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OFFON

ACUITY BRANDS, INC.

(AYI)
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ACUITY BRANDS INC Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

10/27/2021 | 09:14am EST
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 of Acuity Brands, Inc.
(referred to herein as "we," "our," "us," the "Company," or similar references)
and its subsidiaries for the years ended August 31, 2021, 2020, and 2019
("fiscal 2021," "fiscal 2020," and "fiscal 2019," respectively). The following
discussion should be read in conjunction with the Consolidated Financial
Statements and Notes to Consolidated Financial Statements included within this
report.

Overview
Company
We are a market-leading industrial technology company. Through our two business
segments, Acuity Brands Lighting and Lighting Controls ("ABL") and the
Intelligent 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.
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, to make required contributions to our employee benefit plans, and to
maintain compliance with covenants contained in our financing agreements. 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 at August 31, 2021 was $491.3 million, a decrease of $69.4
million from August 31, 2020. Cash generated from operating activities, cash
on-hand, and additional long-term debt borrowings were used during the current
year to fund our capital allocation priorities as discussed below.
We generated $408.7 million of cash flows from operating activities during
fiscal 2021 compared with $504.8 million in the prior-year period, a decrease of
$96.1 million, due primarily to increased operating working capital requirements
to support the improvement in year-over-year sales as well as higher payments
for income taxes, partially offset by payroll tax deferrals under the
Coronavirus Aid, Relief, and Economic Security Act of 2020 and lower interest
payments on long-term borrowings due to timing.
Our significant contractual cash requirements as of August 31, 2021 include
principal and interest on long-term debt as well as payments for operating lease
liabilities. Our obligations related to these items are outlined in the Debt and
Lines of Credit and Leases footnotes of the Notes to Consolidated Financial
Statements within this Form 10-K. Additionally, we incur purchase obligations in
the ordinary course of business that are enforceable and legally binding.
Contractual purchase obligations for years subsequent to August 31, 2021 include
$451.1 million in fiscal 2022. Contractual purchase obligations beyond fiscal
2022 are not significant.
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Financing Arrangements
During fiscal 2021, we received proceeds of $493.8 million through debt
issuances and repaid $401.1 million of previously outstanding long-term debt,
resulting in net proceeds of $92.7 million. 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 due December 15, 2030 (the "Unsecured Notes"). At August 31, 2021, our
outstanding debt balance was $494.3 million compared to our cash position of
$491.3 million. We were in compliance with all financial covenants under our
financing arrangements as of August 31, 2021.
At August 31, 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 facility less the
outstanding letters of credit of $4.1 million issued under the facility. As of
August 31, 2021, our cash on hand combined with the additional borrowing
capacity under the revolving credit facility totaled approximately $0.9 billion.
The Unsecured Notes were issued by Acuity Brands Lighting, Inc., a wholly-owned
subsidiary of Acuity Brands, Inc. The Unsecured Notes are fully and
unconditionally guaranteed on a senior unsecured basis by Acuity Brands, Inc.
and ABL IP Holding LLC, a wholly-owned subsidiary of Acuity Brands, Inc. The
following tables present summarized financial information for Acuity Brands,
Inc., Acuity Brands Lighting, Inc., and ABL 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                                  August 31, 2021           August 31, 2020
Current assets                                                      $        1,172.0          $        1,152.6
Current assets due from non-guarantor affiliates                               213.4                     183.3
Non-current assets                                                           1,391.7                   1,416.0
Current liabilities                                                            595.1                     530.2
Non-current liabilities                                                        815.7                     723.8


       Summarized Income Statement Information         Year Ended August 31, 2021
       Net sales                                    $                   2,900.0
       Gross profit                                                     1,244.8

