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EX-32.B - EXHIBIT 32.B - ACUITY BRANDS INCayi-20180831xex32b.htm
EX-32.A - EXHIBIT 32.A - ACUITY BRANDS INCayi-20180831xex32a.htm
EX-31.B - EXHIBIT 31.B - ACUITY BRANDS INCayi-20180831xex31b.htm
EX-31.A - EXHIBIT 31.A - ACUITY BRANDS INCayi-20180831xex31a.htm
EX-24 - EXHIBIT 24 - ACUITY BRANDS INCayi-20180831xex24.htm
EX-23 - EXHIBIT 23 - ACUITY BRANDS INCayi-20180831xex23.htm
EX-21 - EXHIBIT 21 - ACUITY BRANDS INCayi-20180831xex21.htm
EX-10.(III)A(63) - EXHIBIT 10.(III)A(63) - ACUITY BRANDS INCayi-20180831xex10iiia63.htm
EX-10.(III)A(62) - EXHIBIT 10.(III)A(62) - ACUITY BRANDS INCayi-20180831xex10iiia62.htm
EX-10.(III)A(61) - EXHIBIT 10.(III)A(61) - ACUITY BRANDS INCayi-20180831xex10iiia61.htm
EX-10.(III)A(58) - EXHIBIT 10.(III)A(58) - ACUITY BRANDS INCayi-20180831xex10iiia58.htm
EX-10.(III)A(24) - EXHIBIT 10.(III)A(24) - ACUITY BRANDS INCayi-20180831xex10iiia24.htm

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
Form 10-K
__________________________________________________________
(Mark One)
 
þ
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the fiscal year ended August 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from to .

Commission file number 001-16583.
__________________________________________________________
ACUITY BRANDS, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________
Delaware
 
58-2632672
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification Number)
1170 Peachtree Street, N.E., Suite 2300, Atlanta, Georgia
(Address of principal executive offices)
 
30309-7676
(Zip Code)
(404) 853-1400
(Registrant’s telephone number, including area code)
__________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
 
Name of Each Exchange on Which Registered
Common Stock ($0.01 Par Value)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
__________________________________________________________
Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).  Yes þ     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer þ
Accelerated Filer o
Non-accelerated Filer o
 
Smaller Reporting Company o
Emerging Growth Company o
 
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes o     No þ
Based on the closing price of the Registrant’s common stock of $142.58 as quoted on the New York Stock Exchange on February 28, 2018, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $4.11 billion.
The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 40,182,832 shares as of October 22, 2018.
__________________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE
Location in Form 10-K
 
Incorporated Document
Part II, Item 5; Part III, Items 10, 11, 12, 13, and 14
 
Proxy Statement for 2018 Annual Meeting of Stockholders
 




ACUITY BRANDS, INC.
Table of Contents

 
 
Page
 
 
 
 
 
 
 




PART I

Item 1.
Business
Overview
Acuity Brands, Inc. (“Acuity Brands”) is the parent company of Acuity Brands Lighting, Inc. (“ABL”) and other subsidiaries (Acuity Brands, ABL, and such other subsidiaries are collectively referred to herein as the “Company”), and was incorporated in 2001 under the laws of the State of Delaware. The Company is 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. The Company’s lighting and building management solutions include devices such as luminaires, lighting controls, controllers 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, the Company continues to expand its 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 a results-driven, customer-centric company, management continues to align the unique capabilities and resources of the organization to drive profitable growth by providing comprehensive, differentiated, and integrated lighting and building management solutions and services for customers, driving world-class cost efficiency, and leveraging a culture of operational excellence through continuous improvement.
Lighting and building management solutions vary significantly in terms of functionality and performance and are selected based on a customer's specification, including the aesthetic desires and performance requirements for a given application. The Company’s lighting and building management solutions are marketed under numerous brand names, including but not limited to Lithonia Lighting®, Holophane®, Peerless®, Gotham®, Mark Architectural Lighting™, Winona® Lighting, Juno®, Indy™, Aculux™, Healthcare Lighting®, Hydrel®, American Electric Lighting®, Antique Street Lamps™, Sunoptics®, eldoLED®, Distech Controls®, nLight®, ROAM®, Sensor Switch®, Power Sentry®, IOTA®, and Atrius™. As of August 31, 2018, the Company manufactures products in 17 facilities in North America and two facilities in Europe and employs approximately 13,000 associates.
Principal customers include electrical distributors, retail home improvement centers, electric utilities, national accounts, system integrators, digital retailers, lighting showrooms, and energy service companies located in North America and select international markets serving new construction, renovation, and maintenance and repair applications. In North America, the Company’s lighting and building management solutions are sold primarily by independent sales agents, electrical distributors, internal sales representatives, and system integrators who cover specific geographic areas and market channels. Products are delivered directly or through a network of distribution centers, regional warehouses, and commercial warehouses using both common carriers and a company-managed truck fleet. To serve international customers, the sales forces utilize a variety of distribution methods to meet specific individual customer or country requirements. In fiscal 2018, sales originated in North America and the United States accounted for approximately 97% and 89% of net sales, respectively. See the Supplemental Disaggregated Information footnote of the Notes to Consolidated Financial Statements for more information concerning the domestic and international net sales of the Company. The Company has one reportable segment serving the North American and select international lighting and building management markets.
Industry Overview
Based on industry sources and government information, the Company estimates that in fiscal 2018 the size of the North American lighting and building management solutions market served by the Company (also referred to herein as “addressable market”) was over $20 billion and similar to the prior year as the addressable market was estimated to be flat to up low-single digits compared with fiscal 2017. The addressable market includes non-portable luminaires as defined by the National Electrical Manufacturers Association; poles for outdoor lighting; emergency lighting fixtures; daylighting; lighting controls; heating, ventilation, and air conditioning (“HVAC”) controls; and building management controllers, software, and systems. This market estimate is based on a combination of external industry data and internal estimates, and excludes portable and vehicular lighting fixtures and certain related lighting components, such as lighting ballasts, electronic drivers, and most lamps. A source of demand for the lighting and building management industry is attributed to the renovation and retrofit of less efficient lighting and building management systems. While the precise size of the North American market is not known, the Company estimates the potential size of the installed base of lighting and building management solutions to be over $500 billion.

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The Company operates in a highly competitive industry that is affected by volatility from a number of general business and economic factors, such as gross domestic product growth, employment levels, credit availability, energy costs, and commodity costs. The Company’s market is based on residential and non-residential construction, both new as well as renovation and retrofit activity, which is sensitive to the volatility of these general economic factors. The Company is not aware of any data that accurately quantifies the split of the non-residential lighting market between new construction and renovation and retrofit activity; however, recent trends developed from industry sources and Company estimates suggest that renovation and retrofit activity represents a growing proportion of the total non-residential lighting market. Construction spending on infrastructure projects such as highways, streets, and urban developments has a material impact on the demand for the Company’s infrastructure-focused lighting and building management solutions. Demand for the Company’s lighting and building management solutions sold through certain retail channels is highly dependent on economic drivers, such as consumer spending and discretionary income, along with housing construction and home improvement spending.
The residential and non-residential market is influenced by: the development of new lighting technologies, including solid-state lighting, electronic drivers, embedded lighting controls, form factors, and more effective optical designs and lamps; federal, state, and local requirements for updated energy codes; incentives by federal, state, and local municipal authorities, as well as utility companies, for using more energy-efficient lighting and building management solutions; and design technologies addressing sustainability and facilitating smarter buildings and cities. The Company is a leading provider of integrated lighting and building management solutions based on these technologies and utilizes internally developed, licensed, or acquired intellectual property. Solid-state lighting and digital building management systems provide the opportunity for lighting and building management systems to be integrated in a manner resulting in the optimal platform for enabling the IoT that collect and exchange data to increase efficiency as well as provide a host of other economic benefits resulting from data analytics and other features. The Company expects that the industry’s addressable market is likely to meaningfully expand due to the benefits and value creation provided by intelligent networked lighting, building management systems, and the IoT. New entrants, including both well-established as well as new software and technology companies, therefore continue to develop capabilities and solutions that are both complementary as well as competitive to those of traditional industry participants.    
Products and Solutions
The Company offers a broad portfolio of indoor and outdoor lighting and building management solutions for commercial, institutional, industrial, infrastructure, and residential applications. The portfolio of lighting solutions includes lighting products utilizing light emitting diode (“LED”), fluorescent, organic LED (“OLED”), high intensity discharge, metal halide, and incandescent light sources to illuminate an extensive number of applications as well as standalone and embedded lighting control solutions from simple to sophisticated, wired and wireless. Lighting and controls products and solutions include the following: recessed, surface, and suspended lighting; downlighting; decorative lighting; emergency and exit lighting; track lighting; daylighting; special-use lighting; street and roadway lighting; parking garage lighting; underwater lighting; area pedestrian, flood, and decorative site lighting; landscape lighting; occupancy sensors; photocontrols; relay panels; architectural dimming panels; and integrated lighting controls systems. Building management solutions include products and solutions for controlling HVAC, lighting, shades, and access control that deliver end to end optimization of those building systems. The Company's lighting and building management solutions are designed to enhance the occupant experience, improve the quality of the visual environment, and provide seamless operational energy efficiency and cost reductions, as well as increased digital functionality due to a unique capability to collect vast amounts of data that can better enable the IoT for building owners. The Company also sells products to original equipment manufacturers (“OEMs”) that include LED drivers, power supplies, modular wiring, sensors, glass, and inverters.
In addition, the Company provides services across applications that primarily relate to monitoring and controlling lighting and building management systems through network technologies and the commissioning of control systems. During fiscal 2017, the Company launched the Atrius™ IoT platform, which delivers connectivity and intelligence to a space via an expansive network of smart LED lighting and controls and a software platform that gathers, unlocks and transforms raw data to enable a broad range of software solutions addressing critical business challenges. The Company's total solution offerings now include recurring services that deliver an array of capabilities, including indoor positioning, asset tracking, space utilization, spatial analytics, and energy management.
Sales of lighting and building management solutions, excluding services, accounted for approximately 99% of total consolidated net sales for the Company in fiscal 2018, 2017, and 2016.
Sales and Marketing
Sales.  The Company sells lighting and building management solutions to customers in the North American market utilizing numerous sales forces, including internal direct salespeople and independent sales agencies, based on the

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channel and geography served. The Company also operates separate European sales forces, including independent international sales agencies and system integrators, and an international sales group coordinating export sales outside of North America and Europe.
Marketing.  The Company markets its portfolio and service capabilities to end users in multiple channels through a broad spectrum of marketing and promotional methods, including direct customer contact, trade shows, on-site training, print and digital advertising in industry publications, product brochures, and other literature, as well as through digital marketing and social media. The Company operates training and education facilities in several locations throughout North America and Europe designed to enhance the lighting knowledge of customers and industry professionals.
Customers
Customers of the Company include electrical distributors, retail home improvement centers, electric utilities, national accounts, system integrators, utility distributors, value-added resellers, digital retailers, government entities and municipalities, lighting showrooms, developers, OEMs, and energy service companies. In addition, there are a variety of other professionals who can represent a significant influence in the product and solutions specification process for any given project. These generally include building owners, federal, state, and local governments, contractors, engineers, architects, and lighting designers.
No single customer accounted for more than 10% of net sales in fiscal 2018, 2017, or 2016.
Manufacturing and Distribution
The Company operates 19 manufacturing facilities, including nine facilities in the United States, six facilities in Mexico, two facilities in Europe, and two in Canada. The Company utilizes a blend of internal and outsourced manufacturing processes and capabilities to fulfill a variety of customer needs in the most cost-effective manner. Certain critical processes, such as reflector forming and anodizing, high-end glass production, surface mount circuit board production, and assembly are performed (not exclusively) at company-operated facilities, offering the ability to differentiate products through superior capabilities. Other components, such as lamps, LEDs, certain LED light engines, sockets, and ballasts are purchased primarily from third-party vendors. The Company’s investment in its production facilities is focused primarily on improving capabilities, product quality, and manufacturing efficiency as well as environmental, health, and safety compliance. The Company also utilizes contract manufacturing from U.S., Asian, and European sources for certain products. The following table shows the percentage of finished goods manufactured and purchased in fiscal 2018 by significant geographic region.
 
Manufactured
 
Purchased
 
Total
United States
19
%
 
7
%
 
26
%
Mexico
57
%
 
%
 
57
%
China
%
 
15
%
 
15
%
Others
2
%
 
%
 
2
%
Total
78
%
 
22
%
 
100
%
The Company operates six facilities in Mexico, which are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows the Company to import certain items from the United States into Mexico duty-free, provided that such items, after processing, are exported from Mexico within a stipulated time frame. Maquiladora status, which is renewed periodically, is subject to various restrictions and requirements, including compliance with the terms of the Maquiladora program and other local regulations, which have become stricter in recent years.
Lighting and building management solutions are delivered directly from manufacturing facilities or through a network of strategically located distribution centers, regional warehouses, and commercial warehouses in North America using both common carriers and a company-managed truck fleet. For international customers, distribution methods are adapted to meet individual customer or country requirements. During fiscal 2018, net sales initiated outside of the U.S. represented approximately 11% of total net sales. See the Supplemental Disaggregated Information footnote of the Notes to Consolidated Financial Statements for additional information regarding the geographic distribution of net sales, operating profit, and long-lived assets.

