ACUITY BRANDS: Management Discussion and Analysis of Financial Position and Results of Operations (Form 10-Q)

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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.
(referred to herein as "we," "our," "us," the "Company," or similar references)
and its subsidiaries as of May 31, 2021 and for the three and nine months ended
May 31, 2021 and 2020. The following discussion should be read in conjunction
with the Consolidated Financial Statements and Notes to Consolidated Financial
Statements included within this report. Also, please refer to Acuity Brands'
Annual Report on Form 10-K for the fiscal year ended August 31, 2020, filed with
the Securities and Exchange Commission (the "SEC") on October 23, 2020 ("Form
10-K").
Overview
Company
The Company was incorporated in 2001 under the laws of the State of Delaware. We
are a market-leading industrial technology company that develops, manufactures,
and brings to market products and services including building management
systems, lighting, lighting controls, and location-aware applications. These
products and services provide commercial, institutional, industrial,
infrastructure, and residential applications throughout North America and select
international markets.
During the third quarter of fiscal 2021, we completed a realignment of our
operations and structure to better support our business strategy. As a result,
beginning in the third quarter of fiscal 2021, we now report our financial
results of operations in two reportable segments, Acuity Brands Lighting and
Lighting Controls ("ABL") and Intelligent Spaces Group ("ISG"), consistent with
how our chief operating decision maker currently evaluates operating results,
assesses performance, and allocates resources within the Company. We have recast
historical information to conform to the current segment structure. We achieve
growth through the development of innovative new products and services. Through
the Acuity Business System, we achieve customer-focused efficiencies that allow
us to increase market share and deliver superior returns. We look to
aggressively deploy capital to grow the business and to enter attractive new
verticals.
We do not consider acquisitions a critical element of our strategy but seek
opportunities to expand and enhance our portfolio of solutions, including the
following transactions.
One June 4, 2021, the Company announced that it has signed a definitive
agreement to purchase ams OSRAM's North American Digital Systems ("DS")
business. This acquisition is intended to enable the Company to enhance our LED
driver and controls technology portfolio and accelerate our innovation, expand
our access to market through a more fulsome OEM product offering, and give us
more control over our supply chain. The transaction is expected to close by end
of day on July 1, 2021.
On May 18, 2021, using cash on hand, we acquired all of the equity interests of
Rockpile Ventures, an accelerator of Edge artificial intelligence startups.
Rockpile Ventures helps early-stage artificial intelligence companies drive
co-engineering and co-selling partnerships with major cloud ecosystems, enabling
faster adoption from proof-of-concept trials to market scale.
On September 17, 2019, using cash on hand and borrowings under available
existing credit arrangements, we acquired all of the equity interests of The
Luminaires Group ("TLG"), a leading provider of specification-grade luminaires
for commercial, institutional, hospitality, and municipal markets, all of which
complement our 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 November 25, 2019, using cash on hand, we acquired all of the equity
interests of LocusLabs, Inc ("LocusLabs"). The LocusLabs software platform
supports navigation applications used on mobile devices, web browsers, and
digital displays in airports, event centers, multi-floor office buildings, and
campuses.
The results of operations for the three and nine months ended May 31, 2021 and
2020 are not necessarily indicative of the results to be expected for the full
fiscal year due primarily to continued uncertainty of general economic
conditions that may impact our key end markets for fiscal 2021, seasonality, and
the impact of any acquisitions, among other reasons. Additionally, we are
uncertain of the future impact of the ongoing COVID-19 pandemic or recovery of
prior deterioration in economic conditions to our sales channels, supply chain,
manufacturing, and distribution as well as overall construction, renovation, and
consumer spending.
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The COVID-19 Pandemic
The COVID-19 pandemic has resulted in intermittent worldwide government
restrictions on the movement of people, goods, and services resulting in
increased volatility in and disruptions to global markets. However, our
manufacturing operations are deemed essential and continue to operate. We remain
committed to prioritizing the health and well-being of our associates and their
families and ensuring that we operate effectively. We have implemented policies
to screen associates, contractors, and vendors for COVID-19 symptoms upon
entering our manufacturing, distribution, and open-office facilities in the
United States, Mexico, and other locations as permitted by law. We have also
implemented one-way traffic flows, additional cleaning requirements for common
spaces, mandatory face coverings, hand sanitizer stations, socially-distanced
workspaces, and self-serve pay stations within our cafeterias to mitigate the
spread of the virus. Additionally, we have required certain employees whose job
functions can be performed remotely to work primarily from home.
Government-mandated and voluntary social distancing measures have had, and
continue to have, an adverse impact on our results of operations. The pandemic
has caused reduced construction and renovation spending as well as a disruption
in our supply chain for certain components, both of which negatively impacted
our fiscal 2021 sales. In fiscal 2020 we experienced a limited number of
temporary facility shutdowns due to government-mandated closures. Although our
facilities are now open and new government-mandated restrictions have been
gradually lifted, a resurgence in COVID-19 cases may lead to the reimposition of
previously lifted business closure requirements, the imposition of new
restrictions, or the issuance of new or revised local or national health
guidance. We also continue to incur additional health and safety costs including
expenditures for personal protection equipment and facility enhancements to
maintain proper distancing guidelines issued by the Centers for Disease Control
and Prevention. We have taken actions to reduce costs, including the realignment
of headcount with current volumes, a limit on all non-essential employee travel,
other efforts to decrease discretionary spending, and reductions in our real
estate footprint. Additionally, we elected to defer certain employer payroll
taxes as allowable under the Coronavirus Aid, Relief, and Economic Security Act
(the "CARES" Act) signed into law on March 27, 2020. Half of these deferrals are
due in December 2021, and the remaining deferrals are due in December 2022.
Although we have implemented significant measures to mitigate further spread of
the virus, our employees, customers, suppliers, and contractors may continue to
experience disruptions to business activities due to potential further
