Acuity Brands, Inc. — Form 10-Q Summary
Reporting period: Second quarter and six months ended February 28, 2019. The filing identifies the registrant as Acuity Brands, Inc., a Delaware corporation, and reports one segment serving North American and select international lighting markets.
Financial performance
Amounts in millions, except per-share data. Comparisons are with the corresponding 2018 periods.
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $854.4; +2.7% | $1,787.0; +6.7% |
| Gross profit / margin | $333.9 / 39.1%; margin down 110 bps | $701.4 / 39.3%; margin down 160 bps |
| Operating profit / margin | $95.9 / 11.2%; +7.2% | $212.3 / 11.9%; +1.2% |
| Net income | $66.3; down 31.6% | $145.9; down 13.4% |
| Diluted EPS | $1.67; down 28.3% | $3.66; down 9.4% |
| Operating cash flow | Not separately presented | $188.3, versus $177.6 |
- Second-quarter adjusted operating profit, a non-GAAP measure, was $112.4 million, up 6.7%, with a 13.2% margin versus 12.7%. Adjusted diluted EPS was $1.99 versus $1.89.
- For the six months, adjusted operating profit was $246.5 million, up 2.4%, while its margin declined to 13.8% from 14.4%. Adjusted diluted EPS was $4.31 versus $3.84. Adjusted measures exclude specified items; they are not substitutes for GAAP results.
- Gross-margin pressure reflected customer and sales-channel mix, higher materials and freight costs, and pricing dynamics. In the quarter, lower SD&A costs helped lift operating profit despite slightly lower gross profit.
- GAAP net income comparisons were materially affected by a $31.2 million discrete TCJA tax benefit in the prior-year comparison period that did not recur. Effective tax rates were 23.1% versus a 23.1% benefit in the quarter, and 24.2% versus 11.2% for the six months.
Cash, debt and liquidity
- Cash was $232.0 million at February 28, 2019, up from $129.1 million at August 31, 2018. Six-month operating cash flow was $188.3 million; capital expenditures were $24.9 million.
- Cash uses included $48.7 million of share repurchases and $10.5 million of dividends during the six months. The company paid $0.26 per share in dividends for the period.
- Total debt was $356.7 million. This includes $350 million of 6% senior unsecured notes due December 2019, plus industrial revenue bonds and bank loans. Management stated it intended to refinance the notes using its term-loan facility.
- The company reported no outstanding borrowings under its $400 million revolving facility or $400 million delayed-draw term-loan facility, $794.7 million of additional borrowing capacity under the most restrictive covenant, and compliance with financial covenants.
- Debt-to-total-capitalization was 16.5%; net-debt-to-net-capitalization was 6.5%. Management believed available cash, operating cash flows, and borrowing capacity could meet liquidity needs over the next 12 months.
Changes, outlook and risks
- Sales growth came primarily from higher volume; six-month volume increased approximately 7%. In the quarter, volume rose more than 3%, while unfavorable price/mix partly offset growth. Recent price increases were partly offset by channel and customer mix shifts.
- Management expected the North American lighting market to grow in the low-single-digit range in fiscal 2019 and remained “cautiously optimistic.” It expected to outperform served markets over time, but provided no specific company revenue or earnings guidance.
- Management expected pricing pressure, product-mix shifts, and the retail-channel customer shift to continue weighing on sales or gross margins. It said lower freight and commission costs would largely offset the retail-mix effect on gross profit dollars and margin.
- Tariffs on certain Chinese imports affected some components and finished products. Mitigation efforts included alternative sourcing, in-sourcing, and price increases; further trade-policy changes could have positive or negative effects.
- The company had recognized $12.0 million to date for facility consolidation and workforce reductions and expected additional lease-termination and relocation costs. Completed streamlining was expected to generate annual savings exceeding recognized charges, most of which would be reinvested.
- ASC 606 adoption reduced reported six-month revenue by $4.0 million, operating profit by $2.4 million, and diluted EPS by $0.05; it also resulted in a $13.0 million retained-earnings adjustment at adoption. Management said the overall adoption impact was not material to financial condition, results, or cash flows.
- A securities class action alleges misleading statements regarding sales trends and profitable growth. The company disputes the claims and moved to dismiss; it could not estimate a possible loss or range. A review of misclassified or inaccurately valued international shipments was ongoing, and the company could not determine any related loss.
- Management cited uncertain economic, political and trade conditions, interest-rate volatility, input costs, demand, competition, and execution risks. It reported no material change to previously disclosed risk factors. Disclosure controls were deemed effective at a reasonable-assurance level.
Investor facts to verify
- Progress and terms for refinancing the $350 million notes due in December 2019, and any resulting change in leverage or interest expense.
- Whether pricing actions and cost initiatives offset tariffs, input-cost inflation, and continued customer/channel mix pressure on margins.
- Underlying sales trends by channel and the sustainability of volume growth, particularly given seasonality and the company’s expectation that sales and earnings are generally higher in the fiscal second half.
- Developments and potential exposure in the securities litigation and international trade-compliance review.
- Effects of ASC 842 lease adoption, scheduled for September 1, 2019; the company stated it could not yet reasonably estimate the impact.