ACUITY INC. (DE) quarterly report, Q2 FY2013

Acuity Brands, Inc. — Form 10-Q Summary

Reporting period: Quarter and six months ended February 28, 2013; comparisons are with the corresponding periods ended February 29, 2012. Unless noted, financial figures are in millions of dollars. The company designs, manufactures, and distributes lighting products and systems, primarily in North America, and reports one operating segment.

Financial performance

Metric	Q2 FY2013	Q2 FY2012	Six months FY2013	Six months FY2012
Net sales	$486.7	$457.7	$967.8	$932.0
Gross profit / margin	$189.7 / 39.0%	$181.9 / 39.7%	$379.2 / 39.2%	$375.6 / 40.3%
Operating profit / margin	$45.1 / 9.3%	$39.0 / 8.5%	$93.3 / 9.6%	$89.5 / 9.6%
Net income	$24.7	$19.5	$50.8	$49.5
Diluted EPS	$0.57	$0.46	$1.18	$1.16

• Quarterly change: Sales rose 6.3%, net income 26.7%, and diluted EPS 23.9%. Operating margin increased 80 basis points, while gross margin fell 70 basis points.
• First-half change: Sales rose 3.8%, net income 2.6%, and diluted EPS 1.7%. Gross margin declined 110 basis points; operating margin was unchanged.
• Management attributed sales growth chiefly to higher volume, partly offset by unfavorable price and product mix. Volume increased more than 9% in Q2 and more than 5% for the first half. LED luminaires were about 15% of Q2 sales and 14% of first-half sales, versus 7% and 6%, respectively, a year earlier.
• Adjusted, non-GAAP diluted EPS was $0.62 for Q2 versus $0.57, and $1.31 for the first half versus $1.31. These measures exclude specified Cochran closure inefficiencies and special charges; they are not substitutes for GAAP results.

Cash flow, liquidity, and debt

• Cash and cash equivalents were $262.8 at February 28, down $21.7 from August 31, 2012. Current assets were $783.7 and current liabilities $312.5.
• Operating cash flow was negative $0.3 for the first half, compared with positive $37.6 in the prior-year period. Management cited working-capital use, including higher receivables and lower payables and accrued compensation.
• Investing cash outflow was $25.1, including $21.9 of capital expenditures and $3.3 for acquisitions. Financing cash inflow was $3.8, including $11.1 of dividends paid. The company expects fiscal 2013 capital spending of about $40.0.
• Total debt was $353.5, substantially unchanged from August 31, 2012, comprising $350.0 of 6% senior unsecured notes due December 2019 and $4.0 of industrial revenue bonds due 2021. Debt-to-total-capitalization was 28.4%; debt net of cash to capitalization net of cash was 9.2%.
• The $250.0 revolving credit facility matures in January 2017. Available borrowing capacity was $244.3, net of letters of credit issued under the facility. The company reported compliance with its financial covenants.
• First-half dividends declared were $0.26 per share. The company planned quarterly dividends of $0.13 per share for the remainder of fiscal 2013; a $0.13 dividend was declared March 29, payable May 1, 2013.

Material changes, outlook, and risks

• Gross margin pressure reflected unfavorable product mix, lower prices on certain LED products, and $7.6 of first-half temporary manufacturing inefficiencies associated with closing the Cochran, Georgia facility. The closure was principally completed by the end of Q2. Management expected about $1.0 of additional related costs in Q3 and no further costs after that quarter.
• Management estimated annualized pretax savings of about $14.0 from fiscal 2012 streamlining actions, with approximately $6.0 of benefits realized in the first half of fiscal 2013, excluding noted inefficiencies.
• The company acquired Adura Technologies in December 2012; its reported impact was not material. It acquired eldoLED on March 13, 2013; the filing said the transaction was not material to financial condition, results, or cash flows.
• Management expected modest improvement in non-residential construction and mid-single-digit growth in the North American lighting market for the remainder of fiscal 2013. It expected demand to improve and become more consistent, cited stronger March order rates, and remained optimistic about profitable growth and outperforming served markets. These are forward-looking expectations, not guarantees.
• Management expected material input costs to be relatively flat, except for continued declines in certain LED component costs; employee-related costs were expected to rise. The estimated fiscal 2013 effective tax rate was approximately 35%, assuming tax-jurisdiction rates remained generally consistent.
• A freight payment and audit provider notified the company on March 25 that it was ceasing services after a fraud-related internal system failure. The company could incur losses if funds paid to the provider are not remitted to carriers, but could not estimate any potential loss. Management did not expect a material adverse effect based on information then available.
• Other disclosed exposures include product warranty and recall costs, litigation, environmental matters, commodity and foreign-exchange fluctuations, and economic and market demand uncertainty. The company said no material changes had occurred in its previously disclosed legal, self-insurance, environmental, or guarantee reserves. It also warned actual warranty costs could exceed historical estimates.

Important facts for investors to verify

• Whether the Q2 volume increase and March order strength persisted, particularly given management’s warning that delayed projects affected Q2 sales and product mix.
• Whether unfavorable price/mix and LED price reductions continue to offset volume growth, and whether margins recover after Cochran transition costs end.
• Whether operating cash flow improves from its near-zero first-half level as working-capital movements normalize.
• Whether the company achieves projected $14.0 annualized streamlining savings, the remaining Cochran closure timetable, and approximately $40.0 fiscal 2013 capital spending.
• Any quantified exposure or subsequent developments involving the freight provider incident, and any changes to warranty, litigation, or other contingency estimates.