ACUITY BRANDS, INC. 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 ofAcuity Brands, Inc. (referred to herein as "we," "our," "us," the "Company," or similar references) and its subsidiaries as ofNovember 30, 2021 and for the three months endedNovember 30, 2021 and 2020. The following discussion should be read in conjunction with the Consolidated Financial Statements and Notes to Consolidated Financial Statements included within this report. Also, please refer to Acuity Brands' Annual Report on Form 10-K for the fiscal year endedAugust 31, 2021 , filed with theSecurities and Exchange Commission (the "SEC") onOctober 27, 2021 ("Form 10-K"). 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 theIntelligent Spaces Group ("ISG") we design, manufacture, and bring to market products and services that make the world more brilliant, productive, and connected. 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 months endedNovember 30, 2021 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. Additionally, 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. 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 organic 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-term and to maintain compliance with covenants contained in our financing agreements. Our significant contractual cash requirements primarily include principal and interest on long-term debt, 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 atNovember 30, 2021 was$504.0 million , an increase of$12.7 million fromAugust 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. We generated$83.7 million of cash flows from operating activities during the three months endedNovember 30, 2021 compared with$123.9 million in the prior-year period, a decrease of$40.2 million , due primarily to increased operating working capital, particularly inventories, to support the growth in the business as well as the timing of payments for income taxes and prior year payroll tax deferrals under the Coronavirus Aid, Relief, and Economic Security Act of 2020. 18 -------------------------------------------------------------------------------- Table of Contents 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 terms of our$400.0 million five-year unsecured revolving credit facility ("Revolving Credit Facility") as well as the$500.0 million aggregate principal amount of 2.150% senior unsecured notes dueDecember 15, 2030 (the "Unsecured Notes"). AtNovember 30, 2021 , our outstanding debt balance was$494.5 million compared to our cash position of$504.0 million . We were in compliance with all financial covenants under our financing arrangements as ofNovember 30, 2021 . AtNovember 30, 2021 , we had additional borrowing capacity under the revolving credit facility of$395.9 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. As ofNovember 30, 2021 , our cash on hand combined with the additional borrowing capacity under the revolving credit facility totaled$899.9 million . The Unsecured Notes were issued byAcuity Brands Lighting, Inc. , a wholly-owned subsidiary ofAcuity Brands, Inc. The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis byAcuity Brands, Inc. andABL IP Holding LLC , a wholly-owned subsidiary ofAcuity Brands, Inc. The following tables present summarized financial information forAcuity Brands, Inc. ,Acuity Brands Lighting, Inc. , andABL 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 November 30, 2021 August 31, 2021 Current assets $ 1,222.6 $
1,172.0
Amounts due from non-guarantor affiliates 238.5 213.4 Non-current assets 1,381.1 1,391.7 Current liabilities 602.7 595.1 Non-current liabilities 818.7 815.7 Summarized Income Statement Information Three Months Ended November 30, 2021 Net sales $ 781.2 Gross profit 324.7 Net income 84.9 Capital Allocation Priorities Effective capital allocation is a key driver of stockholder value. Our capital allocation priorities are to invest in our business for growth, to invest in mergers and acquisitions, to maintain our dividend, and to make share repurchases. Organic Growth Investments We invested$9.3 million and$11.4 million during the three months endedNovember 30, 2021 and 2020, 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. Strategic Acquisitions and Investments We seek opportunities to strategically expand and enhance our portfolio of solutions. There were no acquisitions during the first quarter of fiscal 2022. We invested in acquisitions of businesses, net of cash acquired, of$75.3 million in the year endedAugust 31, 2021 . These acquisitions included the following transactions: •OnJuly 1, 2021 , using cash on hand, we acquired certain assets and liabilities of amsOSRAM's North American Digital Systems ("OSRAM DS") business. This acquisition is intended to enhance our light emitting diode ("LED") driver and controls technology portfolio and accelerate our innovation, expand our access to market through a more fulsome OEM product offering, and give us more control over our supply chain. 19 -------------------------------------------------------------------------------- Table of Contents •OnMay 18, 2021 , using cash on hand, we acquired all of the equity interests ofRockpile Ventures , an accelerator of edge artificial intelligence startups.Rockpile Ventures helps early-stage artificial intelligence companies drive co-engineering and co-selling partnerships with major cloud ecosystems, enabling faster adoption from proof-of-concept trials to market scale. 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$4.7 million ($0.13 per share) and$5.0 million ($0.13 per share) during the three months endedNovember 30, 2021 and 2020, 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 quarter of fiscal 2022, we repurchased 0.3 million shares of our outstanding common stock for$52.8 million . Total cash outflows for share repurchases during the quarter were$56.3 million . As ofNovember 30, 2021 , the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 3.5 million shares. 