(EDGAR Online via COMTEX) -- Item 2.Management's Discussion and Analysis of Financial Condition and Results of Operations
The purpose of this discussion and analysis is to enhance the understanding and evaluation of the results of operations, financial position, cash flows, indebtedness, and other key financial information of Acuity Brands, Inc.
Overview
Company
We are a market-leading industrial technology company. We use technology to solve problems in spaces and light. Through our two business segments, Acuity Brands Lighting and Lighting Controls ("ABL") and the Intelligent Spaces Group ("ISG") we design, manufacture, and bring to market products and services that make a valuable difference in people's lives. We achieve growth through the development of innovative new products and services, including lighting, lighting controls, building management systems, and location-aware applications. We achieve customer-focused efficiencies that allow us to increase market share and deliver superior returns. We look to aggressively deploy capital to grow the business and to enter attractive new verticals.
The results of operations for the three and nine months ended May 31, 2022 are not necessarily indicative of the results to be expected for the full fiscal 2022 year due primarily to continued uncertainty of general economic conditions that may impact our key end markets for fiscal 2022, seasonality, and the impact of any acquisitions, among other reasons. We are uncertain of the future impact of the ongoing COVID-19 pandemic or recovery of prior deterioration in economic conditions to our sales channels, supply chain, manufacturing, and distribution as well as overall construction, renovation, and consumer spending. Additionally, the current conflict between Russia and Ukraine and the related sanctions and other penalties imposed by countries across the globe against Russia are creating substantial uncertainty in the global economy. While we do not have operations in Russia or Ukraine and do not have significant direct exposure to customers and vendors in those countries, we are unable to predict the impact that these actions will have on the global economy or on our financial condition, results of operations, and cash flows as of the date of these financial statements.
Financial Condition, Capital Resources, and Liquidity
We have numerous sources of capital, including cash on hand and cash flows generated from operations as well as various sources of financing. Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to meet our capital allocation priorities, which are to reinvest in our current business growth, make strategic acquisitions and investments, pay dividends, and repurchase shares. Sufficient cash flow generation is also critical to fund our operations in the short and long terms and to maintain compliance with covenants contained in our financing agreements.
Our significant contractual cash requirements primarily include principal and interest on our unsecured notes and borrowings under our credit agreement, payments for operating lease liabilities, and certain purchase obligations incurred in the ordinary course of business that are enforceable and legally binding. Our obligations related to these items are described further within Management's Discussion and Analysis of Financial Condition and Results of Operations within our Annual Report filed on Form 10-K. We believe that we will be able to meet our liquidity needs over the next 12 months based on our cash on hand, current projections of cash flows from operations, and borrowing availability under financing arrangements. Additionally, we believe that our cash flows from operations and sources of funding, including, but not limited to, future borrowings and borrowing capacity, will sufficiently support our long-term liquidity needs. In the event of a sustained market deterioration, we may need additional capital, which would require us to evaluate available alternatives and take appropriate actions.
Cash
Our cash position at May 31, 2022 was $318.2 million, a decrease of $173.1 million from August 31, 2021. Cash generated from operating activities and cash on hand were used during the current year to fund our capital allocation priorities as discussed below.
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We generated $165.7 million of cash flows from operating activities during the nine months ended May 31, 2022 compared with $316.2 million in the prior-year period, a decrease of $150.5 million. This decline was due primarily to increased operating working capital related primarily to higher inventory levels and increased income tax payments associated with our higher profit.
Financing Arrangements
See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for discussion of our various financing arrangements, including the $500.0 million aggregate principal amount of 2.150% senior unsecured notes due December 15, 2030 (the "Unsecured Notes") as well as the terms of our $400.0 million five-year unsecured revolving credit facility ("Revolving Credit Facility"). The Revolving Credit Facility expires in June 2023; however, we entered into a new agreement prior to this expiration. See Subsequent Event footnote of the Notes to Consolidated Financial Statements for further details on the terms of the new agreement. At May 31, 2022, our outstanding debt balance was $616.8 million compared to our cash position of $318.2 million. We were in compliance with all financial covenants under our financing arrangements as of May 31, 2022.
At May 31, 2022, we had additional borrowing capacity under the Revolving Credit Facility of $273.9 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility less the outstanding letters of credit of $4.1 million issued under the facility and the $122.0 million of short-term borrowings outstanding under the Revolving Credit Facility. As of May 31, 2022, our cash on hand combined with the additional borrowing capacity under the Revolving Credit Facility totaled $592.1 million.
