ACUITY INC. (DE) 10-Q

Item 1. Financial Statements ACUITY BRANDS, INC. CONSOLIDATED BALANCE SHEETS (In millions, except share data) November 30, 2022 August 31, 2022 (unaudited) ASSETS Current assets: Cash and cash equivalents $ 284.1 $ 223.2 Accounts receivable, less reserve for doubtful accounts of $ 1.7 and $ 1.2 , respectively 584.2 665.9 Inventories 487.0 485.7 Prepayments and other current assets 100.5 91.2 Total current assets 1,455.8 1,466.0 Property, plant, and equipment, net 279.6 276.5 Operating lease right-of-use assets 66.8 74.9 Goodwill 1,082.0 1,084.3 Intangible assets, net 505.6 529.2 Deferred income taxes 1.4 1.3 Other long-term assets 45.4 48.0 Total assets $ 3,436.6 $ 3,480.2 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Accounts payable $ 415.1 $ 397.8 Current maturities of debt — 18.0 Current operating lease liabilities 15.7 15.7 Accrued compensation 68.7 88.0 Other accrued liabilities 198.1 214.1 Total current liabilities 697.6 733.6 Long-term debt 495.1 495.0 Long-term operating lease liabilities 63.6 67.4 Accrued pension liabilities 41.5 41.4 Deferred income taxes 100.8 102.1 Other long-term liabilities 134.5 128.9 Total liabilities 1,533.1 1,568.4 Commitments and contingencies (see Commitments and Contingencies footnote) Stockholders’ equity: Preferred stock, $ 0.01 par value; 50,000,000 shares authorized; none issued — — Common stock, $ 0.01 par value; 500,000,000 shares authorized; 54,376,386 and 54,241,069 issued, respectively 0.5 0.5 Paid-in capital 1,035.4 1,036.3 Retained earnings 3,246.8 3,176.2 Accumulated other comprehensive loss ( 126.2 ) ( 125.8 ) Treasury stock, at cost, of 22,225,453 and 21,753,820 shares, respectively ( 2,253.0 ) ( 2,175.4 ) Total stockholders’ equity 1,903.5 1,911.8 Total liabilities and stockholders’ equity $ 3,436.6 $ 3,480.2 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 1 Table of Contents ACUITY BRANDS, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (Unaudited) (In millions, except per-share data) Three Months Ended November 30, 2022 November 30, 2021 Net sales $ 997.9 $ 926.1 Cost of products sold 581.4 540.3 Gross profit 416.5 385.8 Selling, distribution, and administrative expenses 300.7 270.7 Special charges 6.9 — Operating profit 108.9 115.1 Other expense: Interest expense, net 6.6 5.9 Miscellaneous expense, net 9.1 0.3 Total other expense 15.7 6.2 Income before income taxes 93.2 108.9 Income tax expense 18.3 21.3 Net income $ 74.9 $ 87.6 Earnings per share (1) : Basic earnings per share $ 2.32 $ 2.50 Basic weighted average number of shares outstanding 32.308 35.063 Diluted earnings per share $ 2.29 $ 2.46 Diluted weighted average number of shares outstanding 32.704 35.539 Dividends declared per share $ 0.13 $ 0.13 Comprehensive income: Net income $ 74.9 $ 87.6 Other comprehensive income (loss) items: Foreign currency translation adjustments ( 1.5 ) ( 11.9 ) Defined benefit plans, net of tax 1.1 1.2 Other comprehensive loss items, net of tax ( 0.4 ) ( 10.7 ) Comprehensive income $ 74.5 $ 76.9 ______________________________ (1) Earnings per share is calculated using unrounded numbers. Amounts in the table may not recalculate exactly due to rounding. The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 2 Table of Contents ACUITY BRANDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In millions) Three Months Ended November 30, 2022 November 30, 2021 Cash flows from operating activities: Net income $ 74.9 $ 87.6 Adjustments to reconcile net income to net cash flows from operating activities: Depreciation and amortization 26.5 24.3 Share-based payment expense 10.7 7.6 Asset impairment 4.3 — Loss on sale of a business 11.2 — Changes in operating assets and liabilities, net of acquisitions and divestitures: Accounts receivable 81.6 40.2 Inventories ( 5.8 ) ( 41.3 ) Prepayments and other current assets ( 8.5 ) ( 47.7 ) Accounts payable 20.3 17.7 Other ( 28.6 ) ( 4.7 ) Net cash provided by operating activities 186.6 83.7 Cash flows from investing activities: Purchases of property, plant, and equipment ( 18.2 ) ( 9.3 ) Other investing activities 3.9 0.3 Net cash used for investing activities ( 14.3 ) ( 9.0 ) Cash flows from financing activities: Repayments on credit facility, net of borrowings ( 18.0 ) — Repurchases of common stock ( 76.5 ) ( 56.3 ) Proceeds from stock option exercises and other 0.9 8.6 Payments of taxes withheld on net settlement of equity awards ( 12.5 ) ( 6.7 ) Dividends paid ( 4.3 ) ( 4.7 ) Net cash used for financing activities ( 110.4 ) ( 59.1 ) Effect of exchange rate changes on cash and cash equivalents ( 1.0 ) ( 2.9 ) Net change in cash and cash equivalents 60.9 12.7 Cash and cash equivalents at beginning of period 223.2 491.3 Cash and cash equivalents at end of period $ 284.1 $ 504.0 Supplemental cash flow information: Income taxes paid during the period $ 11.0 $ 28.3 Interest paid during the period $ 15.3 $ 13.3 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 3 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 1 — Description of Business and Basis of Presentation Acuity Brands, Inc. (referred to herein as “we,” “our,” “us,” the “Company,” or similar references) is a market-leading industrial technology company. 