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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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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. (“Acuity Brands”) and its subsidiaries for the years ended August 31, 2019, 2018, and 2017. 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
Acuity Brands is the parent company of Acuity Brands Lighting, Inc. (“ABL”) and other wholly-owned subsidiaries (Acuity Brands, ABL, and such other subsidiaries are collectively referred to herein as “we,” “our,” “us,” “the Company,” or similar references). Our principal office is located in Atlanta, Georgia.
We are one of the world’s leading providers of lighting and building management solutions and services for commercial, institutional, industrial, infrastructure, and residential applications throughout North America and select international markets. Our lighting and building management solutions include devices such as luminaires, lighting controls, controls for various building systems, power supplies, prismatic skylights, and drivers, as well as integrated systems designed to optimize energy efficiency and comfort for various indoor and outdoor applications. Additionally, we continue to expand our solutions portfolio, including software and services, to provide a host of other economic benefits resulting from data analytics that enables the Internet of Things (“IoT”), supports the advancement of smart buildings, smart cities, and the smart grid, and allows businesses to develop custom applications to scale their operations. As of August 31, 2019, we employed approximately 12,000 associates and operated 18 manufacturing facilities, nine distribution facilities, and four warehouses to serve our extensive customer base.
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:
On September 17, 2019, using cash on hand and borrowings under available existing credit arrangements, 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 complements 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.
On June 20, 2019, using cash on hand we acquired all of the equity interests of WhiteOptics, LLC (“WhiteOptics”). WhiteOptics is headquartered in New Castle, Delaware and manufactures advanced optical components used to reflect, diffuse, and control light for LED lighting used in commercial and institutional applications.
On May 1, 2018, using cash on hand and borrowings available under existing credit arrangements, we acquired IOTA Engineering, LLC (“IOTA”). IOTA is headquartered in Tucson, Arizona and manufactures highly engineered emergency lighting products and power equipment for commercial and institutional applications both in the U.S. and internationally.
On February 12, 2018, using cash on hand, we acquired Lucid Design Group, Inc (“Lucid”). Lucid is headquartered in Oakland, California and provides a data and analytics platform to make data-driven decisions to improve building efficiency and drive energy conservation and savings.
No acquisitions were completed during fiscal 2017.
Please refer to the Acquisitions footnote of the Notes to Consolidated Financial Statements for more information.
Strategy
Our strategy is to extend our leadership position in the North American market and certain international markets by delivering superior lighting and building management solutions. Additionally, we plan to continue to expand our software solution offerings, including IoT enabled solutions. As a results-oriented, customer-centric company, management plans to align the unique capabilities and resources of the organization to drive profitable growth through a keen focus on providing comprehensive and differentiated lighting and building management solutions for our customers, driving world-class cost efficiency, and leveraging a culture of operational excellence through continuous improvement.
Throughout fiscal 2019, we believe we made progress towards achieving our strategic objectives, including expanding our access to the market, expanding our addressable market, introducing new lighting and building management
solutions, and enhancing our operations to create a stronger, more effective organization. Our strategic objectives were developed in order to meet or exceed the following financial goals during an entire business cycle:
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•
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Operating profit margin in the mid-teens or higher;
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•
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Diluted earnings per share growth in excess of 15% per annum;
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•
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Return on stockholders’ equity of 20% or better per annum;
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•
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Cash flow from operations, less capital expenditures, that is in excess of net income; and
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•
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Return on invested capital in excess of our weighted average cost of capital.
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To enhance our probability of achieving these financial goals, management will continue to implement programs to enhance our capabilities at providing unparalleled customer service; creating a globally competitive cost structure; improving productivity; and introducing innovative solutions and services more rapidly and cost effectively. In addition, we have invested considerable resources to teach and train associates to utilize tools and techniques that accelerate success in these key areas, as well as to create a culture that demands excellence through continuous improvement. Additionally, we promote a “pay-for-performance” culture that rewards associates for achieving various levels of year-over-year improvement, while closely monitoring appropriate risk-taking. The expected outcome of these activities will be to better position ourselves to deliver on our full potential, to provide a platform for future growth opportunities, and to achieve our long-term financial goals. See the Outlook section below for additional information.
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.
In fiscal 2019, we invested $53.0 million in property, plant, and equipment, primarily for new and enhanced information technology capabilities, equipment, tooling, and facility enhancements. We expect to invest approximately 1.7% of net sales in capital expenditures during fiscal 2020.
In March 2018, the Board authorized the repurchase of up to six million shares of our common stock. As of August 31, 2019, 1.45 million shares had been purchased under this authorization, of which 0.7 million were repurchased in fiscal 2019. 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; making capital investments as currently anticipated; paying quarterly stockholder dividends as currently anticipated; paying principal and interest on debt as currently scheduled, including our senior unsecured notes maturing in December 2019, which we expect to repay with borrowings available under existing credit arrangements, subject to satisfying the applicable conditions precedent; making required contributions to our employee benefit plans; funding possible acquisitions; 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 not limited to, future borrowings and capacity, will sufficiently support our long-term liquidity needs.
Cash Flow
We use available cash and cash flows from operations as well as borrowings on credit arrangements to fund operations, capital expenditures, and acquisitions, if any; to repurchase Company stock; and to pay dividends.
Our cash position at August 31, 2019 was $461.0 million, an increase of $331.9 million from August 31, 2018. During the year ended August 31, 2019, we generated net cash flows from operating activities of $494.7 million. Cash generated from operating activities, as well as cash on-hand, was used during the current year primarily to repurchase 0.7 million shares of our outstanding common stock for $81.6 million, fund capital expenditures of $53.0 million, pay dividends to stockholders of $20.8 million, and pay withholding taxes on the net settlement of equity awards of $6.0 million.
During fiscal 2019, net cash generated from operating activities increased $143.2 million to $494.7 million compared with $351.5 million in the prior-year period due primarily to lower net working capital requirements. Operating working capital (calculated by adding accounts receivable plus inventories and subtracting accounts payable-net of acquisitions and the impact of foreign exchange rate changes) decreased by approximately $57.0 million during fiscal 2019 compared to an increase of $84.7 million during fiscal 2018. Operating working capital decreased primarily due to
greater cash collections from customers year over year as well as reductions in current year inventory as a result of our efforts to improve inventory turnover. These improvements were partially offset by the timing of payments for trade payables.
Management believes that investing in assets and programs that will over time increase the overall return on its invested capital is a key factor in driving stockholder value. We invested $53.0 million and $43.6 million in fiscal 2019 and 2018, respectively, in property, plant, and equipment primarily for new and enhanced information technology capabilities, equipment, tooling, and facility enhancements. We expect to invest approximately 1.7% of net sales in capital expenditures during fiscal 2020.
Contractual Obligations
The following table summarizes our contractual obligations at August 31, 2019 (in millions):
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Payments Due by Period
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Total
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Less than
One Year
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1 to 3 Years
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4 to 5
Years
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After 5
Years
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Debt(1)
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$
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356.7
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$
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350.3
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$
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4.8
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$
|
0.7
|
|
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$
|
0.9
|
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Interest obligations(2)
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95.2
|
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23.6
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25.2
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20.9
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|
25.5
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Operating leases(3)
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68.7
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16.7
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23.4
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11.8
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16.8
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Purchase obligations(4)
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357.2
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347.2
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10.0
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—
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—
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Other liabilities(5)
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44.9
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|
1.8
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3.2
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1.5
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38.4
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Total
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$
|
922.7
|
|
|
$
|
739.6
|
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$
|
66.6
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$
|
34.9
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$
|
81.6
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___________________________
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(1)
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These amounts, which represent the principal amounts outstanding at August 31, 2019, are included in our Consolidated Balance Sheets. See the Debt and Lines of Credit footnote for additional information regarding debt and other matters.
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(2)
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These amounts primarily represent our expected future interest payments on outstanding debt held at August 31, 2019 and our outstanding loans related to our corporate-owned life insurance policies (“COLI”), which constitute a small portion of the total contractual obligations shown. COLI-related interest payments included in this table are estimates. These estimates are based on various assumptions, including age at death, loan interest rate, and tax bracket. The amounts in this table do not include COLI-related payments after ten years due to the difficulty in calculating a meaningful estimate that far in the future. Note that payments related to debt and the COLI are reflected in our Consolidated Statements of Cash Flows.
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(3)
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Our operating lease obligations are described in the Commitments and Contingencies footnote.
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(4)
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Purchase obligations include commitments to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders.
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(5)
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These amounts are included in our Consolidated Balance Sheets and largely represent liabilities for which we are obligated to make future payments under certain long-term employee benefit programs. Estimates of the amounts and timing of these amounts are based on various assumptions, including expected return on plan assets, interest rates, and other variables. The amounts in this table do not include amounts related to future funding obligations under the defined benefit pension plans. The amount and timing of these future funding obligations are subject to many variables and are also dependent on whether or not we elect to make contributions to the pension plans in excess of those required under Employee Retirement Income Security Act of 1974. Such voluntary contributions may reduce or defer the funding obligations. See the Pension and Profit Sharing Plans footnote for additional information. These amounts exclude $16.6 million of unrecognized tax benefits as the period of cash settlement with the respective taxing authorities cannot be reasonably estimated.
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The above table does not include deferred income tax liabilities of approximately $174.4 million as of August 31, 2019. Refer to the Income Taxes footnote for more information. This amount is not included in the total contractual obligations table because we believe this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax and book bases of assets and liabilities, which will result in taxable amounts in future years when the liabilities are settled at their reported financial statement amounts. The results of these calculations do not have a direct connection with the amount of cash taxes to be paid in any future periods. As a result, scheduling deferred income tax liabilities as payments due by period could be misleading, because this scheduling would not relate to liquidity needs.
Capitalization
Our current capital structure is comprised principally of senior unsecured notes and equity of our stockholders. Total debt outstanding was $356.6 million and $356.8 million at August 31, 2019 and 2018, respectfully, and consisted primarily of fixed-rate obligations. We fully repaid all borrowings under our revolving credit facility during fiscal 2019. Additionally, we repaid $0.4 million under the fixed rate long-term bank loans during fiscal 2019.
On December 8, 2009, ABL issued $350.0 million of senior unsecured notes due in December 2019 (the “Unsecured Notes”) in a private placement transaction. The Unsecured Notes were subsequently exchanged for Securities and Exchange Commission registered notes with substantially identical terms. The Unsecured Notes bear interest at a rate of 6% per annum and were issued at a price equal to 99.797% of their face value and for a term of ten years. Although
the Unsecured Notes will mature within one year from August 31, 2019, we have the ability and intent to refinance these borrowings using availability under our unsecured delayed draw term loan facility (“Term Loan Facility”) as described below, subject to satisfying the applicable conditions precedent. Currently, we plan to refinance the Unsecured Notes in full with borrowings under the Term Loan Facility, of which $341.2 million of the carrying value would be due more than one year from the anticipated refinancing date. As such, this amount is reflected within Long-term debt on the Consolidated Balance Sheets as of August 31, 2019. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for more information.
On June 29, 2018, we entered into a credit agreement (“Credit Agreement”) with a syndicate of banks that provides us with a $400.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”) and a $400.0 million Term Loan Facility. On August 31, 2019, we had no borrowings outstanding under the Revolving Credit Facility and no borrowings under the Term Loan Facility. We were in compliance with all financial covenants under the Credit Agreement as of August 31, 2019. At August 31, 2019, we had additional borrowing capacity under the Credit Agreement of $796.2 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility and the Term Loan Facility less the outstanding letters of credit of $3.8 million issued under the Revolving Credit Facility. As of August 31, 2019, we had outstanding letters of credit totaling $8.0 million, primarily for securing collateral requirements under our casualty insurance programs and for providing credit support for our industrial revenue bond, including $3.8 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 fiscal 2019, our consolidated stockholders’ equity increased $202.1 million to $1.92 billion at August 31, 2019 from $1.72 billion at August 31, 2018. The increase was due primarily to net income earned in the period, partially offset by share repurchases, pension plan adjustments, dividend payments, adjustments related to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), shares withheld for employee taxes on vested restricted stock grants, and 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 15.7% and 17.2% at August 31, 2019 and 2018, respectively. The ratio of debt, net of cash, to total capitalization, net of cash, was (5.8)% and 11.7% at August 31, 2019 and 2018, respectively.
Dividends
We paid dividends on our common stock of $20.8 million ($0.52 per share) in fiscal 2019 and $21.4 million ($0.52 per share) in fiscal 2018, indicating a quarterly dividend rate of $0.13 per share. All decisions regarding the declaration and payment of dividends are at the discretion of the Board and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant.
Results of Operations
Fiscal 2019 Compared with Fiscal 2018
The following table sets forth information comparing the components of net income for the year ended August 31, 2019 with the year ended August 31, 2018 (in millions except per share data):
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Year Ended August 31,
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Increase
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Percent
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2019
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|
2018
|
|
(Decrease)
|
|
Change
|
Net sales
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$
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3,672.7
|
|
|
$
|
3,680.1
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|
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$
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(7.4
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)
|
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(0.2
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)%
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Cost of products sold
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2,193.0
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|
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2,194.7
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(1.7
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)
|
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(0.1
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)%
|
Gross profit
|
1,479.7
|
|
|
1,485.4
|
|
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(5.7
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)
|
|
(0.4
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)%
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Percent of net sales
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40.3
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%
|
|
40.4
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%
|
|
(10
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)
|
bps
|
|
|
Selling, distribution, and administrative expenses
|
1,015.0
|
|
|
1,019.0
|
|
|
(4.0
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)
|
|
(0.4
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)%
|
Special charges
|
1.8
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|
|
5.6
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|
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(3.8
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)
|
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NM
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Operating profit
|
462.9
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|
|
460.8
|
|
|
2.1
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|
|
0.5
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%
|
Percent of net sales
|
12.6
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%
|
|
12.5
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%
|
|
10
|
|
bps
|
|
|
Other expense:
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|
|
|
|
|
|
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|
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Interest expense, net
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33.3
|
|
|
33.5
|
|
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(0.2
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)
|
|
(0.6
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)%
|
Miscellaneous expense, net
|
4.7
|
|
|
1.4
|
|
|
3.3
|
|
|
NM
|
|
Total other expense
|
38.0
|
|
|
34.9
|
|
|
3.1
|
|
|
8.9
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%
|
Income before income taxes
|
424.9
|
|
|
425.9
|
|
|
(1.0
|
)
|
|
(0.2
|
)%
|
Percent of net sales
|
11.6
|
%
|
|
11.6
|
%
|
|
—
|
|
bps
|
|
|
Income tax expense
|
94.5
|
|
|
76.3
|
|
|
18.2
|
|
|
23.9
|
%
|
Effective tax rate
|
22.2
|
%
|
|
17.9
|
%
|
|
|
|
|
|
|
Net income
|
$
|
330.4
|
|
|
$
|
349.6
|
|
|
$
|
(19.2
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)
|
|
(5.5
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)%
|
Diluted earnings per share
|
$
|
8.29
|
|
|
$
|
8.52
|
|
|
$
|
(0.23
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)
|
|
(2.7
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)%
|
NM - not meaningful
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|
|
|
|
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Net sales decreased $7.4 million, or 0.2%, to $3.67 billion for the year ended August 31, 2019 compared with $3.68 billion reported for the year ended August 31, 2018. For the year ended August 31, 2019, we reported net income of $330.4 million compared with $349.6 million for the year ended August 31, 2018, a decrease of $19.2 million, or 5.5%. For fiscal 2019, diluted earnings per share decreased 2.7% to $8.29 from $8.52 for the prior-year period.
Fiscal 2019 results were impacted by the adoption of ASC 606, which resulted in a decrease to revenues, gross profit, and operating profit of $8.9 million, $4.8 million, and $5.2 million, respectively, during the year ended August 31, 2019. Additionally, fiscal 2018 results were retrospectively adjusted to reflect the impact of adopting Accounting Standards Update No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). Upon adoption of ASU 2017-07, our previously reported operating profit and other expense both increased $6.2 million for the year ended August 31, 2018. The provisions of ASU 2017-07 had no impact to our previously reported net income or earnings per share. See New Accounting Pronouncements footnote of the Notes to Consolidated Financial Statements for further details.
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, certain manufacturing inefficiencies and excess inventory adjustments related to the closure of a facility, amortization of acquired intangible assets, share-based payment expense, special charges associated primarily with continued efforts to streamline the organization, a gain associated with the sale of our former Spanish lighting business, and certain discrete income tax benefits of the Tax Cuts and Jobs Act (“TCJA”). 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 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.
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(In millions, except per share data)
|
Year Ended August 31,
|
|
Increase (Decrease)
|
Percent Change
|
|
2019
|
|
2018
|
|
Gross profit
|
$
|
1,479.7
|
|
|
$
|
1,485.4
|
|
|
|
|
Add-back: Manufacturing inefficiencies (1)
|
0.9
|
|
|
—
|
|
|
|
|
Add-back: Acquisition-related items (2)
|
1.2
|
|
|
1.7
|
|
|
|
|
Add-back: Excess inventory (3)
|
—
|
|
|
3.1
|
|
|
|
|
Adjusted gross profit
|
$
|
1,481.8
|
|
|
$
|
1,490.2
|
|
|
$
|
(8.4
|
)
|
(0.6
|
)%
|
Percent of net sales
|
40.3
|
%
|
|
40.5
|
%
|
|
(20
|
)
|
bps
|
|
|
|
|
|
|
|
Selling, distribution, and administrative expenses
|
$
|
1,015.0
|
|
|
$
|
1,019.0
|
|
|
|
|
Less: Amortization of acquired intangible assets
|
(30.8
|
)
|
|
(28.5
|
)
|
|
|
|
Less: Share-based payment expense
|
(29.2
|
)
|
|
(32.3
|
)
|
|
|
|
Less: Acquisition-related items (2)
|
(1.3
|
)
|
|
(2.1
|
)
|
|
|
|
Adjusted selling, distribution, and administrative expenses
|
$
|
953.7
|
|
|
$
|
956.1
|
|
|
$
|
(2.4
|
)
|
(0.3
|
)%
|
Percent of net sales
|
26.0
|
%
|
|
26.0
|
%
|
|
—
|
|
bps
|
|
|
|
|
|
|
|
Operating profit
|
$
|
462.9
|
|
|
$
|
460.8
|
|
|
|
|
Add-back: Amortization of acquired intangible assets
|
30.8
|
|
|
28.5
|
|
|
|
|
Add-back: Share-based payment expense
|
29.2
|
|
|
32.3
|
|
|
|
|
Add-back: Manufacturing inefficiencies (1)
|
0.9
|
|
|
—
|
|
|
|
|
Add-back: Acquisition-related items (2)
|
2.5
|
|
|
3.8
|
|
|
|
|
Add-back: Excess inventory (3)
|
—
|
|
|
3.1
|
|
|
|
|
Add-back: Special charges
|
1.8
|
|
|
5.6
|
|
|
|
|
Adjusted operating profit
|
$
|
528.1
|
|
|
$
|
534.1
|
|
|
$
|
(6.0
|
)
|
(1.1
|
)%
|
Percent of net sales
|
14.4
|
%
|
|
14.5
|
%
|
|
(10
|
)
|
bps
|
|
|
|
|
|
|
|
Other expense
|
$
|
38.0
|
|
|
$
|
34.9
|
|
|
|
|
Add-back: Gain on sale of business
|
—
|
|
|
5.4
|
|
|
|
|
Adjusted other expense
|
$
|
38.0
|
|
|
$
|
40.3
|
|
|
$
|
(2.3
|
)
|
(5.7
|
)%
|
|
|
|
|
|
|
|
Net income
|
$
|
330.4
|
|
|
$
|
349.6
|
|
|
|
|
Add-back: Amortization of acquired intangible assets
|
30.8
|
|
|
28.5
|
|
|
|
|
Add-back: Share-based payment expense
|
29.2
|
|
|
32.3
|
|
|
|
|
Add-back: Manufacturing inefficiencies (1)
|
0.9
|
|
|
—
|
|
|
|
|
Add-back: Acquisition-related items (2)
|
2.5
|
|
|
3.8
|
|
|
|
|
Add-back: Excess inventory (3)
|
—
|
|
|
3.1
|
|
|
|
|
Add-back: Special charges
|
1.8
|
|
|
5.6
|
|
|
|
|
Less: Gain on sale of business
|
—
|
|
|
(5.4
|
)
|
|
|
|
Total pre-tax adjustments to net income
|
65.2
|
|
|
67.9
|
|
|
|
|
Income tax effect
|
(14.2
|
)
|
|
(20.0
|
)
|
|
|
|
Less: Discrete income tax benefits of the TCJA (4)
|
—
|
|
|
(34.6
|
)
|
|
|
|
Adjusted net income
|
$
|
381.4
|
|
|
$
|
362.9
|
|
|
$
|
18.5
|
|
5.1
|
%
|
|
|
|
|
|
|
|
Diluted earnings per share
|
$
|
8.29
|
|
|
$
|
8.52
|
|
|
|
|
Adjusted diluted earnings per share
|
$
|
9.57
|
|
|
$
|
8.84
|
|
|
$
|
0.73
|
|
8.3
|
%
|
______________________________
(1) Incremental costs incurred due to manufacturing inefficiencies directly related to the closure of a facility.
(2) Acquisition-related items include profit in inventory and professional fees.
(3) Excess inventory related to the closure of a facility.
(4) Discrete income tax benefits of the TCJA recognized within Income tax expense on the Consolidated Statements of Comprehensive Income. See Income Taxes footnote within the Notes to Consolidated Financial Statements for additional details.
Net Sales
Net sales for the year ended August 31, 2019 decreased by 0.2% compared with the prior-year period as a 1% decline in sales volumes was offset by favorable changes in product prices and mix of products sold (“price/mix”). The volume decline was a result of several factors, which included prior year’s significant initial stocking of product in the stores of a new customer in the retail sales channel that did not repeat in the current period; the elimination of certain products in our portfolio sold primarily through the retail sales channel that did not meet our return objectives; and softer market conditions. The favorable change in price/mix was due to changes in sales channel mix and implemented price increases, which were partially offset by changes in the mix of product sold. The combined negative impact of changes in foreign currencies, the adoption of ASC 606, and acquisitions net of divestitures was de minimis. Due to the changing dynamics of our product portfolio, including the increase of integrated lighting and building management solutions, it is not possible to precisely quantify or differentiate the individual components of volume, price, and mix.
Gross Profit
Gross profit for fiscal 2019 decreased $5.7 million, or 0.4%, to $1.48 billion compared with $1.49 billion for the prior year. Gross profit margin decreased to 40.3% for the year ended August 31, 2019 compared with 40.4% for the year ended August 31, 2018. The decline in gross profit margin was due primarily to a shift in sales among key customers within the retail channel, tariff costs, and the under-absorption of manufacturing costs as a result of inventory reduction efforts, partially offset by inter-channel mix, price increases, and favorable materials and inbound freight costs. Adjusted gross profit for fiscal 2019 decreased $8.4 million, or 0.6%, to $1.48 billion compared with $1.49 billion for the prior year. Adjusted gross profit margin decreased 20 basis points to 40.3% compared to 40.5% in the prior year.
Operating Profit
SD&A expenses of $1.02 billion for the year ended August 31, 2019 decreased $4.0 million, or 0.4%. The decrease in SD&A expenses was primarily due to lower outbound freight charges, which was partially due to the customer shift within the retail sales channel, as well as lower employee-related costs, partially offset by expenses associated with acquired businesses. Compared with the prior-year period, SD&A expenses as a percent of net sales decreased 10 basis points to 27.6% for fiscal 2019 from 27.7% in fiscal 2018. Adjusted SD&A expenses were $953.7 million, or 26.0% of net sales, in fiscal 2019 compared to $956.1 million, or 26.0% of net sales, in the year-ago period.
During the year ended August 31, 2019, we recognized pre-tax special charges of $1.8 million compared with pre-tax special charges of $5.6 million recorded during the year ended August 31, 2018. Further details regarding our special charges are included in the Special Charges footnote of the Notes to Consolidated Financial Statements.
Operating profit for fiscal 2019 was $462.9 million compared with $460.8 million reported for the prior-year period, an increase of $2.1 million, or 0.5%. Operating profit margin increased 10 basis points to 12.6% for fiscal 2019 compared with 12.5% for fiscal 2018. The increase in operating profit was due to a decrease in SD&A expenses and a lower net special charge, partially offset by lower gross profit.
Adjusted operating profit decreased $6.0 million, or 1.1%, to $528.1 million compared with $534.1 million for fiscal 2018. Adjusted operating profit margin was 14.4% and 14.5% for fiscal 2019 and 2018, respectively.
Other Expense
Other expense consists principally 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 $33.3 million and $33.5 million for the years ended August 31, 2019 and 2018, respectively. We reported net miscellaneous expense of $4.7 million in fiscal 2019 compared with $1.4 million in fiscal 2018. Net miscellaneous expense for fiscal 2018 included a gain of $5.4 million associated with the sale of our former Spanish lighting business.
