ACUITY BRANDS, INC. 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 ofAcuity Brands, Inc. (referred to herein as "we," "our," "us," the "Company," or similar references) and its subsidiaries as ofNovember 30, 2022 and for the three months endedNovember 30, 2022 and 2021. 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 toAcuity Brands, Inc.'s Annual Report on Form 10-K for the fiscal year endedAugust 31, 2022 , filed with theSecurities and Exchange Commission (the "SEC") onOctober 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 theIntelligent 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. The results of operations for the three months endedNovember 30, 2022 are not necessarily indicative of the results to be expected for the full fiscal 2023 year due primarily to continued uncertainty of general economic conditions that may impact our key end markets for fiscal 2023; the impact of inflation; component shortages; disruptions in the global supply chain; seasonality; and the impact of any acquisitions and/or divestitures, among other reasons. We are uncertain of the future impact of the ongoing COVID-19 pandemic or recovery of prior deterioration in economic conditions to our sales channels, supply chain, manufacturing, and distribution as well as overall construction, renovation, and consumer spending. Additionally, the current conflict betweenRussia andUkraine and the related sanctions and other penalties imposed by countries across the globe againstRussia are creating substantial uncertainty in the global economy. While we do not have operations inRussia orUkraine 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 flow from operations or to access certain capital markets, including banks, is necessary to meet our capital allocation priorities, which are to invest in our current business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases. 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 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 atNovember 30, 2022 was$284.1 million , an increase of$60.9 million fromAugust 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
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2022, compared with$83.7 million in the prior-year period, an increase of$102.9 million . This increase was due primarily to increased cash collections from customers and fewer inventory purchases during the current period as well as the timing of quarterly income tax payments.
Financing Arrangements
See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of our various financing arrangements, including the$500.0 million aggregate principal amount of 2.150% senior unsecured notes dueDecember 15, 2030 (the "Unsecured Notes") as well as the terms of our$600.0 million five-year unsecured revolving credit facility ("Revolving Credit Facility"). AtNovember 30, 2022 , our outstanding debt balance was$495.1 million , which consisted solely of our Unsecured Notes, compared to our cash position of$284.1 million . We were in compliance with all financial covenants under our financing arrangements as ofNovember 30, 2022 . AtNovember 30, 2022 , we had additional borrowing capacity under the Revolving Credit Facility of$595.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility less outstanding letters of credit of$4.1 million issued under the facility. As ofNovember 30, 2022 , our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled$880.0 million . The Unsecured Notes were issued byAcuity Brands Lighting, Inc. , a wholly-owned subsidiary ofAcuity Brands, Inc. The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis byAcuity Brands, Inc. andABL IP Holding LLC , a wholly-owned subsidiary ofAcuity Brands, Inc. The following tables present summarized financial information forAcuity Brands, Inc. ,Acuity Brands Lighting, Inc. , andABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in non-guarantors as of the dates and during the period presented (in millions): Summarized Balance Sheet Information November 30, 2022 August 31, 2022 Current assets $ 1,021.0 $
1,056.6
Amounts due from non-guarantor affiliates 300.9 280.2 Non-current assets 1,385.0 1,414.3 Current liabilities 593.3 620.4 Non-current liabilities 822.7 821.0 Summarized Income Statement Information Three Months Ended November 30, 2022 Net sales $ 845.4 Gross profit 347.0 Net income 63.3 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
Strategic Acquisitions, Investments, and Divestitures
We seek opportunities to strategically expand and enhance our portfolio of solutions. There were no acquisitions during the first three months of fiscal 2023 or fiscal 2022. During the three months endedNovember 30, 2022 , we committed to a plan to sell our Sunoptics prismatic skylights business, which we completed onNovember 10, 2022 . We recognized a loss of$11.2 million on the sale of the business.
Please refer to the Acquisitions and Divestitures footnote of the Notes to Consolidated Financial Statements for more information.
