Acuity Brands, Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended February 28, 2021; comparisons are to the corresponding prior-year periods. Acuity Brands develops and sells lighting, lighting controls, building management and location-aware technology solutions, principally in North America. It reports one segment.
Financial performance
| Metric | Q2 FY2021 | Q2 FY2020 | Six months FY2021 | Six months FY2020 |
|---|---|---|---|---|
| Net sales | $776.6 million | $824.2 million | $1,568.6 million | $1,658.9 million |
| Gross profit | $336.7 million | $343.9 million | $669.1 million | $699.7 million |
| Gross margin | 43.4% | 41.7% | 42.7% | 42.2% |
| Operating profit | $91.0 million | $81.4 million | $176.7 million | $165.0 million |
| Operating margin | 11.7% | 9.9% | 11.3% | 9.9% |
| Net income | $62.9 million | $57.2 million | $122.5 million | $114.2 million |
| Diluted EPS | $1.74 | $1.44 | $3.30 | $2.88 |
For Q2, sales fell 5.8%, while operating profit increased 11.8% and net income rose 10.0%. Higher gross margin and lower selling, distribution and administrative (SD&A) costs more than offset lower sales. Q2 adjusted operating profit was $108.9 million, up 7.1%, and adjusted diluted EPS was $2.12 versus $1.84. For the six-month period, sales declined 5.4%; operating profit rose 7.1%, but adjusted operating profit fell 3.4% to $213.1 million. Adjusted diluted EPS increased 4.3% to $4.14. These are company-defined non-GAAP measures and exclude specified items.
Sales weakness was concentrated in retail and corporate accounts: Q2 retail sales declined 24% and corporate account sales declined 51%, largely reflecting customer inventory rebalancing and deferred retailer renovations. Independent and direct sales networks were flat in Q2. For the six months, independent network sales fell 2%, retail fell 11%, and corporate accounts fell 43%.
Cash flow, balance sheet and capital
- Six-month operating cash flow was $212.6 million, versus $214.7 million a year earlier. Capital expenditures were $21.2 million; operating cash flow less capital expenditures was approximately $191.4 million.
- Cash was $498.7 million at February 28, 2021, down $62.0 million from August 31, 2020. The period included $338.3 million of share repurchases and $9.7 million of dividends paid.
- Total debt was $498.0 million, compared with $401.1 million at fiscal year-end; stockholders’ equity was $1,932.5 million. Debt to total capitalization was 20.5%, up from 15.9%.
- In November 2020, the company issued $500 million of 2.150% senior unsecured notes due December 2030 and used proceeds principally to repay its $395 million term loan. Debt was therefore primarily fixed-rate at period-end. A $4 million industrial revenue bond was due June 2021.
- No revolver borrowings were outstanding. Available borrowing capacity was $395.8 million, net of letters of credit; the company reported compliance with its financial covenants.
- The board authorized repurchases of up to 6 million shares; 4.4 million remained available at February 28. The company declared a $0.13-per-share quarterly dividend on March 25, payable May 3, 2021.
Outlook, risks and unusual items
Management was cautiously optimistic about improving end markets in the remainder of FY2021 and intended to support top-line performance through its product portfolio and go-to-market teams while continuing to invest. It provided no specific sales or earnings forecast. Management expected FY2021 capital expenditures of approximately 1.5% of net sales and estimated a blended effective tax rate of approximately 23% before discrete items.
COVID-19 continued to weigh on construction and renovation activity and disrupted supply of certain components. Management cited uncertainty around the pandemic’s duration and effects on sales channels, supply chain, manufacturing, distribution and spending. It believed liquidity would meet needs over the next 12 months, but warned sustained economic deterioration could affect operating cash flow and access to funding. Cost actions included workforce realignment, reduced discretionary spending and a smaller real estate footprint.
Six-month special charges were $1.0 million, primarily relocation and severance-related costs tied to facility closures and streamlining. The company also recorded a $4.0 million impairment of an unconsolidated investment. A securities class action remained pending: most challenged statements had been dismissed, while claims concerning five statements proceeded; the company could not reasonably estimate potential losses. Management reported no material change in other estimated contingencies and no material change in disclosed risk factors.
Investor verification priorities
- Whether sales and end-market conditions recover, especially retail and corporate-account demand, and whether supply-chain disruption persists.
- Whether margin improvement and cost controls can continue despite lower sales; reconcile GAAP results with the company’s adjusted, non-GAAP measures.
- Cash generation and capital allocation, including the scale of share repurchases, dividends and planned capital spending.
- Debt refinancing outcomes, the June 2021 industrial revenue bond maturity, revolver availability and covenant compliance.
- Developments in the securities class action and any changes in litigation, warranty or other contingent exposures.