What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-04-04 compared with 2023-01-09 · 141 added, 83 removed, 98 unchanged (70% of the section changed)

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

(referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries as of November 30, 2022 and for the three months ended November 30, 2022 and 2021.

(referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries as of February 28, 2023 and for the three and six months ended February 28, 2023 and 2022.

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

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

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 fiscal 2023;

the impact of inflation;

Several factors may impact our financial condition, results of operations, and cash flows for the remainder of fiscal 2023 and future fiscal periods, including continued uncertainty of general economic conditions that may impact our key end markets;

the impact of future inflation or disruptions in financial and banking markets;

component shortages;

disruptions in the global supply chain;

global pandemics;

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.

As such, our financial performance for the three and six months ended February 28, 2023 is not necessarily indicative of the results to be expected for the remainder of fiscal 2023 and future periods.

The COVID-19 pandemic has resulted in intermittent worldwide government restrictions on the movement of people, goods, and services resulting in increased volatility in and disruptions to global markets and has had an adverse impact on our results of operations.

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

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.

Although we have implemented significant measures to mitigate further spread of the virus, our associates, 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.

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.

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

Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to meet our capital allocation priorities, which are to invest in our current business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases.

Our ability to generate sufficient cash flows 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.

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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.

Additionally, we believe that our cash flows from operations and sources of funding, including, but not limited to, future borrowings and borrowing capacity, will sufficiently support our long-term liquidity needs.

Additionally, we believe that our cash flows from operations

and sources of funding, including, but not limited to, future borrowings and borrowing capacity, will sufficiently support our long-term liquidity needs.

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

Our cash position at November 30, 2022 was $284.1 million, an increase of $60.9 million from August 31, 2022.

Our cash position at February 28, 2023 was $339.0 million, an increase of $115.8 million from August 31, 2022.

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 $186.6 million of cash flows from operating activities during the three months ended November 30,

2022, compared with $83.7 million in the prior-year period, an increase of $102.9 million.

This increase was due primarily to increased cash collections from customers and fewer inventory purchases during the current period as well as the timing of quarterly income tax payments.

We generated $306.4 million of cash flows from operating activities during the six months ended February 28, 2023, compared with $127.3 million in the prior-year period, an increase of $179.1 million.

This increase was due primarily to increased cash collections from customers and fewer inventory purchases during the current period, partially offset by the timing of payments for purchases on account.

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.

We paid half of these deferrals in December 2021 and the other half in December 2022.

Financing Arrangements

See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of our various financing arrangements, including the $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 (“Revolving Credit Facility”).

At November 30, 2022, our outstanding debt balance was $495.1 million, which consisted solely of our Unsecured Notes, compared to our cash position of $284.1 million.

We were in compliance with all financial covenants under our financing arrangements as of November 30, 2022.

At November 30, 2022, we had additional borrowing capacity under the Revolving Credit Facility 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 facility.

As of November 30, 2022, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled $880.0 million.

See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of the terms 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 (“Revolving Credit Facility”).

At February 28, 2023, our outstanding debt balance was $495.3 million, which consisted solely of our Unsecured Notes, compared to our cash position of $339.0 million.

We were in compliance with all covenants under our financing arrangements as of February 28, 2023.

At February 28, 2023, we had additional borrowing capacity under the Revolving Credit Facility of $596.2 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 $3.8 million issued under the facility.

As of February 28, 2023, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled $935.2 million.

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

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

Summarized Balance Sheet Information November 30, 2022 August 31, 2022

Summarized Balance Sheet Information February 28, 2023 August 31, 2022

Current assets $ 929.6 $ 1,056.6

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Non-current liabilities 819.5 821.0

Summarized Income Statement Information Three Months Ended November 30, 2022

Summarized Income Statement Information Six Months Ended February 28, 2023

Net sales $ 1,633.3

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Investments in Current Business for Growth

We invested $18.2 million and $9.3 million in property, plant, and equipment during the three months ended November 30, 2022 and 2021, respectively.

We invested more in fiscal 2023 primarily for investments in new and enhanced equipment and tooling.

We invested $35.6 million and $24.1 million in property, plant, and equipment during the six months ended February 28, 2023 and 2022, respectively.

We invested more in fiscal 2023 primarily for investments in new and enhanced information technology, equipment, and tooling.

