Acuity Brands(AYI) - 2024 Q2 - Quarterly Report

Part I. FINANCIAL INFORMATION Financial Statements Acuity Brands' unaudited consolidated financial statements detail financial position, operations, and cash flows, highlighting increased cash and net income Consolidated Balance Sheet Summary (in millions) | Account | Feb 29, 2024 (Unaudited) | Aug 31, 2023 | | :--- | :--- | :--- | | Total Assets | $3,525.8 | $3,408.5 | | Cash and cash equivalents | $578.9 | $397.9 | | Inventories | $375.8 | $368.5 | | Goodwill | $1,097.1 | $1,097.9 | | Total Liabilities | $1,376.2 | $1,393.1 | | Long-term debt | $495.9 | $495.6 | | Total Stockholders' Equity | $2,149.6 | $2,015.4 | Consolidated Statement of Comprehensive Income Summary (in millions) | Account | Three Months Ended Feb 29, 2024 | Three Months Ended Feb 28, 2023 | Six Months Ended Feb 29, 2024 | Six Months Ended Feb 28, 2023 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $905.9 | $943.6 | $1,840.6 | $1,941.5 | | Gross profit | $412.4 | $406.7 | $840.8 | $823.2 | | Operating profit | $118.1 | $111.5 | $251.0 | $220.4 | | Net income | $89.2 | $83.2 | $189.8 | $158.1 | | Diluted EPS | $2.84 | $2.57 | $6.05 | $4.86 | Consolidated Statement of Cash Flows Summary (in millions) | Account | Six Months Ended Feb 29, 2024 | Six Months Ended Feb 28, 2023 | | :--- | :--- | :--- | | Net cash provided by operating activities | $292.6 | $306.4 | | Net cash used for investing activities | $(32.7) | $(29.2) | | Net cash used for financing activities | $(79.0) | $(159.4) | | Net change in cash and cash equivalents | $181.0 | $115.8 | Note 1 — Description of Business and Basis of Presentation Acuity Brands operates two segments, ABL for lighting and ISG for intelligent building solutions, with typical seasonality in later fiscal quarters - The company operates through two business segments: Acuity Brands Lighting and Lighting Controls (ABL) and the Intelligent Spaces Group (ISG)[19] - The ABL segment's portfolio includes commercial, architectural, and specialty lighting, primarily using LED technology, sold through various channels including electrical distributors and retail home improvement centers[20] - The ISG segment offers building management solutions for HVAC, lighting, and access control, aiming to make spaces smarter, safer, and greener[22] Note 3 — Acquisitions and Divestitures The company acquired Arize horticulture lighting assets in FY2024 and KE2 Therm in FY2023, while divesting Sunoptics in FY2023 with a pre-tax loss - On January 19, 2024, the company acquired certain assets related to Arize® horticulture lighting products, which were included in the ABL segment's results[29] - The acquisition of KE2 Therm in May 2023 resulted in preliminary goodwill of $15.0 million within the ISG segment and preliminary gross intangible assets of $18.0 million[31][32] - In November 2022 (fiscal 2023), the company sold its Sunoptics business, resulting in a pre-tax loss of $11.2 million[34] Note 8 — Goodwill and Intangible Assets Goodwill slightly decreased to $1,097.1 million due to currency adjustments, while amortization expense for intangibles was $19.9 million for six months Goodwill by Segment (in millions) | Segment | Aug 31, 2023 | Feb 29, 2024 | | :--- | :--- | :--- | | ABL | $1,014.4 | $1,013.8 | | ISG | $83.5 | $83.3 | | Total | $1,097.9 | $1,097.1 | Amortization Expense of Definite-Lived Intangibles (in millions) | Period | Three Months Ended | Six Months Ended | | :--- | :--- | :--- | | FY 2024 | $10.0 | $19.9 | | FY 2023 | $9.3 | $22.9 | Note 10 — Debt and Lines of Credit Long-term debt is $500.0 million in unsecured notes, with a $600.0 million undrawn revolving credit facility and $596.2 million available capacity - Long-term debt is comprised of $500.0 million aggregate principal amount of 2.150% senior unsecured notes due December 15, 2030[59] - The company has a $600.0 million five-year unsecured revolving credit facility with an option to request an additional $400.0 million[60] - As of February 29, 2024, there were no borrowings outstanding under the Revolving Credit Facility, and available borrowing capacity was $596.2 million[60] Note 11 — Commitments and Contingencies Product warranty and recall liabilities increased to $40.1 million, and a data security class action lawsuit reached a non-material proposed settlement Changes in Product Warranty and Recall Liabilities (in millions) | | Six Months Ended Feb 29, 2024 | Six Months Ended Feb 28, 2023 | | :--- | :--- | :--- | | Beginning balance | $31.6 | $27.3 | | Warranty and recall costs | $28.7 | $19.1 | | Payments and other deductions | $(20.2) | $(18.4) | | Ending balance | $40.1 | $28.0 | - A proposed settlement was reached on December 1, 2023, for a class action lawsuit concerning data security incidents; the impact of the settlement is not material[68] Note 13 — Revenue Recognition Revenue is recognized upon transfer of control, with ABL sales decreasing and ISG sales increasing across disaggregated channels Disaggregated Revenues by Sales Channel (in millions) | Channel | Three Months Ended Feb 29, 2024 | Three Months Ended Feb 28, 2023 | Six Months Ended Feb 29, 2024 | Six Months Ended Feb 28, 2023 | | :--- | :--- | :--- | :--- | :--- | | ABL Total | $843.5 | $890.8 | $1,719.9 | $1,837.9 | | Independent sales network | $612.3 | $635.3 | $1,237.5 | $1,309.0 | | Direct sales network | $93.0 | $94.7 | $190.4 | $201.1 | | Retail sales | $46.4 | $50.4 | $102.0 | $100.3 | | ISG Total | $68.1 | $58.2 | $132.3 | $115.0 | | Total Net Sales | $905.9 | $943.6 | $1,840.6 | $1,941.5 | Note 16 — Special Charges No special charges were recognized in H1 FY2024, contrasting with $6.9 million in FY2023 for Sunoptics divestiture-related costs - No special charges were recognized during the first six months of fiscal 2024[92] - In the first quarter of fiscal 2023, the company recognized $6.9 million in special charges related to the Sunoptics divestiture, including $4.3 million for asset impairments and $2.6 million for severance and other costs[92] Note 18 — Earnings Per Share Basic EPS was $2.89 and diluted EPS $2.84 for Q2 FY2024, with both increasing year-over-year due to higher net income and fewer shares Earnings Per Share | Metric | Three Months Ended Feb 29, 2024 | Three Months Ended Feb 28, 2023 | Six Months Ended Feb 29, 2024 | Six Months Ended Feb 28, 2023 | | :--- | :--- | :--- | :--- | :--- | | Basic EPS | $2.89 | $2.60 | $6.13 | $4.91 | | Diluted EPS | $2.84 | $2.57 | $6.05 | $4.86 | | Basic weighted average shares (millions) | 30.864 | 32.048 | 30.940 | 32.178 | | Diluted weighted average shares (millions) | 31.399 | 32.386 | 31.388 | 32.545 | Note 20 — Segment Information Q2 FY2024 saw ABL sales decrease but profit increase, while ISG sales and profit both grew, reflecting similar trends for the six-month period Segment Financial Information (in millions) | Segment & Metric | Three Months Ended Feb 29, 2024 | Three Months Ended Feb 28, 2023 | Six Months Ended Feb 29, 2024 | Six Months Ended Feb 28, 2023 | | :--- | :--- | :--- | :--- | :--- | | ABL Net Sales | $843.5 | $890.8 | $1,719.9 | $1,837.9 | | ABL Operating Profit | $126.0 | $123.6 | $269.8 | $241.7 | | ISG Net Sales | $68.1 | $58.2 | $132.3 | $115.0 | | ISG Operating Profit | $9.1 | $6.3 | $14.4 | $14.0 | Management's Discussion and Analysis of Financial Condition and Results of Operations Q2 FY2024 net sales decreased 4.0% to $905.9 million, but gross profit margin improved, leading to a 5.9% increase in operating profit, with strong liquidity and ISG growth Financial Condition, Capital Resources, and Liquidity The company's financial condition is strong, with cash increasing to $578.9 million, total liquidity at $1.2 billion, and $495.9 million in unsecured debt - Cash position increased by $181.0 million from August 31, 2023, to $578.9 million at February 29, 2024[116] - Net cash provided by operating activities was $292.6 million for the six months ended February 29, 2024, a decrease from $306.4 million in the prior-year period[116] - Total liquidity, combining cash on hand ($578.9 million) and available borrowing capacity ($596.2 million), totaled approximately $1.2 billion as of February 29, 2024[119] Capital Allocation Priorities Capital allocation priorities included $29.0 million in capex, Arize acquisition, $8.8 million in dividends, and $67.6 million in share repurchases - Invested $29.0 million in property, plant, and equipment during the first six months of fiscal 2024[124] - Paid dividends of $8.8 million ($0.28 per share) during the first six months of fiscal 2024[129] - Repurchased 0.4 million shares of common stock for $67.6 million in the first six months of fiscal 2024. As of February 29, 2024, 3.9 million shares remained available for repurchase[130] Results of Operations - Second Quarter Q2 FY2024 net sales decreased 4.0% to $905.9 million, but improved gross profit margin led to a 5.9% increase in operating profit and higher diluted EPS Q2 FY2024 vs Q2 FY2023 Performance (in millions) | Metric | Q2 FY2024 | Q2 FY2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $905.9 | $943.6 | (4.0)% | | Gross