Income Taxes and Net Income
Our effective income tax rate was 22.2% and 17.9% for the years ended August 31, 2019 and 2018, respectively. The effective income tax rate for the year ended August 31, 2018 was significantly impacted by the provisions of the TCJA, which was enacted during the second quarter of fiscal 2018. Further details regarding the TCJA are included in the Income Taxes footnote of the Notes to Consolidated Financial Statements. We estimate that our effective tax rate for fiscal 2020 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 2019 decreased $19.2 million, or 5.5%, to $330.4 million from $349.6 million reported for the prior year. The decrease in net income resulted primarily from a one-time tax benefit for income taxes related to the TCJA recorded in 2018 that did not recur in the current fiscal year. Adjusted net income for fiscal 2019 increased 5.1% to $381.4 million compared with $362.9 million in the year-ago period. Diluted earnings per share for fiscal 2019 was $8.29 compared with $8.52 for the prior-year period, which represented a decrease of $0.23 or 2.7%. Adjusted diluted earnings per share for fiscal 2019 was $9.57 compared with $8.84 for the prior-year period, which represented an increase of $0.73, or 8.3%.
Fiscal 2018 Compared with Fiscal 2017
The following table sets forth information comparing the components of net income for the year ended August 31, 2018 with the year ended August 31, 2017 (in millions except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
Increase
|
|
Percent
|
|
2018
|
|
2017
|
|
(Decrease)
|
|
Change
|
Net sales
|
$
|
3,680.1
|
|
|
$
|
3,505.1
|
|
|
$
|
175.0
|
|
|
5.0
|
%
|
Cost of products sold
|
2,194.7
|
|
|
2,024.0
|
|
|
170.7
|
|
|
8.4
|
%
|
Gross profit
|
1,485.4
|
|
|
1,481.1
|
|
|
4.3
|
|
|
0.3
|
%
|
Percent of net sales
|
40.4
|
%
|
|
42.3
|
%
|
|
(190
|
)
|
bps
|
|
|
Selling, distribution, and administrative expenses
|
1,019.0
|
|
|
942.3
|
|
|
76.7
|
|
|
8.1
|
%
|
Special charges
|
5.6
|
|
|
11.3
|
|
|
(5.7
|
)
|
|
NM
|
|
Operating profit
|
460.8
|
|
|
527.5
|
|
|
(66.7
|
)
|
|
(12.6
|
)%
|
Percent of net sales
|
12.5
|
%
|
|
15.0
|
%
|
|
(250
|
)
|
bps
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
33.5
|
|
|
32.5
|
|
|
1.0
|
|
|
3.1
|
%
|
Miscellaneous expense, net
|
1.4
|
|
|
2.4
|
|
|
(1.0
|
)
|
|
NM
|
|
Total other expense
|
34.9
|
|
|
34.9
|
|
|
—
|
|
|
—
|
%
|
Income before income taxes
|
425.9
|
|
|
492.6
|
|
|
(66.7
|
)
|
|
(13.5
|
)%
|
Percent of net sales
|
11.6
|
%
|
|
14.1
|
%
|
|
(250
|
)
|
bps
|
|
|
Income tax expense
|
76.3
|
|
|
170.9
|
|
|
(94.6
|
)
|
|
(55.4
|
)%
|
Effective tax rate
|
17.9
|
%
|
|
34.7
|
%
|
|
|
|
|
|
|
Net income
|
$
|
349.6
|
|
|
$
|
321.7
|
|
|
$
|
27.9
|
|
|
8.7
|
%
|
Diluted earnings per share
|
$
|
8.52
|
|
|
$
|
7.43
|
|
|
$
|
1.09
|
|
|
14.7
|
%
|
NM - not meaningful
|
|
|
|
|
|
|
|
Net sales increased $175.0 million, or 5.0%, to $3.68 billion for the year ended August 31, 2018 compared with $3.51 billion reported for the year ended August 31, 2017. For the year ended August 31, 2018, we reported net income of $349.6 million compared with $321.7 million for the year ended August 31, 2017, an increase of $27.9 million, or 8.7%. For fiscal 2018, diluted earnings per share increased 14.7% to $8.52 from $7.43 for the prior-year period.
Fiscal 2018 and fiscal 2017 results were retrospectively adjusted to reflect the impact of adopting ASU 2017-07. Upon adoption of ASU 2017-07, our previously reported operating profit and other expense both increased $6.2 million for the year ended August 31, 2018 and $8.7 million for the year ended August 31, 2017. The provisions of ASU 2017-07 had no impact to our previously reported net income or earnings per share. See New Accounting Pronouncements footnote of the Notes to Consolidated Financial Statements for further details.
The following table reconciles certain 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, certain manufacturing inefficiencies and excess inventory adjustments related to the closure of a facility, amortization of acquired intangible assets, share-based payment expense, special charges associated primarily with continued efforts to streamline the organization, a gain associated with the sale of our former Spanish lighting business, a gain on the sale of an investment in an unconsolidated affiliate, and certain discrete income tax benefits of the TCJA.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(In millions, except per share data)
|
Year Ended August 31,
|
|
Increase (Decrease)
|
Percent Change
|
|
2018
|
|
2017
|
|
Gross profit
|
$
|
1,485.4
|
|
|
$
|
1,481.1
|
|
|
|
|
Add-back: Acquisition-related items (1)
|
1.7
|
|
|
—
|
|
|
|
|
Add-back: Manufacturing inefficiencies (2)
|
—
|
|
|
1.6
|
|
|
|
|
Add-back: Excess inventory (3)
|
3.1
|
|
|
—
|
|
|
|
|
Adjusted gross profit
|
$
|
1,490.2
|
|
|
$
|
1,482.7
|
|
|
$
|
7.5
|
|
0.5
|
%
|
Percent of net sales
|
40.5
|
%
|
|
42.3
|
%
|
|
(180
|
)
|
bps
|
|
|
|
|
|
|
|
Selling, distribution, and administrative expenses
|
$
|
1,019.0
|
|
|
$
|
942.3
|
|
|
|
|
Less: Amortization of acquired intangible assets
|
(28.5
|
)
|
|
(28.0
|
)
|
|
|
|
Less: Share-based payment expense
|
(32.3
|
)
|
|
(32.0
|
)
|
|
|
|
Less: Acquisition-related items (1)
|
(2.1
|
)
|
|
—
|
|
|
|
|
Adjusted selling, distribution, and administrative expenses
|
$
|
956.1
|
|
|
$
|
882.3
|
|
|
$
|
73.8
|
|
8.4
|
%
|
Percent of net sales
|
26.0
|
%
|
|
25.2
|
%
|
|
80
|
|
bps
|
|
|
|
|
|
|
|
Operating profit
|
$
|
460.8
|
|
|
$
|
527.5
|
|
|
|
|
Add-back: Amortization of acquired intangible assets
|
28.5
|
|
|
28.0
|
|
|
|
|
Add-back: Share-based payment expense
|
32.3
|
|
|
32.0
|
|
|
|
|
Add-back: Acquisition-related items (1)
|
3.8
|
|
|
—
|
|
|
|
|
Add-back: Manufacturing inefficiencies (2)
|
—
|
|
|
1.6
|
|
|
|
|
Add-back: Excess inventory (3)
|
3.1
|
|
|
—
|
|
|
|
|
Add-back: Special charges
|
5.6
|
|
|
11.3
|
|
|
|
|
Adjusted operating profit
|
$
|
534.1
|
|
|
$
|
600.4
|
|
|
$
|
(66.3
|
)
|
(11.0
|
)%
|
Percent of net sales
|
14.5
|
%
|
|
17.1
|
%
|
|
(260
|
)
|
bps
|
|
|
|
|
|
|
|
Other expense
|
$
|
34.9
|
|
|
$
|
34.9
|
|
|
|
|
Add-back: Gain on sale of investment in unconsolidated affiliate
|
—
|
|
|
7.2
|
|
|
|
|
Add-back: Gain on sale of business
|
5.4
|
|
|
—
|
|
|
|
|
Adjusted other expense
|
$
|
40.3
|
|
|
$
|
42.1
|
|
|
$
|
(1.8
|
)
|
(4.3
|
)%
|
|
|
|
|
|
|
|
Net income
|
$
|
349.6
|
|
|
$
|
321.7
|
|
|
|
|
Add-back: Amortization of acquired intangible assets
|
28.5
|
|
|
28.0
|
|
|
|
|
Add-back: Share-based payment expense
|
32.3
|
|
|
32.0
|
|
|
|
|
Add-back: Acquisition-related items (1)
|
3.8
|
|
|
—
|
|
|
|
|
Add-back: Manufacturing inefficiencies (2)
|
—
|
|
|
1.6
|
|
|
|
|
Add-back: Excess inventory (3)
|
3.1
|
|
|
—
|
|
|
|
|
Add-back: Special charges
|
5.6
|
|
|
11.3
|
|
|
|
|
Less: Gain on sale of investment in unconsolidated affiliate
|
—
|
|
|
(7.2
|
)
|
|
|
|
Less: Gain on sale of business
|
(5.4
|
)
|
|
—
|
|
|
|
|
Total pre-tax adjustments to net income
|
67.9
|
|
|
65.7
|
|
|
|
|
Income tax effect
|
(20.0
|
)
|
|
(21.5
|
)
|
|
|
|
Less: Discrete income tax benefits of the TCJA (4)
|
(34.6
|
)
|
|
—
|
|
|
|
|
Adjusted net income
|
$
|
362.9
|
|
|
$
|
365.9
|
|
|
$
|
(3.0
|
)
|
(0.8
|
)%
|
|
|
|
|
|
|
|
Diluted earnings per share
|
$
|
8.52
|
|
|
$
|
7.43
|
|
|
|
|
Adjusted diluted earnings per share
|
$
|
8.84
|
|
|
$
|
8.45
|
|
|
$
|
0.39
|
|
4.6
|
%
|
______________________________
(1) Acquisition-related items include acquired profit in inventory and professional fees.
(2) Incremental costs incurred due to manufacturing inefficiencies directly related to the closure of a facility.
(3) Excess inventory related to the closure of a facility.
(4) Discrete income tax benefits of the TCJA recognized within Income tax expense on the Consolidated Statements of Comprehensive Income. See Income Taxes footnote within the Notes to Consolidated Financial Statements for additional details.
Net Sales
Net sales for the year ended August 31, 2018 increased by 5.0% compared with the prior-year period due primarily to an increase in sales volumes of approximately 7% and an approximately 1% favorable impact of acquired revenues from acquisitions, partially offset by the impact of an unfavorable change in price/mix of approximately 3%. The increase in volumes was due primarily to greater shipments of Atrius-based luminaires to customers in certain key vertical applications and higher shipments within the home center channel. The net unfavorable price/mix was primarily due to lower pricing on certain luminaires as a result of increased competition in portions of the market for more basic, lesser-featured products; changes in product mix reflecting the substitution of certain products with less costly form factors resulting in lower price points; and changes in sales channel mix, which reflected fewer large commercial projects that generally include higher priced solutions. Due to the changing dynamics of our product portfolio, including the increase of integrated lighting and building management solutions, it is not possible to precisely quantify or differentiate the individual components of volume, price, and mix.
Gross Profit
Gross profit for fiscal 2018 increased $4.3 million, or 0.3%, to $1.49 billion compared with $1.48 billion for the prior year. Gross profit margin decreased to 40.4% for the year ended August 31, 2018 compared with 42.3% for the year ended August 31, 2017. Gross profit margin was lower than the prior-year period primarily due to unfavorable price/mix; higher material, component, and freight costs; increased wages; and additional reserves for excess inventory related to the closure of a facility. These declines were partially offset by higher sales volumes, productivity improvements, and gross profit attributable to acquisitions. Adjusted gross profit for fiscal 2018 increased $7.5 million, or 0.5%, to $1.49 billion compared with $1.48 billion for the prior year. Adjusted gross profit margin decreased 180 basis points to 40.5% compared to 42.3% in the prior year.
Operating Profit
SD&A expenses for the year ended August 31, 2018 increased $76.7 million, or 8.1%, to $1.02 billion compared with $942.3 million in the prior year. The increase in SD&A expenses was primarily due to higher employee related costs, including additional headcount from acquisitions, increased freight charges and commissions to support greater sales volume, higher professional fees related to acquisitions, and to a lesser degree, certain other operating expenses. Compared with the prior-year period, SD&A expenses as a percent of net sales increased 80 basis points to 27.7% for fiscal 2018 from 26.9% in fiscal 2017. Adjusted SD&A expenses were $956.1 million, or 26.0% of net sales, in fiscal 2018 compared to $882.3 million, or 25.2% of net sales, in the year-ago period.
During the year ended August 31, 2018, we recognized pre-tax special charges of $5.6 million compared with pre-tax net special charges of $11.3 million recorded during the year ended August 31, 2017. Further details regarding our special charges are included in the Special Charges footnote of the Notes to Consolidated Financial Statements.
Operating profit for fiscal 2018 was $460.8 million compared with $527.5 million reported for the prior-year period, a decrease of $66.7 million, or 12.6%. Operating profit margin decreased 250 basis points to 12.5% for fiscal 2018 compared with 15.0% for fiscal 2017. The decrease in operating profit was due primarily to the impact of price/mix on gross profit as well as higher SD&A expenses, partially offset by higher sales volumes and lower net special charges.
Adjusted operating profit decreased $66.3 million, or 11.0%, to $534.1 million compared with $600.4 million for fiscal 2017. Adjusted operating profit margin was 14.5% and 17.1% for fiscal 2018 and 2017, respectively.
Other Expense
Other expense consists principally 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 $33.5 million and $32.5 million for the years ended August 31, 2018 and 2017, respectively. We reported net miscellaneous expense of $1.4 million in fiscal 2018 compared with $2.4 million in fiscal 2017. Net miscellaneous expense included a gain of $5.4 million associated with the sale of our former Spanish lighting business and a gain of $7.2 million associated with the sale of an investment in an unconsolidated affiliate for fiscal 2018 and 2017, respectively.
Income Taxes and Net Income
Our effective income tax rate was 17.9% and 34.7% for the years ended August 31, 2018 and 2017, respectively. The effective income tax rate for the year ended August 31, 2018 was significantly impacted by the provisions of the TCJA, which was enacted during the second quarter of fiscal 2018. Further details regarding the TCJA are included in the Income Taxes footnote of the Notes to Consolidated Financial Statements.
Net income for fiscal 2018 increased $27.9 million, or 8.7%, to $349.6 million from $321.7 million reported for the prior year. The increase in net income resulted primarily from the benefit recognized related to the TCJA, partially offset by a decrease in operating profit. Adjusted net income for fiscal 2018 decreased 0.8% to $362.9 million compared with $365.9 million in the year-ago period. Diluted earnings per share for fiscal 2018 was $8.52 compared with $7.43 for the prior-year period, which represented an increase of $1.09 or 14.7%. Adjusted diluted earnings per share for fiscal 2018 was $8.84 compared with $8.45 for the prior-year period, which represented an increase of $0.39, or 4.6%.
Outlook
We continue to believe the execution of our strategy will provide attractive opportunities for profitable growth over the long-term. Our strategy is to capitalize on market growth and share gain opportunities by continuing to expand and leverage our industry-leading lighting and building management solutions portfolio, coupled with our extensive market presence and financial strength, to produce attractive financial performance over the long-term.
We remain cautious about overall market conditions within the lighting industry for fiscal 2020 primarily due to continued economic uncertainties caused by global trade issues, including tariffs. We expect market demand for lighting products to remain sluggish until there is more clarity regarding these global trade issues. Additionally, we expect that labor shortages in certain markets will continue to dampen growth rates for both the construction and lighting markets. Nonetheless, our focus for fiscal 2020 will be to drive top-line growth through market share gains and enhance margins, while implementing appropriate cost containment measures as necessitated by market demand.
Management estimates a fiscal 2020 annual tax rate of approximately 23% before any discrete items, assuming the tax rates in the Company’s taxing jurisdictions remain generally consistent throughout the year. Additionally, management expects fiscal 2020 capital expenditures will approximate 1.7% of net sales.
We believe our fiscal 2020 first quarter net sales could be down in the mid-to-high single-digit percentage range compared with first quarter of fiscal 2019 primarily due to the pull forward of orders by certain customers in advance of announced price increases in the prior-year period as well as our recent efforts to reduce our exposure to products whose profitability has been most negatively impacted by tariffs and are sold primarily through the retail sales channel. The decline in net sales should be partially mitigated by the recently acquired TLG. While we believe prior year’s pull forward of orders contributed significantly to first quarter of fiscal 2019 net sales growth rate of 11%, we are unable to specifically quantify its impact. Therefore, it is not possible to precisely know how this will impact this year’s first quarter results compared with the year-ago period.
We expect to continue to outperform the growth rates of the key markets that we serve in future periods, subject to quarterly volatility and excluding our actions to prune less profitable portions of our product portfolio, by continuing to execute our various strategies. These strategies focus on growth opportunities for new construction and renovation projects, expansion into underpenetrated geographies and channels, and growth from the continued introduction of new lighting and building management solutions as part of our integrated, tiered solutions strategy, including leveraging our unique, technology driven solutions portfolio, including IoT enabled solutions, to capture market share in the nascent, but rapidly growing, market for data capture, analytics, and other services, assisting in transforming buildings and campuses from cost centers to strategic assets.
We expect the pricing environment to continue to be challenging in portions of the market, particularly for more basic, lesser-featured products sold through certain sales channels as well as shifts in product mix, both of which could continue to negatively impact net sales and margins. We expect recently announced price increases to mitigate some of the pricing pressures in the market but not to have any material impact on product substitution trends to lower priced alternatives. We expect to continue to introduce products and solutions to more effectively compete in these portions of the market and to accelerate programs to reduce product costs in order to maintain our competitiveness and drive improved profitability.
Starting in calendar 2018, the U.S. federal government began imposing tariffs on certain Chinese imports and threatened to impose tariffs on all products imported from Mexico. We produce a meaningful percentage of our products in Mexico. Certain components used in our products as well as source certain finished products from China that are impacted by the recently imposed Chinese tariffs. Our efforts to mitigate the impact of these added costs include a variety of activities, such as finding alternative suppliers, producing components and finished goods in countries other than China, in-
sourcing the production of certain products, and raising prices. We believe that our mitigation activities, including recently announced price increases once fully enacted, will assist to offset the added costs. Future U.S. policy changes that may be implemented, including additional tariffs, could have a positive or negative consequence on our financial performance depending on how the changes influence many factors, including business and consumer sentiment.
We expect to refinance our $350 million public notes maturing in December 2019 through borrowings under our Term Loan, which we would expect to have a meaningfully lower interest rate. Our borrowing capacity additionally provides us with the resources to support our growth opportunities, including acquisitions, and accommodate the current stock repurchase program, of which 4.55 million shares remain available for repurchase as of August 31, 2019. The extent and timing of actual stock repurchases will be subject to various factors, including stock price, company performance, expected future market conditions, and other possible uses of cash, including acquisitions. We may increase our leverage to accommodate the stock repurchase program.
From a longer term perspective, we expect that our addressable markets have the potential to experience solid growth over the next decade, particularly as energy and environmental concerns continue to come to the forefront along with emerging opportunities for digital lighting to play a key role in the IoT through the use of intelligent networked lighting and building automation systems that can collect and exchange data to increase efficiency as well as provide a host of other economic benefits resulting from data analytics. We remain positive about the future prospects of the Company and our ability to outperform the markets we serve.
Accounting Standards Adopted in Fiscal 2019 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 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; depreciation, amortization, and the recoverability of long-lived assets, including goodwill and intangible assets; share-based payment expense; medical, product warranty and recall, and other reserves; 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 our Audit Committee of the Board of Directors. See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for a summary of the accounting policies.
We believe the following 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, provisions for certain rebates, sales incentives, product returns, and discounts to customers are estimated and recorded, in most instances, as a reduction 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 accrued 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, 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.
Goodwill and Indefinite-Lived Intangible Assets
We 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 indefinite-lived asset is below its carrying value. All other long-lived and intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. 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 were to occur, we would be required to record a non-cash charge to earnings for the write-down in the value of such assets, which could have a material adverse effect on our results of operations and financial position but not our cash flows from operations.
Goodwill
Our business is comprised of one reporting unit with a goodwill balance of $967.3 million as of August 31, 2019. During fiscal 2019, we utilized a qualitative assessment of the fair value of goodwill as of June 1, 2019. To perform this assessment, we identified and analyzed macroeconomic conditions, industry and market conditions, and company-specific factors. Additionally, factors that would have the greatest impact on the fair value of the organization were compared to those used in the most recent quantitative impairment test, which was performed as of June 1, 2017, to identify potentially significant variances to the reasonableness of the assumptions. Taking into consideration these factors, we estimated the potential change in the fair value of goodwill compared with our most recent quantitative impairment test. As a result of the analysis performed, management believes the estimated fair value of the reporting unit continues to exceed its carrying value by a substantial margin and does not represent a more likely than not possibility of potential impairment. The goodwill analysis did not result in an impairment charge.
Indefinite-Lived Intangible Assets
Our indefinite-lived intangible assets consist of eight trade names with an aggregate carrying value of approximately $141.3 million. 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 U.S. GAAP. 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 value of the resulting after-tax cash flow is our current estimate of the fair value of the trade names. This fair value model requires us to make several significant assumptions, including estimated future net sales (including short and long-term growth rates), the royalty rate, and the discount rate.
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 credit availability and interest rates. The long-term growth rate used in determining terminal value is estimated at 3% and is based primarily on our understanding of projections for expected long-term growth within 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. A reduction
in the theoretical royalty rate would result in lower expected future after-tax cash flows in the valuation model. We utilized a range of estimated discount rates between 9% and 14% as of June 1, 2019, based on the Capital Asset Pricing Model, which considers the current risk-free interest rate, beta, market risk premium, and entity specific size premium.
During fiscal 2019, we performed an evaluation of the fair values of our indefinite-lived trade names. Our expected revenues are based on our fiscal 2020 expectations and recent lighting, controls, and building management solutions market growth estimates for fiscal 2020 through 2024. We also included revenue growth estimates based on current initiatives expected to help improve performance. During fiscal 2019, estimated theoretical royalty rates ranged between 1% and 4%. Based on the results of the indefinite-lived intangible asset analyses, we concluded that our indefinite-lived trade names are fairly stated; therefore, no impairment charges were recorded for fiscal 2019. 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.
Definite-Lived Intangible Assets
We evaluate the remaining useful lives of our definite-lived intangible assets on an annual basis in the fiscal fourth quarter or on an interim basis if an event occurs or circumstances change that would warrant a revision to the remaining period of amortization. For each reporting period we consider whether an event occurred or circumstances changed that would more likely than not indicate that the fair value of the definite-lived asset is below its carrying value. We recorded no impairment charges for our definite-lived intangible assets during fiscal 2019 or 2018.
Self-Insurance
We self-insure, up to certain limits, traditional risks including workers’ compensation, comprehensive general liability, and auto liability. A provision for claims under this self-insured program, based on our estimate of the aggregate liability for claims incurred, is revised and recorded annually. The estimate is derived from both internal and external sources including, but not limited to, our independent actuary. The actuarial estimates are subject to uncertainty from various sources including, changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation, and economic conditions, among others. Although we believe that the actuarial estimates are reasonable, significant differences related to the items noted above could materially affect our self-insurance obligations, future expense, and cash flow. We are also self-insured up to certain limits for certain other insurable risks, primarily physical loss to property and business interruptions resulting from such loss lasting two days or more in duration. Insurance coverage is maintained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. We are fully self-insured for certain other types of liabilities, including environmental, product recall, warranty, and patent infringement.
We are also self-insured for the majority of our medical benefit plans up to certain limits. We estimate our aggregate liability for claims incurred by applying a lag factor to our historical claims and administrative cost experience. The appropriateness of our lag factor is evaluated and revised, if necessary, annually. Although we believe that the current estimates are reasonable, significant differences related to claim reporting patterns, plan design, legislation, and general economic conditions could materially affect our medical benefit plan liabilities, future expense, and cash flow.
Retirement Benefits
We sponsor domestic and international defined benefit pension plans, defined contribution plans, and other postretirement plans. Assumptions are used to determine the estimated fair value of plan assets, the actuarial value of plan liabilities, and the current and projected costs for these employee benefit plans and include, among other factors, estimated discount rates, expected returns on the pension fund assets, estimated mortality rates, the rates of increase in employee compensation levels, and, for one international plan, retroactive inflationary adjustments. These assumptions are determined based on organizational and market data and are evaluated annually as of the plans’ measurement date. See the Pensions and Defined Contribution Plans footnote of the Notes to Consolidated Financial Statements for further information on our plans, including the potential impact of changes to certain of these assumptions.
Share-based Payment Expense
We recognize compensation cost relating to share-based payment transactions in the financial statements based on the estimated grant date fair value of the equity instrument issued. We account for stock options, restricted shares, and share units representing certain deferrals into the Director Deferred Compensation Plan or the Supplemental Deferred Savings Plan (both of which are discussed further in the Share-based Payments footnote of the Notes to
Consolidated Financial Statements) based on the grant-date fair value estimated under the provisions of ASC Topic 718, Compensation — Stock Compensation (“ASC 718”).
