Acuity Brands(AYI) - 2019 Q4 - Annual Report

Part I Business Acuity Brands is a leading provider of lighting and building management solutions and services in North America and select international markets, operating as a single reportable segment - Acuity Brands is a leading provider of lighting and building management solutions and services, operating as one reportable segment primarily serving the North American market[5] - The company estimates the North American lighting and building management solutions market it serves was over $20 billion in fiscal 2019, with renovation and retrofit activity representing a growing proportion of the total market[9][10] - In fiscal 2019, approximately 98% of net sales originated in North America, with 89% from the United States Key customers include electrical distributors, retail home improvement centers, and national accounts[8] Fiscal 2019 Manufacturing & Sourcing by Region | Region | Manufactured | Purchased | Total | | :--- | :--- | :--- | :--- | | United States | 19% | 7% | 26% | | Mexico | 60% | —% | 60% | | China | —% | 11% | 11% | | Others | 3% | —% | 3% | | Total | 82% | 18% | 100% | Research and Development Expenses (2017-2019) | Fiscal Year | R&D Expense (in millions) | | :--- | :--- | | 2019 | $74.7 | | 2018 | $63.9 | | 2017 | $52.0 | Risk Factors The company faces significant risks related to its strategy, operations, legal/regulatory environment, and financial matters - Sales are highly dependent on the cyclical construction market and are subject to aggressive pricing from competitors, including Asian importers[37][39] - Approximately 60% of finished products are manufactured in Mexico, exposing the company to potential disruptions from civil unrest or trade disputes[51] - The company sources components and about 11% of finished goods from China, which are subject to import tariffs Mitigation efforts include finding alternative suppliers, insourcing, and raising prices[66][68] - Significant operational risk exists from potential failures or security compromises of IT systems, especially for customer-facing IoT and building management solutions, which could lead to data loss, reputational damage, and fines under evolving data privacy laws like GDPR and CCPA[52][56][57] - The company faces financial risk from the planned transition away from LIBOR after 2021, as its credit agreement is indexed to LIBOR, which could increase interest expenses[81] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the Securities and Exchange Commission - None[84] Properties As of August 31, 2019, the company operates from numerous facilities, primarily in North America, including 18 manufacturing facilities Facility Summary by Type (as of Aug 31, 2019) | Facility Type | Owned | Leased | | :--- | :--- | :--- | | Manufacturing facilities | 13 | 5 | | Warehouses | 1 | 3 | | Distribution centers | 2 | 7 | | Offices | 5 | 17 | Manufacturing Facilities by Location (as of Aug 31, 2019) | Location | Owned | Leased | Total | | :--- | :--- | :--- | :--- | | United States | 6 | 2 | 8 | | Mexico | 4 | 2 | 6 | | Europe | 2 | — | 2 | | Canada | 1 | 1 | 2 | | Total | 13 | 5 | 18 | Legal Proceedings The company is involved in various legal claims, including patent infringement and a securities class action lawsuit - Lighting Science Group Corp (LSG) filed complaints alleging infringement of seven patents related to certain LED luminaires and is seeking to preclude importation and sale of accused products, along with unspecified monetary damages[89] - A consolidated securities class action lawsuit alleges false or misleading statements between October 2015 and April 2017 While a motion to dismiss was granted for 42 of 47 challenged statements, claims based on 5 statements are proceeding to discovery[90] Mine Safety Disclosures This item is not applicable to the company - Not applicable[93] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities Acuity Brands' common stock trades on the NYSE under "AYI", with a share repurchase program authorized in March 2018 - The Board authorized a repurchase of up to six million shares in March 2018 As of August 31, 2019, 4.55 million shares may yet be purchased under this program[95] Share Repurchase Activity (Quarter Ended Aug 31, 