       Net income                                                         301.7


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 $43.8 million and $54.9 million in fiscal 2021 and 2020,
respectively, in property, plant, and equipment, primarily related to
investments in tooling, new and enhanced information technology capabilities,
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. We invested in acquisitions of businesses, net of cash acquired, of
$75.3 million and $303.0 million in fiscal 2021 and 2020, respectively. These
acquisitions primarily included the following transactions:
•On July 1, 2021, using cash on hand, we acquired certain assets and liabilities
of ams OSRAM'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.
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•On May 18, 2021, using cash on hand, we acquired all of the equity interests of
Rockpile 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.
•On September 17, 2019, using cash on hand and borrowings under available
existing credit arrangements at that time, we acquired all of the equity
interests of The Luminaires Group ("TLG"), a leading provider of
specification-grade luminaires for commercial, institutional, hospitality, and
municipal markets, all of which complement our dynamic lighting portfolio. TLG's
indoor and outdoor lighting fixtures are marketed to architects, landscape
architects, interior designers, and engineers through five niche lighting
brands: A-light™, Cyclone™, Eureka®, Luminaire LED™, and Luminis®.
•On November 25, 2019, using cash on hand, we acquired all of the equity
interests of LocusLabs, Inc ("LocusLabs"). The LocusLabs software platform
supports navigation applications used on mobile devices, web browsers, and
digital displays in airports, event centers, multi-floor office buildings, and
campuses.
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 $19.1 million ($0.52 per share) in
fiscal 2021 and $20.8 million ($0.52 per share) in fiscal 2020, indicating a
quarterly dividend rate of $0.13 per share. 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 fiscal 2021, we repurchased 3.8 million shares of our outstanding common
stock for $434.9 million. As of August 31, 2021, the maximum number of shares
that may yet be repurchased under the share repurchase program authorized by the
Board equaled 3.8 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 in the 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 fiscal 2021 sales. In fiscal 2020 we experienced a
limited number of temporary facility shutdowns due to government-mandated
closures. Although our facilities are open and government-mandated restrictions
have been gradually lifted, a resurgence in COVID-19 cases 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 the Centers 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 on March 27, 2020. Half of these deferrals are
due in December 2021, and the remaining deferrals are due in December 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
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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
for further details regarding the potential impacts of COVID-19 to our results
of operations, financial position, and cash flows.
Results of Operations
The following is a discussion of our results of operations in fiscal 2021
compared to fiscal 2020. A discussion of our fiscal 2020 results of operations
compared to fiscal 2019 can be found within Part II, Item 7. Management's
Discussion and Analysis within our fiscal 2020 Annual Report on Form 10-K filed
with the Securities and Exchange Commission on October 23, 2020.
The following table sets forth information comparing the components of net
income for the year ended August 31, 2021 with the year ended August 31, 2020
(in millions except per share data):
                                                           Year Ended August 31,                Increase                 Percent
                                                          2021                2020             (Decrease)                Change
Net sales                                             $  3,461.0          $ 3,326.3          $     134.7                      4.0  %
Cost of products sold                                    1,986.0            1,923.9                 62.1                      3.2  %
Gross profit                                             1,475.0            1,402.4                 72.6                      5.2  %
Percent of net sales                                        42.6  %            42.2  %                40    bps
Selling, distribution, and administrative expenses       1,044.1            1,028.5                 15.6                      1.5  %
Special charges                                              3.3               20.0                (16.7)                         NM
Operating profit                                           427.6              353.9                 73.7                     20.8  %
Percent of net sales                                        12.4  %            10.6  %               180    bps
Other expense:
Interest expense, net                                       23.2               23.3                 (0.1)                    (0.4) %
Miscellaneous expense, net                                   8.2                5.9                  2.3                          NM
Total other expense                                         31.4               29.2                  2.2                      7.5  %
Income before income taxes                                 396.2              324.7                 71.5                     22.0  %
Percent of net sales                                        11.4  %             9.8  %               160    bps
Income tax expense                                          89.9               76.4                 13.5                     17.7  %
Effective tax rate                                          22.7  %            23.5  %
Net income                                            $    306.3          $   248.3          $      58.0                     23.4  %
Diluted earnings per share                            $     8.38          $    6.27          $      2.11                     33.7  %
NM - not meaningful