The Unsecured Notes were issued by Acuity Brands Lighting, Inc., a wholly-owned subsidiary of Acuity Brands, Inc. The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Acuity Brands, Inc. and ABL IP Holding LLC, a wholly-owned subsidiary of Acuity Brands, Inc. The following tables present summarized financial information for Acuity Brands, Inc., Acuity Brands Lighting, Inc., and ABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in non-guarantors as of the dates and during the period presented (in millions):
Summarized Balance Sheet Information May 31, 2022 August 31, 2021
Current assets $ 1,183.6 $ 1,172.0
Amounts due from non-guarantor affiliates 285.5 213.4
Non-current assets 1,392.1 1,391.7
Current liabilities 764.3 595.1
Non-current liabilities 817.6 815.7
Summarized Income Statement Information Nine Months Ended May 31, 2022
Net sales $ 2,452.9
Gross profit 1,024.3
Net income 264.4
Capital Allocation Priorities
Our capital allocation priorities are to invest in our current business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases.
Investments in Current Business Growth
We invested $38.0 million and $30.6 million during the nine months ended May 31, 2022 and 2021, respectively, in property, plant, and equipment, primarily related to investments in new and enhanced information technology capabilities, tooling, equipment, and facility enhancements. We currently expect to invest approximately 1.5% of net sales on capital expenditures during fiscal 2022. Additionally, we increased our inventory levels to support growth and mitigate inconsistent supply availability at our production facilities.
Strategic Acquisitions and Investments
We seek opportunities to strategically expand and enhance our portfolio of solutions. There were no acquisitions during the first nine months of fiscal 2022. The $12.2 million of cash outflows reflected in the fiscal 2022 Consolidated Statements of Cash Flows relate to fiscal 2021 acquisitions primarily for working capital settlements.
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Please refer to the Acquisitions footnote of the Notes to Consolidated Financial Statements for more information.
Dividends
We paid dividends on our common stock of $13.7 million ($0.39 per share) and $14.3 million ($0.39 per share) during the nine months ended May 31, 2022 and 2021, respectively. All decisions regarding the declaration and payment of dividends are at the discretion of the Board of Directors (the "Board") and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant.
Share Repurchases
During the first nine months of fiscal 2022, we repurchased 2.3 million shares of our outstanding common stock for $405.1 million. Total cash outflows for share repurchases during the nine months ended May 31, 2022 were $403.5 million. We expect to repurchase shares on an opportunistic basis subject to various factors including stock price, Company performance, market conditions, and other possible uses of cash. As of May 31, 2022, the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 3.5 million shares.
The COVID-19 Pandemic
The COVID-19 pandemic has resulted in intermittent worldwide government restrictions on the movement of people, goods, and services resulting in increased volatility in and disruptions to global markets. We remain committed to prioritizing the health and well-being of our associates and their families and ensuring that we operate effectively. We have implemented various health and safety policies and processes at our facilities in the United States, Mexico, Canada, and other locations as permitted by law.
The COVID-19 pandemic has had an adverse impact on our results of operations. The pandemic has caused reduced construction and renovation spending as well as a disruption in our supply chain for certain components, both of which negatively impacted our operating results. Although our facilities are open, a resurgence in COVID-19 cases, including as a result of new variants, may lead to the reimposition of previously lifted business closure requirements, the imposition of new restrictions, or the issuance of new or revised local or national health guidance. We also continue to incur additional health and safety costs including expenditures for personal protection equipment and facility enhancements to maintain proper distancing guidelines issued by the Centers for Disease Control and Prevention. We have taken actions to reduce costs, including the realignment of headcount with current volumes, a limit on all non-essential employee travel, other efforts to decrease discretionary spending, and reductions in our real estate footprint. Additionally, we elected to defer certain employer payroll taxes as allowable under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES" Act) signed into law on March 27, 2020. Half of these deferrals were paid in December 2021, and the remaining deferrals are due in December 2022.
Although we have implemented significant measures to mitigate further spread of the virus, our employees, customers, suppliers, and contractors may continue to experience disruptions to business activities due to potential further government-mandated or voluntary shutdowns, general economic conditions, or other negative impacts of the COVID-19 pandemic. We are continuously monitoring the adverse effects of the pandemic and identifying steps to mitigate those effects. As the COVID-19 pandemic is continually evolving, we are uncertain of its ultimate duration and impact. See Part I, Item 1a. Risk Factors of our Form 10-K for further details regarding the potential impacts of COVID-19 to our results of operations, financial position, and cash flows.
