Acuity Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and first six months ended February 29, 2020; comparisons are with the periods ended February 28, 2019. Acuity Brands develops lighting, building-management, software, and related services for North American and select international markets. This interim filing is unaudited.
Financial performance
| Metric | Q2 FY2020 | Q2 FY2019 | Six months FY2020 | Six months FY2019 |
|---|---|---|---|---|
| Net sales | $824.2 million | $854.4 million | $1,658.9 million | $1,787.0 million |
| Gross profit | $343.9 million | $333.9 million | $699.7 million | $701.4 million |
| Gross margin | 41.7% | 39.1% | 42.2% | 39.3% |
| Operating profit | $81.4 million | $95.9 million | $165.0 million | $212.3 million |
| Operating margin | 9.9% | 11.2% | 9.9% | 11.9% |
| Net income | $57.2 million | $66.3 million | $114.2 million | $145.9 million |
| Diluted EPS | $1.44 | $1.67 | $2.88 | $3.66 |
- Q2: Sales fell 3.5%, while net income declined 13.7%. Gross margin improved 260 basis points, but operating profit fell 15.1%, as higher selling, distribution, and administrative expenses and special charges outweighed higher gross profit.
- Six months: Sales fell 7.2%, net income declined 21.7%, and diluted EPS fell 21.3%. Gross margin rose 290 basis points, but operating profit declined 22.3% and operating margin fell 200 basis points.
- Management attributed sales pressure primarily to lower volume: approximately 7% in Q2 and 12% for the six-month period. Acquisitions contributed about 3% in each comparison; favorable price/mix also partly offset lower volume. Management cited market softness, discontinued tariff-affected retail products, and lower large-project activity.
- Adjusted, non-GAAP results also weakened: Q2 adjusted operating profit was $101.7 million, down 9.5%, and adjusted diluted EPS was $1.84, down 7.5%. For six months, adjusted operating profit was $220.7 million, down 10.5%, and adjusted diluted EPS was $3.97, down 7.9%. These measures exclude specified items and should be considered alongside, not instead of, GAAP results.
Cash flow, liquidity, and capitalization
- Six-month operating cash flow was $214.7 million, versus $188.3 million a year earlier. Management attributed the increase mainly to lower working-capital requirements, partly offset by lower net income.
- Investing cash use was $329.5 million, including $302.9 million for acquisitions and $24.9 million for capital expenditures. Financing provided $34.9 million; cash declined $80.4 million to $380.6 million.
- At February 29, 2020, total debt was $406.2 million, up from $356.6 million at August 31, 2019. The company drew $400 million under its term loan in December 2019, primarily to repay $350 million of senior notes that matured that month. Debt was primarily variable-rate at period-end.
- The company reported $396.2 million of additional borrowing capacity under its credit agreement, including the effect of letters of credit, and compliance with all financial covenants. Debt-to-total-capitalization was 16.6%, compared with 15.7% at fiscal year-end; cash was $380.6 million.
- Management said it expected to meet liquidity needs over the next 12 months using cash, operating cash flow, and available borrowing capacity, while noting that pandemic effects could change that assessment. Capital expenditures were $24.9 million in the first half; the company expected a similar amount in the second half.
Material developments, outlook, and risks
- The company acquired The Luminaires Group and LocusLabs in fiscal 2020. Purchase accounting remained provisional; preliminary acquired goodwill and identified intangible assets were approximately $125.3 million and $183.1 million, respectively.
- Six-month special charges were $8.5 million, primarily severance and right-of-use asset impairments related to planned facility closures, relocations, and integration efforts. Remaining restructuring reserves were $4.0 million.
- COVID-19 created substantial uncertainty around sales channels, supply chain, manufacturing, distribution, construction and renovation activity, and consumer spending. The filing provided no quantified fiscal 2020 sales or earnings forecast; management said the pandemic’s impact could not be reliably estimated.
- Management estimated a fiscal 2020 effective tax rate of approximately 23%, before discrete items and assuming tax-jurisdiction rates remained generally consistent. It noted seasonality, with sales and net income generally higher in the second half.
- Risks include COVID-19 disruption and liquidity effects; variable-rate debt exposure; product warranty and recall costs; unresolved patent litigation and securities class-action claims; and a review of potentially misclassified or inaccurately valued international shipments. Loss estimates for the highlighted legal and trade-compliance matters were not available.
- The Board declared a $0.13-per-share quarterly dividend on March 27, 2020, payable May 1 to shareholders of record April 17.
Important facts for investors to verify
- How subsequent COVID-19 effects changed demand, operations, cash generation, and liquidity relative to management’s February 29 assessment.
- Whether lower sales volume and elevated adjusted SD&A costs persisted, and whether margin improvements translated into stronger operating profit.
- Final purchase-price allocations and the contribution of the TLG and LocusLabs acquisitions to revenue, earnings, and cash flow.
- Variable-rate debt costs, covenant headroom, and the company’s capacity to service debt while funding capital spending and dividends.
- Developments in the patent, securities, and trade-compliance matters, for which potential losses were not reasonably estimable in this filing.