ACUITY INC. (DE) quarterly report, Q1 FY2020

Acuity Brands, Inc. — Form 10-Q Summary

Reporting period: Fiscal first quarter ended November 30, 2019; comparisons are with the three months ended November 30, 2018. Unaudited U.S. GAAP financial statements. Acuity Brands provides lighting and building-management solutions and reports one segment.

Financial performance

MetricQ1 FY2020Q1 FY2019Change
Net sales$834.7 million$932.6 millionDown 10.5%
Gross profit / margin$355.8 million / 42.6%$367.5 million / 39.4%Profit down 3.2%; margin up 320 bps
Operating profit / margin$83.6 million / 10.0%$116.4 million / 12.5%Down 28.2%
Net income$57.0 million$79.6 millionDown 28.4%
Diluted EPS$1.44$1.98Down 27.3%
Operating cash flow$129.6 million$131.8 millionDown $2.2 million

Adjusted operating profit was $119.0 million, down 11.3%, with a 14.3% margin versus 14.4%. Adjusted diluted EPS was $2.13 versus $2.32, down 8.2%. These are non-GAAP measures; the company excludes acquisition-related items, acquired-intangible amortization, share-based compensation, and special charges.

Sales volume declined 16%, partly offset by 3% favorable price/mix and approximately 2.5% contribution from acquisitions. Management attributed lower volume to estimated market declines, prior-year order pull-forward ahead of price increases, removal of certain tariff-affected retail products, and reduced large-project activity. Sales declined across all key channels.

Cash, liquidity, debt, and balance sheet

  • Cash was $266.6 million at November 30, down $194.4 million from August 31, principally reflecting $302.0 million spent on acquisitions. Investing cash outflow was $315.1 million; capital expenditures were $11.6 million.
  • Total debt was $356.3 million at quarter-end; stockholders’ equity was $1.99 billion. Debt-to-total-capitalization was 15.2%. The company reported $796.2 million of borrowing capacity under its credit agreement at quarter-end and compliance with its financial covenants.
  • On December 16, 2019, after quarter-end, the company repaid its $350 million, 6% senior unsecured notes using borrowings under its term-loan facility. It had borrowed the full $400 million available under that facility; subsequent borrowing capacity under the credit agreement was reported as $396.2 million.
  • The company adopted lease accounting on September 1, 2019, recognizing operating lease liabilities and right-of-use assets. At November 30, lease liabilities totaled $66.1 million.

Material changes and unusual items

  • Acquired The Luminaires Group on September 17 and LocusLabs on November 25, 2019. Acquisition accounting remained preliminary; goodwill and identified intangible assets recorded were approximately $147.8 million and $165.0 million, respectively. Acquired results were not material to the quarter.
  • Special charges were $6.9 million versus $1.0 million a year earlier, mainly severance and lease-asset impairments tied to planned facility closures and restructuring. Remaining restructuring reserves were $4.8 million.
  • Share-based compensation expense rose to $16.7 million from $7.8 million, partly reflecting changes to the equity incentive program and accelerated expense in the quarter.
  • Gross margin improved, primarily from favorable sales-channel mix, while operating profit fell due to lower gross profit, higher selling, distribution and administrative costs, and higher special charges.

Outlook, risks, and contingencies

  • Management gave no specific revenue or earnings guidance. It expects fiscal 2020 capital expenditures of approximately 1.7% of net sales and estimates a blended effective tax rate of about 23%, before discrete items.
  • Management remained cautious on fiscal 2020 market conditions, citing weak private non-residential construction, global trade and tariff uncertainty, potential U.S. political uncertainty, and skilled-labor shortages. It expects sluggish lighting demand until construction growth and policy uncertainty become clearer.
  • Priorities include market-share gains, margin improvement, cost containment, expanding solutions and technology offerings, and integration of acquisitions. Management expects to outperform served markets over time, subject to quarterly volatility and product-portfolio pruning.
  • The company estimated $7–$8 million of interest savings for the remainder of fiscal 2020 from refinancing the maturing notes, assuming no meaningful change in short-term rates.
  • Tariffs on Chinese imports and possible trade-policy changes could affect costs and demand. Mitigation includes alternative suppliers, in-sourcing, and price increases.
  • Litigation includes patent claims by Lighting Science Group seeking, among other relief, an import/sales exclusion order; a securities class action in which claims based on five challenged statements proceeded to discovery; and a review of misclassified or inaccurately valued international shipments. The company could not estimate possible losses for these matters.
  • At the January 2020 annual meeting, stockholders did not approve the advisory vote on named executive officer compensation. The board declared a $0.13-per-share quarterly dividend payable February 3, 2020.

Important facts for investors to verify

  • Whether sales volumes and demand stabilize, particularly in non-residential construction and large projects, and whether price/mix offsets continued volume weakness.
  • Whether margin gains persist as tariffs, product mix, pricing pressure, restructuring, and acquisition integration affect costs and profitability.
  • Final purchase-price allocations and the performance and integration costs of The Luminaires Group and LocusLabs.
  • Post-refinancing debt terms, interest expense, covenant headroom, and actual interest savings relative to management’s estimate.
  • Developments and potential financial exposure in the patent litigation, securities class action, and trade-compliance review; the filing provides no clear loss estimate.
  • The effect of restructuring and portfolio pruning on future costs, sales, and cash flows; first-quarter results are not necessarily indicative of the full fiscal year because of seasonality and other factors.