Acuity Brands, Inc. — Fiscal 2018 Second-Quarter Form 10-Q
Reporting period: Quarter and six months ended February 28, 2018; comparatives are the corresponding 2017 periods. The company provides lighting and building-management products and services, including IoT-enabled solutions, in North America and select international markets. Results are unaudited, and the company notes that sales and income are generally higher in the second half of its fiscal year.
Financial performance and position
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $832.1 million, +3.4% | $1,674.9 million, +1.1% |
| Gross profit / margin | $334.9 million / 40.2%, down 150 bps | $685.1 million / 40.9%, down 110 bps |
| Operating profit / margin | $88.0 million / 10.6%, down 18.5% in profit | $206.6 million / 12.3%, down 11.9% in profit |
| Net income | $96.9 million, up 44.0% | $168.4 million, up 13.0% |
| Diluted EPS | $2.33, versus $1.53 | $4.04, versus $3.39 |
| Operating cash flow | Not presented for the quarter | $178.3 million, versus $90.0 million |
Reported net income and EPS benefited substantially from a provisional $31.2 million tax benefit related to the Tax Cuts and Jobs Act (TCJA). Excluding the company’s stated adjustments and TCJA benefit, non-GAAP adjusted diluted EPS was $1.89 for the quarter, up 6.8%, and $3.84 year to date, up 2.1%. Adjusted operating profit was down 16.2% for the quarter and 11.0% year to date. These non-GAAP measures are not substitutes for GAAP results.
For the quarter, sales growth reflected volume gains and favorable foreign exchange, offset by unfavorable price/mix. Lower gross margin reflected price/mix, partly offset by volume and productivity. Higher employee-related costs and freight contributed to increased selling, distribution and administrative expenses. For the six-month period, higher material and commodity costs also pressured gross margin.
Cash, debt and liquidity: Cash was $229.8 million at February 28, down $81.3 million from August 31, 2017. Total debt was $356.9 million; debt was primarily fixed-rate and included $350 million of 6% senior notes due December 2019. The $250 million revolving facility had no borrowings and $244.7 million of available capacity under the most restrictive covenant, net of applicable letters of credit. The company reported covenant compliance. Debt-to-total-capitalization was 17.9%; debt, net of cash, to capitalization, net of cash, was 7.2%.
Six-month investing cash use was $47.3 million, including $26.4 million for the Lucid acquisition and $20.9 million of capital expenditures. Financing cash use was $210.7 million, principally $194.3 million of share repurchases and $10.9 million of dividends. Operating cash flow improved mainly from lower working-capital requirements and lower incentive payments. The company expected fiscal 2018 capital expenditures of approximately 2% of sales.
Material changes and notable items
- Quarterly and year-to-date sales increased modestly, but operating profit and margins declined as price/mix and higher expenses outweighed sales growth.
- The TCJA reduced the U.S. federal corporate tax rate and generated a provisional tax benefit; the company said its tax analysis was not final. It estimated an effective tax rate, before discrete items, of 26%–28% for fiscal 2018 and 23%–25% for fiscal 2019.
- On February 12, 2018, the company acquired Lucid Design Group, a building-efficiency data and analytics provider, for cash. Preliminary purchase accounting was incomplete; the acquired business’s results were not material to the period.
- The company repurchased 1.2 million shares for $194.3 million during the six months. In March 2018, the board authorized repurchases of up to six million shares, including the 0.8 million remaining under the prior authorization. The company said completing the authorization within twelve months could require additional resources and potentially higher leverage.
- The board declared a $0.13-per-share quarterly dividend on March 29, payable May 1, 2018.
Outlook, commentary and risks
- Management described near-term lighting-market conditions as weak, with soft order activity and tepid demand for larger non-residential projects. It expected weakness to persist in the near term, while third-party forecasts suggested North American demand could improve later in calendar 2018.
- Management expected continued pricing pressure, especially for basic products, and unfavorable product and channel mix to weigh on sales and margins. It planned product introductions and cost-reduction efforts, while pursuing growth in integrated lighting, building management and Atrius-based solutions.
- Management expressed long-term optimism about market growth and the company’s ability to outperform its served markets; the filing did not provide specific sales or earnings guidance.
- Two shareholder securities class actions allege misleading statements about sales trends and profitable growth. The company disputes the claims, intends to defend them, and said it could not estimate the possible loss or range of loss. Trade-compliance reviews concerning misclassified or inaccurately valued international shipments were ongoing; the company could not determine the likelihood or amount of any liability.
- Warranty and recall reserves rose to $24.0 million from $22.0 million at the start of the six-month period. The company cautioned that actual future warranty or recall costs could exceed estimates.
- The company expected adoption of the new revenue standard in fiscal 2019 to have no material overall impact, while anticipating additional deferral for certain services and gross presentation of return assets and refund liabilities.
Important facts for investors to verify
- How much reported earnings growth is attributable to the provisional TCJA benefit versus underlying operating performance.
- Whether sales volume, price/mix, material costs and expense trends improve or further pressure gross and operating margins.
- The cash-flow and leverage effects of the expanded share-repurchase authorization and any additional borrowing.
- Updates to the TCJA tax estimates and the final accounting for the tax benefit and Lucid acquisition.
- Developments, potential financial exposure and insurance coverage related to the securities litigation and trade-compliance review.