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. ABL Segment ABL's portfolio of lighting solutions includes commercial, architectural, and specialty lighting in addition to lighting controls and components that can be combined to create integrated lighting controls systems. We offer devices such as luminaires that predominantly utilize light emitting diode (“LED”) technology designed to optimize energy efficiency and comfort for various indoor and outdoor applications. ABL's portfolio of products includes but is not limited to the following brands: Lithonia Lighting ® , Holophane ® , Peerless ® , Gotham ® , Mark Architectural Lighting TM , Juno ® , Indy TM , Aculux TM , Healthcare Lighting ® , Hydrel ® , American Electric Lighting ® , eldoLED ® , nLight ® , Sensor Switch ® , IOTA ® , A-Light TM , Cyclone TM , Eureka ® , Luminaire LED TM , Luminis ® , Dark to Light ® , RELOC ® Wiring Solutions, and OPTOTRONIC ® . Principal customers of ABL include electrical distributors, retail home improvement centers, electric utilities, national accounts, original equipment manufacturer (“OEM”) customers, digital retailers, lighting showrooms, and energy service companies. Our customers are located in North America and select international markets that serve new construction, renovation and retrofit, and maintenance and repair applications. ABL's lighting and lighting controls solutions are sold primarily through a network of independent sales agencies that cover specific geographic areas and market channels, by internal sales representatives, through consumer retail channels, directly to large corporate accounts, and directly to OEM customers. Products are delivered directly from our manufacturing facilities or through a network of distribution centers, regional warehouses, and commercial warehouses using both common carriers and a company-managed truck fleet. To serve international customers, our sales forces utilize a variety of distribution methods to meet specific individual customer or country requirements. ABL comprised approximately 95 % of consolidated revenues during the three months ended November 30, 2022 and 2021. ISG Segment ISG delivers products and services that make spaces smarter, safer, and greener. ISG offers a building management platform and location-aware applications. Our building management platform includes products for controlling heating, ventilation, and air conditioning (“HVAC”), lighting, shades, and building access that deliver end-to-end optimization of those building systems. Our Atrius ® intelligent building software enhances the occupant experience, improves building system management, and automates labor intensive tasks while delivering operational energy efficiency and cost reductions. Through a connected and converged building system architecture, our Atrius ® software delivers different applications, allows clients to upgrade over time with natural refresh cycles, and deploys new capabilities through both software and hardware updates. Customers of ISG primarily include system integrators as well as retail stores, airports, and enterprise campuses throughout North America and select international locations. ISG products and solutions are marketed under multiple brand names, including but not limited to Distech Controls ® and Atrius ® . ISG comprised approximately 5 % of consolidated revenues during the three months ended November 30, 2022 and 2021. Basis of Presentation We have prepared the Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) to present the financial position, results of operations, and cash flows of Acuity Brands, Inc. and its wholly-owned subsidiaries. 4 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) These unaudited interim consolidated financial statements reflect all normal and recurring adjustments that are, in the opinion of management, necessary to present fairly our consolidated financial position as of November 30, 2022, our consolidated comprehensive income for the three months ended November 30, 2022 and 2021, and our consolidated cash flows for the three months ended November 30, 2022 and 2021. Certain information and footnote disclosures normally included in our annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. However, we believe that the disclosures included herein are adequate to make the information presented not misleading. These financial statements should be read in conjunction with the audited consolidated financial statements as of and for the three years ended August 31, 2022 and notes thereto included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (the “SEC”) on October 26, 2022 (File No. 001-16583) (“Form 10-K”). The results of operations for the three months ended November 30, 2022 are not necessarily indicative of the results to be expected for the full fiscal 2023 year due primarily to continued uncertainty of general economic conditions that may impact our key end markets for the remainder of fiscal 2023; the impact of inflation; component shortages; disruptions in the global supply chain; seasonality; and the impact of any acquisitions and/or divestitures, 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. Additionally, 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. Note 2 — Significant Accounting Policies Use of Estimates The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Reclassifications We may reclassify certain prior period amounts to conform to the current year presentation. No material reclassifications occurred during the current period. Note 3 — Acquisitions and Divestitures Acquisitions There were no acquisitions during fiscal 2023 or fiscal 2022. Divestitures During the first quarter of fiscal 2023, we committed to a plan to sell our Sunoptics prismatic skylights business. We completed the sale of the business on November 10, 2022, and we transferred assets with a total carrying value of $ 15.1 million, which primarily consisted of intangibles with definite lives, inventories, and allocated goodwill from the ABL segment. We recognized a pre-tax loss on the sale of $ 11.2 million within Miscellaneous expense, net on the Consolidated Statements of Comprehensive Income . Additionally, we recorded impairment charges for certain retained assets as well as associate severance and other costs related to the sale. These items are included within Special charges on the Consolidated Statements of Comprehensive Income . See the Special Charges footnote of the Notes to Consolidated Financial Statements for further details. 