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 ofMay 31, 2021 and for the three and nine months endedMay 31, 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, 2020 , filed with theSecurities and Exchange Commission (the "SEC") onOctober 23, 2020 ("Form 10-K"). Overview Company The Company was incorporated in 2001 under the laws of theState of Delaware . We are a market-leading industrial technology company that develops, manufactures, and brings to market products and services including building management systems, lighting, lighting controls, and location-aware applications. These products and services provide commercial, institutional, industrial, infrastructure, and residential applications throughoutNorth America and select international markets. During the third quarter of fiscal 2021, we completed a realignment of our operations and structure to better support our business strategy. As a result, beginning in the third quarter of fiscal 2021, we now report our financial results of operations in two reportable segments,Acuity Brands Lighting and Lighting Controls ("ABL") andIntelligent Spaces Group ("ISG"), consistent with how our chief operating decision maker currently evaluates operating results, assesses performance, and allocates resources within the Company. We have recast historical information to conform to the current segment structure. We achieve growth through the development of innovative new products and services. Through the Acuity Business System, 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. We do not consider acquisitions a critical element of our strategy but seek opportunities to expand and enhance our portfolio of solutions, including the following transactions. OneJune 4, 2021 , the Company announced that it has signed a definitive agreement to purchase amsOSRAM's North American Digital Systems ("DS") business. This acquisition is intended to enable the Company to enhance our 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. The transaction is expected to close by end of day onJuly 1, 2021 . 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. OnSeptember 17, 2019 , using cash on hand and borrowings under available existing credit arrangements, we acquired all of the equity interests ofThe Luminaires Group ("TLG"), a leading provider of specification-grade luminaires for commercial, institutional, hospitality, and municipal markets, all of which complement our current and 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®. OnNovember 25, 2019 , using cash on hand, we acquired all of the equity interests ofLocusLabs, 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. The results of operations for the three and nine months endedMay 31, 2021 and 2020 are not necessarily indicative of the results to be expected for the full fiscal year due primarily to continued uncertainty of general economic conditions that may impact our key end markets for fiscal 2021, 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. 20 -------------------------------------------------------------------------------- Table of Contents 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. However, our manufacturing operations are deemed essential and continue to operate. 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. Government-mandated and voluntary social distancing measures have had, and continue to have, 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 now open and new 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 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 are due 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. Liquidity and Capital Resources Our principal sources of liquidity are operating cash flows generated primarily from our business operations, cash on hand, and various sources of borrowings. Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to fund our operations and capital expenditures, pay dividends, repurchase shares, meet obligations as they become due, and maintain compliance with covenants contained in our financing agreements. For the first nine months of fiscal 2021, we paid$30.6 million for property, plant, and equipment, primarily for 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 2021. During the first nine months of fiscal 2021, we repurchased 3.3 million shares of our outstanding common stock. As ofMay 31, 2021 , the maximum number of shares that may yet be repurchased under the share repurchase program authorized by the Board equaled 4.4 million shares. We expect to repurchase the remaining shares available for repurchase on an opportunistic basis subject to various factors including stock price, Company performance, market conditions, and other possible uses of cash. Our short-term cash needs are expected to include funding operations as currently planned; funding possible acquisitions; making capital investments as currently anticipated; paying quarterly stockholder dividends as currently anticipated; paying principal and interest on debt as currently scheduled; making required contributions and distributions related to our employee benefit plans; and potentially repurchasing shares of our outstanding common stock. 