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Acuity Brands Climbs Following Second-Quarter Earnings Report

Acuity BrandsATLANTA — Acuity Brands, Inc. today announced that fiscal 2019 second quarter net sales increased $22.3 million, or 2.7 percent, to $854.4 million compared with the prior-year period. Operating profit for the second quarter of fiscal 2019 increased $6.4 million, or 7.2 percent, to $95.9 million, or 11.2 percent of net sales, compared with the year-ago period’s $89.5 million, or 10.8 percent of net sales. Fiscal 2019 second quarter net income was $66.3 million, a decrease of $30.6 million, or 32 percent, compared with the prior-year period, and diluted earnings per share (“EPS”) of $1.67 decreased $0.66, or 28 percent, compared with $2.33 for the year-ago period. Prior year’s second quarter results included a tax benefit of $31.2 million, a $0.75 impact to diluted EPS, for net discrete items associated with the Tax Cuts and Jobs Act of 2017 (“TCJA”). Additionally, last year’s second quarter tax rate was reduced to reflect a lower blended year-to-date effective rate following the passage of the TCJA.

Adjusted diluted EPS for the second quarter of fiscal 2019 increased $0.10, or 5.3 percent, to $1.99 compared with adjusted diluted EPS of $1.89 for the year-ago period. Adjusted operating profit for the second quarter of fiscal 2019 increased $7.1 million, or 6.7 percent, to $112.4 million, or 13.2 percent of net sales, compared with the year-ago period adjusted operating profit of $105.3 million, or 12.7 percent of net sales. Adjusted results exclude the impact of amortization expense of acquired intangible assets, share-based payment expense, manufacturing inefficiencies related to the closure of a facility, acquisition-related items, special charges for streamlining activities, and an income tax net benefit for discrete items associated with the TCJA. 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. Generally Accepted Accounting Principles (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, Inc., commented, “We are very pleased with our second quarter financial performance. We achieved record second quarter net sales and adjusted diluted EPS as well as improved operating profit margin by 40 basis points and adjusted operating profit margin by 50 basis points as compared with the year-ago period. Although we believe second quarter revenue growth was negatively impacted by the pull forward of orders by customers into the first quarter in advance of price increases, our net sales grew by almost 3 percent. Additionally, our results for the second quarter were solid despite continuing inflationary cost pressures and the impact of tariffs. We implemented several actions to address these cost issues, including price increases and productivity improvements.”

Second Quarter Results

The 2.7 percent year-over-year growth in fiscal 2019 second quarter net sales was due primarily to a sales volume increase of over 3 percent, partially offset by a less than 1 percentage point of net unfavorable changes in product prices and mix of products sold (“price/mix”) as the benefit from recently announced price increases was more than offset by changes primarily in sales channel mix and to a much lesser degree in the mix of products sold; the realization from recent price increases was estimated to have contributed low single-digit growth to overall net sales for the quarter. Also impacting second quarter net sales was a less than 1 percent favorable impact of acquired revenues from acquisitions net of lost revenues from divestitures, which was largely offset by a combination of unfavorable changes in foreign exchange rates and the impact of adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”).

Fiscal 2019 second quarter results were impacted by the adoption of ASC 606, which resulted in a decrease to revenues, gross profit, and operating profit of $1.6 million, $1.1 million, and $1.2 million, respectively. Additionally, fiscal 2018 results were restated to reflect the impact of adopting Accounting Standards Update No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Table of Contents 29 Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). Upon adoption of ASU 2017-07, prior year’s second quarter reported operating profit and other expense both increased $1.5 million. The provisions of ASU 2017-07 had no impact to previously reported net income or earnings per share.

Gross profit for the second quarter of fiscal 2019 decreased $0.6 million, or 0.2 percent, to $333.9 million compared with $334.5 million in the prior-year period as the contribution from higher sales volume, realized price increases, and benefits from productivity improvements were offset by both a shift in key customers and changes in sales channel mix described below as well as higher input costs. Gross profit margin decreased 110 basis points to 39.1 percent for the quarter ended February 28, 2019 compared with 40.2 percent in the prior-year period. The decline in gross profit margin was due primarily to a shift in sales among key customers within the retail channel as well as changes in sales channel mix. Although current quarter gross profit reflected a mix shift towards certain sales channels and customers that generate lower gross profit margins as compared with the Company’s historical consolidated gross profit margin profile, the decline was generally offset by proportionally lower selling, distribution, and administrative (“SD&A”) costs as freight and commissions associated with such sales were lower. Adjusted gross profit margin for the quarter ended February 28, 2019 declined 100 basis points to 39.2 percent.

