Acuity Brands, Inc. — Q1 Fiscal 2019 Form 10-Q
Reporting period: Three months ended November 30, 2018; filed January 9, 2019. Acuity Brands provides lighting and building-management products, software, and services, primarily in North America, and reports one segment. Comparisons are with the three months ended November 30, 2017. Amounts are in U.S. dollars; financial statement amounts are in millions except per-share data.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $932.6 | $842.8 | Up 10.7% |
| Gross profit / margin | $367.5 / 39.4% | $349.9 / 41.5% | Profit up 5.0%; margin down 210 bps |
| Operating profit / margin | $116.4 / 12.5% | $120.2 / 14.3% | Down 3.2%; margin down 180 bps |
| Net income | $79.6 | $71.5 | Up 11.3% |
| Diluted EPS | $1.98 | $1.70 | Up 16.5% |
| Operating cash flow | $131.8 | $139.8 | Down $8.0 |
- Margins and costs: Higher materials, component, and freight costs pressured gross margin. Higher sales volume, productivity improvements, and acquired-business contributions partly offset those pressures. SD&A rose 9.0% to $250.1 million, mainly due to freight and commissions, employee costs, and acquired businesses.
- Taxes: The effective tax rate fell to 25.2% from 35.5%, helping net income rise despite lower operating profit. Management attributed the current-period rate in significant part to the Tax Cuts and Jobs Act. The company estimated a 24%–26% blended effective rate for the remainder of FY2019, before discrete items.
- Cash and working capital: Cash was $214.8 million at November 30, up $85.7 million from August 31. Management attributed the lower year-over-year operating cash flow primarily to payment timing for trade payables and accrued expenses, partly offset by customer collections. Operating working capital decreased approximately $31.3 million during the quarter.
- Capital spending and distributions: Capital expenditures were $14.0 million versus $10.3 million a year earlier. The company repurchased 200,000 shares for $25.0 million and paid $5.2 million in dividends; quarterly dividends were $0.13 per share.
- Debt and liquidity: Total debt was $356.7 million, principally fixed-rate obligations; cash exceeded debt by approximately $141.9 million. The company had no outstanding borrowings under its revolving or delayed-draw term facilities and reported $794.7 million of additional borrowing capacity under the most restrictive covenant. It was in compliance with financial covenants. The $350 million senior unsecured notes bear 6% interest and mature in December 2019.
Material changes and unusual items
- Sales growth reflected approximately 11% higher volume and a 1% favorable impact from acquired revenues net of divestitures, partly offset by ASC 606 adoption and foreign exchange, each with an approximately 1% unfavorable combined impact; price/mix was flat. Management said some volume reflected customers purchasing ahead of announced price increases.
- ASC 606 was adopted September 1, 2018 using the modified retrospective method, reducing opening retained earnings by $13.0 million. For the quarter, adoption reduced reported sales by $2.4 million, operating profit by $1.2 million, and diluted EPS by $0.02 compared with results without adoption.
- Net income and EPS benefited from the lower tax rate and fewer average shares outstanding following prior-period repurchases. Adjusted diluted EPS, a non-GAAP measure, rose 19.6% to $2.32; adjusted operating profit fell 1.0% to $134.1 million. These adjusted measures exclude specified items and are not substitutes for GAAP results.
- Special charges were $1.0 million, primarily related to moving activities associated with a planned facility closure. Remaining restructuring reserves were $6.8 million. Management expects additional facility-closure costs, including lease-termination and relocation costs, and says eventual annual savings are expected to exceed charges recognized.
Outlook, commentary, and risks
- Management cited third-party forecasts for low-single-digit growth in the North American lighting market in FY2019 and said it remained cautiously optimistic. It aims to outperform served markets through new construction and renovation opportunities, channel and geographic expansion, new integrated solutions, and data-analytics offerings; no specific company revenue or earnings forecast was provided.
- Management expects challenging pricing in some product categories and ongoing product-mix pressure. Announced price increases are expected to mitigate some pressure, while cost-reduction efforts and product introductions are intended to support competitiveness and profitability.
- Tariffs on certain Chinese imports affect some components and sourced finished products. Mitigation actions include alternative suppliers, in-sourcing, and price increases; additional U.S. policy changes could affect results positively or negatively.
- Management said cash, projected operating cash flow, and borrowing availability should meet liquidity needs over the next 12 months. Capital spending was expected to be approximately 1.5% of FY2019 net sales. The board-authorized repurchase plan allowed up to six million shares; 4.8 million remained available as of January 9, 2019. Repurchases are discretionary and may increase leverage.
- Results are seasonal, with sales and net income generally higher in the second half of the fiscal year; Q1 results are not necessarily indicative of the full year. Broader uncertainties include economic, political, trade, and interest-rate conditions, input costs, customer demand, competition, and execution of restructuring and growth initiatives.
- Contingencies: The company is defending a consolidated securities class action alleging misleading statements about sales trends and profitable growth; it filed a motion to dismiss and cannot reasonably estimate potential losses. It is also reviewing import/export classification and valuation issues and cannot yet determine the likelihood or amount of any loss. Other legal claims were described as not expected by management to have a material adverse effect, though unfavorable developments could do so.
- A limited number of alleged thermal events involving certain nPP16 power-pack configurations were reported to the CPSC. The company said its testing linked the events to faults in external load wiring, not the devices; the CPSC closed its review. The company does not believe a recall is necessary but noted that costs or reputational effects cannot be ruled out.
Important facts for investors to verify
- Whether pricing, product mix, and input-cost trends allow gross and operating margins to stabilize or recover.
- Whether customer purchases ahead of price increases affected reported volume and subsequent demand.
- Progress on tariff mitigation, announced price increases, and the potential effect of further trade-policy changes.
- Refinancing or repayment plans for the $350 million notes maturing in December 2019, and continued covenant compliance and access to committed facilities.
- Developments in the securities litigation and trade-compliance review, including any change in the company’s ability to estimate potential exposure.
- Effects of ASC 606 adoption and the remaining provisional accounting for the Tax Cuts and Jobs Act; management reported no material TCJA adjustment in this quarter but had not completed its accounting.