Acuity Brands, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter ended May 31, 2018; comparisons are with the three and nine months ended May 31, 2017. Amounts are in millions of dollars except per-share data. The company provides lighting and building-management products and services, including IoT-related solutions, primarily in North America.
Financial performance
| Metric | Q3 FY2018 | Q3 FY2017 | Nine months FY2018 | Nine months FY2017 |
|---|---|---|---|---|
| Net sales | $944.0 | $891.6 | $2,618.9 | $2,547.5 |
| Gross profit | $389.4 | $378.9 | $1,074.5 | $1,074.3 |
| Gross margin | 41.3% | 42.5% | 41.0% | 42.2% |
| Operating profit | $105.9 | $131.5 | $312.5 | $366.1 |
| Operating margin | 11.2% | 14.7% | 11.9% | 14.4% |
| Net income | $73.0 | $82.2 | $241.4 | $231.2 |
| Diluted EPS | $1.80 | $1.90 | $5.85 | $5.29 |
| Operating cash flow | Not presented separately | Not presented separately | $300.7 | $198.0 |
- Q3 sales rose 5.9%, with volume up approximately 10%; unfavorable price and product/channel mix of approximately 5% partly offset growth. Q3 net income fell 11.2% and diluted EPS fell 5.3%.
- For nine months, sales increased 2.8%, while operating profit declined 14.6%. Diluted EPS rose 10.6%, helped by fewer weighted-average shares following repurchases and lower taxes. The 16.4% nine-month effective tax rate included a $31.2 million provisional Tax Cuts and Jobs Act (TCJA) benefit; adjusted net income declined 1.2% to $255.5 million.
- Management-reported adjusted Q3 operating profit was $135.8 million, down 8.4%, and adjusted diluted EPS was $2.37, up 10.2%. For nine months, adjusted operating profit fell 10.1% to $373.5 million and adjusted diluted EPS rose 4.6% to $6.19. These non-GAAP measures exclude specified items and are not substitutes for GAAP results.
- Margin pressure reflected unfavorable price/mix, wage increases, and excess-inventory reserves. Higher SD&A costs and special charges also weighed on operating profit; higher volume, productivity improvements, and lower quality costs provided partial offsets.
Cash, debt and liquidity
- Cash was $94.3 million at May 31, 2018, down from $311.1 million at August 31, 2017. Nine-month operating cash flow was $300.7 million; investing used $195.7 million, including $163.5 million for acquisitions, and financing used $319.3 million.
- Cash uses included $298.4 million to repurchase 2.0 million shares, $32.2 million of capital expenditures, and $16.2 million of dividends. Inventory rose to $406.5 million from $328.6 million, including higher finished goods and reserves.
- Total debt was $358.0 million, versus $356.9 million at fiscal year-end; debt-to-total capitalization was 18.3%. The company reported compliance with its credit-facility covenants at May 31 and $243.5 million of available capacity under the then-existing facility’s most restrictive covenant.
- After quarter-end, on June 29, the company entered into an $800 million credit agreement: a $400 million five-year revolver and a $400 million delayed-draw term facility. It had drawn $90.4 million on the revolver and reported $704.3 million of additional capacity on that date. Management said liquidity should meet needs over the next 12 months.
Outlook, notable items and risks
- Management expected modest improvement in North American lighting demand in the second half of calendar 2018, while describing near-term conditions as challenging. It anticipated continued pricing pressure and unfavorable mix, particularly for basic products, and planned cost-reduction and product initiatives. No specific full-year sales or EPS guidance is provided in the filing text.
- Management estimated effective tax rates, before discrete items, of 26%–28% for fiscal 2018 and 23%–25% for fiscal 2019. It expected the TCJA to benefit future net income, EPS, and cash flow, but noted estimates could change as interpretation and implementation develop.
- The company acquired Lucid Design Group in February and IOTA Engineering in May 2018. Preliminary acquisition accounting included approximately $75.7 million of goodwill and $79.1 million of identified intangible assets in aggregate.
- Fiscal 2018 restructuring charges were $10.7 million for nine months, primarily for facility consolidation and workforce reductions; Q3 charges were $9.9 million. A separate $3.1 million excess-inventory reserve related to a facility closure was recorded in Q3. Remaining restructuring reserves were $17.3 million; additional lease-termination and relocation costs were expected. Management anticipated eventual savings exceeding the special charge.
- Risks include soft non-residential lighting demand, competition and price/mix pressure, tariffs on certain China imports, and uncertain trade policy. Management did not then expect the tariffs to have a material adverse financial effect. A trade-compliance review of misclassified or inaccurately valued shipments remained ongoing, with loss likelihood and amount undetermined.
- Two shareholder securities class actions had been transferred to federal court in Georgia. The company disputed the allegations and said it could not estimate possible losses. Product warranty and recall reserves were $24.5 million at May 31, 2018.
Important facts for investors to verify
- Whether sales-volume growth can offset continued unfavorable pricing and product/channel mix, and whether gross and operating margins stabilize.
- How much of reported nine-month earnings and EPS growth reflects the provisional TCJA benefit, share repurchases, and other nonrecurring adjustments; compare GAAP and company-defined adjusted results.
- Cash conversion and working-capital trends, especially the inventory increase, alongside spending on acquisitions, capital expenditures, dividends, and buybacks.
- Actual revolver and term-loan usage, covenant headroom, refinancing plans for the $350 million notes due December 2019, and the effect of the new facilities on leverage and interest costs.
- Final acquisition valuations and integration performance; actual restructuring costs and realized savings; and developments in trade-compliance and securities litigation matters.