government-mandated or voluntary shutdowns, general economic conditions, or
other negative impacts of the COVID-19 pandemic. We are continuously monitoring
the adverse effects of the pandemic and identifying steps to mitigate those
effects. As the COVID-19 pandemic is continually evolving, we are uncertain of
its ultimate duration and impact. See Part I, Item 1a. Risk Factors of our
Form 10-K for further details regarding the potential impacts of COVID-19 to our
results of operations, financial position, and cash flows.
Liquidity and Capital Resources
Our principal sources of liquidity are operating cash flows generated primarily
from our business operations, cash on hand, and various sources of borrowings.
Our ability to generate sufficient cash flow from operations or to access
certain capital markets, including banks, is necessary to fund our operations
and capital expenditures, pay dividends, repurchase shares, meet obligations as
they become due, and maintain compliance with covenants contained in our
financing agreements.
For the first nine months of fiscal 2021, we paid $30.6 million for property,
plant, and equipment, primarily for tooling, new and enhanced information
technology capabilities, equipment, and facility enhancements. We currently
expect to invest approximately 1.5% of net sales on capital expenditures during
fiscal 2021.
During the first nine months of fiscal 2021, we repurchased 3.3 million shares
of our outstanding common stock. As of May 31, 2021, the maximum number of
shares that may yet be repurchased under the share repurchase program authorized
by the Board equaled 4.4 million shares. We expect to repurchase the remaining
shares available for repurchase on an opportunistic basis subject to various
factors including stock price, Company performance, market conditions, and other
possible uses of cash.
Our short-term cash needs are expected to include funding operations as
currently planned; funding possible acquisitions; making capital investments as
currently anticipated; paying quarterly stockholder dividends as currently
anticipated; paying principal and interest on debt as currently scheduled;
making required contributions and distributions related to our employee benefit
plans; and potentially repurchasing shares of our outstanding common stock. We
believe that we will be able to meet our liquidity needs over the next 12 months
based on our cash on hand, current projections of cash flow from operations, and
borrowing availability under financing arrangements. Additionally, we believe
that our cash flows from operations and sources of funding, including, but
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not limited to, future borrowings and borrowing capacity, will sufficiently
support our long-term liquidity needs. In the event of a sustained market
deterioration, we may need additional liquidity, which would require us to
evaluate available alternatives and take appropriate actions.
Cash Flow
We use available cash and cash flows from operations, borrowings, and proceeds
from the exercise of stock options to fund operations, capital expenditures, and
acquisitions if any; to repurchase Company stock; and to pay dividends.
Our cash position at May 31, 2021 was $593.5 million, an increase of $32.8
million from August 31, 2020. During the nine months ended May 31, 2021, we
generated net cash flows from operations of $316.2 million. During November
2020, we issued long-term debt that contributed net proceeds of $493.9 million
to our cash position. See more details below under the Capitalization section.
Cash generated from operating activities, cash on hand, and funds from
borrowings were used during the nine months ended May 31, 2021 primarily to
repay borrowings on our Term Loan Facility (defined below) of $395.0 million as
well as bank loans of $2.1 million, to fund share repurchases of $340.9 million,
to fund capital expenditures of $30.6 million, to pay dividends to stockholders
of $14.3 million, and to pay withholding taxes on the net settlement of equity
awards of $3.9 million.
We generated $316.2 million of cash flows from operating activities during the
nine months ended May 31, 2021 compared with $378.3 million in the prior-year
period, a decrease of $62.1 million, due primarily to an increase in accounts
receivable that resulted from the improvement in year-over-year sales, partially
offset by payroll tax deferrals under the CARES Act as well as lower interest
payments on long-term borrowings due to timing.
We believe that investing in assets and programs that will over time increase
the overall return on our invested capital is a key factor in driving
stockholder value. We paid $30.6 million and $38.3 million during the first nine
months of fiscal 2021 and 2020, respectively, for property, plant, and
equipment, primarily related to investments in tooling, new and enhanced
information technology capabilities, equipment, and facility enhancements.
Capitalization
On November 10, 2020, Acuity Brands Lighting, Inc., a wholly-owned subsidiary of
Acuity Brands, Inc. issued $500.0 million aggregate principal amount of 2.150%
senior unsecured notes due December 15, 2030 (the "Unsecured Notes"). The
Unsecured Notes bear interest at a rate of 2.150% per annum and were issued at a
price equal to 99.737% of their face value. Interest on the Unsecured Notes is
paid semi-annually in arrears on June 15 and December 15 of each year, which
began on June 15, 2021. The Unsecured Notes are fully and unconditionally
guaranteed on a senior unsecured basis by Acuity Brands, Inc. and ABL IP Holding
LLC ("ABL IP Holding", and, together with Acuity Brands, Inc. the "Guarantors"),
a wholly-owned subsidiary of Acuity Brands, Inc. Additionally, we capitalized
$4.8 million of deferred issuance costs related to the Unsecured Notes that are
being amortized over the 10-year term. As of May 31, 2021, the balance of the
Unsecured Notes net of unamortized discount and deferred issuance costs was
$494.2 million.
As of May 31, 2021, we also had $4.0 million of tax-exempt industrial revenue
bonds that were paid at maturity on June 1, 2021. The carrying value of these
bonds is reflected within Current maturities of debt on the Consolidated Balance
Sheets as of May 31, 2021. Additionally, we had $2.1 million outstanding under
fixed-rate bank loans at August 31, 2020 that we repaid during the nine months
ended May 31, 2021, prior to their maturity date. There have been no other
material changes outside of the ordinary course of business in our contractual
obligations since August 31, 2020.
The following tables present summarized financial information for Acuity Brands,
Inc. Acuity Brands Lighting, Inc., and ABL IP Holding LLC on a combined basis
after the elimination of all intercompany balances and transactions between the
combined group as well as any investments in non-guarantors as of the dates and
during the period presented (in millions):
Summarized Balance Sheet Information          May 31, 2021       August 31, 2020
Current assets                               $     1,185.1      $        1,152.6
Non-current assets                                 1,368.8               1,416.0
Amounts due from non-guarantor affiliates            203.1                 183.3
Current liabilities                                  583.5                 530.2
Non-current liabilities                              817.7                 723.8