5 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 4 — New Accounting Pronouncements Accounting Standards Yet to Be Adopted Accounting Standards Update (“ASU”) 2021-08, Business Combinations (Topic 805): Accounting for Contract Assets and Contract Liabilities from Contracts with Customers (“ASU 2021-08”) In October 2021, the Financial Accounting Standards Board issued ASU 2021-08, which requires companies to recognize and measure contract assets and contract liabilities acquired in a business combination as if the acquiring company originated the related revenue contracts. ASU 2021-08 is effective for fiscal years beginning after December 15, 2022, or our fiscal 2024, with early adoption permitted. We are currently assessing the impacts of ASU 2021-08 to determine whether we will adopt early or in fiscal 2024. Amendments within the standard are required to be applied on a prospective basis from the date of adoption. We will apply the provisions of ASU 2021-08 after adoption to future acquisitions, if any. All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable. Note 5 — Fair Value Measurements We determine fair value measurements based on the assumptions a market participant would use in pricing an asset or liability. Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), establishes a three-level hierarchy that distinguishes between market participant assumptions based on (i) unadjusted quoted prices for identical assets or liabilities in an active market (Level 1), (ii) quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability (Level 2), and (iii) prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (Level 3). We utilize valuation methodologies to determine the fair values of our financial assets and liabilities in conformity with the concepts of “exit price” and the fair value hierarchy as prescribed in ASC 820. All valuation methods and assumptions are validated at least quarterly to ensure the accuracy and relevance of the fair values. There were no material changes to the valuation methods or assumptions used to determine fair values during the current period. No transfers between the levels of the fair value hierarchy occurred during the current fiscal period. In the event of a transfer in or out of a level within the fair value hierarchy, the transfers would be recognized on the date of occurrence. Financial Instruments Recorded at Fair Value We used quoted market prices to determine the fair value of Level 1 assets and liabilities. Our cash and cash equivalents (Level 1), which are required to be carried at fair value and measured on a recurring basis, were $ 284.1 million and $ 223.2 million as of November 30, 2022 and August 31, 2022, respectively. We hold a small number of strategic investments totaling $ 12.0 million and $ 11.9 million as of November 30, 2022 and August 31, 2022, respectively. These investments are primarily equity instruments in privately-held entities over which we do not exercise significant influence or control. We generally account for these investments at fair value on a recurring basis; however, these investments do not have readily determinable fair value. We have elected the practical expedient in ASC Topic 321, Investments—Equity Securities , to measure these investments at cost less any impairment adjusted for observable price changes, if any. As such, these investments are excluded from the fair value hierarchy. Changes in the fair values of these financial instruments during the three months ended November 30, 2022 and 2021 were not material to our financial condition, results of operations, or cash flows. Disclosures of Fair Value of Financial Instruments Disclosures of fair value information about financial instruments, for which it is practicable to estimate that value, are required each reporting period in addition to any financial instruments carried at fair value on a recurring basis as prescribed by ASC Topic 825, Financial Instruments (“ASC 825”). In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. 6 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Fair value for our outstanding debt obligations is estimated based on discounted future cash flows using rates currently available for debt of similar terms and maturity (Level 2). Our senior unsecured public notes are carried at the outstanding balance, net of unamortized bond discount and deferred costs, as of the end of the reporting period. The estimated fair value of our senior unsecured public notes was $ 388.4 million and $ 399.2 million as of November 30, 2022 and August 31, 2022, respectively. The decrease in fair value is due to increases in market bond yields since the end of fiscal 2022. We had no short-term borrowings and $ 18.0 million of short-term borrowings outstanding under our revolving credit facility as of November 30, 2022 and August 31, 2022, respectively. These borrowings are variable-rate instruments that reset on a frequent short-term basis; therefore, we estimate that any outstanding carrying values, which are equal to the face amounts, of these instruments approximate their fair values. See Debt and Lines of Credit footnote for further details on our outstanding borrowings. ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value to us. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instruments. In evaluating our management of liquidity and other risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above. Note 6 — Inventories 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 and consist of the following as of the dates presented (in millions): November 30, 2022 August 31, 2022 Raw materials, supplies, and work in process (1) $ 272.3 $ 252.6 Finished goods 245.1 264.0 Inventories excluding reserves 517.4 516.6 Less: Reserves ( 30.4 ) ( 30.9 ) Total inventories $ 487.0 $ 485.7 _______________________________________ (1) Due to the immaterial amount of estimated work in process and the short lead times for the conversion of raw materials to finished goods, we do not believe the segregation of raw materials and work in process is meaningful information. 