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 flow from operations, and borrowing availability under financing arrangements. Additionally, we believe that our cash flows from operations and sources of funding, including, but 21 -------------------------------------------------------------------------------- Table of Contents 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 liquidity, which would require us to evaluate available alternatives and take appropriate actions. Cash Flow We use available cash and cash flows from operations, borrowings, and proceeds from the exercise of stock options to fund operations, capital expenditures, and acquisitions if any; to repurchase Company stock; and to pay dividends. Our cash position atMay 31, 2021 was$593.5 million , an increase of$32.8 million fromAugust 31, 2020 . During the nine months endedMay 31, 2021 , we generated net cash flows from operations of$316.2 million . DuringNovember 2020 , we issued long-term debt that contributed net proceeds of$493.9 million to our cash position. See more details below under the Capitalization section. Cash generated from operating activities, cash on hand, and funds from borrowings were used during the nine months endedMay 31, 2021 primarily to repay borrowings on our Term Loan Facility (defined below) of$395.0 million as well as bank loans of$2.1 million , to fund share repurchases of$340.9 million , to fund capital expenditures of$30.6 million , to pay dividends to stockholders of$14.3 million , and to pay withholding taxes on the net settlement of equity awards of$3.9 million . We generated$316.2 million of cash flows from operating activities during the nine months endedMay 31, 2021 compared with$378.3 million in the prior-year period, a decrease of$62.1 million , due primarily to an increase in accounts receivable that resulted from the improvement in year-over-year sales, partially offset by payroll tax deferrals under the CARES Act as well as lower interest payments on long-term borrowings due to timing. We believe that investing in assets and programs that will over time increase the overall return on our invested capital is a key factor in driving stockholder value. We paid$30.6 million and$38.3 million during the first nine months of fiscal 2021 and 2020, respectively, for property, plant, and equipment, primarily related to investments in tooling, new and enhanced information technology capabilities, equipment, and facility enhancements. Capitalization OnNovember 10, 2020 ,Acuity Brands Lighting, Inc. , a wholly-owned subsidiary ofAcuity Brands, Inc. issued$500.0 million aggregate principal amount of 2.150% senior unsecured notes dueDecember 15, 2030 (the "Unsecured Notes"). The Unsecured Notes bear interest at a rate of 2.150% per annum and were issued at a price equal to 99.737% of their face value. Interest on the Unsecured Notes is paid semi-annually in arrears onJune 15 andDecember 15 of each year, which began onJune 15, 2021 . The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis byAcuity Brands, Inc. andABL IP Holding LLC ("ABL IP Holding ", and, together withAcuity Brands, Inc. the "Guarantors"), a wholly-owned subsidiary ofAcuity Brands, Inc. Additionally, we capitalized$4.8 million of deferred issuance costs related to the Unsecured Notes that are being amortized over the 10-year term. As ofMay 31, 2021 , the balance of the Unsecured Notes net of unamortized discount and deferred issuance costs was$494.2 million . As ofMay 31, 2021 , we also had$4.0 million of tax-exempt industrial revenue bonds that were paid at maturity onJune 1, 2021 . The carrying value of these bonds is reflected within Current maturities of debt on the Consolidated Balance Sheets as ofMay 31, 2021 . Additionally, we had$2.1 million outstanding under fixed-rate bank loans atAugust 31, 2020 that we repaid during the nine months endedMay 31, 2021 , prior to their maturity date. There have been no other material changes outside of the ordinary course of business in our contractual obligations sinceAugust 31, 2020 . The following tables present summarized financial information forAcuity Brands, Inc. Acuity Brands Lighting, Inc. , andABL IP Holding LLC on a combined basis after the elimination of all intercompany balances and transactions between the combined group as well as any investments in non-guarantors as of the dates and during the period presented (in millions): Summarized Balance Sheet Information May 31, 2021 August 31, 2020 Current assets$ 1,185.1 $ 1,152.6 Non-current assets 1,368.8 1,416.0 Amounts due from non-guarantor affiliates 203.1 183.3 Current liabilities 583.5 530.2 Non-current liabilities 817.7 723.8 22
--------------------------------------------------------------------------------