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Research and Development
Research and development (“R&D”) is defined as the critical investigation aimed at discovery of new knowledge and the conversion of that knowledge into the design of a new product or significant improvement to an existing product. The Company invests in the development of new products and solutions as well as the enhancement of existing offerings with a focus on improving the performance-to-cost ratio and energy efficiency. The Company also develops software applications and capabilities to enhance data analytics offerings. R&D expenses consist of compensation, payroll taxes, employee benefits, materials, supplies, and other administrative costs, but do not include all new product development costs. For fiscal 2018, 2017, and 2016, research and development expense totaled $63.9 million, $52.0 million, and $47.1 million, respectively.
Competition
The Company experiences competition based on numerous factors, including features and benefits, brand name recognition, product quality, product and system design, energy efficiency, customer relationships, service capabilities, and price. The market for lighting and building management solutions and services is competitive and continues to evolve. Certain global and more diversified electrical manufacturers may provide a broader product offering utilizing electrical, lighting, and building management products as well as pricing benefits from the bundling of various offerings. In addition, there have been a growing number of new competitors, from small startup companies to global electronics, technology, and software companies, offering competing solutions, sometimes deploying different technologies. Asian imports have also increased competition within the lighting market.
Environmental Regulation
The operations of the Company 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 of the Company’s operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. On an ongoing basis, the Company allocates resources, including investments in capital and operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years, and federal, state, and local governments domestically and internationally are considering new laws and regulations, including those governing raw material composition, air emissions, end-of-life product dispositions, and energy efficiency. The Company is not aware of any pending legislation or proposed regulation related to environmental issues that would have a material adverse effect on the Company. The cost of responding to future changes, however, may be substantial.
Raw Materials
Products produced by the Company require certain raw materials, including certain grades of steel and aluminum, electrical and electronic components, plastics, and other petroleum-based materials and components. In fiscal 2018, the Company purchased approximately 104,000 tons of steel and aluminum. The Company estimates that approximately 7% of purchased raw materials are petroleum-based. Additionally, the Company estimates that approximately six million gallons of diesel fuel were consumed in fiscal 2018 through the Company’s distribution activities. The Company purchases most raw materials and other components on the open market and relies on third parties for providing certain finished goods. While these items are generally available from multiple sources, the cost of products sold may be affected by changes in the market price of raw materials and tariffs on certain raw materials, particularly imports from China, as well as disruptions in availability of raw materials, components, and sourced finished goods.
The Company does not currently engage in or expect to engage in significant commodity hedging transactions for raw materials, though the Company has and will continue to commit to purchase certain materials for a period of up to 12 months. The Company monitors and investigates alternative suppliers and materials based on numerous attributes including quality, service, and price. The Company currently sources raw materials and components from a number of suppliers, but the Company’s ongoing efforts to improve the cost effectiveness of its products and services may result in a reduction in the number of its suppliers.

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Backlog Orders
The Company produces and stocks quantities of inventory at key distribution centers and warehouses throughout North America and to a much lesser degree, certain European markets. The 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.
Intellectual Property
The Company owns or has licenses to use various domestic and foreign patents, trademarks, and other intellectual property related to its products, processes, and businesses. These intellectual property rights are important factors for its businesses. The Company relies on copyright, patent, trade secret, and trademark laws as well as agreements, restrictive covenants, and internal processes and controls to protect these proprietary rights. Despite these protections, unauthorized parties may attempt to infringe on the intellectual property of the Company. As of August 31, 2018, the Company had approximately 1,450 active United States and foreign patents. While patents and patent applications in the aggregate are important to the competitive position of the Company, no single patent or patent application is individually material to the Company.
Seasonality and Cyclicality
The Company’s business exhibits some seasonality, with net sales being affected by weather and seasonal demand on construction and installation programs, particularly during the winter months, as well as the annual budget cycles of major customers. Because of these seasonal factors, the Company has experienced, and generally expects to experience, its highest sales in the last two quarters of each fiscal year.
The Company's lighting and building management solutions are sold to customers in both the new construction as well as renovation and retrofit markets for residential and non-residential applications. The construction market is cyclical in nature and subject to changes in general economic conditions. Sales volume has a major impact on the profitability of the Company. Economic downturns and the potential decline in key construction markets may have a material adverse effect on the net sales and operating income of the Company.
Employees
As of August 31, 2018, the Company employed approximately 13,000 associates, of which approximately 4,200 were employed in the United States, approximately 8,300 in Mexico, and approximately 500 in other international locations, including Europe, Canada, and the Asia/Pacific region. Union recognition and collective bargaining arrangements are in place or in process, covering approximately 9,300 persons (including approximately 1,900 in the United States). Union recognition and collective bargaining arrangements covering approximately 8,200 persons will expire within the next fiscal year, primarily due to annual negotiations with unions in Mexico. The remaining arrangements will expire after the next fiscal year and relate to approximately 1,100 persons employed within the United States. The Company believes that it has a good relationship with both its unionized and non-unionized employees.
Information Concerning Acuity Brands
The Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (and all amendments to these reports) and proxy statements, together with all reports filed pursuant to Section 16 of the Securities Exchange Act of 1934 by the Company’s officers, directors, and beneficial owners of 10% or more of the Company’s common stock, available free of charge through the “SEC Filings” link on the Company’s website, located at www.acuitybrands.com, as soon as reasonably practicable after they are filed with or furnished to the Securities and Exchange Commission. Information included on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K. The Company’s reports are also available on the Securities and Exchange Commission’s website at www.sec.gov.
Additionally, the Company has adopted a written Code of Ethics and Business Conduct that applies to all of the Company’s directors, officers, and employees, including its principal executive officer and senior financial officers. The Code of Ethics and Business Conduct and the Company’s Corporate Governance Guidelines are available free of charge through the “Corporate Governance” link on the Company’s website. Any amendments to, or waivers of, the Code of Ethics and Business Conduct for the Company's principal executive officer and senior financial officers will be disclosed on the Company's website promptly following the date of such amendment or waiver. Additionally, the Statement of Responsibilities of Committees of the Board and the Statement of Rules and Procedures of Committees

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of the Board, which contain the charters for the Company’s Audit Committee, Compensation Committee, and Governance Committee, and the rules and procedures relating thereto, are available free of charge through the “Corporate Governance” link on the Company’s website. Each of the Code of Ethics and Business Conduct, the Corporate Governance Guidelines, the Statement of Responsibilities of Committees of the Board, and the Statement of Rules and Procedures of Committees of the Board is available in print to any stockholder of the Company that requests such document by contacting the Company’s Investor Relations department.


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Item 1a.
Risk Factors
This filing contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. A variety of risks and uncertainties could cause the Company’s actual results to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Information” included in Management's Discussion and Analysis of Financial Condition and Results of Operations. These risks could adversely impact the Company's financial position, results of operations, and cash flows and could cause the market price of the Company's common stock to decrease. Such risks include, without limitation:
Risks Related to the Company's Strategy
General business, political, and economic conditions, including the strength of the construction market, political events, or other factors may affect demand for the Company’s products and services.
The Company competes based on numerous factors, including features and benefits, brand name recognition, product quality, product and system design, energy efficiency, customer relationships, service capabilities, and price. Asian imports have also increased competition within the lighting market. In addition, the Company operates in a highly competitive environment that is influenced by a number of general business and economic factors, such as economic vitality, employment levels, credit availability, interest rates, trends in vacancy rates and rent values, energy costs, and commodity costs. Sales of lighting and building management solutions depend significantly on the level of activity in new construction and renovation/retrofits. Declines in general economic activity, appropriations, and regulations, including tax and trade policy, may negatively impact new construction and renovation projects, which in turn may impact demand for the Company’s product and service offerings.
The Company’s results may be adversely affected by fluctuations in the cost or availability of raw materials, components, purchased finished goods, or services.
The Company utilizes a variety of raw materials and components in its production process including steel, aluminum, lamps, certain rare earth materials, LEDs, LED drivers, ballasts, wire, electronic components, power supplies, petroleum-based by-products, natural gas, and copper. The Company also sources certain finished goods externally. Future increases in the costs of these items, including import tariffs, could adversely affect profitability, as there can be no assurance that future price increases will be successfully passed through to customers. The Company generally sources these goods from a number of suppliers. However, there are a limited number of suppliers for certain components and certain purchased finished goods, which on a limited basis results in sole-source supplier situations. Disruptions in the supply of those items could negatively impact the Company’s performance. Suppliers for certain of those items are competitors of the Company that may, for various strategic reasons, choose to cease selling to the Company. In addition, the Company's ongoing efforts to improve the cost effectiveness of its products and services may result in a reduction in the number of its suppliers, and in turn, increased risk associated with reliance on a single or limited number of suppliers. Furthermore, volatility in certain commodities, such as oil, impacts all suppliers and, therefore, may cause the Company to experience significant price increases from time to time regardless of the number and availability of suppliers. Profitability and volume could be negatively impacted by limitations inherent within the supply chain of certain of these component parts, including competitive, governmental, and legal limitations, natural disasters, and other events that could impact both supply and price. Additionally, the Company is dependent on certain service providers for key operational functions. While there are a number of suppliers of these services, the cost to change service providers and set up new processes could be significant.
The Company’s results may be adversely affected by its inability to maintain pricing.
Aggressive pricing actions by competitors, including Asian importers and those within the technology and services sectors, may affect the Company’s ability to achieve desired revenue growth and profitability levels under its current pricing strategies. The Company may also decide to lower prices to match the competition. Additionally, the Company may not be able to increase prices to cover rising costs of components and raw materials. Even if the Company were able to increase prices to cover costs, competitive pricing pressures may not allow the Company to pass on any more than the cost increases. Alternatively, if component and raw material costs were to decline, the marketplace may not allow the Company to hold prices at their current levels.

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The Company’s inability to effectively introduce new products and solutions could adversely affect its ability to compete.
Continual introductions of new products and solutions, services, and technologies, enhancement of existing products and services, and effective servicing of customers are key to the Company’s competitive strategy. The success of new product and solution introductions depends on a number of factors, including, but not limited to, timely and successful product development, product quality, market acceptance, the Company’s ability to manage the risks associated with product life cycles, such as additional inventory obsolescence risk as product life cycles begin to shorten, new products and production capabilities, effective management of purchase commitments and inventory levels to support anticipated product manufacturing and demand, availability of products in appropriate quantities and costs to meet anticipated demand, and risk that new products may have quality or other defects in the early stages of introduction. Accordingly, the Company cannot fully predict the ultimate effect of new product introductions on the Company’s business. Additionally, new products and solutions may not achieve the same profit margins as expected and as compared to the Company's historic products and solutions.
The Company may pursue future growth through strategic acquisitions, alliances, or investments, which may not yield anticipated benefits.
The Company has strengthened its business through strategic acquisitions, alliances, and investments and may continue to do so as opportunities arise in the future. Such investments have been and may be in start-up or development stage entities. The Company will benefit from such activity only to the extent that it can effectively leverage and integrate the assets or capabilities of the acquired businesses and alliances, including, but not limited to, personnel, technology, and operating processes. Moreover, unanticipated events, negative revisions to valuation assumptions and estimates, diversion of resources and management's attention from other business concerns, and difficulties in attaining synergies, among other factors, could adversely affect the Company’s ability to recover initial and subsequent investments, particularly those related to acquired goodwill and intangible assets or non-controlling interests. In addition, such investment transactions may limit the Company's ability to invest in other activities, which could be more profitable or advantageous.
The inability to effectively execute its business strategies could adversely affect the Company’s financial condition and results of operations.
Various uncertainties and risks are associated with the implementation of a number of aspects of the Company’s global business strategies, including but not limited to, the development, marketing and selling of new products and solutions, new product development, the development, marketing, and selling of lighting, building management, and software-based solutions, effective integration of acquisitions, and development of production capacity related to components such as LED drivers. Those uncertainties and risks include, but are not limited to: diversion of management’s attention; difficulty in retaining or attracting employees; negative impact on relationships with distributors and customers; obsolescence of current products and slow new product development; inability to effectively participate in the emerging opportunities of the IoT utilizing the Company's digital lighting and building management systems; additional streamlining efforts; inability to produce certain components with quality, performance, and cost attributes equal to or better than provided by other component manufacturers; and unforeseen difficulties in the implementation of the management operating structure. Problems with strategy execution could offset anticipated benefits, disrupt service to customers, and impact product quality as well as adversely affect the Company. With the addition of new products and solutions, the Company may encounter new and different competitors that may have more experience with respect to such products and solutions.
The Company may experience difficulties in streamlining activities which could impact shipments to customers, product quality, and the realization of expected savings from streamlining actions.
The Company expects to benefit from its programs to streamline operations, including the consolidation of certain facilities and the reduction of overhead costs. Such benefits will only be realized to the extent that the Company can effectively leverage assets, personnel, and operating processes in the transition of production between manufacturing facilities. Uncertainty is inherent within the facility consolidation process and unforeseen circumstances could offset the anticipated benefits, disrupt service to customers, and impact product quality.