Net sales increased $134.7 million, or 4.0%, to $3.46 billion for the year ended
August 31, 2021 compared with $3.33 billion reported for the year ended
August 31, 2020. For the year ended August 31, 2021, we reported net income of
$306.3 million compared with $248.3 million for the year ended August 31, 2020,
an increase of $58.0 million, or 23.4%. For fiscal 2021, diluted earnings per
share increased 33.7% to $8.38 from $6.27 for the prior-year period.
The following table reconciles certain U.S. generally accepted accounting
principles ("U.S. GAAP") financial measures to the corresponding non-U.S. GAAP
measures referred to in the discussion of our results of operations, which
exclude the impact of acquisition-related items, amortization of acquired
intangible assets, share-based payment expense, special charges associated
primarily with continued efforts to streamline the organization, and impairments
of investments in unconsolidated affiliates. Although the impacts of these items
have been recognized in prior periods and could recur in future periods,
management typically excludes these items during internal reviews of performance
and uses these non-U.S. GAAP measures for baseline comparative operational
analysis, decision making, and other activities. These non-U.S. GAAP financial
measures, including adjusted gross profit and margin, adjusted selling,
distribution, and administrative ("SD&A") expenses and adjusted SD&A expenses as
a percent of net sales, adjusted operating profit and margin, adjusted other
expense, adjusted net income, and adjusted diluted earnings per share, are
provided to enhance the user's overall understanding of our current financial
performance. Specifically, we believe these non-U.S. GAAP measures provide
greater comparability and
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enhanced visibility into our results of operations. The non-U.S. GAAP financial
measures should be considered in addition to, and not as a substitute for or
superior to, results prepared in accordance with U.S. GAAP.
(In millions, except per share data)                     Year Ended August 31,
                                                                                                                       Increase
                                                   2021                           2020                                (Decrease)    Percent Change
Gross profit                                  $   1,475.0                     $ 1,402.4                            $        72.6            5.2  %
Percent of net sales                                                  42.6  %                        42.2  %                  40    bps

Add-back: Acquisition-related items (1)                 -                           1.2
Adjusted gross profit                         $   1,475.0                     $ 1,403.6                            $        71.4            5.1  %
Percent of net sales                                                  42.6  %                        42.2  %                  40    bps

Selling, distribution, and administrative
expenses                                      $   1,044.1                     $ 1,028.5                            $        15.6            1.5  %
Percent of net sales                                                  30.2  %                        30.9  %                 (70)   bps
Less: Amortization of acquired intangible
assets                                              (40.7)                  

(41.7)

Less: Share-based payment expense                   (32.5)                  

(38.2)

Less: Acquisition-related items (1)                  (2.2)                  

(1.3)

Adjusted selling, distribution, and
administrative expenses                       $     968.7                     $   947.3                            $        21.4            2.3  %
Percent of net sales                                                  28.0  %                        28.5  %                 (50)   bps

Operating profit                              $     427.6                     $   353.9                            $        73.7           20.8  %
Percent of net sales                                                  12.4  %                        10.6  %                 180    bps
Add-back: Amortization of acquired intangible
assets                                               40.7                   

41.7

Add-back: Share-based payment expense                32.5                   

38.2


Add-back: Acquisition-related items (1)               2.2                           2.5
Add-back: Special charges                             3.3                          20.0
Adjusted operating profit                     $     506.3                     $   456.3                            $        50.0           11.0  %
Percent of net sales                                                  14.6  %                        13.7  %                  90    bps

Other expense                                 $      31.4                     $    29.2                            $         2.2            7.5  %
Less: Impairments of investments                     (6.0)                            -
Adjusted other expense                        $      25.4                     $    29.2                            $        (3.8)         (13.0) %

Net income                                    $     306.3                     $   248.3                            $        58.0           23.4  %
Add-back: Amortization of acquired intangible
assets                                               40.7                   

41.7

Add-back: Share-based payment expense                32.5                   

38.2


Add-back: Acquisition-related items (1)               2.2                   

2.5

Add-back: Special charges                             3.3                   

20.0

Add-back: Impairments of investments                  6.0                   

-

Total pre-tax adjustments to net income              84.7                         102.4
Income tax effect                                   (19.3)                        (23.4)
Adjusted net income                           $     371.7                     $   327.3                            $        44.4           13.6  %

Diluted earnings per share                    $      8.38                     $    6.27                            $        2.11           33.7  %
Adjusted diluted earnings per share           $     10.17                     $    8.27                            $        1.90           23.0  %


______________________________

(1) Acquisition-related items include profit in inventory and professional fees.

