Exchange: NYSE | Sector: Industrials | Industry: Electrical Equipment Parts
Q3 2024
Published: Jun 27, 2024
Earnings Highlights
Revenue of $968.10M down 3.2% year-over-year
EPS of $3.62 increased by 11.5% from previous year
Gross margin of 45.7%
Net income of 113.90M
"We increased our adjusted operating profit $2 million to $162 million and increased our adjusted operating profit margin 100 basis points to 18% on $42 million less sales." - Neil Ashe
Acuity Brands Inc (AYI) QQ3 2024 Earnings Analysis — Margin Expansion, Backlog Build, and Growth Initiatives Across Lighting, Lighting Controls and Intelligent Spaces
Executive Summary
Acuity Brands reported a solid Q3 2024 with total net sales of $968.1 million, down 3.2% year-over-year but up 6.9% quarter-over-quarter, driven by a robust contribution from the Intelligent Spaces (ISG) segment and a challenging year-over-year comparison in Lighting & Lighting Controls. The company continues to expand margins through product vitality, pricing discipline, cost management, and productivity gains, producing adjusted operating profit of $162 million in ABL and an adjusted operating margin of 18.0% despite a 5% year-over-year decline in Lighting-led net sales. Management highlighted backlog creation as orders exceeded shipments, setting up a favorable cadence for the balance of the year as production targets are normalized. Management reiterated a multi-year strategy to return the Lighting business to growth while expanding margins and free cash flow, supported by ongoing investments in high-value product platforms and differentiated offerings (Made-to-Order, Design Select, Contractor Select). Spaces growth remains a meaningful contributor to overall profitability, with ISG delivering a 22.9% adjusted operating margin in Q3, up 340 basis points YoY. The company also signaled disciplined capital allocation, including a 15% dividend increase and share repurchases, while stressing a robust M&A pipeline focused on expanding addressable markets within Spaces and adjacent lighting adjacencies. Overall, AYI demonstrates resilience in a mixed macro environment, supported by a diversified portfolio, strong balance sheet (net cash position), and a clear path to sustainable free cash flow generation and margin expansion.
Key Performance Indicators
Revenue
968.10M
QoQ: 6.87% | YoY:-3.22%
Gross Profit
442.20M
45.68% margin
QoQ: 9.89% | YoY:-1.14%
Operating Income
145.30M
QoQ: 23.03% | YoY:1.40%
Net Income
113.90M
QoQ: 27.69% | YoY:8.48%
EPS
3.69
QoQ: 27.68% | YoY:11.48%
Revenue Trend
Margin Analysis
Key Insights
Total AYI net sales: $968.1 million in Q3 2024, down 3.22% YoY and up 6.87% QoQ. Lighting & Lighting Controls contributed to the decline, while Intelligent Spaces grew 15% YoY.
Segment mix: ABL net sales $899 million (-5% YoY); Intelligent Spaces net sales $76 million (+15% YoY). ISG margin expanded meaningfully (adjusted operating margin 22.9%, +340 bp YoY). ABL margin remained strong at 18.0% (up 100 bp YoY).
Gross profit and margin: Gross profit $442.2 million; gross margin 45.68% (0.457). YoY gross profit change -1.14%; QoQ +9.89% driven by product vitality and productivity benefits.
Operating and net profitability: Operating income $145.3 million; operating margin 15.01% (YoY margin +~0.5%-1.0% range depending on basis). Adjusted operating profit rose by $4 million despite a $32 million sales decline (Q3 vs. prior year). Net income $113.9 million; net margin 11.77%.
Revenue and profitability highlights:
- Total AYI net sales: $968.1 million in Q3 2024, down 3.22% YoY and up 6.87% QoQ. Lighting & Lighting Controls contributed to the decline, while Intelligent Spaces grew 15% YoY.
- Segment mix: ABL net sales $899 million (-5% YoY); Intelligent Spaces net sales $76 million (+15% YoY). ISG margin expanded meaningfully (adjusted operating margin 22.9%, +340 bp YoY). ABL margin remained strong at 18.0% (up 100 bp YoY).
- Gross profit and margin: Gross profit $442.2 million; gross margin 45.68% (0.457). YoY gross profit change -1.14%; QoQ +9.89% driven by product vitality and productivity benefits.
- Operating and net profitability: Operating income $145.3 million; operating margin 15.01% (YoY margin +~0.5%-1.0% range depending on basis). Adjusted operating profit rose by $4 million despite a $32 million sales decline (Q3 vs. prior year). Net income $113.9 million; net margin 11.77%.
