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
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $834.7 million | $932.6 million | Down 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 million | Down 28.4% |
| Diluted EPS | $1.44 | $1.98 | Down 27.3% |
| Operating cash flow | $129.6 million | $131.8 million | Down $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.