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 November 30, 2023 and for the three months ended November 30, 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, 2023, filed with the Securities and Exchange Commission (the “SEC”) on October 26, 2023 (“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 solutions, and location-aware applications. Our business exhibits some seasonality, with net sales being affected by weather and seasonal demand on construction and installation programs, particularly during the winter months, as well as the annual budget cycles of major customers. Historically, with certain exceptions, we have experienced our highest sales in the last two quarters of each fiscal year due to these factors. 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, accounts payable, accrued employee compensation, 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 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 November 30, 2023 was $513.3 million, an increase of $115.4 million from August 31, 2023. 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 $190.0 million of cash flows from operating activities during the three months ended November 30, 2023, compared to $186.6 million in the prior-year period, an increase of $3.4 million. This increase was due primarily to increased pre-tax income, partially offset by lower collections from customers. 19 Table of Contents 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 November 30, 2023, our outstanding debt balance was $495.7 million, which consisted solely of our Unsecured Notes, compared to our cash position of $513.3 million. We were in compliance with all covenants under our financing arrangements as of November 30, 2023. At November 30, 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 November 30, 2023, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled $1.1 billion. 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 November 30, 2023 August 31, 2023 Current assets $ 1,120.1 $ 995.7 Amounts due from non-guarantor affiliates 320.3 326.4 Non-current assets 1,365.8 1,377.9 Current liabilities 477.0 464.2 Non-current liabilities 792.1 785.4 Summarized Income Statement Information Three Months Ended November 30, 2023 Net sales $ 777.3 Gross profit 349.3 Net income 99.7 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. Investments in Current Business for Growth We invested $14.6 million and $18.2 million in property, plant, and equipment during the three months ended November 30, 2023 and 2022, respectively. We invested primarily in new and enhanced information technology, equipment, and facility improvements in fiscal 2024. Strategic Acquisitions, Investments, and Divestitures We seek opportunities to strategically expand and enhance our portfolio of solutions. There were no acquisitions or divestitures during the first three months of fiscal 2024. On May 15, 2023, using cash on hand, we acquired all of the equity interests of KE2 Therm Solutions, Inc. (“KE2 Therm”). KE2 Therm develops and provides intelligent refrigeration control solutions that deliver the precision of digital controls to promote safety, efficiency, and reliability, while delivering cost savings to the customer. This acquisition is intended to expand ISG's technology and controls product portfolio and reach new customers. We sold our Sunoptics prismatic skylights business in November 2022 and recognized a pre-tax loss of $11.2 million on the sale of this business. Refer to the Acquisitions and Divestitures footnote of the Notes to Consolidated Financial Statements for more information. 20 Table of Contents Dividends We paid dividends on our common stock of $4.1 million ($0.13 per share) and $4.3 million ($0.13 per share) during the three months ended November 30, 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 2024, we repurchased 0.3 million shares of our outstanding common stock for $50.0 million. Total cash outflows for share repurchases during the three months ended November 30, 2023 were $48.2 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, 2023, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 0.9 million shares. 21 Table of Contents Results of Operations First Quarter of Fiscal 2024 Compared with First Quarter of Fiscal 2023 The following table sets forth information comparing the components of net income for the three months ended November 30, 2023 and 2022 (in millions except per share data): Three Months Ended November 30, 2023 November 30, 2022 Increase (Decrease) Percent Change Net sales $ 934.7 $ 997.9 $ (63.2) (6.3) % Cost of products sold 506.3 581.4 (75.1) (12.9) % Gross profit 428.4 416.5 11.9 2.9 % Percent of net sales 45.8 % 41.7 % 410 bps Selling, distribution, and administrative expenses 295.5 300.7 (5.2) (1.7) % Special charges — 6.9 (6.9) NM Operating profit 132.9 108.9 24.0 22.0 % Percent of net sales 14.2 % 10.9 % 330 bps Other expense: Interest expense, net 0.9 6.6 (5.7) (86.4) % Miscellaneous expense, net 1.1 9.1 (8.0) NM Total other expense 2.0 15.7 (13.7) (87.3) % Income before income taxes 130.9 93.2 37.7 40.5 % Percent of net sales 14.0 % 9.3 % 470 bps Income tax expense 30.3 18.3 12.0 65.6 % Effective tax rate 23.1 % 19.6 % Net income $ 100.6 $ 74.9 $ 25.7 34.3 % Diluted earnings per share $ 3.21 $ 2.29 $ 0.92 40.2 % NM - not meaningful Net Sales Net sales for the first quarter of fiscal 2024 decreased $63.2 million, or 6.3%, to $934.7 million, compared with $997.9 million in the prior-year period due to a decline in sales within our ABL segment, partially offset by higher sales within our ISG segment. The fiscal 2023 acquisition of KE2 Therm and divestiture of our Sunoptics business did not have meaningful impacts on consolidated net sales for the first quarter of fiscal 2024. Gross