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Summarized Income Statement Information    Nine Months Ended May 31, 2021
Net sales                                 $                       2,046.7
Gross profit                                                        889.1
Net income                                                          204.7


As of May 31, 2021, our capital structure was comprised principally of the
Unsecured Notes and equity of our stockholders. Total debt outstanding was
$498.2 million at May 31, 2021 and consisted primarily of fixed-rate
obligations. At August 31, 2020, total debt outstanding was $401.1 million and
consisted primarily of variable-rate obligations.
On June 29, 2018, we entered into a credit agreement (the "Credit Agreement")
with a syndicate of banks that provides us with a $400.0 million five-year
unsecured revolving credit facility (the "Revolving Credit Facility") and
provided us with a $400.0 million unsecured delayed draw term loan facility (the
"Term Loan Facility)". We had no borrowings outstanding under the Revolving
Credit Facility as of May 31, 2021 or August 31, 2020. We had no borrowings
outstanding under the Term Loan Facility as of May 31, 2021. We had $395.0
million in borrowings outstanding under the Term Loan Facility as of August 31,
2020, which we fully repaid during the first quarter of fiscal 2021 using the
proceeds from the Unsecured Notes. The Credit Agreement allows for no future
borrowings under the Term Loan Facility.
We were in compliance with all financial covenants under the Credit Agreement as
of May 31, 2021. At May 31, 2021, we had additional borrowing capacity under the
Credit Agreement of $395.9 million under the most restrictive covenant in effect
at the time, which represents the full amount of the Revolving Credit Facility
less the outstanding letters of credit of $4.1 million issued under the
Revolving Credit Facility. As of May 31, 2021, we had outstanding letters of
credit totaling $8.3 million, primarily for securing collateral requirements
under our casualty insurance programs and for providing credit support for our
industrial revenue bond, which includes the $4.1 million issued under the
Revolving Credit Facility. See the Debt and Lines of Credit footnote of the
Notes to Consolidated Financial Statements for more information.
During the first nine months of fiscal 2021, our consolidated stockholders'
equity decreased $88.4 million to $2.0 billion at May 31, 2021, from $2.1
billion at August 31, 2020. The decrease was due primarily to repurchases of our
outstanding common stock and dividend payments, partially offset by net income
earned and favorable foreign currency translation adjustments. Our debt to total
capitalization ratio (calculated by dividing total debt by the sum of total debt
and total stockholders' equity) was 19.6% and 15.9% at May 31, 2021 and
August 31, 2020, respectively. The ratio of debt, net of cash, to total
capitalization, net of cash, was (4.9)% and (8.1)% at May 31, 2021 and
August 31, 2020, respectively.
Dividends
We paid dividends on our common stock of $14.3 million ($0.39 per share) and
$15.6 million ($0.39 per share) during the nine months ended May 31, 2021 and
2020, respectively. All decisions regarding the declaration and payment of
dividends are at the discretion of the Board and are evaluated regularly in
light of our financial condition, earnings, growth prospects, funding
requirements, applicable law, and any other factors the Board deems relevant.

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Results of Operations
Third Quarter of Fiscal 2021 Compared with Third Quarter of Fiscal 2020
The following table sets forth information comparing the components of net
income for the three months ended May 31, 2021 and 2020 (in millions except per
share data):
                                                        Three Months Ended
                                                                                             Increase
                                                May 31, 2021          May 31, 2020          (Decrease)              Percent Change
Net sales                                      $      899.7          $     776.2          $      123.5                      15.9  %
Cost of products sold                                 513.1                448.6                  64.5                      14.4  %
Gross profit                                          386.6                327.6                  59.0                      18.0  %
Percent of net sales                                   43.0  %              42.2  %                 80    bps
Selling, distribution, and administrative
expenses                                              268.0                241.3                  26.7                      11.1  %
Special charges                                         0.5                  3.3                  (2.8)                          NM
Operating profit                                      118.1                 83.0                  35.1                      42.3  %
Percent of net sales                                   13.1  %              10.7  %                240    bps
Other expense:
Interest expense, net                                   6.2                  5.4                   0.8                      14.8  %
Miscellaneous expense (income), net                     2.7                 (0.9)                  3.6                           NM
Total other expense                                     8.9                  4.5                   4.4                      97.8  %
Income before income taxes                            109.2                 78.5                  30.7                      39.1  %
Percent of net sales                                   12.1  %              10.1  %                200    bps
Income tax expense                                     23.5                 18.1                   5.4                      29.8  %
Effective tax rate                                     21.5  %              23.1  %
Net income                                     $       85.7          $      60.4          $       25.3                      41.9  %
Diluted earnings per share                     $       2.37          $      1.52          $       0.85                      55.9  %
NM - not meaningful