We utilize the Black-Scholes model in deriving the fair value estimates of our stock option awards and 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. See the Significant Accounting Policies and Share-based Payments footnotes of the Notes to Consolidated Financial Statements for more information regarding the assumptions used in estimating the fair value of stock options.
Product Warranty and Recall Costs
Our products generally have a standard warranty term of five years. We record an allowance 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. 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 warranty or recall costs exceed recorded amounts, additional allowances 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 and recognize revenue for these contracts ratably over the life of the additional warranty period. Claims related to service-type warranties are expensed as incurred.
Litigation
We recognize expense for legal claims when payments associated with the claims become probable and can be reasonably estimated. Due to the difficulty in estimating costs of resolving legal claims, actual costs could have a material adverse impact on our results of operations and cash flow.
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 “expect,” “believe,” “intend,” “anticipate,” and similar terms that relate to future events, performance, or results of the organization. In addition, we, or the executive officers on our behalf, may from time to time make forward-looking statements in reports and other documents we file with the 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, including our intent and ability to refinance our senior unsecured notes; (b) expectations about the impact of any changes in demand as well as volatility and uncertainty in general economic conditions and the pricing environment; (c) external forecasts projecting the North American lighting and building management solutions market growth rate and growth in our addressable markets; (d) our ability to execute and realize benefits from initiatives related to streamlining our operations, capitalize on growth opportunities, expand in key markets as well as underpenetrated geographies and channels, and introduce new lighting and building management solutions; (e) estimate of our fiscal 2020 tax rates, results of operations, and cash flows; (f) our estimate of future amortization expense; (g) our ability to achieve our long-term financial goals and measures and outperform the markets we serve; (h) the impact of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies; (i) our expectations related to mitigating efforts around recently imposed tariffs; (j) our expectations about the resolution of trade compliance, securities class action, patent litigation, and/or other legal matters; and (k) the impacts of new accounting pronouncements. 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 our 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 is 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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Item 8.
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Financial Statements and Supplementary Data
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Index to Consolidated Financial Statements
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
ACUITY BRANDS, INC.
The management of Acuity Brands, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2019. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework (2013 Framework). Based on this assessment, management believes that, as of August 31, 2019, the Company’s internal control over financial reporting is effective.
The Company’s independent registered public accounting firm has issued an audit report on their audit of the Company’s internal control over financial reporting. This report dated October 29, 2019 is included within this Form 10-K.
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/s/ VERNON J. NAGEL
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/s/ KAREN J. HOLCOM
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Vernon J. Nagel
Chairman and
Chief Executive Officer
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Karen J. Holcom
Senior Vice President and
Chief Financial Officer
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Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Acuity Brands, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Acuity Brands, Inc. (the Company) as of August 31, 2019 and 2018, the related consolidated statements of comprehensive income, cash flows and stockholders’ equity for each of the three years in the period ended August 31, 2019, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company at August 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2019, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework), and our report dated October 29, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the account or disclosure to which it relates.
Valuation of Indefinite-Lived Trade Names
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Description of the Matter
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At August 31, 2019, the Company’s indefinite-lived intangible assets consisted of eight trade names with an aggregate carrying value of approximately $141.3 million. As explained in Note 2 to the consolidated financial statements, the Company tests indefinite-lived trade names for impairment on an annual basis or more frequently as facts and circumstances change. If the carrying amount exceeds the estimated fair value, an impairment loss would be recorded in the amount equal to the excess.
Auditing the Company’s impairment tests for indefinite-lived trade names was especially complex due to the judgmental nature of the significant assumptions used in the determination of estimated fair values for trade names. The Company estimates the fair values of trade names using a fair value model based on discounted future cash flows. Significant assumptions used to estimate the value of the trade names included estimated future net sales (including short- and long-term growth rates), discount rates and royalty rates, all of which are forward-looking and could be affected by economic, industry and company-specific qualitative factors.
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How We Addressed the Matter in Our Audit
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We obtained an understanding, evaluated the design and tested the operating effectiveness of controls over the Company’s annual impairment process. This included testing controls over management’s review of the discounted cash flow model, including the significant assumptions described above.
To test the fair values of the Company’s indefinite-lived trade names, our audit procedures included, among others, evaluating the Company’s use of the discounted cash flow model, the completeness and accuracy of the underlying data and the significant assumptions described above. We compared the significant assumptions to current industry, market and economic trends, the Company’s historical results and other relevant factors. We involved our valuation specialists to assist in evaluating the Company’s discount rates and royalty rates. In addition, we considered the accuracy of the Company’s historical projections of net sales compared to actual net sales. We also performed a sensitivity analysis to evaluate the potential change in the fair values of the trade names resulting from changes in the significant assumptions.
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/s/ Ernst & Young LLP
We have served as the Company’s auditor since 2002.
Atlanta, Georgia
October 29, 2019
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Acuity Brands, Inc.
Opinion on Internal Control over Financial Reporting
We have audited Acuity Brands, Inc.’s internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the COSO criteria). In our opinion, Acuity Brands, Inc. (the Company) maintained, in all material respects, effective internal control over financial reporting as of August 31, 2019, based on the COSO criteria.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated balance sheets of the Company as of August 31, 2019 and 2018, the related consolidated statements of comprehensive income, cash flows and stockholders’ equity for each of the three years in the period ended August 31, 2019, and the related notes and our report dated October 29, 2019 expressed an unqualified opinion thereon.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects.
Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control Over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Ernst & Young LLP
Atlanta, Georgia
October 29, 2019
ACUITY BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
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August 31,
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2019
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2018
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ASSETS
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Current assets:
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Cash and cash equivalents
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$
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461.0
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$
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129.1
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Accounts receivable, less reserve for doubtful accounts of $1.0 and $1.3, respectively
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561.0
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637.9
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Inventories
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340.8
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411.8
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Prepayments and other current assets
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79.0
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32.3
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Total current assets
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1,441.8
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1,211.1
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Property, plant, and equipment, at cost:
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Land
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22.6
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22.9
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Buildings and leasehold improvements
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190.7
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189.1
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Machinery and equipment
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544.4
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516.6
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Total property, plant, and equipment
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757.7
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728.6
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Less — Accumulated depreciation and amortization
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(480.4
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)
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(441.9
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)
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Property, plant, and equipment, net
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277.3
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286.7
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Goodwill
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967.3
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970.6
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Intangible assets, net
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466.0
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498.7
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Deferred income taxes
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2.3
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2.9
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Other long-term assets
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17.7
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18.8
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Total assets
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$
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3,172.4
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$
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2,988.8
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LIABILITIES AND STOCKHOLDERS’ EQUITY
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Current liabilities:
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Accounts payable
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$
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338.8
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$
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451.1
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Current maturities of long-term debt
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9.1
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0.4
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Accrued compensation
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73.2
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67.0
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Other accrued liabilities
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175.0
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164.2
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Total current liabilities
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596.1
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|
|
682.7
|
|
Long-term debt
|
347.5
|
|
|
356.4
|
|
Accrued pension liabilities
|
99.7
|
|
|
64.6
|
|
Deferred income taxes
|
92.7
|
|
|
92.5
|
|
Self-insurance reserves
|
6.8
|
|
|
7.9
|
|
Other long-term liabilities
|
110.7
|
|
|
67.9
|
|
Total liabilities
|
1,253.5
|
|
|
1,272.0
|
|
Commitments and contingencies (see Commitments and Contingencies footnote)
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
|
|
Preferred stock, $0.01 par value; 50,000,000 shares authorized; none issued
|
—
|
|
|
—
|
|
Common stock, $0.01 par value; 500,000,000 shares authorized; 53,778,155 and 53,667,327 issued, respectively
|
0.5
|
|
|
0.5
|
|
Paid-in capital
|
930.0
|
|
|
906.3
|
|
Retained earnings
|
2,295.8
|
|
|
1,999.2
|
|
Accumulated other comprehensive loss
|
(151.4
|
)
|
|
(114.8
|
)
|
Treasury stock, at cost — 14,325,197 and 13,676,689 shares, respectively
|
(1,156.0
|
)
|
|
(1,074.4
|
)
|
Total stockholders’ equity
|
1,918.9
|
|
|
1,716.8
|
|
Total liabilities and stockholders’ equity
|
$
|
3,172.4
|
|
|
$
|
2,988.8
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
ACUITY BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions, except per-share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Net sales
|
$
|
3,672.7
|
|
|
$
|
3,680.1
|
|
|
$
|
3,505.1
|
|
Cost of products sold
|
2,193.0
|
|
|
2,194.7
|
|
|
2,024.0
|
|
Gross profit
|
1,479.7
|
|
|
1,485.4
|
|
|
1,481.1
|
|
Selling, distribution, and administrative expenses
|
1,015.0
|
|
|
1,019.0
|
|
|
942.3
|
|
Special charges
|
1.8
|
|
|
5.6
|
|
|
11.3
|
|
Operating profit
|
462.9
|
|
|
460.8
|
|
|
527.5
|
|
Other expense:
|
|
|
|
|
|
|
|
|
Interest expense, net
|
33.3
|
|
|
33.5
|
|
|
32.5
|
|
Miscellaneous expense, net
|
4.7
|
|
|
1.4
|
|
|
2.4
|
|
Total other expense
|
38.0
|
|
|
34.9
|
|
|
34.9
|
|
Income before income taxes
|
424.9
|
|
|
425.9
|
|
|
492.6
|
|
Income tax expense
|
94.5
|
|
|
76.3
|
|
|
170.9
|
|
Net income
|
$
|
330.4
|
|
|
$
|
349.6
|
|
|
$
|
321.7
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
Basic earnings per share
|
$
|
8.32
|
|
|
$
|
8.54
|
|
|
$
|
7.46
|
|
Basic weighted average number of shares outstanding
|
39.7
|
|
|
40.9
|
|
|
43.1
|
|
Diluted earnings per share
|
$
|
8.29
|
|
|
$
|
8.52
|
|
|
$
|
7.43
|
|
Diluted weighted average number of shares outstanding
|
39.8
|
|
|
41.0
|
|
|
43.3
|
|
Dividends declared per share
|
$
|
0.52
|
|
|
$
|
0.52
|
|
|
$
|
0.52
|
|
|
|
|
|
|
|
Comprehensive income:
|
|
|
|
|
|
Net income
|
$
|
330.4
|
|
|
$
|
349.6
|
|
|
$
|
321.7
|
|
Other comprehensive income (loss) items:
|
|
|
|
|
|
Foreign currency translation adjustments
|
(11.5
|
)
|
|
(25.2
|
)
|
|
19.0
|
|
Defined benefit plans, net of tax
|
(25.1
|
)
|
|
21.2
|
|
|
20.7
|
|
Other comprehensive (loss) income items, net of tax
|
(36.6
|
)
|
|
(4.0
|
)
|
|
39.7
|
|
Comprehensive income
|
$
|
293.8
|
|
|
$
|
345.6
|
|
|
$
|
361.4
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
ACUITY BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Net income
|
$
|
330.4
|
|
|
$
|
349.6
|
|
|
$
|
321.7
|
|
Adjustments to reconcile net income to net cash flows from operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
88.3
|
|
|
80.3
|
|
|
74.6
|
|
Share-based payment expense
|
29.2
|
|
|
32.3
|
|
|
32.0
|
|
Loss on the sale or disposal of property, plant, and equipment
|
0.9
|
|
|
0.6
|
|
|
0.3
|
|
Deferred income taxes
|
9.3
|
|
|
(38.2
|
)
|
|
(7.7
|
)
|
Gain on sale of business
|
—
|
|
|
(5.4
|
)
|
|
—
|
|
Gain on sale of investment in unconsolidated affiliate
|
—
|
|
|
—
|
|
|
(7.2
|
)
|
Change in assets and liabilities, net of effect of acquisitions, divestitures, and exchange rate changes:
|
|
|
|
|
|
|
|
Accounts receivable
|
97.7
|
|
|
(62.8
|
)
|
|
2.7
|
|
Inventories
|
70.8
|
|
|
(74.4
|
)
|
|
(32.4
|
)
|
Prepayments and other current assets
|
(34.0
|
)
|
|
0.7
|
|
|
6.0
|
|
Accounts payable
|
(111.5
|
)
|
|
52.5
|
|
|
(4.6
|
)
|
Other current liabilities
|
(11.9
|
)
|
|
19.1
|
|
|
(63.5
|
)
|
Other
|
25.5
|
|
|
(2.8
|
)
|
|
14.7
|
|
Net cash provided by operating activities
|
494.7
|
|
|
351.5
|
|
|
336.6
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and equipment
|
(53.0
|
)
|
|
(43.6
|
)
|
|
(67.3
|
)
|
Proceeds from sale of property, plant, and equipment
|
—
|
|
|
—
|
|
|
5.5
|
|
Acquisition of businesses, net of cash acquired
|
(2.9
|
)
|
|
(163.2
|
)
|
|
—
|
|
Proceeds from sale of business
|
—
|
|
|
1.1
|
|
|
—
|
|
Proceeds from sale of investment in unconsolidated affiliate
|
—
|
|
|
—
|
|
|
13.2
|
|
Other investing activities
|
2.9
|
|
|
1.7
|
|
|
(0.2
|
)
|
Net cash used for investing activities
|
(53.0
|
)
|
|
(204.0
|
)
|
|
(48.8
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Borrowings on credit facility
|
86.5
|
|
|
395.4
|
|
|
—
|
|
Repayments of borrowings on credit facility
|
(86.5
|
)
|
|
(395.4
|
)
|
|
—
|
|
(Repayments) issuances of long-term debt
|
(0.4
|
)
|
|
(0.4
|
)
|
|
1.0
|
|
Repurchases of common stock
|
(81.6
|
)
|
|
(298.4
|
)
|
|
(357.9
|
)
|
Proceeds from stock option exercises and other
|
0.6
|
|
|
1.7
|
|
|
3.0
|
|
Payments of taxes withheld on net settlement of equity awards
|
(6.0
|
)
|
|
(8.2
|
)
|
|
(15.2
|
)
|
Dividends paid
|
(20.8
|
)
|
|
(21.4
|
)
|
|
(22.7
|
)
|
Net cash used for financing activities
|
(108.2
|
)
|
|
(326.7
|
)
|
|
(391.8
|
)
|
Effect of exchange rate changes on cash and cash equivalents
|
(1.6
|
)
|
|
(2.8
|
)
|
|
1.9
|
|
Net change in cash and cash equivalents
|
331.9
|
|
|
(182.0
|
)
|
|
(102.1
|
)
|
Cash and cash equivalents at beginning of year
|
129.1
|
|
|
311.1
|
|
|
413.2
|
|
Cash and cash equivalents at end of year
|
$
|
461.0
|
|
|
$
|
129.1
|
|
|
$
|
311.1
|
|
Supplemental cash flow information:
|
|
|
|
|
|
|
|
|
Income taxes paid during the period
|
$
|
92.9
|
|
|
$
|
126.6
|
|
|
$
|
173.6
|
|
Interest paid during the period
|
$
|
35.6
|
|
|
$
|
36.7
|
|
|
$
|
33.6
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
ACUITY BRANDS, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock Outstanding
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Paid-in
Capital
|
|
Retained
Earnings
|
|
Accumulated Other
Comprehensive
Loss Items
|
|
Treasury
Stock, at cost
|
|
Total
|
Balance, August 31, 2016
|
43.7
|
|
|
$
|
0.5
|
|
|
$
|
856.4
|
|
|
$
|
1,360.9
|
|
|
$
|
(139.4
|
)
|
|
$
|
(418.6
|
)
|
|
$
|
1,659.8
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
321.7
|
|
|
—
|
|
|
—
|
|
|
321.7
|
|
Other comprehensive income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
39.7
|
|
|
—
|
|
|
39.7
|
|
Amortization, issuance, and cancellations of restricted stock grants
|
0.1
|
|
|
—
|
|
|
16.4
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
16.8
|
|
Employee stock purchase plan issuances
|
—
|
|
|
—
|
|
|
0.9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.9
|
|
Cash dividends of $0.52 per share paid on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(22.7
|
)
|
|
—
|
|
|
—
|
|
|
(22.7
|
)
|
Stock options exercised
|
—
|
|
|
—
|
|
|
2.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.1
|
|
Repurchases of common stock
|
(2.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(357.9
|
)
|
|
(357.9
|
)
|
Excess tax benefits from share-based payments
|
—
|
|
|
—
|
|
|
5.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.2
|
|
Balance, August 31, 2017
|
41.8
|
|
|
0.5
|
|
|
881.0
|
|
|
1,659.9
|
|
|
(99.7
|
)
|
|
(776.1
|
)
|
|
1,665.6
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
349.6
|
|
|
—
|
|
|
—
|
|
|
349.6
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(4.0
|
)
|
|
—
|
|
|
(4.0
|
)
|
Reclassification of stranded tax effects of the Tax Cuts and Jobs Act
|
—
|
|
|
—
|
|
|
—
|
|
|
11.1
|
|
|
(11.1
|
)
|
|
—
|
|
|
—
|
|
Amortization, issuance, and cancellations of restricted stock grants
|
0.2
|
|
|
—
|
|
|
23.6
|
|
|
—
|
|
|
—
|
|
|
0.1
|
|
|
23.7
|
|
Employee stock purchase plan issuances
|
—
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
Cash dividends of $0.52 per share paid on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(21.4
|
)
|
|
—
|
|
|
—
|
|
|
(21.4
|
)
|
Stock options exercised
|
—
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
Repurchases of common stock
|
(2.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(298.4
|
)
|
|
(298.4
|
)
|
Balance, August 31, 2018
|
40.0
|
|
|
0.5
|
|
|
906.3
|
|
|
1,999.2
|
|
|
(114.8
|
)
|
|
(1,074.4
|
)
|
|
1,716.8
|
|
Net income
|
—
|
|
|
—
|
|
|
—
|
|
|
330.4
|
|
|
—
|
|
|
—
|
|
|
330.4
|
|
Other comprehensive loss
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(36.6
|
)
|
|
—
|
|
|
(36.6
|
)
|
Amortization, issuance, and cancellations of restricted stock grants
|
0.2
|
|
|
—
|
|
|
23.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
23.1
|
|
Employee stock purchase plan issuances
|
—
|
|
|
—
|
|
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
Cash dividends of $0.52 per share paid on common stock
|
—
|
|
|
—
|
|
|
—
|
|
|
(20.8
|
)
|
|
—
|
|
|
—
|
|
|
(20.8
|
)
|
Repurchases of common stock
|
(0.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(81.6
|
)
|
|
(81.6
|
)
|
ASC 606 adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
(13.0
|
)
|
|
—
|
|
|
—
|
|
|
(13.0
|
)
|
Balance, August 31, 2019
|
39.5
|
|
|
$
|
0.5
|
|
|
$
|
930.0
|
|
|
$
|
2,295.8
|
|
|
$
|
(151.4
|
)
|
|
$
|
(1,156.0
|
)
|
|
$
|
1,918.9
|
|
The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 1 — Description of Business and Basis of Presentation
Acuity Brands, Inc. (“Acuity Brands”) is the parent company of Acuity Brands Lighting, Inc. (“ABL”) and other wholly-owned subsidiaries (Acuity Brands, ABL, and such other subsidiaries are collectively referred to herein as “we,” “our,” “us,” “the Company,” or similar references) and was incorporated in 2001 under the laws of the State of Delaware. We are one of the world’s leading providers of lighting and building management solutions and services for commercial, institutional, industrial, infrastructure, and residential applications throughout North America and select international markets. Our lighting and building management solutions include devices such as luminaires, lighting controls, controls for various building systems, power supplies, prismatic skylights, and drivers, as well as integrated systems designed to optimize energy efficiency and comfort for various indoor and outdoor applications. Additionally, we continue to expand our solutions portfolio, including software and services, to provide a host of other economic benefits resulting from data analytics that enables the Internet of Things (“IoT”), supports the advancement of smart buildings, smart cities, and the smart grid, and allows businesses to develop custom applications to scale their operations. We have one reportable segment serving the North American lighting market and select international markets.
We have prepared the Consolidated Financial Statements in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) to present the financial position, results of operations, and cash flows of Acuity Brands and its wholly-owned subsidiaries.
Note 2 — Significant Accounting Policies
Principles of Consolidation
The Consolidated Financial Statements include the accounts of Acuity Brands and its wholly-owned subsidiaries after elimination of intercompany transactions and accounts.
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 and is recognized net of allowances for rebates, sales incentives, product returns, service-type warranties, and discounts to customers. Please refer to the Revenue Recognition footnote of the Notes to Consolidated Financial Statements for additional information.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash in excess of daily requirements is invested in time deposits and marketable securities and is included in the accompanying balance sheets at fair value. We consider time deposits and marketable securities with an original maturity of three months or less when purchased to be cash equivalents.
Accounts Receivable
We record accounts receivable at net realizable value. This value includes a reserve for doubtful accounts to reflect losses anticipated on accounts receivable balances. The allowance is based on historical write-offs, an analysis of past due accounts based on the contractual terms of the receivables, and the economic status of customers, if known. We believe that the allowance is sufficient to cover uncollectible amounts; however, there can be no assurance that unanticipated future business conditions of customers will not have a negative impact on our results of operations.
Prior to the adoption of the new revenue accounting standard described in the New Accounting Pronouncements footnote, we recorded reserves for product returns, cash discounts, and other deductions due to customers as a reduction to our outstanding receivables. The changes in these reserves during the fiscal years ended August 31, 2019, 2018, and 2017 are summarized as follows (in millions):
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
23.4
|
|
|
$
|
21.3
|
|
|
$
|
17.3
|
|
Refund costs
|
—
|
|
|
133.4
|
|
|
134.2
|
|
Payments and other deductions
|
—
|
|
|
(131.3
|
)
|
|
(130.2
|
)
|
ASC 606 adjustments (1)
|
(23.4
|
)
|
|
—
|
|
|
—
|
|
Ending balance
|
$
|
—
|
|
|
$
|
23.4
|
|
|
$
|
21.3
|
|
_______________________________________
|
|
(1)
|
Estimated liabilities for returns, cash discounts, and other deductions are now reflected as Other current liabilities within our consolidated financial statements. Refer to the New Accounting Pronouncements and Revenue Recognition footnotes for additional information.
|
Concentrations of Credit Risk
Concentrations of credit risk with respect to receivables, which are typically unsecured, are generally limited due to the wide variety of customers and markets using our lighting and building management solutions as well as their dispersion across many different geographic areas. One customer accounted for approximately 10% of receivables at August 31, 2019, and 2018. Two customers each accounted for approximately 10% of receivables at August 31, 2017. No single customer accounted for more than 10% of net sales in fiscal 2019, 2018, or 2017.
Reclassifications
Certain prior-period amounts have been reclassified to conform to the current year presentation. No material reclassifications occurred during the current period. Refer to the New Accounting Pronouncements footnote for additional information regarding retrospective reclassifications related to accounting standards adopted in the current year.
Subsequent Events
We have evaluated subsequent events for recognition and disclosure for occurrences and transactions after the date of the consolidated financial statements as of August 31, 2019. See Subsequent Event footnote for additional details regarding subsequent events.
Inventories
Inventories include materials, direct labor, inbound freight, and related manufacturing overhead, are stated at the lower of cost (on a first-in, first-out or average cost basis) and net realizable value, and consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
2019
|
|
2018
|
Raw materials, supplies, and work in process(1)
|
$
|
179.4
|
|
|
$
|
196.8
|
|
Finished goods
|
183.7
|
|
|
251.8
|
|
Inventories excluding reserves
|
363.1
|
|
|
448.6
|
|
Less: Reserves
|
(22.3
|
)
|
|
(36.8
|
)
|
Total inventories
|
$
|
340.8
|
|
|
$
|
411.8
|
|
_______________________________________
|
|
(1)
|
Due to the immaterial amount of estimated work in process and the short lead times for the conversion of raw materials to finished goods, we do not believe the segregation of raw materials and work in process is meaningful information.
|
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 or market conditions could render certain inventory obsolete and could have a material adverse impact on our operating results in the period the change occurs.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Assets Held for Sale
In accordance with U.S. GAAP, we classify assets as held for sale upon the development of a plan for disposal and cease the depreciation and amortization of the assets at that date. We did not classify any assets as held for sale as of August 31, 2019 or 2018.