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Net Sales
Net sales of $3.46 billion for the year ended August 31, 2021 increased by
$134.7 million, or 4.0%, compared with the prior-year period. This increase was
driven by improved sales performance in the second half of fiscal 2021. Sales in
our ABL segment of $3.29 billion increased $106.4 million, or 3.3%, compared to
the prior year. Within our ABL segment, sales through the independent sales
network and direct sales network increased 5% and 9%, respectively, due
primarily to these channels continuing to benefit from improved service levels
and an improving economy. However, corporate accounts sales for fiscal 2021 were
12% lower year over year due to fewer nonessential renovations from large
retailers in the first half of the fiscal year, and retail sales declined 17%
due primarily to a customer inventory rebalancing in fiscal 2021. Sales within
our ISG segment increased 21% to $190.0 million due primarily to strong demand
for building and HVAC controls. Changes in foreign currency rates and revenues
from acquired companies did not have a meaningful impact on net sales for fiscal
2021.
Gross Profit
Gross profit for fiscal 2021 increased $72.6 million, or 5.2%, to $1.48 billion
compared with $1.40 billion for the prior year due. The increase in gross profit
and margin was due primarily to increased sales as well as product and
productivity improvements, partially offset by higher component and freight
costs.
Operating Profit
SD&A expenses of $1.04 billion for the year ended August 31, 2021 increased
$15.6 million, or 1.5%, compared with the prior year. The increase in SD&A
expense was due primarily to higher outbound freight to support the increase in
sales as well as increased employee-related costs, partially offset by lower
travel expense and sales and marketing costs due to cost control and travel
restrictions that have continued since the start of the COVID-19 pandemic.
Additionally, share-based payment expense decreased in fiscal 2021 due to the
discontinuation of certain retirement provisions in the equity incentive program
that resulted in the acceleration of share-based payment expense for fiscal 2020
grants.
Compared with the prior-year period, SD&A expenses as a percent of net sales
decreased 70 basis points to 30.2% for fiscal 2021 from 30.9% in fiscal 2020.
Adjusted SD&A expenses were $968.7 million, or 28.0% of net sales, in fiscal
2021 compared to $947.3 million, or 28.5% of net sales, in the year-ago period.
During the year ended August 31, 2021, we recognized pre-tax special charges of
$3.3 million compared with pre-tax special charges of $20.0 million recorded
during the year ended August 31, 2020. Further details regarding our special
charges are included in the Special Charges footnote of the Notes to
Consolidated Financial Statements.
Operating profit for fiscal 2021 was $427.6 million compared with $353.9 million
reported for the prior-year period, an increase of $73.7 million, or 20.8%.
Operating profit margin increased 180 basis points to 12.4% for fiscal 2021
compared with 10.6% for fiscal 2020. The increase in operating profit margin
reflects favorable gross profit margin, a decline in special charges, and our
ability to leverage our operating costs.
Adjusted operating profit increased $50.0 million, or 11.0%, to $506.3 million
compared with $456.3 million for fiscal 2020. Adjusted operating profit margin
was 14.6% and 13.7% for fiscal 2021 and 2020, respectively.
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 $23.2 million and $23.3 million for the years ended
August 31, 2021 and 2020, respectively.
We reported net miscellaneous expense of $8.2 million in fiscal 2021 compared
with $5.9 million in fiscal 2020. During fiscal 2021, we recorded impairment
charges totaling $6.0 million for certain unconsolidated equity investments.
Further details regarding the impairment charges are included in the Fair Value
Measurements footnote of the Notes to Consolidated Financial Statements.
Income Taxes and Net Income
Our effective income tax rate was 22.7% and 23.5% for the years ended August 31,
2021 and 2020, respectively. The change in our effective income tax rate year
over year is due primarily to the impacts of discrete items. Further details
regarding income taxes are included in the Income Taxes footnote of the Notes to
Consolidated Financial
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Statements. We estimate that our effective tax rate for fiscal 2022 will be
approximately 23% before any discrete items, assuming the rates in our taxing
jurisdictions remain generally consistent throughout the year.
Net income for fiscal 2021 increased $58.0 million, or 23.4%, to $306.3 million
from $248.3 million reported for the prior year. The increase in net income
resulted primarily from an increase in operating profit compared to the
prior-year period partially offset by higher income tax expense related to the
increase in profit. Adjusted net income for fiscal 2021 increased 13.6% to
$371.7 million compared with $327.3 million in the year-ago period.
Diluted earnings per share for fiscal 2021 was $8.38 compared with $6.27 for the
prior-year period, an increase of $2.11, or 33.7%. This increase reflects higher
net income as well as lower outstanding diluted shares. Adjusted diluted
earnings per share for fiscal 2021 was $10.17 compared with $8.27 for the
prior-year period, an increase of $1.90, or 23.0%.
Segment Results
The following tables set forth information comparing the operating results of
our segments, ABL and ISG, for the year ended August 31, 2021 with the year
ended August 31, 2020 (in millions). We have recast historical information to
conform to the current segment structure.
                                                          Year Ended August 31,
                                                                                               Increase
ABL                                                      2021                2020             (Decrease)           Percent Change
Net sales                                            $  3,287.3          $ 3,180.9          $      106.4                    3.3  %