Profit Gross profit for the first quarter of fiscal 2024 increased $11.9 million, or 2.9%, to $428.4 million, compared with $416.5 million in the prior-year period, and gross profit margin increased 410 basis points to 45.8% from 41.7% compared with the prior-year period. Our gross profit increased compared with the prior period due primarily to favorable material and import costs, partially offset by higher labor, overhead, and quality costs as well as the fall through of the net sales decline. Operating Profit Selling, distribution, and administrative expenses (“SD&A”) expenses for the first quarter of fiscal 2024 were $295.5 million, compared with $300.7 million in the prior-year period, a decrease of $5.2 million, or 1.7%. The decrease in SD&A expenses was due primarily to lower commissions, freight costs, and amortization, partially offset by higher employee-related costs. Amortization expense of definite-lived intangibles decreased in fiscal 2024 as we recorded $4.0 million of accelerated amortization for intangibles associated in fiscal 2023 with certain brands that were discontinued. Operating profit for the first quarter of fiscal 2024 was $132.9 million (14.2% of net sales), compared with $108.9 million (10.9% of net sales) for the prior-year period, an increase of $24.0 million, or 22.0%. The increase in operating profit was due primarily to the increase in gross profit, partially offset by lower operating expenses. 22 Table of Contents 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. Interest Expense, net Interest expense, net, was $0.9 million and $6.6 million for the first quarter of fiscal 2024 and 2023, respectively. The decrease in net interest expense was due to higher investing rates on our interest-bearing cash and cash equivalents as well as lower average short-term borrowings outstanding. Miscellaneous Expense, net Miscellaneous expense, net consists of non-service 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 $1.1 million and $9.1 million for the first quarter of fiscal 2024 and 2023, respectively. This year-over-year decrease is due primarily to the recognition of an $11.2 million loss on the sale of our Sunoptics prismatic skylights business in fiscal 2023, partially offset by the impact of foreign currency-related items compared to the prior year. Income Taxes and Net Income Our effective income tax rate was 23.1% and 19.6% for the first quarter of fiscal 2024 and 2023, respectively. This decline was due primarily to the recognition of higher favorable discrete items in the prior year. Net income for the first quarter of fiscal 2024 increased $25.7 million, or 34.3%, to $100.6 million, from $74.9 million reported for the prior-year period. Diluted earnings per share for the first quarter of fiscal 2024 increased $0.92, or 40.2%, to $3.21 compared with diluted earnings per share of $2.29 for the prior-year period. This increase reflects higher net income as well as lower outstanding diluted shares. Segment Results The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the three months ended November 30, 2023 and 2022 (in millions): Three Months Ended November 30, 2023 November 30, 2022 Increase (Decrease) Percent Change ABL: Net sales $ 876.4 $ 947.1 $ (70.7) (7.5) % Operating profit 143.8 118.1 25.7 21.8 % Operating profit margin 16.4 % 12.5 % 390 bps ISG: Net sales $ 64.2 $ 56.8 $ 7.4 13.0 % Operating profit 5.3 7.7 (2.4) (31.2) % Operating profit margin 8.3 % 13.6 % (530) bps ABL net sales for the first quarter of fiscal 2024 decreased $70.7 million, or 7.5%, to $876.4 million, compared with $947.1 million in the prior-year period. Sales within the ABL segment decreased due to lower net sales across all channels except the retail sales channel. Operating profit for ABL was $143.8 million (16.4% of ABL net sales) for the first quarter of fiscal 2024, compared with $118.1 million (12.5% of ABL net sales) in the prior-year period, an increase of $25.7 million. The increase in operating profit was due primarily to improved profitability on lower sales, partially offset by increased employee-related costs. During the first quarter of fiscal 2023, we recorded $6.9 million of special charges and $4.0 million of accelerated amortization expense for intangibles associated with certain brands that were discontinued. ISG net sales for the first quarter of fiscal 2024 increased $7.4 million, or 13.0%, to $64.2 million, compared with $56.8 million in the prior-year period. Sales within the ISG segment increased due to the acquisition of KE2 Therm, price increases, and favorable product mix. ISG operating profit was $5.3 million for the first quarter of fiscal 2024, compared with $7.7 million in the prior-year period, a decrease of $2.4 million. This decrease was due primarily to increased employee-related costs and professional fees, partially offset by higher net sales. 23 Table of Contents 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 include, among other things, statements that describe or relate to the Company’s plans, initiatives, projections, vision, goals, targets, commitments, expectations, objectives, prospects, strategies, or financial outlook, and the assumptions underlying or relating thereto. In some cases, we may use words such as “expect,” “believe,” “intend,” “anticipate,” “estimate,” “forecast,” “indicate,” “project,” “predict,” “plan,” “may,” “will,” “could,” “should,” “would,” “potential,” and words of similar meaning, as well as other words or expressions referencing future events, conditions, or circumstances, to identify forward-looking statements. We intend these forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Act. 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 events or 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.