Table of Contents Summarized Income Statement Information Nine Months Ended May 31, 2021 Net sales $ 2,046.7 Gross profit 889.1 Net income 204.7 As ofMay 31, 2021 , our capital structure was comprised principally of the Unsecured Notes and equity of our stockholders. Total debt outstanding was$498.2 million atMay 31, 2021 and consisted primarily of fixed-rate obligations. AtAugust 31, 2020 , total debt outstanding was$401.1 million and consisted primarily of variable-rate obligations. OnJune 29, 2018 , we entered into a credit agreement (the "Credit Agreement") with a syndicate of banks that provides us with a$400.0 million five-year unsecured revolving credit facility (the "Revolving Credit Facility") and provided us with a$400.0 million unsecured delayed draw term loan facility (the "Term Loan Facility)". We had no borrowings outstanding under the Revolving Credit Facility as ofMay 31, 2021 orAugust 31, 2020 . We had no borrowings outstanding under the Term Loan Facility as ofMay 31, 2021 . We had$395.0 million in borrowings outstanding under the Term Loan Facility as ofAugust 31, 2020 , which we fully repaid during the first quarter of fiscal 2021 using the proceeds from the Unsecured Notes. The Credit Agreement allows for no future borrowings under the Term Loan Facility. We were in compliance with all financial covenants under the Credit Agreement as ofMay 31, 2021 . AtMay 31, 2021 , we had additional borrowing capacity under the Credit Agreement 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 Revolving Credit Facility. As ofMay 31, 2021 , we had outstanding letters of credit totaling$8.3 million , primarily for securing collateral requirements under our casualty insurance programs and for providing credit support for our industrial revenue bond, which includes the$4.1 million issued under the Revolving Credit Facility. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for more information. During the first nine months of fiscal 2021, our consolidated stockholders' equity decreased$88.4 million to$2.0 billion atMay 31, 2021 , from$2.1 billion atAugust 31, 2020 . The decrease was due primarily to repurchases of our outstanding common stock and dividend payments, partially offset by net income earned and favorable foreign currency translation adjustments. Our debt to total capitalization ratio (calculated by dividing total debt by the sum of total debt and total stockholders' equity) was 19.6% and 15.9% atMay 31, 2021 andAugust 31, 2020 , respectively. The ratio of debt, net of cash, to total capitalization, net of cash, was (4.9)% and (8.1)% atMay 31, 2021 andAugust 31, 2020 , respectively. Dividends We paid dividends on our common stock of$14.3 million ($0.39 per share) and$15.6 million ($0.39 per share) during the nine months endedMay 31, 2021 and 2020, respectively. All decisions regarding the declaration and payment of dividends are at the discretion of the Board and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant. 23 -------------------------------------------------------------------------------- Table of Contents Results of Operations Third Quarter of Fiscal 2021 Compared with Third Quarter of Fiscal 2020 The following table sets forth information comparing the components of net income for the three months endedMay 31, 2021 and 2020 (in millions except per share data): Three Months Ended Increase May 31, 2021 May 31, 2020 (Decrease) Percent Change Net sales$ 899.7 $ 776.2 $ 123.5 15.9 % Cost of products sold 513.1 448.6 64.5 14.4 % Gross profit 386.6 327.6 59.0 18.0 % Percent of net sales 43.0 % 42.2 % 80 bps Selling, distribution, and administrative expenses 268.0 241.3 26.7 11.1 % Special charges 0.5 3.3 (2.8) NM Operating profit 118.1 83.0 35.1 42.3 % Percent of net sales 13.1 % 10.7 % 240 bps Other expense: Interest expense, net 6.2 5.4 0.8 14.8 % Miscellaneous expense (income), net 2.7 (0.9) 3.6 NM Total other expense 8.9 4.5 4.4 97.8 % Income before income taxes 109.2 78.5 30.7 39.1 % Percent of net sales 12.1 % 10.1 % 200 bps Income tax expense 23.5 18.1 5.4 29.8 % Effective tax rate 21.5 % 23.1 % Net income$ 85.7 $ 60.4 $ 25.3 41.9 % Diluted earnings per share$ 2.37 $ 1.52 $ 0.85 55.9 % NM - not meaningful Net sales were$899.7 million for the three months endedMay 31, 2021 compared with$776.2 million reported for the three months endedMay 31, 2020 , an increase of$123.5 million , or 15.9%. For the three months endedMay 31, 2021 , we reported net income of$85.7 million , an increase of$25.3 million , or 41.9%, compared with$60.4 million for the three months endedMay 31, 2020 . For the third quarter of fiscal 2021, diluted earnings per share increased 55.9% to$2.37 compared with$1.52 reported in the year-ago period. The following table as well as the tables under Segment Results below reconcile certainU.