Profit | $412.4 | $406.7 | 1.4% | | Gross Profit Margin | 45.5% | 43.1% | +240 bps | | Operating Profit | $118.1 | $111.5 | 5.9% | | Operating Profit Margin | 13.0% | 11.8% | +120 bps | | Net Income | $89.2 | $83.2 | 7.2% | | Diluted EPS | $2.84 | $2.57 | 10.5% | Segment Results - Second Quarter Q2 FY2024 saw ABL net sales decline but operating profit increase, while ISG net sales and operating profit both grew significantly Q2 FY2024 Segment Performance (in millions) | Segment | Net Sales | Operating Profit | Operating Margin | | :--- | :--- | :--- | :--- | | ABL | $843.5 (-5.3% YoY) | $126.0 (+1.9% YoY) | 14.9% (+100 bps) | | ISG | $68.1 (+17.0% YoY) | $9.1 (+44.4% YoY) | 13.4% (+260 bps) | Results of Operations - First Six Months H1 FY2024 net sales decreased 5.2% to $1.84 billion, but gross profit margin expanded, leading to a 13.9% increase in operating profit and higher diluted EPS YTD FY2024 vs YTD FY2023 Performance (in millions) | Metric | YTD FY2024 | YTD FY2023 | Change (%) | | :--- | :--- | :--- | :--- | | Net Sales | $1,840.6 | $1,941.5 | (5.2)% | | Gross Profit | $840.8 | $823.2 | 2.1% | | Gross Profit Margin | 45.7% | 42.4% | +330 bps | | Operating Profit | $251.0 | $220.4 | 13.9% | | Operating Profit Margin | 13.6% | 11.4% | +220 bps | | Net Income | $189.8 | $158.1 | 20.1% | | Diluted EPS | $6.05 | $4.86 | 24.5% | Segment Results - First Six Months H1 FY2024 ABL net sales declined but operating profit grew, while ISG net sales increased significantly, though its operating profit growth was modest YTD FY2024 Segment Performance (in millions) | Segment | Net Sales | Operating Profit | Operating Margin | | :--- | :--- | :--- | :--- | | ABL | $1,719.9 (-6.4% YoY) | $269.8 (+11.6% YoY) | 15.7% (+250 bps) | | ISG | $132.3 (+15.0% YoY) | $14.4 (+2.9% YoY) | 10.9% (-130 bps) | Quantitative and Qualitative Disclosures about Market Risk No material changes occurred in the company's exposure to market risks, including interest rates, foreign exchange, and commodity prices - There have been no material changes to the company's exposure from market risks (interest rates, foreign exchange rates, commodity prices) from those disclosed in the Form 10-K[160] Controls and Procedures Management concluded disclosure controls were effective as of February 29, 2024, with no material changes to internal control over financial reporting - The principal executive and financial officers concluded that the company's disclosure controls and procedures were effective as of February 29, 2024[163] - The evaluation of controls excluded KE2 Therm Solutions, Inc., which was acquired during fiscal 2023 and constituted less than 2% of total assets[163] - No changes in internal control over financial reporting occurred during the most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, internal controls[165] Part II. OTHER INFORMATION Legal Proceedings Information on legal proceedings is incorporated by reference from the Commitments and Contingencies footnote in Part I of this report - Information regarding legal proceedings is contained in the Commitments and Contingencies footnote of the Notes to Consolidated Financial Statements and is incorporated by reference[167] Risk Factors No material changes occurred in the company's risk factors from those disclosed in its Annual Report on Form 10-K - There have been no material changes in risk factors from those disclosed in the company's Form 10-K[168] Unregistered Sales of Equity Securities and Use of Proceeds The company repurchased 84,546 shares in Q2 FY2024 at $207.87 average, with 3.9 million shares remaining available after a new authorization Purchases of Equity Securities (Q2 FY2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | Dec 2023 | 53,277 | $188.27 | | Jan 2024 | 10,539 | $236.86 | | Feb 2024 | 20,730 | $243.50 | | Total | 84,546 | $207.87 | - On January 25, 2024, the Board authorized the repurchase of an additional three million shares of common stock[169] - As of February 29, 2024, the maximum number of shares that may yet be repurchased under the program was 3.9 million[169] Other Information No directors or Section 16 officers adopted or terminated Rule 10b5-1 trading arrangements during Q2 FY2024 - During Q2 FY2024, no directors or Section 16 officers adopted or terminated any Rule 10b5-1 trading arrangements[171] Exhibits This section refers to the Index to Exhibits, listing all exhibits filed or incorporated by reference into this Form 10-Q - A list of all exhibits filed as part of the Form 10-Q is provided in the Index to Exhibits[172]