8


Risks Related to the Company's Operations
Technological developments and increased competition could affect the Company’s operating profit margins and sales volume.
The Company competes in an industry and markets where technology and innovation play major roles in the competitive landscape. The Company is highly engaged in the investigation, development, and implementation of new technologies and services. Securing employee talent, key partnerships, and alliances, including having access to technologies, services, and solutions developed by others, and obtaining appropriate patents and the right to utilize patents of other parties all play a significant role in protecting the Company’s freedom to operate and development activities. Additionally, the continual development of new technologies by existing and new source suppliers — including non-traditional competitors with significant resources — looking for either direct market access or partnerships with competing large manufacturers, coupled with significant associated exclusivity and/or patent activity, could adversely affect the Company’s ability to sustain operating profit margins and desirable levels of sales volume.
In addition, there have been a growing number of new competitors, from small startup companies to global electronics, Asian, technology, and software companies, which may vertically integrate and begin offering total solution packages that directly compete with the Company's offerings. Certain global and more diversified electrical manufacturers as well as certain global technology and building solution providers may be able to obtain a competitive advantage over the Company by offering broader and more integrated solutions utilizing electrical, lighting, controls, building automation systems, and data analytics, and small startup companies may offer more localized product sales and support services within individual regions.
The Company may be unable to sustain significant customer and/or channel partner relationships.
Relationships with customers are directly impacted by the Company’s ability to deliver quality products and services. Although no individual customer exceeded 10% of sales during the current fiscal year, the loss of or a substantial decrease in the volume of purchases by certain larger customers could harm the Company in a meaningful manner. The Company has relationships with channel partners such as electrical distributors, home improvement retailers, independent sales agencies, system integrators, and value-added resellers. While the Company maintains positive, and in many cases long-term, relationships with these channel partners, the loss of a number of these channel partners or a substantial decrease in the volume of purchases from a major channel partner or a group of channel partners could adversely affect the Company.
The Company could be adversely affected by disruptions to its operations.
The breakdown of equipment or other events, including, but not limited to, labor disputes, strikes, workplace violence, pandemics, cyber-attacks, civil disruptions, or catastrophic events such as war or natural disasters, leading to production interruptions in the Company’s or one or more of its suppliers’ facilities could adversely affect the Company. Approximately 57% of the Company’s finished products are manufactured in Mexico, a country that periodically experiences heightened civil unrest or may experience trade disputes with the U.S., both of which could cause a disruption of the supply of products to or from these facilities. Further, because many of the Company’s customers are to varying degrees dependent on planned deliveries from the Company’s facilities, those customers that have to reschedule their own production or delay opening a facility due to the Company’s missed deliveries as a result of these disruptions could pursue financial claims against the Company. The Company may incur costs to correct any of these problems in addition to facing claims from customers. Further, the Company’s reputation among actual and potential customers may be harmed and result in a loss of business. While the Company has developed business continuity plans, including alternative capacity, to support responses to such events or disruptions and maintains insurance policies covering, among other things, physical damage and business interruptions, these policies may not cover all losses. The Company could incur uninsured losses and liabilities arising from such events, including damage to its reputation, loss of customers, and substantial losses in operational capacity.
Company operating systems, information systems, or portable devices may experience a failure, a compromise of security, or a violation of data privacy laws or regulations, which could adversely impact the Company’s operations as well as the effectiveness of internal controls over operations and financial reporting.
The Company is highly dependent on various software and automated systems to record and process operational and financial transactions. The Company could experience a failure of one or more of these software and automated systems or could fail to complete all necessary data reconciliation or other conversion controls when implementing a new software system. The Company could also experience a compromise of its security due to many reasons, including technical system flaws, clerical, data input or record-keeping errors, or tampering or manipulation of its systems by

9


employees or unauthorized third parties, including viruses, malware, or phishing. Information security risks also exist with respect to the use of portable electronic devices, such as laptops and smartphones, which are particularly vulnerable to loss and theft. The Company may also be subject to disruptions of any of these systems arising from events that are wholly or partially beyond its control (for example, natural disasters, acts of terrorism, cyber attacks, epidemics, computer viruses, and electrical/telecommunications outages). All of these risks are also applicable where the Company relies on outside vendors to provide services, which may operate in a cloud environment. The Company is dependent on third-party vendors to operate secure and reliable systems which may include data transfers over the internet.
The Company also provides and maintains technology to enable lighting controls systems, building management systems, and business intelligence systems, in many cases though the internet of things (IoT) in certain of its customer offerings. In addition to the risks noted above, there are other risks associated with these customer offerings. For example, a customer may depend on integral information from, or functionality of, Company’s technology to support that customer’s other systems, such that a failure of Company’s technology could impact those systems, including by loss or destruction of data. Likewise, a customer’s failure to properly configure its own network and integrations with Company’s technology are outside of the Company’s control and could result in a failure in functionality or security of Company’s technology.
The Company and certain of its third-party vendors may receive and store personal information in connection with human resources operations, customer offerings, and other aspects of the business. A material network breach in the security of these systems could include the theft of intellectual property, trade secrets, the unauthorized release, gathering, monitoring, misuse, loss, change, or destruction of the Company's or its clients' confidential, proprietary and other information (including personal identifying information of individuals), or otherwise disrupt the Company's or its clients' or other third parties' business operations. To the extent that any disruption or security breach results in a loss or damage to the Company's data, or an inappropriate disclosure of confidential or customer or employee information, it could cause significant damage to the Company's reputation, affect relationships with the Company's customers, employees, and other counterparties, lead to claims against the Company, which may result in the payment of fines, penalties, and costs, and ultimately harm the Company's business. In addition, the Company may be required to incur significant costs, or regulatory fines, penalties, or intervention, to protect against damage caused by these disruptions or security breaches in the future.
The Company is also subject to an increasing number of data privacy and security laws and regulations that impose requirements on the Company and its technology prior to certain use or transfer, storing, use, processing, disclosure, and protection of data and prior to sale or use of certain technologies. Failure to comply with such laws and regulations could result in the imposition of fines, penalties and other costs. The legal and regulatory data privacy framework is evolving and uncertain. For example, the European Court of Justice’s decision in October 2015 to invalidate the Safe Harbor data privacy program between the United States and the European Union, the European Union’s implementation of the General Data Protection Regulation in 2018, the European Union’s pending ePrivacy Regulation, and California’s implementation of its Consumer Privacy Act of 2018 and Connected Device Privacy Act of 2018 (f.k.a. SB-327) all could disrupt the Company's ability to use or transfer data or sell products and solutions because such activities may not be in compliance with applicable law in certain jurisdictions.
System failures, ineffective system implementation or disruptions, failure to comply with data privacy and security laws or regulations, or the compromise of security with respect to internal or external systems or portable electronic devices could damage the Company's systems or infrastructure, subject the Company to liability claims, or regulatory fines, penalties, or intervention, harm the Company’s reputation, interrupt the Company’s operations, disrupt customer operations, and adversely affect the Company’s internal control over financial reporting, business, financial condition, results of operations, or cash flows.
Changes in the Company's relationship with employees, changes in U.S. or international employment regulations, an inability to attract and retain talented employees, or a loss of key employees could adversely impact the effectiveness of the Company’s operations.
The Company employed approximately 13,000 people as of August 31, 2018, approximately 8,800 of whom are employed in international locations. As such, the Company has significant exposure to changes in domestic and foreign laws governing relationships with employees, including wage and hour laws and regulations, fair labor standards, minimum wage requirements, overtime pay, unemployment tax rates, workers' compensation rates, citizenship requirements, and payroll taxes, which likely would have a direct impact on the Company's operating costs. Union recognition and collective bargaining agreements are in place or in process covering approximately 72% of the Company's workforce, primarily due to annual negotiations with unions in Mexico. Collective bargaining agreements representing approximately 63% of the Company's workforce will expire within one year. While the Company believes that it has good relationships with both its unionized and non-unionized employees, the Company may become vulnerable to a strike, work stoppage, or other labor action by these employees.

10


The Company relies upon the knowledge and experience of employees involved in functions throughout the organization that require technical expertise and knowledge of the industry. An inability to attract and retain such employees could adversely impact the Company’s ability to execute key operational functions.
There are inherent risks in our solutions and services businesses.
Risks inherent in the sale of solutions and services include assuming greater responsibility for successfully delivering projects that meet a particular customer specification, including defining and controlling contract scope and timing, efficiently executing projects, and managing the performance and quality of subcontractors and suppliers. As the Company expands its service offerings, reliance on the technical infrastructure to provide services to customers will increase. If the Company fails to appropriately manage and secure the technical infrastructure required, customers could experience service outages or delays in implementation of services. If the Company is unable to manage and mitigate these risks, the Company could incur liabilities and other losses.
The Company may be subject to risk in connection with third-party relationships necessary to operate the Company's business.
The Company utilizes strategic partners and third-party relationships in order to operate and grow its business. For instance, the Company utilizes third parties to contract manufacture certain products, subcontract installation and commissioning, as well as perform certain selling, distribution, and administrative functions. The Company cannot control the actions or performance, including product quality, of these third parties and therefore, cannot be certain that the Company or its end-users will be satisfied. Any future actions of or any failure to act by any third party on which the Company’s business relies could cause the Company to incur losses or interruptions in its operations.
The Company is subject to risks related to operations and suppliers outside the United States.
The Company has substantial activities outside of the United States, including sourcing of products, materials, components, and contract manufactured finished goods, as well as manufacturing and distribution activities. The Company’s operations, as well as those of key vendors, are therefore subject to regulatory, economic, political, military, and other events in countries where these operations are located. In addition to the risks that are common to both the Company’s domestic and international operations, the Company faces risks specifically related to its foreign operations and sourcing activities, including but not limited to: foreign currency fluctuations; unstable political, social, regulatory, economic, financial, and market conditions; laws that prohibit shipments to certain countries or restricted parties and that prohibit improper payments to government officials such as the Foreign Corrupt Practices Act and the U.K. Bribery Act; potential for privatization and other confiscatory actions; trade restrictions and disruption; criminal activities; increases in tariffs and taxes; corruption; and other changes in regulation in international jurisdictions that could result in substantial additional legal or compliance obligations for the Company.
The Company sources certain components and approximately 15% of its finished goods from China, which are subject to the recently enacted import tariffs. These tariffs could increase in future periods resulting in higher costs and/or lower demand. The Company is seeking to mitigate the impact of the tariffs on its profitability, including a variety of activities such as engaging alternative non-Chinese suppliers, insourcing the production of certain products, and raising selling prices. The Company could be adversely affected to the extent it is unable to mitigate the impacts of the tariffs. In addition, if the Company's Mexican facilities cease to qualify for Maquiladora status or if the Mexican government adopts additional adverse changes to the program, the Company's manufacturing costs in Mexico would increase.
The Company operates six manufacturing facilities in Mexico, which are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows the Company to import certain items from the United States into Mexico duty-free, provided that such items, after processing, are exported from Mexico within a stipulated time frame. Maquiladora status, which is renewed periodically, is subject to various restrictions and requirements, including compliance with the terms of the Maquiladora program and other local regulations, which have become stricter in recent years.
Certain regulations related to the Maquiladora program became effective in January 2015. Failure to comply with these regulations could adversely affect the Company’s financial position, results of operations, and cash flows primarily because the Company would in such event be required to pay value-added tax on material imported into Mexico and then seek a refund of those amounts months later after the material is exported from Mexico.
The Company is also subject to certain other laws and regulations affecting its international operations, including laws and regulations such as the North American Free Trade Agreement (“NAFTA”) which, among other things, provide certain beneficial duties and tariffs for qualifying imports and exports, subject to compliance with the applicable

11


classification and other requirements. A majority of the Company's sales are subject to NAFTA. The U.S. government has indicated its intent to alter its approach to international trade policy and in some cases to renegotiate, or potentially terminate, certain existing bilateral or multi-lateral trade agreements and treaties with foreign countries, including NAFTA. In addition, the US government has initiated or is considering imposing tariffs on certain foreign goods, including steel and aluminum. Related to this action, certain foreign governments, including China, have instituted or are considering imposing tariffs on certain U.S. goods. The Company sources certain components, including steel and aluminum, and approximately 15% of its finished goods from China, which are subject to recently enacted tariffs. It remains unclear what the U.S. Administration or foreign governments will or will not do with respect to tariffs, NAFTA, or other international trade agreements and policies. A trade war or other governmental action related to tariffs or international trade agreements or policies has the potential to adversely impact demand for the Company's products, costs, customers, suppliers, and/or the US economy or certain sectors thereof and, thus, to adversely impact the Company's business.
The evolution of the Company’s products, complexity of its supply chain, and reliance on third-party vendors such as customs brokers and freight vendors, which may not have effective processes and controls to enable the Company to fully and accurately comply with such requirements, could subject the Company to liabilities for past, present, or future periods. Such liabilities could adversely impact the Company’s business.
In June 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European Union (“U.K.”) commonly referred to as “Brexit.” As a result of the referendum, the British government has begun negotiating the terms of the U.K.’s future relationship with the E.U. Although it is unknown what those terms will be, it is possible that there will be greater restrictions on imports and exports between the U.K. and E.U. countries and increased regulatory complexities. These changes could cause disruptions to and create uncertainty surrounding the Company's business and the business of existing and future customers and suppliers as well as have an impact on the Company's employees based in Europe, which could adversely impact its business. The actual effects of Brexit will depend on any agreements the U.K. makes to retain access to E.U. markets either during a transitional period or more permanently.
The Company continues to monitor conditions affecting its international locations, including potential changes in income from a strengthening or weakening in foreign exchange rates in relation to the U.S. dollar. Some of these risks, including but not limited to foreign exchange rates, violations of laws, and higher costs associated with changes in regulation, could adversely impact the Company’s business.
Risks Related to Legal and Regulatory Matters
Failure to comply with the broad range of standards, laws and regulations in the jurisdictions in which the Company operates may result in exposure to substantial disruptions, costs and liabilities.
The laws and regulations impacting the Company impose increasingly complex, stringent and costly compliance activities, including but not limited to environmental, health, and safety protection standards and permitting, labeling and other requirements regarding, among other things, electronic and wireless communications, air emissions, wastewater discharges, the use, handling, and disposal of hazardous or toxic materials, remediation of environmental contamination, and working conditions for the Company’s employees. Some environmental laws, such as Superfund, the Clean Water Act, and comparable laws in U.S. states and other jurisdictions world-wide, impose joint and several liability for the cost of environmental remediation, natural resource damages, third-party claims, and other expenses, without regard to the fault or the legality of the original conduct, on those persons who contributed to the release of a hazardous substance into the environment. The Company may also be affected by future industry standards, laws or regulations, including those imposed in response to energy, climate change, product functionality, geopolitical, or similar concerns. These standards, laws, or regulations may impact the sourcing of raw materials and the manufacture and distribution of the Company’s products and place restrictions and other requirements or impediments on the products and solutions the Company can sell in certain geographical locations.
The Company may develop unexpected legal contingencies or matters that exceed insurance coverage.
The Company is subject to and in the future may be subject to various claims, including legal claims arising in the normal course of business. Such claims may include without limitation employment claims, product recall, personal injury, network security, data privacy, or property damage claims resulting from the use of the Company's products, services, or solutions, as well as exposure to hazardous materials, contract disputes, or intellectual property disputes. The Company is insured up to specified limits for certain types of losses with a self-insurance retention per occurrence, including product or professional liability, and cyber liability, including network security and data privacy claims, and is fully self-insured for certain other types of losses, including environmental, product recall, warranties, commercial disputes, and patent infringement. The Company establishes reserves for legal claims when the costs associated with