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, and special charges associated primarily with continued efforts to streamline the organization and integrate recent acquisitions. Although the impacts of some of these items have been recognized in prior periods and could recur in future periods, we typically exclude these charges during internal reviews of performance and use 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 selling, distribution, and administrative ("SD&A") expenses and adjusted SD&A expenses as a percent of net sales, adjusted operating profit and adjusted operating profit margin for total company and by segment, 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 enhanced visibility into our results of operations. There are limitations to the use of non-U.S. GAAP financial measures and such 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 withU.S. GAAP. The non-U.S. GAAP measures as defined by us may not be comparable to similar non-U.S. GAAP measures presented by other companies. Our presentation of such measures, which may include adjustments to exclude unusual or non-recurring items, should not be construed as an inference that our future results will be unaffected by other unusual or non-recurring items. 24 -------------------------------------------------------------------------------- Table of Contents (In millions, except per share data) Three Months Ended Increase May 31, 2021 May 31, 2020 (Decrease) Percent Change Selling, distribution, and administrative expenses$ 268.0 $ 241.3 $ 26.7 11.1 % Percent of net sales 29.8 % 31.1 % (130) bps Less: Amortization of acquired intangible assets (10.2) (10.8) Less: Share-based payment expense (7.1) (7.8) Less: Acquisition-related items (1) (0.9) - Adjusted selling, distribution, and administrative expenses$ 249.8 $ 222.7 $ 27.1 12.2 % Percent of net sales 27.8 % 28.7 % (90) bps Operating profit$ 118.1 $ 83.0 $ 35.1 42.3 % Percent of net sales 13.1 % 10.7 % 240 bps Add-back: Amortization of acquired intangible assets 10.2 10.8 Add-back: Share-based payment expense 7.1 7.8 Add-back: Acquisition-related items (1) 0.9 - Add-back: Special charges 0.5 3.3 Adjusted operating profit$ 136.8 $ 104.9 $ 31.9 30.4 % Percent of net sales 15.2 % 13.5 % 170 bps Net income$ 85.7 $ 60.4 $ 25.3 41.9 % Add-back: Amortization of acquired intangible assets 10.2 10.8 Add-back: Share-based payment expense 7.1 7.8 Add-back: Acquisition-related items (1) 0.9 - Add-back: Special charges 0.5 3.3 Total pre-tax adjustments to net income 18.7 21.9 Income tax effects (4.0) (5.1) Adjusted net income$ 100.4 $ 77.2 $ 23.2 30.1 % Diluted earnings per share$ 2.37 $ 1.52 $ 0.85 55.9 % Adjusted diluted earnings per share$ 2.77 $ 1.94 $ 0.83 42.8 %
____________________________
(1) Acquisition-related items include professional fees.Net Sales Net sales for the three months endedMay 31, 2021 increased$123.5 million , or 15.9%, to$899.7 million compared with$776.2 million in the prior-year period due primarily to higher volumes. From a sales channel perspective, sales through the independent sales network and direct sales network increased 14% and 39%, respectively, due primarily to our improved go-to-market activity, which leveraged improvements in the construction market and wider economy. Additionally, sales within the corporate accounts channel increased 13% as large retailers within this channel have begun to address previously deferred nonessential renovations. Retail sales declined 26% due primarily to a customer inventory rebalancing in fiscal 2021. Changes in foreign currency rates and revenues from acquired companies did not have a meaningful impact on net sales for the third quarter of fiscal 2021. Gross Profit Gross profit for the third quarter of fiscal 2021 increased$59.0 million , or 18.0%, to$386.6 million compared with$327.6 million in the prior-year period, and gross profit margin increased 80 basis points to 43.0% from 42.2%. The increase in gross profit and margin was primarily due to increased sales volumes as well as product and productivity improvements, partially offset by higher component and freight costs. 25 -------------------------------------------------------------------------------- Table of Contents Operating Profit SD&A expenses for the three months endedMay 31, 2021 were$268.0 million compared with$241.3 million in the prior-year period, an increase of$26.7 million , or 11.1%. The increase in SD&A expense was due primarily to higher outbound freight and commissions costs associated with higher sales volumes as well as increased employee-related costs. SD&A expenses for the third quarter of fiscal 2021 were 29.8% of net sales compared with 31.1% for the prior-year period. Adjusted SD&A expenses for the three months endedMay 31, 2021 were$249.8 million (27.8% of net sales) compared with$222.7 million (28.7% of net sales) in the prior-year period. We recognized pre-tax special charges of$0.5 million during the third quarter of fiscal 2021 compared with$3.3 million recorded during the third quarter of fiscal 2020. Further details regarding our special charges are included in the Special Charges footnote of the Notes to Consolidated Financial Statements. Operating profit for the third quarter of fiscal 2021 was$118.1 million (13.1% of net sales) compared with$83.0 million (10.7% of net sales) for the prior-year period, an increase of$35.1 million , or 42.3%. The increase in operating profit was due to higher gross profit and lower special charges, partially offset by higher SD&A expenses. The operating profit margin increase of 240 bps year over year reflects higher gross profit as well as our ability to successfully leverage our fixed costs. Adjusted operating profit increased$31.9 million , or 30.4%, to$136.8 million for the third quarter of fiscal 2021 compared with$104.9 million for the third quarter of fiscal 2020. Adjusted operating profit margin increased to 15.2% for the third quarter of fiscal 2021 compared with 13.5% for the year-ago period. 