SD&A expenses for the second quarter of fiscal 2019 were $237.6 million compared with $244.4 million in the prior-year period, a decrease of $6.8 million, or 2.8 percent. The decrease in SD&A expenses was due primarily to a decrease in freight and commission expense as well as certain cost containment and productivity improvements, which were partially offset by higher cost to support the increase in net sales, and to a lesser degree, additional expenses associated with acquired businesses. The decline in freight and commission expense was partially due to the customer shift within the retail sales channel as previously noted. SD&A expenses for the second quarter of fiscal 2019 were 27.8 percent of net sales compared with 29.4 percent for the prior-year period. Adjusted SD&A expenses for the fiscal quarter ended February 28, 2019 were $222.4 million, or 26.0 percent of net sales, compared with $229.2 million, or 27.5 percent of net sales, in the prior-year period.

Excluded from prior year’s second quarter adjusted diluted EPS of $1.89 was the aforementioned $0.75 benefit from $31.2 million of net discrete items associated with the TCJA, primarily due to a non-cash income tax benefit from the remeasurement of the Company’s net U.S. deferred tax liabilities reflecting a reduced corporate federal rate, partially offset by an unfavorable impact related to the taxation of the Company’s accumulated unremitted foreign earnings.

Year-to-Date Results

Net sales for the first six months of fiscal 2019 increased approximately 7 percent to $1.79 billion compared with $1.67 billion for the prior-year period. The Company reported $212.3 million of operating profit, or 11.9 percent of net sales, for the first half of fiscal 2019 compared with $209.7 million, or 12.5 percent of net sales, for the prior-year period. Net income for the first half of fiscal 2019 was $145.9 million compared with $168.4 million for the year-ago period. Diluted EPS for the first six months of fiscal 2019 of $3.66 decreased $0.38, or 9.4 percent, compared with $4.04 for the prior-year period.

Adjusted operating profit for the first half of fiscal 2019 increased $5.7 million, or 2.4 percent, to $246.5 million, or 13.8 percent of net sales. Adjusted net income for the first half of fiscal 2019 was $171.8 million compared with $160.0 million for the prior-year period, an increase of 7.4 percent. Adjusted diluted EPS for the first half of fiscal 2019 increased $0.47, or 12.2 percent, to $4.31 compared with adjusted diluted EPS of $3.84 for the year-ago period. Adjusted results exclude amortization expense of acquired intangible assets, share-based payment expense, manufacturing inefficiencies related to the closure of a facility, acquisition-related items, special charges for streamlining activities, and an income tax net benefit for discrete items associated with the 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 cash provided by operating activities totaled $188.3 million for the first half of fiscal 2019 compared with $177.6 million for the year-ago period. Cash and cash equivalents at the end of the second quarter of fiscal 2019 totaled $232.0 million, an increase of $102.9 million since the beginning of the fiscal year. During the first half of fiscal 2019, the Company repurchased 0.4 million shares of its common stock under its previously authorized stock repurchase program at a total cost of $48.7 million and paid dividends to shareholders totaling $10.5 million.

Outlook

Nagel commented, “We remain cautiously optimistic for the remainder of fiscal and calendar year 2019 and do not believe that the demand outlook has meaningfully changed from our outlook provided last quarter. Our wide and varied base of customers generally remains positive about current year growth prospects. Many customers continue to have record backlogs though they too are concerned about the timing of releases, particularly for larger projects, and the potential impact that tariffs and higher prices may have on overall demand. Third-party forecasts and leading indicators continue to suggest that the North American lighting market, our primary market, should grow in the low-single digit range in fiscal 2019.”

Nagel continued, “Our focus in fiscal 2019 is to garner additional top-line growth driven primarily by outperforming the growth rates of the markets we serve through execution of our previously announced growth strategies, improvement in the mix of products and solutions sold as we execute our tiered solutions strategy, and leveraging our fixed cost infrastructure to achieve targeted incremental margins to improve our overall profitability. The shift in sales among key customers within the retail channel could continue to have a dampening effect on gross profit dollars and gross profit margin, but we expect this to be largely offset by lower freight and commission costs, which are included in SD&A expenses. Additionally, in an effort to enhance our margin profile, we have initiated a review of a small portion of our product portfolio and services offering with the objective of eliminating those items and activities that do not meet our return objectives.”

Nagel concluded, “We continue to believe the lighting and lighting-related industry as well as building management systems have the potential to experience solid growth over the next decade, particularly as owners and users of lighting equipment and buildings see the potential to transform those investments into strategic assets by deploying our distinctive solutions. We believe we are uniquely positioned to fully participate in this exciting industry.”

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