Operating profit                                     $    476.2          $   425.8          $       50.4                   11.8  %
Add-back: Amortization of acquired intangible
assets                                                     27.9             

27.4

Add-back: Share-based payment expense                      11.0             

13.4

Add-back: Acquisition-related items (1)                       -             

1.2

Adjusted operating profit                            $    515.1          $   467.8          $       47.3                   10.1  %

Operating profit margin                                    14.5  %            13.4  %                   110       bps
Adjusted operating profit margin                           15.7  %            14.7  %                   100       bps


_____________________________

(1) Acquisition-related items include profit in inventory.


ABL net sales for the year ended August 31, 2021 increased 3.3% compared with
the prior-year period due primarily to improvements within the independent sales
network and direct sales network channels as our go-to-market activities
leveraged improvements in the construction market and wider economy. These gains
were partially offset by lower sales in the retail channel due to a customer
inventory rebalancing and in the corporate accounts channel due to fewer
nonessential renovations from large retailers in the first half of the fiscal
year. Operating profit for ABL was $476.2 million (14.5% of ABL net sales) for
the year ended August 31, 2021 compared to $425.8 million (13.4% of ABL net
sales) in the prior-year period, an increase of $50.4 million. The increase in
operating profit was due primarily to higher sales as well as product and
productivity improvements, partially offset by higher component, freight, and
operating costs. The operating profit margin increase year over year reflects
higher sales as well as our ability to successfully leverage our operating
costs. Adjusted operating profit for ABL increased $47.3 million to $515.1
million for the year ended August 31, 2021 compared with the prior year period.
                                                         Year Ended August 31,
                                                                                                 Increase
ISG                                                    2021                   2020              (Decrease)           Percent Change
Net sales                                         $    190.0               $  157.0          $        33.0                   21.0  %

Operating profit (loss)                           $      9.9               $   (3.9)         $        13.8                        NM
Add-back: Amortization of acquired
intangible assets                                       12.8                

14.3

Add-back: Share-based payment expense                    2.9                    4.5

Adjusted operating profit                         $     25.6               $   14.9          $        10.7                   71.8  %

Operating profit (loss) margin                           5.2   %               (2.5) %                    770       bps
Adjusted operating profit margin                        13.5   %                9.5  %                    400       bps