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Results of Operations
Third Quarter of Fiscal 2022 Compared with Third Quarter of Fiscal 2021
The following table sets forth information comparing the components of net
income for the three months ended May 31, 2022 and 2021 (in millions except per
share data):
Three Months Ended
Increase
May 31, 2022 May 31, 2021 (Decrease) Percent Change
Net sales $ 1,060.6 $ 899.7 $ 160.9 17.9 %
Cost of products sold 615.5 513.1 102.4 20.0 %
Gross profit 445.1 386.6 58.5 15.1 %
Percent of net sales 42.0 % 43.0 % (100) bps
Selling, distribution, and administrative expenses 302.4 268.0 34.4 12.8 %
Special charges - 0.5 (0.5) NM
Operating profit 142.7 118.1 24.6 20.8 %
Percent of net sales 13.5 % 13.1 % 40 bps
Other expense:
Interest expense, net 6.2 6.2 - - %
Miscellaneous (income) expense, net (1.5) 2.7 (4.2) NM
Total other expense 4.7 8.9 (4.2) (47.2) %
Income before income taxes 138.0 109.2 28.8 26.4 %
Percent of net sales 13.0 % 12.1 % 90 bps
Income tax expense 32.3 23.5 8.8 37.4 %
Effective tax rate 23.4 % 21.5 %
Net income $ 105.7 $ 85.7 $ 20.0 23.3 %
Diluted earnings per share $ 3.07 $ 2.37 $ 0.70 29.5 %
NM - not meaningful
Net Sales
Net sales for the three months ended May 31, 2022 increased $160.9 million, or 17.9%, to $1.06 billion compared with $899.7 million in the prior-year period. Both our ABL and ISG segments benefited from recent price increases as well as higher volumes. Revenues from acquired companies contributed an approximately 3% increase to current quarter revenues compared to the prior year. Changes in foreign currency rates did not have a meaningful impact on net sales for the third quarter of fiscal 2022.
Gross Profit
Gross profit for the third quarter of fiscal 2022 increased $58.5 million, or 15.1%, to $445.1 million compared with $386.6 million in the prior-year period, while gross profit margin decreased 100 basis points to 42.0% from 43.0%. In this inflationary environment, we continued to experience material, labor, and freight escalations while also taking pricing actions that mitigated these escalations. Gross profit margin was also unfavorably impacted by the near-term dilutive effects of recent acquisitions.
Operating Profit
Selling, distribution, and administrative expenses ("SD&A") expenses for the three months ended May 31, 2022 were $302.4 million compared with $268.0 million in the prior-year period, an increase of $34.4 million, or 12.8%. The increase in SD&A expense was due primarily to higher outbound freight and commission costs associated with higher sales as well as increased employee-related costs due in part to recent acquisitions.
Operating profit for the third quarter of fiscal 2022 was $142.7 million (13.5% of net sales) compared with $118.1 million (13.1% of net sales) for the prior-year period, an increase of $24.6 million, or 20.8%. The increase in operating profit was due primarily to higher gross profit associated with the increase in sales, partially offset by
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higher SD&A expenses. The operating profit margin increase of 40 bps year over year was due primarily to improved leveraging of our operating costs, partially offset by the decline in gross profit margin.
Other Expense
Other expense consists of net interest expense and net miscellaneous (income) expense, which includes non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses.
Interest expense, net, was $6.2 million for the three months ended May 31, 2022 and 2021.
We reported net miscellaneous income of $1.5 million for the three months ended May 31, 2022 and net miscellaneous expense of $2.7 million for the three months ended May 31, 2021. The year-over-year change in net miscellaneous (income) expense was largely due to gains and losses on foreign currency-related transactions.
Income Taxes and Net Income
Our effective income tax rate was 23.4% and 21.5% for the three months ended May 31, 2022 and 2021, respectively. The increase in the effective income tax rate was primarily due to favorable discrete items recognized in the third quarter of fiscal 2021. We currently estimate that our blended consolidated effective income tax rate, before any discrete items, will be approximately 23% for fiscal 2022, assuming the rates in our taxing jurisdictions remain generally consistent throughout the fiscal year.
Net income for the three months ended May 31, 2022 increased $20.0 million, or 23.3%, to $105.7 million from $85.7 million reported for the prior-year period. The increase in net income resulted primarily from an increased operating profit compared to the prior-year period. Diluted earnings per share for the three months ended May 31, 2022 increased $0.70, or 29.5%, to $3.07 compared with diluted earnings per share of $2.37 for the prior-year period. This increase reflects higher net income as well as lower outstanding diluted shares.
Segment Results
The following table sets forth information comparing the operating results of
our segments, ABL and ISG, for the three months ended May 31, 2022 and 2021 (in
millions).