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$6.2 million and$5.4 million for the three months endedMay 31, 2021 and 2020, respectively. This increase was due primarily to less interest earned on cash investments compared to the prior year due primarily to unfavorable short-term investment rates. We reported net miscellaneous expense of$2.7 million and net miscellaneous income of$0.9 million for the three months endedMay 31, 2021 and 2020, respectively. Income Taxes and Net Income Our effective income tax rate was 21.5% and 23.1% for the three months endedMay 31, 2021 and 2020, respectively. The decrease in the effective income tax rate was primarily due to favorable discrete items recognized in the third quarter of fiscal 2021. We currently estimate that our blended consolidated effective income tax rate, before any discrete items, will be approximately 23% for fiscal 2021, assuming the rates in our taxing jurisdictions remain generally consistent throughout the year. Net income for the third quarter of fiscal 2021 increased$25.3 million , or 41.9%, to$85.7 million from$60.4 million reported for the prior-year period. The increase in net income resulted from an increased operating profit compared to the prior-year period, partially offset by higher net non-operating expenses and income tax expense associated with our increased profit. Diluted earnings per share for the three months endedMay 31, 2021 increased$0.85 , or 55.9%, to$2.37 compared with diluted earnings per share of$1.52 for the prior-year period. This increase reflects higher net income as well as lower outstanding diluted shares. Adjusted net income for the third quarter of fiscal 2021 was$100.4 million , compared with$77.2 million in the prior-year period, an increase of$23.2 million , or 30.1%. Adjusted diluted earnings per share for the three months endedMay 31, 2021 increased$0.83 , or 42.8%, to$2.77 compared with$1.94 for the prior-year period. 26 -------------------------------------------------------------------------------- Table of Contents Segment Results The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the three months endedMay 31, 2021 and 2020 (in millions except per share data). We have recast historical information to conform to the current segment structure. Three Months Ended Increase ABL May 31, 2021 May 31, 2020 (Decrease) Percent Change Net sales$ 850.0 $ 741.6 $ 108.4 14.6 % Operating profit 126.5 98.6 27.9 28.3 % Add-back: Amortization of acquired intangible assets 6.9
6.9
Add-back: Share-based payment expense 2.4
2.9
Adjusted operating profit$ 135.8 $ 108.4 $ 27.4 25.3 % Operating profit margin 14.9 % 13.3 % 160 bps Adjusted operating profit margin 16.0 % 14.6 % 140 bps ABL net sales for the three months endedMay 31, 2021 increased 14.6% compared with the prior-year period due primarily to improvements within the independent sales network, direct sales network, and corporate accounts 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 sales channel. Operating profit for ABL was$126.5 million (14.9% of ABL net sales) for the three months endedMay 31, 2021 compared to$98.6 million (13.3% of ABL net sales) in the prior-year period, an increase of$27.9 million . The increase in operating profit was due primarily to higher sales volumes as well as product and productivity improvements, partially offset by higher component, freight, and SD&A costs. The operating profit margin increase year over year reflects higher sales volumes as well as our ability to successfully leverage our fixed costs. Adjusted operating profit for ABL increased$27.4 million to$135.8 million for the third quarter of fiscal 2021 compared with the prior year period. Three Months Ended Increase ISG May 31, 2021 May 31, 2020 (Decrease) Percent Change Net sales$ 55.4 $ 37.7 $ 17.7 46.9 % Operating profit (loss) 7.2 (0.2) 7.4 NM Add-back: Amortization of acquired intangible assets 3.3
3.9
Add-back: Share-based payment expense 0.6
1.3