ISG net sales for the year ended August 31, 2021 increased 21.0% compared with
the prior-year period driven primarily by strong demand for building and HVAC
controls. ISG operating profit was $9.9 million for the year ended
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August 31, 2021 compared with a $3.9 million operating loss in the prior-year
period, an increase of $13.8 million. This increase was due primarily to higher
sales, partially offset by increased employee costs. Adjusted operating profit
for ISG increased $10.7 million to $25.6 million for the year ended August 31,
2021 compared with the prior-year period.
Outlook
We expect the challenging global supply chain environment to continue into
fiscal 2022. We currently expect ABL to grow net sales in the high single digits
for the full year of 2022 and ISG to deliver net sales growth in the mid-teens.
Additionally, we expect a 42% plus annualized gross profit margin for the full
year of 2022, and we believe that we can continue to leverage our operating
costs as we increase net sales.
Accounting Standards Adopted in Fiscal 2021 and Accounting Standards Yet to Be
Adopted
See the New Accounting Pronouncements footnote of the Notes to Consolidated
Financial Statements for information on recently adopted and upcoming standards.
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
accordance with 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 with U.S. GAAP requires
management 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 as well as reported amounts of revenue and
expense during the reporting period. On an ongoing basis, we evaluate our
estimates and judgments. We base our estimates and judgments on our substantial
historical experience and/or other relevant factors, such as projections of
future performance, 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 accounting estimates with our Audit Committee of
the Board of Directors on a recurring basis. See the Significant Accounting
Policies footnote of the Notes to Consolidated Financial Statements for a
summary of our accounting policies.
We believe the following accounting topics represent our critical accounting
estimates.
Revenue Recognition
We recognize revenue when we transfer control of goods and services to our
customers. Revenue is measured as the amount of consideration we expect to
receive in exchange for goods and services. In the period of revenue
recognition, we estimate and record provisions for certain rebates, sales
incentives, product returns, and discounts to customers, in most instances, as
reductions of revenue. We also maintain one-time or on-going marketing and
trade-promotion programs with certain customers that require us to estimate and
accrue the expected costs of such programs. Generally, these items are estimated
based on customer agreements, historical trends, and expected demand. For sales
with multiple deliverables, significant judgment may be required to determine
which performance obligations are distinct and should be accounted for
separately. We allocate the expected consideration to be collected to each
distinct performance obligation based on its standalone selling price.
Standalone selling price is generally estimated using a cost plus margin
valuation when no observable input is available.
Actual results could differ from estimates, which would require adjustments to
recorded amounts. Please refer to the Revenue Recognition footnote of the Notes
to Consolidated Financial Statements for additional information regarding
estimates related to revenue recognition.
Inventories
Inventories include materials, direct labor, in-bound freight, customs, duties,
tariffs, and related manufacturing overhead and are stated at the lower of cost
(on a first-in, first-out or average-cost basis) and net realizable value. We
review inventory quantities on hand and record a provision for excess or
obsolete inventory primarily based on estimated future demand and current market
conditions. A significant change in customer demand, market conditions, or
technology could render certain inventory obsolete and thus could have a
material adverse impact on our operating results in the period the change
occurs.
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Goodwill and Indefinite-Lived Intangible Assets
Indefinite-lived intangible assets consist of trade names acquired through
multiple acquisitions that are expected to generate cash flows indefinitely.
Significant estimates and assumptions were used to both identify and determine
the initial fair value of these acquired intangible assets, often with the
assistance of third-party valuation specialists. These assumptions include, but
are not limited to, estimated future net sales and profitability, customer
attrition rates, royalty rates, and discount rates. Goodwill is calculated as
the residual value of an acquisition's purchase price less the value of the
identifiable net assets and is thus dependent on the appropriate identification
and valuation of the net assets obtained in an acquisition.
We also review goodwill and indefinite-lived intangible assets for impairment on
an annual basis in the fiscal fourth quarter or on an interim basis if an event
occurs or circumstances change that would more likely than not indicate that the
fair value of the goodwill or an indefinite-lived asset is below its carrying
value. An impairment loss for goodwill or an indefinite-lived intangible asset
would be recognized based on the difference between the carrying value of the
asset and its estimated fair value, which would be determined based on either
discounted future cash flows or another appropriate fair value method. The
evaluation of goodwill and indefinite-lived intangibles for impairment requires
management to use significant judgments and estimates in accordance with
U.S. GAAP including, but not limited to, economic, industry, and
Company-specific qualitative factors, projected future net sales, operating
results, and cash flows.
Although we currently believe that the estimates used in the evaluation of
goodwill and indefinite-lived intangibles are reasonable, differences between
actual and expected net sales, operating results, and cash flows and/or changes
in the discount rates or theoretical royalty rates used could cause these assets
to be deemed impaired. If this occurs, we are required to record a non-cash
charge to earnings for the write-down in the value of such assets. Such charges