12


the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the level of insurance coverage held by the Company and/or the amounts reserved for such claims. In the event of unexpected future developments, it is possible that the ultimate resolutions of such matters could be unfavorable. The Company’s insurance coverage is negotiated on an annual basis, and insurance policies in the future may have coverage exclusions that could cause claim-related costs to rise.
If the Company's products are improperly designed, manufactured, packaged, or labeled, or are otherwise alleged to cause harm or injury, the Company may need to recall those items, may have increased warranty costs, and could be the target of product liability claims.
The Company may need to recall products if they are improperly designed, manufactured, packaged, or labeled, and the Company does not maintain insurance for such recall events. Many of the Company's products and solutions have become more complex in recent years and include more sophisticated and sensitive electronic components. A problem or issue relating to any individual component could have the effect of creating a compounded problem for an integrated solution, which could result in significant costs and losses. The Company has increasingly manufactured certain of those components and products in its own facilities. The Company has previously initiated product recalls as a result of potentially faulty components, assembly, installation, design, and packaging of its products. Widespread product recalls could result in significant losses due to the costs of a recall, the destruction of product inventory, penalties, and lost sales due to the unavailability of a product for a period of time. In addition, products developed by the Company that incorporate new technologies, such as LED technology, generally provide for more extensive warranty protection which may result in higher costs if warranty claims on these products are higher than historical amounts. The Company may also be liable if the use of any of its products causes harm, whether from fire, shock, harmful materials or components, alleged adverse health impacts from exposure to light, or any other personal injury or property damage, and the Company could suffer losses from a significant product liability judgment against the Company in excess of its insurance limits. The Company may not be able to obtain indemnity or reimbursement from its suppliers or other third parties for the warranty costs or liabilities associated with its products. A significant product recall, warranty claim, or product liability case could also result in adverse publicity, damage to the Company’s reputation, and a loss of consumer confidence in its products.
The Company may fail to effectively estimate employer-sponsored health insurance premiums and incremental costs due to the Affordable Care Act and other healthcare considerations.
Previously enacted comprehensive federal healthcare reform legislation and proposed federal and state healthcare reform initiatives could create adverse effects for the Company. Possible adverse effects could include increased costs, exposure to expanded liability, and requirements for the Company to revise the ways in which healthcare and other benefits are provided to employees. To date, the Company has experienced increased costs related to such legislation; however, due to the phased-in nature of the implementation and the lack of interpretive guidance, the Company continues to monitor the potential impacts the health care reform legislation will have on the Company’s financial results. Furthermore, any changes to or a repeal of previously enacted health care reform could cause the Company to incur additional expense to comply with or change its practices with respect any new or revised legislation.
The Company may not be able to adequately protect its intellectual property and could be the target of intellectual property claims.
The Company owns certain patents, trademarks, copyrights, trade secrets, and other intellectual property. In addition, the Company continues to file patent applications, when appropriate. The Company cannot be certain that others have not and will not infringe on its intellectual property rights; however, the Company seeks to establish and protect those rights, which could result in significant legal expenses and adversely affect the Company's financial condition and results of operations.
Over the last several years, the Company and others in the industry have received an increased number of allegations of patent infringement from competitors and from non-practicing entity patent holders, often coupled with offers to license such patents for use by the Company. Such offers typically relate to various technologies including electronics, power systems, controls, and software, as well as the use of visible light to communicate data, the use of certain wireless networking methods, and the design of specific products. The Company believes that it does not need or will be able to invalidate or access such patents through licensing, cross-licensing, or other mutually beneficial arrangements, although to the extent the Company is required but unable to enter into such arrangements on acceptable economic terms, it could adversely impact the Company.

13


Risks Related to Financial Matters
Tight credit conditions could impair the ability of the Company and other industry parties to effectively access capital markets, which could negatively impact demand for the Company’s products and services.
The impact of tight credit conditions could impair the ability of real estate developers, property owners, and contractors to effectively access capital markets or obtain reasonable costs of capital on borrowed funds, resulting in depressed levels of construction and renovation projects. The inability of these constituents to borrow money to fund construction and renovation projects may reduce the demand for the Company’s products and services.
The market price and trading volume of the Company’s shares may be volatile.
The market price of the Company’s common shares could fluctuate significantly for many reasons, including reasons unrelated to the Company’s specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by customers, competitors, or suppliers regarding their own performance, as well as general global economic, industry, and political conditions. Since management does not provide guidance, the Company's performance could be different than analyst expectations causing a decline in the Company's stock price. To the extent that other large companies within the Company’s industry experience declines in share price, the Company’s share price may decline as well. In addition, when the market price of a company’s shares drops significantly, shareholders could institute securities class action lawsuits against the Company or otherwise engage in activism, which could cause the Company to incur substantial costs and could divert the time and attention of the Company’s management and other resources.
Risks related to the Company's defined benefit retirement plans may adversely impact results of operations and cash flows.
Significant changes in actual investment returns on defined benefit plan assets, discount rates, and other factors could adversely affect the Company's results of operations and the amount of contributions the Company is required to make to the defined benefit plans in future periods. As the Company's defined benefit plan assets and liabilities are marked-to-market on an annual basis, large non-cash gains or losses could be recorded in the fourth quarter of each fiscal year. In accordance with United States generally accepted accounting principles, the income or expense for the plans is calculated using actuarial valuations. These valuations reflect assumptions about financial markets and interest rates, which may change based on economic conditions. Funding requirements for the defined benefit plans are dependent upon, among other things, interest rates, underlying asset returns, and the impact of legislative or regulatory changes related to defined benefit funding obligations. Unfavorable changes in these factors could adversely affect the Company.

Item 1b.
Unresolved Staff Comments
None.


14


Item 2.
Properties
The general corporate offices of the Company are located in Atlanta, Georgia. Because of the diverse nature of operations and the large number of individual locations, it is neither practical nor meaningful to describe each of the operating facilities owned or leased by the Company. The following listing summarizes the significant facility categories as of August 31, 2018:
Nature of Facilities
Owned
 
Leased
Manufacturing facilities
14

 
5

Warehouses
1

 
2

Distribution centers*
1

 
7

Offices
5

 
19

______________________________________
* The majority of the distribution centers also have certain manufacturing and assembly capabilities.
The following table provides additional geographic information related to the Company’s manufacturing facilities as of August 31, 2018:
 
United States
 
Mexico
 
Europe
 
Canada
 
Total
Owned
7

 
4

 
2

 
1

 
14

Leased
2

 
2

 

 
1

 
5

Total
9

 
6

 
2

 
2

 
19

The Company believes that its properties are well maintained and in good operating condition and that its properties are suitable and adequate for its present needs. Initiatives related to enhancing global operations may result in the future consolidation of certain facilities.

Item 3.
Legal Proceedings
General
The Company is subject to various legal claims arising in the normal course of business, including, but not limited to, patent infringement, product liability claims, and employment matters. The Company is self-insured up to specified limits for certain types of claims, including product liability, and is fully self-insured for certain other types of claims, including environmental, product recall, and patent infringement. Based on information currently available, it is the opinion of management that the ultimate resolution of any such pending and threatened legal proceedings will not have a material adverse effect on the financial condition, results of operations, or cash flows of the Company. 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 of the Company in future periods. The Company establishes reserves for legal claims when the costs associated with the claims 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, the Company cannot make a meaningful estimate of actual costs to be incurred that could possibly be higher or lower than the amounts reserved.
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 the Company and certain of its officers on behalf of all persons who purchased or otherwise acquired the Company’s 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 the Company’s 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 the Company’s common stock between October 7, 2015 and April 3, 2017 and alleges that the Company and certain of its 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 the Company’s products and (ii) overstated the Company’s ability to achieve

15


profitable sales growth. The plaintiffs seek class certification, unspecified monetary damages, costs, and attorneys’ fees. The Company disputes the allegations in the complaints and intends to move to dismiss the Consolidated Complaint and to vigorously defend against the 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 are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, the Company is 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. The Company is insured, in excess of a self-retention, for Directors and Officers liability.
Environmental Matters
The operations of the Company 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 of the Company’s operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. On an ongoing basis, the Company invests capital and incurs operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years. The cost of responding to future changes may be substantial. The Company establishes reserves for known environmental claims when the costs associated with the claims 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.

Item 4.
Mine Safety Disclosures
Not applicable.


16


PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
The common stock of Acuity Brands is listed on the New York Stock Exchange under the symbol “AYI.” At October 22, 2018, there were 2,107 stockholders of record. The following table sets forth the New York Stock Exchange high and low sale prices and the dividend payments for Acuity Brands’ common stock for the periods indicated.
 
Price per Share
 
Dividends
 
High
 
Low
 
per Share
Fiscal 2017
 
 
 
 
 
First quarter
$276.69
 
$216.89
 
$0.13
Second quarter
$255.45
 
$193.06
 
$0.13
Third quarter
$214.94
 
$157.33
 
$0.13
Fourth quarter
$208.83
 
$162.22
 
$0.13
Fiscal 2018
 
 
 
 
 
First quarter
$182.64
 
$153.28
 
$0.13
Second quarter
$186.99
 
$141.77
 
$0.13
Third quarter
$154.52
 
$109.98
 
$0.13
Fourth quarter
$155.25
 
$113.91
 
$0.13
The indicated annual dividend rate on the Company's common stock is $0.52 per share. However, all decisions regarding the declaration and payment of dividends are at the discretion of the Board of Directors of the Company (the “Board”) and will be evaluated regularly in light of the Company’s financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors that the Board deems relevant. The information required by this item with respect to equity compensation plans is included under the caption Equity Compensation Plans in the Company’s proxy statement for the annual meeting of stockholders to be held January 4, 2019, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.
Issuer Purchases of Equity Securities
In March 2018, the Board authorized the repurchase of up to six million shares of the Company's common stock. As of August 31, 2018, 0.8 million shares had been purchased under this authorization. The maximum number of shares that may yet be purchased under the program equals 5.2 million. Additionally, the Company repurchased 1.2 million shares during the current year under previous authorizations from the Board, resulting in total repurchases during fiscal 2018 of two million shares.
Shares may be repurchased from time to time at prevailing market prices, depending on market conditions, through open market or privately negotiated transactions. No date has been established for the completion of the share repurchase program, and the Company is not obligated to repurchase any shares. Subject to applicable corporate securities laws, repurchases may be made at such times and in such amounts as management deems appropriate. Repurchases under the program can be discontinued at any time management feels additional repurchases are not warranted.
Company Stock Performance
The following information in this Annual Report on Form 10-K is not deemed to be “soliciting material” or to be “filed” with the Securities and Exchange Commission or subject to Regulation 14A or 14C under the Exchange Act or to the liabilities of Section 18 of the Exchange Act, and it will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent specifically incorporated by reference into such filing.

17


The following graph compares the cumulative total return to shareholders on the Company’s outstanding stock during the five years ended August 31, 2018, with the cumulative total returns of the Standard & Poor’s (“S&P”) 500 Index, the S&P Midcap 400 Index, the Dow Jones U.S. Electrical Components & Equipment Index, and the Dow Jones U.S. Building Materials & Fixtures Index. The Company is a component of both the S&P Midcap 400 Index and the Dow Jones U.S. Building Materials & Fixtures Index. The Dow Jones U.S. Electrical Components & Equipment Index is included in the following graph as the parent companies of several major lighting companies are included in the index. During fiscal 2018, the Company was removed from the S&P 500 Index and added to the S&P Midcap 400 Index. Therefore, the S&P 500 Index will be removed from the following cumulative total return chart in future periods.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among Acuity Brands, Inc., the S&P 500 Index, the S&P Midcap 400 Index,
the Dow Jones US Electrical Components & Equipment Index,
and the Dow Jones US Building Materials & Fixtures Index
ayi-2015831_chartx29503a06.jpg

*Assumes $100 invested on August 31, 2013 in stock or index, including reinvestment of dividends.
 
