Acuity Brands(AYI) - 2023 Q4 - Annual Report

Part I Business The company is an industrial technology firm with two segments, ABL and ISG, focused on lighting and building management solutions - The company operates through two primary business segments: Acuity Brands Lighting and Lighting Controls (ABL) and the Intelligent Spaces Group (ISG)[9] - ABL's strategy focuses on product vitality, service levels, and technology differentiation for its lighting and controls portfolio, serving customers like electrical distributors and retail home improvement centers[10] - ISG's strategy is to make spaces smarter, safer, and greener by offering building management solutions for HVAC, lighting, and access control, primarily targeting system integrators and enterprise campuses[12] Fiscal 2023 Manufacturing & Sourcing by Region | Region | Manufactured | Purchased | Total | | :--- | :--- | :--- | :--- | | United States | 15% | 7% | 22% | | Mexico | 57% | —% | 57% | | Asia | —% | 15% | 15% | | Others | 6% | —% | 6% | | Total | 78% | 22% | 100% | Research & Development Expenses (Fiscal Years 2021-2023) | Fiscal Year | R&D Expense (in millions) | | :--- | :--- | | 2023 | $97.1 | | 2022 | $95.1 | | 2021 | $88.3 | - As of August 31, 2023, the company employed approximately 12,200 associates, with about 7,700 in Mexico and 3,600 in the United States. Approximately 7,800 associates are covered by collective bargaining agreements[28] Risk Factors The company faces strategic, operational, legal, and financial risks including raw material costs, supply chain disruptions, and regulatory compliance - Strategic Risks: The business is exposed to fluctuations in the cost and availability of raw materials like steel, aluminum, and electronic components, which could negatively impact profitability[39][40] - Operational Risks: A significant portion of manufacturing (57% of finished products) is located in Mexico, exposing the company to potential disruptions from civil unrest or trade disputes[57] - Cybersecurity Risks: The company has experienced security compromises and faces ongoing risks from cyber-attacks, which could disrupt business, lead to data loss, and result in reputational damage or liability[61][63] - Labor Risks: Approximately 65% of the workforce is covered by collective bargaining agreements, with 57% of these agreements expiring within the next year, primarily in Mexico[66] - Legal & Regulatory Risks: The company is subject to a broad range of complex laws and regulations, including environmental (ESG), data privacy, and trade agreements like USMCA. Failure to comply could result in significant costs and liabilities[80][81] - Financial Risks: The market price of the company's stock may be volatile. Additionally, rising interest rates could reduce demand for products by increasing borrowing costs for construction and renovation projects[98][101] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[104] Cybersecurity This item is not applicable for the current reporting period - Not applicable[104] Properties The company owns or leases 46 significant facilities, with the majority of its 18 manufacturing sites located in the United States and Mexico Summary of Facilities by Type (as of Aug 31, 2023) | Facility Type | Owned | Leased | Total | | :--- | :--- | :--- | :--- | | Manufacturing facilities | 12 | 6 | 18 | | Warehouses | — | 1 | 1 | | Distribution centers | 2 | 6 | 8 | | Offices | 5 | 14 | 19 | | Total | 19 | 27 | 46 | Manufacturing Facilities by Geography (as of Aug 31, 2023) | Country | Owned | Leased | Total | | :--- | :--- | :--- | :--- | | United States | 4 | 2 | 6 | | Mexico | 5 | 2 | 7 | | Europe | 2 | — | 2 | | Canada | 1 | 2 | 3 | | Total | 12 | 6 | 18 | Legal Proceedings Information regarding legal proceedings is disclosed in the Commitments and Contingencies footnote to the financial statements - Details on legal proceedings are available in the Commitments and Contingencies footnote to the financial statements[108] Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable[108] Part II Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The company's stock trades on the NYSE, and it actively repurchased shares in fiscal 2023, though its five-year return has underperformed key indices - The company's common stock trades on the New York Stock Exchange under the ticker symbol "AYI"[109] Share Repurchases for Quarter Ended August 31, 2023 | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | June 2023 | 129,774 | $163.44 | | July 2023 | 75,027 | $167.12 | | August 2023 | 101,935 | $164.33 | | Total | 306,736 | $164.64 | - As of August 31, 2023, a maximum of 1,229,790 shares may yet be repurchased under the current Board authorization[111][112] [Reserved] This item is reserved and contains no information Management's Discussion and Analysis of Financial Condition and Results of Operations Fiscal 2023 saw a slight sales decline but improved gross margins, offset by higher expenses, while generating significantly stronger operating cash flow Fiscal Year 2023 vs. 2022 Performance | Metric | FY 2023 | FY 2022 | Change | % Change | | :--- | :--- | :--- | :--- | :--- | | Net Sales | $3,952.2M | $4,006.1M | ($53.9M) | (1.3)% | | Gross Profit | $1,713.2M | $1,672.7M | $40.5M | 2.4% | | Gross Margin | 43.3% | 41.8% | +150 bps | - | | Operating Profit | $473.4M | $509.7M | ($36.3M) | (7.1)% | | Operating Margin | 12.0% | 12.7% | (70 bps) | - | | Net Income | $346.0M | $384.0M | ($38.0M) | (9.9)% | | Diluted EPS | $10.76 | $11.08 | ($0.32) | (2.9)% | - Cash flow from operating activities increased significantly to $578.1 million in fiscal 2023 from $316.3 million in the prior year, mainly due to better cash collections and fewer inventory purchases[125] - Capital allocation in FY2023 included repurchasing 1.6 million shares for $269.3 million, paying $16.8 million in dividends, and acquiring KE2 Therm Solutions, Inc[133][136][137] - The ABL segment's net sales decreased by 2.3% to $3.72 billion, while the ISG segment's net sales grew by 16.9% to $252.7 million[149][151] - The company identified critical accounting estimates including revenue recognition, inventory valuation, goodwill and intangible asset impairment, share-based payment expense, and product warranty costs[155] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to market risks from interest rate and foreign exchange fluctuations, particularly from its operations in Mexico and Canada - The company's primary market risks are from changing interest and foreign exchange rates[174] - Long-term debt is primarily fixed-rate, so a fluctuation in interest rates would not affect interest expense. However, a 10% increase in market rates would decrease the fair value of senior unsecured notes by an estimated $14.2 million[175][176] - Significant foreign exchange risk exists from operations in Mexico and Canada. A hypothetical 10% decrease in the Mexican peso's value relative to the USD would favorably impact operating profit by ~$19.4 million, while a 10% increase would negatively impact it by ~$23.7 million[177] Financial Statements and Supplementary Data This section contains the company's audited consolidated financial statements and accompanying notes for the fiscal year ended August 31, 2023 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants on accounting principles or financial disclosure - None[455] Controls and Procedures Management concluded that disclosure controls and procedures were effective as of August 31, 2023, excluding the recently acquired KE2 Therm - The CEO and CFO concluded that the company's disclosure controls and procedures were effective as of August 31, 2023[457] - The evaluation of controls excluded the operations of KE2 Therm, which was acquired during the fiscal year[457] - No changes in internal control over financial reporting occurred during the most recent quarter that materially affected, or are reasonably likely to materially affect, internal controls[459] Other Information The company amended the severance agreement for its President and CEO, modifying the calculation of the minimum bonus component - The company amended the severance agreement for CEO Neil M. Ashe on October 26, 2023, changing the calculation of the minimum bonus component of potential severance payments[460] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - None[460] Part III Directors, Executive Officers, and Corporate Governance Required information on directors, officers, and corporate governance is incorporated by reference from the company's 2024 proxy statement - Information regarding directors, executive officers, and corporate governance is incorporated by reference from the company's definitive proxy statement[461][462] Executive Compensation Required information on executive compensation is incorporated by reference from the company's 2024 proxy statement - Information regarding executive compensation is incorporated by reference from the company's definitive proxy statement[463] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Required information on security ownership is incorporated by reference from the company's 2024 proxy statement - Information regarding security ownership and equity compensation plans is incorporated by reference from the company's definitive proxy statement[464] Certain Relationships and Related Transactions, and Director Independence Required information on related transactions and director independence is incorporated by reference from the company's 2024 proxy statement - Information regarding certain relationships, related transactions, and director independence is incorporated by reference from the company's definitive proxy statement[465] Principal Accountant Fees and Services Required information on accountant fees and services is incorporated by reference from the company's 2024 proxy statement - Information regarding principal accountant fees and services is incorporated by reference from the company's definitive proxy statement[466] Part IV Exhibits and Financial Statement Schedules This section lists all financial statements, schedules, and exhibits filed as part of the Form 10-K report - This item lists the financial statements, schedules, and exhibits filed with the Form 10-K[468] Form 10-K Summary The company has elected not to provide a summary of the Form 10-K in this section - None[500]