Acuity Beats Sales Forecast; Misses Profit Forecast. Stock down 34% in Last 12 months–Repurchasing 6M Shares
ATLANTA, April 04, 2018 (GLOBE NEWSWIRE) — Acuity Brands, Inc. (AYI) (“Company”) today announced that fiscal 2018 second quarter net sales increased 3.4 percent to $832.1 million from $804.7 million reported in the prior-year period. Operating profit for the second quarter of fiscal 2018 was $88.0 million, a decrease of $20.0 million, or 18.5 percent, over the year-ago period. Net income for the second quarter of fiscal 2018 was $96.9 million, an increase of $29.6 million, or 44 percent, compared with the prior-year period. Fiscal 2018 second quarter diluted earnings per share (“EPS”) of $2.33 increased $0.80, or 52 percent, compared with $1.53 for the year-ago period.
Adjusted diluted EPS for the second quarter of fiscal 2018 increased 7 percent to $1.89 compared with adjusted diluted EPS of $1.77 for the year-ago period. Adjusted operating profit for the second quarter of fiscal 2018 decreased $20.1 million, or 16 percent, to $103.8 million, or 12.5 percent of net sales, compared with the year-ago period adjusted operating profit of $123.9 million, or 15.4 percent of net sales. Adjusted results exclude the impact of amortization expense of acquired intangible assets, share-based payment expense, acquisition-related items, special charges for streamlining activities, and an income tax net benefit for discrete items associated with the Tax Cuts and Jobs Act of 2017 (“TCJA”). Management believes these items impacted the comparability of the Company’s results and that adjusted financial measures enhance the reader’s overall understanding of the Company’s current financial performance by making results comparable between periods. A reconciliation of adjusted financial measures to the most directly comparable U.S. GAAP measure is provided in the tables at the end of this release.
Vernon J. Nagel, Chairman, President, and Chief Executive Officer of Acuity Brands, commented, “We believe our net sales growth of 3.4 percent in the second quarter once again exceeded market level performance as initial industry data suggests the lighting market in the U.S. was flat to down low-single digits, reflecting continued weakness of non-residential construction in certain markets. The increase in net sales was primarily due to greater shipments of our Atrius-based luminaires to customers in certain key vertical applications, partially offset by lower shipments for larger commercial projects and through the home center/showroom sales channel. We were disappointed in our second quarter profitability measures, which were impacted by unfavorable changes in product prices and mix of products sold as well as higher selling, distribution, and administrative expenses. We expect to accelerate programs to reduce product and other overhead costs in order to maintain the Company’s competitiveness and drive improved profitability. We are pleased that past investments in our Atrius platform are now generating robust growth in our Tier 3 and 4 solutions, which grew well over 20 percent this quarter over the year-ago period. Additionally, we are excited to welcome aboard the associates of the recently acquired Lucid Design Group, whose comprehensive building operations and analytics platform enables customers to have unparalleled insights about their energy use and other building operations.”
Second Quarter Results
The 3.4 percent year-over-year growth in fiscal 2018 second quarter net sales was due primarily to an increase in sales volume of over 6 percent and an approximate 1 percent favorable impact from foreign exchange rate changes, partially offset by an approximate 3.5 percent unfavorable change in product prices and mix of products sold (“price/mix”). Unfavorable price/mix reflected changes in both product mix, which included substitutions to certain products with lower price points, and sales channel mix, which included declines in generally higher priced solutions, primarily for larger commercial projects. Price/mix was also impacted by lower pricing on certain luminaires, reflecting the decline in certain LED component costs as well as increased competition in more basic, lesser-featured products. Sales of LED-based products represented over two-thirds of fiscal 2018 second quarter total net sales.
Gross profit for the second quarter of fiscal 2018 decreased $0.9 million, or 0.3 percent, to $334.9 million compared with $335.8 million in the prior-year period due primarily to unfavorable price/mix, partially offset by higher sales volumes and productivity improvements. Fiscal 2018 second quarter gross profit margin of 40.2 percent declined 150 basis points compared with prior year’s gross profit margin. Selling, distribution, and administrative (“SD&A”) expenses for the second quarter of fiscal 2018 increased $18.5 million, or 8.1 percent, to $246.3 million compared with the prior-year period, due primarily to higher employee related costs, including compensation, increased freight charges to support the greater sales volume, and to a lesser degree, certain other operating expenses. Adjusted SD&A expenses for the second quarter of fiscal 2018 of $231.1 million increased $19.2 million, or 9.1 percent, compared with $211.9 million in the prior-year period. Adjusted SD&A expenses for the three months ended February 28, 2018 represented 27.8% of net sales compared with 26.3% of net sales in the prior-year period.
Excluded from adjusted diluted EPS for the second quarter of fiscal 2018 was a $0.75 benefit from $31.2 million of net discrete items associated with the TCJA, primarily due to a non-cash income tax benefit from the remeasurement of the Company’s net U.S. deferred tax liabilities reflecting a reduced corporate federal rate, partially offset by an unfavorable impact related to the taxation of the Company’s accumulated unremitted foreign earnings.
