Acuity Inc. (De): Form 10-Q for the period ended May 31, 2024

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 May 31, 2024 and for the three and nine months ended May 31, 2024 and May 31, 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, 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 pay a 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 May 31, 2024 was $699.0 million, an increase of $301.1 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 $445.1 million of cash flows from operating activities during the nine months ended May 31, 2024, compared to $471.5 million in the prior-year period, a decrease of $26.4 million. This decrease was due primarily to more favorable operating working capital reductions in fiscal 2023 as well as the timing of income tax payments in fiscal 2024, partially offset by higher pre-tax income in fiscal 2024.

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 May 31, 2024, our outstanding debt balance was $496.0 million, which consisted solely of our Unsecured Notes, compared to our cash position of $699.0 million. We were in compliance with all covenants under our financing arrangements as of May 31, 2024.

At May 31, 2024, 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 May 31, 2024, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled $1.3 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):

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 $41.0 million and $48.0 million in property, plant, and equipment during the nine months ended May 31, 2024 and May 31, 2023, respectively. We invested primarily in new and enhanced information technology, equipment, tooling, and facility improvements in fiscal 2024 to date.

Strategic Acquisitions, Investments, and Divestitures

We seek opportunities to strategically expand and enhance our portfolio of solutions. Refer to the Acquisitions and Divestitures footnote of the Notes to Consolidated Financial Statements for more information.

Arize Assets

On January 19, 2024, we acquired certain assets related to Arize® horticulture lighting products from Current Lighting Solutions, LLC. The assets have been included in ABL's financial results since the date of acquisition and did not have a material impact to our consolidated financial condition, results of operations, or cash flows.

KE2 Therm

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 expanded ISG's technology and controls product portfolio and reached new customers.

Divestitures

There were no divestitures during the first nine months of fiscal 2024. We sold our Sunoptics prismatic skylights business in the first fiscal quarter of 2023 and recognized a pre-tax loss of $11.2 million on the sale of this business.

Dividends

We paid dividends on our common stock of $13.4 million ($0.43 per share) and $12.7 million ($0.39 per share) during the nine months ended May 31, 2024 and May 31, 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 nine months of fiscal 2024 and 2023, we repurchased 0.5 million and 1.3 million shares of our outstanding common stock for $88.3 million and $218.8 million, respectively. Total cash outflows for share repurchases during the nine months ended May 31, 2024 and May 31, 2023 were $88.7 million and $216.2 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 May 31, 2024, 3.8 million shares remained available within the program to repurchase.

Results of Operations

Third Quarter of Fiscal 2024 Compared with Third Quarter of Fiscal 2023

The following table sets forth information comparing the components of net income for the three months ended May 31, 2024 and May 31, 2023 (in millions except per share data):

Net Sales

Net sales for the third quarter of fiscal 2024 decreased $32.2 million, or 3.2%, to $968.1 million, compared with $1.0 billion in the prior-year period due to a decline in sales within our ABL segment, partially offset by higher sales within our ISG segment. Acquisitions did not have a meaningful impact on consolidated net sales for the third quarter of fiscal 2024.

Gross Profit

Gross profit for the third quarter of fiscal 2024 increased $4.9 million, or 1.1%, to $452.2 million, compared with $447.3 million in the prior-year period, and gross profit margin increased 200 basis points to 46.7% from 44.7% compared with the prior-year period. Our gross profit increased compared with the prior period due primarily to favorable material costs, which outpaced the impact of lower net sales and higher production costs.

Operating Profit

Selling, distribution, and administrative expenses (“SD&A”) expenses for the third quarter of fiscal 2024 were $306.9 million, compared with $304.0 million in the prior-year period, an increase of $2.9 million, or 1.0%. The increase in SD&A expenses was due primarily to higher employee-related costs, partially offset by lower commissions and freight costs associated with the decline in net sales.

Operating profit for the third quarter of fiscal 2024 was $145.3 million (15.0% of net sales), compared with $143.3 million (14.3% of net sales) for the prior-year period, an increase of $2.0 million, or 1.4%. The increase in operating profit was due primarily to the increase in gross profit, partially offset by higher operating expenses.