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. A significant change in customer demand or market conditions could render certain inventory obsolete and could have a material adverse impact on our operating results in the period the change occurs. Note 7 — Property, Plant, and Equipment Property, plant, and equipment consist of the following as of the dates presented (in millions): November 30, 2022 August 31, 2022 Land $ 22.2 $ 22.0 Buildings and leasehold improvements 202.8 202.3 Machinery and equipment 681.1 667.6 Total property, plant, and equipment, at cost 906.1 891.9 Less: Accumulated depreciation and amortization ( 626.5 ) ( 615.4 ) Property, plant, and equipment, net $ 279.6 $ 276.5 7 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 8 — Goodwill and Intangible Assets Through multiple acquisitions, we acquired definite-lived intangible assets consisting primarily of customer relationships, patented technology, distribution networks, and trademarks and trade names associated with specific products, which are amortized over their estimated useful lives. Indefinite-lived intangible assets consist of trade names that are expected to generate cash flows indefinitely. We recorded amortization expense for definite-lived intangible assets of $ 13.6 million and $ 10.3 million during the three months ended November 30, 2022 and 2021, respectively. Amortization expense is generally recorded on a straight-line basis and is expected to be approximately $ 41.5 million in fiscal 2023, $ 36.9 million in fiscal 2024, $ 29.4 million in fiscal 2025, $ 26.7 million in fiscal 2026, and $ 25.2 million in fiscal 2027. The following table summarizes the changes in the carrying amount of goodwill by segment during the periods presented (in millions): ABL ISG Total Balance as of August 31, 2022 $ 1,014.2 $ 70.1 $ 1,084.3 Derecognitions for divestitures ( 0.7 ) — ( 0.7 ) Foreign currency translation adjustments ( 0.4 ) ( 1.2 ) ( 1.6 ) Balance as of November 30, 2022 $ 1,013.1 $ 68.9 $ 1,082.0 ABL ISG Total Balance as of August 31, 2021 $ 1,022.2 $ 72.5 $ 1,094.7 Foreign currency translation adjustments ( 3.0 ) ( 0.7 ) ( 3.7 ) Balance as of November 30, 2021 $ 1,019.2 $ 71.8 $ 1,091.0 Further discussion of goodwill and other intangible assets is included within the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements within our Form 10-K. Note 9 — Other Current Liabilities Other current liabilities consist of the following as of the dates presented (in millions): November 30, 2022 August 31, 2022 Customer incentive programs (1) $ 49.1 $ 40.7 Refunds to customers (1) 26.6 28.0 Current deferred revenues (1) 11.6 11.4 Sales commissions 30.4 41.9 Freight costs 12.9 22.8 Warranty and recall costs (2) 18.1 22.4 Tax-related items (3) 7.7 13.9 Interest on long-term debt (4) 5.0 2.3 Other 36.7 30.7 Total other current liabilities $ 198.1 $ 214.1 ____________________________________ (1) Refer to the Revenue Recognition footnote of the Notes to Consolidated Financial Statements within our Form 10-K for additional information. (2) Refer to the Commitments and Contingencies footnote of the Notes to Consolidated Financial Statements for additional information. (3) Includes accruals for income, sales and use, and value added taxes. (4) Refer to the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for additional information. 8 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 10 — Debt and Lines of Credit Long-term Debt On November 10, 2020, Acuity Brands Lighting, Inc. issued $ 500.0 million aggregate principal amount of 2.150 % senior unsecured notes due December 15, 2030 (the “Unsecured Notes”). The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Acuity Brands, Inc. and ABL IP Holding LLC, a wholly-owned subsidiary of Acuity Brands, Inc. The Unsecured Notes bear interest at a rate of 2.150 % per annum and were issued at a price equal to 99.737 % of their face value. Interest on the Unsecured Notes is paid semi-annually in arrears on June 15 and December 15 of each year. The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Acuity Brands, Inc. and ABL IP Holding LLC, a wholly-owned subsidiary of Acuity Brands, Inc. Additionally, we recorded $ 4.8 million of deferred issuance costs related to the Unsecured Notes as a direct deduction from the face amount of the Unsecured Notes. These issuance costs are amortized over the 10-year term of the Unsecured Notes. Lines of Credit On June 30, 2022, we entered into a credit agreement (the “Credit Agreement”) with a syndicate of banks that provides us with a $ 600.0 million five-year unsecured revolving credit facility (the “Revolving Credit Facility”) with the ability to request an additional $ 400.0 million of borrowing capacity. We had no short-term borrowings at November 30, 2022 and $ 18.0 million in short-term borrowings at August 31, 2022 outstanding under the Revolving Credit Facility. The Revolving Credit Facility uses the Secured Overnight Financing Rate (“SOFR”) as the applicable benchmark for U.S. Dollar borrowings and an applicable benchmark rate for non-U.S. Dollar borrowings as defined in the Credit Agreement. The applicable margin pricing grid mechanics are based on the better of our public credit ratings or our net leverage ratio and range from 0.80 % to 1.20 % for base rate borrowings and from 0.00 % to 0.20 % for floating rate advances. We are also required to pay certain fees in connection with the Credit Agreement, including administrative service fees and annual facility fees, which range from 0.075 % to 0.175 % of the aggregate $ 600.0 million remaining commitment of the lenders under the Credit Agreement. The Credit Agreement contains a leverage ratio covenant (“Maximum Leverage Ratio”) of total indebtedness to earnings before interest, tax, depreciation, and amortization (“EBITDA”), as such terms are defined in the Credit Agreement. These ratios are computed at the end of each fiscal quarter for the most recent 12-month period. The Credit Agreement generally allows for a Maximum Leverage Ratio of 3.75 (subject to a temporary increase to 4.25 in the event of a significant acquisition) and allows netting of all unrestricted cash and cash equivalents against debt. We were in compliance with all financial covenants under the Credit Agreement as of November 30, 2022. At November 30, 2022, we had additional borrowing capacity under the Credit Agreement of $ 595.