Net sales for the first six months of fiscal 2018 increased 1 percent to $1.67 billion compared with $1.66 billion for the prior-year period. The Company reported $206.6 million of operating profit for the first half of fiscal 2018 compared with $234.6 million for the prior-year period. Net income for the first half of fiscal 2018 was $168.4 million compared with $149.0 million for the year-ago period. Diluted EPS for the first six months of fiscal 2018 was $4.04 compared with $3.39 for the prior-year period.
Adjusted operating profit for the first half of fiscal 2018 decreased $29.4 million, or 11 percent, to $237.7 million, or 14.2 percent of net sales. Prior year’s adjusted operating profit was $267.1 million, or 16.1 percent of net sales. Adjusted net income for the first half of fiscal 2018 was $160.0 million compared with $165.5 million for the prior-year period, a decrease of 3 percent. Adjusted diluted EPS for the first half of fiscal 2018 increased $0.08, or 2 percent, to $3.84 compared with adjusted diluted EPS of $3.76 for the year-ago period. Adjusted results exclude amortization expense of acquired intangible assets, share-based payment expense, acquisition-related items, special charges for streamlining activities, manufacturing inefficiencies related to the closing of a facility, gain on the sale of an investment in an unconsolidated affiliate, and an income tax net benefit for discrete items associated with the TCJA. These items reduced adjusted diluted EPS for the first half of fiscal 2018 by $0.20 and increased prior year’s results $0.37. A reconciliation of adjusted financial measures to the most directly comparable U.S. GAAP measure is provided in the tables at the end of this release.
Net miscellaneous income for the six months of the prior fiscal year included a $7.2 million pre-tax gain associated with the sale of an investment in an unconsolidated affiliate, which occurred in the first quarter of fiscal 2017.
Net cash provided by operating activities totaled $178.3 million for the first half of fiscal 2018 compared with $90 million for the year-ago period. Cash and cash equivalents at the end of the second quarter of fiscal 2018 totaled $229.8 million, a decrease of $81.3 million since the beginning of the fiscal year. During the second quarter of fiscal 2018, the Company repurchased 1.2 million shares of Acuity Brands common stock under its previously authorized stock repurchase program at a total cost of $194.3 million.
Stock Repurchase Authorization
The Board of Directors of Acuity Brands has authorized the repurchase of up to 6 million shares, or approximately 15 percent, of the Company’s outstanding common stock. Mr. Nagel said, “In light of the current weakness in the lighting industry, balanced against our long-term optimism in the Company’s prospects, the Board believes share repurchases represent an effective use of the Company’s cash flow to generate shareholder value, especially during periods of high stock price volatility. Additionally, the Board believes that repurchases of the Company’s stock supports the objective to maximize long-term stockholder value, while continuing to fund investments to better serve our customers, grow our businesses, and improve our operating and financial performance.”
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 such as acquisitions. Management believes that repurchasing the full authorization under the program within a twelve-month period would require additional resources beyond the Company’s current available cash and borrowing capacity. Therefore, the Company may increase its leverage to accommodate repurchases at attractive price levels. Under the current authorization, the Company may acquire shares through open market transactions, subject to market conditions and other factors. The Company may also enter into Rule 10b5-1 plans to facilitate open market repurchases. A Rule 10b5-1 plan would generally permit the Company to repurchase shares at times when it might otherwise be prevented from doing so under certain securities laws provided the plan is adopted when the Company is not in possession of material non-public information. Shares repurchased under the authorization may be retired or used for general corporate purposes, which may include transactions related to the Company’s share-based compensation and employee benefit plans.
Mr. Nagel commented, “The current weakness in the lighting industry has created a challenging environment for management to drive financial performance in the short term while continuing to invest in attractive longer-term opportunities. Third-party forecasts and leading indicators suggest that demand in the North American lighting market, the Company’s primary market, will improve later in calendar 2018. However, we continue to be cautious and believe overall market conditions could continue to be challenging for the near future based on soft order activity in certain sales channels, which suggests growth in the lighting fixture market may remain sluggish for the balance of 2018. In addition, we expect headwinds in the home center/showroom sales channel to continue in the near term, giving way to growth in the second half of calendar 2018 as the Company brings new solutions to key customers and expands its access to market in this important sales channel. We believe the pricing environment will continue to be challenging in portions of the market, particularly for more basic, lesser-featured products sold through certain sales channels as well as shifts in product mix, both of which are expected to continue to negatively impact net sales and margins. We expect to introduce products and solutions to more effectively compete in these portions of the market. Additionally, we believe the price of certain LED components will continue to decline though at a decelerating pace, while certain other costs will continue to increase, including certain components and commodity costs, especially steel prices, as well as certain employee related costs.”
Mr. Nagel concluded, “While current quoting activity for lighting equipment in portions of the non-residential market remains tepid, certain short and long-term fundamental drivers of the markets that the Company serves remain positive, including growing demand for our Atrius-based lighting solutions. We expect to continue to outperform the growth rates of the markets that we serve by executing our strategies focused on growth opportunities for new construction and renovation projects, expansion into underpenetrated geographies and channels, and growth from the continued introduction of new lighting and building management solutions as part of our integrated, tiered solutions strategy. We continue to believe the lighting and lighting-related industry as well as building management systems will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront along with emerging opportunities for digital lighting to play a key role in the Internet of Things. We believe we are uniquely positioned to fully participate in this exciting industry.”