warranty costs.

Historical warranty costs have been within expectations.

Although we expect that historical activity will continue to be the best indicator of future warranty costs, there can be no assurance that future warranty costs will not exceed historical amounts.

Estimated costs related to product recalls based on a formal campaign soliciting repair or return of that product are accrued when they are deemed to be probable and can be reasonably estimated.

If actual future

warranty or recall costs exceed recorded amounts, additional accruals may be required, which could have a material adverse impact on our results of operations and cash flow.

If actual future warranty or recall costs exceed recorded amounts, additional accruals may be required, which could have a material adverse impact on our results of operations and cash flow.

We also sell certain service-type warranties that extend coverages for products beyond their base warranties.

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(a) our projections regarding financial performance, including our expected margins and ability to leverage operating costs, liquidity, capital structure, capital expenditures, investments, share repurchases, and dividends;

(b) external and internal forecasts projecting the North American lighting and building management solutions market growth rate and growth in our addressable market;

(c) expectations about the impact of any changes in demand, including improvements in our end markets, as well as volatility, challenges, competition, and uncertainty in general economic conditions;

(d) expectations about volatility in raw material costs, freight costs, and component and labor availability;

(e) our ability to execute and realize benefits from initiatives related to streamlining our operations and integrating recent acquisitions, realize synergies from acquisitions, capitalize on growth opportunities with the intention of becoming a larger, more dynamic company, and introduce innovative products and services;

(f) our estimate of our fiscal 2022 effective income tax rate, results of operations, cash flows, and capital spending;

(b) external and internal forecasts projecting growth in our addressable market;

(c) expectations about the impact of any changes in demand, including improvements in our end markets, as well as volatility, challenges, and uncertainty in general economic conditions;

(d) expectations about volatility in raw material, purchased finished goods, and transportation costs as well as component and labor availability;

(e) our ability to execute and realize benefits from initiatives related to streamlining our operations and integrating recent acquisitions, realize synergies from acquisitions, capitalize on growth opportunities, introduce innovative products and services, and realize benefits from sustainability initiatives;

(f) our estimate of our future results of operations and cash flows;

(g) our estimate of future amortization expense;

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

(i) the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies;

(j) our expectations about the resolution of securities class action and other regulatory matters;

(k) our expectations of the impact of the ongoing COVID-19 pandemic;

(l) our human capital initiatives in fiscal 2022, and (m) our ability to reduce our carbon output and seize market opportunities related to sustainability.

(h) the impact of future product warranty and recall costs;

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

(j) the impact of changes in the political landscape and related policy changes, including monetary, regulatory, tax, and trade policies;

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

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

(m) our human capital initiatives;

and (n) our ability to reduce our carbon output and seize market opportunities related to sustainability.

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

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What changed 10-K

Item 7. Management’s Discussion and Analysis