Acuity Brands, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended May 31, 2019. Financial statements are unaudited. Acuity Brands provides lighting and building-management products and services, primarily in North America, and reports one operating segment.
Financial performance
| Metric | Q3 FY2019 | Q3 FY2018 | Nine months FY2019 | Nine months FY2018 |
|---|---|---|---|---|
| Net sales | $947.6 million | $944.0 million | $2,734.6 million | $2,618.9 million |
| Gross profit | $383.6 million | $389.1 million | $1,085.0 million | $1,073.5 million |
| Gross margin | 40.5% | 41.2% | 39.7% | 41.0% |
| Operating profit | $120.3 million | $107.4 million | $332.6 million | $317.1 million |
| Net income | $88.4 million | $73.0 million | $234.3 million | $241.4 million |
| Diluted EPS | $2.22 | $1.80 | $5.87 | $5.85 |
- Q3 sales increased 0.4%; management attributed growth chiefly to higher volume, partly offset by foreign exchange and ASC 606 adoption. Price and mix were flat. Q3 GAAP gross margin fell 70 basis points; management cited retail customer mix and manufacturing under-absorption amid inventory reduction.
- Q3 operating profit rose 12.0%, helped by lower selling, distribution and administrative expense and substantially lower special charges. Adjusted operating profit was $135.5 million, down 1.3%, with adjusted margin of 14.3% versus 14.5%.
- Nine-month sales increased 4.4%, primarily on approximately 5% higher volume. Gross margin declined 130 basis points, with management citing customer/channel mix, manufacturing under-absorption, and higher materials and freight costs. Nine-month adjusted operating profit increased 1.0% to $382.0 million; adjusted margin declined to 14.0% from 14.4%.
- Nine-month net income decreased 2.9%, mainly because the prior-year period included a one-time tax benefit related to the Tax Cuts and Jobs Act. The effective tax rate was 23.0% versus 16.4%; management estimates a FY2019 rate of 22%–24% before discrete items. Adjusted nine-month net income rose 6.6% to $272.4 million and adjusted diluted EPS rose 10.3% to $6.83. These adjusted measures are non-GAAP.
Cash flow, balance sheet and liquidity
- Operating cash flow for the first nine months was $312.0 million, up from $299.7 million. Capital expenditures were $39.8 million; management expects FY2019 capital expenditures of approximately 1.5% of sales.
- Cash was $333.7 million at May 31, 2019, versus $129.1 million at August 31, 2018. Total debt was $356.6 million, broadly unchanged from $356.8 million. Stockholders’ equity was $1.88 billion. Debt to total capitalization was 15.9%; net-debt-to-net-capitalization was 1.2%.
- The company had no borrowings outstanding under its $400 million revolving facility or $400 million delayed-draw term loan facility and reported $794.7 million of borrowing capacity after letters of credit under the most restrictive covenant. It was in compliance with financial covenants.
- $350 million of 6% senior unsecured notes mature in December 2019. Management intends to refinance them in full using the term loan facility, subject to applicable conditions. The company paid $15.6 million in dividends and repurchased $48.7 million of shares during the nine-month period.
Outlook, risks and notable items
- Management expects Q4 FY2019 net sales could be modestly below the prior-year quarter, which benefited from initial stocking by a new retail customer. It expects Q4 adjusted operating margin to exceed the prior-year quarter and improve sequentially from Q3.
- Management cited low-single-digit expected growth in the North American lighting market for calendar 2019, but noted softer indicators, trade-policy uncertainty, potential tariffs, labor shortages, pricing pressure and adverse product/customer mix. It expects to continue pruning offerings that do not meet return objectives.
- The company has exposure to U.S. tariffs on certain Chinese imports; it also produces a meaningful percentage of products in Mexico. Mitigation efforts include alternative sourcing, in-sourcing and price increases. Further policy changes could affect results.
- A securities class action remains pending; the company disputes the allegations and has moved to dismiss. Management cannot reasonably estimate possible losses. A review of potentially misclassified or inaccurately valued international shipments is ongoing, and the likelihood or amount of any related loss is not yet known.
- ASC 606 adoption reduced Q3 sales by $3.8 million and diluted EPS by $0.03, and reduced nine-month sales by $7.8 million and diluted EPS by $0.08, compared with results absent adoption. It also included a $13.0 million opening retained-earnings adjustment. The company expects adoption of lease standard ASC 842 on September 1, 2019 to materially affect the balance sheet, primarily through operating lease assets and liabilities, but not materially affect earnings or cash flows.
- Fiscal 2019 special charges were $1.3 million for the nine months, primarily facility-related move costs. The company expects further costs from previously announced facility consolidations and workforce reductions; expected savings once completed are intended to be reinvested largely in growth and profitability initiatives.
Key facts investors should verify
- Whether the planned refinancing of the December 2019 notes is completed on the expected terms and timing.
- Whether Q4 sales and adjusted-margin expectations are achieved, and how portfolio pruning affects revenue and profitability.
- Whether pricing and mitigation actions offset tariffs, freight and materials costs, and whether margin pressure persists.
- Developments and potential financial exposure from the securities litigation and trade-compliance review.
- The actual balance-sheet impact of ASC 842 and the comparability of reported results after ASC 606 adoption; review non-GAAP reconciliations alongside GAAP results.