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. 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 policies to screen associates, contractors, and vendors for COVID-19 symptoms upon entering our manufacturing, distribution, and open-office facilities inthe United States ,Mexico , and other locations as permitted by law. We have also implemented one-way traffic flows, additional cleaning requirements for common spaces, mandatory face coverings, hand sanitizer stations, socially-distanced workspaces, and self-serve pay stations within our cafeterias to mitigate the spread of the virus. Additionally, we have required certain employees whose job functions can be performed remotely to work primarily from home. 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 theCenters 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 onMarch 27, 2020 . Half of these deferrals were paid inDecember 2021 , and the remaining deferrals are due inDecember 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. 20 -------------------------------------------------------------------------------- Table of Contents Results of Operations First Quarter of Fiscal 2022 Compared with First Quarter of Fiscal 2021 The following table sets forth information comparing the components of net income for the three months endedNovember 30, 2021 and 2020 (in millions except per share data): Three Months Ended Increase November 30, 2021 November 30, 2020 (Decrease) Percent Change Net sales $ 926.1 $ 792.0$ 134.1 16.9 % Cost of products sold 540.3 459.6 80.7 17.6 % Gross profit 385.8 332.4 53.4 16.1 % Percent of net sales 41.7 % 42.0 % (30) bps Selling, distribution, and administrative expenses 270.7 246.0 24.7 10.0 % Special charges - 0.7 (0.7) NM Operating profit 115.1 85.7 29.4 34.3 % Percent of net sales 12.4 % 10.8 % 160 bps Other expense: Interest expense, net 5.9 4.9 1.0 20.4 % Miscellaneous expense, net 0.3 1.6 (1.3) NM Total other expense 6.2 6.5 (0.3) (4.6) % Income before income taxes 108.9 79.2 29.7 37.5 % Percent of net sales 11.8 % 10.0 % 180 bps Income tax expense 21.3 19.6 1.7 8.7 % Effective tax rate 19.6 % 24.7 % Net income $ 87.6 $ 59.6$ 28.0 47.0 % Diluted earnings per share $ 2.46 $ 1.57$ 0.89 56.7 % NM - not meaningful Net Sales Net sales for the three months endedNovember 30, 2021 increased$134.1 million , or 16.9%, to$926.1 million compared with$792.0 million in the prior-year period as our go-to-market activities, focus on servicing our customers, and continued recovery in our end markets generated higher sales in both our ABL and ISG operating segments. Sales across both segments also benefited from recent price increases. Revenues from acquired companies contributed a less than 4% 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 quarter of fiscal 2022. Gross Profit Gross profit for the first quarter of fiscal 2022 increased$53.4 million , or 16.1%, to$385.8 million compared with$332.4 million in the prior-year period, and gross profit margin decreased 30 basis points to 41.7% from 42.0%. Throughout the current quarter, material and conversion costs as well as freight costs continued to escalate. We were largely able to offset the increased costs through price increases and product and productivity improvements. Gross profit margin was unfavorably impacted by the near-term dilutive effects of recent acquisitions. Operating Profit SD&A expenses for the three months endedNovember 30, 2021 were$270.7 million compared with$246.0 million in the prior-year period, an increase of$24.7 million , or 10.0%. 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 due in part to recent acquisitions. SD&A expenses for the first quarter of fiscal 2022 were 29.2% of net sales compared with 31.1% for the prior-year period due primarily to improved leveraging of our operating costs. Operating profit for the first quarter of fiscal 2022 was$115.1 million (12.4% of net sales) compared with$85.7 million (10.8% of net sales) for the prior-year period, an increase of$29.4 million , or 34.3%. The increase in 21 -------------------------------------------------------------------------------- Table of Contents operating profit was due to higher gross profit associated with the increase in sales, partially offset by higher SD&A expenses. The operating profit margin increase of 160 bps year over year was the result of improved leveraging of operating costs, partially offset by lower gross profit margin. Other Expense Other expense consists of net interest expense and net miscellaneous 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$5.9 million and$4.9 million for the three months endedNovember 30, 2021 and 2020, respectively. We reported net miscellaneous expense of$0.3 million and$1.6 million for the three months endedNovember 30, 2021 and 2020, respectively. During the first quarter of fiscal 2021, we recorded an impairment charge of$4.0 million for an unconsolidated equity investment. Excluding the impairment, the year-over-year change in net miscellaneous expense was largely due to gains and losses on foreign currency-related transactions. Income Taxes and Net Income Our effective income tax rate was 19.6% and 24.7% for the three months endedNovember 30, 2021 and 2020, respectively. The decrease in the effective income tax rate was primarily due to favorable discrete items recognized in the first quarter of fiscal 2022 related to excess tax benefits on share-based payments. 