Interest (Income) Expense, net

We reported net interest income of $1.8 million and net interest expense of $3.9 million for the third quarter of fiscal 2024 and 2023, respectively. Our fiscal 2024 net interest income reflects higher interest bearing cash and cash equivalent balances, higher investing rates on those balances, and lower average short-term borrowings outstanding compared to the prior year.

Miscellaneous (Income) Expense, net

Miscellaneous (income) 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 income of $0.5 million and net miscellaneous expense of $0.7 million for the third quarter of fiscal 2024 and 2023, respectively. This year-over-year change is due primarily to the impact of foreign currency-related items compared to the prior year.

Income Taxes and Net Income

Our effective income tax rate was 22.8% and 24.3% for the third quarter of fiscal 2024 and 2023, respectively. This decrease was due primarily to higher discrete items for research and development tax credits as well as excess tax benefits on stock compensation in the third quarter of fiscal 2024. We recognized excess tax benefits of $0.2 million related to share-based payment awards for the third quarter of fiscal 2024. We recognized no excess tax benefits related to share-based payment awards for the third quarter of fiscal 2023.

Net income for the third quarter of fiscal 2024 increased $8.9 million, or 8.5%, to $113.9 million, from $105.0 million reported for the prior-year period. Diluted earnings per share for the third quarter of fiscal 2024 increased $0.34, or 10.4%, to $3.62 compared with diluted earnings per share of $3.28 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 May 31, 2024 and May 31, 2023 (in millions):

ABL net sales for the third quarter of fiscal 2024 decreased $42.2 million, or 4.5%, to $898.5 million, compared with $940.7 million in the prior-year period. Sales within the ABL segment decreased due to lower net sales across all channels, except for corporate accounts. Net sales in the third quarter of 2023 benefited from working through an elevated backlog.

Operating profit for ABL was $151.5 million (16.9% of ABL net sales) for the third quarter of fiscal 2024, compared with $150.0 million (15.9% of ABL net sales) in the prior-year period, an increase of $1.5 million. The increase in operating profit was due to improved profitability on lower sales as well as lower sales-related costs, such as commissions and freight to customers.

ISG net sales for the third quarter of fiscal 2024 increased $9.9 million, or 15.0%, to $75.7 million, compared with $65.8 million in the prior-year period. The increase in sales within the ISG segment is attributed to higher sales of Distech products as well as the acquisition of KE2 Therm. ISG operating profit was $12.5 million for the third quarter of fiscal 2024, compared with $8.6 million in the prior-year period, an increase of $3.9 million. This increase was due primarily to contributions from higher net sales, partially offset by higher employee-related costs.

First Nine Months of Fiscal 2024 Compared with First Nine Months of Fiscal 2023

The following table sets forth information comparing the components of net income for the nine months ended May 31, 2024 and May 31, 2023 (in millions except per share data):

Net Sales

Net sales for the nine months ended May 31, 2024 decreased $133.1 million, or 4.5%, to $2.81 billion compared with $2.94 billion in the prior-year period due to a decline in sales within our ABL segment, partially offset by higher sales within our ISG segment. Acquisitions and divestitures did not have meaningful impacts on consolidated net sales for the first nine months of fiscal 2024.

Gross Profit

Gross profit for the nine months ended May 31, 2024 increased $22.5 million, or 1.8%, to $1.29 billion compared with $1.27 billion million in the prior-year period. Gross profit margin increased 280 basis points to 46.0% for the nine months ended May 31, 2024 compared with 43.2% in the prior-year period. Our gross profit increased compared with the prior period due primarily to favorable material and import costs, which outpaced the impact of lower net sales and higher production costs.

Operating Profit

SD&A expenses for the nine months ended May 31, 2024 were $896.7 million compared with $899.9 million in the prior-year period, a decrease of $3.2 million, or 0.4%. The decrease in SD&A expenses was due primarily to lower commissions and freight costs associated with the decline in net sales as well as lower amortization expense, partially offset by increased employee-related costs.

Amortization expense of definite-lived intangibles decreased in fiscal 2024 as we recorded $4.0 million of accelerated amortization in fiscal 2023 for intangibles associated with certain brands that were discontinued.