could have a material adverse effect on our results of operations and financial
position but not our cash flows from operations.
Goodwill
We perform our goodwill impairment analysis at the reporting unit level using a
combination of discounted future cash flows and relevant market multiples. Our
discounted cash flow analyses required significant assumptions about discount
rates, short and long-term growth rates, and future profitability. We utilized
estimated discount rates ranging from 9.0% to 12.0% as of June 1, 2021, based on
the Capital Asset Pricing Model, which considers the risk-free interest rate,
beta, market risk premium, and size premium to determine an appropriate discount
rate for a reporting unit. Short-term growth rates were based on management's
forecasted financial results, which consider key business drivers such as
specific revenue growth initiatives, market share changes, growth in our
addressable market, and general economic factors such as macroeconomic
conditions, credit availability, and interest rates. Short-term growth rates
used in the fiscal 2021 impairment analysis reflected additional estimation
uncertainty as a result of the COVID-19 pandemic. We calculated the discounted
cash flows attributable to our reporting units for a 10-year discrete period
with a terminal value and compared this calculation to the discounted cash flows
generated over a 40-year period to corroborate the reasonableness of assumptions
used. The long-term growth rate used in determining terminal value was estimated
at 3.5% and was primarily based on our understanding of projections for expected
long-term growth in our addressable market and historical long-term performance.
We corroborate the values determined from our discounted cash flow models using
a relevant market multiple, generally published earnings and/or revenue
multiples. We also reconcile the sum of the fair values for each reporting unit
to our market capitalization at the testing date, including consideration of a
control premium.
Any reasonably likely change in the assumptions used in these analyses,
including revenue growth rates, the discount rates, long-term growth rates, or
relevant multiples would not cause the carrying value of any reporting unit to
exceed its estimated fair value as determined under the goodwill impairment
analysis. See the Significant Accounting Policies footnote of the Notes to
Consolidated Financial Statements for further details.
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets consist of 13 trade names with an
aggregate carrying value of $174.8 million at August 31, 2021. We utilized
significant assumptions to estimate the fair value of these indefinite-lived
trade names using a fair value model based on discounted future cash flows
("fair value model") in accordance with Accounting Standards Codification
("ASC") Topic 820, Fair Value Measurement ("ASC 820"). Future cash flows
associated with each of our indefinite-lived trade names are calculated by
multiplying a theoretical royalty rate a willing third party would pay for use
of the particular trade name by estimated future net sales attributable to the
relevant trade name. The present values of the resulting after-tax cash flows is
our current estimate of the fair value of each trade name.
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This fair value model requires us to make several significant assumptions,
including specific estimated future net sales (including short and long-term
growth rates), the royalty rate, and the discount rate for each trade name.
Future net sales and short-term growth rates are estimated for each particular
trade name based on management's financial forecasts, which consider key
business drivers, such as specific revenue growth initiatives, market share
changes, expected growth in our addressable market, and general economic
factors, such as macroeconomic conditions, credit availability, and interest
rates. Short-term growth rates used in the fiscal 2021 impairment analysis
reflected additional estimation uncertainty as a result of the COVID-19
pandemic. The long-term growth rate used in determining terminal value was
estimated at 3.5% and was based primarily on our understanding of projections
for expected long-term growth for our addressable market and historical
long-term performance. The theoretical royalty rate is estimated primarily using
management's assumptions regarding the amount a willing third party would pay to
use the particular trade name and is compared with market information for
similar intellectual property within and outside of the industry. If future
operating results are unfavorable compared with forecasted amounts, we may be
required to reduce the theoretical royalty rate used in the fair value model,
which would result in lower expected future after-tax cash flows in the fair
value model. We utilized a range of estimated discount rates between 9% and 12%
as of June 1, 2021, based on the Capital Asset Pricing Model, which considers
the current risk-free interest rate, beta, market risk premium, and size premium
appropriate for each intangible.
During fiscal 2021, we performed an evaluation of the fair values of our
indefinite-lived trade names . Our expected revenues were based on our fiscal
2022 projections and recent third-party lighting, controls, and building
technology solutions market growth estimates for fiscal 2023 through 2025 as of
June 1, 2021. We also included revenue growth estimates based on current
initiatives expected to help improve performance. During fiscal 2021, estimated
theoretical royalty rates ranged between 1% and 3%. The impairment analyses of
our indefinite-lived intangible assets indicated that their fair values exceeded
their carrying values; therefore, no impairments were recorded for fiscal 2021.
Any reasonably likely change in the assumptions used in the analyses for our
trade names, including revenue growth rates, royalty rates, and discount rates,
would not be material to our financial condition or results of operations. See
the Significant Accounting Policies footnote of the Notes to Consolidated
Financial Statements for further details.
Share-based Payment Expense
We recognize compensation cost for share-based payment transactions in the
financial statements under the provisions of ASC Topic 718, Compensation - Stock
Compensation ("ASC 718"). Restricted stock awards, performance stock awards, and