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Dividends
We paid dividends on our common stock of$4.3 million ($0.13 per share) and$4.7 million ($0.13 per share) during the three months endedNovember 30, 2022 and 2021, respectively. All decisions regarding the declaration and payment of dividends are at the discretion of the Board of Directors (the "Board") and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant. Share Repurchases During the first three months of fiscal 2023, we repurchased 0.5 million shares of our outstanding common stock for$77.6 million . Total cash outflows for share repurchases during the three months endedNovember 30, 2022 were$76.5 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 ofNovember 30, 2022 , the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 2.4 million shares.
The COVID-19 Pandemic
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. We remain committed to prioritizing the health and well-being of our associates and their families and ensuring that we operate effectively. We have implemented various health and safety policies and processes at our facilities inthe United States ,Mexico ,Canada , and other locations as permitted by law. The COVID-19 pandemic has had an adverse impact on our results of operations. The pandemic has caused reduced construction and renovation spending as well as a disruption in our supply chain for certain components, both of which negatively impacted our operating results. Although our facilities are open, a resurgence in COVID-19 cases, including as a result of new variants, may lead to the reimposition of previously lifted business closure requirements, the imposition of new restrictions, or the issuance of new or revised local or national health guidance. We also continue to incur additional health and safety costs including expenditures for personal protection equipment and facility enhancements to maintain proper distancing guidelines issued by theCenters for Disease Control and Prevention . We have taken actions to reduce costs, including the realignment of headcount with volumes, a limit on all non-essential employee travel, other efforts to decrease discretionary spending, and reductions in our real estate footprint. Additionally, we elected to defer certain employer payroll taxes as allowable under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act) signed into law onMarch 27, 2020 . We paid half of these deferrals inDecember 2021 and the other half inDecember 2022 . Although we have implemented significant measures to mitigate further spread of the virus, our employees, customers, suppliers, and contractors may continue to experience disruptions to business activities due to potential further government-mandated or voluntary shutdowns, general economic conditions, or other negative impacts of the COVID-19 pandemic. We are continuously monitoring the adverse effects of the pandemic and identifying steps to mitigate those effects. As the COVID-19 pandemic is continually evolving, we are uncertain of its ultimate duration and impact. See Part I, Item 1a. Risk Factors of our Form 10-K for further details regarding the potential impacts of COVID-19 to our results of operations, financial position, and cash flows. 20
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Results of Operations
First Quarter of Fiscal 2023 Compared with First Quarter of Fiscal 2022
The following table sets forth information comparing the components of net income for the three months endedNovember 30, 2022 and 2021 (in millions except per share data): Three Months Ended November 30, Increase November 30, 2022 2021 (Decrease) Percent Change Net sales $ 997.9$ 926.1 $ 71.8 7.8 % Cost of products sold 581.4 540.3 41.1 7.6 % Gross profit 416.5 385.8 30.7 8.0 % Percent of net sales 41.7 % 41.7 % - bps Selling, distribution, and administrative expenses 300.7 270.7 30.0 11.1 % Special charges 6.9 - 6.9 NM Operating profit 108.9 115.1 (6.2) (5.4) % Percent of net sales 10.9 % 12.4 % (150) bps Other expense: Interest expense, net 6.6 5.9 0.7 11.9 % Miscellaneous expense, net 9.1 0.3 8.8 NM Total other expense 15.7 6.2 9.5 153.2 % Income before income taxes 93.2 108.9 (15.7) (14.4) % Percent of net sales 9.3 % 11.8 % (250) bps Income tax expense 18.3 21.3 (3.0) (14.1) % Effective tax rate 19.6 % 19.6 % Net income $ 74.9$ 87.6 $ (12.7) (14.5) % Diluted earnings per share $ 2.29$ 2.46 $ (0.17) (6.9) % NM - not meaningful Net Sales Net sales for the three months endedNovember 30, 2022 increased$71.8 million , or 7.8%, to$997.9 million , compared with$926.1 million in the prior-year period. Both our ABL and ISG segments benefited from recent price increases as well as favorable mix. Changes in foreign currency rates and the divestiture from our Sunoptics prismatic skylight business did not have a meaningful impact on net sales for the first quarter of fiscal 2023.