 
Aug-13

Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

 
 
 
 
 
 


Acuity Brands, Inc.
 
$
100

$
146

$
230

$
325

$
209

$
182

S&P 500 Index
 
$
100

$
125

$
126

$
142

$
165

$
197

S&P Midcap 400 Index
 
$
100

$
123

$
123

$
138

$
156

$
187

Dow Jones US Electrical Components & Equipment Index
 
$
100

$
125

$
113

$
129

$
160

$
188

Dow Jones US Building Materials & Fixtures Index
 
$
100

$
125

$
144

$
179

$
188

$
199



18


Item 6.
Selected Financial Data
The following table sets forth certain selected consolidated financial data of the Company, which has been derived from the Consolidated Financial Statements for each of the five years in the period ended August 31, 2018. This historical information may not be indicative of the Company’s future performance. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto.
 
Year Ended August 31,
 
2018(1)
 
2017(2)
 
2016(3)
 
2015(4)
 
2014(5)
 
(In millions, except per-share data)
Net sales
$
3,680.1

 
$
3,505.1

 
$
3,291.3

 
$
2,706.7

 
$
2,393.5

Net income
349.6

 
321.7

 
290.8

 
222.1

 
175.8

Basic earnings per share
8.54

 
7.46

 
6.67

 
5.13

 
4.07

Diluted earnings per share
8.52

 
7.43

 
6.63

 
5.09

 
4.05

Cash and cash equivalents
129.1

 
311.1

 
413.2

 
756.8

 
552.5

Total assets
2,988.8

 
2,899.6

 
2,948.0

 
2,407.0

 
2,145.4

Long-term debt
356.4

 
356.5

 
355.0

 
352.4

 
351.9

Total debt
356.8

 
356.9

 
355.2

 
352.4

 
351.9

Stockholders’ equity
1,716.8

 
1,665.6

 
1,659.8

 
1,360.0

 
1,163.5

Cash dividends declared per common share
0.52

 
0.52

 
0.52

 
0.52

 
0.52

_______________________________________
(1)
Net Income, Basic Earnings per Share, and Diluted Earnings per Share for fiscal 2018 include a) pre-tax special charges of $5.6 million related to streamlining initiatives, b) pre-tax amortization of acquired intangible assets of $28.5 million c) pre-tax share-based payment expense of $32.3 million, d) pre-tax acquisition-related items of $3.8 million, f) excess inventory related to the closure of a facility of $3.1 million, g) gain on sale of a business of $5.4 million, and h) discrete income tax benefits of the U.S. Tax Cuts and Jobs Act of $34.6 million, totaling $0.32 per share.
(2)
Net Income, Basic Earnings per Share, and Diluted Earnings per Share for fiscal 2017 include a) pre-tax special charges of $11.3 million related to streamlining initiatives, b) pre-tax amortization of acquired intangible assets of $28.0 million c) pre-tax share-based payment expense of $32.0 million, d) gain on sale of investment in unconsolidated affiliate of $7.2 million, and e) manufacturing related inefficiencies directly related to the closure of a facility of $1.6 million, totaling $1.02 per share.
(3)
Net Income, Basic Earnings per Share, and Diluted Earnings per Share for fiscal 2016 include a) pre-tax special charges of $15.0 million related to streamlining initiatives, b) pre-tax amortization of acquired intangible assets of $21.4 million, c) pre-tax share-based payment expense of $27.7 million, d) pre-tax acquisition-related items of $10.8 million, and e) pre-tax impairment of intangible asset of $5.1 million, totaling $1.21 per share.
(4)
Net Income, Basic Earnings per Share, and Diluted Earnings per Share for fiscal 2015 include a) pre-tax special charges of $12.4 million related to streamlining initiatives, b) pre-tax amortization of acquired intangible assets of $11.0 million, c) pre-tax share-based payment expense of $18.2 million, d) non tax-deductible professional fees of $3.2 million related to acquisitions, and e) pre-tax net loss on financial instruments of $2.6 million, totaling $0.74 per share.
(5)
Net Income, Basic Earnings per Share, and Diluted Earnings per Share for fiscal 2014 include a) pre-tax amortization of acquired intangible assets of $11.2 million, b) pre-tax share-based payment expense of $17.7 million, c) pre-tax recoveries of $5.8 million associated with fraud at the Company's former freight payment and audit service provider, and d) pre-tax special charge reversal of $0.2 million related to initiatives to simplify and streamline the Company's operations, totaling $0.35 per share.

19


Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
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, 2018, 2017, and 2016. 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 subsidiaries (Acuity Brands, ABL, and such other subsidiaries are collectively referred to herein as the “Company”). The Company has its principal office in Atlanta, Georgia.
The Company is 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. The Company’s lighting and building management solutions include individual devices and integrated systems designed to optimize energy efficiency and comfort, enhance the occupant experience, and reduce operating costs for various indoor and outdoor applications. Individual devices include luminaires, lighting controls, controllers for various building systems, power supplies, prismatic skylights, inverters, and drivers. Additionally, the Company continues to expand its solutions portfolio to provide a host of other economic benefits, including software and services that enable the Internet of Things (“IoT”). The Company's IoT solutions provide customers with access to robust data analytics; support the advancement of smart buildings, smart cities, and the smart grid; and allow businesses to develop custom applications to scale their operations. As of August 31, 2018, the Company operates 19 manufacturing facilities and eight distribution facilities along with three warehouses to serve its extensive customer base and employs approximately 13,000 associates.
The Company does not consider acquisitions a critical element of its strategy but seeks opportunities to expand and enhance its portfolio of solutions, including the following transactions:
On May 1, 2018, using cash on hand and borrowings available under existing credit arrangements, the Company acquired IOTA Engineering, LLC (“IOTA”), a provider of 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, the Company acquired Lucid Design Group, Inc (“Lucid”) a provider of a data and analytics platform to make data-driven decisions to improve building efficiency and drive energy conservation and savings.
On June 30, 2016, using cash on hand and treasury stock, the Company acquired DGLogik, Inc. (“DGLogik”), a provider of innovative software solutions that enable and visualize the IoT. DGLogik's solutions provide users with the intelligence to better manage energy usage and improve facility performance.
On December 10, 2015, using cash on hand, the Company acquired Juno Lighting LLC (“Juno Lighting”), a leading provider of downlighting and track lighting fixtures for both residential and commercial applications.
On December 9, 2015, using cash on hand, the Company acquired Geometri, LLC (“Geometri”), a provider of a software and services platform for mapping, navigation, and analytics.
On September 1, 2015, using cash on hand, the Company acquired Distech Controls Inc. (“Distech Controls”), a provider of building automation solutions that allow for the integration of lighting, heating, ventilation, and air conditioning (“HVAC”), access control, closed circuit television, and related systems.
No acquisitions were completed during fiscal 2017.
Please refer to the Acquisitions and Investments footnote of the Notes to Consolidated Financial Statements for more information.
Strategy
The Company's strategy is to extend its leadership position in the North American market and certain international markets by delivering superior lighting and building management solutions. Additionally, the Company plans to continue to expand its software solution offerings. As a results-oriented, customer-centric company, management plans to align

20


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 its customers, driving world-class cost efficiency, and leveraging a culture of operational excellence through continuous improvement.
Throughout fiscal 2018, the Company believes it made progress towards achieving its strategic objectives, including expanding its access to the market, expanding its addressable market, introducing new lighting and building management solutions, and enhancing its operations to create a stronger, more effective organization. The strategic objectives were developed to enable the Company to meet or exceed the following financial goals during an entire business cycle:
Operating profit margin in the mid-teens or higher;
Diluted earnings per share growth in excess of 15% per annum;
Return on stockholders’ equity of 20% or better per annum; and
Cash flow from operations, less capital expenditures, that is in excess of net income.
To increase the probability of the Company achieving these financial goals, management will continue to implement programs to enhance its 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, the Company has 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, the Company promotes a “pay-for-performance” culture that rewards various levels of year-over-year improvement, while closely monitoring appropriate risk-taking. The expected outcome of these activities will be to better position the Company to deliver on its full potential, to provide a platform for future growth opportunities, and to allow the Company to achieve its long-term financial goals. See the Outlook section below for additional information.
Liquidity and Capital Resources
The Company's principal sources of liquidity are operating cash flows generated primarily from its business operations, cash on hand, and various sources of borrowings. The ability of the Company to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to fund its operations and capital expenditures, pay dividends, repurchase shares of common stock, meet its obligations as they become due, and maintain compliance with covenants contained in its financing agreements.
The Company invested $43.6 million in fiscal 2018 for capital expenditures, primarily for new equipment, tooling, facility enhancements, and information technology. The Company expects to invest approximately 1.5% of net sales in capital expenditures during fiscal 2019.
The Company's short-term cash needs are expected to include funding operations as currently planned, making anticipated capital investments, paying quarterly stockholder dividends as currently anticipated, paying principal and interest on borrowings as currently scheduled, making required contributions to its employee benefit plans, funding possible acquisitions, and potentially repurchasing up to 5.2 million shares of its outstanding common stock as authorized by the the Board of Directors (the “Board”). Management believes that the Company will be able to meet its liquidity needs over the next 12 months based on its cash on hand, current projections of cash flow from operations, and borrowing availability under recently executed financing arrangements. Additionally, management believes that the Company’s cash flows from operations and sources of funding, including, but not limited to, future borrowings and capacity, will sufficiently support the long-term liquidity needs of the Company.
In March 2018, the Board authorized the repurchase of up to six million shares of the Company's common stock. As of August 31, 2018, 0.8 million shares had been purchased under this authorization. Additionally, the Company repurchased 1.2 million shares during the current year under previous authorizations from the Board, resulting in total repurchases during fiscal 2018 of two million shares. The extent and timing of future 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. The Company may increase its leverage to accommodate the stock repurchase program.
Cash Flow
The Company uses available cash and cash flow from operations, borrowings on credit arrangements, and proceeds from the exercise of stock options, to fund operations, capital expenditures, and acquisitions; to repurchase Company stock; and to pay dividends.

21


The Company’s cash position at August 31, 2018 was $129.1 million, a decrease of $182.0 million from August 31, 2017. During the year ended August 31, 2018, the Company generated net cash flows from operating activities of $353.2 million. Cash generated from operating activities, as well as cash on-hand, was used during the current year primarily to repurchase two million shares of the Company's outstanding common stock for $298.4 million, to fund acquisitions of $163.2 million, to fund capital expenditures of $43.6 million, to pay dividends to stockholders of $21.4 million, and to pay employee taxes of $8.2 million on the net settlement of equity awards. Additionally, the Company fully repaid all borrowings under its revolving credit facility during fiscal 2018.
During fiscal 2018, net cash generated from operating activities increased $16.6 million to $353.2 million compared with $336.6 million in the prior-year period due primarily to lower net working capital requirements, which reflect reduced variable incentive payments for prior year performance and payments for income taxes, partially offset by lower operating profit. 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) increased by approximately $84.7 million during fiscal 2018 compared to an increase of $34.3 million during fiscal 2017. Operating working capital requirements increased primarily due to greater production and purchases necessary to support the higher level of net sales. The increase in inventory during the year was due primarily to customer expansion in the home center channel, new product launches, and a buildup of finished goods to support committed projects in the corporate accounts channel. This increase in inventory was mostly offset by a corresponding increase in accounts payable during the same period. Additionally, the increase in accounts receivable during the year was due primarily to the timing of cash collections from customers.
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. The Company invested $43.6 million and $67.3 million in fiscal 2018 and 2017, respectively, primarily for new equipment, tooling, facility enhancements, and information technology. The Company expects to invest approximately 1.5% of net sales in capital expenditures during fiscal 2019.
Contractual Obligations
The following table summarizes the Company’s contractual obligations at August 31, 2018 (in millions):
 
 
 
Payments Due by Period
 
Total
 
Less than
One Year
 
1 to 3 Years
 
4 to 5
Years
 
After 5
Years
Debt(1)
$
357.3

 
$
0.4

 
$
354.9

 
$
0.7

 
$
1.3

Interest obligations(2)
121.8

 
33.6

 
34.1

 
18.9

 
35.2

Operating leases(3)
76.0

 
16.9

 
25.4

 
13.7

 
20.0

Purchase obligations(4)
243.8

 
236.7

 
4.7

 
2.4

 

Other liabilities(5)
44.0

 
4.0

 
9.3

 
5.0

 
25.7

Total
$
842.9

 
$
291.6

 
$
428.4

 
$
40.7

 
$
82.2

___________________________
(1) 
These amounts, which represent the principal amounts outstanding at August 31, 2018, are included in the Company’s Consolidated Balance Sheets. See the Debt and Lines of Credit footnote for additional information regarding debt and other matters.
(2) 
These amounts represent primarily the expected future interest payments on outstanding debt held by the Company at August 31, 2018 and the Company’s outstanding loans related to its 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 the Company’s Consolidated Statements of Cash Flows.
(3) 
The Company’s operating lease obligations are described in the Commitments and Contingencies footnote.
(4) 
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.
(5) 
These amounts are included in the Company’s Consolidated Balance Sheets and largely represent liabilities for which the Company is 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 the Company elects 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 $4.4 million of unrecognized tax benefits as the period of cash settlement with the respective taxing authorities cannot be reasonably estimated.