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility less outstanding letters of credit of $ 4.1 million issued under the Revolving Credit Facility, primarily for securing collateral requirements under our casualty insurance programs. Borrowings and repayments on our Revolving Credit Facility with terms of three months or less are reported on a net basis on our Consolidated Statements of Cash Flows . Interest Expense, net Interest expense, net , is comprised primarily of interest expense on long-term debt, line of credit borrowings, and loans that are secured by and presented net of company-owned life insurance policies on our Consolidated Balance Sheets . Interest expense is partially offset by interest income earned on cash and cash equivalents. 9 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table summarizes the components of interest expense, net for the periods presented (in millions): Three Months Ended November 30, 2022 November 30, 2021 Interest expense $ 7.9 $ 6.2 Interest income ( 1.3 ) ( 0.3 ) Interest expense, net $ 6.6 $ 5.9 Note 11 — Commitments and Contingencies In the normal course of business, we are subject to the effects of certain contractual stipulations, events, transactions, and laws and regulations that may, at times, require the recognition of liabilities, such as those related to self-insurance estimated liabilities and claims, legal and contractual issues, environmental laws and regulations, guarantees, and indemnities. We establish estimated liabilities when the associated costs related to uncertainties or guarantees become probable and can be reasonably estimated. For the period ended November 30, 2022, no material changes have occurred in our estimated liabilities for self-insurance, litigation, environmental matters, guarantees and indemnities, or relevant events and circumstances, from those disclosed in the Commitments and Contingencies footnote of the Notes to Consolidated Financial Statements within our Form 10-K other than the items discussed below. Product Warranty and Recall Costs Our products generally have a standard warranty term of five years that assures our products comply with agreed upon specifications. We record an accrual for the estimated amount of future warranty costs when the related revenue is recognized. Estimated future warranty and recall costs are primarily based on historical experience of identified warranty and recall 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 and included within Other current assets or Other long-term assets on the Consolidated Balance Sheets based on the expected timing of receipt of recovery. There can be no assurance that future warranty or recall costs will not exceed historical amounts or that new technology products may not generate unexpected costs. If actual future warranty or recall costs exceed historical amounts, additional increases in the accrual may be required, which could have a material adverse impact on our results of operations and cash flows. Estimated liabilities for product warranty and recall costs are included in Other accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets based upon when we expect to settle the incurred warranty. The following table summarizes changes in the estimated liabilities for product warranty and recall costs during the periods presented (in millions): Three Months Ended November 30, 2022 November 30, 2021 Beginning balance $ 27.3 $ 20.3 Warranty and recall costs 3.7 4.4 Payments and other deductions ( 8.6 ) ( 4.5 ) Ending balance $ 22.4 $ 20.2 Shareholder Derivative Complaint As previously disclosed, on October 1, 2021, certain alleged shareholders of the Company filed a putative derivative complaint in the United States District Court for the Northern District of Georgia asserting claims against three former executives for breach of fiduciary duty and certain other claims (the “Derivative Complaint”). The Company is named as a nominal defendant, and the plaintiffs seek on behalf of the Company unspecified damages from the 10 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) individual defendants and other relief. Prior to filing the Derivative Complaint, the derivative plaintiffs sent letters to the Company’s Board of Directors (the “Board”) demanding that the Company investigate and pursue substantially the same claims against the individual defendants that are asserted in the Derivative Complaint. The Company’s Board formed a demand evaluation committee consisting of independent directors to investigate these matters and make a recommendation to the Board regarding the best interests of the Company in connection therewith. On December 14, 2021, the Company filed a motion to stay the derivative action pending the conclusion of the related securities class action or, in the alternative, to dismiss the derivative action without prejudice as premature, given the demand evaluation committee’s ongoing work. Also on December 14, 2021, the individual defendants filed a motion to dismiss the Derivative Complaint for failure to adequately plead any claim for relief against them. On August 3, 2022, the Court entered a stipulated consent order extending the deadline for the individual defendants and the Company to answer, move against, or otherwise respond to the Derivative Complaint until thirty days after the filing of an amended complaint or the designation of an operative complaint. Subsequently, the demand evaluation committee completed its investigation and recommended that the Board reject the demands and direct the Company to seek dismissal of the Derivative Complaint. The Board approved and adopted the recommendation from the committee and rejected the demands and directed the Company to seek dismissal of the Derivative Complaint. The parties advised the Court of the Board’s decision during the status conference held on October 6, 2022. The Court directed the parties to submit a written status report within forty-five days as to the litigation. The