Net sales were $899.7 million for the three months ended May 31, 2021 compared
with $776.2 million reported for the three months ended May 31, 2020, an
increase of $123.5 million, or 15.9%. For the three months ended May 31, 2021,
we reported net income of $85.7 million, an increase of $25.3 million, or 41.9%,
compared with $60.4 million for the three months ended May 31, 2020. For the
third quarter of fiscal 2021, diluted earnings per share increased 55.9% to
$2.37 compared with $1.52 reported in the year-ago period.
The following table as well as the tables under Segment Results below reconcile
certain U.S. generally accepted accounting principles ("U.S. GAAP") financial
measures to the corresponding non-U.S. GAAP measures referred to in the
discussion of our results of operations, which exclude the impact of
acquisition-related items, amortization of acquired intangible assets,
share-based payment expense, and special charges associated primarily with
continued efforts to streamline the organization and integrate recent
acquisitions. Although the impacts of some of these items have been recognized
in prior periods and could recur in future periods, we typically exclude these
charges during internal reviews of performance and use these non-U.S. GAAP
measures for baseline comparative operational analysis, decision making, and
other activities. These non-U.S. GAAP financial measures, including adjusted
selling, distribution, and administrative ("SD&A") expenses and adjusted SD&A
expenses as a percent of net sales, adjusted operating profit and adjusted
operating profit margin for total company and by segment, adjusted net income,
and adjusted diluted earnings per share, are provided to enhance the user's
overall understanding of our current financial performance. Specifically, we
believe these non-U.S. GAAP measures provide greater comparability and enhanced
visibility into our results of operations. There are limitations to the use of
non-U.S. GAAP financial measures and such non-U.S. GAAP financial measures
should be considered in addition to, and not as a substitute for or superior to,
results prepared in accordance with U.S. GAAP. The non-U.S. GAAP measures as
defined by us may not be comparable to similar non-U.S. GAAP measures presented
by other companies. Our presentation of such measures, which may include
adjustments to exclude unusual or non-recurring items, should not be construed
as an inference that our future results will be unaffected by other unusual or
non-recurring items.
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(In millions, except per share data)                         Three Months Ended
                                                                                                                             Increase
                                             May 31, 2021                           May 31, 2020                            (Decrease)    Percent Change

Selling, distribution, and administrative
expenses                                   $       268.0                          $       241.3                          $        26.7           11.1  %
Percent of net sales                                                29.8  %                                31.1  %                (130)   bps
Less: Amortization of acquired intangible
assets                                             (10.2)                                 (10.8)
Less: Share-based payment expense                   (7.1)                                  (7.8)
Less: Acquisition-related items (1)                 (0.9)                                     -
Adjusted selling, distribution, and
administrative expenses                    $       249.8                          $       222.7                          $        27.1           12.2  %
Percent of net sales                                                27.8  %                                28.7  %                 (90)   bps

Operating profit                           $       118.1                          $        83.0                          $        35.1           42.3  %
Percent of net sales                                                13.1  %                                10.7  %                 240    bps
Add-back: Amortization of acquired
intangible assets                                   10.2                                   10.8
Add-back: Share-based payment expense                7.1                                    7.8

Add-back: Acquisition-related items (1)              0.9                                      -

Add-back: Special charges                            0.5                                    3.3
Adjusted operating profit                  $       136.8                          $       104.9                          $        31.9           30.4  %
Percent of net sales                                                15.2  %                                13.5  %                 170    bps

Net income                                 $        85.7                          $        60.4                          $        25.3           41.9  %
Add-back: Amortization of acquired
intangible assets                                   10.2                                   10.8
Add-back: Share-based payment expense                7.1                                    7.8

Add-back: Acquisition-related items (1)              0.9                                      -

Add-back: Special charges                            0.5                                    3.3

Total pre-tax adjustments to net income             18.7                                   21.9
Income tax effects                                  (4.0)                                  (5.1)

Adjusted net income                        $       100.4                          $        77.2                          $        23.2           30.1  %

Diluted earnings per share                 $        2.37                          $        1.52                          $        0.85           55.9  %
Adjusted diluted earnings per share        $        2.77                          $        1.94                          $        0.83           42.8  %


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(1) Acquisition-related items include professional fees.
Net Sales
Net sales for the three months ended May 31, 2021 increased $123.5 million, or
15.9%, to $899.7 million compared with $776.2 million in the prior-year period
due primarily to higher volumes. From a sales channel perspective, sales through
the independent sales network and direct sales network increased 14% and 39%,
respectively, due primarily to our improved go-to-market activity, which
leveraged improvements in the construction market and wider economy.
Additionally, sales within the corporate accounts channel increased 13% as large
retailers within this channel have begun to address previously deferred
nonessential renovations. Retail sales declined 26% due primarily to a customer
inventory rebalancing in fiscal 2021. Changes in foreign currency rates and
revenues from acquired companies did not have a meaningful impact on net sales
for the third quarter of fiscal 2021.
Gross Profit
Gross profit for the third quarter of fiscal 2021 increased $59.0 million, or
18.0%, to $386.6 million compared with $327.6 million in the prior-year period,
and gross profit margin increased 80 basis points to 43.0% from 42.2%. The
increase in gross profit and margin was primarily due to increased sales volumes
as well as product and productivity improvements, partially offset by higher
component and freight costs.
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Operating Profit
SD&A expenses for the three months ended May 31, 2021 were $268.0 million
compared with $241.3 million in the prior-year period, an increase of $26.7
million, or 11.1%. The increase in SD&A expense was due primarily to higher
outbound freight and commissions costs associated with higher sales volumes as
well as increased employee-related costs. SD&A expenses for the third quarter of
fiscal 2021 were 29.8% of net sales compared with 31.1% for the prior-year
period. Adjusted SD&A expenses for the three months ended May 31, 2021 were
$249.8 million (27.8% of net sales) compared with $222.7 million (28.7% of net
sales) in the prior-year period.
We recognized pre-tax special charges of $0.5 million during the third quarter
of fiscal 2021 compared with $3.3 million recorded during the third quarter of
fiscal 2020. Further details regarding our special charges are included in the
Special Charges footnote of the Notes to Consolidated Financial Statements.
Operating profit for the third quarter of fiscal 2021 was $118.1 million (13.1%
of net sales) compared with $83.0 million (10.7% of net sales) for the
prior-year period, an increase of $35.1 million, or 42.3%. The increase in
operating profit was due to higher gross profit and lower special charges,
partially offset by higher SD&A expenses. The operating profit margin increase
of 240 bps year over year reflects higher gross profit as well as our ability to
successfully leverage our fixed costs. Adjusted operating profit increased $31.9
million, or 30.4%, to $136.8 million for the third quarter of fiscal 2021
compared with $104.9 million for the third quarter of fiscal 2020. Adjusted
operating profit margin increased to 15.2% for the third quarter of fiscal 2021
compared with 13.5% for the year-ago period.
Other Expense
Other expense consists of net interest expense and net miscellaneous expense,
which includes non-service related components of net periodic pension cost,
gains and losses associated with foreign currency-related transactions, and
non-operating gains and losses.
Interest expense, net, was $6.2 million and $5.4 million for the three months
ended May 31, 2021 and 2020, respectively. This increase was due primarily to
less interest earned on cash investments compared to the prior year due
primarily to unfavorable short-term investment rates.
We reported net miscellaneous expense of $2.7 million and net miscellaneous
income of $0.9 million for the three months ended May 31, 2021 and 2020,
respectively.
Income Taxes and Net Income
Our effective income tax rate was 21.5% and 23.1% for the three months ended May
31, 2021 and 2020, respectively. The decrease in the effective income tax rate
was primarily due to favorable discrete items recognized in the third quarter of
fiscal 2021. We currently estimate that our blended consolidated effective
income tax rate, before any discrete items, will be approximately 23% for fiscal
2021, assuming the rates in our taxing jurisdictions remain generally consistent
throughout the year.
Net income for the third quarter of fiscal 2021 increased $25.3 million, or
41.9%, to $85.7 million from $60.4 million reported for the prior-year period.
The increase in net income resulted from an increased operating profit compared
to the prior-year period, partially offset by higher net non-operating expenses
and income tax expense associated with our increased profit. Diluted earnings
per share for the three months ended May 31, 2021 increased $0.85, or 55.9%, to
$2.37 compared with diluted earnings per share of $1.52 for the prior-year
period. This increase reflects higher net income as well as lower outstanding
diluted shares. Adjusted net income for the third quarter of fiscal 2021 was
$100.4 million, compared with $77.2 million in the prior-year period, an
increase of $23.2 million, or 30.1%. Adjusted diluted earnings per share for the
three months ended May 31, 2021 increased $0.83, or 42.8%, to $2.77 compared
with $1.94 for the prior-year period.

