In The Spotlight - Research Report

(RTTNews) - Acuity Brands Inc. (AYI) has demonstrated a pattern of positive earnings per share growth over the past five years, and still remains optimistic about the opportunities for solid profitable growth for fiscal 2015 and the foreseeable future.

The Stock In Focus...

Acuity Brands Inc., a provider of lighting solutions, is the parent company of Acuity Brands Lighting Inc. and other subsidiaries.

The company's lighting solutions encompass devices such as luminaires, lighting controls, lighting components, power supplies, prismatic skylights, light-emitting diode or LED lamps, and integrated lighting systems for indoor and outdoor applications utilizing a combination of light sources, including daylight, and other devices controlled by software that monitors and manages light levels while optimizing energy consumption.

Acuity Brands manufactures or procures lighting devices primarily in North America, Europe, and Asia. The company has one operating segment serving the North American lighting market and select international markets.

The company's lighting solutions are marketed under numerous brand names, including Lithonia Lighting, Holophane, Peerless, Mark Architectural Lighting, Hydrel, American Electric Lighting, Gotham, Carandini, RELOC, Antique Street Lamps, Winona Lighting, Synergy Lighting Controls, Sensor Switch, Lighting Control & Design, Dark to Light, ROAM, Sunoptics, Axion Controls, acculamp, Pathway Connectivity, Healthcare Lighting, and eldoLED.

Annual Financial Data

For fiscal 2014, Acuity Brands' net income increased to $175.8 million or $4.05 per share from $127.4 million or $2.95 per share in fiscal 2013, $116.3 million or $2.72 per share in 2012, $105.5 million or $2.42 per share in 2011, and $79.6 million or $1.80 per share in 2010.

Net sales for the year 2014 grew to $2.39 billion from $2.08 billion in 2013, $1.93 billion in 2012, $1.79 billion in 2011, and $1.62 billion in 2010.

Revenue Breakup

In fiscal 2014, North America accounted for about 98% of the company's net sales, and sales initiated outside of the U.S. represented approximately 10% of total net sales.

Sales of lighting solutions, excluding services, accounted for about 99% of total consolidated net sales for Acuity Brands in fiscal 2014, 2013, and 2012.

Domestic sales increased to $2.16 billion in 2014 from $1.85 billion in fiscal 2013, $1.73 billion in 2012 and $1.60 billion in 2011. International sales totaled $238.5 million in the fiscal year ended August 31, 2014, higher than the $234.2 million generated in fiscal 2013, $205.6 million in fiscal 2012 and $191.2 million in 2011.

The company realized greater demand for LED-based luminaires during the first nine months of fiscal 2014 as sales of these products more than doubled compared to the year-ago period and represented more than 30% of total net sales.

Geographical Analysis

The company operates 16 manufacturing facilities, including eight facilities in the United States, five facilities in Mexico, two facilities in Europe, and one in Canada.

Of total finished goods manufactured and purchased in fiscal 2014, the company's U.S. Operations produced about 25%; its Mexican operations produced about 53%; its European operations produced about 2%; and finished product manufactured by others accounted for about 20%. Of the products produced by the company, about 66% are manufactured at five facilities in Mexico.

Customer Concentration

Principal customers include electrical distributors, retail home improvement centers, electric utilities, lighting showrooms, national accounts, and energy service companies located in North America and select international markets serving new construction, renovation, and maintenance and repair applications.

A single customer of the company, The Home Depot, accounted for about 12% of net sales of the company in fiscal 2014, 13% in fiscal 2013, and 10% in fiscal 2012. These sales include products for resale as well as for lighting its facilities.

Market Potential

The company continued to expand its addressable market and further penetrated key geographies, reducing its reliance on new construction activity. The company has developed more than 500 product families in the last five years.

The company estimates North American addressable market to increase 48% to $20.1 billion in 2019 from $13.6 billion in 2014, of which, Lighting business is expected to generate $15.6 billion and Controls business to generate $2.5 billion in 2019 versus $11.6 billion and $1.3 billion, respectively, in 2014.

Growth Strategy

The company's strategy is to capitalize on market growth opportunities by continuing to expand and leverage its industry-leading lighting product and solutions portfolio combined with its extensive market presence and financial strength. Management continues to position the company to optimize short-term performance while investing in and deploying resources for long-term profitable growth opportunities.

The company continued its investments to both expand its industry-leading product and solutions portfolio and enhance its production, distribution, and customer service and support capabilities.

In an effort to help fund these important investments, Acuity Brands completed streamlining activities to improve its efficiency that included the consolidation of our manufacturing footprint and the reduction in headcount through the realignment of responsibilities within various selling, distribution, and administrative departments.

The strategic objectives were developed to enable the company to meet or exceed the following financial goals during an entire business cycle:

- Operating margins in the mid-teens or higher;

- 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 new and innovative lighting 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. Additionally, the company promotes a "pay-for-performance" culture that rewards achievement, while closely monitoring appropriate risk-taking. The expected outcome of these activities will be to better position the company to provide a platform for future growth opportunities, and to allow the company to achieve its long-term financial goals, the company said.

Future In Focus...

Acuity Brands noted that third-party forecasts as well as key leading indicators suggest fiscal 2015 growth rate in the mid-to-upper single-digit range for the North American lighting market, which includes renovation and retrofit activity.

In addition, overall demand in the company's end markets is expected to continue to experience solid growth over the next several years.

Management remains optimistic about the opportunities for solid profitable growth for fiscal 2015 and the foreseeable future and expects that the company will be able to outperform the markets it serves while delivering performance more consistent with management's long-term financial objectives.

From a longer term perspective, management expects that its addressable markets will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront. Management remains positive about the future prospects of the company and its ability to continue to outperform the markets it serves.

Latest Q4 Results

The company's fourth-quarter net income was $54.8 million or $1.26 per share, up from the previous year's $44.9 million or $1.03 per share.

On average, 13 analysts polled by Thomson Reuters expected the company to report earnings of $1.22 per share for the quarter. Analysts' estimates typically exclude certain special items.

Net sales for the quarter grew 15% to $668.7 million from $579.8 million in the same quarter of last year, and beat analysts' consensus revenue estimate of $649.22 million.

The company attributed the sales growth to a 17% increase in sales volume amid broad-based sales growth across most product categories and in virtually all key sales channels. This was partially offset by the impact of an unfavorable change in product prices and the mix of products sold of one percentage point, and the impact of an unfavorable change in foreign currency rates of approximately one-half percentage point.

Vernon Nagel, chairman, president and CEO of Acuity Brands said, "The year-over-year increase in fourth quarter net sales reflects continued favorable trends in our order rates as well as the continued adoption of LED lighting solutions, which nearly doubled over the prior year. Sales of LED-based lighting solutions represented approximately 40 percent of our total fourth quarter net sales."

Operating profit was $90.7 million compared with $78.2 million in the year-ago period. Operating profit margin was a robust 13.6%, up 10 basis points from the year-ago period.

The company generated $233 million in net cash provided by operating activities this year, while funding a $55 million increase in accounts receivable due to its record sales growth. Acuity Brands said it meaningfully enhanced its already strong financial position in 2014 as it now has more than $550 million of cash and cash equivalents on hand, far exceeding its debt at slightly more than $350 million.