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, 2024 and for the three months ended November 30, 2024 and November 30, 2023. 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, 2024, filed with the Securities and Exchange Commission (the “SEC”) on October 28, 2024 (“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 Acuity Intelligent Spaces, 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 pay a dividend, and to make share repurchases. Sufficient cash flow generation is also critical to fund our operations in the short and long term 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. Refer to Recent Developments for a discussion of changes to our contractual obligations after November 30, 2024. 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, borrowing availability under financing arrangements, and current access to capital markets. 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, 2024 was $935.6 million, an increase of $89.8 million from August 31, 2024. 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 $132.2 million of cash flows from operating activities during the three months ended November 30, 2024, compared to $190.0 million in the prior-year period, a decrease of $57.8 million. This decrease was due primarily to timing of payments to suppliers as well as lower cash collections from customers. 17 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”), the terms of our $600.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”), and the terms of our $600.0 million two-year unsecured term loan facility (“Term Loan Facility”). At November 30, 2024, our outstanding debt balance was $496.3 million, which consisted solely of our Unsecured Notes, compared to our cash position of $935.6 million. We were in compliance with all covenants under our financing arrangements as of November 30, 2024. 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, 2024 August 31, 2024 Current assets $ 1,588.0 $ 1,517.6 Amounts due from non-guarantor affiliates 371.5 338.0 Non-current assets 1,340.2 1,337.7 Current liabilities 526.2 553.2 Non-current liabilities 750.9 746.5 Summarized Income Statement Information Three Months Ended November 30, 2024 Net sales $ 789.4 Gross profit 382.2 Net income 111.6 On November 25, 2024, we entered into an amendment to our credit agreement (the “Credit Agreement”) that, among other things, provides for a delayed draw term under the Term Loan Facility of up to $600.0 million, which may be drawn in a single borrowing at any time through May 25, 2025, subject to certain conditions. The Credit Agreement permits the proceeds of the Term Loan Facility to be used for general corporate purposes, including working capital, permitted acquisitions, and repurchases of capital stock. We were in compliance with all financial covenants under the Credit Agreement as of the periods presented. At November 30, 2024, we had additional borrowing capacity under the Credit Agreement of $1.2 billion under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility and the Term Loan Facility less outstanding letters of credit of $3.5 million issued under the Revolving Credit Facility, primarily for securing collateral requirements under our casualty insurance premiums. As of November 30, 2024, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility and the Term Loan Facility totaled $2.1 billion. Capital Allocation Priorities Our capital allocation priorities are to invest in our current business for growth, to invest in mergers and acquisitions, to pay a dividend, and to make share repurchases. Investments in Current Business for Growth We invested $18.9 million and $14.6 million in property, plant, and equipment during the three months ended November 30, 2024 and November 30, 2023, respectively. We invested primarily in new and enhanced information technology, equipment, tooling, and facility improvements in fiscal 2025 to date. Strategic Acquisitions, Investments, and Divestitures We seek opportunities to strategically expand and enhance our portfolio of solutions. There were no acquisitions during the three months ended November 30, 2024 and November 30, 2023, respectively. 18 Table of Contents Dividends We paid dividends on our common stock of $4.5 million ($0.15 per share) and $4.1 million ($0.13 per share) during the three months ended November 30, 2024 and November 30, 2023, 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 2025 and 2024, we repurchased approximately 17,000 shares and 290,000 shares of our outstanding common stock for $5.4 million and $50.0 million, respectively. Total cash outflows for share repurchases during the three months ended November 30, 2024 and November 30, 2023 were $6.7 million and $48.2 million, respectively. 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. On January 25, 2024, the Board approved an increase of three million shares to the maximum number of shares that may yet be repurchased under the share repurchase program. As of November 30, 2024, 3.8 million shares remained available within the program to repurchase. Recent Developments On January 1, 2025, Acuity Brands Technology Services, Inc., a wholly owned subsidiary of Acuity Brands, Inc. acquired all of the equity interests of QSC, LLC (“QSC”), a leader in the design, engineering, and manufacturing of audio, video, and control solutions and services, for $1.215 billion. We funded the transaction using cash on hand and proceeds from our Term Loan Facility, under which we incurred an aggregate $600.0 million in indebtedness effective as of January 2, 2025. 