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Segment Results
The following table sets forth information comparing the operating results of
our segments, ABL and ISG, for the three months ended May 31, 2021 and 2020 (in
millions except per share data). We have recast historical information to
conform to the current segment structure.
                                                           Three Months Ended
                                                                                                Increase
ABL                                                May 31, 2021          May 31, 2020          (Decrease)           Percent Change
Net sales                                         $      850.0          $     741.6          $      108.4                   14.6  %

Operating profit                                         126.5                 98.6                  27.9                   28.3  %
Add-back: Amortization of acquired
intangible assets                                          6.9              

6.9

Add-back: Share-based payment expense                      2.4              

2.9

Adjusted operating profit                         $      135.8          $     108.4          $       27.4                   25.3  %

Operating profit margin                                   14.9  %              13.3  %                   160       bps
Adjusted operating profit margin                          16.0  %              14.6  %                   140       bps


ABL net sales for the three months ended May 31, 2021 increased 14.6% compared
with the prior-year period due primarily to improvements within the independent
sales network, direct sales network, and corporate accounts channels as our
go-to-market activities leveraged improvements in the construction market and
wider economy. These gains were partially offset by lower sales in the retail
sales channel. Operating profit for ABL was $126.5 million (14.9% of ABL net
sales) for the three months ended May 31, 2021 compared to $98.6 million (13.3%
of ABL net sales) in the prior-year period, an increase of $27.9 million. The
increase in operating profit was due primarily to higher sales volumes as well
as product and productivity improvements, partially offset by higher component,
freight, and SD&A costs. The operating profit margin increase year over year
reflects higher sales volumes as well as our ability to successfully leverage
our fixed costs. Adjusted operating profit for ABL increased $27.4 million to
$135.8 million for the third quarter of fiscal 2021 compared with the prior year
period.
                                                          Three Months Ended
                                                                                                Increase
ISG                                                May 31, 2021         May 31, 2020           (Decrease)           Percent Change
Net sales                                         $     55.4           $      37.7          $        17.7                   46.9  %

Operating profit (loss)                                  7.2                  (0.2)                   7.4                        NM
Add-back: Amortization of acquired
intangible assets                                        3.3                

3.9

Add-back: Share-based payment expense                    0.6                

1.3

Adjusted operating profit                         $     11.1           $       5.0          $         6.1                  122.0  %

Operating profit (loss) margin                          13.0   %              (0.5) %                   1350       bps
Adjusted operating profit margin                        20.0   %              13.3  %                    670       bps


