ATLANTA — Acuity Brands, Inc. today announced that fiscal 2018 third-quarter net sales increased 5.9 percent to $944.0 million from $891.6 million reported in the prior-year period. Operating profit for the third quarter of fiscal 2018 was $105.9 million, a decrease of $25.6 million, or 19.5 percent, over the year-ago period. Net income for the third quarter of fiscal 2018 was $73.0 million, a decrease of $9.2 million, or 11.2 percent, compared with the prior-year period. Fiscal 2018 third quarter diluted earnings per share (“EPS”) of $1.80 decreased $0.10, or 5.3 percent, compared with $1.90 for the year-ago period.
Adjusted diluted EPS for the third quarter of fiscal 2018 increased 10.2 percent to $2.37 compared with adjusted diluted EPS of $2.15 for the year-ago period. Adjusted operating profit for the third quarter of fiscal 2018 decreased $12.5 million, or 8.4 percent, to $135.8 million compared with the year-ago period adjusted operating profit of $148.3 million. Adjusted operating profit margin declined 220 basis points to 14.4 percent compared with the year-ago period. Adjusted results exclude the impact of amortization expense of acquired intangible assets, share-based payment expense, acquisition-related items, special charges for streamlining activities, and excess inventory adjustments related to the closure of a facility. Management believes these items impacted the comparability of the Company’s results and that adjusted financial measures enhance the reader’s overall understanding of the Company’s current financial performance by making results comparable between periods. A reconciliation of adjusted financial measures to the most directly comparable U.S. GAAP measure is provided in the tables at the end of this release.
Vernon J. Nagel, Chairman, President, and Chief Executive Officer of Acuity Brands, commented, “Our third quarter performance was solid, particularly against the backdrop of a challenging lighting market. Our net sales grew almost 6 percent in the third quarter, which was primarily due to greater shipments of our Atrius-based luminaires as well as increased shipments of products for infrastructure and utility projects, partially offset by lower net sales for larger commercial projects. Third quarter profitability measures were negatively impacted by unfavorable changes in product prices and mix of products sold as well as higher selling, distribution, and administrative expenses. We took a number of actions this quarter to improve our profitability, including relaunching our Contractor Select portfolio of basic, lesser featured products at competitive price points to more effectively and profitably compete in that certain portion of the market. Additionally, we initiated actions to consolidate certain facilities. Finally, we are excited to welcome aboard the associates of the recently acquired IOTA Engineering, whose industry-leading technology coupled with its reputation for providing superior customer service will further enhance Acuity’s market position in emergency lighting and equipment.”
Third Quarter Results
The 5.9 percent year-over-year growth in fiscal 2018 third quarter net sales was due primarily to an increase in sales volume of approximately 10 percent and a combined 1 percent favorable impact from acquisitions and foreign exchange rate changes, partially offset by an approximate 5 percent unfavorable change in product prices and mix of products sold (“price/mix”.) Unfavorable price/mix reflected changes in both product mix, which included substitutions to certain products with less costly form factors resulting in lower price points, and sales channel mix, which included declines in shipments of generally higher priced solutions, primarily for larger commercial projects. Price/mix was also impacted by lower pricing on certain luminaires as well as increased competition in portions of the market for more basic, lesser-featured products. Sales of LED-based products represented over two-thirds of fiscal 2018 third quarter total net sales.
Gross profit for the third quarter of fiscal 2018 increased $10.5 million, or 2.8 percent, to $389.4 million compared with $378.9 million in the prior-year period due to higher sales volumes, productivity improvements, and lower quality costs, partially offset by unfavorable price/mix, increased wages, and additional reserves for excess inventory related to the closure of a facility. Fiscal 2018 third-quarter gross profit margin of 41.3 percent declined 120 basis points compared with prior year’s gross profit margin, while adjusted gross profit margin of 41.6 percent declined 90 basis points compared the year-ago period. Selling, distribution, and administrative (“SD&A”) expenses for the third quarter of fiscal 2018 totaled $273.6 million, an increase of $26.7 million, or 10.8 percent, compared with the prior-year period, due primarily to higher employee-related costs, including additional headcount associated with acquisitions, increased freight and commission expenses to support the greater sales volume, and higher professional fees related to recent acquisitions. Adjusted SD&A expenses for the three months ended May 31, 2018 represented 27.2 percent of net sales compared with 25.9 percent of net sales in the prior-year period.