director stock units representing certain deferrals into the Director Deferred
Compensation Plan are valued based on the fair value of our common stock on the
grant date. We review the values of our performance awards on a frequent and
recurring basis and adjust those values based on the probability that the
related performance metric will be satisfied. We utilize the Black-Scholes model
in deriving the fair value estimates of our stock option awards that only have a
service requirement, and we utilize the Monte Carlo simulation model to
determine grant date fair value estimates of stock options also subject to a
market condition.
Additionally, we estimate forfeitures of all share-based awards at the time of
grant, which are revised in subsequent periods if actual forfeitures differ from
initial estimates. Forfeitures are estimated based on historical experience. If
factors change causing different assumptions to be made in future periods,
estimated compensation expense may differ significantly from that recorded in
the current period.
We generally recognize compensation cost for share-based payment transactions on
a straight-line basis over an award's requisite service period as defined by ASC
718. In certain circumstances, such as when a performance award is subject to
graded vesting, we apply the accelerated attribution method to recognize
compensation cost related to our share-based payment awards.
See the Share-based Payments footnote of the Notes to Consolidated Financial
Statements for further information on these awards, including assumptions used
in estimating the fair value of our awards.
Product Warranty and Recall Costs
Our products generally have a standard warranty term of five years. We accrue
for the estimated amount of future warranty costs when the related revenue is
recognized. Estimated future warranty costs are primarily based on historical
experience of identified warranty claims. We are fully self-insured for product
warranty costs. Historical warranty costs have been within expectations.
Although we expect that historical activity will continue to be the best
indicator of future warranty costs, there can be no assurance that future
warranty costs will not exceed historical amounts. Estimated costs related to
product recalls based on a formal campaign soliciting repair or return of that
product are accrued when they are deemed to be probable and can be reasonably
estimated. If actual future
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warranty or recall costs exceed recorded amounts, additional accruals may be
required, which could have a material adverse impact on our results of
operations and cash flow.
We also sell certain service-type warranties that extend coverages for products
beyond their base warranties. We account for service-type warranties as distinct
performance obligations, allocate an appropriate amount of transaction price to
these transactions, and recognize revenue for these contracts ratably over the
life of the additional warranty period. We allocate transaction price to our
service-type warranties largely based on expectations of cost plus margin based
on our estimate of future claims. These estimates are subject to a higher level
of estimation uncertainty than other estimates, as we have less experience in
costs in the extended warranty period. Claims related to service-type warranties
are expensed as incurred.
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 the U.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) external and internal forecasts projecting the
North American lighting and building management solutions market growth rate and
growth in our addressable market; (c) expectations about the impact of any
changes in demand, including improvements in our end markets, as well as
volatility, challenges, competition, and uncertainty in general economic
conditions; (d) expectations about volatility in raw material costs, freight
costs, and component and labor availability; (e) 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; (f) our estimate of our
fiscal 2022 effective income tax rate, results of operations, cash flows, and
capital spending; (g) our estimate of future amortization expense; (h) our
ability to achieve our long-term financial goals and measures; (i) the impact of
changes in the political landscape and related policy changes, including
monetary, regulatory, and trade policies; (j) our expectations about the
resolution of securities class action and other regulatory matters; (k) our
expectations of the impact of the ongoing COVID-19 pandemic; (l) our human
capital initiatives in fiscal 2022, and (m) our ability to reduce our carbon
output and seize market opportunities related to sustainability. You are
cautioned not to place undue reliance on any forward looking statements, which
speak only as of the date of this annual 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 annual 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 the historical experience
of the organization and management's present expectations or projections. These
risks and uncertainties include, but are not limited to, customer and supplier
relationships and prices; competition; ability to realize anticipated benefits
from initiatives taken and timing of benefits; market demand; litigation and
other contingent liabilities; and economic, political, governmental, and
technological factors that have affected us as a company. Also, additional risks
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
this Annual Report on Form 10-K, and are specifically incorporated herein by
reference.
The industry and market data contained in this report are based either on
management's own estimates or, where indicated, independent industry
publications, reports by governmental agencies, or market research firms or
other published independent sources and, in each case, are believed by our
management to be reasonable estimates. However, industry and market data are
subject to change and cannot always be verified with complete certainty due to
limits on the availability and reliability of raw data, the voluntary nature of
the data gathering process, and other limitations and uncertainties inherent in
any statistical survey of market shares. We have not independently verified
market and industry data from third-party sources.
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