ISG net sales for the three months ended May 31, 2021 increased 46.9% compared
with the prior-year period driven primarily by increased sales of building
management products due primarily to improved market conditions as well as the
benefit of a pull forward of sales from an announced price increase. ISG
operating profit was $7.2 million for three months ended May 31, 2021 compared
with a $0.2 million operating loss in the prior-year period, an increase of $7.4
million. This increase was due primarily to higher sales volumes, partially
offset by increased employee costs. Adjusted operating profit for ISG increased
$6.1 million to $11.1 million for the third quarter of fiscal 2021 compared with
the prior-year period.
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First Nine Months of Fiscal 2021 Compared with First Nine Months of Fiscal 2020
The following table sets forth information comparing the components of net
income for the nine months ended May 31, 2021 and 2020 (in millions except per
share data):
                                                           Nine Months Ended
                                                                                                 Increase
                                                  May 31, 2021          May 31, 2020            (Decrease)             Percent Change
Net sales                                        $    2,468.3          $    2,435.1          $        33.2                      1.4  %
Cost of products sold                                 1,412.6               1,407.8                    4.8                      0.3  %
Gross profit                                          1,055.7               1,027.3                   28.4                      2.8  %
Percent of net sales                                     42.8  %               42.2  %                  60    bps
Selling, distribution, and administrative
expenses                                                759.4                 767.5                   (8.1)                    (1.1) %
Special charges                                           1.5                  11.8                  (10.3)                         NM
Operating profit                                        294.8                 248.0                   46.8                     18.9  %
Percent of net sales                                     11.9  %               10.2  %                 170    bps
Other expense:
Interest expense, net                                    17.7                  19.4                   (1.7)                    (8.8) %
Miscellaneous expense, net                                6.5                   1.5                    5.0                          NM
Total other expense                                      24.2                  20.9                    3.3                     15.8  %
Income before income taxes                              270.6                 227.1                   43.5                     19.2  %
Percent of net sales                                     11.0  %                9.3  %                 170    bps
Income tax expense                                       62.4                  52.5                    9.9                     18.9  %
Effective tax rate                                       23.1  %               23.1  %
Net income                                       $      208.2          $      174.6          $        33.6                     19.2  %
Diluted earnings per share                       $       5.66          $       4.40          $        1.26                     28.6  %
NM - not meaningful



Net sales were $2.47 billion for the nine months ended May 31, 2021 compared
with $2.44 billion reported for the nine months ended May 31, 2020, an increase
of $33.2 million, or 1.4%. For the nine months ended May 31, 2021, we reported
net income of $208.2 million, an increase of $33.6 million, or 19.2%, compared
with $174.6 million for the nine months ended May 31, 2020. For the first nine
months of fiscal 2021, diluted earnings per share increased 28.6% to $5.66
compared with $4.40 reported in the year-ago period.
The following table as well as the tables under Segment Results below reconcile
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 acquisition-related items, amortization of acquired intangible assets,
share-based payment expense, special charges associated primarily with continued
efforts to streamline the organization and integrate recent acquisitions, and
impairments of investments. These non-U.S. GAAP financial measures, including
adjusted gross profit and adjusted gross profit margin, adjusted SD&A expenses
and adjusted SD&A expenses as a percent of net sales, adjusted operating profit
and adjusted operating profit margin for total company and by segment, adjusted
other expense, adjusted net income, and adjusted diluted earnings per share, are
provided to enhance the user's overall understanding of our current financial
performance. Specifically, we believe these non-U.S. GAAP measures provide
greater comparability and enhanced visibility into our results of operations.
The non-U.S. GAAP financial measures should be considered in addition to, and
not as a substitute for or superior to, results prepared in accordance with U.S.
GAAP.
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(In millions, except per share data)                            Nine Months Ended
                                                                                                                               Increase
                                               May 31, 2021                           May 31, 2020                            (Decrease)    Percent Change
Gross profit                                 $     1,055.7                          $     1,027.3                          $        28.4            2.8  %
Percent of net sales                                                  42.8  %                                42.2  %                  60    bps

Add-back: Acquisition-related items (1)                  -                                    1.2

Adjusted gross profit                        $     1,055.7                          $     1,028.5                          $        27.2            2.6  %
Percent of net sales                                                  42.8  %                                42.2  %                  60    bps

Selling, distribution, and administrative
expenses                                     $       759.4                          $       767.5                          $        (8.1)          (1.1) %
Percent of net sales                                                  30.8  %                                31.5  %                 (70)   bps
Less: Amortization of acquired intangible
assets                                               (30.4)                                 (30.8)
Less: Share-based payment expense                    (22.3)                                 (32.5)

Less: Acquisition-related items (1)                   (0.9)                                  (1.3)
Adjusted selling, distribution, and
administrative expenses                      $       705.8                          $       702.9                          $         2.9            0.4  %
Percent of net sales                                                  28.6  %                                28.9  %                 (30)   bps

Operating profit                             $       294.8                          $       248.0                          $        46.8           18.9  %
Percent of net sales                                                  11.9  %                                10.2  %                 170    bps

Add-back: Amortization of acquired
intangible assets                                     30.4                                   30.8
Add-back: Share-based payment expense                 22.3                                   32.5

Add-back: Acquisition-related items (1)                0.9                                    2.5

Add-back: Special charges                              1.5                                   11.8
Adjusted operating profit                    $       349.9                          $       325.6                          $        24.3            7.5  %
Percent of net sales                                                  14.2  %                                13.4  %                  80    bps

Other expense                                $        24.2                          $        20.9                          $         3.3           15.8  %
Less: Impairment of investment                        (4.0)                                     -
Adjusted other expense                       $        20.2                          $        20.9                          $        (0.7)          (3.3) %

Net income                                   $       208.2                          $       174.6                          $        33.6           19.2  %

Add-back: Amortization of acquired
intangible assets                                     30.4                                   30.8
Add-back: Share-based payment expense                 22.3                                   32.5

Add-back: Acquisition-related items (1)                0.9                                    2.5

Add-back: Special charges                              1.5                                   11.8
Add-back: Impairment of investment                     4.0                                      -
Total pre-tax adjustments to net income               59.1                                   77.6
Income tax effect                                    (13.3)                                 (17.7)

Adjusted net income                          $       254.0                          $       234.5                          $        19.5            8.3  %

Diluted earnings per share                   $        5.66                          $        4.40                          $        1.26           28.6  %
Adjusted diluted earnings per share          $        6.90                          $        5.91                          $        0.99           16.8 