22


The above table does not include deferred income tax liabilities of approximately $168.5 million as of August 31, 2018. Refer to the Income Taxes footnote for more information. This amount is not included in the total contractual obligations table because the Company believes this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax bases of assets and liabilities and their respective book bases, 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
The current capital structure of the Company is comprised principally of senior unsecured notes and equity of its stockholders. Total debt outstanding was $356.8 million and $356.9 million at August 31, 2018 and 2017, respectfully, and consisted primarily of fixed-rate obligations. The Company fully repaid all borrowings under its revolving credit facility during fiscal 2018. Additionally, the Company repaid $0.4 million under the fixed rate long-term bank loans during fiscal 2018.
On December 8, 2009, ABL issued $350.0 million of senior unsecured notes due in fiscal 2020 (the “Unsecured Notes”) in a private placement transaction. The Unsecured Notes were subsequently exchanged for SEC-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 10 years. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for more information.
On June 29, 2018, the Company entered into a credit agreement (“Credit Agreement”) with a syndicate of banks that provides the Company 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”). The Company was in compliance with all financial covenants under the Credit Agreement as of August 31, 2018. At August 31, 2018, the Company had additional borrowing capacity under the Credit Agreement of $794.7 million under the most restrictive covenant in effect , which represents the full amount of the Revolving Credit Facility and the Term Loan Facility less the outstanding letters of credit of $5.3 million issued. As of August 31, 2018, the Company had outstanding letters of credit totaling $10.2 million, primarily for securing collateral requirements under the Company's casualty insurance programs and for providing credit support for the Company’s industrial revenue bond, including $5.3 million issued under the Revolving Credit Facility. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements.
During fiscal 2018, the Company’s consolidated stockholders’ equity increased $51.2 million to $1.72 billion at August 31, 2018 from $1.67 billion at August 31, 2017. The increase was due primarily to net income earned in the period, stock issuances resulting primarily from the exercise of stock options, and actuarial gains on pension plans, partially offset by share repurchases, the payment of dividends, shares withheld for employee taxes on vested restricted stock grants, and foreign currency translation adjustments. The Company’s debt to total capitalization ratio (calculated by dividing total debt by the sum of total debt and total stockholders’ equity) was 17.2% and 17.6% at August 31, 2018 and 2017, respectively. The ratio of debt, net of cash, to total capitalization, net of cash, was 11.7% and 2.7% at August 31, 2018 and 2017, respectively.
Dividends
Acuity Brands paid dividends on its common stock of $21.4 million ($0.52 per share) in fiscal 2018 and $22.7 million ($0.52 per share) in fiscal 2017, indicating a quarterly dividend rate of $0.13 per share. All decisions regarding the declaration and payment of dividends by Acuity Brands are at the discretion of the Company’s Board and are evaluated regularly in light of the Company’s financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant.

23


Results of Operations
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
2,193.3

 
2,023.9

 
169.4

 
8.4
 %
Gross profit
1,486.8

 
1,481.2

 
5.6

 
0.4
 %
Percent of net sales
40.4
%
 
42.3
%
 
(190
)
bps
 

Selling, distribution, and administrative expenses
1,026.6

 
951.1

 
75.5

 
7.9
 %
Special charge
5.6

 
11.3

 
(5.7
)
 
NM

Operating profit
454.6

 
518.8

 
(64.2
)
 
(12.4
)%
Percent of net sales
12.4
%
 
14.8
%
 
(240
)
bps
 

Other expense (income):
 

 
 

 
 

 
 

Interest expense, net
33.5

 
32.5

 
1.0

 
3.1
 %
Miscellaneous income, net
(4.8
)
 
(6.3
)
 
1.5

 
NM

Total other expense
28.7

 
26.2

 
2.5

 
9.5
 %
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, the Company 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.
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 the Company’s results of operations, which exclude the impact of acquisition-related items, excess inventory adjustments, certain manufacturing inefficiencies, 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 the Company's Spanish lighting business, a gain on the sale of an investment in an unconsolidated affiliate, 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, 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 the Company’s current financial performance. Specifically, the Company believes these non-U.S. GAAP measures provide greater comparability and enhanced visibility into the Company's 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.

24


(In millions, except per share data)
Year Ended August 31,
 
Increase (Decrease)
Percent Change
 
2018
 
2017
 
Gross profit
$
1,486.8

 
$
1,481.2

 
 
 
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
$
1,491.6

 
$
1,482.8

 
$
8.8

0.6
 %
Percent of net sales
40.5
%
 
42.3
%
 
(180
)
bps
 
 
 
 
 
 
 
Selling, distribution, and administrative expenses
$
1,026.6

 
$
951.1

 
 
 
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
$
963.7

 
$
891.1

 
$
72.6

8.1
 %
Percent of net sales
26.2
%
 
25.4
%
 
80

bps
 
 
 
 
 
 
 
Operating profit
$
454.6

 
$
518.8

 
 
 
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 charge
5.6

 
11.3

 
 
 
Adjusted operating profit
$
527.9

 
$
591.7

 
$
(63.8
)
(10.8
)%
Percent of net sales
14.3
%
 
16.9
%
 
(260
)
bps
 
 
 
 
 
 
 
Other expense
$
28.7

 
$
26.2

 
 
 
Add-back: Gain on sale of investment in unconsolidated affiliate

 
7.2

 
 
 
Add-back: Gain on sale of business
5.4

 

 
 
 
Adjusted other expense
$
34.1

 
$
33.4

 
$
0.7

2.1
 %
 
 
 
 
 
 
 
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 charge
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 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 include provisional estimates 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.

25


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 product prices and the mix of products sold (“price/mix”) of approximately 3%. Sales of LED-based luminaires during the year ended August 31, 2018 accounted for approximately two-thirds of total net sales. 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 the Company's 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 $5.6 million, or 0.4%, 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 $8.8 million, or 0.6%, 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 $75.5 million, or 7.9%, to $1.03 billion compared with $951.1 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 recent acquisitions, and to a lesser degree, certain other operating expenses. Compared with the prior-year period, SD&A expenses as a percent of sales increased 80 basis points to 27.9% for fiscal 2018 from 27.1% in fiscal 2017. Adjusted SD&A expenses were $963.7 million, or 26.2% of net sales, in fiscal 2018 compared to $891.1 million, or 25.4% of net sales, in the year-ago period.
During the year ended August 31, 2018, the Company recognized pre-tax special charges of $5.6 million compared with pre-tax special charges of $11.3 million recorded during the year ended August 31, 2017. Further details regarding the Company's special charges are included in the Special Charge footnote of the Notes to Consolidated Financial Statements.
Operating profit for fiscal 2018 was $454.6 million compared with $518.8 million reported for the prior-year period, a decrease of $64.2 million, or 12.4%. Operating profit margin decreased 240 basis points to 12.4% for fiscal 2018 compared with 14.8% 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 a lower net special charge.
Adjusted operating profit decreased $63.8 million, or 10.8%, to $527.9 million compared with $591.7 million for fiscal 2017. Adjusted operating profit margin was 14.3% and 16.9% for fiscal 2018 and 2017, respectively.
Other Expense (Income)
Other expense (income) for the Company consists principally of net interest expense and net miscellaneous expense (income), which includes gains and losses related to foreign exchange rate changes. Interest expense, net, was $33.5 million and $32.5 million for the years ended August 31, 2018 and 2017, respectively. The Company reported net miscellaneous income of $4.8 million in fiscal 2018 compared with net miscellaneous income of $6.3 million in fiscal 2017. Net miscellaneous income included a gain of $5.4 million associated with the sale of the Company’s 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.

26


Income Taxes and Net Income
The Company's 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. The Company estimates that its effective tax rate for fiscal 2019 will be approximately 25% before any discrete items, assuming the rates in its taxing jurisdictions remain generally consistent throughout the year.
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. 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%.
Fiscal 2017 Compared with Fiscal 2016
The following table sets forth information comparing the components of net income for the year ended August 31, 2017 with the year ended August 31, 2016 (in millions except per share data):
 
Year Ended August 31,
 
Increase
 
Percent
 
2017
 
2016
 
(Decrease)
 
Change
Net sales
$
3,505.1

 
$
3,291.3

 
$
213.8

 
6.5
 %
Cost of products sold
2,023.9

 
1,855.1

 
168.8

 
9.1
 %
Gross profit
1,481.2

 
1,436.2

 
45.0

 
3.1
 %
Percent of net sales
42.3
%
 
43.6
%
 
(130
)
bps
 

Selling, distribution, and administrative expenses
951.1

 
946.0

 
5.1

 
0.5
 %
Special charge
11.3

 
15.0

 
(3.7
)
 
NM

Operating profit
518.8

 
475.2

 
43.6

 
9.2
 %
Percent of net sales
14.8
%
 
14.4
%
 
40

bps
 

Other expense (income):
 

 
 

 
 

 
 

Interest expense, net
32.5

 
32.2

 
0.3

 
0.9
 %
Miscellaneous income, net
(6.3
)
 
(1.6
)
 
(4.7
)
 
NM

Total other expense
26.2

 
30.6

 
(4.4
)
 
(14.4
)%
Income before income taxes
492.6

 
444.6

 
48.0

 
10.8
 %
Percent of net sales
14.1
%
 
13.5
%
 
60

bps
 

Income tax expense
170.9

 
153.8

 
17.1

 
11.1
 %
Effective tax rate
34.7
%
 
34.6
%
 
 

 
 

Net income
$
321.7

 
$
290.8

 
$
30.9

 
10.6
 %
Diluted earnings per share
$
7.43

 
$
6.63

 
$
0.80

 
12.1
 %
NM - not meaningful
 
 
 
 
 
 
 
Net sales increased $213.8 million, or 6.5%, to $3.51 billion for the year ended August 31, 2017 compared with $3.29 billion reported for the year ended August 31, 2016. For the year ended August 31, 2017, the Company reported net income of $321.7 million compared with $290.8 million for the year ended August 31, 2016, an increase of $30.9 million, or 10.6%. For fiscal 2017, diluted earnings per share increased 12.1% to $7.43 from $6.63 for the prior-year period.
The following table reconciles certain U.S. generally accepted accounting principles (“U.S. GAAP”) financial measures to the corresponding non-U.S. GAAP measures referred to in the discussion of the Company’s results of operations, which exclude the impact of acquisition-related items, certain manufacturing inefficiencies, amortization of acquired intangible assets, share-based payment expense, impairment of intangible asset, special charges associated primarily with continued efforts to streamline the organization, and a gain on the sale of an investment in an unconsolidated affiliate.

27


(In millions, except per share data) 
Year Ended August 31,
 
Increase (Decrease)
Percent Change
 
2017
 
2016
 
Gross profit
$
1,481.2

 
$
1,436.2

 
 
 
Add-back: Acquisition-related items (1)

 
2.8

 
 
 
Add-back: Manufacturing inefficiencies (2)
1.6

 

 
 
 
Adjusted gross profit
$
1,482.8

 
$
1,439.0

 
$
43.8

3.0
%
Percent of net sales
42.3
%
 
43.7
%
 
(140
)
bps
 
 
 
 
 
 
 
Selling, distribution, and administrative expenses
$
951.1

 
$
946.0

 
 
 
Less: Amortization of acquired intangible assets
(28.0
)
 
(21.4
)
 
 
 
Less: Share-based payment expense
(32.0
)
 
(27.7
)
 
 
 
Less: Acquisition-related items (1)

 
(8.0
)
 
 
 
Less: Impairment of intangible asset

 
(5.1
)
 
 
 
Adjusted selling, distribution, and administrative expenses
$
891.1

 
$
883.8

 
$
7.3

0.8
%
Percent of net sales
25.4
%
 
26.9
%
 
(150
)
bps
 
 
 
 
 
 
 
Operating profit
$
518.8

 
$
475.2

 
 
 
Add-back: Amortization of acquired intangible assets
28.0

 
21.4

 
 
 
Add-back: Share-based payment expense
32.0

 
27.7

 
 
 
Add-back: Acquisition-related items (1)

 
10.8

 
 
 
Add-back: Impairment of intangible asset

 
5.1

 
 
 
Add-back: Manufacturing inefficiencies (2)
1.6

 

 
 
 
Add-back: Special charge
11.3

 
15.0

 
 
 
Adjusted operating profit
$
591.7

 
$
555.2

 
$
36.5

6.6
%
Percent of net sales
16.9
%
 
16.9
%
 

bps
 
 
 
 
 
 
 
Other expense
$
26.2

 
$
30.6

 
 
 
Add-back: Gain on sale of investment in unconsolidated affiliate
7.2

 

 
 
 
Adjusted other expense
$
33.4

 
$
30.6

 
$
2.8

9.2
%
 
 
 
 
 
 
 
Net income
$
321.7

 
$
290.8

 
 
 
Add-back: Amortization of acquired intangible assets
28.0

 
21.4

 
 
 
Add-back: Share-based payment expense
32.0

 
27.7

 
 
 
Add-back: Acquisition-related items (1)

 
10.8

 
 
 
Add-back: Impairment of intangible asset

 
5.1

 
 
 
Add-back: Manufacturing inefficiencies (2)
1.6

 

 
 
 
Add-back: Special charge
11.3

 
15.0

 
 
 
Less: Gain on sale of investment in unconsolidated affiliate
(7.2
)
 

 
 
 
Total pre-tax adjustments to net income
65.7

 
80.0

 
 
 
Income tax effect
(21.5
)
 
(27.1
)
 
 
 
Adjusted net income
$
365.9

 
$
343.7

 
$
22.2

6.5
%
 
 
 
 
 
 
 
Diluted earnings per share
$
7.43

 
$
6.63

 
 
 
Adjusted diluted earnings per share
$
8.45

 
$
7.84

 
$
0.61

7.8
%
______________________________ 
(1) Acquisition-related items include acquired profit in inventory, professional fees, and certain contract termination costs.
(2) Incremental costs incurred due to manufacturing inefficiencies directly related to the closure of a facility.