Goodwill and Other Intangibles
Goodwill amounted to $967.3 million and $970.6 million as of August 31, 2019 and 2018, respectively. The changes in the carrying amount of goodwill during fiscal 2019 and 2018 are summarized as follows (in millions):
|
|
|
|
|
|
Carrying Amount
|
Balance, August 31, 2017
|
$
|
900.9
|
|
Additions from acquired businesses
|
77.0
|
|
Foreign currency translation adjustments
|
(7.3
|
)
|
Balance, August 31, 2018
|
970.6
|
|
Additions from an acquired business
|
2.0
|
|
Adjustments to provisional amounts
|
(0.2
|
)
|
Foreign currency translation adjustments
|
(5.1
|
)
|
Balance as of August 31, 2019
|
$
|
967.3
|
|
Summarized information for our acquired intangible assets is as follows (in millions except amortization periods):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
|
|
2019
|
|
2018
|
|
Weighted Average Amortization Period in Years
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
|
Gross Carrying
Amount
|
|
Accumulated
Amortization
|
Definite-lived intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Patents and patented technology
|
12
|
|
$
|
135.7
|
|
|
$
|
(72.9
|
)
|
|
$
|
137.2
|
|
|
$
|
(62.2
|
)
|
Trademarks and trade names
|
19
|
|
27.2
|
|
|
(14.5
|
)
|
|
27.2
|
|
|
(13.2
|
)
|
Distribution network
|
28
|
|
61.8
|
|
|
(39.7
|
)
|
|
61.8
|
|
|
(37.5
|
)
|
Customer relationships
|
21
|
|
299.2
|
|
|
(72.1
|
)
|
|
300.0
|
|
|
(56.3
|
)
|
Total definite-lived intangible assets
|
17
|
|
$
|
523.9
|
|
|
$
|
(199.2
|
)
|
|
$
|
526.2
|
|
|
$
|
(169.2
|
)
|
Indefinite-lived trade names
|
|
|
$
|
141.3
|
|
|
|
|
|
$
|
141.7
|
|
|
|
|
Through multiple acquisitions, we acquired intangible assets consisting primarily of trademarks and trade names associated with specific products with finite lives, definite-lived distribution networks, patented technology, non-compete agreements, and customer relationships, which are amortized over their estimated useful lives. Indefinite-lived intangible assets consist of trade names that are expected to generate cash flows indefinitely. Significant estimates and assumptions were used to determine the initial fair value of these acquired intangible assets, including estimated future net sales, customer attrition rates, royalty rates, and discount rates. Certain of our intangible assets are attributable to foreign operations and are impacted by currency translation due to movements in foreign currency rates year over year.
We recorded amortization expense of $30.8 million, $28.5 million, and $28.0 million related to intangible assets with finite lives during fiscal 2019, 2018, and 2017, respectively. Amortization expense is generally recorded on a straight-line basis and is expected to be approximately $30.8 million in fiscal 2020, $28.0 million in fiscal 2021, $27.0 million in fiscal 2022, $25.9 million in fiscal 2023, and $25.4 million in fiscal 2024.
We test goodwill and indefinite-lived intangible assets for impairment on an annual basis or more frequently as facts and circumstances change, as required by ASC Topic 350, Intangibles — Goodwill and Other (“ASC 350”). ASC 350 allows for an optional qualitative analysis for goodwill to determine the likelihood of impairment. If the qualitative review results in a more likely than not probability of impairment, a quantitative analysis is required. The qualitative step may
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
be bypassed entirely in favor of a quantitative test. The quantitative analysis identifies impairments by comparing the fair value of a reporting unit with its carrying value, including goodwill. The fair values can be determined based on a combination of valuation techniques including the expected present value of future cash flows, a market multiple approach, and a comparable transaction approach. If the fair value of a reporting unit exceeds its carrying value, goodwill is not considered impaired. Conversely, if the carrying value of a reporting unit exceeds its fair value, an impairment charge for the difference is recorded.
In fiscal 2019 and 2018, a qualitative fair value analysis was used to determine the likelihood of goodwill impairment for our one reporting unit. During fiscal 2017, a quantitative analysis, based on discounted future cash flows, was used to determine the likelihood of impairment. The analysis for goodwill did not result in an impairment charge during fiscal 2019, 2018, or 2017.
The impairment test for indefinite-lived trade names consists of comparing the fair value of a trade name with its carrying value. If the carrying amount exceeds the estimated fair value, an impairment loss would be recorded in the amount of the excess. We estimate the fair value of indefinite-lived trade names using a fair value model based on discounted future cash flows. Significant assumptions, including estimated future net sales, royalty rates, and discount rates, are used in the determination of estimated fair value for indefinite-lived trade names. Based on the results of the indefinite-lived intangible asset analyses, we concluded that our indefinite-lived trade names are fairly stated for the years presented; therefore, no impairment charges were recorded for fiscal 2019, 2018, or 2017. Any reasonably likely change in the assumptions used in the analyses for our trade names would not be material to our financial condition or results of operations.
Other Long-Term Assets
Other long-term assets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
2019
|
|
2018
|
Deferred contract costs
|
$
|
15.4
|
|
|
$
|
12.8
|
|
Net overfunded pension plans
|
—
|
|
|
1.6
|
|
Other(1)
|
2.3
|
|
|
4.4
|
|
Total other long-term assets
|
$
|
17.7
|
|
|
$
|
18.8
|
|
_______________________________________
|
|
(1)
|
Amounts primarily include deferred debt issuance costs related to our credit facilities and company-owned life insurance investments. We maintain life insurance policies on 66 former employees primarily to satisfy obligations under certain deferred compensation plans. These company-owned life insurance policies are presented net of loans that are secured by these policies. This program is frozen, and no new policies were issued in the three-year period ended August 31, 2019.
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Other Long-Term Liabilities
Other long-term liabilities consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
2019
|
|
2018
|
Deferred compensation and postretirement benefits other than pensions(1)
|
$
|
41.6
|
|
|
$
|
40.0
|
|
Service-type warranties(2)
|
46.3
|
|
|
14.8
|
|
Unrecognized tax position liabilities, including interest(3)
|
17.6
|
|
|
4.9
|
|
Other(4)
|
5.2
|
|
|
8.2
|
|
Total other long-term liabilities
|
$
|
110.7
|
|
|
$
|
67.9
|
|
____________________________________
|
|
(1)
|
We maintain several non-qualified retirement plans for the benefit of eligible employees, primarily deferred compensation plans. The deferred compensation plans provide for elective deferrals of an eligible employee’s compensation and, in some cases, matching contributions by the organization. In addition, one plan provides an automatic contribution of 3% of an eligible employee’s compensation. We maintain life insurance policies on certain former officers and other key employees as a means of satisfying a portion of these obligations.
|
|
|
(2)
|
Certain service-type warranties accounted for as contingent liabilities prior to the adoption of ASC 606 are now reflected as contract liabilities effective September 1, 2018. Refer to the New Accounting Pronouncements and Revenue Recognition footnotes for additional information.
|
|
|
(3)
|
See the Income Taxes footnote for more information.
|
|
|
(4)
|
Amount primarily includes deferred rent.
|
Shipping and Handling Fees and Costs
We include shipping and handling fees billed to customers in Net sales in the Consolidated Statements of Comprehensive Income. Shipping and handling costs associated with inbound freight and freight between manufacturing facilities and distribution centers are generally recorded in Cost of products sold in the Consolidated Statements of Comprehensive Income. Other shipping and handling costs are included in Selling, distribution, and administrative expenses in the Consolidated Statements of Comprehensive Income and totaled $138.4 million, $154.9 million, and $138.3 million in fiscal 2019, 2018, and 2017, respectively.
Share-based Payments
We recognize compensation cost relating to share-based payment transactions in the financial statements based on the estimated grant date fair value of the equity or liability instrument issued. We account for stock options, restricted shares, and share units representing certain deferrals into the Nonemployee Director Deferred Compensation Plan (the “Director Plan”) or the Supplemental Deferred Savings Plan (“SDSP”) (both of which are discussed further in the Share-based Payments footnote) based on the grant-date fair value estimated under the current provisions of ASC Topic 718, Compensation — Stock Compensation (“ASC 718”).
Share-based payment expense includes expense related to restricted stock and options issued, as well as share units deferred into the Director Plan. We recorded $29.2 million, $32.3 million, and $32.0 million of share-based payment expense for the years ended August 31, 2019, 2018, and 2017, respectively. The total income tax benefit recognized for share-based payment expense was $6.5 million, $8.4 million, and $11.1 million for the years ended August 31, 2019, 2018, and 2017, respectively. We account for any awards with graded vesting on a straight-line basis. Additionally, forfeitures of share-based awards are estimated based on historical experience at the time of grant and are revised in subsequent periods if actual forfeitures differ from initial estimates. We did not capitalize any expense related to share-based payments and have recorded share-based payment expense, net of estimated forfeitures, in Selling, distribution, and administrative expenses in the Consolidated Statements of Comprehensive Income.
Excess tax benefits and/or expense related to share-based payment awards are reported within Income tax expense on the Consolidated Statements of Comprehensive Income for fiscal 2019 and fiscal 2018. We recognized net excess tax expense related to share-based payment cost of $1.6 million and $0.8 million for the years ended August 31, 2019 and 2018, respectively. For fiscal 2017, we reported net excess tax benefits related to share-based payment cost of $5.2 million within Paid-in capital on the Consolidated Balance Sheets.
See the Share-based Payments footnote of the Notes to Consolidated Financial Statements for more information.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Depreciation
Depreciation is determined principally on a straight-line basis using estimated useful lives of plant and equipment (10 to 40 years for buildings and related improvements and 3 to 15 years for machinery and equipment) for financial reporting purposes, while accelerated depreciation methods are used for income tax purposes. Leasehold improvements are amortized over the shorter of the life of the lease or the estimated useful life of the improvement. Depreciation expense amounted to $57.5 million, $51.8 million, and $46.6 million during fiscal 2019, 2018, and 2017, respectively.
Research and Development
Research and development (“R&D”) expense, which is expensed as incurred, consists of compensation, payroll taxes, employee benefits, materials, supplies, and other administrative costs. R&D does not include all new product development costs and is included in Selling, distribution, and administrative expenses in our Consolidated Statements of Comprehensive Income. R&D expense amounted to $74.7 million, $63.9 million, and $52.0 million during fiscal 2019, 2018, and 2017, respectively.
Advertising
Advertising costs are expensed as incurred and are included within Selling, distribution, and administrative expenses in our Consolidated Statements of Comprehensive Income. These costs totaled $18.5 million, $20.6 million, and $18.6 million during fiscal 2019, 2018, and 2017, respectively.
Interest Expense, Net
Interest expense, net, is comprised primarily of interest expense on long-term debt, obligations in connection with non-qualified retirement benefits, and line of credit borrowings, partially offset by interest income earned on cash and cash equivalents.
The following table summarizes the components of interest expense, net (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Interest expense
|
$
|
36.4
|
|
|
$
|
35.5
|
|
|
$
|
34.1
|
|
Interest income
|
(3.1
|
)
|
|
(2.0
|
)
|
|
(1.6
|
)
|
Interest expense, net
|
$
|
33.3
|
|
|
$
|
33.5
|
|
|
$
|
32.5
|
|
Miscellaneous Expense, Net
Miscellaneous expense, net, is comprised primarily of non-service related components of net periodic pension cost, gains or losses on foreign currency items, and other non-operating items. Gains or losses relating to foreign currency items consisted of net gains of $0.6 million in fiscal 2019, net gains of $0.1 million in fiscal 2018, and net expense of $0.5 million in fiscal 2017. During fiscal 2018, we recognized a $5.4 million gain on the sale of a foreign domiciled business, which included the reclassification of $8.7 million in accumulated foreign currency gains from Accumulated other comprehensive loss. During fiscal 2017, we recognized a $7.2 million gain associated with the sale of an investment in an unconsolidated affiliate.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Income Taxes
We are taxed at statutory corporate rates after adjusting income reported for financial statement purposes for certain items that are treated differently for income tax purposes. Deferred income tax expenses or benefits result from changes during the year in cumulative temporary differences between the tax basis and book basis of assets and liabilities.
Foreign Currency Translation
The functional currency for foreign operations is the local currency where the foreign operations are domiciled. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet dates and for revenue and expense accounts using a weighted average exchange rate each month during the year. The gains or losses resulting from the balance sheet translation are included in Foreign currency translation adjustments in the Consolidated Statements of Comprehensive Income and are excluded from net income.
Comprehensive Income
Comprehensive income represents a measure of all changes in equity that result from recognized transactions and other economic events other than transactions with owners in their capacity as owners. Other comprehensive income (loss) includes foreign currency translation and pension adjustments.
The following table presents the changes in each component of accumulated other comprehensive loss net of tax during the year ended August 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign Currency Items
|
|
Defined Benefit Pension Plans
|
|
Accumulated Other Comprehensive Loss Items
|
Balance as of August 31, 2017
|
$
|
(28.7
|
)
|
|
$
|
(71.0
|
)
|
|
$
|
(99.7
|
)
|
Other comprehensive (loss) income before reclassifications
|
(16.5
|
)
|
|
14.0
|
|
|
(2.5
|
)
|
Amounts reclassified from accumulated other comprehensive loss (1)
|
(8.7
|
)
|
|
7.2
|
|
|
(1.5
|
)
|
Net current period other comprehensive (loss) income
|
(25.2
|
)
|
|
21.2
|
|
|
(4.0
|
)
|
Reclassification of stranded tax effects of TCJA
|
—
|
|
|
(11.1
|
)
|
|
(11.1
|
)
|
Balance as of August 31, 2018
|
(53.9
|
)
|
|
(60.9
|
)
|
|
(114.8
|
)
|
Other comprehensive loss before reclassifications
|
(11.5
|
)
|
|
(31.1
|
)
|
|
(42.6
|
)
|
Amounts reclassified from accumulated other comprehensive loss (1)
|
—
|
|
|
6.0
|
|
|
6.0
|
|
Net current period other comprehensive loss
|
(11.5
|
)
|
|
(25.1
|
)
|
|
(36.6
|
)
|
Balance at August 31, 2019
|
$
|
(65.4
|
)
|
|
$
|
(86.0
|
)
|
|
$
|
(151.4
|
)
|
_______________________________________
|
|
(1)
|
The before tax amounts of the defined benefit pension plan items are included in net periodic pension cost. See the Pension and Defined Contribution Plans footnote for additional details. The reclassification of foreign currency items relates to the sale of a foreign domiciled business and is included within Miscellaneous expense, net on the Consolidated Statements of Comprehensive Income.
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The following table presents the tax expense or benefit allocated to each component of other comprehensive income (loss) for the three years ended August 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
|
Before Tax Amount
|
|
Tax (Expense) or Benefit
|
|
Net of Tax Amount
|
|
Before Tax Amount
|
|
Tax (Expense) or Benefit
|
|
Net of Tax Amount
|
|
Before Tax Amount
|
|
Tax (Expense) or Benefit
|
|
Net of Tax Amount
|
Foreign currency translation adjustments
|
$
|
(11.5
|
)
|
|
$
|
—
|
|
|
$
|
(11.5
|
)
|
|
$
|
(25.2
|
)
|
|
$
|
—
|
|
|
$
|
(25.2
|
)
|
|
$
|
19.0
|
|
|
$
|
—
|
|
|
$
|
19.0
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (losses) gains
|
(40.8
|
)
|
|
9.7
|
|
|
(31.1
|
)
|
|
18.4
|
|
|
(4.4
|
)
|
|
14.0
|
|
|
18.3
|
|
|
(5.7
|
)
|
|
12.6
|
|
Amortization of defined benefit pension items:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
3.5
|
|
|
(0.9
|
)
|
|
2.6
|
|
|
3.1
|
|
|
(0.7
|
)
|
|
2.4
|
|
|
3.1
|
|
|
(0.7
|
)
|
|
2.4
|
|
Actuarial losses
|
4.1
|
|
|
(1.0
|
)
|
|
3.1
|
|
|
6.8
|
|
|
(2.0
|
)
|
|
4.8
|
|
|
8.9
|
|
|
(3.2
|
)
|
|
5.7
|
|
Settlement losses
|
0.4
|
|
|
(0.1
|
)
|
|
0.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total defined benefit plans, net
|
(32.8
|
)
|
|
7.7
|
|
|
(25.1
|
)
|
|
28.3
|
|
|
(7.1
|
)
|
|
21.2
|
|
|
30.3
|
|
|
(9.6
|
)
|
|
20.7
|
|
Other comprehensive (loss) income
|
$
|
(44.3
|
)
|
|
$
|
7.7
|
|
|
$
|
(36.6
|
)
|
|
$
|
3.1
|
|
|
$
|
(7.1
|
)
|
|
$
|
(4.0
|
)
|
|
$
|
49.3
|
|
|
$
|
(9.6
|
)
|
|
$
|
39.7
|
|
Note 3 — New Accounting Pronouncements
Accounting Standards Adopted in Fiscal 2019
ASU 2017-01 -— Clarifying the Definition of a Business
In January 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business (“ASU 2017-01”), which requires an evaluation of whether substantially all of the fair value of assets obtained in an acquisition is concentrated in a single identifiable asset or a group of similar identifiable assets. If so, the transaction does not qualify as a business. The guidance also requires an acquired business to include at least one substantive process and narrows the definition of outputs. We adopted ASU 2017-01 effective September 1, 2018 and applied the guidance prospectively. The provisions of ASU 2017-01 did not have a material effect on our financial condition, results of operations, or cash flows.
ASU 2016-15 — Statement of Cash Flows
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”), which is intended to reduce the diversity in practice in how certain cash receipts and cash payments are presented and classified in the statement of cash flows. These cash flows include debt prepayment and extinguishment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, and proceeds from the settlement of corporate-owned life insurance. We adopted ASU 2016-15 effective September 1, 2018 and applied the changes retrospectively. We maintain life insurance policies on certain former employees primarily to satisfy obligations under certain deferred compensation plans. As required by the standard, proceeds from these policies are now classified as cash inflows from investing activities. We received proceeds of $0.8 million and $1.7 million from settlements of corporate-owned life insurance policies during the years ended August 31, 2019 and 2018, respectively, and received no cash from these policies during the year ended August 31, 2017. As such, cash flows from operations for the year ended August 31, 2018 decreased $1.7 million with a corresponding increase to cash flows from investing activities, compared to amounts previously reported. The remaining provisions of ASU 2016-15 did not impact our financial statements for the periods presented.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
ASU 2017-07 — Presentation of Net Periodic Pension Cost
In March 2017, the FASB issued ASU No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”), which changes the presentation of net periodic pension cost related to employer sponsored defined benefit plans and other postretirement benefits. Service cost is now included within the same income statement line item as other compensation costs arising from services rendered during the period, while other components of net periodic pension cost are presented separately outside of operating income. Additionally, only service costs may be capitalized in assets. We adopted ASU 2017-07 effective as of September 1, 2018. We applied the standard retrospectively for the presentation of the service cost component and the other components of net periodic pension cost within our income statements. As a practical expedient, we used amounts previously disclosed in the Pension and Defined Contribution Plans footnote of the Notes to Consolidated Financial Statements within our fiscal 2018 Form 10-K as the basis for retrospective application because amounts capitalized in inventory at a given point in time are de minimis and determining these amounts was impractical. Upon adoption of ASU 2017-07, our previously reported Operating profit for the years ended August 31, 2018 and 2017 increased $6.2 million and $8.7 million, respectively, with a corresponding increase to Miscellaneous expense, net. The provisions of ASU 2017-07 have no impact to our net income or earnings per share.
The impact of the provisions of ASU 2017-07 on the Consolidated Statements of Comprehensive Income for the years ended August 31, 2018 and 2017 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2018
|
|
Year Ended August 31, 2017
|
|
As Revised
|
|
Previously Reported
|
|
Higher (Lower)
|
|
As Revised
|
|
Previously Reported
|
|
Higher (Lower)
|
Cost of products sold
|
$
|
2,194.7
|
|
|
$
|
2,193.3
|
|
|
$
|
1.4
|
|
|
$
|
2,024.0
|
|
|
$
|
2,023.9
|
|
|
$
|
0.1
|
|
Selling, distribution, and administrative expenses
|
1,019.0
|
|
|
1,026.6
|
|
|
(7.6
|
)
|
|
942.3
|
|
|
951.1
|
|
|
(8.8
|
)
|
Miscellaneous expense, net
|
1.4
|
|
|
(4.8
|
)
|
|
6.2
|
|
|
2.4
|
|
|
(6.3
|
)
|
|
8.7
|
|
ASC 606 — Revenue from Contracts with Customers
In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (“ASU 2014-09”), which replaced the existing revenue recognition guidance in U.S. GAAP. Since the issuance of ASU 2014-09, the FASB released several amendments to improve and clarify the implementation guidance, as well as to change the effective date. These standards have been collectively codified within Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”). ASC 606 outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers. The standard also requires additional disclosures about the nature, timing, and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in those judgments.
We adopted ASC 606 effective September 1, 2018 using the modified retrospective method and recognized a cumulative effect of applying ASC 606 of $13.0 million in Retained earnings on the Consolidated Balance Sheet as of this date. We applied the standard to all contracts as of the transition date. Information for prior years presented has not been retrospectively adjusted and continues to reflect the authoritative accounting standards in effect for those periods.
Adjustments related to the adoption of ASC 606 include additional deferrals of revenue recognition for service-type warranties and the gross presentation of right of return assets and refund liabilities for sales with a right of return. The effects of the adoption of ASC 606 on our Consolidated Statement of Comprehensive Income for the year ended August 31, 2019 and the Consolidated Balance Sheet as of August 31, 2019 are as follows (in millions except per share amounts):
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Statement of Comprehensive Income
|
|
Year Ended August 31, 2019
|
|
|
As Currently Reported
|
|
Without ASC 606 Adoption
|
|
Higher (Lower)
|
Net sales
|
|
$
|
3,672.7
|
|
|
$
|
3,681.6
|
|
|
$
|
(8.9
|
)
|
Cost of products sold
|
|
2,193.0
|
|
|
2,197.1
|
|
|
(4.1
|
)
|
Selling, distribution, and administrative expenses
|
|
1,015.0
|
|
|
1,014.6
|
|
|
0.4
|
|
Operating profit
|
|
462.9
|
|
|
468.1
|
|
|
(5.2
|
)
|
Income tax expense
|
|
94.5
|
|
|
95.7
|
|
|
(1.2
|
)
|
Net income
|
|
330.4
|
|
|
334.4
|
|
|
(4.0
|
)
|
|
|
|
|
|
|
|
Basic earnings per share
|
|
$
|
8.32
|
|
|
$
|
8.42
|
|
|
$
|
(0.10
|
)
|
Diluted earnings per share
|
|
8.29
|
|
|
8.39
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consolidated Balance Sheet
|
|
August 31, 2019
|
|
|
As Currently Reported
|
|
Without ASC 606 Adoption
|
|
Higher (Lower)
|
Accounts receivable, net
|
|
$
|
561.0
|
|
|
539.6
|
|
|
$
|
21.4
|
|
Prepayments and other current assets
|
|
79.0
|
|
|
65.1
|
|
|
13.9
|
|
Other accrued liabilities
|
|
175.0
|
|
|
139.4
|
|
|
35.6
|
|
Deferred income tax liabilities
|
|
92.7
|
|
|
98.0
|
|
|
(5.3
|
)
|
Other long-term liabilities
|
|
110.7
|
|
|
88.7
|
|
|
22.0
|
|
Retained earnings
|
|
2,295.8
|
|
|
2,312.8
|
|
|
(17.0
|
)
|
Accounting Standards Yet to Be Adopted
In August 2018, the FASB issued ASU No. 2018-15, Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract (“ASU 2018-15”), which will require companies to apply internal-use software guidance to determine the implementation costs of these arrangements that can be capitalized. Capitalized implementation costs will be required to be amortized over the term of the arrangement, beginning when the cloud computing arrangement is ready for its intended use. ASU 2018-15 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2019. The standard allows changes to be applied either retrospectively or prospectively. We will adopt the standard as required in fiscal 2021. The provisions of ASU 2018-15 are not expected to have a material effect on our financial condition, results of operations, or cash flows.
In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU 2016-13”), which requires an entity to assess impairment of its financial instruments based on its estimate of expected credit losses. The provisions of ASU 2016-13 are effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2019. Entities are required to apply these changes through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. We will adopt the amendments as required in fiscal 2021. The provisions of ASU 2016-13 are not expected to have a material effect on our financial condition, results of operations, or cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”), which requires lessees to include most leases on the balance sheet. ASU 2016-02 is effective for fiscal years (and interim reporting periods within those years) beginning after December 15, 2018. Since the issuance of ASU 2016-02, the FASB released several amendments to improve and clarify the implementation guidance, as well as to change the allowable adoption methods. These standards have been collectively codified within ASC 842, Leases (“ASC 842”). The standard allows entities to present the effects of the accounting change as either a cumulative adjustment as of the beginning of the earliest period presented or as of the date of adoption. We have an implementation team tasked with reviewing our lease obligations and determining the impact of the new standard to our financial statements. The team is also tasked with identifying appropriate changes to our business processes, systems, and controls to support recognition and disclosure under the new standard. The implementation team completed its review of our lease obligations outstanding at August 31, 2019 and is in the process of reviewing and finalizing transition adjustments to the balance sheet. The implementation team reports its findings and progress of the project to management on a frequent basis and to the
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Audit Committee of the Board of Directors on a quarterly basis. Based on our lease portfolio as of August 31, 2019, we preliminarily expect the adoption of ASC 842 to result in the recognition of operating lease liabilities between $63 million and $68 million. We expect the corresponding operating lease right of use assets to approximate the lease total liabilities less our deferred rent balance as of August 31, 2019. We do not expect ASC 842 to have a material impact on our consolidated statements of comprehensive income or cash flows. Further details regarding our undiscounted future lease payments as well as the timing of those payments are included within the Commitments and Contingencies footnote of the Notes to Consolidated Financial Statements within our Form 10-K. We will adopt ASC 842 as required effective September 1, 2019.