- EPS and liquidity: GAAP diluted EPS $3.62; basic EPS $3.69; adjusted diluted EPS $4.15 (+11% YoY, +27% QoQ). Cash flow metrics: year-to-date operating cash flow $152.5 million; free cash flow $140.5 million; cash balance $699 million; net debt negative $120.3 million (net cash).
- Balance sheet health: Total assets $3.6429 billion; total liabilities $1.3882 billion; stockholders’ equity $2.2547 billion. Current ratio 2.77; quick ratio 2.15; cash ratio 1.16. Debt-to-capitalization 0.204; debt-to-equity 0.257. Capex $12 million in the period; YTD capex $41 million; dividends per share up 15% YTD; approximately 454k shares repurchased for ~$89 million.
- Forward-looking signals: Order rate continued to grow YoY in Q3; backlog built; production targets to be realigned in coming quarters; management emphasized continued margin expansion and free cash flow generation as priorities. Backlog and diverse end-market exposure provide a degree of resilience against near-term macro softness.
Income Statement
Metric
Value
YoY Change
QoQ Change
Revenue
968.10M
-3.22%
6.87%
Gross Profit
442.20M
-1.14%
9.89%
Operating Income
145.30M
1.40%
23.03%
Net Income
113.90M
8.48%
27.69%
EPS
3.69
11.48%
27.68%
Key Financial Ratios
currentRatio
2.77
grossProfitMargin
45.7%
operatingProfitMargin
15%
netProfitMargin
11.8%
returnOnAssets
3.13%
returnOnEquity
5.05%
debtEquityRatio
0.26
operatingCashFlowPerShare
$4.95
freeCashFlowPerShare
$4.56
dividendPayoutRatio
4.04%
priceToBookRatio
3.55
priceEarningsRatio
17.57
Net Income vs. Revenue
Expense Breakdown
Management Commentary
Key management takeaways and quotes by theme:
- Strategy and portfolio differentiation
- Neil Ashe: We are returning the Lighting and Lighting Controls business to growth, while expanding margins and generating strong free cash flow; product vitality and technology enable differentiation and productivity.
- Neil Ashe: Lithonia FRAME exemplifies our Made-to-Order / Design Select / Contractor Select approach—flexible design, lighter weight, and lower packaging costs to improve value and profitability.
- Charlotte/ Karen Holcom emphasized ongoing investments in differentiated portfolios (Made-to-Order, Design Select, Contractor Select) and the strategic entry into new verticals (refueling, horticulture) to broaden addressable markets.
- Margin expansion and operations
- Neil Ashe highlighted margin expansion as a multi-year effort driven by product vitality, pricing, cost management, and productivity; Design Select pacing is positive but not the sole driver of margin gains.
- Karen Holcom noted that gross margin improvements were the primary driver of higher adjusted operating margins; adjusted operating profit rose by $4 million despite a $32 million decline in sales, pushing adjusted OPM to 17.3%.
- Backlog, orders and timing
- Neil Ashe: Orders exceeded shipments in Q3, leading to backlog; production targets were not fully met, but the backlog will be serviced in coming quarters; they expect to resolve these production constraints this quarter/next.
- Neil Ashe: The order rate has been relatively consistent; infrastructure and corporate accounts provide meaningful opportunities with some streakiness.
- Growth and capital allocation
- Karen Holcom: YTD free cash flow of $404 million; increased dividend by 15%; repurchased over 454k shares; capital allocation prioritized growth investments (horticulture, Distech expansion), with a strong M&A pipeline focused on expanding Spaces and adjacent lighting adjacencies.
- Neil Ashe: A robust M&A pipeline remains, with emphasis on spaces (e.g., KE2 Therm integration) and lighting; acquisitions are to be strategically integrated and valued.
We increased our adjusted operating profit $2 million to $162 million and increased our adjusted operating profit margin 100 basis points to 18% on $42 million less sales.
— Neil Ashe
The order rate continued to grow year-over-year in the third quarter. We built backlog as our orders exceeded our shipments.
— Karen Holcom
Forward Guidance
Outlook and assessment:
- Near-term trajectory: Management maintains an expectation that order rates will continue to grow YoY in Lighting, with backlog serving over the coming quarters. They expect to return Lighting to growth while expanding margins and maintaining strong free cash flow.