28


Net Sales
Net sales for the year ended August 31, 2017 increased by 6.5% compared with the prior-year period due primarily to an increase in sales volumes of approximately 6% and an approximately 2% favorable impact of acquired revenues from acquisitions, partially offset by the impact of an unfavorable change in product prices and the mix of products sold (“price/mix”) of approximately 1%. Sales of LED-based luminaires during the year ended August 31, 2017 accounted for approximately two-thirds of total net sales. The change in price/mix was due primarily to changes in the mix of products sold and lower pricing on luminaires, reflecting the decline in certain LED component costs. Due to the changing dynamics of the Company's 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 2017 increased $45.0 million, or 3.1%, to $1.48 billion compared with $1.44 billion for the prior year. Gross profit margin decreased to 42.3% for the year ended August 31, 2017 compared with 43.6% for the year ended August 31, 2016. This margin decline was primarily attributable to increased manufacturing expenses driven largely by higher wages and freight costs as well as higher quality costs, partially offset by the additional contribution on higher net sales. Materials and component costs were favorable as declining prices for certain LED components were only partially offset by rising costs for certain commodities, including steel. Gross profit margin was negatively impacted by unfavorable price/mix. Adjusted gross profit for fiscal 2017 increased $43.8 million, or 3.0%, to $1.48 billion compared with $1.44 billion for the prior year. Adjusted gross profit margin decreased 140 basis points to 42.3% compared to 43.7% in the prior year.
Operating Profit
SD&A expenses for the year ended August 31, 2017 increased $5.1 million, or 0.5%, to $951.1 million compared with $946.0 million in the prior year. The increase in SD&A expenses was due primarily to higher costs related to freight, commissions, and investments in additional headcount, which reflects the Company's investments in capabilities related to areas of future growth and enhanced customer service, as well as additional costs associated with acquired businesses, partially offset by lower incentive compensation expense. Compared with the prior-year period, SD&A expenses as a percent of sales decreased 160 basis points to 27.1% for fiscal 2017 from 28.7% in fiscal 2016. Adjusted SD&A expenses were $891.1 million, or 25.4% of net sales, in fiscal 2017 compared to $883.8 million, or 26.9% of net sales, in the year-ago period.
During the year ended August 31, 2017, the Company recognized pre-tax special charges of $11.3 million, which consisted primarily of severance and employee-related benefit costs for the elimination of certain operations and positions following a realignment of the Company’s operating structure, including positions within various SD&A departments. During fiscal 2016, the Company recognized pre-tax special charges of $15.0 million. These charges related primarily to the Company's continued efforts to integrate recent acquisitions and to streamline the organization by realigning certain responsibilities primarily within various SD&A departments, as well as the consolidation of certain production activities. Further details regarding the Company's special charges are included in the Special Charge footnote of the Notes to Consolidated Financial Statements.
Operating profit for fiscal 2017 was $518.8 million compared with $475.2 million reported for the prior-year period, an increase of $43.6 million, or 9.2%. Operating profit margin increased 40 basis points to 14.8% for fiscal 2017 compared with 14.4% for fiscal 2016 due primarily to an increase in sales volume, lower material and component costs, and lower incentive compensation expense, partially offset by higher manufacturing expenses, greater freight and commission costs, investments in additional headcount, and increased amortization of acquired intangible assets. Additionally, the Company recorded an impairment charge of $5.1 million during fiscal 2016; no such charges were recorded during fiscal 2017.
Adjusted operating profit increased $36.5 million, or 6.6%, to $591.7 million compared with $555.2 million for fiscal 2016. Adjusted operating profit margin was 16.9% for both fiscal 2017 and 2016.
Other Expense (Income)
Other expense (income) for the Company consists principally of net interest expense and net miscellaneous expense (income), which includes gains and losses related to foreign exchange rate changes. Interest expense, net, was $32.5 million and $32.2 million for the years ended August 31, 2017 and 2016, respectively. The Company reported net miscellaneous income of $6.3 million in fiscal 2017 compared with net miscellaneous income of $1.6 million in

29


fiscal 2016. Net miscellaneous income for the year ended August 31, 2017 included a gain of $7.2 million associated with the sale of an investment in an unconsolidated affiliate.
Provision for Income Taxes and Net Income
The effective income tax rate was 34.7% and 34.6% for the years ended August 31, 2017 and 2016, respectively.
Net income for fiscal 2017 increased $30.9 million, or 10.6%, to $321.7 million from $290.8 million reported for the prior year. The increase in net income resulted primarily from higher operating profit and higher miscellaneous income, partially offset by a higher provision for income taxes. Adjusted net income for fiscal 2017 increased 6.5% to $365.9 million compared with $343.7 million in the year-ago period. Adjusted diluted earnings per share for fiscal 2017 was $8.45 compared with $7.84 for the prior-year period, which represented an increase of $0.61, or 7.8%.

Outlook
Management continues to believe the execution of the Company's strategy will provide attractive opportunities for profitable growth over the long-term. The Company's strategy is to capitalize on market growth and share gain opportunities by continuing to expand and leverage its industry-leading lighting and building management solutions portfolio, coupled with its extensive market presence and financial strength, to produce attractive financial performance over the long-term.
Third-party forecasts and leading indicators suggest that the North American lighting market, the Company’s primary market, will increase in the low-single digit range in fiscal 2019. Management expects to continue to outperform the growth rates of the markets that the Company serves by executing its 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 the Company’s integrated, tiered solutions strategy, including leveraging its unique, technology driven solutions portfolio 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.
Management expects 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 are expected to continue to negatively impact net sales and margins. Management expects 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 the Company’s competitiveness and drive improved profitability.
The U.S. federal government has recently imposed tariffs on certain Chinese imports. Certain components used in the Company’s products as well as certain sourced finished products are sourced from China and are impacted by the recently imposed tariffs. Management’s efforts to mitigate the impact of these added costs include a variety of activities, such as finding alternative suppliers, in-sourcing the production of certain products, and raising prices. Management believes that its mitigation activities, including recently announced price increases once fully enacted, will assist to offset the added costs. The Company’s margins may continue to be negatively impacted, particularly in the first quarter of fiscal 2019, due to a delay in the full realization of the expected benefits from the mitigation activities. Future U.S. policy changes that may be implemented, including additional tariffs, could have a positive or negative consequence on the Company’s financial performance depending on how the changes influence many factors, including business and consumer sentiment.
During fiscal 2018, the Company recognized a pre-tax special charge primarily related to the planned consolidation of certain facilities and associated reduction in employee workforce. The special charge consisted primarily of severance and employee-related benefit costs. Management expects to incur additional costs in future periods associated with the closing of facilities, primarily attributable to early lease termination costs and relocation costs. Annual savings realized from the streamlining activities, once fully completed, are expected to exceed the amount of the special charge, and the Company expects to reinvest portions thereof in activities to support higher-growth opportunities as well as drive improved profitability.
During the fourth quarter of fiscal 2018, the Company entered into a new credit agreement with a syndicate of banks that increased the Company’s borrowing capacity under such agreement from $250 million to $800 million. The increase in borrowing capacity provides the Company with the resources to support growth opportunities, including acquisitions, and accommodate the current stock repurchase program of which 5.2 million shares remain available for repurchase. 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. The Company may increase its leverage to accommodate the stock repurchase program.

30


Management expects the TCJA that was passed on December 22, 2017, to favorably impact the Company’s net income, diluted earnings per share, and cash flows in future periods, due primarily to the reduction in the federal corporate tax rate from 35% to 21% effective for periods beginning January 1, 2018. Additionally, positive business sentiment and other favorable aspects of the new tax law could incentivize additional investments in facilities and infrastructure in the U.S. that may increase future demand in the end-markets that the Company serves. Management currently estimates that the Company’s fiscal 2019 blended consolidated effective income tax rate before discrete items will approximate 25%. The estimated tax rate may differ from actual results, possibly materially, due to changes in interpretations of the TCJA and assumptions made by the Company, as well as guidance that may be issued and actions the Company may take as a result of the TCJA.
From a longer term perspective, management expects that the Company’s addressable markets have the potential to 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 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. Management remains positive about the future prospects of the Company and its ability to outperform the markets it serves.
Accounting Standards Adopted in Fiscal 2018 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 the Company’s 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, management evaluates its 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. Management bases its estimates and judgments on its 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. Management discusses the development of accounting estimates with the Company’s 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 of the Company.
Management believes the following represent the Company’s critical accounting estimates:
Revenue Recognition
The Company records revenue when the following criteria are met: persuasive evidence of a sales arrangement exists, delivery has occurred, the Company’s price to the customer is fixed and determinable, and collectability is reasonably assured. 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. The Company also maintains one-time or on-going marketing and trade-promotion programs with certain customers that require the Company to estimate and accrue the expected costs of such programs. These items are estimated based on customer agreements, historical trends, and expected demand. Actual results could differ from estimates, which would require adjustments to accrued amounts. See the Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for additional information about these assumptions and estimates.
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) or market. Management reviews inventory quantities on hand and records 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

31


certain inventory obsolete and thus could have a material adverse impact on the Company’s operating results in the period the change occurs.
Goodwill and Indefinite-Lived Intangible Assets
The Company reviews 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 management currently believes 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 rate or theoretical royalty rate could cause these assets to be deemed impaired. If this were to occur, the Company would be required to record a non-cash charge to earnings for the write-down in value of such assets, which could have a material adverse effect on the Company’s results of operations and financial position but not its cash flows from operations.
Goodwill
The Company is comprised of one reporting unit with a goodwill balance of $970.6 million as of August 31, 2018. During fiscal 2018, the Company utilized a qualitative assessment of the fair value of goodwill as of June 1, 2018. To perform this assessment, the Company 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 Company were compared to those used in the previous quantitative impairment test performed as of June 1, 2017 to identify potentially significant variances to the reasonableness of the assumptions. Taking into consideration these factors, the Company estimated the potential change in the fair value of goodwill compared with the previous 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
The Company’s indefinite-lived intangible assets consist of eight trade names with an aggregate carrying value of approximately $144.3 million. Management 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 the Company’s 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 management’s current estimate of the fair value of the trade names. This fair value model requires management 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 the Company's 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 the Company’s understanding of projections for expected long-term growth within its 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, the Company 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. The Company utilized a range of estimated discount rates between 9% and 16% as of June 1, 2018, based on the Capital Asset Pricing Model, which considers the current risk-free interest rate, beta, market risk premium, and entity specific size premium.