All other newly issued accounting pronouncements not yet effective have been deemed either immaterial or not applicable.
Note 4 — Acquisitions
The following discussion relates to acquisitions completed during fiscal 2019 and 2018. No acquisitions were completed during fiscal 2017.
Fiscal 2019 Acquisitions
WhiteOptics, LLC
On June 20, 2019, using cash on hand, we acquired all of the equity interests of WhiteOptics, LLC (“WhiteOptics”). WhiteOptics is headquartered in New Castle, Delaware and manufactures advanced optical components used to reflect, diffuse, and control light for light emitting diode (“LED”) lighting used in commercial and institutional applications. The operating results of WhiteOptics have been included in our consolidated financial statements since the date of acquisition and are not material to our financial condition, results of operations, or cash flows.
Fiscal 2018 Acquisitions
IOTA Engineering, LLC
On May 1, 2018, using cash on hand and borrowings available under existing credit arrangements, we acquired all of the equity interests of IOTA Engineering, LLC (“IOTA”). IOTA is headquartered in Tucson, Arizona and manufactures highly engineered emergency lighting products and power equipment for commercial and institutional applications both in the U.S. and international markets. The operating results of IOTA have been included in our consolidated financial statements since the date of acquisition and are not material to our financial condition, results of operations, or cash flows.
Lucid Design Group, Inc.
On February 12, 2018, using cash on hand, we acquired all of the equity interests of Lucid Design Group, Inc (“Lucid”). Lucid is headquartered in Oakland, California and provides a data and analytics platform to make data-driven decisions to improve building efficiency and drive energy conservation and savings. The operating results of Lucid have been included in our consolidated financial statements since the date of acquisition and are not material to our financial condition, results of operations, or cash flows.
Accounting for Acquisitions
Acquisition-related costs were expensed as incurred. Preliminary amounts related to the acquisition accounting for WhiteOptics and finalized amounts related to the acquisition accounting for Lucid and IOTA are reflected in the Consolidated Balance Sheets as of August 31, 2019. WhiteOptics did not have a material impact to our financial position or results of operations for fiscal 2019. We finalized the acquisition accounting for Lucid and IOTA during the second and third quarter of fiscal 2019, respectively. There were no material changes to our financial statements as a result of the finalization of the acquisition accounting for Lucid or IOTA. The aggregate purchase price of these acquisitions reflects total goodwill and identified intangible assets of approximately $76.8 million and $81.8 million, respectively, as of August 31, 2019. Identified intangible assets consist of indefinite-lived marketing related intangibles as well as definite-lived customer-based and technology-based assets, which have a weighted average useful life of approximately 14 years.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 5 — 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 and is recognized net of allowances for rebates, sales incentives, product returns, and discounts to customers. Sales and use taxes collected on behalf of governmental authorities are excluded from revenues. Payment is generally due and received within 60 days from the point of sale or prior to the transfer of control of certain goods and services. No payment terms extend beyond one year, and we apply the practical expedient within ASC 606 to conclude that no significant financing terms exist within our contracts with customers. Allowances for cash discounts to customers are estimated using the expected value method based on historical experience and are recorded as a reduction to sales. Our standard terms and conditions of sale allow for the return of certain products within four months of the date of shipment. We also provide for limited product return rights to certain distributors and other customers, primarily for slow moving or damaged items subject to certain defined criteria. The limited product return rights generally allow customers to return resalable products purchased within a specified time period and subject to certain limitations, including, at times, when accompanied by a replacement order of equal or greater value. At the time revenue is recognized, we record a refund liability for the expected value of future returns primarily based on historical experience, specific notification of pending returns, or based on contractual terms with the respective customers. Although historical product returns generally have been within expectations, there can be no assurance that future product returns will not exceed historical amounts. A significant increase in product returns could have a material adverse impact on our operating results in future periods.
Refund liabilities recorded under ASC 606 related to rights of return, cash discounts, and other miscellaneous credits to customers were $37.3 million and $41.2 million as of August 31, 2019 and September 1, 2018, respectively, and are reflected within Other accrued liabilities on the Consolidated Balance Sheets. Additionally, we record right of return assets for products expected to be returned to our distribution centers, which are included within Prepayments and other current assets on the Consolidated Balance Sheets. Such assets totaled $13.9 million and $16.4 million as of August 31, 2019 and September 1, 2018, respectively.
We also maintain one-time or ongoing promotions with our customers, which may include rebate, sales incentive, marketing, and trade-promotion programs with certain customers that require us to estimate and accrue the expected costs of such programs. These arrangements may include volume rebate incentives, cooperative marketing programs, merchandising of our products, introductory marketing funds for new products, and other trade-promotion activities conducted by the customer. Costs associated with these programs are generally estimated based on the most likely amount expected to be settled based on the context of the individual contract and are reflected within the Consolidated Statements of Comprehensive Income in accordance with ASC 606, which in most instances requires such costs to be recorded as reductions of revenue. Amounts due to our customers associated with these programs totaled $34.5 million and $43.9 million as of August 31, 2019 and September 1, 2018, respectively, and are reflected within Other accrued liabilities on the Consolidated Balance Sheets.
Costs to obtain and fulfill contracts, such as sales commissions and shipping and handling activities, are short-term in nature and are expensed as incurred.
Nature of Goods and Services
Products
Approximately 95% of revenues for the periods presented were generated from short-term contracts with our customers to deliver tangible goods such as luminaires, lighting controls, controls for various building systems, power supplies, prismatic skylights, and drivers. We record revenue from these contracts when the customer obtains control of those goods. For sales designated free on board shipping point, control is transferred and revenue is recognized at the time of shipment. For sales designated free on board destination, customers take control and revenue is recognized when a product is delivered to the customer’s delivery site.
Professional Services
We collect fees associated with training, installation, and technical support services, primarily related to the set up of our lighting solutions. We recognize revenue for these one-time services at the time the service is performed. We also sell certain service-type warranties that extend coverages for products beyond their base warranties. We account for
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
service-type warranties as distinct performance obligations and recognize revenue for these contracts ratably over the life of the additional warranty period. Claims related to service-type warranties are expensed as incurred.
Software
Software sales include licenses for software, data usage fees, and software as a service arrangements, which generally extend for one year or less. We recognize revenue for software based on the contractual rights provided to a customer, which typically results in the recognition of revenue ratably over the contractual service period.
Shipping and Handling Activities
We account for all shipping and handling activities as activities to fulfill the promise to transfer products to our customers. As such, we do not consider shipping and handling activities to be separate performance obligations, and we expense these costs as incurred.
Contracts with Multiple Performance Obligations
A small portion (approximately 5% for the periods presented) of our revenue was derived from the combination of any or all of our products, professional services, and software licenses. 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 determined using a cost plus margin valuation when no observable input is available. The amount of consideration allocated to each performance obligation is recognized as revenue in accordance with the timing for products, professional services, and software as described above.
Contract Balances
Our rights related to collections from customers are unconditional and are reflected within Accounts receivable on the Consolidated Balance Sheets. We do not have any other significant contract assets. Contract liabilities arise when we receive cash or an unconditional right to collect cash prior to the transfer of control of goods or services.
The amount of transaction price from contracts with customers allocated to our contract liabilities as of August 31, 2019 and September 1, 2018 consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
September 1, 2018
|
Current deferred revenues
|
$
|
4.7
|
|
|
$
|
4.8
|
|
Non-current deferred revenues
|
46.4
|
|
|
35.0
|
|
Current deferred revenues primarily consist of customer prepayments, software licenses, and to a lesser extent professional service and service-type warranty fees collected prior to performing the related service. Current deferred revenues are included within Other current liabilities on the Consolidated Balance Sheets. These services are expected to be performed within one year. Non-current deferred revenues primarily consist of long-term service-type warranties, which are typically recognized ratably as revenue between five and ten years from the date of sale, and are included within Other long-term liabilities on the Consolidated Balance Sheets. Revenue recognized from beginning balances of contract liabilities during the year ended August 31, 2019 totaled $4.1 million.
Unsatisfied performance obligations that do not represent contract liabilities consist primarily of orders for physical goods that have not yet been shipped. This backlog of orders at any given time is affected by various factors, including seasonality, cancellations, sales promotions, production cycle times, and the timing of receipt and shipment of orders, which are usually shipped within a few weeks of order receipt. Accordingly, a comparison of backlog orders from period to period is not necessarily meaningful and may not be indicative of future shipments.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Disaggregated Revenues
Our lighting and building management solutions are sold primarily through independent sales agents who cover specific geographic areas and market channels, by internal sales representatives, through consumer retail channels, and directly to large corporate accounts. The following table shows revenue from contracts with customers by sales channel for the year ended August 31, 2019 (in millions):
|
|
|
|
|
|
Year Ended August 31, 2019
|
Independent sales network
|
$
|
2,516.4
|
|
Direct sales network
|
381.1
|
|
Retail sales
|
270.2
|
|
Corporate accounts
|
318.0
|
|
Other
|
187.0
|
|
Total
|
$
|
3,672.7
|
|
Note 6 — Fair Value Measurements
We determine fair value measurements based on the assumptions a market participant would use in pricing an asset or liability. ASC Topic 820, Fair Value Measurements and Disclosures (“ASC 820”), establishes a three level hierarchy making a distinction between market participant assumptions based on (i) unadjusted quoted prices for identical assets or liabilities in an active market (Level 1), (ii) quoted prices in markets that are not active or inputs that are observable either directly or indirectly for substantially the full term of the asset or liability (Level 2), and (iii) prices or valuation techniques that require inputs that are both unobservable and significant to the overall fair value measurement (Level 3).
Our cash and cash equivalents (Level 1), which are required to be carried at fair value and measured on a recurring basis, were $461.0 million and $129.1 million as of August 31, 2019 and 2018, respectively.
We utilize valuation methodologies to determine the fair values of our financial assets and liabilities in conformity with the concepts of “exit price” and the fair value hierarchy as prescribed in ASC 820. All valuation methods and assumptions are validated at least quarterly to ensure the accuracy and relevance of the fair values. There were no material changes to the valuation methods or assumptions used to determine fair values during the current period.
We use quoted market prices to determine the fair value of Level 1 assets and liabilities. No transfers between the levels of the fair value hierarchy occurred during the current fiscal period. In the event of a transfer in or out of a level within the fair value hierarchy, the transfers would be recognized on the date of occurrence.
Disclosures of fair value information about financial instruments (whether or not recognized in the balance sheet), for which it is practicable to estimate that value, are required each reporting period in addition to any financial instruments carried at fair value on a recurring basis as prescribed by ASC Topic 825, Financial Instruments (“ASC 825”). In cases where quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. Those techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. The carrying values and estimated fair values of certain financial instruments were as follows at August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
August 31, 2018
|
|
Carrying Value
|
|
Fair Value
|
|
Carrying Value
|
|
Fair Value
|
Senior unsecured public notes, net of unamortized discount and deferred costs
|
$
|
349.9
|
|
|
$
|
352.7
|
|
|
$
|
349.5
|
|
|
$
|
361.7
|
|
Industrial revenue bond
|
4.0
|
|
|
4.0
|
|
|
4.0
|
|
|
4.0
|
|
Bank loans
|
2.7
|
|
|
2.9
|
|
|
3.3
|
|
|
3.3
|
|
The senior unsecured public notes are carried at the outstanding balance, net of unamortized bond discount and deferred costs, as of the end of the reporting period. Fair value is estimated based on discounted future cash flows using rates currently available for debt of similar terms and maturity (Level 2).
The industrial revenue bond is carried at the outstanding balance as of the end of the reporting period. The industrial revenue bond is a tax-exempt, variable-rate instrument that resets on a weekly basis; therefore, we estimate that the
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
face amount of the bond approximates fair value as of August 31, 2019 based on bonds of similar terms and maturity (Level 2).
The bank loans are carried at the outstanding balance as of the end of the reporting period. Fair value is estimated based on discounted future cash flows using rates currently available for debt of similar terms and maturity (Level 2).
ASC 825 excludes certain financial instruments and all nonfinancial instruments from its disclosure requirements. Accordingly, the aggregate fair value amounts presented do not represent the underlying value to us. In many cases, the fair value estimates cannot be substantiated by comparison to independent markets, nor can the disclosed value be realized in immediate settlement of the instruments. In evaluating our management of liquidity and other risks, the fair values of all assets and liabilities should be taken into consideration, not only those presented above.
Note 7 — Pension and Defined Contribution Plans
Company-sponsored Pension Plans
We have several pension plans, both qualified and non-qualified, covering certain hourly and salaried employees. Benefits paid under these plans are based generally on employees’ years of service and/or compensation during the final years of employment. We make at least the minimum annual contributions to the plans to the extent indicated by actuarial valuations and statutory requirements. Plan assets are invested primarily in equity and fixed income securities. During fiscal 2019, we recognized an actuarial gain of $3.4 million as well as $0.4 million in net periodic pension cost related to the early retirement of one participant within our non-qualified domestic plans.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The following tables reflect the status of our domestic (U.S.-based) and international pension plans at August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
International Plans
|
|
August 31,
|
|
August 31,
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Change in benefit obligation:
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
203.2
|
|
|
$
|
215.5
|
|
|
$
|
45.5
|
|
|
$
|
53.5
|
|
Service cost
|
2.9
|
|
|
2.7
|
|
|
0.2
|
|
|
0.2
|
|
Interest cost
|
7.7
|
|
|
7.3
|
|
|
1.3
|
|
|
1.3
|
|
Amendments
|
11.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actuarial losses (gains)
|
26.2
|
|
|
(14.3
|
)
|
|
3.2
|
|
|
(4.5
|
)
|
Settlement gain
|
(3.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Benefits paid
|
(8.8
|
)
|
|
(8.0
|
)
|
|
(2.6
|
)
|
|
(5.5
|
)
|
Other
|
—
|
|
|
—
|
|
|
(3.0
|
)
|
|
0.5
|
|
Benefit obligation at end of year
|
239.2
|
|
|
203.2
|
|
|
44.6
|
|
|
45.5
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
$
|
149.4
|
|
|
$
|
136.8
|
|
|
$
|
30.9
|
|
|
$
|
34.1
|
|
Actual return on plan assets
|
9.0
|
|
|
11.3
|
|
|
3.1
|
|
|
0.9
|
|
Employer contributions
|
5.3
|
|
|
9.3
|
|
|
1.2
|
|
|
1.2
|
|
Benefits paid
|
(12.2
|
)
|
|
(8.0
|
)
|
|
(2.6
|
)
|
|
(5.5
|
)
|
Other
|
—
|
|
|
—
|
|
|
(1.9
|
)
|
|
0.2
|
|
Fair value of plan assets at end of year
|
151.5
|
|
|
149.4
|
|
|
30.7
|
|
|
30.9
|
|
Funded status at the end of year
|
$
|
(87.7
|
)
|
|
$
|
(53.8
|
)
|
|
$
|
(13.9
|
)
|
|
$
|
(14.6
|
)
|
Amounts recognized in the consolidated balance sheets consist of:
|
|
|
|
|
|
|
|
|
|
|
|
Non-current assets
|
$
|
—
|
|
|
$
|
1.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Current liabilities
|
(1.8
|
)
|
|
(5.3
|
)
|
|
(0.1
|
)
|
|
(0.1
|
)
|
Non-current liabilities
|
(85.9
|
)
|
|
(50.1
|
)
|
|
(13.8
|
)
|
|
(14.5
|
)
|
Net amount recognized in consolidated balance sheets
|
$
|
(87.7
|
)
|
|
$
|
(53.8
|
)
|
|
$
|
(13.9
|
)
|
|
$
|
(14.6
|
)
|
Accumulated benefit obligation
|
$
|
239.2
|
|
|
$
|
202.7
|
|
|
$
|
44.6
|
|
|
$
|
45.5
|
|
Pre-tax amounts in accumulated other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
$
|
(12.4
|
)
|
|
$
|
(4.6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Net actuarial loss
|
(83.4
|
)
|
|
(58.8
|
)
|
|
(13.0
|
)
|
|
(12.9
|
)
|
Amounts in accumulated other comprehensive loss
|
$
|
(95.8
|
)
|
|
$
|
(63.4
|
)
|
|
$
|
(13.0
|
)
|
|
$
|
(12.9
|
)
|
Pensions plans in which benefit obligation exceeds plan assets:
|
|
|
|
|
|
|
|
Projected benefit obligation
|
$
|
239.2
|
|
|
$
|
119.2
|
|
|
$
|
44.6
|
|
|
$
|
45.5
|
|
Accumulated benefit obligation
|
239.2
|
|
|
118.7
|
|
|
44.6
|
|
|
45.5
|
|
Plan assets
|
151.5
|
|
|
63.8
|
|
|
30.6
|
|
|
30.9
|
|
Pensions plans in which plan assets exceed benefit obligation:
|
|
|
|
|
|
|
|
Projected benefit obligation
|
$
|
—
|
|
|
$
|
84.0
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Accumulated benefit obligation
|
—
|
|
|
84.0
|
|
|
—
|
|
|
—
|
|
Plan assets
|
—
|
|
|
85.6
|
|
|
—
|
|
|
—
|
|
Estimated amounts that will be amortized from accumulated comprehensive income over the next fiscal year:
|
|
|
|
|
|
|
|
|
|
|
|
Prior service cost
|
$
|
4.0
|
|
|
$
|
3.1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Net actuarial loss
|
$
|
4.1
|
|
|
$
|
2.9
|
|
|
$
|
1.4
|
|
|
$
|
1.5
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Service cost of net periodic pension cost is allocated between Cost of products sold and Selling, distribution, and administrative expenses in the Consolidated Statements of Comprehensive Income based on the nature of the employee's services. All other components of net periodic pension cost are included within Miscellaneous expense, net in the Consolidated Statements of Comprehensive Income. Net periodic pension cost during the fiscal years ended August 31, 2019, 2018, and 2017 included the following components before tax (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
International Plans
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Service cost
|
$
|
2.9
|
|
|
$
|
2.7
|
|
|
$
|
3.5
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
|
$
|
0.2
|
|
Interest cost
|
7.7
|
|
|
7.3
|
|
|
6.9
|
|
|
1.3
|
|
|
1.3
|
|
|
1.1
|
|
Expected return on plan assets
|
(10.5
|
)
|
|
(10.2
|
)
|
|
(9.4
|
)
|
|
(1.9
|
)
|
|
(2.2
|
)
|
|
(1.9
|
)
|
Amortization of prior service cost
|
3.5
|
|
|
3.1
|
|
|
3.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Settlement
|
0.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Recognized actuarial loss
|
2.7
|
|
|
4.5
|
|
|
5.3
|
|
|
1.4
|
|
|
2.3
|
|
|
3.6
|
|
Net periodic pension cost
|
$
|
6.7
|
|
|
$
|
7.4
|
|
|
$
|
9.4
|
|
|
$
|
1.0
|
|
|
$
|
1.6
|
|
|
$
|
3.0
|
|
Weighted average assumptions used in computing the benefit obligation are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
International Plans
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Discount rate
|
2.8
|
%
|
|
3.9
|
%
|
|
2.0
|
%
|
|
2.9
|
%
|
Rate of compensation increase
|
5.0
|
%
|
|
5.5
|
%
|
|
3.1
|
%
|
|
3.1
|
%
|
Weighted average assumptions used in computing net periodic pension cost are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
International Plans
|
|
2019
|
|
2018
|
|
2017
|
|
2019
|
|
2018
|
|
2017
|
Discount rate
|
3.9
|
%
|
|
3.5
|
%
|
|
3.2
|
%
|
|
2.9
|
%
|
|
2.5
|
%
|
|
2.1
|
%
|
Expected return on plan assets
|
7.3
|
%
|
|
7.5
|
%
|
|
7.5
|
%
|
|
6.5
|
%
|
|
6.5
|
%
|
|
6.5
|
%
|
Rate of compensation increase
|
5.5
|
%
|
|
5.5
|
%
|
|
5.5
|
%
|
|
3.1
|
%
|
|
3.1
|
%
|
|
3.2
|
%
|
It is our policy to adjust, on an annual basis, the discount rate used to determine the projected benefit obligation to approximate rates on high-quality, long-term obligations based on our estimated benefit payments available as of the measurement date. We use a published yield curve to assist in the development of our discount rates. We estimate that each 100 basis point increase in the discount rate would reduce net periodic pension cost approximately $1.4 million and approximately $1.2 million for the domestic plans and international plans, respectively. The expected return on plan assets is derived primarily from a periodic study of long-term historical rates of return on the various asset classes included in our targeted pension plan asset allocation as well as future expectations. We estimate that each 100 basis point reduction in the expected return on plan assets would result in additional net periodic pension cost of $1.5 million and $0.3 million for domestic plans and international plans, respectively. We also evaluate the rate of compensation increase annually and adjust if necessary.
Our investment objective for domestic plan assets is to earn a rate of return sufficient to exceed the long-term growth of the plans’ liabilities without subjecting plan assets to undue risk. The plan assets are invested primarily in high quality equity and debt securities. We conduct a periodic strategic asset allocation study to form a basis for the allocation of pension assets between various asset categories. Specific allocation percentages are assigned to each asset category with minimum and maximum ranges established for each. The assets are then managed within these ranges. During fiscal 2019, the U.S. targeted asset allocation was 55% equity securities, 40% fixed income securities, and 5% real estate securities. Our investment objective for the international plan assets is also to add value by exceeding the long-term growth of the plans’ liabilities. During fiscal 2019, the international asset target allocation approximated 75% equity securities, 15% fixed income securities, and 10% multi-strategy investments.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Our pension plan asset allocation at August 31, 2019 and 2018 by asset category is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Plan Assets
|
|
Domestic Plans
|
|
International Plans
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Equity securities
|
53.3
|
%
|
|
57.5
|
%
|
|
73.0
|
%
|
|
61.9
|
%
|
Fixed income securities
|
41.8
|
%
|
|
37.8
|
%
|
|
17.1
|
%
|
|
25.5
|
%
|
Multi-strategy investments
|
—
|
%
|
|
—
|
%
|
|
9.9
|
%
|
|
12.6
|
%
|
Real estate
|
4.9
|
%
|
|
4.7
|
%
|
|
—
|
%
|
|
—
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
Our pension plan assets are stated at fair value based on quoted market prices in an active market, quoted redemption values, or estimates based on reasonable assumptions as of the most recent measurement period. See the Fair Value Measurements footnote for a description of the fair value guidance. No transfers between the levels of the fair value hierarchy occurred during the current fiscal period. In the event of a transfer in or out of a level within the fair value hierarchy, the transfers would be recognized on the date of occurrence. Certain pension assets valued at net asset value (“NAV”) per share as a practical expedient are excluded from the fair value hierarchy. Investments in pension plan assets are described in further detail below.
Short-term Fixed Income Investments
Short-term investments consist of money market funds, which are valued at the daily closing price as reported by the relevant fund (Level 1).
Mutual Funds
Mutual funds held by the domestic plans are open-end mutual funds that are registered with the Securities and Exchange Commission (“SEC”) and seek to either replicate or outperform a related index. These funds are required to publish their daily net asset value and to transact at that price. The mutual funds held by the domestic plans are deemed to be actively traded (Level 1).
Collective Trust
The collective trust seeks to outperform the overall small-cap stock market and is comprised of small cap equity securities with quoted prices in active markets for identical investments. The value of this fund is calculated on each business day by dividing the total value of assets, less liabilities, by the number of units of each class outstanding but is not published (Level 2).
Fixed Income Investments
The fixed interest fund seeks to maximize total return by investing primarily in a diversified portfolio of intermediate and long-term debt securities and is valued using the NAV of units of a management investment company’s trust. The NAV, as provided by the fund's trustee, is used as a practical expedient to estimate fair value. As such, these funds are excluded from the fair value hierarchy. The NAV is based on the fair value of the underlying investments held by the fund less the fund's liabilities.
Real Estate Fund
The real estate fund invests primarily in commercial real estate and includes mortgage loans that are backed by the associated property's investment objective. The fund seeks real estate returns, risk, and liquidity appropriate to a core fund. The fund also seeks to provide current income with the potential for long-term capital appreciation. This investment is valued based on the NAV per share, without further adjustment. The NAV, as provided by the fund's trustee, is used as a practical expedient to estimate fair value and is therefore excluded from the fair value hierarchy. NAV is based on the fair value of the underlying investments. Investors may request to redeem all or any portion of their shares on a quarterly basis. Each investor must provide a written redemption request at least sixty days prior to the end of the quarter for which the request is to be effective. If insufficient funds are available to honor all redemption requests at
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
any point in time, available funds will be allocated pro-rata based on the total number of shares held by each investor. All decisions regarding whether to honor redemption requests are made by the fund’s board of directors.