Strategic Acquisitions, Investments, and Divestitures

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

There were no acquisitions during the first three months of fiscal 2023 or fiscal 2022.

During the three months ended November 30, 2022, we committed to a plan to sell our Sunoptics prismatic skylights business, which we completed on November 10, 2022.

We recognized a loss of $11.2 million on the sale of the business.

There were no acquisitions during the first half of fiscal 2023 or fiscal 2022.

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

We sold our Sunoptics prismatic skylights business in November 2022.

We recognized a pre-tax loss of $11.2 million on the sale of this business.

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

We paid dividends on our common stock of $4.3 million ($0.13 per share) and $4.7 million ($0.13 per share) during the three months ended November 30, 2022 and 2021, respectively.

We paid dividends on our common stock of $8.5 million ($0.26 per share) and $9.3 million ($0.26 per share) during the six months ended February 28, 2023 and 2022, respectively.

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

Share Repurchases

During the first three months of fiscal 2023, we repurchased 0.5 million shares of our outstanding common stock for $77.6 million.

Total cash outflows for share repurchases during the three months ended November 30, 2022 were $76.5 million.

During the first six months of fiscal 2023, we repurchased 0.7 million shares of our outstanding common stock for $124.1 million.

Total cash outflows for share repurchases during the six months ended February 28, 2023 were $121.7 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 November 30, 2022, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 2.4 million shares.

The COVID-19 Pandemic

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 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 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.

We have taken actions to reduce costs, including the realignment of headcount with volumes, a limit on all non-essential employee travel, other efforts to decrease discretionary spending, and reductions in our real estate footprint.

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.

We paid half of these deferrals in December 2021 and the other half 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.

As the COVID-19 pandemic is continually evolving, we are uncertain of its ultimate duration and impact.

See Part I, Item 1a.

Risk Factors of our Form 10-K for further details regarding the potential impacts of COVID-19 to our results of operations, financial position, and cash flows.

As of February 28, 2023, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 2.1 million shares.

Results of Operations

First Quarter of Fiscal 2023 Compared with First Quarter of Fiscal 2022

The following table sets forth information comparing the components of net income for the three months ended November 30, 2022 and 2021 (in millions except per share data):

Second Quarter of Fiscal 2023 Compared with Second Quarter of Fiscal 2022

The following table sets forth information comparing the components of net income for the three months ended February 28, 2023 and 2022 (in millions except per share data):

Three Months Ended

November 30, 2022 November 30, 2021 Increase (Decrease) Percent Change

February 28, 2023 February 28, 2022 Increase (Decrease) Percent Change

Net sales $ 943.6 $ 909.1 $ 34.5 3.8 %

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Selling, distribution, and administrative expenses 295.2 277.0 18.2 6.6 %

Special charges 6.9 — 6.9 NM

Operating profit 111.5 102.3 9.2 9.0 %

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Interest expense, net 5.7 6.0 (0.3) (5.0) %

Miscellaneous expense, net 9.1 0.3 8.8 NM

Miscellaneous income, net (3.7) (1.9) (1.8) NM

Total other expense 2.0 4.1 (2.1) (51.2) %

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Net sales for the three months ended November 30, 2022 increased $71.8 million, or 7.8%, to $997.9 million, compared with $926.1 million in the prior-year period.

Both our ABL and ISG segments benefited from recent price increases as well as favorable mix.

Changes in foreign currency rates and the divestiture from our Sunoptics prismatic skylight business did not have a meaningful impact on net sales for the first quarter of fiscal 2023.

Gross profit for the first quarter of fiscal 2023 increased $30.7 million, or 8.0%, to $416.5 million, compared with $385.8 million in the prior-year period, while gross profit margin remained flat at 41.7% compared with the prior-year period.

Our gross profit margin remained flat with the prior year as we were able to offset material, labor, and other cost escalations with price and favorable mix.

Net sales for the three months ended February 28, 2023 increased $34.5 million, or 3.8%, to $943.6 million, compared with $909.1 million in the prior-year period.

Both our ABL and ISG segments benefited from recent price increases.

Changes in foreign currency rates and the divestiture from our Sunoptics prismatic skylight business did not have a meaningful impact on net sales for the second quarter of fiscal 2023.

Gross profit for the second quarter of fiscal 2023 increased $27.4 million, or 7.2%, to $406.7 million, compared with $379.3 million in the prior-year period, and gross profit margin increased 140 basis points to 43.1% from 41.7% compared with the prior-year period.