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 year. Net income for the first quarter of fiscal 2022 increased$28.0 million , or 47.0%, to$87.6 million from$59.6 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 as well as a lower tax rate. Diluted earnings per share for the three months endedNovember 30, 2021 increased$0.89 , or 56.7%, to$2.46 compared with diluted earnings per share of$1.57 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 endedNovember 30, 2021 and 2020 (in millions except per share data). We have recast historical information to conform to the current segment structure. Three Months Ended November 30, Increase November 30, 2021 2020 (Decrease) Percent Change ABL: Net sales $ 883.6$ 753.6 $ 130.0 17.3 % Operating profit 128.1 98.4 29.7 30.2 % Operating profit margin 14.5 % 13.1 % 140 bps ISG: Net sales $ 46.4$ 40.8 $ 5.6 13.7 % Operating profit (loss) 2.0 (0.1) 2.1 NM Operating profit margin 4.3 % (0.2) % 450 bps ABL net sales for the three months endedNovember 30, 2021 increased$130.0 million , or 17.3%, to$883.6 million compared with$753.6 million in the prior-year period due primarily to our go-to-market activities, focus on servicing our customers, and continued recovery in end markets we serve within the independent and direct sales network channels. Sales within these channels also benefited from recent price increases and revenues from acquired companies. Additionally, sales within corporate accounts increased year over year as some large accounts began previously deferred maintenance and renovations. These increases were partially offset by declines in the retail sales channel. Operating profit for ABL was$128.1 million (14.5% of ABL net sales) for the three months endedNovember 30, 2021 compared to$98.4 million (13.1% of ABL net sales) in the prior-year period, an increase of$29.7 million . The increase in operating profit was due primarily to contributions from higher sales partially offset by increased materials and freight costs as well as higher operating costs to support the increase in sales. 22 -------------------------------------------------------------------------------- Table of Contents ISG net sales for the three months endedNovember 30, 2021 increased$5.6 million , or 13.7%, to$46.4 million compared with$40.8 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$2.0 million for three months endedNovember 30, 2021 compared with a$0.1 million operating loss in the prior-year period, an increase of$2.1 million . This increase was due primarily to contributions from higher sales, partially offset by increased employee costs. Critical Accounting Estimates Management's Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition and results of operations as reflected in our Consolidated Financial Statements, which have been prepared in accordanceU.S. generally accepted accounting principles ("U.S. GAAP"). As discussed in the Description of Business and Basis of Presentation footnote of the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity withU.S. GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition; inventory valuation; goodwill and indefinite-lived intangible assets; share-based payment expense; and product warranty and recall costs. We base our estimates and judgments on our substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. We discuss the development of critical accounting estimates with the Audit Committee of the Board of Directors. There have been no material changes in our critical accounting estimates during the current period. For a detailed discussion of other significant accounting policies that may involve a higher degree of judgment, refer to our Form 10-K. Cautionary Statement Regarding Forward-Looking Statements and Information This filing contains forward-looking statements within the meaning of the federal securities laws. Statements made herein that may be considered forward-looking include statements incorporating terms such as "expects," "believes," "intends," "anticipates," and similar terms that relate to future events, performance, or results of the Company. In addition, the Company, or the executive officers on the Company's behalf, may from time to time make forward-looking statements in reports and other documents we file with theU.S. Securities and Exchange Commission or in connection with oral statements made to the press, current and potential investors, or others. Forward-looking statements include, without limitation: (a) our projections regarding financial performance, including our expected margins and ability to leverage operating costs, liquidity, capital structure, capital expenditures, investments, share repurchases, and dividends; (b) expectations about the impact of any changes in demand, including improvements in our end markets, as well as volatility, challenges, and uncertainty in general economic conditions; (c) expectations about volatility in raw material costs and component and labor availability; (d) our ability to execute and realize benefits from initiatives related to streamlining our operations and integrating recent acquisitions, realize synergies from acquisitions, capitalize on growth opportunities with the intention of becoming a larger, more dynamic company, and introduce innovative products and services; (e) our estimate of our fiscal 2022 effective income tax rate, results of operations, and cash flows; (f) our estimate of future amortization expense; (g) our ability to achieve our long-term financial goals and measures; (h) our expectations about the resolution of securities class action and other legal matters; (i) our expectations about our ability to enter into a new credit agreement prior to the expiration of the current agreement as well as any impacts of the phase out of the London Inter-Bank Offered Rate ("LIBOR"); and (j) our expectations of the impact of the ongoing COVID-19 pandemic. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this quarterly report. Except as required by law, we undertake no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this quarterly report or to reflect the occurrence of unanticipated events. Our forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from our historical experience and management's present expectations or projections. These risks and uncertainties that could cause our actual results to differ materially from those expressed in our forward-looking statements are discussed in Part I, Item 1a. Risk Factors of our Form 10-K. 23
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