International Plan Investments
The international plans' assets consist primarily of funds invested in equity securities, multi-strategy investments, and fixed income investments. These securities are calculated using the values of the underlying holdings (i.e. significant observable inputs) but do not have actively quoted market prices (Level 2). The short-term fixed income investments represents cash and cash equivalents held by the funds at fiscal year end (Level 1).
The following tables present the fair value of the domestic pension plan assets by major category as of August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Fair Value
as of
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
August 31, 2019
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets included in the fair value hierarchy:
|
|
|
|
|
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap equity fund
|
$
|
45.6
|
|
|
$
|
45.6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign equity fund
|
20.5
|
|
|
20.5
|
|
|
—
|
|
|
—
|
|
Collective trust: Domestic small cap equities
|
14.6
|
|
|
—
|
|
|
14.6
|
|
|
—
|
|
Short-term fixed income investments
|
6.0
|
|
|
6.0
|
|
|
—
|
|
|
—
|
|
Total assets in the fair value hierarchy
|
86.7
|
|
|
|
|
|
|
|
|
|
|
Assets calculated at net asset value:
|
|
|
|
|
|
|
|
Fixed-income investments
|
57.4
|
|
|
|
|
|
|
|
Real estate fund
|
7.4
|
|
|
|
|
|
|
|
Total assets at net asset value
|
64.8
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
151.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Fair Value
as of
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
August 31, 2018
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets included in the fair value hierarchy:
|
|
|
|
|
|
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Domestic large cap equity fund
|
$
|
48.3
|
|
|
$
|
48.3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Foreign equity fund
|
20.8
|
|
|
20.8
|
|
|
—
|
|
|
—
|
|
Collective trust: Domestic small cap equities
|
16.8
|
|
|
—
|
|
|
16.8
|
|
|
—
|
|
Short-term fixed income investments
|
7.6
|
|
|
7.6
|
|
|
—
|
|
|
—
|
|
Total assets in the fair value hierarchy
|
93.5
|
|
|
|
|
|
|
|
|
|
|
Assets calculated at net asset value:
|
|
|
|
|
|
|
|
Fixed-income investments
|
48.9
|
|
|
|
|
|
|
|
Real estate fund
|
7.0
|
|
|
|
|
|
|
|
Total assets at net asset value
|
55.9
|
|
|
|
|
|
|
|
Total assets at fair value
|
$
|
149.4
|
|
|
|
|
|
|
|
|
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The following tables present the fair value of the international pension plan assets by major category as of August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Fair Value
as of
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
August 31, 2019
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets included in the fair value hierarchy:
|
|
|
|
|
|
|
|
Equity securities
|
$
|
22.4
|
|
|
$
|
—
|
|
|
$
|
22.4
|
|
|
$
|
—
|
|
Short-term fixed income investments
|
0.3
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Multi-strategy investments
|
3.0
|
|
|
—
|
|
|
3.0
|
|
|
—
|
|
Fixed-income investments
|
5.0
|
|
|
—
|
|
|
5.0
|
|
|
—
|
|
Total assets at fair value
|
$
|
30.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
Fair Value
as of
|
|
Quoted Market
Prices in Active
Markets for
Identical Assets
|
|
Significant
Other
Observable
Inputs
|
|
Significant
Unobservable
Inputs
|
|
August 31, 2018
|
|
(Level 1)
|
|
(Level 2)
|
|
(Level 3)
|
Assets included in the fair value hierarchy:
|
|
|
|
|
|
|
|
Equity securities
|
$
|
19.1
|
|
|
$
|
—
|
|
|
$
|
19.1
|
|
|
$
|
—
|
|
Short-term fixed income investments
|
0.3
|
|
|
0.3
|
|
|
—
|
|
|
—
|
|
Multi-strategy investments
|
3.9
|
|
|
—
|
|
|
3.9
|
|
|
—
|
|
Fixed-income investments
|
7.6
|
|
|
—
|
|
|
7.6
|
|
|
—
|
|
Total assets at fair value
|
$
|
30.9
|
|
|
|
|
|
|
|
|
|
|
We expect to contribute approximately $3.6 million and $1.0 million during fiscal 2020 to our domestic qualified plans and international defined benefit plans, respectively. These amounts are based on the total contributions required during fiscal 2020 to satisfy current legal minimum funding requirements for qualified plans and estimated benefit payments for non-qualified plans.
Benefit payments are made primarily from funded benefit plan trusts. Benefit payments are expected to be paid as follows for the years ending August 31 (in millions):
|
|
|
|
|
|
|
|
|
|
Domestic Plans
|
|
International Plans
|
2020
|
$
|
9.5
|
|
|
$
|
1.0
|
|
2021
|
9.3
|
|
|
1.0
|
|
2022
|
12.5
|
|
|
1.0
|
|
2023
|
24.2
|
|
|
1.1
|
|
2024
|
17.8
|
|
|
1.1
|
|
2025-2029
|
66.8
|
|
|
6.3
|
|
Multi-employer Pension Plans
We contribute to two multi-employer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain of our union-represented employees. The risks of participating in these multi-employer plans are different from single-employer plans in the following aspects:
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
•
|
Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers.
|
|
|
•
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be shared by the remaining participating employers.
|
|
|
•
|
If a participating employer chooses to stop participating in some of its multi-employer plans, the employer may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
Our contributions to these plans were $0.5 million for the years ended August 31, 2019, 2018, and 2017, respectively.
Defined Contribution Plans
We also have defined contribution plans to which both employees and we make contributions. Our cost for these plans was $8.1 million, $8.0 million, and $8.0 million for the years ended August 31, 2019, 2018, and 2017, respectively. Employer matching amounts are allocated in accordance with the participants’ investment elections for elective deferrals. At August 31, 2019, assets of the domestic defined contribution plans included shares of our common stock with a market value of approximately $7.4 million, which represented approximately 2.0% of the total fair market value of the assets in our domestic defined contribution plans.
Note 8 — Debt and Lines of Credit
Debt
Our debt at August 31, 2019 and 2018 consisted of the following (in millions):
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
2019
|
|
2018
|
Senior unsecured public notes due December 2019, principal
|
$
|
350.0
|
|
|
$
|
350.0
|
|
Senior unsecured public notes due December 2019, unamortized discount and deferred costs
|
(0.1
|
)
|
|
(0.5
|
)
|
Industrial revenue bond due June 2021
|
4.0
|
|
|
4.0
|
|
Bank loans
|
2.7
|
|
|
3.3
|
|
Total debt outstanding, net of unamortized discount and deferred costs
|
$
|
356.6
|
|
|
$
|
356.8
|
|
Future principal payments of long-term debt are $350.3 million, $4.4 million, $0.4 million, $0.4 million, $0.3 million, and $0.9 million in fiscal 2020, 2021, 2022, 2023, 2024, and after 2024, respectively.
Long-term Debt
On December 1, 2009, we announced a private offering by ABL, Acuity Brands’ wholly-owned principal operating subsidiary, of $350.0 million aggregate principal amount of senior unsecured notes due in December 2019 (the “Unsecured Notes”). The Unsecured Notes are fully and unconditionally guaranteed on a senior unsecured basis by Acuity Brands and ABL IP Holding LLC (“ABL IP Holding,” and, together with Acuity Brands, the “Guarantors”), a wholly-owned subsidiary of Acuity Brands. The Unsecured Notes are senior unsecured obligations of ABL and rank equally in right of payment with all of ABL’s existing and future senior unsecured indebtedness. The guarantees of Acuity Brands and ABL IP Holding are senior unsecured obligations of Acuity Brands and ABL IP Holding and rank equally in right of payment with their other senior unsecured indebtedness. The Unsecured Notes bear interest at a rate of 6% per annum and were issued at a price equal to 99.797% of their face value for a term of 10 years. Interest on the Unsecured Notes is payable semi-annually on June 15 and December 15. Additionally, we capitalized $3.1 million of deferred issuance costs related to the Unsecured Notes that are being amortized over the 10-year term of the Unsecured Notes.
In accordance with the registration rights agreement by and between ABL and the Guarantors and the initial purchasers of the Unsecured Notes, ABL and the Guarantors filed a registration statement with the SEC for an offer to exchange the Notes for SEC-registered notes with substantially identical terms. The registration became effective on August 17, 2010, and all of the Unsecured Notes were exchanged.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Although the Unsecured Notes will mature within one year from August 31, 2019, we have the ability and intent to refinance these borrowings using availability under our term loan facility described below, subject to satisfying the applicable conditions precedent. Currently, we plan to refinance the Unsecured Notes in full at maturity with borrowings under the term loan facility, of which $341.2 million of the current carrying value of the Unsecured Notes would be due more than one year from the anticipated refinancing date. As such, this amount is reflected within Long-term debt on the Consolidated Balance Sheets as of August 31, 2019.
We also had $4.0 million of tax-exempt industrial revenue bonds that are scheduled to mature in June 2021 outstanding at August 31, 2019. The interest rate on the $4.0 million bonds was approximately 1.7% at August 31, 2019 and 2018. Additionally, we had $2.7 million outstanding under fixed-rate bank loans. These loans have interest rates between 0.8% and 2.0% and mature between December 2022 and February 2028, subject to monthly or quarterly repayment schedules.
Lines of Credit
On June 29, 2018, we entered into a credit agreement (“Credit Agreement”) with a syndicate of banks that provides us with a $400.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”) and a $400.0 million unsecured delayed draw term loan facility (“Term Loan Facility”). We had no borrowings outstanding under the Revolving Credit Facility or Term Loan Facility as of August 31, 2019 or 2018.
Generally, amounts outstanding under the Revolving Credit Facility allow for borrowings to bear interest at either the Eurocurrency Rate or the base rate at our option, plus an applicable margin. Eurocurrency Rate advances can be denominated in a variety of currencies, including U.S. Dollars, and amounts outstanding bear interest at a periodic fixed rate equal to the London Inter-Bank Offered Rate ("LIBOR") for the applicable currency plus an applicable margin. The Eurocurrency applicable margin is based on our leverage ratio, as defined in the Credit Agreement, with such margin ranging from 1.000% to 1.375% Base rate advances bear interest at an alternate base rate plus an applicable margin. The base rate applicable margin is based on our leverage ratio, as defined in the Credit Agreement, with such margin ranging from 0.0% to 0.375%. The Term Loan Facility allows for borrowings to be drawn over a one-year period ending December 31, 2019, utilizing up to four separate installments, which are U.S. dollar denominated. Borrowings under the Term Loan Facility will amortize in equal quarterly installments of 2.5% per year in year one, 2.5% per year in year two, 5.0% per year in year three, 5.0% per year in year four, and 7.5% per year in year five. Any remaining borrowings under the Term Loan Facility are due and payable in full on June 29, 2023. The Term Loan Facility allows for borrowings to bear interest at either a Eurocurrency Rate or the base rate, at our option, in each case plus an applicable margin. Eurocurrency Rate advances can be denominated in a variety of currencies, including U.S. Dollars, and amounts outstanding bear interest at a periodic fixed rate equal to the LIBOR for the applicable currency plus an applicable margin. The Eurocurrency applicable margin is based on our leverage ratio, as defined in the Credit Agreement, with such margin ranging from 0.875% to 1.250%. Base Rate advances bear interest at an alternate base rate plus an applicable margin. The base rate applicable margin is based on our leverage ratio, as defined in the Credit Agreement, with such margin ranging from 0.0% to 0.25%.
We are required to pay certain fees in connection with the Credit Agreement, including administrative service fees and annual facility fees. The annual facility fee is payable quarterly, in arrears, and is determined by our leverage ratio as defined in the Credit Agreement. The facility fee ranges from 0.125% to 0.250% of the aggregate $800 million commitment of the lenders under the Credit Agreement. The Credit Agreement contains financial covenants, including a minimum interest expense coverage ratio (“Minimum Interest Expense Coverage Ratio”) and a leverage ratio (“Maximum Leverage Ratio”) of total indebtedness to earnings before interest, tax, depreciation, and amortization (“EBITDA”), as such terms are defined in the Credit Agreement. These ratios are computed at the end of each fiscal quarter for the most recent 12-month period. The Credit Agreement generally allows for a Minimum Interest Expense Coverage Ratio of 2.50 and a Maximum Leverage Ratio of 3.50, subject to certain conditions, as such terms are defined in the Credit Agreement.
We were in compliance with all financial covenants under the Credit Agreement as of August 31, 2019. At August 31, 2019, we had additional borrowing capacity under the Credit Agreement of $796.2 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility and the Term Loan Facility less the outstanding letters of credit of $3.8 million issued under the Revolving Credit Facility. As of August 31, 2019, we had outstanding letters of credit totaling $8.0 million, primarily for securing collateral requirements under our casualty insurance programs and for providing credit support for our industrial revenue bond, which includes $3.8 million we issued under the Revolving Credit Facility.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
None of our existing debt instruments include provisions that would require an acceleration of repayments based solely on changes in our credit ratings.
Note 9 — Common Stock and Related Matters
Common Stock
Changes in common stock for the years ended August 31, 2019, 2018, and 2017 were as follows (amounts and shares in millions):
|
|
|
|
|
|
|
|
|
Common Stock
|
|
Shares
|
|
Amount
|
|
|
|
(At par)
|
Balance at August 31, 2016
|
53.4
|
|
|
$
|
0.5
|
|
Issuance of restricted stock grants, net of cancellations
|
0.1
|
|
|
—
|
|
Stock options exercised
|
—
|
|
*
|
—
|
|
Balance at August 31, 2017
|
53.5
|
|
|
$
|
0.5
|
|
Issuance of restricted stock grants, net of cancellations
|
0.2
|
|
|
—
|
|
Stock options exercised
|
—
|
|
*
|
—
|
|
Balance at August 31, 2018
|
53.7
|
|
|
$
|
0.5
|
|
Issuance of restricted stock grants, net of cancellations
|
0.1
|
|
|
—
|
|
Balance at August 31, 2019
|
53.8
|
|
|
$
|
0.5
|
|
___________________________
* Represents shares of less than 0.1 million.
As of August 31, 2019 and 2018, we had 14.3 million and 13.7 million of repurchased shares recorded as treasury stock at an original repurchase cost of $1.2 billion and $1.1 billion, respectively.
In March 2018, the Board of Directors (the “Board”) authorized the repurchase of up to six million shares of common stock. As of August 31, 2019, 1.45 million shares had been purchased under this authorization, of which 0.7 million were repurchased in fiscal 2019.
Preferred Stock
We have 50 million shares of preferred stock authorized. No shares of preferred stock were issued in fiscal 2019 or 2018, and no shares of preferred stock are outstanding.
Earnings per Share
Basic earnings per share for the periods presented is computed by dividing net earnings available to common stockholders by the weighted average number of common shares outstanding for these periods. Diluted earnings per share is computed similarly but reflects the potential dilution that would occur if dilutive options were exercised, all unvested share-based payment awards were vested, and other distributions related to deferred stock agreements were incurred.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
The following table calculates basic earnings per common share and diluted earnings per common share for the years ended August 31, 2019, 2018, and 2017 (in millions, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Net income
|
$
|
330.4
|
|
|
$
|
349.6
|
|
|
$
|
321.7
|
|
Basic weighted average shares outstanding
|
39.7
|
|
|
40.9
|
|
|
43.1
|
|
Common stock equivalents
|
0.1
|
|
|
0.1
|
|
|
0.2
|
|
Diluted weighted average shares outstanding
|
39.8
|
|
|
41.0
|
|
|
43.3
|
|
Basic earnings per share
|
$
|
8.32
|
|
|
$
|
8.54
|
|
|
$
|
7.46
|
|
Diluted earnings per share
|
$
|
8.29
|
|
|
$
|
8.52
|
|
|
$
|
7.43
|
|
Stock options of approximately 300,000, 179,000, and 117,000 were excluded from the diluted earnings per share calculation for the years ended August 31, 2019, 2018, and 2017, respectively, as the effect of inclusion would have been antidilutive. Restricted stock shares of approximately 160,000, 227,000, and 99,000 were excluded from the diluted earnings per share calculation for the years ended August 31, 2019, 2018, and 2017, respectively, as the effect of inclusion would have been antidilutive.
Note 10 — Share-based Payments
Omnibus Stock Compensation Incentive and Directors’ Equity Plans
In January 2018, our stockholders approved the Amended and Restated Acuity Brands, Inc. 2012 Omnibus Stock Compensation Incentive Plan (the “Stock Incentive Plan”), which, among other things, resulted in an aggregate of 2.7 million of shares authorized for issuance pursuant to the Stock Incentive Plan. The Compensation Committee of the Board is authorized to issue awards consisting of incentive and non-qualified stock options, stock appreciation rights, restricted stock awards, restricted stock units, performance stock awards, performance stock units, stock bonus awards, and cash-based awards to eligible employees, non-employee directors, and outside consultants.
Shares available for grant under the Stock Incentive Plan, including those previously issued and outstanding prior to the amendment, were approximately 1.4 million, 1.6 million, and 1.4 million at August 31, 2019, 2018, and 2017, respectively. Any shares subject to an award under the Stock Incentive Plan that are forfeited, canceled, expire or that are settled for cash will be available for future grant under the Stock Incentive Plan.
Restricted Stock Awards
As of August 31, 2019, we had approximately 350,000 shares outstanding of restricted stock to officers, directors, and other key employees under the Stock Incentive Plan, including restricted stock units granted to foreign employees. The shares vest primarily over a four-year period and are valued at the closing stock price on the date of the grant. Compensation expense recognized related to the awards under the equity incentive plans was $25.1 million, $27.9 million, and $27.2 million in fiscal 2019, 2018, and 2017, respectively.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Activity related to restricted stock awards during the fiscal year ended August 31, 2019 was as follows (in millions, except per share data):
|
|
|
|
|
|
|
|
Number of
Shares
|
|
Weighted Average
Grant Date
Fair Value Per
Share
|
Outstanding at August 31, 2018
|
0.4
|
|
$
|
186.63
|
|
Granted
|
0.2
|
|
$
|
120.73
|
|
Vested
|
(0.2)
|
|
$
|
184.60
|
|
Forfeited*
|
—
|
|
$
|
159.88
|
|
Outstanding at August 31, 2019
|
0.4
|
|
$
|
156.32
|
|
___________________________
* Represents shares of less than 0.1 million.
As of August 31, 2019, there was $34.6 million of total unrecognized compensation cost related to unvested restricted stock, which is expected to be recognized over a weighted-average period of 1.6 years. The total weighted average fair value of shares vested during the years ended August 31, 2019, 2018, and 2017 was approximately $26.9 million, $26.6 million, and $24.8 million, respectively.
Stock Options
As of August 31, 2019, we had approximately 420,000 options outstanding to officers and other key employees under the Stock Incentive Plan. Options issued under the Stock Incentive Plan are generally granted with an exercise price equal to the fair market value of our stock on the date of grant, but never less than the fair market value on the grant date, and expire 10 years from the date of grant. These options generally vest and become exercisable over a three-year period. Compensation expense recognized related to the awards under the current and prior equity incentive plans was $2.7 million, $3.1 million, and $3.6 million in fiscal 2019, 2018, and 2017, respectively.
The fair value of each option was estimated on the date of grant using the Black-Scholes model. The dividend yield was calculated based on annual dividends paid and the trailing 12-month average closing stock price at the time of grant. Expected volatility was based on historical volatility of our stock, calculated using the most recent time period equal to the expected life of the options. The risk-free interest rate was based on the U.S. Treasury yield for a term equal to the expected life of the options at the time of grant. We used historical exercise behavior data of similar employee groups to determine the expected life of options. All inputs into the Black-Scholes model are estimates made at the time of grant. Actual realized value of each option grant could materially differ from these estimates, without impact to future reported net income.
The following weighted average assumptions were used to estimate the fair value of stock options granted in the fiscal years ended August 31:
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Dividend yield
|
0.4%
|
|
0.3%
|
|
0.2%
|
Expected volatility
|
32.8%
|
|
30.9%
|
|
28.5%
|
Risk-free interest rate
|
3.0%
|
|
2.0%
|
|
1.3%
|
Expected life of options
|
4 years
|
|
4 years
|
|
4 years
|
Weighted-average fair value of options
|
$34.06
|
|
$41.87
|
|
$57.40
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Stock option activity during the years ended August 31, 2019, 2018, and 2017 was as follows:
|
|
|
|
|
|
|
|
|
|
Outstanding
|
|
Exercisable
|
|
Number of
Shares
(in millions)
|
|
Weighted Average
Exercise Price
|
|
Number of
Shares
(in millions)
|
|
Weighted Average
Exercise Price
|
Outstanding at August 31, 2016
|
0.3
|
|
$129.85
|
|
0.1
|
|
$83.89
|
Granted
|
—
|
*
|
$239.76
|
|
|
|
|
Exercised
|
—
|
*
|
$139.69
|
|
|
|
|
Outstanding at August 31, 2017
|
0.3
|
|
$156.43
|
|
0.2
|
|
$106.54
|
Granted
|
—
|
*
|
$156.39
|
|
|
|
|
Exercised
|
—
|
*
|
$115.27
|
|
|
|
|
Outstanding at August 31, 2018
|
0.3
|
|
$154.69
|
|
0.2
|
|
$134.13
|
Granted
|
0.1
|
|
$116.40
|
|
|
|
|
Outstanding at August 31, 2019
|
0.4
|
|
$146.70
|
|
0.3
|
|
$147.51
|
Range of option exercise prices:
|
|
|
|
|
|
|
|
$40.01 - $100.00 (average life - 3.1 years)
|
0.1
|
|
$62.25
|
|
0.1
|
|
$62.25
|
$100.01 - $160.00 (average life - 6.9 years)
|
0.2
|
|
$125.66
|
|
0.1
|
|
$125.09
|
$160.01 - $210.00 (average life - 6.2 years)
|
0.1
|
|
$207.80
|
|
0.1
|
|
$207.80
|
$210.01 - $239.76 (average life - 7.1 years)
|
0.1
|
|
$239.76
|
|
—
|
*
|
$239.76
|
___________________________
* Represents shares of less than 0.1 million.
The total intrinsic value of options exercised during the years ended August 31, 2018 and 2017 was $0.5 million, and $1.3 million, respectively. There were no options exercised during fiscal 2019. As of August 31, 2019, the total intrinsic value of options outstanding was $5.8 million, the total intrinsic value of options expected to vest was $0.7 million, and the total intrinsic value of options exercisable was $5.1 million. As of August 31, 2019, there was $2.8 million of total unrecognized compensation cost related to unvested options. That cost is expected to be recognized over a weighted-average period of approximately 1.3 years.
Employee Deferred Share Units
We previously allowed employees to defer a portion of restricted stock awards granted in fiscal 2003 and fiscal 2004 into the SDSP as share units. The share units are payable in shares of stock at the time of distribution from the SDSP. As of August 31, 2019, approximately 9,000 fully vested share units remain deferred, but undistributed, under the Stock Incentive Plan. There was no compensation expense related to these share units during fiscal years 2019, 2018, and 2017.
Director Deferred Share Units
Total shares available for issuance under the Director Plan were approximately 360,000, 370,000, and 390,000 at August 31, 2019, 2018, and 2017. As of August 31, 2019, approximately 119,000 share units were deferred but undistributed under the Director Plan. Compensation expense recognized related to the share units under our the Director Plan was $1.4 million, $1.3 million, and $1.2 million in fiscal 2019, 2018, and 2017, respectively.
Employee Stock Purchase Plan
Employees are able to purchase, through payroll deduction, common stock at a 5% discount on a monthly basis. There were 1.5 million shares of our common stock reserved for purchase under the plan, of which approximately 1.0 million shares remain available as of August 31, 2019. Employees may participate at their discretion.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 11 — Commitments and Contingencies
Self-Insurance
Our policy is to self-insure up to certain limits traditional risks, including workers’ compensation, comprehensive general liability, and auto liability. Our self-insured retention for each claim involving workers’ compensation, comprehensive general liability (including product liability claims), and auto liability is limited per occurrence of such claims. A provision for claims under this self-insured program, based on our estimate of the aggregate liability for claims incurred, is revised and recorded annually. The estimate is derived from both internal and external sources including, but not limited to, our independent actuary. We are also self-insured up to certain limits for certain other insurable risks, primarily physical loss to property and business interruptions resulting from such loss lasting two days or more in duration. Insurance coverage is maintained for catastrophic property and casualty exposures, as well as those risks required to be insured by law or contract. We are fully self-insured for certain other types of liabilities, including environmental, product recall, warranty, and patent infringement. The actuarial estimates are subject to uncertainty from various sources including, among others, changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation, and economic conditions. Although we believe that the actuarial estimates are reasonable, significant differences related to the items noted above could materially affect our self-insurance obligations, future expense, and cash flow.
We are also self-insured for the majority of our medical benefit plans up to certain limits. We estimate our aggregate liability for claims incurred by applying a lag factor to our historical claims and administrative cost experience. The appropriateness of our lag factor is evaluated annually and revised as necessary.