32


During fiscal 2018, the Company performed an evaluation of the fair values of its indefinite-lived trade names. The Company’s expected revenues are based on the Company’s fiscal 2019 expectations and recent lighting, controls, and building management solutions market growth estimates for fiscal 2019 through 2023. The Company also included revenue growth estimates based on current initiatives expected to help the Company improve performance. During fiscal 2018, estimated theoretical royalty rates ranged between 1% and 4%. The indefinite-lived intangible asset analysis did not result in any impairment charges, as the fair values exceeded the carrying values for each of the trade names. However, the estimated fair value of one trade name exceeded its carrying value by a small margin. Management believes the assumptions used to estimate the fair value of this trade name were reasonable, and sensitivity analysis indicated that the trade name would likely not be impaired by a material amount if reasonably differing assumptions had been used. Any reasonably likely change in the assumptions used in the analyses for the other trade names, including revenue growth rates, royalty rates, and discount rates, would not be material to the Company’s financial condition or results of operations.
Definite-Lived Intangible Assets
The Company evaluates the remaining useful lives of its 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. The Company considers each reporting period 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. The Company recorded no impairment charges for its definite-lived intangible assets during fiscal 2018 or 2017.
Self-Insurance
The Company self-insures, 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 the Company’s 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, the Company’s independent actuary. 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 the Company believes that the actuarial estimates are reasonable, significant differences related to the items noted above could materially affect the Company’s self-insurance obligations, future expense, and cash flow. The Company is 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. The Company is fully self-insured for certain other types of liabilities, including environmental, product recall, warranty, and patent infringement.
The Company is also self-insured for the majority of its medical benefit plans up to certain limits. The Company estimates its aggregate liability for claims incurred by applying a lag factor to the Company’s historical claims and administrative cost experience. The appropriateness of the Company’s lag factor is evaluated and revised, if necessary, annually. Although management believes that the current estimates are reasonable, significant differences related to claim reporting patterns, plan design, legislation, and general economic conditions could materially affect the Company’s medical benefit plan liabilities, future expense, and cash flow.
Retirement Benefits
The Company sponsors 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 Company 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 the Company’s plans, including the potential impact of changes to certain of these assumptions.
Share-based Payment Expense
The Company recognizes compensation cost relating to share-based payment transactions in the financial statements based on the estimated fair value of the equity instrument issued. The Company accounts for stock options, restricted shares, and share units representing certain deferrals into the Director Deferred Compensation Plan or the

33


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”).
The Company employs the Black-Scholes model in deriving the fair value estimates of certain share-based awards and estimates 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.
During fiscal 2018, the Company adopted Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment Accounting, (“ASU 2016-09”), which changes certain aspects of accounting for share-based payments to employees, particularly with respect to the presentation of excess tax benefits and deficiencies within the Company's Consolidated Statements of Comprehensive Income and the Consolidated Statements of Cash Flows. See the New Accounting Pronouncements footnote of the Notes to Consolidated Financial Statements for more information.
Product Warranty and Recall Costs
The Company's products generally have a standard warranty term of five years. The Company records 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. The Company is fully self-insured for product warranty costs. Historical warranty costs have been within expectations. The Company expects 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 or that incorporating new technologies, such as LED components into products, may not generate unexpected costs. 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 the Company’s results of operations and cash flow.
Litigation
The Company recognizes 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 the Company’s 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 “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 the Company files 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) the Company’s projections regarding financial performance, liquidity, capital structure, capital expenditures, investments, share repurchases, and dividends; (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 the Company's addressable markets; (d) the Company's ability to execute and realize benefits from initiatives related to streamlining its 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) the Company’s estimate of its fiscal 2019 tax rates, as well as the impact of the TCJA on the Company's financial position, results of operations, and cash flows; (f) the Company’s estimate of future amortization expense; (g) the Company’s ability to achieve its long-term financial goals and measures and outperform the markets its serves; (h) the impact to the Company of changes in the political landscape and related policy changes, including monetary, regulatory, and trade policies; (i) the Company's expectations relating to mitigating efforts around recently imposed tariffs; and (j) the Company's expectations about the resolution of trade compliance, securities class action, and/or other legal matters. 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, the Company undertakes 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

34


report or to reflect the occurrence of unanticipated events. The Company’s forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the historical experience of the Company 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 affecting the Company. Also, additional risks that could cause the Company’s actual results to differ materially from those expressed in the Company’s 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.

Item 7a.
Quantitative and Qualitative Disclosures about Market Risk
General.  The Company is exposed to worldwide market risks that may impact the Consolidated Balance Sheets, Consolidated Statements of Comprehensive Income, Consolidated Statements of Stockholders' Equity, and Consolidated Statements of Cash Flows due primarily to changing interest and foreign exchange rates as well as volatility in commodity prices. The following discussion provides additional information regarding the market risks of the Company.
Interest Rates.  Interest rate fluctuations expose the variable-rate debt of the Company to changes in interest expense and cash flows. At August 31, 2018, the variable-rate debt of the Company was solely comprised of the $4.0 million long-term industrial revenue bond. The Company had no borrowings outstanding under the Revolving Credit Facility as of August 31, 2018. A 10% increase in market interest rates at August 31, 2018, would have resulted in a de minimis amount of additional annual after-tax interest expense. A fluctuation in interest rates would not affect interest expense or cash flows related to the Company’s fixed-rate debt which includes the $350.0 million publicly-traded fixed-rate notes. A 10% increase in market interest rates at August 31, 2018 would have decreased the estimated fair value of these debt obligations by approximately $1.5 million. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements contained in this Form 10-K for additional information regarding the Company’s debt.
Foreign Exchange Rates.  The majority of net sales, expense, and capital purchases of the Company are transacted in U.S. dollars. However, exposure with respect to foreign exchange rate fluctuation exists due to the Company’s operations in Mexico and Canada, where a significant portion of products sold are produced or sourced from the United States, and, to a lesser extent, in Europe. Based on fiscal 2018 performance, a hypothetical decline in the value of the Canadian dollar in relation to the U.S. dollar of 10% would negatively impact operating profit by approximately $14 million, while a hypothetical appreciation of 10% in the value of the Canadian dollar in relation to the U.S. dollar would favorably impact operating profit by approximately $17 million. In addition to products and services sold in Mexico, a significant portion of the goods sold in the United States are manufactured in Mexico. A hypothetical 10% decrease in the value of the Mexican peso in relation to the U.S. dollar would favorably impact operating profit by approximately $15 million, while a hypothetical increase of 10% in the value of the Mexican peso in relation to the U.S. dollar would negatively impact operating profits by approximately $18 million. The individual impacts to the operating profit of the Company of hypothetical currency fluctuations in the Canadian dollar and Mexican peso have been calculated in isolation from any potential responses to address such exchange rate changes in the Company’s foreign markets.
The Company’s exposure to foreign currency risk related to its operations in Europe is immaterial and has been excluded from this analysis.
Commodity Prices.  The Company utilizes a variety of raw materials and components in its production process including petroleum-based products, steel, and aluminum. In fiscal 2018, the Company purchased approximately 104,000 tons of steel and aluminum. The Company estimates that approximately 7% of raw materials purchased are petroleum-based and that approximately six million gallons of diesel fuel were consumed in fiscal 2018. Failure to effectively manage future increases in the costs of these items could have an adverse impact on the Company's results of operations and cash flow.


35


Item 8.  
Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
 
Page


36


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, 2018. 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, 2018, the Company’s internal control over financial reporting is effective.
Management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the acquired operations of IOTA Engineering, LLC and Lucid Design Group, Inc. (collectively, the “2018 Acquisitions”), which are included in the Company’s consolidated financial statements as of August 31, 2018 and for the period from the respective acquisition dates through August 31, 2018. As of August 31, 2018, the 2018 Acquisitions constituted less than 2% and 1% of the Company’s tangible assets and net tangible assets, respectively. For the year ended August 31, 2018, the 2018 Acquisitions constituted less than 1% of both the Company's net sales and pre-tax income.
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 25, 2018 is included within this Form 10-K.

/s/ VERNON J. NAGEL
 
/s/ RICHARD K. REECE
Vernon J. Nagel
Chairman, President, and
Chief Executive Officer
 
Richard K. Reece
Executive Vice President and
Chief Financial Officer



37


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, 2018 and 2017, the related consolidated statements of comprehensive income, cash flows and stockholders’ equity for each of the three years in the period ended August 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) (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, 2018 and 2017, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2018, 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, 2018, 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 25, 2018 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.
/s/  Ernst & Young LLP
We have served as the Company’s auditor since 2002.

Atlanta, Georgia
October 25, 2018


 

38


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, 2018, 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, 2018, based on the COSO criteria.
As indicated in the accompanying Management’s Report on Internal Control Over Financial Reporting, management’s assessment of and conclusion on the effectiveness of internal control over financial reporting did not include the internal controls of the acquired operations of IOTA Engineering, LLC (IOTA) or Lucid Design Group, Inc. (Lucid) (collectively, the 2018 Acquisitions), which are included in the 2018 consolidated financial statements of the Company and constituted less than 2% and 1% of tangible assets and net tangible assets, respectively, as of August 31, 2018 and less than 1% of net sales and pre-tax income for the year then ended. Our audit of internal control over financial reporting of the Company also did not include an evaluation of the internal control over financial reporting of IOTA and Lucid.
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, 2018 and 2017, the related consolidated statements of comprehensive income, cash flows and stockholders’ equity for each of the three years in the period ended August 31, 2018, and the related notes and financial statement schedule listed in the Index at Item 15(a) and our report dated October 25, 2018 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.

39


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 25, 2018

40


ACUITY BRANDS, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except share data)
 
August 31,
 
2018
 
2017
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
129.1

 
$
311.1

Accounts receivable, less reserve for doubtful accounts of $1.3 and $1.9, respectively
637.9

 
573.3

Inventories
411.8

 
328.6

Prepayments and other current assets
32.3

 
32.6

Total current assets
1,211.1

 
1,245.6

Property, plant, and equipment, at cost:
 

 
 

Land
22.9

 
22.5

Buildings and leasehold improvements
189.1

 
180.7

Machinery and equipment
516.6

 
484.6

Total property, plant, and equipment
728.6

 
687.8

Less — Accumulated depreciation and amortization
(441.9
)
 
(400.1
)
Property, plant, and equipment, net
286.7

 
287.7

Goodwill
970.6

 
900.9

Intangible assets
498.7

 
448.8

Deferred income taxes
2.9

 
3.4

Other long-term assets
18.8

 
13.2

Total assets
$
2,988.8

 
$
2,899.6

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
 

 
 

Accounts payable
$
451.1

 
$
395.1

Current maturities of long-term debt
0.4

 
0.4

Accrued compensation
67.0

 
41.8

Other accrued liabilities
164.2

 
163.6

Total current liabilities
682.7

 
600.9

Long-term debt
356.4

 
356.5

Accrued pension liabilities
64.6

 
96.9

Deferred income taxes
92.5

 
108.2

Self-insurance reserves
7.9

 
7.9

Other long-term liabilities
67.9

 
63.6

Total liabilities
1,272.0

 
1,234.0

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; 53,667,327 and 53,549,840 issued, respectively
0.5

 
0.5

Paid-in capital
906.3

 
881.0

Retained earnings
1,999.2

 
1,659.9

Accumulated other comprehensive loss
(114.8
)
 
(99.7
)
Treasury stock, at cost — 13,676,689 and 11,678,002 shares, respectively
(1,074.4
)
 
(776.1
)
Total stockholders’ equity
1,716.8

 
1,665.6

Total liabilities and stockholders’ equity
$
2,988.8

 
$
2,899.6

The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

41


ACUITY BRANDS, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(In millions, except per-share data)
 
Year Ended August 31,
 
2018
 
2017
 
2016
Net sales
$
3,680.1

 
$
3,505.1

 
$
3,291.3

Cost of products sold
2,193.3

 
2,023.9

 
1,855.1

Gross profit
1,486.8

 
1,481.2

 
1,436.2

Selling, distribution, and administrative expenses
1,026.6

 
951.1

 
946.0

Special charge
5.6

 
11.3

 
15.0

Operating profit
454.6

 
518.8

 
475.2

Other expense (income):
 

 
 

 
 

Interest expense, net
33.5

 
32.5

 
32.2

Miscellaneous income, net
(4.8
)
 
(6.3
)
 
(1.6
)
Total other expense
28.7

 
26.2

 
30.6

Income before income taxes
425.9

 
492.6

 
444.6

Income tax expense
76.3

 
170.9

 
153.8

Net income
$
349.6

 
$
321.7

 
$
290.8

 
 
 
 
 
 
Earnings per share:
 

 
 

 
 

Basic earnings per share
$
8.54

 
$
7.46

 
$
6.67

Basic weighted average number of shares outstanding
40.9

 
43.1

 
43.5

Diluted earnings per share
$
8.52

 
$
7.43

 
$
6.63

Diluted weighted average number of shares outstanding
41.0

 
43.3

 
43.8

Dividends declared per share
$
0.52

 
$
0.52

 
$
0.52

 
 
 
 
 
 
Comprehensive income:
 
 
 
 
 
Net income
$
349.6

 
$
321.7

 
$
290.8

Other comprehensive income (loss) items:
 
 
 
 
 
Foreign currency translation adjustments
(25.2
)
 
19.0

 
(5.6
)
Defined benefit plans, net
21.2

 
20.7

 
(23.4
)
Other comprehensive (loss) income items, net of tax
(4.0
)
 
39.7

 
(29.0
)
Comprehensive income
$
345.6

 
$
361.4

 
$
261.8


The accompanying Notes to Consolidated Financial Statements are an integral part of these statements.

42


ACUITY BRANDS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
 
Year Ended August 31,
 
2018
 
2017
 
2016
Cash flows from operating activities:
 

 
 

 
 

Net income
$
349.6

 
$
321.7

 
$
290.8

Adjustments to reconcile net income to net cash flows from operating activities:
 

 
 

 
 

Depreciation and amortization
80.3

 
74.6

 
62.6

Share-based payment expense
32.3

 
32.0

 
27.7

Loss (gain) on the sale or disposal of property, plant, and equipment
0.6

 
0.3

 
(0.9
)
Asset impairments

 

 
5.1

Deferred income taxes
(38.2
)
 
(7.7
)
 
(8.2
)
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
(62.8
)
 
2.7

 
(94.6
)
Inventories
(74.4
)
 
(32.4
)
 
(24.0
)
Prepayments and other current assets
0.7

 
6.0

 
(10.5
)
Accounts payable
52.5

 
(4.6
)
 
65.3

Other current liabilities
19.1

 
(63.5
)
 
60.6

Other
(1.1
)
 
14.7

 
14.0

Net cash provided by operating activities
353.2

 
336.6

 
387.9

Cash flows from investing activities:
 

 
 

 
 

Purchases of property, plant, and equipment
(43.6
)
 
(67.3
)
 
(83.7
)
Proceeds from sale of property, plant, and equipment

 
5.5

 
2.2

Acquisitions of businesses and intangible assets, net of cash acquired
(163.2
)
 

 
(623.2
)
Proceeds from sale of business
1.1