Adjusted operating profit$ 11.1 $ 5.0 $ 6.1 122.0 % Operating profit (loss) margin 13.0 % (0.5) % 1350 bps Adjusted operating profit margin 20.0 % 13.3 % 670 bps ISG net sales for the three months endedMay 31, 2021 increased 46.9% compared with the prior-year period driven primarily by increased sales of building management products due primarily to improved market conditions as well as the benefit of a pull forward of sales from an announced price increase. ISG operating profit was$7.2 million for three months endedMay 31, 2021 compared with a$0.2 million operating loss in the prior-year period, an increase of$7.4 million . This increase was due primarily to higher sales volumes, partially offset by increased employee costs. Adjusted operating profit for ISG increased$6.1 million to$11.1 million for the third quarter of fiscal 2021 compared with the prior-year period. 27 -------------------------------------------------------------------------------- Table of Contents First Nine Months of Fiscal 2021 Compared with First Nine Months of Fiscal 2020 The following table sets forth information comparing the components of net income for the nine months endedMay 31, 2021 and 2020 (in millions except per share data): Nine Months Ended Increase May 31, 2021 May 31, 2020 (Decrease) Percent Change Net sales$ 2,468.3 $ 2,435.1 $ 33.2 1.4 % Cost of products sold 1,412.6 1,407.8 4.8 0.3 % Gross profit 1,055.7 1,027.3 28.4 2.8 % Percent of net sales 42.8 % 42.2 % 60 bps Selling, distribution, and administrative expenses 759.4 767.5 (8.1) (1.1) % Special charges 1.5 11.8 (10.3) NM Operating profit 294.8 248.0 46.8 18.9 % Percent of net sales 11.9 % 10.2 % 170 bps Other expense: Interest expense, net 17.7 19.4 (1.7) (8.8) % Miscellaneous expense, net 6.5 1.5 5.0 NM Total other expense 24.2 20.9 3.3 15.8 % Income before income taxes 270.6 227.1 43.5 19.2 % Percent of net sales 11.0 % 9.3 % 170 bps Income tax expense 62.4 52.5 9.9 18.9 % Effective tax rate 23.1 % 23.1 % Net income$ 208.2 $ 174.6 $ 33.6 19.2 % Diluted earnings per share$ 5.66 $ 4.40 $ 1.26 28.6 % NM - not meaningful Net sales were$2.47 billion for the nine months endedMay 31, 2021 compared with$2.44 billion reported for the nine months endedMay 31, 2020 , an increase of$33.2 million , or 1.4%. For the nine months endedMay 31, 2021 , we reported net income of$208.2 million , an increase of$33.6 million , or 19.2%, compared with$174.6 million for the nine months endedMay 31, 2020 . For the first nine months of fiscal 2021, diluted earnings per share increased 28.6% to$5.66 compared with$4.40 reported in the year-ago period. The following table as well as the tables under Segment Results below reconcile certainU.S. GAAP financial measures to the corresponding non-U.S. GAAP measures referred to in the discussion of our results of operations, which exclude the impact acquisition-related items, amortization of acquired intangible assets, share-based payment expense, special charges associated primarily with continued efforts to streamline the organization and integrate recent acquisitions, and impairments of investments. These non-U.S. GAAP financial measures, including adjusted gross profit and adjusted gross profit margin, adjusted SD&A expenses and adjusted SD&A expenses as a percent of net sales, adjusted operating profit and adjusted operating profit margin for total company and by segment, adjusted other expense, adjusted net income, and adjusted diluted earnings per share, are provided to enhance the user's overall understanding of our current financial performance. Specifically, we believe these non-U.S. GAAP measures provide greater comparability and enhanced visibility into our results of operations. The non-U.S. GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, results prepared in accordance withU.S. GAAP. 28 -------------------------------------------------------------------------------- Table of Contents (In millions, except per share data) Nine Months Ended Increase May 31, 2021 May 31, 2020 (Decrease) Percent Change Gross profit$ 1,055.7 $ 1,027.3 $ 28.4 2.8 % Percent of net sales 42.8 % 42.2 % 60 bps Add-back: Acquisition-related items (1) - 1.2 Adjusted gross profit$ 1,055.7 $ 1,028.5 $ 27.2 2.6 % Percent of net sales 42.8 % 42.2 % 60 bps Selling, distribution, and administrative expenses$ 759.4 $ 767.5 $ (8.1) (1.1) % Percent of net sales 30.8 % 31.5 % (70) bps Less: Amortization of acquired intangible assets (30.4) (30.8) Less: Share-based payment expense (22.3) (32.5) Less: Acquisition-related items (1) (0.9) (1.3) Adjusted selling, distribution, and administrative expenses$ 705.8 $ 702.9 $ 2.9 0.4 % Percent of net sales 28.6 % 28.9 % (30) bps Operating profit$ 294.8 $ 248.0 $ 46.8 18.9 % Percent of net sales 11.9 % 10.2 % 170 bps Add-back: Amortization of acquired intangible assets 30.4 30.8 Add-back: Share-based payment expense 22.3 32.5 Add-back: Acquisition-related items (1) 0.9 2.5 Add-back: Special charges 1.5 11.8 Adjusted operating profit$ 349.9 $ 325.6 $ 24.3 7.5 % Percent of net sales 14.2 % 13.4 % 80 bps Other expense$ 24.2 $ 20.9 $ 3.3 15.8 % Less: Impairment of investment (4.0) - Adjusted other expense$ 20.2 $ 20.9 $ (0.7) (3.3) % Net income$ 208.2 $ 174.6 $ 33.6 19.2 % Add-back: Amortization of acquired intangible assets 30.4 30.8 Add-back: Share-based payment expense 22.3 32.5 Add-back: Acquisition-related items (1) 0.9 2.5 Add-back: Special charges 1.5 11.8 Add-back: Impairment of investment 4.0 - Total pre-tax adjustments to net income 59.1 77.6 Income tax effect (13.3) (17.7) Adjusted net income$ 254.0 $ 234.5 $ 19.5 8.3 % Diluted earnings per share$ 5.66 $ 4.40 $ 1.26 28.6 % Adjusted diluted earnings per share$ 6.90 $ 5.91 $ 0.99 16.8