Our gross profit increased compared with the prior year as price increases more than offset material, labor, and other cost escalations.

Operating Profit

Selling, distribution, and administrative expenses ("SD&A") expenses for the three months ended November 30, 2022 were $300.7 million, compared with $270.7 million in the prior-year period, an increase of $30.0 million, or 11.1%.

The increase in SD&A expenses was due primarily to higher commissions and freight costs associated with higher sales.

Amortization expense of definite-lived intangibles increased in fiscal 2023 as we recorded $4.0 million of accelerated amortization for intangibles associated with certain brands that were discontinued.

We recognized special charges of $6.9 million during the first quarter of fiscal 2023.

Please refer to the Special Charges footnote of the Note to Consolidated Financial Statements for further details.

Operating profit for the first quarter of fiscal 2023 was $108.9 million (10.9% of net sales), compared with $115.1 million (12.4% of net sales) for the prior-year period, a decrease of $6.2 million, or 5.4%.

The operating profit margin

decrease of 150 bps year over year was due primarily to higher special charges, commission rates, and amortization expense.

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.

Interest expense, net, was $6.6 million and $5.9 million for the three months ended November 30, 2022 and 2021, respectively.

We reported net miscellaneous expense of $9.1 million and $0.3 million for the three months ended November 30, 2022 and 2021, respectively.

The year-over-year change in net miscellaneous expense was largely due to the $11.2 million loss of the sale of the Sunoptics prismatic skylights business, the details of which are described in the Acquisitions and Divestitures footnote of the Note to Consolidated Financial Statements.

This loss was partially offset by higher gains on foreign currency-related items compared to the prior year.

Selling, distribution, and administrative expenses ("SD&A") expenses for the three months ended February 28, 2023 were $295.2 million, compared with $277.0 million in the prior-year period, an increase of $18.2 million, or 6.6%.

The increase in SD&A expenses was due primarily to higher commissions associated with higher sales and higher associate-related costs.

Operating profit for the second quarter of fiscal 2023 was $111.5 million (11.8% of net sales), compared with $102.3 million (11.3% of net sales) for the prior-year period, an increase of $9.2 million, or 9.0%.

The increase in operating profit was due primarily to the increase in gross profit, partially offset by higher commissions and associate-related costs.

Interest Expense, net

Interest expense, net, was $5.7 million and $6.0 million for the second quarter of fiscal 2023 and 2022, respectively.

The decrease in net interest expense was due to changes in investing rates compared to the prior year, partially offset by changes in average short-term borrowings outstanding.

Miscellaneous Income, net

Miscellaneous income, net consists of non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses.

We reported net miscellaneous income of $3.7 million and $1.9 million for the second quarter of fiscal 2023 and 2022, respectively.

This year-over-year increase is due primarily to favorable foreign currency transaction gains, partially offset by an increase in net pension cost.

Income Taxes and Net Income

Our effective income tax rate was 19.6% for the three months ended November 30, 2022 and 2021 and reflects favorable discrete items recognized in both periods.

Net income for the three months ended November 30, 2022 decreased $12.7 million, or 14.5%, to $74.9 million, from $87.6 million reported for the prior-year period.

The decrease in net income resulted primarily from $22.1 million in combined losses and special charges recognized from the Sunoptics sale and other restructuring activities as well as accelerated amortization of intangible assets.

Diluted earnings per share for the three months ended November 30, 2022 decreased $0.17, or 6.9%, to $2.29 compared with diluted earnings per share of $2.46 for the prior-year period.

This decrease reflects lower net income, partially offset by lower outstanding diluted shares.

Our effective income tax rate was 24.0% and 23.3% for the second quarter of fiscal 2023 and 2022, respectively.

Net income for the second quarter of fiscal 2023 increased $7.9 million, or 10.5%, to $83.2 million, from $75.3 million reported for the prior-year period.

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

Diluted earnings per share for the three months ended February 28, 2023 increased $0.44, or 20.7%, to $2.57 compared with diluted earnings per share of $2.13 for the prior-year period.

This increase reflects higher net income and lower outstanding diluted shares.

Segment Results

The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the three months ended November 30, 2022 and 2021 (in millions).