2019) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | June 2019 | — | $— | | July 2019 | 250,000 | $131.58 | | August 2019 | — | $— | | Total | 250,000 | $131.58 | - Over the five years ending August 31, 2019, a $100 investment in Acuity Brands stock would be worth $103, compared to $142 for the S&P Midcap 400 Index and $177 for the Dow Jones US Building Materials & Fixtures Index[99] Selected Financial Data The five-year financial data shows net sales peaking at $3.68 billion in 2018, with consistent growth in total assets and stockholders' equity Selected Consolidated Financial Data (2015-2019) | (In millions, except per-share data) | 2019 | 2018 | 2017 | 2016 | 2015 | | :--- | :--- | :--- | :--- | :--- | :--- | | Net sales | $3,672.7 | $3,680.1 | $3,505.1 | $3,291.3 | $2,706.7 | | Net income | $330.4 | $349.6 | $321.7 | $290.8 | $222.1 | | Diluted earnings per share | $8.29 | $8.52 | $7.43 | $6.63 | $5.09 | | Total assets | $3,172.4 | $2,988.8 | $2,899.6 | $2,948.0 | $2,407.0 | | Total debt | $356.6 | $356.8 | $356.9 | $355.2 | $352.4 | | Stockholders' equity | $1,918.9 | $1,716.8 | $1,665.6 | $1,659.8 | $1,360.0 | | Cash dividends declared per common share | $0.52 | $0.52 | $0.52 | $0.52 | $0.52 | Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) Management discusses the company's financial performance, liquidity, and strategic outlook, noting flat sales in fiscal 2019 and a cautious outlook for fiscal 2020 Overview This section outlines Acuity Brands' business as a leading provider of lighting and building management solutions, including IoT-enabled systems - The company's strategy focuses on extending its leadership in North America by delivering superior lighting and building management solutions, including expanding its software and IoT offerings[111] - Recent acquisitions include The Luminaires Group (TLG) and WhiteOptics in fiscal 2019, and IOTA Engineering and Lucid Design Group in fiscal 2018, to enhance the company's portfolio of luminaires, optical components, emergency lighting, and data analytics platforms[107][108][109][110] Liquidity and Capital Resources The company's primary liquidity sources are operating cash flow, cash on hand, and borrowings, with significant increase in operating cash flow in fiscal 2019 - Net cash from operating activities increased by $143.2 million to $494.7 million in fiscal 2019, primarily due to a $57.0 million decrease in operating working capital[120] - The company intends to refinance its $350.0 million senior unsecured notes, due December 2019, using its Term Loan Facility, which is expected to have a lower interest rate[125][126][167] Contractual Obligations as of August 31, 2019 (in millions) | Obligation | Total | Less than 1 Year | 1 to 3 Years | 4 to 5 Years | After 5 Years | | :--- | :--- | :--- | :--- | :--- | :--- | | Debt | $356.7 | $350.3 | $4.8 | $0.7 | $0.9 | | Interest obligations | $95.2 | $23.6 | $25.2 | $20.9 | $25.5 | | Operating leases | $68.7 | $16.7 | $23.4 | $11.8 | $16.8 | | Purchase obligations | $357.2 | $347.2 | $10.0 | $— | $— | | Other liabilities | $44.9 | $1.8 | $3.2 | $1.5 | $38.4 | | Total | $922.7 | $739.6 | $66.6 | $34.9 | $81.6 | Results of Operations This section provides a detailed comparison of financial results for fiscal years 2019 vs 2018 and 2018 vs 2017, highlighting sales, margins, and tax rates Fiscal 2019 vs. 2018 Performance | (In millions, except per share) | 2019 | 2018 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $3,672.7 | $3,680.1 | (0.2)% | | Gross profit | $1,479.7 | $1,485.4 | (0.4)% | | Operating profit | $462.9 | $460.8 | 0.5% | | Net income | $330.4 | $349.6 | (5.5)% | | Diluted EPS | $8.29 | $8.52 | (2.7)% | | Adjusted Diluted EPS | $9.57 | $8.84 | 8.3% | - The fiscal 2019 sales decline was driven by a 1% drop in volume, attributed to non-repeating initial stocking at a retail customer, product portfolio pruning, and softer market conditions This was offset by favorable price/mix from price increases and channel mix changes[136] Fiscal 2018 vs. 2017 Performance | (In millions, except per share) | 2018 | 2017 | % Change | | :--- | :--- | :--- | :--- | | Net sales | $3,680.1 | $3,505.1 | 5.0% | | Gross profit | $1,485.4 | $1,481.1 | 0.3% | | Operating profit | $460.8 | $527.5 | (12.6)% | | Net income | $349.6 | $321.7 | 8.7% | | Diluted EPS | $8.52 | $7.43 | 14.7% | - The fiscal 2018 sales increase was due to a ~7% rise in sales volume, partially offset by an unfavorable price/mix of ~3% The volume growth was driven by Atrius-based luminaires and higher shipments in the home center channel[149] - The effective tax rate for fiscal 2018 was 17.9%, significantly lower than 34.7% in 2017, primarily due to the enactment of the Tax Cuts and Jobs Act (TCJA)[157] Outlook Management expresses caution for fiscal 2020, anticipating sluggish market demand due to global trade issues and tariffs - Management is cautious about fiscal 2020 market conditions due to global trade issues and tariffs, expecting sluggish demand for lighting products[160] - Fiscal 2020 first quarter net sales are projected to be down in the mid-to-high single-digit percentage range compared to Q1 2019, primarily due to a prior-year pull-forward of orders ahead of price increases[162] - The estimated annual tax rate for fiscal 2020 is approximately 23% before discrete items, and capital expenditures are expected to be around 1.7% of net sales[161] Critical Accounting Estimates The company identifies several critical accounting estimates that require significant management judgment, including revenue recognition and impairment testing - Key critical accounting estimates include revenue recognition, inventory valuation, goodwill and intangible asset impairment, self-insurance reserves, retirement benefits, share-based payments, and product warranty/recall costs[170][171] - Goodwill and indefinite-lived intangible assets are tested for impairment annually in Q4 The fiscal 2019 qualitative assessment for goodwill ($967.3M) and quantitative test for indefinite-lived trade names ($141.3M) resulted in no impairment charges[175][177][178] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rates, foreign exchange rates, and commodity prices - A hypothetical 10% decline in the Canadian dollar versus the U.S. dollar would negatively impact operating profit by ~$12 million, while a 10% appreciation would favorably impact it by ~$15 million[197] - A hypothetical 10% decrease in the Mexican peso versus the U.S. dollar would favorably impact operating profit by ~$13 million, while a 10% increase would negatively impact it by ~$16 million[197] - In fiscal 2019, the company purchased approximately 90,000 tons of steel and aluminum, exposing it to commodity price volatility[199] Financial Statements and Supplementary Data This section contains the company's consolidated financial statements for the fiscal year ended August 31, 2019, and the independent auditor's reports Management's Report on Internal Control over Financial Reporting Management asserts its responsibility for establishing and maintaining adequate internal control over financial reporting, concluding it was effective as of August 31, 2019 - Management concluded that the Company's internal control over financial reporting was effective as of August 31, 2019, based on the criteria set forth by COSO in the Internal Control-Integrated Framework (2013)[203] Report of Independent Registered Public Accounting Firm Ernst & Young LLP issued an unqualified opinion on the financial statements and internal controls, identifying indefinite-lived trade names valuation as a critical audit matter - The auditor, Ernst & Young LLP, issued an unqualified opinion on the consolidated financial statements and the company's internal control over financial reporting as of August 31, 2019[207][217] - The audit identified the valuation of the company's $141.3 million in indefinite-lived trade names as a critical audit matter due to the complex and subjective judgments required for assumptions like future net sales, discount rates, and royalty rates[211][213] Consolidated Financial Statements The consolidated financial statements present the company's financial position and performance, including the Balance Sheet, Statements of Comprehensive Income, and Cash Flows Consolidated Balance Sheet Highlights (as of Aug 31, in millions) | | 2019 | 2018 | | :--- | :--- | :--- | | Cash and cash equivalents | $461.0 | $129.1 | | Total current assets | $1,441.8 | $1,211.1 | | Goodwill | $967.3 | $970.6 | | Total assets | $3,172.4 | $2,988.8 | | Total current liabilities | $596.1 | $682.7 | | Long-term debt | $347.5 | $356.4 | | Total liabilities | $1,253.5 | $1,272.0 | | Total stockholders' equity | $1,918.9 | $1,716.8 | Consolidated Statement of Comprehensive Income (Year Ended Aug 31, in millions) | | 2019 | 2018 | 2017 | | :--- | :--- | :--- | :--- | | Net sales | $3,672.7 | $3,680.1 | $3,505.1 | | Gross profit | $1,479.7 | $1,485.4 | $1,481.1 | | Operating profit | $462.9 | $460.8 | $527.5 | | Net income | $330.4 | $349.6 | $321.7 | | Diluted EPS | $8.29 | $8.52 | $7.43 | Notes to Consolidated Financial Statements This section provides detailed disclosures supporting the main financial statements, covering accounting policies, acquisitions, debt, and income taxes - The company adopted ASC 606 (Revenue from Contracts with Customers) on September 1, 2018, using the modified retrospective method, resulting in a $13.0 million cumulative reduction to retained earnings[281] - Total debt outstanding was $356.6 million at August 31, 2019, primarily consisting of $350.0 million in senior unsecured notes due December 2019, which the company intends to refinance[345][346] - The company recorded pre-tax special charges of $1.8 million in fiscal 2019 for streamlining initiatives, compared to $5.6 million in 2018 and $11.3 million in 2017[393][395] - The total tax benefit related to the enactment of the TCJA was $36.8 million, including a $32.5 million benefit from re-measuring deferred taxes and a $4.3 million benefit for the one-time transition tax[403] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on any matter of accounting principles or practices, or financial statement disclosure - None[430] Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective at a reasonable assurance level as of August 31, 2019 - Based on an evaluation as of August 31, 2019, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures are effective at a reasonable assurance level[432] Other Information There is no other information to report for this item - None[435] Part III Directors, Executive Officers, and Corporate Governance Information regarding the company's directors, executive officers, and corporate governance policies is incorporated by reference from the 2020 proxy statement - Information required by this item is incorporated by reference from the company's proxy statement for the 2020 Annual Meeting of Stockholders[437][438][439] Executive Compensation Information regarding executive and director compensation is incorporated by reference from the company's proxy statement for its 2020 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's proxy statement for the 2020 Annual Meeting of Stockholders[440] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by certain beneficial owners and management, and equity compensation plans, is incorporated by reference from the 2020 proxy statement - Information required by this item is incorporated by reference from the company's proxy statement for the 2020 Annual Meeting of Stockholders[441] Certain Relationships and Related Transactions, and Director Independence Information regarding certain relationships, related party transactions, and director independence is incorporated by reference from the company's proxy statement for its 2020 Annual Meeting of Stockholders - Information required by this item is incorporated by reference from the company's proxy statement for the 2020 Annual Meeting of Stockholders[442] Principal Accountant Fees and Services Information regarding principal accountant fees and services, including audit committee pre-approval policies, is incorporated by reference from the 2020 proxy statement - Information required by this item is incorporated by reference from the company's proxy statement for the 2020 Annual Meeting of Stockholders[443] Part IV Exhibits and Financial Statement Schedules This section lists the documents filed as part of the Form 10-K report, including financial statements, schedules, and a comprehensive index of exhibits - This section lists all financial statements, schedules, and exhibits filed with the report, including certifications by the CEO and CFO pursuant to the Sarbanes-Oxley Act[445][484] Form 10-K Summary The company did not provide a summary for this item - None[485]