Leases
We lease certain of our buildings and equipment under noncancelable lease agreements. Future minimum annual lease payments under noncancelable leases are $16.7 million, $13.5 million, $9.9 million, $7.2 million, $4.6 million, and $16.8 million for fiscal 2020, 2021, 2022, 2023, 2024, and after 2024, respectively.
Total rent expense was $22.6 million, $22.3 million, and $20.0 million in fiscal 2019, 2018, and 2017, respectively.
Purchase Obligations
We incur purchase obligations in the ordinary course of business that are enforceable and legally binding. Obligations for years subsequent to August 31, 2019 include $347.2 million, $5.0 million, and $5.0 million in fiscal 2020, and 2021, respectively. As of August 31, 2019, we had no purchase obligations extending beyond August 31, 2022.
Collective Bargaining Agreements
Approximately 67% of our total work force is covered by collective bargaining agreements. Collective bargaining agreements representing approximately 57% of our work force will expire within one year, primarily due to annual negotiations of union contracts with in Mexico.
Lighting Science Group Patent Litigation
On April 30, 2019 and May 1, 2019, Lighting Science Group Corp. (“LSG”) filed complaints in the International Trade Commission and United States District Court for the District of Delaware, respectively, alleging infringement of eight patents by the Company. On May 17, 2019, LSG amended both of its complaints and dropped its claims regarding one of the patents. For the remaining seven patents, LSG’s infringement allegations relate to certain of our LED luminaires and related systems. LSG seeks orders from the International Trade Commission to preclude the importation and sale of the accused products. LSG seeks unspecified monetary damages, costs, and attorneys’ fees in the District of Delaware action. We dispute and have numerous defenses to the allegations, and we intend to vigorously defend against LSG’s claims. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and a request for an exclusion order and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we currently are unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from these matters.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Securities Class Action
On January 3, 2018, a shareholder filed a class action complaint in the United States District Court for the District of Delaware against us and certain of our officers on behalf of all persons who purchased or otherwise acquired our stock between June 29, 2016 and April 3, 2017. On February 20, 2018, a different shareholder filed a second class action complaint in the same venue against the same parties on behalf of all persons who purchased or otherwise acquired our stock between October 15, 2015 and April 3, 2017. The cases were transferred on April 30, 2018, to the United States District Court for the Northern District of Georgia and subsequently were consolidated as In re Acuity Brands, Inc. Securities Litigation, Civil Action No. 1:18-cv-02140-MHC (N.D. Ga.). On October 5, 2018, the court-appointed lead plaintiff filed a consolidated amended class action complaint (the “Consolidated Complaint”), which supersedes the initial complaints. The Consolidated Complaint is brought on behalf of all persons who purchased our common stock between October 7, 2015 and April 3, 2017 and alleges that we and certain of our current officers and one former executive violated the federal securities laws by making false or misleading statements and/or omitting to disclose material adverse facts that (i) concealed known trends negatively impacting sales of our products and (ii) overstated our ability to achieve profitable sales growth. The plaintiffs seek class certification, unspecified monetary damages, costs, and attorneys’ fees. We dispute the allegations in the complaints and intend to move to dismiss the Consolidated Complaint and to vigorously defend against the claims. We filed a motion to dismiss the Consolidated Complaint. On August 12, 2019, the court entered an order granting our motion to dismiss in part and dismissing all claims based on 42 of the 47 statements challenged in the Consolidated Complaint but also denying the motion in part and allowing claims based on 5 challenged statements to proceed to discovery. Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult, particularly where the matters involve indeterminate claims for monetary damages and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we are currently unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from the matters described above. We are insured, in excess of a self-retention, for Directors and Officers liability.
Litigation
We are subject to various other legal claims arising in the normal course of business, including patent infringement, employment matters, and product liability claims. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal proceedings will not have a material adverse effect on the financial condition, results of operations, or cash flows. However, in the event of unexpected future developments, it is possible that the ultimate resolution of any such matters, if unfavorable, could have a material adverse effect on the financial condition, results of operations, or cash flows in future periods. We establish reserves for legal claims when associated costs become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher than the amounts reserved for such claims. However, we cannot make a meaningful estimate of actual costs to be incurred that could possibly be higher or lower than the amounts reserved.
Environmental Matters
Our operations are subject to numerous comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances, as well as solid and hazardous wastes, and to the remediation of contaminated sites. In addition, permits and environmental controls are required for certain operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. On an ongoing basis, we invest capital and incur operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years. We are not aware of any pending legislation or proposed regulation related to environmental issues that would have a material adverse effect. The cost of responding to future changes may be substantial. We establish reserves for known environmental claims when the associated costs become probable and can be reasonably estimated. The actual cost of environmental issues may be substantially higher than that reserved due to difficulty in estimating such costs.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Guarantees and Indemnities
We are a party to contracts entered into in the normal course of business in which it is common for us to agree to indemnify third parties for certain liabilities that may arise out of or relate to the subject matter of the contract. In most cases, we cannot estimate the potential amount of future payments under these indemnities until events arise that would result in a liability under the indemnities.
Acquisition-Related Liabilities
During the negotiations related to business combinations, the previous owners of the acquired entity (“acquiree”) typically indemnify us for specific unrecognized liabilities of the acquiree in existence as of the date of acquisition. For some acquisitions of businesses, we act in the place of escrow agents in the holding of funds, including accrued interest (collectively, the “holdback funds”), used to fulfill pre-acquisition obligations agreed to be paid by the acquiree. These funds represent consideration given to the previous owners of the businesses acquired and are payable to them, net of any pre-acquisition obligations satisfied within a stated amount of time, at a future date. Any potential pre-acquisition obligations for which we may be reimbursed through the holdback funds are usually uncertain as of the date of the change of control. In certain circumstances, we are capable of the identification and quantification of particular liabilities including, but not limited to, uncertain tax positions, legal issues, and other outstanding obligations not recognized in the financial statements of the acquired entity. Under ASC Topic 805, Business Combinations, these unrecognized liabilities are recorded as obligations with a corresponding receivable due from the previous owners as of the date of acquisition and are included as part of the acquisition accounting. The actual costs of resolving pre-acquisition obligations may be substantially higher than the holdback funds or amounts reserved. We do not believe that any amounts we are likely to be required to pay under these acquisition-related liabilities, including net holdback funds, will be material to our financial position, results of operations, or cash flow.
Product Warranty and Recall Costs
Our products generally have a standard warranty term of five years that assure our products comply with agreed upon specifications. We record a reserve for the estimated amount of future warranty costs when the related revenue is recognized. 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. Estimated future warranty and recall costs are primarily based on historical experience of identified warranty and recall claims. However, there can be no assurance that future warranty or recall costs will not exceed historical amounts or that new technology products may not generate unexpected costs. If actual future warranty or recall costs exceed historical amounts, additional reserves may be required, which could have a material adverse impact on our results of operations and cash flows.
Reserves for product warranty and recall costs are included in Other accrued liabilities and Other long-term liabilities on the Consolidated Balance Sheets. The changes in the reserves for product warranty and recall costs during the fiscal years ended August 31, 2019, 2018, and 2017 are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Beginning balance
|
$
|
27.3
|
|
|
$
|
22.0
|
|
|
$
|
15.5
|
|
Warranty and recall costs
|
18.7
|
|
|
32.4
|
|
|
39.8
|
|
Payments and other deductions
|
(19.7
|
)
|
|
(27.7
|
)
|
|
(33.3
|
)
|
Acquired warranty and recall liabilities
|
—
|
|
|
0.6
|
|
|
—
|
|
ASC 606 adjustments (1)
|
(14.8
|
)
|
|
—
|
|
|
—
|
|
Ending balance
|
$
|
11.5
|
|
|
$
|
27.3
|
|
|
$
|
22.0
|
|
______________________________
(1) Certain service-type warranties accounted for as contingent liabilities prior to the adoption of ASC 606 are now reflected as contract liabilities effective September 1, 2018. Refer to the New Accounting Pronouncements and Revenue Recognition footnotes for additional information.
Trade Compliance Matters
In the course of routine reviews of import and export activity, we previously determined that we misclassified and/or inaccurately valued certain international shipments of products. We are conducting a detailed review of this activity to
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
determine the extent of any liabilities and implementing the appropriate remedial measures. At this time, we are unable to determine the likelihood or amount of loss, if any, associated with these shipments.
Note 12 — Special Charges
During the year ended August 31, 2019, we recognized pre-tax special charges of $1.8 million. These charges were primarily related to move costs associated with the previously announced transfer of activities from a planned facility closure. Additionally, we recognized severance costs for actions initiated during fiscal 2019 related to our ongoing efforts to streamline the business, including integrating recent acquisitions. We expect that these actions to streamline our business activities, in addition to those taken in previous fiscal years, will allow us to reduce spending in certain areas while permitting continued investment in future growth initiatives, such as new products, expanded market presence, and technology and innovation. The severance costs related to fiscal 2019 actions were more than offset by reversals of prior year severance costs related to certain planned streamlining activities that did not occur.
During fiscal 2018, we recognized pre-tax special charges of $5.6 million primarily related to charges of $10.6 million related to the planned consolidation of certain facilities and associated reduction in employee headcount, partially offset by the reversal of previously recorded special charges of $5.0 million. The reversal was related to certain planned streamlining activities that did not occur, primarily due to the sale of our Spanish lighting business during the fourth quarter of fiscal 2018.
The details of the special charges during the years ended August 31, 2019, 2018, and 2017 are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Severance and employee-related costs
|
$
|
(0.5
|
)
|
|
$
|
5.4
|
|
|
$
|
11.2
|
|
Other restructuring costs
|
2.3
|
|
|
0.2
|
|
|
0.1
|
|
Total special charges
|
$
|
1.8
|
|
|
$
|
5.6
|
|
|
$
|
11.3
|
|
As of August 31, 2019, remaining reserves were $1.9 million and are included in Accrued compensation and in the Consolidated Balance Sheets. The changes in the reserves related to these programs during the year ended August 31, 2019 are summarized as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2019 Actions
|
|
Fiscal 2018 Actions
|
|
Fiscal 2017 Actions
|
|
Total
|
Balance as of August 31, 2018
|
$
|
—
|
|
|
$
|
9.2
|
|
|
$
|
0.9
|
|
|
$
|
10.1
|
|
Severance costs
|
1.9
|
|
|
(2.0
|
)
|
|
(0.4
|
)
|
|
(0.5
|
)
|
Payments made during the period
|
(0.6
|
)
|
|
(6.6
|
)
|
|
(0.5
|
)
|
|
(7.7
|
)
|
Balance as of August 31, 2019
|
$
|
1.3
|
|
|
$
|
0.6
|
|
|
$
|
—
|
|
|
$
|
1.9
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 13 — Income Taxes
We account for income taxes using the asset and liability approach as prescribed by ASC Topic 740, Income Taxes (“ASC 740”). This approach requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax liabilities and assets are determined based on the differences between the financial reporting and the tax basis of an asset or liability.
The provision for income taxes consists of the following components (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Provision for current federal taxes
|
$
|
60.3
|
|
|
$
|
88.9
|
|
|
$
|
151.2
|
|
Provision for current state taxes
|
14.7
|
|
|
16.4
|
|
|
20.4
|
|
Provision for current foreign taxes
|
10.2
|
|
|
9.2
|
|
|
7.0
|
|
Provision (benefit) for deferred taxes
|
9.3
|
|
|
(38.2
|
)
|
|
(7.7
|
)
|
Total provision for income taxes
|
$
|
94.5
|
|
|
$
|
76.3
|
|
|
$
|
170.9
|
|
The following table reconciles the provision at the federal statutory rate to the total provision for income taxes (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Federal income tax computed at statutory rate
|
$
|
89.2
|
|
|
$
|
109.4
|
|
|
$
|
172.4
|
|
State income tax, net of federal income tax benefit
|
12.2
|
|
|
11.5
|
|
|
12.2
|
|
Foreign permanent differences and rate differential
|
2.1
|
|
|
(2.0
|
)
|
|
(1.6
|
)
|
Discrete income tax benefits of the TCJA
|
(2.2
|
)
|
|
(34.6
|
)
|
|
—
|
|
Research and development tax credits
|
(18.1
|
)
|
|
(3.3
|
)
|
|
(3.0
|
)
|
Unrecognized tax benefits
|
12.2
|
|
|
0.4
|
|
|
0.8
|
|
Other, net
|
(0.9
|
)
|
|
(5.1
|
)
|
|
(9.9
|
)
|
Total provision for income taxes
|
$
|
94.5
|
|
|
$
|
76.3
|
|
|
$
|
170.9
|
|
Components of the net deferred income tax liabilities at August 31, 2019 and 2018 include (in millions):
|
|
|
|
|
|
|
|
|
|
August 31,
|
|
2019
|
|
2018
|
Deferred income tax liabilities:
|
|
|
|
|
|
Depreciation
|
$
|
(22.0
|
)
|
|
$
|
(15.0
|
)
|
Goodwill and intangibles
|
(149.6
|
)
|
|
(151.2
|
)
|
Other liabilities
|
(2.8
|
)
|
|
(2.3
|
)
|
Total deferred income tax liabilities
|
(174.4
|
)
|
|
(168.5
|
)
|
Deferred income tax assets:
|
|
|
|
|
|
Self-insurance
|
2.6
|
|
|
2.6
|
|
Pension
|
22.7
|
|
|
18.1
|
|
Deferred compensation
|
20.5
|
|
|
23.7
|
|
Net operating losses
|
6.2
|
|
|
6.2
|
|
Other accruals not yet deductible
|
26.9
|
|
|
24.9
|
|
Other assets
|
9.7
|
|
|
7.0
|
|
Total deferred income tax assets
|
88.6
|
|
|
82.5
|
|
Valuation allowance
|
(4.6
|
)
|
|
(3.6
|
)
|
Net deferred income tax liabilities
|
$
|
(90.4
|
)
|
|
$
|
(89.6
|
)
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
On December 22, 2017, the President of the United States signed into law the Tax Cuts and Jobs Act (“TCJA”). The TCJA included changes that took effect during fiscal 2019 including, but not limited to, additional limitations on certain executive compensation, limitations on interest deductions, a new U.S. tax on certain offshore earnings referred to as Global Intangible Low-Taxed Income (“GILTI”), a new alternative U.S. tax on certain Base Erosion Anti-Avoidance (“BEAT”) payments from a U.S. company to any foreign related party, a new deduction for Foreign Derived Intangible Income (“FDII”), and the repeal of the Section 199 domestic production activities deduction. Our U.S. federal corporate tax rate was 21.0% for the current fiscal year. During fiscal 2018, we recorded a provisional discrete tax benefit of $34.6 million within Income tax expense on the Consolidated Statements of Comprehensive Income following the enactment of the TCJA. During fiscal 2019, we recorded an additional tax benefit of $2.2 million related to TCJA impacts including, but not limited to, our one-time transition tax, deferred income taxes, and executive compensation. The total tax benefit related to the enactment of the TCJA was $36.8 million, which included a benefit of $32.5 million to decrease our deferred income taxes to the revised statutory federal rate as well as a current estimated benefit of approximately $4.3 million for the transition tax on unremitted foreign earnings.
Previously, we asserted that all undistributed earnings and original investments in foreign subsidiaries were indefinitely reinvested and, therefore, had not recorded any deferred taxes related to any outside basis differences associated with our foreign subsidiaries. As of August 31, 2019, the estimated undistributed earnings from foreign subsidiaries was $107.7 million. A significant portion of these earnings was subject to U.S. federal taxation in fiscal 2018 as part of the one-time transition tax. We are no longer asserting indefinite reinvestment on the portion of our unremitted earnings that were previously subject to U.S. federal taxation with the one-time transition tax. Accordingly, we recognized a deferred income tax liability of $0.6 million for certain foreign withholding taxes and U.S. state taxes. With respect to unremitted earnings and original investments in foreign subsidiaries where we are continuing to assert indefinite reinvestment, any future remittances could be subject to additional foreign withholding taxes, U.S. state taxes, and certain tax impacts relating to foreign currency exchange effects. It is not practicable to estimate the amount of any unrecognized tax effects on these reinvested earnings and original investments in foreign subsidiaries.
We have elected to account for the tax on Global Intangible Low-Taxed Income (“GILTI”) as a period cost and, therefore, do not record deferred taxes related to GILTI on our foreign subsidiaries.
At August 31, 2019, we had state tax credit carryforwards of approximately $2.2 million, which will expire beginning in 2021. At August 31, 2019, we had federal net operating loss carryforwards of $32.9 million that expire beginning in 2030, state net operating loss carryforwards of $20.3 million that begin expiring in 2020, and foreign net operating loss carryforwards of $1.8 million that expire beginning in 2026.
The gross amount of unrecognized tax benefits as of August 31, 2019 and 2018 totaled $16.6 million and $4.4 million, respectively, which includes $15.9 million and $3.8 million, respectively, of net unrecognized tax benefits that, if recognized, would affect the annual effective tax rate. We recognize potential interest and penalties related to unrecognized tax benefits as a component of income tax expense; such accrued interest and penalties are not material. With few exceptions, we are no longer subject to United States federal, state, and local income tax examinations for years ended before 2013 or for foreign income tax examinations before 2013. We do not anticipate unrecognized tax benefits will significantly increase or decrease within the next twelve months.
The following table reconciles the change in the unrecognized income tax benefit (reported in Other long-term liabilities on the Consolidated Balance Sheets) for the years ended August 31, 2019 and 2018 (in millions):
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
Unrecognized tax benefits balance at beginning of year
|
$
|
4.4
|
|
|
$
|
6.0
|
|
Additions based on tax positions related to the current year
|
2.0
|
|
|
0.6
|
|
Additions for tax positions of prior years
|
10.9
|
|
|
1.0
|
|
Reductions due to settlements
|
—
|
|
|
(2.2
|
)
|
Reductions due to lapse of statute of limitations
|
(0.7
|
)
|
|
(1.0
|
)
|
Unrecognized tax benefits balance at end of year
|
$
|
16.6
|
|
|
$
|
4.4
|
|
Total accrued interest was $1.0 million and $0.5 million as of August 31, 2019 and 2018, respectively. There were no accruals related to income tax penalties during fiscal 2019. Interest, net of tax benefits, and penalties are included in Income tax expense within the Consolidated Statements of Comprehensive Income. The classification of interest and penalties did not change during the current fiscal year.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 14 — Subsequent Event
On September 17, 2019, using cash on hand and borrowings under available existing credit arrangements, 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. 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.
Note 15 — Supplemental Disaggregated Information
We have one reportable segment. Sales of products and solutions, excluding services, accounted for approximately 99% of total consolidated net sales in fiscal 2019, 2018, and 2017. Our geographic distribution of net sales, operating profit, income before provision for income taxes, and long-lived assets is summarized in the following table for the years ended August 31, 2019, 2018, and 2017 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Net sales(1):
|
|
|
|
|
|
|
|
|
Domestic(2)
|
$
|
3,277.4
|
|
|
$
|
3,292.6
|
|
|
$
|
3,123.1
|
|
International
|
395.3
|
|
|
387.5
|
|
|
382.0
|
|
Total
|
$
|
3,672.7
|
|
|
$
|
3,680.1
|
|
|
$
|
3,505.1
|
|
Operating profit:
|
|
|
|
|
|
|
|
Domestic(2)
|
$
|
419.3
|
|
|
$
|
419.0
|
|
|
$
|
503.3
|
|
International
|
43.6
|
|
|
41.8
|
|
|
24.2
|
|
Total
|
$
|
462.9
|
|
|
$
|
460.8
|
|
|
$
|
527.5
|
|
Income before provision for income taxes:
|
|
|
|
|
|
|
|
Domestic(2)
|
$
|
386.4
|
|
|
$
|
386.4
|
|
|
$
|
478.5
|
|
International
|
38.5
|
|
|
39.5
|
|
|
14.1
|
|
Total
|
$
|
424.9
|
|
|
$
|
425.9
|
|
|
$
|
492.6
|
|
Long-lived assets(3):
|
|
|
|
|
|
|
|
Domestic(2)
|
$
|
248.9
|
|
|
$
|
256.4
|
|
|
$
|
252.8
|
|
International
|
48.4
|
|
|
52.0
|
|
|
51.5
|
|
Total
|
$
|
297.3
|
|
|
$
|
308.4
|
|
|
$
|
304.3
|
|
_______________________________________
|
|
(1)
|
Net sales are attributed to each country based on the selling location.
|
|
|
(2)
|
Domestic amounts include amounts for U.S. based operations.
|
|
|
(3)
|
Long-lived assets include net property, plant, and equipment, long-term deferred income tax assets, and other long-term assets as reflected in the Consolidated Balance Sheets.
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 16 — Supplemental Guarantor Condensed Consolidating Financial Statements
In December 2009, ABL, the 100% owned and principal operating subsidiary of Acuity Brands, refinanced the then current outstanding debt through the issuance of the Notes. See Debt and Lines of Credit footnote for further information.
In accordance with the registration rights agreement by and between ABL and the guarantors to the Unsecured Notes and the initial purchasers of the Unsecured Notes, ABL and the guarantors to the Notes filed a registration statement with the SEC for an offer to exchange the Unsecured Notes for an issue of SEC-registered notes with identical terms. Due to the filing of the registration statement and offer to exchange, we determined the need for compliance with Rule 3-10 of SEC Regulation S-X (“Rule 3-10”). In lieu of providing separate audited financial statements for ABL and ABL IP Holding, we have included the accompanying Condensed Consolidating Financial Statements in accordance with Rule 3-10(d) of SEC Regulation S-X since the Unsecured Notes are fully and unconditionally guaranteed by Acuity Brands and ABL IP Holding. The column marked “Parent” represents the financial condition, results of operations, and cash flows of Acuity Brands. The column marked “Subsidiary Issuer” represents the financial condition, results of operations, and cash flows of ABL. The column entitled “Subsidiary Guarantor” represents the financial condition, results of operations, and cash flows of ABL IP Holding. Lastly, the column listed as “Non-Guarantors” includes the financial condition, results of operations, and cash flows of the non-guarantor direct and indirect subsidiaries of Acuity Brands, which consist primarily of foreign subsidiaries. Consolidating adjustments were necessary in order to arrive at consolidated amounts. In addition, the equity method of accounting was used to calculate investments in subsidiaries. Accordingly, this basis of presentation is not intended to present our financial condition, results of operations, or cash flows for any purpose other than to comply with the specific requirements for parent-subsidiary guarantor reporting.