During the third quarter of fiscal 2018, the Company recognized a pre-tax special charge of $9.9 million, primarily related to the planned consolidation of certain facilities and associated reduction in employee headcount. The special charge consisted primarily of severance and employee-related benefit costs. The Company also recorded a $3.1 million charge during the third quarter of fiscal 2018 to reserve for raw material inventory located at a facility where production activities will cease because it would not be cost-effective to relocate that inventory. Management expects to incur additional costs in future periods associated with the closing of facilities, primarily attributable to early lease termination and relocation costs. Annual savings realized from the streamlining activities once fully completed are expected to exceed the amount of the special charge and will be reinvested in activities to support higher-growth opportunities as well as drive improved profitability.
Net sales for the first nine months of fiscal 2018 increased 2.8 percent to $2.62 billion compared with $2.55 billion for the prior-year period. The Company reported $312.5 million of operating profit for the first nine months of fiscal 2018 compared with $366.1 million for the prior-year period. Net income for the first nine months of fiscal 2018 was $241.4 million compared with $231.2 million for the year-ago period. Diluted EPS for the first nine months of fiscal 2018 was $5.85 compared with $5.29 for the prior-year period.
Adjusted operating profit for the first nine months of fiscal 2018 decreased $41.9 million, or 10.1 percent, to $373.5 million. Adjusted operating profit margin for the first nine months of fiscal 2018 declined 200 basis points to 14.3 percent compared with 16.3 percent for the prior-year period. Adjusted net income for the first nine months of fiscal 2018 was $255.5 million compared with $258.6 million for the prior-year period, a decrease of 1.2 percent. Adjusted diluted EPS for the first nine months of fiscal 2018 increased $0.27, or 4.6 percent, to $6.19 compared with adjusted diluted EPS of $5.92 for the year-ago period. Adjusted results exclude amortization expense of acquired intangible assets, share-based payment expense, acquisition-related items, special charges for streamlining activities, manufacturing inefficiencies and excess inventory adjustments related to facility closures, gain on the sale of an investment in an unconsolidated affiliate, and an income tax net benefit for discrete items associated with the Tax Cuts and Jobs Act of 2017 (“TCJA”). A reconciliation of adjusted financial measures to the most directly comparable U.S. GAAP measure is provided in the tables at the end of this release.
Net miscellaneous income for the nine months of the prior fiscal year included a $7.2 million pre-tax gain associated with the sale of an investment in an unconsolidated affiliate, which occurred in the first quarter of fiscal 2017.
Net cash provided by operating activities totaled $300.7 million for the first nine months of fiscal 2018 compared with $198.0 million for the year-ago period. Cash and cash equivalents at the end of the third quarter of fiscal 2018 totaled $94.3 million, a decrease of $216.8 million since the beginning of the fiscal year. During fiscal 2018, the Company spent $163.5 million to acquire two businesses, Lucid Design Group and IOTA Engineering, and $298.4 million to repurchase 2.0 million shares of Acuity Brands common stock under its previously authorized stock repurchase programs.
On June 29, 2018, the Company entered into a new credit agreement with a syndicate of banks that increased the Company’s borrowing capacity under such agreement to $800 million from $250 million. The primary purpose of entering into the new credit agreement was to provide the Company with the financial flexibility to pursue strategic opportunities to enhance shareholder value. The increase in borrowing capacity along with the Company’s positive net cash flow provides the Company with significant resources to pursue its long-term growth strategy as well as the flexibility to accommodate the current stock repurchase program of which 5.2 million shares remain available for repurchase. The extent and timing of actual stock repurchases will be subject to various factors, including stock price, company performance, expected future market conditions, and other possible uses of cash, including acquisitions. The Company may increase its leverage to pursue its long-term strategies to enhance shareholder value, including the repurchase of its shares pursuant to the stock repurchase program.
Nagel commented, “Third-party forecasts and leading indicators suggest that demand in the North American lighting market, the Company’s primary market, will improve modestly in the second half of calendar 2018 following several quarters of weak demand. We expect to continue to outperform the growth rates of the markets that the Company serves by executing our strategies focused on growth opportunities for new construction and renovation projects, expansion into underpenetrated geographies and channels, and growth from the continued introduction of new lighting and building management solutions as part of the Company’s integrated, tiered solutions strategy. We believe the pricing environment will continue to be challenging in portions of the market, particularly for more basic, lesser-featured products sold through certain sales channels as well as shifts in product mix, both of which are expected to continue to negatively impact net sales and margins. We expect to continue to introduce products and solutions to more effectively compete in these portions of the market and to accelerate programs to reduce product costs in order to maintain the Company’s competitiveness and drive improved profitability.”
Nagel concluded, “We continue to believe the lighting and lighting-related industry as well as building management systems will experience solid growth over the next decade, particularly as owners and users of lighting equipment and buildings see the potential to transform these investments into strategic assets. We believe we are uniquely positioned to fully participate in this exciting industry.”Tagged with Acuity Brands, financial