%
______________________________
(1) Acquisition-related items include profit in inventory and professional fees.Net Sales Net sales for the nine months endedMay 31, 2021 increased$33.2 million , or 1.4%, to$2.47 billion compared with$2.44 billion in the prior-year period. From a sales channel perspective, sales through the independent sales network and direct sales network increased as we began to leverage improvements in the construction market and wider economy through our go-to-market activities. However, corporate accounts sales for the nine months endedMay 31, 2021 were lower year over year due to fewer nonessential renovations from large retailers in the first half of the fiscal year. Additionally, retail sales in fiscal 2021 were lower than the prior-year period due primarily to a stronger pre-pandemic performance in the first half of the prior fiscal year combined with a customer inventory rebalancing in fiscal 2021. Changes in foreign currency rates and revenues from acquired companies did not have a meaningful impact on our net sales year over year. 29 -------------------------------------------------------------------------------- Table of Contents Gross Profit Gross profit of$1.06 billion for the first nine months of fiscal 2021 increased$28.4 million , or 2.8%, compared with$1.03 billion in the prior-year period. Gross profit margin increased to 42.8% for the nine months endedMay 31, 2021 compared with 42.2% in the prior-year period. The improvement in gross profit margin was due primarily to product and productivity improvements. Adjusted gross profit for the nine months endedMay 31, 2021 was$1.06 billion (42.8% of net sales) compared with$1.03 billion (42.2% of net sales) in the prior-year period. Operating Profit SD&A expenses for the nine months endedMay 31, 2021 were$759.4 million compared with$767.5 million in the prior-year period, a decrease of$8.1 million , or 1.1%. The decrease in SD&A expenses was due primarily to lower travel expense and sales and marketing costs due to 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. These decreased costs were partially offset by higher employee-related costs. SD&A expenses for the first nine months of fiscal 2021 were 30.8% of net sales compared with 31.5% for the prior-year period. Adjusted SD&A expenses for the nine months endedMay 31, 2021 were$705.8 million (28.6% of net sales) compared with$702.9 million (28.9% of net sales) in the prior-year period. We recognized pre-tax special charges of$1.5 million during the first nine months of fiscal 2021, compared with pre-tax special charges of$11.8 million during the first nine months of fiscal 2020. Further details regarding our special charges are included in the Special Charge footnote of the Notes to Consolidated Financial Statements. Operating profit for the first nine months of fiscal 2021 was$294.8 million (11.9% of net sales) compared with$248.0 million (10.2% of net sales) for the prior-year period, an increase of$46.8 million , or 18.9%. The increase in operating profit was due to higher gross profit, lower special charges, and decreased SD&A expenses. Adjusted operating profit increased by$24.3 million , or 7.5%, to$349.9 million for the first nine months of fiscal 2021 compared with$325.6 million for the first nine months of fiscal 2020. Adjusted operating profit margin for the first nine months of fiscal 2021 increased 80 basis points to 14.2% compared with 13.4% in the year-ago period. 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$17.7 million and$19.4 million for the nine months endedMay 31, 2021 and 2020, respectively. The decrease in interest expense was due primarily to interest savings associated with refinancing our debt. The current fiscal year interest savings were partially offset by lower interest earned on cash investments compared to the prior year due primarily to unfavorable short-term investment rates. We reported net miscellaneous expense of$6.5 million and$1.5 million for the nine months endedMay 31, 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. Further details regarding the impairment charge 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 23.1% for the nine months endedMay 31, 2021 and 2020. Net income for the first nine months of fiscal 2021 increased$33.6 million , or 19.2%, to$208.2 million from$174.6 million reported for the prior-year period. The increase in net income was due primarily to an increased operating profit and lower interest expense, partially offset by higher income tax expense associated with increased profit compared to the prior-year period. Diluted earnings per share for the nine months endedMay 31, 2021 increased$1.26 to$5.66 compared with diluted earnings per share of$4.40 for the prior-year period. This increase reflects higher net income as well as lower outstanding diluted shares. Adjusted net income for the first nine months of fiscal 2021 was$254.0 million compared with$234.5 million in the prior-year period, an increase of$19.5 million , or 8.3%. Adjusted diluted earnings per share for the nine months endedMay 31, 2021 increased$0.99 , or 16.8%, to$6.90 compared with$5.91 for the prior-year period. 30 -------------------------------------------------------------------------------- Table of Contents Segment Results The following table sets forth information comparing the operating results of our segments, ABL and ISG, for the nine months endedMay 31, 2021 and 2020 (in millions except per share data). We have recast historical information to conform to the current segment structure. Nine Months Ended Increase ABL May 31, 2021 May 31, 2020 (Decrease) Percent Change Net sales$ 2,340.4 $ 2,327.8 $ 12.6 0.5 % Operating profit$ 326.9 $ 304.0 $ 22.9 7.5 % Add-back: Amortization of acquired intangible assets 20.8