Gross Profit
Gross profit for the first quarter of fiscal 2023 increased$30.7 million , or 8.0%, to$416.5 million , compared with$385.8 million in the prior-year period, while gross profit margin remained flat at 41.7% compared with the prior-year period. Our gross profit margin remained flat with the prior year as we were able to offset material, labor, and other cost escalations with price and favorable mix.
Operating Profit
Selling, distribution, and administrative expenses ("SD&A") expenses for the
three months ended November 30, 2022 were $300.7 million , compared with $270.7
million in the prior-year period, an increase of $30.0 million , or 11.1%. The
increase in SD&A expenses was due primarily to higher commissions and freight
costs associated with higher sales. Amortization expense of definite-lived
intangibles increased in fiscal 2023 as we recorded $4.0 million of accelerated
amortization for intangibles associated with certain brands that were
discontinued.
We recognized special charges of $6.9 million during the first quarter of fiscal
2023. Please refer to the Special Charges footnote of the Note to Consolidated
Financial Statements for further details.
Operating profit for the first quarter of fiscal 2023 was $108.9 million (10.9%
of net sales), compared with $115.1 million (12.4% of net sales) for the
prior-year period, a decrease of $6.2 million , or 5.4%. The operating profit
margin
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decrease of 150 bps year over year was due primarily to higher special charges, commission rates, and amortization expense.
Other Expense
Other expense consists of net interest expense and net miscellaneous expense, which includes non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses.
Interest expense, net, was
We reported net miscellaneous expense of$9.1 million and$0.3 million for the three months endedNovember 30, 2022 and 2021, respectively. The year-over-year change in net miscellaneous expense was largely due to the$11.2 million loss of the sale of the Sunoptics prismatic skylights business, the details of which are described in the Acquisitions and Divestitures footnote of the Note to Consolidated Financial Statements. This loss was partially offset by higher gains on foreign currency-related items compared to the prior year.
Income Taxes and Net Income
Our effective income tax rate was 19.6% for the three months ended
Net income for the three months endedNovember 30, 2022 decreased$12.7 million , or 14.5%, to$74.9 million , from$87.6 million reported for the prior-year period. The decrease in net income resulted primarily from$22.1 million in combined losses and special charges recognized from the Sunoptics sale and other restructuring activities as well as accelerated amortization of intangible assets. Diluted earnings per share for the three months endedNovember 30, 2022 decreased$0.17 , or 6.9%, to$2.29 compared with diluted earnings per share of$2.46 for the prior-year period. This decrease reflects lower net income, partially offset by lower outstanding diluted shares.
Segment Results
The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the three months endedNovember 30, 2022 and 2021 (in millions). Three Months Ended November 30, Increase November 30, 2022 2021 (Decrease) Percent Change ABL: Net sales $ 947.1$ 883.6 $ 63.5 7.2 % Operating profit 118.1 128.1 (10.0) (7.8) % Operating profit margin 12.5 % 14.5 % (200) bps ISG: Net sales $ 56.8$ 46.4 $ 10.4 22.4 % Operating profit 7.7 2.0 5.7 285.0 % Operating profit margin 13.6 % 4.3 % 930 bps
ABL net sales for the three months ended
Operating profit for ABL was$118.1 million (12.5% of ABL net sales) for the three months endedNovember 30, 2022 , compared with$128.1 million (14.5% of ABL net sales) in the prior-year period, a decrease of$10.0 million . The decrease in operating profit was due primarily to the recognition of special charges of$6.9 million attributed to the segment in the current period, the acceleration of amortization for definite-lived intangibles related to brands that were discontinued, and increased commission rates. ISG net sales for the three months endedNovember 30, 2022 increased$10.4 million , or 22.4%, to$56.8 million , compared with$46.4 million in the prior-year period, driven primarily by strong demand for building management controls, improved component availability, and price increases. ISG operating profit was$7.7 million for the three 22
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months ended
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 accordanceU.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 withU.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 theU.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.
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