- Growth drivers: Continued margin expansion through product vitality (e.g., FRAME, other LED innovations), enhanced service levels, and productivity improvements; Intelligent Spaces growth remains a meaningful contributor to profitability (ISG margin 22.9% in Q3).
- Market expansion and capital allocation: Ongoing expansion into new verticals (refueling, horticulture) and geographic expansion for Distech; a disciplined M&A pipeline focused on Spaces and related adjacencies; expect more bolt-on acquisitions to broaden addressable markets.
- Risks and monitoring: Macro demand volatility remains a key risk for Lighting, with project-based ordering and backlogs; execution of backlog and production ramp is critical to sustaining growth. Key factors investors should monitor include: (1) Lighting order pace and backlog conversion; (2) ISG/Distech growth cadence and integration success (KE2 Therm portfolio); (3) progression of verticals (refueling, horticulture) and associated margin impact; (4) SG&A leverage as fixed investments normalize; (5) cash flow generation and capital deployment (dividends, buybacks, and M&A timing). Overall, the combination of a diversified mix, strong cash generation, and an active product vitality program supports a constructive long-term view, albeit with near-term execution risks around production ramp and macro demand.
Competitive Position
Company
Gross Margin
Operating Margin
Return on Equity
P/E Ratio
AYI Focus
45.68%
15.00%
5.05%
17.57%
AEIS
35.80%
-2.95%
-1.28%
-66.25%
KE
7.52%
3.83%
-1.13%
-22.32%
HUBB
34.50%
21.10%
6.82%
26.21%
NVT
39.80%
17.00%
3.20%
27.70%
Gross Profit Margin
Operating Profit Margin
Return on Equity
P/E Ratio Comparison
Investment Outlook
Acuity Brands is positioned to benefit from a converging set of catalysts: (1) continued margin expansion through product vitality, optimized pricing, and productivity; (2) growing contribution from Intelligent Spaces, with Distech and Atrius expanding the addressable market; (3) strategic diversification into refueling and horticulture verticals that broaden the company's portfolio and reduce reliance on traditional Lighting demand. The company’s strong liquidity, sizable free cash flow, and a disciplined capital allocation framework (dividends and buybacks, complemented by an M&A pipeline) support a constructive long-term outlook. Near-term upside hinges on successful backlog conversion and stabilization of Lighting production, while the breadth of end-market exposure and the Spaces growth trajectory provide multiple levers for sustained performance. Investors should monitor Lighting order rates, backlog progression, ISG growth cadence, and the timing/scale of potential bolt-on acquisitions.
Key Investment Factors
Growth Potential
Significant upside from Spaces expansion (Distech, Atrius, KE2 Therm integration), and higher-margin, lower-cost Made-to-Order/Design Select/Contractor Select offerings. New verticals (refueling, horticulture) broaden addressable markets and reduce cyclical exposure. Continued backlog conversion and margin uplift from productivity initiatives support sustainable cash flow growth. A robust M&A pipeline focused on Spaces and adjacent lighting opportunities could further expand the total addressable market and defensible margins.
Profitability Risk
Near-term execution risk from production ramp constraints in Lighting leading to backlog buildup; macro demand volatility affecting project-based Lighting orders; reliance on independent sales network for a portion of Lighting growth; integration risk and integration costs from KE2 Therm/Distech expansions; competition and pricing pressure in commoditized lighting segments; political and macro uncertainties impacting infrastructure spending.
Financial Position
Strong liquidity with net cash position (-$120.3 million net debt) and ample cash balance ($699 million). Solid balance sheet metrics: current ratio 2.77, debt ratio 0.159, debt/equity 0.257, and interest coverage 23.06x. Free cash flow generation (YTD $140.5 million) supports dividends and share buybacks; capital allocation prioritizes organic growth investments, followed by modest buybacks and dividend increases. Valuation metrics indicate a reasonable multiple (P/E ~17.6x; P/B ~3.6x; P/S ~8.3x) relative to sector peers, suggesting upside potential if gross margins sustain and backlog converts efficiently.
SWOT Analysis
Strengths
Largest North American lighting and building management platform with diversified segments (Lighting & Lighting Controls, ABL, Intelligent Spaces).
Strong gross margin resilience and credible margin expansion trajectory driven by product vitality and productivity.
Solid balance sheet with net cash and robust free cash flow generation; disciplined capital allocation (dividends, buybacks).
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