The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the three months ended February 28, 2023 and 2022 (in millions):

Three Months Ended

November 30, 2022 November 30, 2021 Increase (Decrease) Percent Change

February 28, 2023 February 28, 2022 Increase (Decrease) Percent Change

Net sales $ 890.8 $ 863.1 $ 27.7 3.2 %

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Operating profit margin 10.8 % 2.4 % 840 bps

ABL net sales for the three months ended November 30, 2022 increased $63.5 million, or 7.2%, to $947.1 million, compared with $883.6 million in the prior-year period.

Sales within the ABL segment benefited from recent price increases as well as favorable mix year over year.

Operating profit for ABL was $118.1 million (12.5% of ABL net sales) for the three months ended November 30, 2022, compared with $128.1 million (14.5% of ABL net sales) in the prior-year period, a decrease of $10.0 million.

The decrease in operating profit was due primarily to the recognition of special charges of $6.9 million attributed to the segment in the current period, the acceleration of amortization for definite-lived intangibles related to brands that were discontinued, and increased commission rates.

ISG net sales for the three months ended November 30, 2022 increased $10.4 million, or 22.4%, to $56.8 million, compared with $46.4 million in the prior-year period, driven primarily by strong demand for building management controls, improved component availability, and price increases.

ISG operating profit was $7.7 million for the three

months ended November 30, 2022, compared with $2.0 million in the prior-year period, an increase of $5.7 million.

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

ABL net sales for the three months ended February 28, 2023 increased $27.7 million, or 3.2%, to $890.8 million, compared with $863.1 million in the prior-year period.

Sales within the ABL segment benefited from recent price increases.

Operating profit for ABL was $123.6 million (13.9% of ABL net sales) for the three months ended February 28, 2023, compared with $116.5 million (13.5% of ABL net sales) in the prior-year period, an increase of $7.1 million.

The increase in operating profit was due primarily to the fall through of increased profitability on higher sales, partially offset by higher commission rates and associate-related costs.

ISG net sales for the three months ended February 28, 2023 increased $8.2 million, or 16.4%, to $58.2 million, compared with $50.0 million in the prior-year period, driven primarily by price increases as well as increased demand for building management controls.

ISG operating profit was $6.3 million for the three months ended February 28, 2023, compared with $1.2 million in the prior-year period, an increase of $5.1 million.

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

First Six Months of Fiscal 2023 Compared with First Six Months of Fiscal 2022

The following table sets forth information comparing the components of net income for the six months ended February 28, 2023 and 2022 (in millions except per share data):

Six Months Ended

February 28, 2023 February 28, 2022 Increase (Decrease) Percent Change

Net sales $ 1,941.5 $ 1,835.2 $ 106.3 5.8 %

Cost of products sold 1,118.3 1,070.1 48.2 4.5 %

Gross profit 823.2 765.1 58.1 7.6 %

Percent of net sales 42.4 % 41.7 % 70 bps

Selling, distribution, and administrative expenses 595.9 547.7 48.2 8.8 %

Special charges 6.9 — 6.9 NM

Operating profit 220.4 217.4 3.0 1.4 %

Percent of net sales 11.4 % 11.8 % (40) bps

Other expense:

Interest expense, net 12.3 11.9 0.4 3.4 %

Miscellaneous expense (income), net 5.4 (1.6) 7.0 NM

Total other expense 17.7 10.3 7.4 71.8 %

Income before income taxes 202.7 207.1 (4.4) (2.1) %

Percent of net sales 10.4 % 11.3 % (90) bps

Income tax expense 44.6 44.2 0.4 0.9 %

Effective tax rate 22.0 % 21.3 %

Net income $ 158.1 $ 162.9 $ (4.8) (2.9) %

Diluted earnings per share $ 4.86 $ 4.60 $ 0.26 5.7 %

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Net sales for the six months ended February 28, 2023 increased $106.3 million, or 5.8%, to $1.94 billion compared with $1.84 billion in the prior-year period.

Both our ABL and ISG segments benefited from recent price increases.

Changes in foreign currency rates and the divestiture from our Sunoptics prismatic skylight business did not have a meaningful impact on net sales for the first six months of fiscal 2023.

Gross profit for the six months ended February 28, 2023 increased $58.1 million, or 7.6%, to $823.2 million compared with $765.1 million in the prior-year period.

Gross profit margin increased 70 basis points to 42.4% for the six months ended February 28, 2023 compared with 41.7% in the prior-year period.

Our gross profit increased compared with the prior year as price increases more than offset material, labor, and other cost escalations.