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED CONSOLIDATING BALANCE SHEETS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2019
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Subsidiary
Guarantor
|
|
Non-
Guarantors
|
|
Consolidating Adjustments
|
|
Consolidated
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
361.9
|
|
|
$
|
18.1
|
|
|
$
|
—
|
|
|
$
|
81.0
|
|
|
$
|
—
|
|
|
$
|
461.0
|
|
Accounts receivable, net
|
—
|
|
|
484.7
|
|
|
—
|
|
|
76.3
|
|
|
—
|
|
|
561.0
|
|
Inventories
|
—
|
|
|
317.1
|
|
|
—
|
|
|
23.7
|
|
|
—
|
|
|
340.8
|
|
Other current assets
|
32.2
|
|
|
27.1
|
|
|
—
|
|
|
19.7
|
|
|
—
|
|
|
79.0
|
|
Total current assets
|
394.1
|
|
|
847.0
|
|
|
—
|
|
|
200.7
|
|
|
—
|
|
|
1,441.8
|
|
Property, plant, and equipment, net
|
0.2
|
|
|
220.7
|
|
|
—
|
|
|
56.4
|
|
|
—
|
|
|
277.3
|
|
Goodwill
|
—
|
|
|
747.6
|
|
|
2.7
|
|
|
217.0
|
|
|
—
|
|
|
967.3
|
|
Intangible assets, net
|
—
|
|
|
271.0
|
|
|
103.7
|
|
|
91.3
|
|
|
—
|
|
|
466.0
|
|
Deferred income taxes
|
30.2
|
|
|
—
|
|
|
—
|
|
|
5.8
|
|
|
(33.7
|
)
|
|
2.3
|
|
Other long-term assets
|
1.1
|
|
|
15.2
|
|
|
—
|
|
|
1.4
|
|
|
—
|
|
|
17.7
|
|
Investments in and amounts due from affiliates
|
1,627.9
|
|
|
476.8
|
|
|
321.6
|
|
|
—
|
|
|
(2,426.3
|
)
|
|
—
|
|
Total assets
|
$
|
2,053.5
|
|
|
$
|
2,578.3
|
|
|
$
|
428.0
|
|
|
$
|
572.6
|
|
|
$
|
(2,460.0
|
)
|
|
$
|
3,172.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
0.7
|
|
|
$
|
314.4
|
|
|
$
|
—
|
|
|
$
|
23.7
|
|
|
$
|
—
|
|
|
$
|
338.8
|
|
Current maturities of long-term debt
|
—
|
|
|
8.7
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
9.1
|
|
Other accrued liabilities
|
11.8
|
|
|
186.0
|
|
|
—
|
|
|
50.4
|
|
|
—
|
|
|
248.2
|
|
Total current liabilities
|
12.5
|
|
|
509.1
|
|
|
—
|
|
|
74.5
|
|
|
—
|
|
|
596.1
|
|
Long-term debt
|
—
|
|
|
345.2
|
|
|
—
|
|
|
2.3
|
|
|
—
|
|
|
347.5
|
|
Deferred income taxes
|
—
|
|
|
105.8
|
|
|
—
|
|
|
20.6
|
|
|
(33.7
|
)
|
|
92.7
|
|
Other long-term liabilities
|
122.1
|
|
|
80.4
|
|
|
—
|
|
|
14.7
|
|
|
—
|
|
|
217.2
|
|
Amounts due to affiliates
|
—
|
|
|
—
|
|
|
—
|
|
|
146.4
|
|
|
(146.4
|
)
|
|
—
|
|
Total stockholders’ equity
|
1,918.9
|
|
|
1,537.8
|
|
|
428.0
|
|
|
314.1
|
|
|
(2,279.9
|
)
|
|
1,918.9
|
|
Total liabilities and stockholders’ equity
|
$
|
2,053.5
|
|
|
$
|
2,578.3
|
|
|
$
|
428.0
|
|
|
$
|
572.6
|
|
|
$
|
(2,460.0
|
)
|
|
$
|
3,172.4
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED CONSOLIDATING BALANCE SHEETS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At August 31, 2018
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Subsidiary
Guarantor
|
|
Non-
Guarantors
|
|
Consolidating Adjustments
|
|
Consolidated
|
ASSETS
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
$
|
80.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48.6
|
|
|
$
|
—
|
|
|
$
|
129.1
|
|
Accounts receivable, net
|
—
|
|
|
560.7
|
|
|
—
|
|
|
77.2
|
|
|
—
|
|
|
637.9
|
|
Inventories
|
—
|
|
|
386.6
|
|
|
—
|
|
|
25.2
|
|
|
—
|
|
|
411.8
|
|
Other current assets
|
2.3
|
|
|
18.6
|
|
|
—
|
|
|
11.4
|
|
|
—
|
|
|
32.3
|
|
Total current assets
|
82.8
|
|
|
965.9
|
|
|
—
|
|
|
162.4
|
|
|
—
|
|
|
1,211.1
|
|
Property, plant, and equipment, net
|
0.2
|
|
|
226.8
|
|
|
—
|
|
|
59.7
|
|
|
—
|
|
|
286.7
|
|
Goodwill
|
—
|
|
|
746.5
|
|
|
2.7
|
|
|
221.4
|
|
|
—
|
|
|
970.6
|
|
Intangible assets, net
|
—
|
|
|
286.6
|
|
|
106.5
|
|
|
105.6
|
|
|
—
|
|
|
498.7
|
|
Deferred income taxes
|
36.4
|
|
|
—
|
|
|
—
|
|
|
6.2
|
|
|
(39.7
|
)
|
|
2.9
|
|
Other long-term assets
|
1.2
|
|
|
15.6
|
|
|
—
|
|
|
2.0
|
|
|
—
|
|
|
18.8
|
|
Investments in and amounts due from affiliates
|
1,707.0
|
|
|
370.6
|
|
|
279.5
|
|
|
—
|
|
|
(2,357.1
|
)
|
|
—
|
|
Total assets
|
$
|
1,827.6
|
|
|
$
|
2,612.0
|
|
|
$
|
388.7
|
|
|
$
|
557.3
|
|
|
$
|
(2,396.8
|
)
|
|
$
|
2,988.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts payable
|
$
|
0.3
|
|
|
$
|
420.7
|
|
|
$
|
—
|
|
|
$
|
30.1
|
|
|
$
|
—
|
|
|
$
|
451.1
|
|
Current maturities of long-term debt
|
—
|
|
|
—
|
|
|
—
|
|
|
0.4
|
|
|
—
|
|
|
0.4
|
|
Other accrued liabilities
|
18.8
|
|
|
170.1
|
|
|
—
|
|
|
42.3
|
|
|
—
|
|
|
231.2
|
|
Total current liabilities
|
19.1
|
|
|
590.8
|
|
|
—
|
|
|
72.8
|
|
|
—
|
|
|
682.7
|
|
Long-term debt
|
—
|
|
|
353.5
|
|
|
—
|
|
|
2.9
|
|
|
—
|
|
|
356.4
|
|
Deferred income taxes
|
—
|
|
|
106.5
|
|
|
—
|
|
|
25.7
|
|
|
(39.7
|
)
|
|
92.5
|
|
Other long-term liabilities
|
91.7
|
|
|
34.0
|
|
|
—
|
|
|
14.7
|
|
|
—
|
|
|
140.4
|
|
Amounts due to affiliates
|
—
|
|
|
—
|
|
|
—
|
|
|
138.8
|
|
|
(138.8
|
)
|
|
—
|
|
Total stockholders’ equity
|
1,716.8
|
|
|
1,527.2
|
|
|
388.7
|
|
|
302.4
|
|
|
(2,218.3
|
)
|
|
1,716.8
|
|
Total liabilities and stockholders’ equity
|
$
|
1,827.6
|
|
|
$
|
2,612.0
|
|
|
$
|
388.7
|
|
|
$
|
557.3
|
|
|
$
|
(2,396.8
|
)
|
|
$
|
2,988.8
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2019
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Subsidiary
Guarantor
|
|
Non-
Guarantors
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales
|
$
|
—
|
|
|
$
|
3,253.6
|
|
|
$
|
—
|
|
|
$
|
419.1
|
|
|
$
|
—
|
|
|
$
|
3,672.7
|
|
Intercompany sales
|
—
|
|
|
—
|
|
|
52.7
|
|
|
204.7
|
|
|
(257.4
|
)
|
|
—
|
|
Total sales
|
—
|
|
|
3,253.6
|
|
|
52.7
|
|
|
623.8
|
|
|
(257.4
|
)
|
|
3,672.7
|
|
Cost of products sold
|
—
|
|
|
1,940.1
|
|
|
—
|
|
|
454.1
|
|
|
(201.2
|
)
|
|
2,193.0
|
|
Gross profit
|
—
|
|
|
1,313.5
|
|
|
52.7
|
|
|
169.7
|
|
|
(56.2
|
)
|
|
1,479.7
|
|
Selling, distribution, and administrative expenses
|
15.6
|
|
|
897.6
|
|
|
2.8
|
|
|
155.3
|
|
|
(56.3
|
)
|
|
1,015.0
|
|
Intercompany charges
|
(33.2
|
)
|
|
25.6
|
|
|
—
|
|
|
7.6
|
|
|
—
|
|
|
—
|
|
Special charges
|
—
|
|
|
1.8
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.8
|
|
Operating profit
|
17.6
|
|
|
388.5
|
|
|
49.9
|
|
|
6.8
|
|
|
0.1
|
|
|
462.9
|
|
Interest expense, net
|
10.9
|
|
|
17.4
|
|
|
—
|
|
|
5.0
|
|
|
—
|
|
|
33.3
|
|
Equity earnings in subsidiaries
|
(330.0
|
)
|
|
(23.2
|
)
|
|
—
|
|
|
0.2
|
|
|
353.0
|
|
|
—
|
|
Miscellaneous expense (income), net
|
6.7
|
|
|
(2.1
|
)
|
|
—
|
|
|
0.1
|
|
|
—
|
|
|
4.7
|
|
Income before income taxes
|
330.0
|
|
|
396.4
|
|
|
49.9
|
|
|
1.5
|
|
|
(352.9
|
)
|
|
424.9
|
|
Income tax (benefit) expense
|
(0.4
|
)
|
|
84.5
|
|
|
10.5
|
|
|
(0.1
|
)
|
|
—
|
|
|
94.5
|
|
Net income
|
330.4
|
|
|
311.9
|
|
|
39.4
|
|
|
1.6
|
|
|
(352.9
|
)
|
|
330.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) items:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(11.5
|
)
|
|
(11.5
|
)
|
|
—
|
|
|
—
|
|
|
11.5
|
|
|
(11.5
|
)
|
Defined benefit plans, net of tax
|
(25.1
|
)
|
|
(17.1
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
17.3
|
|
|
(25.1
|
)
|
Other comprehensive loss items, net of tax
|
(36.6
|
)
|
|
(28.6
|
)
|
|
—
|
|
|
(0.2
|
)
|
|
28.8
|
|
|
(36.6
|
)
|
Comprehensive income
|
$
|
293.8
|
|
|
$
|
283.3
|
|
|
$
|
39.4
|
|
|
$
|
1.4
|
|
|
$
|
(324.1
|
)
|
|
$
|
293.8
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2018
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Subsidiary
Guarantor
|
|
Non-
Guarantors
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales
|
$
|
—
|
|
|
$
|
3,275.7
|
|
|
$
|
—
|
|
|
$
|
404.4
|
|
|
$
|
—
|
|
|
$
|
3,680.1
|
|
Intercompany sales
|
—
|
|
|
—
|
|
|
53.6
|
|
|
211.2
|
|
|
(264.8
|
)
|
|
—
|
|
Total sales
|
—
|
|
|
3,275.7
|
|
|
53.6
|
|
|
615.6
|
|
|
(264.8
|
)
|
|
3,680.1
|
|
Cost of products sold
|
—
|
|
|
1,951.2
|
|
|
—
|
|
|
442.1
|
|
|
(198.6
|
)
|
|
2,194.7
|
|
Gross profit
|
—
|
|
|
1,324.5
|
|
|
53.6
|
|
|
173.5
|
|
|
(66.2
|
)
|
|
1,485.4
|
|
Selling, distribution, and administrative expenses
|
41.0
|
|
|
884.6
|
|
|
3.2
|
|
|
156.3
|
|
|
(66.1
|
)
|
|
1,019.0
|
|
Intercompany charges
|
(59.2
|
)
|
|
49.5
|
|
|
—
|
|
|
9.7
|
|
|
—
|
|
|
—
|
|
Special charges
|
—
|
|
|
5.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5.6
|
|
Operating profit
|
18.2
|
|
|
384.8
|
|
|
50.4
|
|
|
7.5
|
|
|
(0.1
|
)
|
|
460.8
|
|
Interest expense, net
|
11.1
|
|
|
16.9
|
|
|
—
|
|
|
5.5
|
|
|
—
|
|
|
33.5
|
|
Equity earnings in subsidiaries
|
(344.3
|
)
|
|
(18.5
|
)
|
|
—
|
|
|
0.2
|
|
|
362.6
|
|
|
—
|
|
Miscellaneous expense (income), net
|
6.4
|
|
|
(1.8
|
)
|
|
—
|
|
|
(3.2
|
)
|
|
—
|
|
|
1.4
|
|
Income before income taxes
|
345.0
|
|
|
388.2
|
|
|
50.4
|
|
|
5.0
|
|
|
(362.7
|
)
|
|
425.9
|
|
Income tax (benefit) expense
|
(4.6
|
)
|
|
72.0
|
|
|
8.5
|
|
|
0.4
|
|
|
—
|
|
|
76.3
|
|
Net income
|
349.6
|
|
|
316.2
|
|
|
41.9
|
|
|
4.6
|
|
|
(362.7
|
)
|
|
349.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) items:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
(25.2
|
)
|
|
(25.2
|
)
|
|
—
|
|
|
—
|
|
|
25.2
|
|
|
(25.2
|
)
|
Defined benefit plans, net of tax
|
21.2
|
|
|
16.9
|
|
|
—
|
|
|
4.3
|
|
|
(21.2
|
)
|
|
21.2
|
|
Other comprehensive (loss) income items, net of tax
|
(4.0
|
)
|
|
(8.3
|
)
|
|
—
|
|
|
4.3
|
|
|
4.0
|
|
|
(4.0
|
)
|
Comprehensive income
|
$
|
345.6
|
|
|
$
|
307.9
|
|
|
$
|
41.9
|
|
|
$
|
8.9
|
|
|
$
|
(358.7
|
)
|
|
$
|
345.6
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED CONSOLIDATING STATEMENTS OF COMPREHENSIVE INCOME
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2017
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Subsidiary
Guarantor
|
|
Non-
Guarantors
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
External sales
|
$
|
—
|
|
|
$
|
3,105.2
|
|
|
$
|
—
|
|
|
$
|
399.9
|
|
|
$
|
—
|
|
|
$
|
3,505.1
|
|
Intercompany sales
|
—
|
|
|
—
|
|
|
49.4
|
|
|
179.2
|
|
|
(228.6
|
)
|
|
—
|
|
Total sales
|
—
|
|
|
3,105.2
|
|
|
49.4
|
|
|
579.1
|
|
|
(228.6
|
)
|
|
3,505.1
|
|
Cost of products sold
|
—
|
|
|
1,764.6
|
|
|
—
|
|
|
432.8
|
|
|
(173.4
|
)
|
|
2,024.0
|
|
Gross profit
|
—
|
|
|
1,340.6
|
|
|
49.4
|
|
|
146.3
|
|
|
(55.2
|
)
|
|
1,481.1
|
|
Selling, distribution, and administrative expenses
|
39.2
|
|
|
824.6
|
|
|
3.6
|
|
|
130.0
|
|
|
(55.1
|
)
|
|
942.3
|
|
Intercompany charges
|
(56.9
|
)
|
|
47.7
|
|
|
—
|
|
|
9.2
|
|
|
—
|
|
|
—
|
|
Special charges
|
—
|
|
|
11.3
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
11.3
|
|
Operating profit
|
17.7
|
|
|
457.0
|
|
|
45.8
|
|
|
7.1
|
|
|
(0.1
|
)
|
|
527.5
|
|
Interest expense, net
|
11.0
|
|
|
16.1
|
|
|
—
|
|
|
5.4
|
|
|
—
|
|
|
32.5
|
|
Equity earnings in subsidiaries
|
(320.9
|
)
|
|
(7.7
|
)
|
|
—
|
|
|
0.2
|
|
|
328.4
|
|
|
—
|
|
Miscellaneous expense (income), net
|
5.8
|
|
|
(7.9
|
)
|
|
—
|
|
|
4.5
|
|
|
—
|
|
|
2.4
|
|
Income (loss) before income taxes
|
321.8
|
|
|
456.5
|
|
|
45.8
|
|
|
(3.0
|
)
|
|
(328.5
|
)
|
|
492.6
|
|
Income tax expense (benefit)
|
0.1
|
|
|
158.0
|
|
|
15.7
|
|
|
(2.9
|
)
|
|
—
|
|
|
170.9
|
|
Net income (loss)
|
321.7
|
|
|
298.5
|
|
|
30.1
|
|
|
(0.1
|
)
|
|
(328.5
|
)
|
|
321.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) items:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation adjustments
|
19.0
|
|
|
19.0
|
|
|
—
|
|
|
—
|
|
|
(19.0
|
)
|
|
19.0
|
|
Defined benefit plans, net of tax
|
20.7
|
|
|
11.8
|
|
|
—
|
|
|
7.5
|
|
|
(19.3
|
)
|
|
20.7
|
|
Other comprehensive income items, net of tax
|
39.7
|
|
|
30.8
|
|
|
—
|
|
|
7.5
|
|
|
(38.3
|
)
|
|
39.7
|
|
Comprehensive income
|
$
|
361.4
|
|
|
$
|
329.3
|
|
|
$
|
30.1
|
|
|
$
|
7.4
|
|
|
$
|
(366.8
|
)
|
|
$
|
361.4
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2019
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Subsidiary
Guarantor
|
|
Non-
Guarantors
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net cash provided by operating activities
|
$
|
391.1
|
|
|
$
|
63.4
|
|
|
$
|
—
|
|
|
$
|
43.1
|
|
|
$
|
(2.9
|
)
|
|
$
|
494.7
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and equipment
|
—
|
|
|
(44.5
|
)
|
|
—
|
|
|
(8.5
|
)
|
|
—
|
|
|
(53.0
|
)
|
Investments in subsidiaries
|
(2.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
|
—
|
|
Acquisitions of businesses and intangible assets
|
—
|
|
|
(2.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(2.9
|
)
|
Other investing activities
|
0.8
|
|
|
2.1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
2.9
|
|
Net cash used for investing activities
|
(2.1
|
)
|
|
(45.3
|
)
|
|
—
|
|
|
(8.5
|
)
|
|
2.9
|
|
|
(53.0
|
)
|
Cash flow from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on credit facility
|
—
|
|
|
86.5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
86.5
|
|
Repayments of borrowings on credit facility
|
—
|
|
|
(86.5
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(86.5
|
)
|
Repayments of long-term debt
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
Proceeds from stock option exercises and other
|
0.6
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
0.6
|
|
Repurchases of common stock
|
(81.6
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(81.6
|
)
|
Withholding taxes on net settlement of equity awards
|
(6.0
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(6.0
|
)
|
Dividends paid
|
(20.8
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(20.8
|
)
|
Net cash used for financing activities
|
(107.8
|
)
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(108.2
|
)
|
Effect of exchange rate changes on cash
|
0.2
|
|
|
—
|
|
|
—
|
|
|
(1.8
|
)
|
|
—
|
|
|
(1.6
|
)
|
Net change in cash and cash equivalents
|
281.4
|
|
|
18.1
|
|
|
—
|
|
|
32.4
|
|
|
—
|
|
|
331.9
|
|
Cash and cash equivalents at beginning of year
|
80.5
|
|
|
—
|
|
|
—
|
|
|
48.6
|
|
|
—
|
|
|
129.1
|
|
Cash and cash equivalents at end of year
|
$
|
361.9
|
|
|
$
|
18.1
|
|
|
$
|
—
|
|
|
$
|
81.0
|
|
|
$
|
—
|
|
|
$
|
461.0
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2018
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Subsidiary
Guarantor
|
|
Non-
Guarantors
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net cash provided by operating activities
|
$
|
322.1
|
|
|
$
|
30.2
|
|
|
$
|
—
|
|
|
$
|
36.0
|
|
|
$
|
(36.8
|
)
|
|
$
|
351.5
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and equipment
|
—
|
|
|
(31.4
|
)
|
|
—
|
|
|
(12.2
|
)
|
|
—
|
|
|
(43.6
|
)
|
Investments in subsidiaries
|
(154.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
154.7
|
|
|
—
|
|
Acquisitions of businesses and intangible assets
|
—
|
|
|
(136.3
|
)
|
|
—
|
|
|
(26.9
|
)
|
|
—
|
|
|
(163.2
|
)
|
Proceeds from sale of business
|
—
|
|
|
—
|
|
|
—
|
|
|
1.1
|
|
|
—
|
|
|
1.1
|
|
Other investing activities
|
1.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Net cash used for investing activities
|
(153.0
|
)
|
|
(167.7
|
)
|
|
—
|
|
|
(38.0
|
)
|
|
154.7
|
|
|
(204.0
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings on credit facility
|
—
|
|
|
395.4
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
395.4
|
|
Repayments of borrowings on credit facility
|
—
|
|
|
(395.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(395.4
|
)
|
Issuance of long-term debt
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.4
|
)
|
|
—
|
|
|
(0.4
|
)
|
Proceeds from stock option exercises and other
|
1.7
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1.7
|
|
Repurchases of common stock
|
(298.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(298.4
|
)
|
Withholding taxes on net settlement of equity awards
|
(8.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(8.2
|
)
|
Intercompany dividends
|
—
|
|
|
—
|
|
|
—
|
|
|
(36.8
|
)
|
|
36.8
|
|
|
—
|
|
Intercompany capital
|
—
|
|
|
136.6
|
|
|
—
|
|
|
18.1
|
|
|
(154.7
|
)
|
|
—
|
|
Dividends paid
|
(21.4
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(21.4
|
)
|
Net cash (used for) provided by financing activities
|
(326.3
|
)
|
|
136.6
|
|
|
—
|
|
|
(19.1
|
)
|
|
(117.9
|
)
|
|
(326.7
|
)
|
Effect of exchange rate changes on cash
|
—
|
|
|
0.9
|
|
|
—
|
|
|
(3.7
|
)
|
|
—
|
|
|
(2.8
|
)
|
Net change in cash and cash equivalents
|
(157.2
|
)
|
|
—
|
|
|
—
|
|
|
(24.8
|
)
|
|
—
|
|
|
(182.0
|
)
|
Cash and cash equivalents at beginning of year
|
237.7
|
|
|
—
|
|
|
—
|
|
|
73.4
|
|
|
—
|
|
|
311.1
|
|
Cash and cash equivalents at end of year
|
$
|
80.5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
48.6
|
|
|
$
|
—
|
|
|
$
|
129.1
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOWS
(In millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended August 31, 2017
|
|
Parent
|
|
Subsidiary
Issuer
|
|
Subsidiary
Guarantor
|
|
Non-
Guarantors
|
|
Consolidating Adjustments
|
|
Consolidated
|
Net cash provided by operating activities
|
$
|
262.3
|
|
|
$
|
41.4
|
|
|
$
|
—
|
|
|
$
|
32.9
|
|
|
$
|
—
|
|
|
$
|
336.6
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of property, plant, and equipment
|
—
|
|
|
(53.1
|
)
|
|
—
|
|
|
(14.2
|
)
|
|
—
|
|
|
(67.3
|
)
|
Proceeds from sale of property, plant, and equipment
|
—
|
|
|
0.2
|
|
|
—
|
|
|
5.3
|
|
|
—
|
|
|
5.5
|
|
Proceeds from sale of investment in unconsolidated affiliate
|
—
|
|
|
13.2
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
13.2
|
|
Other investing activities
|
—
|
|
|
(0.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(0.2
|
)
|
Net cash used for investing activities
|
—
|
|
|
(39.9
|
)
|
|
—
|
|
|
(8.9
|
)
|
|
—
|
|
|
(48.8
|
)
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of long-term debt
|
—
|
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
|
1.0
|
|
Proceeds from stock option exercises and other
|
3.0
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
3.0
|
|
Repurchases of common stock
|
(357.9
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(357.9
|
)
|
Withholding taxes on net settlement of equity awards
|
(15.2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15.2
|
)
|
Dividends paid
|
(22.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(22.7
|
)
|
Net cash (used for) provided by financing activities
|
(392.8
|
)
|
|
—
|
|
|
—
|
|
|
1.0
|
|
|
—
|
|
|
(391.8
|
)
|
Effect of exchange rate changes on cash
|
—
|
|
|
(1.5
|
)
|
|
—
|
|
|
3.4
|
|
|
—
|
|
|
1.9
|
|
Net change in cash and cash equivalents
|
(130.5
|
)
|
|
—
|
|
|
—
|
|
|
28.4
|
|
|
—
|
|
|
(102.1
|
)
|
Cash and cash equivalents at beginning of year
|
368.2
|
|
|
—
|
|
|
—
|
|
|
45.0
|
|
|
—
|
|
|
413.2
|
|
Cash and cash equivalents at end of year
|
$
|
237.7
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
73.4
|
|
|
$
|
—
|
|
|
$
|
311.1
|
|
|
|
ACUITY BRANDS, INC
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Note 17 — Quarterly Financial Data (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2019
|
(In millions)
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
Net sales
|
$
|
932.6
|
|
|
$
|
854.4
|
|
|
$
|
947.6
|
|
|
$
|
938.1
|
|
Gross profit
|
$
|
367.5
|
|
|
$
|
333.9
|
|
|
$
|
383.6
|
|
|
$
|
394.7
|
|
Net income
|
$
|
79.6
|
|
|
$
|
66.3
|
|
|
$
|
88.4
|
|
|
$
|
96.1
|
|
Basic earnings per share
|
$
|
1.99
|
|
|
$
|
1.68
|
|
|
$
|
2.23
|
|
|
$
|
2.43
|
|
Diluted earnings per share
|
$
|
1.98
|
|
|
$
|
1.67
|
|
|
$
|
2.22
|
|
|
$
|
2.42
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2018
|
(In millions)
|
1st Quarter
|
|
2nd Quarter
|
|
3rd Quarter
|
|
4th Quarter
|
Net sales
|
$
|
842.8
|
|
|
$
|
832.1
|
|
|
$
|
944.0
|
|
|
$
|
1,061.2
|
|
Gross profit (1)
|
$
|
349.9
|
|
|
$
|
334.5
|
|
|
$
|
389.1
|
|
|
$
|
411.9
|
|
Net income
|
$
|
71.5
|
|
|
$
|
96.9
|
|
|
$
|
73.0
|
|
|
$
|
108.2
|
|
Basic earnings per share
|
$
|
1.71
|
|
|
$
|
2.34
|
|
|
$
|
1.81
|
|
|
$
|
2.71
|
|
Diluted earnings per share
|
$
|
1.70
|
|
|
$
|
2.33
|
|
|
$
|
1.80
|
|
|
$
|
2.70
|
|
______________________________________
|
|
(1)
|
Fiscal 2018 quarterly gross profit amounts have been retrospectively adjusted to reflect the impact of ASU 2017-07 to our interim periods. See the New Accounting Pronouncements footnote for further details.
|
Certain amounts in the tables above have been rounded. Accordingly, the sum of the quarters may not be an exact match to the full year amounts.