%

______________________________

(1) Acquisition-related items include profit in inventory and professional fees.
Net Sales
Net sales for the nine months ended May 31, 2021 increased $33.2 million, or
1.4%, to $2.47 billion compared with $2.44 billion in the prior-year period.
From a sales channel perspective, sales through the independent sales network
and direct sales network increased as we began to leverage improvements in the
construction market and wider economy through our go-to-market activities.
However, corporate accounts sales for the nine months ended May 31, 2021 were
lower year over year due to fewer nonessential renovations from large retailers
in the first half of the fiscal year. Additionally, retail sales in fiscal 2021
were lower than the prior-year period due primarily to a stronger pre-pandemic
performance in the first half of the prior fiscal year combined with a customer
inventory rebalancing in fiscal 2021. Changes in foreign currency rates and
revenues from acquired companies did not have a meaningful impact on our net
sales year over year.
                                       29
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Gross Profit
Gross profit of $1.06 billion for the first nine months of fiscal 2021 increased
$28.4 million, or 2.8%, compared with $1.03 billion in the prior-year period.
Gross profit margin increased to 42.8% for the nine months ended May 31, 2021
compared with 42.2% in the prior-year period. The improvement in gross profit
margin was due primarily to product and productivity improvements. Adjusted
gross profit for the nine months ended May 31, 2021 was $1.06 billion (42.8% of
net sales) compared with $1.03 billion (42.2% of net sales) in the prior-year
period.
Operating Profit
SD&A expenses for the nine months ended May 31, 2021 were $759.4 million
compared with $767.5 million in the prior-year period, a decrease of $8.1
million, or 1.1%. The decrease in SD&A expenses was due primarily to lower
travel expense and sales and marketing costs due to the COVID-19 pandemic.
Additionally, share-based payment expense decreased in fiscal 2021 due to the
discontinuation of certain retirement provisions in the equity incentive program
that resulted in the acceleration of share-based payment expense for fiscal 2020
grants. These decreased costs were partially offset by higher employee-related
costs. SD&A expenses for the first nine months of fiscal 2021 were 30.8% of net
sales compared with 31.5% for the prior-year period. Adjusted SD&A expenses for
the nine months ended May 31, 2021 were $705.8 million (28.6% of net sales)
compared with $702.9 million (28.9% of net sales) in the prior-year period.
We recognized pre-tax special charges of $1.5 million during the first nine
months of fiscal 2021, compared with pre-tax special charges of $11.8 million
during the first nine months of fiscal 2020. Further details regarding our
special charges are included in the Special Charge footnote of the Notes to
Consolidated Financial Statements.
Operating profit for the first nine months of fiscal 2021 was $294.8 million
(11.9% of net sales) compared with $248.0 million (10.2% of net sales) for the
prior-year period, an increase of $46.8 million, or 18.9%. The increase in
operating profit was due to higher gross profit, lower special charges, and
decreased SD&A expenses. Adjusted operating profit increased by $24.3 million,
or 7.5%, to $349.9 million for the first nine months of fiscal 2021 compared
with $325.6 million for the first nine months of fiscal 2020. Adjusted operating
profit margin for the first nine months of fiscal 2021 increased 80 basis points
to 14.2% compared with 13.4% in the year-ago period.
Other Expense
Other expense consists of net interest expense and net miscellaneous expense,
which includes non-service related components of net periodic pension cost,
gains and losses associated with foreign currency-related transactions, and
non-operating gains and losses.
Interest expense, net, was $17.7 million and $19.4 million for the nine months
ended May 31, 2021 and 2020, respectively. The decrease in interest expense was
due primarily to interest savings associated with refinancing our debt. The
current fiscal year interest savings were partially offset by lower interest
earned on cash investments compared to the prior year due primarily to
unfavorable short-term investment rates.
We reported net miscellaneous expense of $6.5 million and $1.5 million for the
nine months ended May 31, 2021 and 2020, respectively. During the first quarter
of fiscal 2021, we recorded an impairment charge of $4.0 million for an
unconsolidated equity investment. Further details regarding the impairment
charge are included in the Fair Value Measurements footnote of the Notes to
Consolidated Financial Statements.
Income Taxes and Net Income
Our effective income tax rate was 23.1% for the nine months ended May 31, 2021
and 2020.
Net income for the first nine months of fiscal 2021 increased $33.6 million, or
19.2%, to $208.2 million from $174.6 million reported for the prior-year period.
The increase in net income was due primarily to an increased operating profit
and lower interest expense, partially offset by higher income tax expense
associated with increased profit compared to the prior-year period. Diluted
earnings per share for the nine months ended May 31, 2021 increased $1.26 to
$5.66 compared with diluted earnings per share of $4.40 for the prior-year
period. This increase reflects higher net income as well as lower outstanding
diluted shares. Adjusted net income for the first nine months of fiscal 2021 was
$254.0 million compared with $234.5 million in the prior-year period, an
increase of $19.5 million, or 8.3%. Adjusted diluted earnings per share for the
nine months ended May 31, 2021 increased $0.99, or 16.8%, to $6.90 compared with
$5.91 for the prior-year period.

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Segment Results
The following table sets forth information comparing the operating results of
our segments, ABL and ISG, for the nine months ended May 31, 2021 and 2020 (in
millions except per share data). We have recast historical information to
conform to the current segment structure.
                                                               Nine Months Ended
                                                                                                     Increase
ABL                                                   May 31, 2021          May 31, 2020            (Decrease)           Percent Change
Net sales                                            $    2,340.4          $    2,327.8          $        12.6                    0.5  %

Operating profit                                     $      326.9          $      304.0          $        22.9                    7.5  %
Add-back: Amortization of acquired intangible
assets                                                       20.8           

20.2

Add-back: Share-based payment expense                         8.3           

11.1

Add-back: Acquisition-related items (1)                         -                   1.2
Adjusted operating profit                            $      356.0          $      336.5          $        19.5                    5.8  %

Operating profit margin                                      14.0  %               13.1  %                     90       bps
Adjusted operating profit margin                             15.2  %               14.5  %                     70       bps