Operating Profit

SD&A expenses for the six months ended February 28, 2023 were $595.9 million compared with $547.7 million in the prior-year period, an increase of $48.2 million, or 8.8%.

The increase in SD&A expense was due primarily to higher commissions associated with higher sales as well as increased associate-related costs.

Additionally, in the first quarter of fiscal 2023 we recorded $4.0 million of accelerated amortization for intangibles associated with certain brands that were discontinued.

We also recognized special charges of $6.9 million during the first quarter of fiscal 2023.

Please refer to the Special Charges footnote of the Notes to Consolidated Financial Statements for further details.

Operating profit for the first six months of fiscal 2023 was $220.4 million (11.4% of net sales) compared with $217.4 million (11.8% of net sales) for the prior-year period, an increase of $3.0 million, or 1.4%.

The increase in operating profit was due primarily to higher gross profit associated with the increase in sales, partially offset by higher SD&A expenses, which includes the aforementioned acceleration of amortization and special charges in the first quarter of

The operating profit margin decrease of 40 bps year over year was due primarily to higher special charges, commission rates, and amortization expense.

Interest Expense, net

Interest expense, net, was $12.3 million and $11.9 million for the six months ended February 28, 2023 and 2022, respectively.

The increase in net interest expense was due to changes in average short-term borrowings outstanding, partially offset by increased investing rates compared to the prior year.

Miscellaneous Expense (Income), net

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

We reported net miscellaneous expense of $5.4 million for the six months ended February 28, 2023 and net miscellaneous income of $1.6 million for the six months ended February 28, 2022.

This year-over-year change was largely due to the $11.2 million loss of the sale of the Sunoptics prismatic skylights business during fiscal 2023 as well as higher net pension cost, partially offset by higher gains on foreign currency-related items compared to the prior year.

The details of the Sunoptics sale are described in the Acquisitions and Divestitures footnote of the Notes to Consolidated Financial Statements.

Income Taxes and Net Income

Our effective income tax rate was 22.0% and 21.3% for the six months ended February 28, 2023 and 2022, respectively.

Net income for the first six months of fiscal 2023 decreased $4.8 million, or 2.9%, to $158.1 million from $162.9 million reported for the prior-year period.

The decrease in net income resulted primarily from $22.1 million in combined pre-tax losses and special charges recognized from the Sunoptics sale and other restructuring activities as well as accelerated amortization of intangible assets during the first quarter of fiscal 2023.

Diluted earnings per share for the six months ended February 28, 2023 increased $0.26 to $4.86 compared with diluted earnings per share of $4.60 for the prior-year period.

This increase reflects lower outstanding diluted shares, partially offset by lower net income.

Segment Results

The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the six months ended February 28, 2023 and 2022 (in millions):

Six Months Ended

February 28, 2023 February 28, 2022 Increase (Decrease) Percent Change

Net sales $ 1,837.9 $ 1,746.7 $ 91.2 5.2 %

Operating profit 241.7 244.6 (2.9) (1.2) %

Operating profit margin 13.2 % 14.0 % (80) bps

Net sales $ 115.0 $ 96.4 $ 18.6 19.3 %

Operating profit 14.0 3.2 10.8 337.5 %

Operating profit margin 12.2 % 3.3 % 890 bps

ABL net sales for the six months ended February 28, 2023 increased 5.2% compared with the prior-year period.

Sales within the ABL segment benefited from recent price increases.

Operating profit for ABL was $241.7 million (13.2% of ABL net sales) for the six months ended February 28, 2023 compared to $244.6 million (14.0% of ABL net sales) in the prior-year period, a decrease of $2.9 million.

The decrease in operating profit was due primarily to the recognition of nonrecurring items in the first quarter of fiscal 2023, including special charges of $6.9 million and acceleration of amortization for definite-lived intangibles related to brands that were discontinued of $4.0 million, as well as increased commission rates.

These unfavorable impacts

were partially offset by profit realized on increased sales.

ISG net sales for the six months ended February 28, 2023 increased 19.3% compared with the prior-year period primarily driven by price increases as well as strong demand for building management controls.

ISG operating profit was $14.0 million for the six months ended February 28, 2023 compared with $3.2 million in the prior-year period, an increase of $10.8 million.

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

Critical Accounting Estimates

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 U.S.

generally accepted accounting principles (“U.S.

25 unchanged sentences

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis