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Table of Contents

 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________________________________
Form 10-K
__________________________________________________________
(Mark One)
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended August 31, 2019.
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
 

__________________________________________________________
ACUITY BRANDS, INC.
(Exact name of registrant as specified in its charter)
__________________________________________________________
Delaware
 
001-16583
 
58-2632672
(State or other jurisdiction of incorporation or organization)
 
(Commission File Number)
 
(I.R.S. Employer Identification Number)
__________________________________________________________
1170 Peachtree Street, N.E., Suite 2300, Atlanta, Georgia 30309-7676
(Address of principal executive offices)
(404853-1400
(Registrant’s telephone number, including area code)
__________________________________________________________
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol
 
Name of each exchange on which registered
Common stock, $0.01 par value per share
 
AYI
 
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      No 
Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes      No 
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      No 
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      No 
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer
Accelerated Filer
Non-accelerated Filer
Smaller Reporting Company
Emerging Growth Company
 
 
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).  Yes      No 
Based on the closing price of the Registrant’s common stock of $130.12 as quoted on the New York Stock Exchange on February 28, 2019, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $4.55 billion.
The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 39,643,111 shares as of October 23, 2019.
__________________________________________________________
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 2019 Annual Meeting of Stockholders
 




ACUITY BRANDS, INC.
Table of Contents

 
 
Page
 
 
 
 
 
 
 



Table of Contents

PART I

Item 1.
Business
Overview
Acuity Brands, Inc. (“Acuity Brands”) is the parent company of Acuity Brands Lighting, Inc. (“ABL”) and other wholly-owned subsidiaries (Acuity Brands, ABL, and such other subsidiaries are collectively referred to herein as “we,” “our,” “us,” “the Company,” or similar references) and was incorporated in 2001 under the laws of the State of Delaware. We are 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. Our lighting and building management solutions include devices such as luminaires, lighting controls, controls 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, we continue to expand our 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. We have one reportable segment serving the North American lighting market and select international markets.
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. Our 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, 2019, we manufacture products in 16 facilities in North America and two facilities in Europe and employ approximately 12,000 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 retrofit, and maintenance and repair applications. Our lighting and building management solutions are sold primarily through independent sales agents who cover specific geographic areas and market channels, by internal sales representatives, through consumer retail channels, and directly to large corporate accounts. 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 2019, sales originated in North America and the United States accounted for approximately 98% and 89% of net sales, respectively. See the Supplemental Disaggregated Information footnote of the Notes to Consolidated Financial Statements for more information concerning our domestic and international net sales.
Industry Overview
Based on industry sources and government information, we estimate that in fiscal 2019 the size of the North American lighting and building management solutions market we serve (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 down modestly to flat compared with fiscal 2018. 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 controls, 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 non-integrated lighting ballasts and 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, we estimate the potential size of the installed base of lighting and building management solutions to be over $500 billion.

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We operate in a highly competitive industry that is affected by volatility from a number of general business and economic factors, such as, but not limited to, gross domestic product growth, employment levels, credit availability, building costs, building occupancy rates, imports and trade, energy costs, and commodity costs, including tariffs. Our market is based on non-residential and residential construction, both new as well as renovation and retrofit activity, which is sensitive to the volatility of these general economic factors. We are 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 our estimates indicate that renovation and retrofit activity represents a growing proportion of the total non-residential lighting market. Construction spending on commercial, institutional, industrial, and infrastructure projects has a material impact on the demand for our lighting and building management solutions. Demand for our 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.
Our market is influenced by: the development of new lighting technologies, including solid-state lighting, electronic drivers, embedded lighting controls, 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 strategies and technologies addressing sustainability and facilitating smarter buildings and cities. We are a leading provider of integrated lighting and building management solutions based on these technologies and utilize 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 allowing for an optimal platform for enabling the IoT that collects and exchanges data to increase efficiency as well as provide a host of other economic benefits resulting from data analytics and other features. We expect 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
We offer 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, incandescent, high intensity discharge, halogen, and metal halide 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. Our 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. We also sell products to original equipment manufacturers (“OEMs”) that include LED drivers, power supplies, modular wiring, sensors, glass, and inverters.
In addition, we provide services across applications that primarily relate to monitoring and controlling lighting and building management systems through network technologies and the commissioning of control systems. We also offer 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. Our total solution offerings 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 our total consolidated net sales in fiscal 2019, 2018, and 2017.

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Sales and Marketing
Sales
We sell 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 channel and geography served. We also operate 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
We market our portfolio and service capabilities to customers and/or 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. We operate training and education facilities in several locations throughout North America and Europe designed to enhance the lighting knowledge of customers and industry professionals.
Customers
Our customers 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.
Manufacturing and Distribution
We operate 18 manufacturing facilities, including eight facilities in the United States, six facilities in Mexico, two facilities in Europe, and two in Canada. We utilize 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 LEDs, certain LED drivers, lamps, sockets, and ballasts are purchased primarily from third-party vendors. Our investment in our production facilities is focused primarily on improving capabilities, product quality, and manufacturing efficiency as well as environmental, health, and safety compliance. We also utilize 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 2019 by significant geographic region.
 
Manufactured
 
Purchased
 
Total
United States
19
%
 
7
%
 
26
%
Mexico
60
%
 
%
 
60
%
China
%
 
11
%
 
11
%
Others
3
%
 
%
 
3
%
Total
82
%
 
18
%
 
100
%
We operate six facilities in Mexico, which are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows us 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 2019, 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. We invest 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. We also develop 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 2019, 2018, and 2017, research and development expense totaled $74.7 million, $63.9 million, and $52.0 million, respectively.
Competition
We experience competition based on numerous factors, including features and benefits, price, brand name recognition, product quality, product and system design, energy efficiency, customer relationships, and service capabilities. The market for lighting and building management solutions and services is competitive and continues to evolve through acquisitions and consolidation of niche manufacturers. Certain global and more diversified 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, including lower cost Asian imports, small startup companies, and 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
Our operations 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 our operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. On an ongoing basis, we allocate 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, carbon dioxide and other air emissions, end-of-life product dispositions, and energy efficiency. We are not aware of any pending legislation or proposed regulation related to environmental issues that would have a material adverse effect on us. The cost of responding to future changes, however, may be substantial.
Raw Materials
Our production requires certain raw materials, including certain grades of steel and aluminum, electrical and electronic components, plastics, and other petroleum-based materials and components. In fiscal 2019, we purchased approximately 90,000 tons of steel and aluminum. We estimate that approximately 7% of purchased raw materials are petroleum-based. Additionally, we estimate that approximately six million gallons of diesel fuel were consumed in fiscal 2019 through our distribution activities. We purchase most raw materials and other components on the open market and rely on third parties to provide 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 materials and tariffs on certain materials, particularly imports from China, as well as disruptions in availability of raw materials, components, and sourced finished goods.
We do not currently engage in or expect to engage in significant commodity hedging transactions for raw materials, though we have and will continue to commit to purchase certain materials for a period of up to 12 months. We monitor and investigate alternative suppliers and materials based on numerous attributes including quality, service, and price. We currently source raw materials and components from a number of suppliers, but our ongoing efforts to improve the cost effectiveness of our products and services may result in a reduction in the number of our suppliers.
Backlog Orders
We produce and stock 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.

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Intellectual Property
We own or have licenses to use various domestic and foreign patents, trademarks, and other intellectual property related to our products, processes, and businesses. These intellectual property rights are important factors for our businesses. We rely 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 our intellectual property. As of August 31, 2019, we had approximately 1,500 active United States and foreign patents. While patents and patent applications in the aggregate are important to our competitive position, no single patent or patent application is individually material to us.
Seasonality and Cyclicality
Our 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, we have experienced, and generally expect to experience, our highest sales in the last two quarters of each fiscal year.
Our 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 and fiscal policies. Sales volume has a major impact on our profitability. Economic downturns and the potential decline in key construction markets may have a material adverse effect on our net sales and operating income. Additionally, tariffs have caused pull forwards of customer orders to avoid price increases.
Employees
As of August 31, 2019, we employed approximately 12,000 associates, of which approximately 4,200 were employed in the United States, approximately 7,200 in Mexico, and approximately 600 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 8,000 persons (including approximately 1,700 in the United States). Union recognition and collective bargaining arrangements covering approximately 6,800 persons will expire within the next fiscal year, primarily due to annual negotiations of union contracts in Mexico. The remaining arrangements will expire after the next fiscal year and relate to approximately 1,200 persons employed within the United States. We believe that we have a good relationship with both our unionized and non-unionized employees.
Information Concerning Acuity Brands
We make our 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 our officers, directors, and beneficial owners of 10% or more of our common stock, available free of charge through the “SEC Filings” link within the “Investors” section on our 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 our website is not incorporated by reference into this Annual Report on Form 10-K. Our reports are also available on the Securities and Exchange Commission’s website at www.sec.gov.
Additionally, we have adopted a written Code of Ethics and Business Conduct that applies to all of our directors, officers, and employees, including our principal executive officer and senior financial officers. The Code of Ethics and Business Conduct and our Corporate Governance Guidelines are available free of charge through the “Corporate Governance” link on our website. Any amendments to, or waivers of, the Code of Ethics and Business Conduct for our principal executive officer and senior financial officers will be disclosed on our website promptly following the date of such amendment or waiver. Additionally, the Statement of Responsibilities of Committees of the Board of Directors (the “Board”) and the Statement of Rules and Procedures of Committees of the Board, which contain the charters for our 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 our 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 of our stockholders that request such document by contacting our 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 our actual results to differ materially from the anticipated results or other expectations expressed in our 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 our financial position, results of operations, and cash flows and could cause the market price of our common stock to decrease. Such risks include, without limitation:
Risks Related to Our Strategy
General business, political, and economic conditions, including the strength of the construction market, political events, or other factors may affect demand for our products and services.
We compete 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, we operate 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 and other political uncertainties, may negatively impact new construction and renovation projects, which in turn may impact demand for our product and service offerings.
Our results may be adversely affected by fluctuations in the cost or availability of raw materials, components, purchased finished goods, or services.
We utilize a variety of raw materials and components in our 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. We also source 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. We generally source 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 our performance. Suppliers for certain of those items are our competitors that may, for various strategic reasons, choose to cease selling to us. In addition, our ongoing efforts to improve the cost effectiveness of our products and services may result in a reduction in the number of our 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 us 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, we are 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.
Our results may be adversely affected by our inability to maintain pricing.
Aggressive pricing actions by competitors, including Asian importers and those within the technology and services sectors, may affect our ability to achieve desired revenue growth and profitability levels under our current pricing strategies. We may also decide to lower prices to match the competition or exit unprofitable business. Additionally, we may not be able to increase prices to cover rising costs of components and raw materials. Even if we were able to increase prices to cover costs, competitive pricing pressures may not allow us to pass on any more than the cost increases. Alternatively, if component and raw material costs were to decline, the marketplace may not allow us to hold prices at their current levels.

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Our inability to effectively introduce new products and solutions could adversely affect our 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 our 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, our 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, we cannot fully predict the ultimate effect of new product introductions on our business. Additionally, new products and solutions may not achieve the same profit margins as expected and as compared to our historic products and solutions.
We may pursue future growth through acquisitions, alliances, or investments, which may not yield anticipated benefits.
We have strengthened our business through 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. We will benefit from such activity only to the extent that we 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 our 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 our ability to invest in other activities, which could be more profitable or advantageous.
The inability to effectively execute our business strategies could adversely affect our financial condition and results of operations.
Various uncertainties and risks are associated with the implementation of a number of aspects of our 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, and effective integration of acquisitions. 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 our 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 our business. With the addition of new products and solutions, we may encounter new and different competitors that may have more experience with respect to such products and solutions.
We may experience difficulties in streamlining activities, which could impact shipments to customers, product quality, and the realization of expected savings from streamlining actions.
We expect to benefit from our 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 we 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.

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Risks Related to Our Operations
Technological developments and increased competition could affect our operating profit margins and sales volume.
We compete in an industry and markets where technology and innovation play major roles in the competitive landscape. We are 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, as well as obtaining appropriate patents and the right to utilize patents of other parties all play a significant role in protecting our freedom to operate. 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 our 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 our 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 us 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.
We may be unable to sustain significant customer and/or channel partner relationships.
Relationships with customers are directly impacted by our 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 our business in a meaningful manner. We have relationships with channel partners such as electrical distributors, home improvement retailers, independent sales agencies, system integrators, and value-added resellers. While we maintain positive, and in many cases long-term, relationships with these channel partners, the sudden or unplanned 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 our business.
We could be adversely affected by disruptions to our 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 our or one or more of our suppliers’ facilities could adversely affect us. Approximately 60% of our 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 our customers are to varying degrees dependent on planned deliveries from our facilities, those customers that have to reschedule their own production or delay opening a facility due to our missed deliveries as a result of these disruptions could pursue financial claims against us. We may incur costs to correct any of these problems in addition to facing claims from customers. Further, our reputation among actual and potential customers may be harmed and result in a loss of business. While we have 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. We could incur uninsured losses and liabilities arising from such events, including damage to our reputation, loss of customers, and substantial losses in operational capacity.
Company operating systems, information systems, or devices may experience a failure, a compromise of security, or a violation of data privacy laws or regulations, which could adversely impact our operations as well as the effectiveness of internal controls over operations and financial reporting.
We are highly dependent on various software and automated systems to record and process operational and financial transactions. We 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. We could also experience a compromise of our security due to many reasons, including technical system flaws, clerical, data input or record-keeping errors, or tampering or manipulation of our systems by employees or unauthorized third parties, including viruses, malware, or phishing. Information security risks also exist with respect to the use of portable

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electronic devices, such as laptops and smartphones, which are particularly vulnerable to loss and theft. We may also be subject to disruptions of any of these systems arising from events that are wholly or partially beyond our 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 we rely on outside vendors to provide services, which may operate in a cloud environment. We are dependent on third-party vendors to operate secure and reliable systems which may include data transfers over the internet.
We also provide and maintain 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 our 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, our technology to support that customer’s other systems, such that a failure of our technology could impact those systems, including by loss or destruction of data. Likewise, a customer’s failure to properly configure, update, or upgrade its own network and integrations with our technology are outside of our control and could result in a failure in functionality or security of our technology.
Certain of our third-party vendors and we 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 our or our clients' confidential, proprietary and other information (including personal identifying information of individuals), or otherwise disrupt our or our clients' or other third parties' business operations. To the extent that any disruption or security breach results in a loss or damage to our data, or an inappropriate disclosure of confidential or customer or employee information, it could cause significant damage to our reputation, affect relationships with our customers, employees, and other counterparties, lead to claims against us, which may result in the payment of fines, penalties, and costs, and ultimately harm our business. In addition, we 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.
We are also subject to an increasing number of data privacy and security laws and regulations that impose requirements on us and our 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 our 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 our systems or infrastructure, subject us to liability claims, or regulatory fines, penalties, or intervention, harm our reputation, interrupt our operations, disrupt customer operations, and adversely affect our internal control over financial reporting, business, financial condition, results of operations, or cash flows.
Changes in our 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 our operations.
We employed approximately 12,000 people as of August 31, 2019, approximately 7,800 of whom are employed in international locations. As such, we have 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 our operating costs. Union recognition and collective bargaining agreements are in place or in process covering approximately 67% of our workforce, primarily due to annual negotiations with unions in Mexico. Collective bargaining agreements representing approximately 57% of our workforce will expire within one year. While we believe that we have good relationships with both our unionized and non-unionized employees, we may become vulnerable to a strike, work stoppage, or other labor action by these employees.
We rely 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 our ability to execute key operational functions.

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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 we expand our service offerings, reliance on the technical infrastructure to provide services to customers will increase. If we fail to appropriately manage and secure the technical infrastructure required, customers could experience service outages or delays in implementation of services. If we are unable to manage and mitigate these risks, we could incur liabilities and other losses.
We may be subject to risk in connection with third-party relationships necessary to operate our business.
We utilize strategic partners and third-party relationships in order to operate and grow our business. For instance, we utilize third parties to contract manufacture certain products, subcontract installation and commissioning, as well as perform certain selling, distribution, and administrative functions. We cannot control the actions or performance, including product quality, of these third parties and therefore, cannot be certain that we or our end-users will be satisfied. Any future actions of or any failure to act by any third party on which our business relies could cause us to incur losses or interruptions in our operations.
We are subject to risks related to operations and suppliers outside the United States.
We have 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. Our 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 our domestic and international operations, we face risks specifically related to our 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 us.
We source certain components and approximately 11% of our 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. We are seeking to mitigate the impact of the tariffs on our profitability, including a variety of activities such as engaging alternative suppliers that produce products and components whose origin is in countries other than China, insourcing the production of certain products, and raising selling prices. We could be adversely affected to the extent we are unable to mitigate the impacts of the tariffs.
We operate six manufacturing facilities in Mexico, which are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows us 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. In addition, if our Mexican facilities cease to qualify for Maquiladora status or if the Mexican government adopts additional adverse changes to the program, our manufacturing costs in Mexico would increase.
We are also subject to certain other laws and regulations affecting our 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 classification and other requirements. A majority of our 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. We source certain components and approximately 11% of our 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 our products, costs, customers, suppliers, and/or the US economy or certain sectors thereof and, thus, to adversely impact our business.

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The evolution of our products, complexity of our 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 us to fully and accurately comply with such requirements, could subject us to liabilities for past, present, or future periods. Such liabilities could adversely impact our business.
In June 2016, the United Kingdom (“U.K.”) held a referendum in which voters approved an exit from the European Union (“E.U.”) commonly referred to as “Brexit.” As a result of the referendum, the British government has been 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 our business and the business of existing and future customers and suppliers as well as have an impact on our employees based in Europe, which could adversely impact our 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.
We continue to monitor conditions affecting our 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 our 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 we operate may result in exposure to substantial disruptions, costs and liabilities.
The laws and regulations impacting us 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 and compensation of our 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. We may also be affected by future standards, laws or regulations, including those imposed in response to energy, climate change, product functionality, geopolitical, corporate social responsibility, or similar concerns. These standards, laws, or regulations may impact our costs of operation, the sourcing of raw materials, and the manufacture and distribution of our products and place restrictions and other requirements or impediments on the products and solutions we can sell in certain geographical locations or on the willingness of certain investors to own our shares.
We may develop unexpected legal contingencies or matters that exceed insurance coverage.
We are 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 our products, services, or solutions, as well as exposure to hazardous materials, contract disputes, or intellectual property disputes. We are 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 are fully self-insured for certain other types of losses, including environmental, product recall, warranties, commercial disputes, and patent infringement. We establish 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 or lower than the level of insurance coverage we hold 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. Our 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 our products are improperly designed, manufactured, packaged, or labeled, or are otherwise alleged to cause harm or injury, we may need to recall those items, may have increased warranty costs, and could be the target of product liability claims.
We may need to recall products if they are improperly designed, manufactured, packaged, or labeled, and we do not maintain insurance for such recall events. Many of our products and solutions have become more complex in recent

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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. We have increasingly manufactured certain of those components and products in our own facilities. We have previously initiated product recalls as a result of potentially faulty components, assembly, installation, design, and packaging of our 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 we developed 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. We may also be liable if the use of any of our products cause harm, whether from fire, shock, harmful materials or components, alleged adverse health impacts from exposure to light emitted by our products, or any other personal injury or property damage, and we could suffer losses from a significant product liability judgment against us in excess of our insurance limits. We may not be able to obtain indemnity or reimbursement from our suppliers or other third parties for the warranty costs or liabilities associated with our products. A significant product recall, warranty claim, or product liability case could also result in adverse publicity, damage to our reputation, and a loss of consumer confidence in our products.
We may not be able to adequately protect our intellectual property and could be the target of intellectual property claims.
We own certain patents, trademarks, copyrights, trade secrets, and other intellectual property. In addition, we continue to file patent applications, when appropriate. We cannot be certain that others have not and will not infringe on our intellectual property rights; however, we seek to establish and protect those rights, which could result in significant legal expenses and adversely affect our financial condition and results of operations.
Over the last several years, we 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 our use. 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. We believe that we do 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 we are required but unable to enter into such arrangements on acceptable economic terms, it could adversely impact us.
Risks Related to Financial Matters
The market price and trading volume of our shares may be volatile.
The market price of our common shares could fluctuate significantly for many reasons, including reasons unrelated to our 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, our performance could be different than analyst expectations causing a decline in our stock price. To the extent that other large companies within our industry experience declines in share price, our 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 us or otherwise engage in activism, which could cause us to incur substantial costs and could divert the time and attention of our management and other resources.
Changes to LIBOR may adversely impact the interest rate paid on some of our loans and consequently, our earnings and cash flows.
The borrowing facilities under our Credit Agreement, including under the Term Loan Facility, currently allow us to incur variable debt that is indexed to the London Inter-Bank Offered Rate (“LIBOR”). Upon maturity in December 2019, we intend to refinance in full our $350 million of Senior Notes outstanding with borrowings under our Term Loan Facility.  We expect that interest on those borrowings, as well as on certain other borrowings under our Credit Agreement, would be based on LIBOR, plus an applicable margin.  On July 27, 2017, the U.K. Financial Conduct Authority, which regulates LIBOR, announced that it will no longer persuade or compel banks to submit rates for the calculation of LIBOR to the LIBOR administrator after 2021. The announcement also indicates that the continuation of LIBOR on the current basis cannot and will not be guaranteed after 2021. Consequently, at this time, it is not possible to predict whether and to what extent banks will continue to provide LIBOR submissions to the LIBOR administrator or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Similarly, it is not possible to predict whether LIBOR will continue to be viewed as an acceptable benchmark for certain securities, loans, and liabilities, what rate or rates may become accepted alternatives to LIBOR or the effect of any such changes in views or alternatives on the value of securities whose interest rates are tied to LIBOR. Recent proposals for LIBOR reforms may result in the

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establishment of new methods of calculating LIBOR or the establishment of one or more alternative benchmark rates.  Although our Credit Agreement provides for application of successor base rates, the successor base rates may be related to LIBOR, and the consequences of any potential cessation, modification or other reform of LIBOR cannot be predicted at this time. As a result, our interest expense may increase, our ability to refinance some or all of our existing indebtedness may be impacted and our available cash flow may be adversely affected.
Risks related to our 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 our results of operations and the amount of contributions we are required to make to the defined benefit plans in future periods. As our 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 our results.

Item 1b.
Unresolved Staff Comments
None.

Item 2.
Properties
Our general corporate offices 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 our operating facilities owned or leased. The following listing summarizes the significant facility categories as of August 31, 2019:
Nature of Facilities
Owned
 
Leased
Manufacturing facilities
13

 
5

Warehouses
1

 
3

Distribution centers*
2

 
7

Offices
5

 
17

______________________________________
* The majority of the distribution centers also have certain manufacturing and assembly capabilities.
The following table provides additional geographic information related to our manufacturing facilities as of August 31, 2019:
 
United States
 
Mexico
 
Europe
 
Canada
 
Total
Owned
6

 
4

 
2

 
1

 
13

Leased
2

 
2

 

 
1

 
5

Total
8

 
6

 
2

 
2

 
18

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

Item 3.
Legal Proceedings
General
We are 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. We are self-insured up to specified limits for certain types of claims, including product liability, and we are 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

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adverse effect on our financial condition, results of operations, or cash flows. 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 our financial condition, results of operations, or cash flows in future periods. We establish 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, we cannot make a meaningful estimate of actual costs to be incurred that could possibly be higher or lower than the amounts reserved.
Lighting Science Group Patent Litigation
On April 30, 2019 and May 1, 2019, Lighting Science Group Corp. (“LSG”) filed complaints in the International Trade Commission and United States District Court for the District of Delaware, respectively, alleging infringement of eight patents by the Company. On May 17, 2019, LSG amended both of its complaints and dropped its claims regarding one of the patents. For the remaining seven patents, LSG’s infringement allegations relate to certain of our LED luminaires and related systems. LSG seeks orders from the International Trade Commission to preclude the importation and sale of the accused products. LSG seeks unspecified monetary damages, costs, and attorneys’ fees in the District of Delaware action. We dispute and have numerous defenses to the allegations, and we intend to vigorously defend against LSG’s 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 a request for an exclusion order and are in the stages of the proceedings where key factual and legal issues have not been resolved. For these reasons, we currently are unable to predict the ultimate timing or outcome of or reasonably estimate the possible losses or a range of possible losses resulting from these matters.
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 us and certain of our officers on behalf of all persons who purchased or otherwise acquired our 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 our 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 our common stock between October 7, 2015 and April 3, 2017 and alleges that we and certain of our 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 our products and (ii) overstated our ability to achieve profitable sales growth. The plaintiffs seek class certification, unspecified monetary damages, costs, and attorneys’ fees. We dispute the allegations in the complaints and intend to move to dismiss the Consolidated Complaint and to vigorously defend against the claims. We filed a motion to dismiss the Consolidated Complaint. On August 12, 2019, the court entered an order granting our motion to dismiss in part and dismissing all claims based on 42 of the 47 statements challenged in the Consolidated Complaint but also denying the motion in part and allowing claims based on 5 challenged statements to proceed to discovery. 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, we are 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. We are insured, in excess of a self-retention, for Directors and Officers liability.
Environmental Matters
Our operations 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 operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. On an ongoing basis, we invest capital and incur operating costs related to environmental compliance. Environmental laws and regulations have generally become stricter in recent years. The cost of responding to future changes may be substantial. We establish 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.

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Item 4.
Mine Safety Disclosures
Not applicable.


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PART II

Item 5.
Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our common stock is listed on the New York Stock Exchange under the symbol “AYI.” At October 23, 2019, there were 2,004 stockholders of record. The information required by this item with respect to equity compensation plans is included under the caption Equity Compensation Plans in our proxy statement for the annual meeting of stockholders to be held January 8, 2020, which we will file with the Securities and Exchange Commission pursuant to Regulation 14A. The proxy statement 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 our common stock. As of August 31, 2019, 1.45 million shares had been purchased under this authorization. The maximum number of shares that may yet be purchased under the program equals 4.55 million shares.
The following table summarizes share repurchase activity by month for the quarter ended August 31, 2019:
Period
Total Number of Shares Purchased
 
Average Price Paid per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Plans
 
Maximum Number of Shares that May Yet Be Purchased Under the Plans
6/1/2019 through 6/30/2019

 
$

 

 
4,800,000

7/1/2019 through 7/31/2019
250,000

 
$
131.58

 
250,000

 
4,550,000

8/1/2019 through 8/31/2019

 
$

 

 
4,550,000

Total
250,000

 
$
131.58

 
250,000

 
4,550,000

We may repurchase shares of our common stock 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 we are 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.

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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.
The following graph compares the cumulative total return to shareholders on our outstanding stock during the five years ended August 31, 2019, with the cumulative total returns of the Standard & Poor’s (“S&P”) Midcap 400 Index, the Dow Jones U.S. Electrical Components & Equipment Index, and the Dow Jones U.S. Building Materials & Fixtures Index. We are 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.
COMPARISON OF FIVE-YEAR CUMULATIVE TOTAL RETURN*
Among Acuity Brands, Inc., the S&P Midcap 400 Index,
the Dow Jones US Electrical Components & Equipment Index,
and the Dow Jones US Building Materials & Fixtures Index
chart-644b0abb0ea05b9c83d.jpg

*Assumes $100 invested on August 31, 2014 in stock or index, including reinvestment of dividends.
 
 
Aug-14

Aug-15

Aug-16

Aug-17

Aug-18

Aug-19

 
 
 
 
 
 


Acuity Brands, Inc.
 
$
100

$
158

$
223

$
144

$
125

$
103

S&P Midcap 400 Index
 
$
100

$
100

$
112

$
126

$
151

$
142

Dow Jones US Electrical Components & Equipment Index
 
$
100

$
90

$
103

$
128

$
150

$
135

Dow Jones US Building Materials & Fixtures Index
 
$
100

$
115

$
143

$
150

$
159

$
177



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Item 6.
Selected Financial Data
The following table sets forth certain selected consolidated financial data, which has been derived from the Consolidated Financial Statements for each of the five years in the period ended August 31, 2019. This historical information may not be indicative of our 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,
 
2019(1)
 
2018(2)
 
2017(3)
 
2016(4)
 
2015(5)
 
(In millions, except per-share data)
Net sales
$
3,672.7

 
$
3,680.1

 
$
3,505.1

 
$
3,291.3

 
$
2,706.7

Net income
330.4

 
349.6

 
321.7

 
290.8

 
222.1

Basic earnings per share
8.32

 
8.54

 
7.46

 
6.67

 
5.13

Diluted earnings per share
8.29

 
8.52

 
7.43

 
6.63

 
5.09

Cash and cash equivalents
461.0

 
129.1

 
311.1

 
413.2

 
756.8

Total assets
3,172.4

 
2,988.8

 
2,899.6

 
2,948.0

 
2,407.0

Long-term debt
347.5

 
356.4

 
356.5

 
355.0

 
352.4

Total debt
356.6

 
356.8

 
356.9

 
355.2

 
352.4

Stockholders’ equity
1,918.9

 
1,716.8

 
1,665.6

 
1,659.8

 
1,360.0

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 2019 include a) pre-tax special charges of $1.8 million related to streamlining initiatives, b) pre-tax amortization of acquired intangible assets of $30.8 million, c) pre-tax share-based payment expense of $29.2 million, d) pre-tax acquisition-related items of $2.5 million, and e) certain manufacturing inefficiencies related to the closure of a facility of $0.9 million, totaling $1.28 per share.
(2)
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, e) excess inventory related to the closure of a facility of $3.1 million, f) gain on sale of a business of $5.4 million, and g) discrete income tax benefits of the U.S. Tax Cuts and Jobs Act of $34.6 million, totaling $0.32 per share.
(3)
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.
(4)
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.
(5)
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.

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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, 2019, 2018, and 2017. 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 wholly-owned subsidiaries (Acuity Brands, ABL, and such other subsidiaries are collectively referred to herein as “we,” “our,” “us,” “the Company,” or similar references). Our principal office is located in Atlanta, Georgia.
We are 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. Our lighting and building management solutions include devices such as luminaires, lighting controls, controls 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, we continue to expand our 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 of August 31, 2019, we employed approximately 12,000 associates and operated 18 manufacturing facilities, nine distribution facilities, and four warehouses to serve our extensive customer base.
We do not consider acquisitions a critical element of our strategy but seek opportunities to expand and enhance our portfolio of solutions, including the following transactions:
On September 17, 2019, using cash on hand and borrowings under available existing credit arrangements, we acquired all of the equity interests of The Luminaires Group (“TLG”), a leading provider of specification-grade luminaires for commercial, institutional, hospitality, and municipal markets, all of which complements our current and dynamic lighting portfolio. TLG’s indoor and outdoor lighting fixtures are marketed to architects, landscape architects, interior designers and engineers through five niche lighting brands: A-light, Cyclone, Eureka, Luminaire LED and Luminis.
On June 20, 2019, using cash on hand we acquired all of the equity interests of WhiteOptics, LLC (“WhiteOptics”). WhiteOptics is headquartered in New Castle, Delaware and manufactures advanced optical components used to reflect, diffuse, and control light for LED lighting used in commercial and institutional applications.
On May 1, 2018, using cash on hand and borrowings available under existing credit arrangements, we acquired IOTA Engineering, LLC (“IOTA”). IOTA is headquartered in Tucson, Arizona and manufactures 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, we acquired Lucid Design Group, Inc (“Lucid”). Lucid is headquartered in Oakland, California and provides a data and analytics platform to make data-driven decisions to improve building efficiency and drive energy conservation and savings.
No acquisitions were completed during fiscal 2017.
Please refer to the Acquisitions footnote of the Notes to Consolidated Financial Statements for more information.
Strategy
Our strategy is to extend our leadership position in the North American market and certain international markets by delivering superior lighting and building management solutions. Additionally, we plan to continue to expand our software solution offerings, including IoT enabled solutions. As a results-oriented, customer-centric company, management plans to align 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 our customers, driving world-class cost efficiency, and leveraging a culture of operational excellence through continuous improvement.
Throughout fiscal 2019, we believe we made progress towards achieving our strategic objectives, including expanding our access to the market, expanding our addressable market, introducing new lighting and building management

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solutions, and enhancing our operations to create a stronger, more effective organization. Our strategic objectives were developed in order 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;
Cash flow from operations, less capital expenditures, that is in excess of net income; and
Return on invested capital in excess of our weighted average cost of capital.
To enhance our probability of achieving these financial goals, management will continue to implement programs to enhance our 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, we have 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, we promote a “pay-for-performance” culture that rewards associates for achieving various levels of year-over-year improvement, while closely monitoring appropriate risk-taking. The expected outcome of these activities will be to better position ourselves to deliver on our full potential, to provide a platform for future growth opportunities, and to achieve our long-term financial goals. See the Outlook section below for additional information.
Liquidity and Capital Resources
Our principal sources of liquidity are operating cash flows generated primarily from our business operations, cash on hand, and various sources of borrowings. Our ability to generate sufficient cash flow from operations or to access certain capital markets, including banks, is necessary to fund our operations and capital expenditures, pay dividends, repurchase shares, meet obligations as they become due, and maintain compliance with covenants contained in our financing agreements.
In fiscal 2019, we invested $53.0 million in property, plant, and equipment, primarily for new and enhanced information technology capabilities, equipment, tooling, and facility enhancements. We expect to invest approximately 1.7% of net sales in capital expenditures during fiscal 2020.
In March 2018, the Board authorized the repurchase of up to six million shares of our common stock. As of August 31, 2019, 1.45 million shares had been purchased under this authorization, of which 0.7 million were repurchased in fiscal 2019. We expect to repurchase the remaining shares available for repurchase on an opportunistic basis subject to various factors including stock price, Company performance, market conditions and other possible uses of cash.
Our short-term cash needs are expected to include funding operations as currently planned; making capital investments as currently anticipated; paying quarterly stockholder dividends as currently anticipated; paying principal and interest on debt as currently scheduled, including our senior unsecured notes maturing in December 2019, which we expect to repay with borrowings available under existing credit arrangements, subject to satisfying the applicable conditions precedent; making required contributions to our employee benefit plans; funding possible acquisitions; and potentially repurchasing shares of our outstanding common stock. We believe that we will be able to meet our liquidity needs over the next 12 months based on our cash on hand, current projections of cash flow from operations, and borrowing availability under financing arrangements. Additionally, we believe that our cash flows from operations and sources of funding, including, but not limited to, future borrowings and capacity, will sufficiently support our long-term liquidity needs.
Cash Flow
We use available cash and cash flows from operations as well as borrowings on credit arrangements to fund operations, capital expenditures, and acquisitions, if any; to repurchase Company stock; and to pay dividends.
Our cash position at August 31, 2019 was $461.0 million, an increase of $331.9 million from August 31, 2018. During the year ended August 31, 2019, we generated net cash flows from operating activities of $494.7 million. Cash generated from operating activities, as well as cash on-hand, was used during the current year primarily to repurchase 0.7 million shares of our outstanding common stock for $81.6 million, fund capital expenditures of $53.0 million, pay dividends to stockholders of $20.8 million, and pay withholding taxes on the net settlement of equity awards of $6.0 million.
During fiscal 2019, net cash generated from operating activities increased $143.2 million to $494.7 million compared with $351.5 million in the prior-year period due primarily to lower net working capital requirements. 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) decreased by approximately $57.0 million during fiscal 2019 compared to an increase of $84.7 million during fiscal 2018. Operating working capital decreased primarily due to

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greater cash collections from customers year over year as well as reductions in current year inventory as a result of our efforts to improve inventory turnover. These improvements were partially offset by the timing of payments for trade payables.
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. We invested $53.0 million and $43.6 million in fiscal 2019 and 2018, respectively, in property, plant, and equipment primarily for new and enhanced information technology capabilities, equipment, tooling, and facility enhancements. We expect to invest approximately 1.7% of net sales in capital expenditures during fiscal 2020.
Contractual Obligations
The following table summarizes our contractual obligations at August 31, 2019 (in millions):
 
 
 
Payments Due by Period
 
Total
 
Less than
One Year
 
1 to 3 Years
 
4 to 5
Years
 
After 5
Years
Debt(1)
$
356.7

 
$
350.3

 
$
4.8

 
$
0.7

 
$
0.9

Interest obligations(2)
95.2

 
23.6

 
25.2

 
20.9

 
25.5

Operating leases(3)
68.7

 
16.7

 
23.4

 
11.8

 
16.8

Purchase obligations(4)
357.2

 
347.2

 
10.0

 

 

Other liabilities(5)
44.9

 
1.8

 
3.2

 
1.5

 
38.4

Total
$
922.7

 
$
739.6

 
$
66.6

 
$
34.9

 
$
81.6

___________________________
(1) 
These amounts, which represent the principal amounts outstanding at August 31, 2019, are included in our Consolidated Balance Sheets. See the Debt and Lines of Credit footnote for additional information regarding debt and other matters.
(2) 
These amounts primarily represent our expected future interest payments on outstanding debt held at August 31, 2019 and our outstanding loans related to our 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 our Consolidated Statements of Cash Flows.
(3) 
Our 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 our Consolidated Balance Sheets and largely represent liabilities for which we are 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 we elect 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 $16.6 million of unrecognized tax benefits as the period of cash settlement with the respective taxing authorities cannot be reasonably estimated.
The above table does not include deferred income tax liabilities of approximately $174.4 million as of August 31, 2019. Refer to the Income Taxes footnote for more information. This amount is not included in the total contractual obligations table because we believe this presentation would not be meaningful. Deferred income tax liabilities are calculated based on temporary differences between the tax and book bases of assets and liabilities, 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
Our current capital structure is comprised principally of senior unsecured notes and equity of our stockholders. Total debt outstanding was $356.6 million and $356.8 million at August 31, 2019 and 2018, respectfully, and consisted primarily of fixed-rate obligations. We fully repaid all borrowings under our revolving credit facility during fiscal 2019. Additionally, we repaid $0.4 million under the fixed rate long-term bank loans during fiscal 2019.
On December 8, 2009, ABL issued $350.0 million of senior unsecured notes due in December 2019 (the “Unsecured Notes”) in a private placement transaction. The Unsecured Notes were subsequently exchanged for Securities and Exchange Commission 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 ten years. Although

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the Unsecured Notes will mature within one year from August 31, 2019, we have the ability and intent to refinance these borrowings using availability under our unsecured delayed draw term loan facility (“Term Loan Facility”) as described below, subject to satisfying the applicable conditions precedent. Currently, we plan to refinance the Unsecured Notes in full with borrowings under the Term Loan Facility, of which $341.2 million of the carrying value would be due more than one year from the anticipated refinancing date. As such, this amount is reflected within Long-term debt on the Consolidated Balance Sheets as of August 31, 2019. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for more information.
On June 29, 2018, we entered into a credit agreement (“Credit Agreement”) with a syndicate of banks that provides us with a $400.0 million five-year unsecured revolving credit facility (“Revolving Credit Facility”) and a $400.0 million Term Loan Facility. On August 31, 2019, we had no borrowings outstanding under the Revolving Credit Facility and no borrowings under the Term Loan Facility. We were in compliance with all financial covenants under the Credit Agreement as of August 31, 2019. At August 31, 2019, we had additional borrowing capacity under the Credit Agreement of $796.2 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility and the Term Loan Facility less the outstanding letters of credit of $3.8 million issued under the Revolving Credit Facility. As of August 31, 2019, we had outstanding letters of credit totaling $8.0 million, primarily for securing collateral requirements under our casualty insurance programs and for providing credit support for our industrial revenue bond, including $3.8 million issued under the Revolving Credit Facility. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements for more information.
During fiscal 2019, our consolidated stockholders’ equity increased $202.1 million to $1.92 billion at August 31, 2019 from $1.72 billion at August 31, 2018. The increase was due primarily to net income earned in the period, partially offset by share repurchases, pension plan adjustments, dividend payments, adjustments related to the adoption of Accounting Standards Codification 606, Revenue from Contracts with Customers (“ASC 606”), shares withheld for employee taxes on vested restricted stock grants, and foreign currency translation adjustments. Our debt to total capitalization ratio (calculated by dividing total debt by the sum of total debt and total stockholders’ equity) was 15.7% and 17.2% at August 31, 2019 and 2018, respectively. The ratio of debt, net of cash, to total capitalization, net of cash, was (5.8)% and 11.7% at August 31, 2019 and 2018, respectively.
Dividends
We paid dividends on our common stock of $20.8 million ($0.52 per share) in fiscal 2019 and $21.4 million ($0.52 per share) in fiscal 2018, indicating a quarterly dividend rate of $0.13 per share. All decisions regarding the declaration and payment of dividends are at the discretion of the Board and are evaluated regularly in light of our financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Board deems relevant.

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Results of Operations
Fiscal 2019 Compared with Fiscal 2018
The following table sets forth information comparing the components of net income for the year ended August 31, 2019 with the year ended August 31, 2018 (in millions except per share data):
 
Year Ended August 31,
 
Increase
 
Percent
 
2019
 
2018
 
(Decrease)
 
Change
Net sales
$
3,672.7

 
$
3,680.1

 
$
(7.4
)
 
(0.2
)%
Cost of products sold
2,193.0

 
2,194.7

 
(1.7
)
 
(0.1
)%
Gross profit
1,479.7

 
1,485.4

 
(5.7
)
 
(0.4
)%
Percent of net sales
40.3
%
 
40.4
%
 
(10
)
bps
 

Selling, distribution, and administrative expenses
1,015.0

 
1,019.0

 
(4.0
)
 
(0.4
)%
Special charges
1.8

 
5.6

 
(3.8
)
 
NM

Operating profit
462.9

 
460.8

 
2.1

 
0.5
 %
Percent of net sales
12.6
%
 
12.5
%
 
10

bps
 

Other expense:
 

 
 

 
 

 
 

Interest expense, net
33.3

 
33.5

 
(0.2
)
 
(0.6
)%
Miscellaneous expense, net
4.7

 
1.4

 
3.3

 
NM

Total other expense
38.0

 
34.9

 
3.1

 
8.9
 %
Income before income taxes
424.9

 
425.9

 
(1.0
)
 
(0.2
)%
Percent of net sales
11.6
%
 
11.6
%
 

bps
 

Income tax expense
94.5

 
76.3

 
18.2

 
23.9
 %
Effective tax rate
22.2
%
 
17.9
%
 
 

 
 

Net income
$
330.4

 
$
349.6

 
$
(19.2
)
 
(5.5
)%
Diluted earnings per share
$
8.29

 
$
8.52

 
$
(0.23
)
 
(2.7
)%
NM - not meaningful
 
 
 
 
 
 
 
Net sales decreased $7.4 million, or 0.2%, to $3.67 billion for the year ended August 31, 2019 compared with $3.68 billion reported for the year ended August 31, 2018. For the year ended August 31, 2019, we reported net income of $330.4 million compared with $349.6 million for the year ended August 31, 2018, a decrease of $19.2 million, or 5.5%. For fiscal 2019, diluted earnings per share decreased 2.7% to $8.29 from $8.52 for the prior-year period.
Fiscal 2019 results were impacted by the adoption of ASC 606, which resulted in a decrease to revenues, gross profit, and operating profit of $8.9 million, $4.8 million, and $5.2 million, respectively, during the year ended August 31, 2019. Additionally, fiscal 2018 results were retrospectively adjusted to reflect the impact of adopting Accounting Standards Update No. 2017-07, Compensation — Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost (“ASU 2017-07”). Upon adoption of ASU 2017-07, our previously reported operating profit and other expense both increased $6.2 million for the year ended August 31, 2018. The provisions of ASU 2017-07 had no impact to our previously reported net income or earnings per share. See New Accounting Pronouncements footnote of the Notes to Consolidated Financial Statements for further details.
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 our results of operations, which exclude the impact of acquisition-related items, certain manufacturing inefficiencies and excess inventory adjustments related to the closure of a facility, 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 our former Spanish lighting business, 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 and adjusted SD&A expenses as a percent of net sales, 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 our current financial performance. Specifically, we believe these non-U.S. GAAP measures provide greater comparability and enhanced visibility into our results of operations. The non-U.S. GAAP financial measures