20.2
Add-back: Share-based payment expense 8.3
11.1
Add-back: Acquisition-related items (1) - 1.2 Adjusted operating profit$ 356.0 $ 336.5 $ 19.5 5.8 % Operating profit margin 14.0 % 13.1 % 90 bps Adjusted operating profit margin 15.2 % 14.5 % 70 bps
______________________________
(1) Acquisition-related items include profit in inventory. ABL net sales for the nine months endedMay 31, 2021 increased 0.5% compared with the prior-year period due primarily to higher sales volumes through the independent sales network and direct sales networks as our go-to-market activities began to leverage improvements in the construction market and wider economy during the third quarter of fiscal 2021. These higher sales volumes were partially offset by declines in the retail sales channel due to a customer inventory rebalancing and stronger pre-pandemic performance. Additionally, sales within the corporate accounts channel were lower due to fewer nonessential renovations from large retailers in the first half of the fiscal year. Operating profit for ABL was$326.9 million (14.0% of ABL net sales) for the nine months endedMay 31, 2021 compared to$304.0 million (13.1% of ABL net sales) in the prior-year period, an increase of$22.9 million . The increase in operating profit was due primarily to higher sales, product and productivity improvements, as well as lower travel expenses and sales and marketing costs, partially offset by increased employee related costs. Adjusted operating profit increased$19.5 million to$356.0 million for the nine months endedMay 31, 2021 compared with the prior year period. Nine Months Ended Increase ISG May 31, 2021 May 31, 2020 (Decrease) Percent Change Net sales$ 139.5 $ 116.1 $ 23.4 20.2 % Operating profit (loss)$ 7.9 $ (2.3) $ 10.2 NM Add-back: Amortization of acquired intangible assets 9.6
10.6
Add-back: Share-based payment expense 2.1
4.5
Adjusted operating profit$ 19.6 $ 12.8 $ 6.8 53.1 % Operating profit (loss) margin 5.7 % (2.0) % 770 bps Adjusted operating profit margin 14.1 % 11.0 % 310 bps ISG net sales for the nine months endedMay 31, 2021 increased 20.2% compared with the prior-year period primarily due to increased sales of building management products. ISG operating profit was$7.9 million for the nine months endedMay 31, 2021 compared with a$2.3 million operating loss in the prior-year period, an increase of$10.2 million . This increase was due primarily to higher sales volumes, partially offset by increased employee related costs. Adjusted operating profit for ISG increased$6.8 million to$19.6 million for the nine months endedMay 31, 2021 compared with the prior year period.
Outlook
As we look ahead, we expect to see continued improvements in the end markets we
serve, and we are positioning ourselves to support higher levels of market
growth. We anticipate some continued volatility in raw material costs and
component and labor availability, and we will work to address the impact to our
business. We plan to continue to invest in our business with the intention of
becoming a larger, more dynamic company.
31
--------------------------------------------------------------------------------
Table of Contents
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 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;
amortization and the recoverability of long-lived assets, including goodwill and
intangible assets; share-based payment expense; medical, product warranty and
recall, and other estimated liabilities; retirement benefits; and litigation. 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 accounting estimates with the Audit Committee of
the Board.
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 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, 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 2021 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 outperform the markets we serve; (h) our expectations about the resolution
of securities class action and other legal matters; (i) our expectations of the
impact of the ongoing COVID-19 pandemic; and (j) our expectation that the OSRAM
DS transaction will close by end of day on July 1, 2021 and deliver the expected
benefits to the Company and its customers. 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.
32--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
