ACUITY INC. (DE) 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Acuity Brands, Inc. (referred to herein as “we,” “our,” “us,” the “Company,” or similar references) and its subsidiaries as of February 28, 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. Also, please refer to Acuity Brands, Inc.'s Annual Report on Form 10-K for the fiscal year ended August 31, 2022, filed with the Securities and Exchange Commission (the “SEC”) on October 26, 2022 (“Form 10-K”). Overview Company We are 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. 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; seasonality; global pandemics; and the impact of any acquisitions and/or divestitures, among other reasons. 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. 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 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. Our significant contractual cash requirements primarily include principal and interest on our unsecured notes and borrowings under our credit agreement, payments for operating lease liabilities, and certain purchase obligations incurred in the ordinary course of business that are enforceable and legally binding. Our obligations related to these items are described further within Management’s Discussion and Analysis of Financial Condition and Results of Operations within our Annual Report filed on Form 10-K. 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 18 Table of Contents 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. Cash 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 $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 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. 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 following tables present summarized financial information for Acuity Brands, Inc., Acuity Brands Lighting, Inc., and ABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in non-guarantors as of the dates and during the period presented (in millions): Summarized Balance Sheet Information February 28, 2023 August 31, 2022 Current assets $ 929.6 $ 1,056.6 Amounts due from non-guarantor affiliates 311.2 280.2 Non-current assets 1,387.6 1,414.3 Current liabilities 487.8 620.4 Non-current liabilities 819.5 821.0 Summarized Income Statement Information Six Months Ended February 28, 2023 Net sales $ 1,633.3 Gross profit 676.6 Net income 132.7 Capital Allocation Priorities 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. 19 Table of Contents Investments in Current Business for Growth 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 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. Dividends 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 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 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. 20 Table of Contents Results of Operations 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 February 28, 2023 February 28, 2022 Increase (Decrease) Percent Change Net sales $ 943.6 $ 909.1 $ 34.5 3.8 % Cost of products sold 536.9 529.8 7.1 1.3 % Gross profit 406.7 379.3 27.4 7.2 % Percent of net sales 43.1 % 41.7 % 140 bps Selling, distribution, and administrative expenses 295.2 277.0 18.2 6.6 % Operating profit 111.5 102.3 9.2 9.0 % Percent of net sales 11.8 % 11.3 % 50 bps Other expense: Interest expense, net 5.7 6.0 (0.3) (5.0) % Miscellaneous income, net (3.7) (1.9) (1.8) NM Total other expense 2.0 4.1 (2.1) (51.2) % Income before income taxes 109.5 98.2 11.3 11.5 % Percent of net sales 11.6 % 10.8 % 80 bps Income tax expense 26.3 22.9 3.4 14.8 % Effective tax rate 24.0 % 23.3 % Net income $ 83.2 $ 75.3 $ 7.9 10.5 % Diluted earnings per share $ 2.57 $ 2.13 $ 0.44 20.7 % NM - not meaningful Net Sales 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 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 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. 21 Table of Contents 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 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 February 28, 2023 and 2022 (in millions): Three Months Ended February 28, 2023 February 28, 2022 Increase (Decrease) Percent Change ABL: Net sales $ 890.8 $ 863.1 $ 27.7 3.2 % Operating profit 123.6 116.5 7.1 6.1 % Operating profit margin 13.9 % 13.5 % 40 bps ISG: Net sales $ 58.2 $ 50.0 $ 8.2 16.4 % Operating profit 6.3 1.2 5.1 425.0 % Operating profit margin 10.8 % 2.4 % 840 bps 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. 22 Table of Contents 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 % NM - not meaningful Net Sales 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 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 23 Table of Contents fiscal 2023. 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 ABL: 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 ISG: 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 24 Table of Contents 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 with U.S. generally accepted accounting principles (“U.S. GAAP”). 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. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition; inventory valuation; goodwill and indefinite-lived intangible assets; share-based payment expense; and product warranty and recall costs. We base our estimates and judgments on our substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We discuss the development of critical accounting estimates with the Audit Committee of the Board of Directors on a recurring basis. There have been no material changes in our critical accounting estimates during the current period. For a detailed discussion of other significant accounting policies that may involve a higher degree of judgment, refer to our Form 10-K. Cautionary Statement Regarding Forward-Looking Statements and Information This filing contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 (the “Act”). Forward-looking statements use words such as “expect,” “believe,” “intend,” “anticipate,” “indicative,” “projection,” “predict,” “plan,” “may,” “could,” “should,” “would,” “potential,” and words of similar meaning, as well as other words or expressions referencing future events, conditions, or circumstances. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Act. Statements that describe or relate to the Company’s plans, goals, intentions, strategies, or financial outlook, and statements that do not relate to historical or current fact, are examples of forward-looking statements. Forward-looking statements are not guarantees of future performance. Our forward-looking statements are based on our current beliefs, expectations, and assumptions, which may not prove to be accurate, and are subject to known and unknown risks and uncertainties, many of which are outside of our control. These risks and uncertainties could cause actual results to differ materially from our historical experience and management’s present expectations or projections.These risks and uncertainties are discussed in our filings with the U.S. Securities and Exchange Commission, including our most recent annual report on Form 10-K (including, but not limited to, Part I, Item 1a. Risk Factors ), quarterly reports on Form 10-Q, and current reports on Form 8-K. Any forward-looking statement speaks only as of the date on which it is made. You are cautioned not to place undue reliance on any forward-looking statements. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events, whether as a result of new information, future events, or otherwise.