parties subsequently negotiated a Stipulated Confidentially Agreement, which was filed with the Court on October 31, 2022. Pursuant to the Stipulated Confidentiality Agreement and Order, the Company produced the demand evaluation committee report and recommendation regarding the claims asserted in the Derivative Complaint, along with exhibits, to the plaintiffs for review. On December 21, 2022, the parties filed a joint status report notifying the Court that the plaintiffs had completed their review of the demand evaluation committee report and that the parties expect to update the Court by January 20, 2023 regarding the next steps in the litigation. Data Security Incidents On December 14, 2022, a former employee filed a putative class action complaint against the Company in the United States District Court for the Northern District of Georgia on behalf of all persons whose personal information was compromised as a result of data security incidents we experienced in October 2020 and/or December 2021. The plaintiff alleges that the Company failed to exercise reasonable caution in securing and safeguarding her and the other putative class members’ personal information, and on that basis, asserts claims for negligence, breach of contract, breach of implied contract, unjust enrichment, and breach of fiduciary duty. The plaintiff seeks class certification, unspecified monetary damages, certain injunctive relief regarding our data-security measures, additional credit-monitoring services, other equitable relief (including disgorgement), attorneys’ fees, costs, and pre- and post-judgment interest. We dispute the allegations in the complaint and, given the recency of the lawsuit, are planning our response strategy, which we currently expect to include a vigorous defense of the claims. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the early stages of the proceedings where key evidential and legal issues have not been resolved. In addition, we have received inquiries from, and it is also possible that investigations or other actions are taken by, state and/or federal agencies regarding the data security incidents and related data privacy matters. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above. We have insurance, subject to certain terms and conditions, for these types of matters. Litigation We are subject to various other legal claims arising in the normal course of business, including patent infringement, employment matters, and product liability claims. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal proceedings will not have a material adverse effect on our financial condition, results of operations, or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of any such matters, if unfavorable, could have a material adverse effect on our financial condition, results of operations, or cash flows in future periods. We establish estimated liabilities for legal claims when associated costs become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher than the amounts accrued for such claims. 11 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) However, we cannot make a meaningful estimate of actual costs to be incurred that could possibly be higher or lower than the accrued amounts. Note 12 — Changes in Stockholders' Equity The following tables summarize changes in the components of stockholders' equity for the periods presented (in millions): Common Stock Outstanding Shares Amount Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock, at cost Total Balance, August 31, 2022 32.5 $ 0.5 $ 1,036.3 $ 3,176.2 $ ( 125.8 ) $ ( 2,175.4 ) $ 1,911.8 Net income — — — 74.9 — — 74.9 Other comprehensive loss — — — — ( 0.4 ) — ( 0.4 ) Share-based payment amortization, issuances, and cancellations 0.2 — ( 1.8 ) — — — ( 1.8 ) Employee stock purchase plan issuances — — 0.5 — — — 0.5 Cash dividends of $ 0.13 per share paid on common stock — — — ( 4.3 ) — — ( 4.3 ) Stock options exercised — — 0.4 — — — 0.4 Repurchases of common stock ( 0.5 ) — — — — ( 77.6 ) ( 77.6 ) Balance, November 30, 2022 32.2 $ 0.5 $ 1,035.4 $ 3,246.8 $ ( 126.2 ) $ ( 2,253.0 ) $ 1,903.5 Common Stock Outstanding Shares Amount Paid-in Capital Retained Earnings Accumulated Other Comprehensive Loss Treasury Stock, at cost Total Balance, August 31, 2021 35.2 $ 0.5 $ 995.6 $ 2,810.3 $ ( 98.2 ) $ ( 1,663.7 ) $ 2,044.5 Net income — — — 87.6 — — 87.6 Other comprehensive loss — — — — ( 10.7 ) — ( 10.7 ) Share-based payment amortization, issuances, and cancellations 0.1 — 0.4 — — — 0.4 Employee stock purchase plan issuances — — 0.6 — — — 0.6 Cash dividends of $ 0.13 per share paid on common stock — — — ( 4.7 ) — — ( 4.7 ) Stock options exercised 0.1 — 8.0 — — — 8.0 Repurchases of common stock ( 0.3 ) — — — — ( 52.8 ) ( 52.8 ) Balance, November 30, 2021 35.1 $ 0.5 $ 1,004.6 $ 2,893.2 $ ( 108.9 ) $ ( 1,716.5 ) $ 2,072.9 Note 13 — Revenue Recognition We recognize revenue when we transfer control of goods and services to our customers. Revenue is measured as the amount of consideration we expect to receive in exchange for goods and services and is recognized net of allowances for rebates, sales incentives, product returns, and discounts to customers. We allocate the expected consideration to be collected to each distinct performance obligation identified in a sale based on its standalone selling price. Sales and use taxes collected on behalf of governmental authorities are excluded from revenues. Further details regarding revenue recognition are included within the Revenue Recognition footnote of the Notes to Consolidated Financial Statements within our Form 10-K. Contract Balances Our rights related to collections from customers are unconditional and are reflected within Accounts receivable on the Consolidated Balance Sheets at net realizable value. Further details regarding our method for developing our estimate of expected credit losses over the contractual term of our receivables are included within the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements within our Form 10-K. We do not have any other significant contract assets. Contract liabilities arise when we receive cash or an unconditional right to collect cash prior to the transfer of control of goods or services. 12 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The amount of transaction price from contracts with customers allocated to our contract liabilities consists of the following as of the periods presented (in millions): November 30, 2022 August 31, 2022 Current deferred revenues $ 11.6 $ 11.4 Non-current deferred revenues 52.1 53.1 Current deferred revenues primarily consist of software licenses as well as professional service and service-type warranty fees collected prior to performing the related service and are included within Other current liabilities on the Consolidated Balance Sheets . These services are expected to be performed within one year. Revenue recognized from beginning balances of contract liabilities during the three months ended November 30, 2022 totaled $ 3.9 million. Non-current deferred revenues primarily consist of long-term service-type warranties, which are typically recognized ratably as revenue between five and ten years from the date of sale, and are included within Other long-term liabilities on the Consolidated Balance Sheets. Unsatisfied performance obligations that do not represent contract liabilities are generally expected to be satisfied within one year from November 30, 2022 and consist primarily of orders for physical goods that have not yet been shipped. Disaggregated Revenues Our ABL segment's lighting and lighting controls are sold primarily through independent sales agents who cover specific geographic areas and market channels, by internal sales representatives, through consumer retail channels, directly to large corporate accounts, and through other distribution methods, including directly to OEM customers. ISG sells predominantly to system integrators. The following table shows revenue from contracts with customers by sales channel and reconciles to our segment information for the periods presented (in millions): Three Months Ended November 30, 2022 November 30, 2021 ABL: Independent sales network $ 673.7 $ 636.8 Direct sales network 106.4 90.0 Retail sales 49.9 46.9 Corporate accounts 49.1 37.0 OEM and other 68.0 72.9 Total ABL 947.1 883.6 ISG 56.8 46.4 Eliminations ( 6.0 ) ( 3.9 ) Total $ 997.9 $ 926.1 Note 14 — Share-based Payments We account for share-based payments through the measurement and recognition of compensation expense for share-based payment awards made to employees and directors over the related requisite service period, including stock options, performance stock units, and restricted stock (all part of our equity incentive plan), as well as stock units representing certain deferrals into our director deferred compensation plan or our supplemental deferred savings plan. 13 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table presents share-based payment expense for the periods presented (in millions): Three Months Ended November 30, 2022 November 30, 2021 Share-based payment expense $ 10.7 $ 7.6 We recognized excess tax benefits of $ 1.3 million and $ 4.2 million related to share-based payment awards during the three months ended November 30, 2022 and 2021, respectively. Further details regarding our share-based payments are included within the Share-based Payments footnote of the Notes to Consolidated Financial Statements within our Form 10-K. Note 15 — Pension Plans We have several pension plans, both qualified and non-qualified, covering certain hourly and salaried employees. Benefits paid under these plans are based generally on employees’ years of service and/or compensation during the final years of employment. We make at least the minimum annual contributions to the plans to the extent indicated by actuarial valuations and statutory requirements. Plan assets are invested primarily in fixed income and equity securities. Service cost of net periodic pension cost is allocated between Cost of products sold and Selling, distribution, and administrative expenses in the Consolidated Statements of Comprehensive Income based on the nature of the employee's services. All other components of net periodic pension cost are included within Miscellaneous expense, net in the Consolidated Statements of Comprehensive Income . Net periodic pension cost included the following components before tax for the periods presented (in millions): Three Months Ended November 30, 2022 November 30, 2021 Service cost $ 1.1 $ 1.2 Interest cost 2.2 1.5 Expected return on plan assets ( 2.4 ) ( 3.4 ) Amortization of prior service cost 0.7 0.7 Recognized actuarial loss 0.8 0.9 Net periodic pension cost $ 2.4 $ 0.9 Further details regarding our pension plans are included within the Pension and Defined Contribution Plans footnote of the Notes to Consolidated Financial Statements within our Form 10-K. Note 16 — Special Charges During the first three months of fiscal 2023, we recognized pre-tax special charges of $ 6.9 million within Special charges on the Consolidated Statements of Comprehensive Income primarily for impairments of operating lease right-of-use assets for $ 4.3 million associated with our previously owned Sunoptics prismatic skylights business that were not transferred in connection with the sale. We additionally recognized associate severance and other costs totaling $ 2.6 million primarily in connection with the Sunoptics divestiture. 