We recognized special charges of $6.9 million during the first nine months 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 nine months of fiscal 2024 was $396.3 million (14.1% of net sales) compared with $363.7 million (12.4% of net sales) for the prior-year period, an increase of $32.6 million, or 9.0%. The increase in operating profit was due primarily to higher gross profit, lower SD&A expenses, and nonrecurring special charges in the first quarter of fiscal 2023.

Interest (Income) Expense, net

We reported net interest income of $1.0 million and net interest expense of $16.2 million for the nine months ended May 31, 2024 and May 31, 2023, respectively. The decrease in net interest expense was due to higher interest bearing cash and cash equivalent balances, higher investing rates on those balances, and lower average short-term borrowings outstanding compared to the prior year.

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 $1.2 million for the nine months ended May 31, 2024 and $6.1 million for the nine months ended May 31, 2023. This year-over-year decrease was 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 23.3% and 22.9% for the nine months ended May 31, 2024 and May 31, 2023, respectively. This increase was due primarily to the recognition of higher favorable discrete items in the prior year. We recognized excess tax benefits of $1.8 million and $1.7 million related to share-based payment awards during the nine months ended May 31, 2024 and May 31, 2023, respectively.

Net income for the first nine months of fiscal 2024 increased $40.6 million, or 15.4%, to $303.7 million from $263.1 million reported for the prior-year period. Diluted earnings per share for the nine months ended May 31, 2024 increased $1.54 to $9.67 compared with diluted earnings per share of $8.13 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 nine months ended May 31, 2024 and May 31, 2023 (in millions):

ABL net sales for the nine months ended May 31, 2024 decreased 5.8% compared with the prior-year period due to lower net sales across all channels. Net sales in fiscal 2023 benefited from working through an elevated backlog.

Operating profit for ABL was $421.3 million (16.1% of ABL net sales) for the nine months ended May 31, 2024 compared to $391.7 million (14.1% of ABL net sales) in the prior-year period, an increase of $29.6 million. The increase in operating profit was due primarily to improved profitability on lower sales as well as lower sales-related costs, such as commissions and freight to customers.

During the first nine months of fiscal 2023, we recorded within ABL $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 nine months ended May 31, 2024 increased 15.0% compared with the prior-year period primarily driven by the acquisition of KE2 Therm as well as higher demand, price increases, and favorable product mix for Distech products. ISG operating profit was $26.9 million for the nine months ended May 31, 2024 compared with $22.7 million in the prior-year period, an increase of $4.2 million. This increase was due primarily to contributions from higher sales, partially offset by increased employee-related costs and professional fees.

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.

We are exposed to market risks that may impact our Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income, and Consolidated Statements of Cash Flows due primarily to fluctuations in interest rates, foreign exchange rates, and commodity prices. There have been no material changes to our exposure from market risks from those disclosed in Part II, Item 7a. Quantitative and Qualitative Disclosures About Market Risk of our Form 10-K.

Disclosure controls and procedures are controls and other procedures that are designed to reasonably ensure that information required to be disclosed in the reports filed or submitted by us under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission (the “SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to reasonably ensure that information required to be disclosed by us in the reports filed under the Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.

As required by SEC rules, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of May 31, 2024. This evaluation was carried out under the supervision and with the participation of management, including the principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of our disclosure controls and procedures are effective at a reasonable assurance level as of May 31, 2024.

However, because all disclosure procedures must rely to a significant degree on actions or decisions made by employees throughout the organization, such as reporting of material events, the Company and its reporting officers believe that they cannot provide absolute assurance that all control issues and instances of fraud or errors and omissions, if any, within the Company will be detected. Limitations within any control system, including our control system, include faulty judgments in decision-making or simple errors or mistakes. In addition, controls can be circumvented by an individual, by collusion between two or more people, or by management override of the control. Because of these limitations, misstatements due to error or fraud may occur and may not be detected.

There have been no changes in our internal control over financial reporting that occurred during our most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

There have been no material changes in our risk factors from those disclosed in Part I, Item 1a. Risk Factors of our Form 10-K.