19 Table of Contents Results of Operations First Quarter of Fiscal 2025 Compared with First Quarter of Fiscal 2024 The following table sets forth information comparing the components of net income for the three months ended November 30, 2024 and November 30, 2023 (in millions except per-share data): Three Months Ended November 30, 2024 November 30, 2023 Increase (Decrease) Percent Change Net sales $ 951.6 $ 934.7 $ 16.9 1.8 % Cost of products sold 502.3 506.3 (4.0) (0.8) % Gross profit 449.3 428.4 20.9 4.9 % Percent of net sales 47.2 % 45.8 % 140 bps Selling, distribution, and administrative expenses 316.0 295.5 20.5 6.9 % Operating profit 133.3 132.9 0.4 0.3 % Percent of net sales 14.0 % 14.2 % (20) bps Other (income) expense: Interest (income) expense, net (4.0) 0.9 (4.9) (544.4) % Miscellaneous expense, net 2.5 1.1 1.4 NM Total other (income) expense (1.5) 2.0 (3.5) (175.0) % Income before income taxes 134.8 130.9 3.9 3.0 % Percent of net sales 14.2 % 14.0 % 20 bps Income tax expense 28.1 30.3 (2.2) (7.3) % Effective tax rate 20.8 % 23.1 % Net income $ 106.7 $ 100.6 $ 6.1 6.1 % Diluted earnings per share $ 3.35 $ 3.21 $ 0.14 4.4 % NM - not meaningful Net Sales Net sales for the first quarter of fiscal 2025 increased $16.9 million, or 1.8%, to $951.6 million, compared with $934.7 million in the prior-year period due to increases in sales in both our Acuity Brands Lighting and Acuity Intelligent Spaces segments. Gross Profit Gross profit for the first quarter of fiscal 2025 increased $20.9 million, or 4.9%, to $449.3 million, compared with $428.4 million in the prior-year period, and gross profit margin increased 140 basis points to 47.2% from 45.8% compared with the prior-year period. Our gross profit increased compared with the prior period due primarily to the fall through of higher net sales and lower materials cost. This increase was partially offset by increased labor and overhead costs. Operating Profit Selling, distribution, and administrative expenses (“SD&A”) expenses for the first quarter of fiscal 2025 were $316.0 million, compared with $295.5 million in the prior-year period, an increase of $20.5 million, or 6.9%. The increase in SD&A expenses was due primarily to higher employee-related costs, sales-related costs, such as commissions, and sales and marketing costs. Additionally, we incurred acquisition-related costs of $4.6 million during the first quarter of 2025. Operating profit for the first quarter of fiscal 2025 was $133.3 million (14.0% of net sales), compared with $132.9 million (14.2% of net sales) for the prior-year period, an increase of $0.4 million, or 0.3%. The increase in operating profit was due primarily to the increase in gross profit, partially offset by higher operating expenses. 20 Table of Contents Interest (Income) Expense, net We reported net interest income of $4.0 million and net interest expense of $0.9 million for the first quarter of fiscal 2025 and 2024, respectively. Our fiscal 2025 net interest income reflects higher interest-bearing cash and cash equivalent balances and higher investing rates on those balances. 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 $2.5 million and $1.1 million for the first quarter of fiscal 2025 and 2024, respectively. This year-over-year change is due primarily to a non-cash loss on an investment in a privately-held entity which we do not exercise significant influence or control. Income Taxes and Net Income Our effective income tax rate was 20.8% and 23.1% for the first quarter of fiscal 2025 and 2024, respectively. This decrease was due primarily to higher excess tax benefits on stock compensation in the first quarter of fiscal 2025. We recognized excess tax benefits of $4.3 million related to share-based payment awards for the first quarter of fiscal 2025 compared to $1.5 million for the first quarter of fiscal 2024. Net income for the first quarter of fiscal 2025 increased $6.1 million, or 6.1%, to $106.7 million, from $100.6 million reported for the prior-year period. Diluted earnings per share for the first quarter of fiscal 2025 increased $0.14, or 4.4%, to $3.35 compared with diluted earnings per share of $3.21 for the prior-year period. This increase reflects higher net income. Segment Results The following table sets forth information comparing the operating results of our segments, Acuity Brands Lighting and Acuity Intelligent Spaces, for the three months ended November 30, 2024 and November 30, 2023 (in millions): Three Months Ended November 30, 2024 November 30, 2023 Increase (Decrease) Percent Change Acuity Brands Lighting: Net sales $ 886.0 $ 876.4 $ 9.6 1.1 % Operating profit 143.3 143.8 (0.5) (0.3) % Operating profit margin 16.2 % 16.4 % (20) bps Acuity Intelligent Spaces: Net sales $ 73.5 $ 64.2 $ 9.3 14.5 % Operating profit 10.8 5.3 5.5 103.8 % Operating profit margin 14.7 % 8.3 % 640 bps Acuity Brands Lighting net sales for the first quarter of fiscal 2025 increased $9.6 million, or 1.1%, to $886.0 million, compared with $876.4 million in the prior-year period. Sales within the Acuity Brands Lighting segment increased due to higher net sales within our independent sales network and direct sales network, partially offset by declines in the retail and corporate accounts channels. Operating profit for Acuity Brands Lighting was $143.3 million (16.2% of Acuity Brands Lighting net sales) for the first quarter of fiscal 2025, compared with $143.8 million (16.4% of Acuity Brands Lighting net sales) in the prior-year period, a decrease of $0.5 million. The decrease in operating profit was due to higher labor and overhead costs, and employee-related costs, partially offset by the fall through of higher net sales and lower materials cost. Acuity Intelligent Spaces net sales for the first quarter of fiscal 2025 increased $9.3 million, or 14.5%, to $73.5 million, compared with $64.2 million in the prior-year period. The increase in sales within the Acuity Intelligent Spaces segment is attributed to higher sales of Distech products. Acuity Intelligent Spaces operating profit was $10.8 million for the first quarter of fiscal 2025, compared with $5.3 million in the prior-year period, an increase of $5.5 million. This increase was due primarily to contributions from higher net sales and lower professional and consulting fees, partially offset by higher employee-related costs. 21 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; and product warranty 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, but are not limited to, 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, assumptions, and other important factors, many of which are outside of our control and any of which could cause our actual results to differ materially from those expressed or implied by the forward-looking statements. 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, the sections titled “Risk Factors” and “Management's Discussion and Analysis of Financial Condition and Results of Operations”), 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. This quarterly report is not comprehensive, and for that reason, should be read in conjunction with such filings. 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.