14 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) Note 17 — Earnings Per Share Basic earnings per share is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding. Diluted earnings per share is computed similarly but reflects the potential dilution that would occur if dilutive options were exercised, all unvested share-based payment awards were vested, and other distributions related to deferred stock agreements were incurred. Common stock equivalents are calculated using the treasury stock method. The dilutive effects of share-based payment awards subject to market and/or performance conditions that were not met during the period are excluded from the computation of diluted earnings per share. The following table calculates basic earnings per common share and diluted earnings per common share for the periods presented (in millions, except per share data): Three Months Ended November 30, 2022 November 30, 2021 Net income $ 74.9 $ 87.6 Basic weighted average shares outstanding 32.308 35.063 Common stock equivalents 0.396 0.476 Diluted weighted average shares outstanding 32.704 35.539 Basic earnings per share (1) $ 2.32 $ 2.50 Diluted earnings per share (1) $ 2.29 $ 2.46 _______________________________________ (1) Earnings per share is calculated using unrounded numbers. Amounts in the table may not recalculate exactly due to rounding. The following table presents stock options, performance stock awards, and restricted stock awards that were excluded from the diluted earnings per share calculation for the periods presented as the effect of inclusion would have been antidilutive (in millions): Three Months Ended November 30, 2022 November 30, 2021 Stock options 0.1 0.1 Performance stock awards — * — * Restricted stock awards 0.1 — * _______________________________________ * Represents shares of less than 0.1 million. Further discussion of our share-based payment awards is included within the Common Stock and Related Matters and Share-based Payments footnotes of the Notes to Consolidated Financial Statements within our Form 10-K. Note 18 — Comprehensive Income Comprehensive income represents a measure of all changes in equity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. Comprehensive income includes our net income as well as other comprehensive income (loss) items, which are comprised of foreign currency translation and pension adjustments. 15 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table presents the changes in each component of accumulated other comprehensive loss net of tax during the periods presented (in millions): Foreign Currency Items Defined Benefit Pension Plans Accumulated Other Comprehensive Loss Items Balance at August 31, 2022 $ ( 73.5 ) $ ( 52.3 ) $ ( 125.8 ) Other comprehensive loss before reclassifications ( 1.5 ) — ( 1.5 ) Amounts reclassified from accumulated other comprehensive loss (1) — 1.1 1.1 Net current period other comprehensive (loss) income ( 1.5 ) 1.1 ( 0.4 ) Balance at November 30, 2022 $ ( 75.0 ) $ ( 51.2 ) $ ( 126.2 ) Foreign Currency Items Defined Benefit Pension Plans Accumulated Other Comprehensive Loss Items Balance at August 31, 2021 $ ( 40.2 ) $ ( 58.0 ) $ ( 98.2 ) Other comprehensive loss before reclassifications ( 11.9 ) — ( 11.9 ) Amounts reclassified from accumulated other comprehensive loss (1) — 1.2 1.2 Net current period other comprehensive (loss) income ( 11.9 ) 1.2 ( 10.7 ) Balance at November 30, 2021 $ ( 52.1 ) $ ( 56.8 ) $ ( 108.9 ) _______________________________________ (1) The before tax amounts of the defined benefit pension plan items are included in net periodic pension cost. See the Pension and Defined Contribution Plans footnote for additional details. The following table summarizes the tax expense or benefit allocated to each component of other comprehensive income (loss) for the periods presented (in millions): Three Months Ended November 30, 2022 November 30, 2021 Before Tax Amount Tax (Expense) Benefit Net of Tax Amount Before Tax Amount Tax (Expense) Benefit Net of Tax Amount Foreign currency translation adjustments $ ( 1.5 ) $ — $ ( 1.5 ) $ ( 11.9 ) $ — $ ( 11.9 ) Defined benefit pension plans: Amortization of defined benefit pension items: Prior service cost 0.7 ( 0.2 ) 0.5 0.7 ( 0.2 ) 0.5 Actuarial losses 0.8 ( 0.2 ) 0.6 0.9 ( 0.2 ) 0.7 Total defined benefit pension plans, net 1.5 ( 0.4 ) 1.1 1.6 ( 0.4 ) 1.2 Other comprehensive loss $ — $ ( 0.4 ) $ ( 0.4 ) $ ( 10.3 ) $ ( 0.4 ) $ ( 10.7 ) Note 19 — Segment Information We report our financial results of operations in two reportable segments, ABL and ISG, consistent with how our chief operating decision maker currently evaluates operating results, assesses performance, and allocates resources within the Company. The accounting policies of our reportable segments are the same as those described in the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements within our Form 10-K. Corporate expenses that are primarily administrative in function and benefit the Company on an entity-wide basis are not allocated to our segments. These include expenses related to governance, policy setting, compliance, and certain other shared services functions. Beginning in fiscal 2023, we now allocate special charges to operating segment information presented to the chief operating decision maker on a prospective basis. Special charges during the three months ended November 30, 2022 of $ 6.9 million pertained to the ABL segment. We recorded no special charges during fiscal 2022. 16 Table of Contents ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) The following table presents financial information by operating segment for the periods presented (in millions): ABL ISG Corporate Eliminations (1) Total Three Months Ended November 30, 2022 Net sales $ 947.1 $ 56.8 $ — $ ( 6.0 ) $ 997.9 Operating profit (loss) 118.1 7.7 ( 16.9 ) — 108.9 Depreciation and amortization 22.7 3.5 0.3 — 26.5 Three Months Ended November 30, 2021 Net sales $ 883.6 $ 46.4 $ — $ ( 3.9 ) $ 926.1 Operating profit (loss) 128.1 2.0 ( 15.0 ) — 115.1 Depreciation and amortization 20.4 3.6 0.3 — 24.3 ____________________________ (1) This column represents intersegment sales. Profit on these sales eliminates within gross profit on a consolidated basis. The following table reconciles operating profit by segment to income before income taxes (in millions): Three Months Ended November 30, 2022 November 30, 2021 Operating profit - ABL $ 118.1 $ 128.1 Operating profit - ISG 7.7 2.0 Unallocated corporate amounts ( 16.9 ) ( 15.0 ) Operating profit 108.9 115.1 Interest expense, net 6.6 5.9 Miscellaneous expense, net 9.1 0.3 Income before income taxes $ 93.2 $ 108.9 17 Table of Contents