______________________________

(1) Acquisition-related items include profit in inventory.
ABL net sales for the nine months ended May 31, 2021 increased 0.5% compared
with the prior-year period due primarily to higher sales volumes through the
independent sales network and direct sales networks as our go-to-market
activities began to leverage improvements in the construction market and wider
economy during the third quarter of fiscal 2021. These higher sales volumes were
partially offset by declines in the retail sales channel due to a customer
inventory rebalancing and stronger pre-pandemic performance. Additionally, sales
within the corporate accounts channel were lower due to fewer nonessential
renovations from large retailers in the first half of the fiscal year. Operating
profit for ABL was $326.9 million (14.0% of ABL net sales) for the nine months
ended May 31, 2021 compared to $304.0 million (13.1% of ABL net sales) in the
prior-year period, an increase of $22.9 million. The increase in operating
profit was due primarily to higher sales, product and productivity improvements,
as well as lower travel expenses and sales and marketing costs, partially offset
by increased employee related costs. Adjusted operating profit increased $19.5
million to $356.0 million for the nine months ended May 31, 2021 compared with
the prior year period.
                                                           Nine Months Ended
                                                                                                Increase
ISG                                                May 31, 2021         May 31, 2020           (Decrease)           Percent Change
Net sales                                         $     139.5          $     116.1          $        23.4                   20.2  %

Operating profit (loss)                           $       7.9          $      (2.3)         $        10.2                        NM
Add-back: Amortization of acquired
intangible assets                                         9.6               

10.6

Add-back: Share-based payment expense                     2.1               

4.5

Adjusted operating profit                         $      19.6          $      12.8          $         6.8                   53.1  %

Operating profit (loss) margin                            5.7  %              (2.0) %                    770       bps
Adjusted operating profit margin                         14.1  %              11.0  %                    310       bps


ISG net sales for the nine months ended May 31, 2021 increased 20.2% compared
with the prior-year period primarily due to increased sales of building
management products. ISG operating profit was $7.9 million for the nine months
ended May 31, 2021 compared with a $2.3 million operating loss in the prior-year
period, an increase of $10.2 million. This increase was due primarily to higher
sales volumes, partially offset by increased employee related costs. Adjusted
operating profit for ISG increased $6.8 million to $19.6 million for the nine
months ended May 31, 2021 compared with the prior year period.

Outlook

As we look ahead, we expect to see continued improvements in the end markets we
serve, and we are positioning ourselves to support higher levels of market
growth. We anticipate some continued volatility in raw material costs and
component and labor availability, and we will work to address the impact to our
business. We plan to continue to invest in our business with the intention of
becoming a larger, more dynamic company.
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Critical Accounting Estimates
Management's Discussion and Analysis of Financial Condition and Results of
Operations addresses the financial condition and results of operations as
reflected in our Consolidated Financial Statements, which have been prepared in
accordance with U.S. GAAP. As discussed in the Description of Business and Basis
of Presentation footnote of the Notes to Consolidated Financial Statements, the
preparation of financial statements in conformity with U.S. GAAP requires us to
make estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and reported amounts of revenue and expense during the
reporting period. On an ongoing basis, we evaluate our estimates and judgments,
including those related to revenue recognition; inventory valuation;
amortization and the recoverability of long-lived assets, including goodwill and
intangible assets; share-based payment expense; medical, product warranty and
recall, and other estimated liabilities; retirement benefits; and litigation. We
base our estimates and judgments on our substantial historical experience and
other relevant factors, the results of which form the basis for making judgments
about the carrying values of assets and liabilities that are not readily
apparent from other sources. Actual results could differ from those estimates.
We discuss the development of accounting estimates with the Audit Committee of
the Board.
There have been no material changes in our critical accounting estimates during
the current period. For a detailed discussion of other significant accounting
policies that may involve a higher degree of judgment, refer to our Form 10-K.
Cautionary Statement Regarding Forward-Looking Statements and Information
This filing contains forward-looking statements within the meaning of the
federal securities laws. Statements made herein that may be considered
forward-looking include statements incorporating terms such as "expects,"
"believes," "intends," "anticipates," and similar terms that relate to future
events, performance, or results of the Company. In addition, the Company, or the
executive officers on the Company's behalf, may from time to time make
forward-looking statements in reports and other documents we file with the U.S.
Securities and Exchange Commission or in connection with oral statements made to
the press, current and potential investors, or others. Forward-looking
statements include, without limitation: (a) our projections regarding financial
performance, liquidity, capital structure, capital expenditures, investments,
share repurchases, and dividends; (b) expectations about the impact of any
changes in demand, including improvements in our end markets, as well as
volatility, challenges, and uncertainty in general economic conditions; (c)
expectations about volatility in raw material costs and component and labor
availability; (d) our ability to execute and realize benefits from initiatives
related to streamlining our operations and integrating recent acquisitions,
realize synergies from acquisitions, capitalize on growth opportunities with the
intention of becoming a larger, more dynamic company, and introduce innovative
products and services; (e) our estimate of our fiscal 2021 effective income tax
rate, results of operations, and cash flows; (f) our estimate of future
amortization expense; (g) our ability to achieve our long-term financial goals
and outperform the markets we serve; (h) our expectations about the resolution
of securities class action and other legal matters; (i) our expectations of the
impact of the ongoing COVID-19 pandemic; and (j) our expectation that the OSRAM
DS transaction will close by end of day on July 1, 2021 and deliver the expected
benefits to the Company and its customers. You are cautioned not to place undue
reliance on any forward-looking statements, which speak only as of the date of
this quarterly report. Except as required by law, we undertake no obligation to
publicly update or release any revisions to these forward-looking statements to
reflect any events or circumstances after the date of this quarterly report or
to reflect the occurrence of unanticipated events. Our forward-looking
statements are subject to certain risks and uncertainties that could cause
actual results to differ materially from our historical experience and
management's present expectations or projections. These risks and uncertainties
that could cause our actual results to differ materially from those expressed in
our forward-looking statements are discussed in Part I, Item 1a. Risk Factors of
our Form 10-K.

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