Three Months Ended
Increase
May 31, 2022 May 31, 2021 (Decrease) Percent Change
ABL:
Net sales $ 1,008.4 $ 850.0 $ 158.4 18.6 %
Operating profit 149.6 126.5 23.1 18.3 %
Operating profit margin 14.8 % 14.9 % (10) bps
ISG:
Net sales $ 58.3 $ 55.4 $ 2.9 5.2 %
Operating profit 9.2 7.2 2.0 27.8 %
Operating profit margin 15.8 % 13.0 % 280 bps
ABL net sales for the three months ended May 31, 2022 increased $158.4 million, or 18.6%, to $1.01 billion compared with $850.0 million in the prior-year period. Sales within the independent sales network channel increased due to benefits from recent price increases as well as higher volumes. Additionally, sales within the corporate accounts channel increased year over year as some large accounts began previously deferred maintenance and renovations. Sales within the retail sales channel increased as sales began to return to normal levels after the customer inventory rebalancing experienced in previous quarters. Acquisitions contributed an approximately 3% increase in sales compared to the prior year and are reflected within the other sales channel in ABL's disaggregated revenue. Sales in our direct sales network channel were approximately flat year over year as products supporting this channel were impacted by component shortages.
Operating profit for ABL was $149.6 million (14.8% of ABL net sales) for the three months ended May 31, 2022 compared to $126.5 million (14.9% of ABL net sales) in the prior-year period, an increase of $23.1 million. The increase in operating profit was due primarily to contributions from higher sales partially offset by increased materials, labor, and freight costs as well as higher operating costs to support the increase in sales.
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ISG net sales for the three months ended May 31, 2022 increased $2.9 million, or 5.2%, to $58.3 million compared with $55.4 million in the prior-year period driven primarily by strong demand for building and heating, ventilation, and air-conditioning controls as well as price increases. ISG operating profit was $9.2 million for the three months ended May 31, 2022 compared to $7.2 million in the prior-year period, an increase of $2.0 million. This increase was due primarily to contributions from higher sales, partially offset by increased employee costs.
First Nine Months of Fiscal 2022 Compared with First Nine Months of Fiscal 2021
The following table sets forth information comparing the components of net
income for the nine months ended May 31, 2022 and 2021 (in millions except per
share data):
Nine Months Ended
Increase
May 31, 2022 May 31, 2021 (Decrease) Percent Change
Net sales $ 2,895.8 $ 2,468.3 $ 427.5 17.3 %
Cost of products sold 1,685.6 1,412.6 273.0 19.3 %
Gross profit 1,210.2 1,055.7 154.5 14.6 %
Percent of net sales 41.8 % 42.8 % (100) bps
Selling, distribution, and administrative expenses 850.1 759.4 90.7 11.9 %
Special charges - 1.5 (1.5) NM
Operating profit 360.1 294.8 65.3 22.2 %
Percent of net sales 12.4 % 11.9 % 50 bps
Other expense:
Interest expense, net 18.1 17.7 0.4 2.3 %
Miscellaneous (income) expense, net (3.1) 6.5 (9.6) NM
Total other expense 15.0 24.2 (9.2) (38.0) %
Income before income taxes 345.1 270.6 74.5 27.5 %
Percent of net sales 11.9 % 11.0 % 90 bps
Income tax expense 76.5 62.4 14.1 22.6 %
Effective tax rate 22.2 % 23.1 %
Net income $ 268.6 $ 208.2 $ 60.4 29.0 %
Diluted earnings per share $ 7.66 $ 5.66 $ 2.00 35.3 %
NM - not meaningful
Net Sales
Net sales for the nine months ended May 31, 2022 increased $427.5 million, or 17.3%, to $2.90 billion compared with $2.47 billion in the prior-year period. Both our ABL and ISG segments benefited from recent price increases as well as higher volumes. Revenues from acquired companies contributed an approximately 3% increase in sales compared to the prior year. Changes in foreign currency rates did not have a meaningful impact on net sales for the first nine months of fiscal 2022.
Gross Profit
Gross profit for the nine months ended May 31, 2022 increased $154.5 million, or 14.6%, to $1.21 billion compared with $1.06 billion in the prior-year period. Gross profit margin decreased 100 basis points to 41.8% for the nine months ended May 31, 2022 compared with 42.8% in the prior-year period. In this inflationary environment, we continued to experience material, labor, and freight escalations while also taking pricing actions that mitigated these escalations. Gross profit margin was also unfavorably impacted by the near-term dilutive effects of recent acquisitions.
Operating Profit
SD&A expenses for the nine months ended May 31, 2022 were $850.1 million compared with $759.4 million in the prior-year period, an increase of $90.7 million, or 11.9%. The increase in SD&A expense was due primarily to higher outbound freight and commissions costs associated with higher sales as well as increased employee-related costs . . .
Jun 30, 2022
COMTEX_409475506/2041/2022-06-30T07:50:10
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