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should be considered in addition to, and not as a substitute for or superior to, results prepared in accordance with U.S. GAAP.
(In millions, except per share data)
Year Ended August 31,
 
Increase (Decrease)
Percent Change
 
2019
 
2018
 
Gross profit
$
1,479.7

 
$
1,485.4

 
 
 
Add-back: Manufacturing inefficiencies (1)
0.9

 

 
 
 
Add-back: Acquisition-related items (2)
1.2

 
1.7

 
 
 
Add-back: Excess inventory (3)


3.1

 
 
 
Adjusted gross profit
$
1,481.8

 
$
1,490.2

 
$
(8.4
)
(0.6
)%
Percent of net sales
40.3
%
 
40.5
%
 
(20
)
bps
 
 
 
 
 
 
 
Selling, distribution, and administrative expenses
$
1,015.0

 
$
1,019.0

 
 
 
Less: Amortization of acquired intangible assets
(30.8
)
 
(28.5
)
 
 
 
Less: Share-based payment expense
(29.2
)
 
(32.3
)
 
 
 
Less: Acquisition-related items (2)
(1.3
)
 
(2.1
)
 
 
 
Adjusted selling, distribution, and administrative expenses
$
953.7

 
$
956.1

 
$
(2.4
)
(0.3
)%
Percent of net sales
26.0
%
 
26.0
%
 

bps
 
 
 
 
 
 
 
Operating profit
$
462.9

 
$
460.8

 
 
 
Add-back: Amortization of acquired intangible assets
30.8

 
28.5

 
 
 
Add-back: Share-based payment expense
29.2

 
32.3

 
 
 
Add-back: Manufacturing inefficiencies (1)
0.9

 

 
 
 
Add-back: Acquisition-related items (2)
2.5

 
3.8

 
 
 
Add-back: Excess inventory (3)

 
3.1

 
 
 
Add-back: Special charges
1.8

 
5.6

 
 
 
Adjusted operating profit
$
528.1

 
$
534.1

 
$
(6.0
)
(1.1
)%
Percent of net sales
14.4
%
 
14.5
%
 
(10
)
bps
 
 
 
 
 
 
 
Other expense
$
38.0

 
$
34.9

 
 
 
Add-back: Gain on sale of business

 
5.4

 
 
 
Adjusted other expense
$
38.0

 
$
40.3

 
$
(2.3
)
(5.7
)%
 
 
 
 
 
 
 
Net income
$
330.4

 
$
349.6

 
 
 
Add-back: Amortization of acquired intangible assets
30.8

 
28.5

 
 
 
Add-back: Share-based payment expense
29.2

 
32.3

 
 
 
Add-back: Manufacturing inefficiencies (1)
0.9

 

 
 
 
Add-back: Acquisition-related items (2)
2.5

 
3.8

 
 
 
Add-back: Excess inventory (3)

 
3.1

 
 
 
Add-back: Special charges
1.8

 
5.6

 
 
 
Less: Gain on sale of business

 
(5.4
)
 
 
 
Total pre-tax adjustments to net income
65.2

 
67.9

 
 
 
Income tax effect
(14.2
)
 
(20.0
)
 
 
 
Less: Discrete income tax benefits of the TCJA (4)

 
(34.6
)
 
 
 
Adjusted net income
$
381.4

 
$
362.9

 
$
18.5

5.1
 %
 
 
 
 
 
 
 
Diluted earnings per share
$
8.29

 
$
8.52

 
 
 
Adjusted diluted earnings per share
$
9.57

 
$
8.84

 
$
0.73

8.3
 %
______________________________ 
(1) Incremental costs incurred due to manufacturing inefficiencies directly related to the closure of a facility.
(2) Acquisition-related items include profit in inventory and professional fees.
(3) Excess inventory related to the closure of a facility.
(4) Discrete income tax benefits of the TCJA 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.

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Table of Contents

Net Sales
Net sales for the year ended August 31, 2019 decreased by 0.2% compared with the prior-year period as a 1% decline in sales volumes was offset by favorable changes in product prices and mix of products sold (“price/mix”). The volume decline was a result of several factors, which included prior year’s significant initial stocking of product in the stores of a new customer in the retail sales channel that did not repeat in the current period; the elimination of certain products in our portfolio sold primarily through the retail sales channel that did not meet our return objectives; and softer market conditions. The favorable change in price/mix was due to changes in sales channel mix and implemented price increases, which were partially offset by changes in the mix of product sold. The combined negative impact of changes in foreign currencies, the adoption of ASC 606, and acquisitions net of divestitures was de minimis. Due to the changing dynamics of our 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 2019 decreased $5.7 million, or 0.4%, to $1.48 billion compared with $1.49 billion for the prior year. Gross profit margin decreased to 40.3% for the year ended August 31, 2019 compared with 40.4% for the year ended August 31, 2018. The decline in gross profit margin was due primarily to a shift in sales among key customers within the retail channel, tariff costs, and the under-absorption of manufacturing costs as a result of inventory reduction efforts, partially offset by inter-channel mix, price increases, and favorable materials and inbound freight costs. Adjusted gross profit for fiscal 2019 decreased $8.4 million, or 0.6%, to $1.48 billion compared with $1.49 billion for the prior year. Adjusted gross profit margin decreased 20 basis points to 40.3% compared to 40.5% in the prior year.
Operating Profit
SD&A expenses of $1.02 billion for the year ended August 31, 2019 decreased $4.0 million, or 0.4%. The decrease in SD&A expenses was primarily due to lower outbound freight charges, which was partially due to the customer shift within the retail sales channel, as well as lower employee-related costs, partially offset by expenses associated with acquired businesses. Compared with the prior-year period, SD&A expenses as a percent of net sales decreased 10 basis points to 27.6% for fiscal 2019 from 27.7% in fiscal 2018. Adjusted SD&A expenses were $953.7 million, or 26.0% of net sales, in fiscal 2019 compared to $956.1 million, or 26.0% of net sales, in the year-ago period.
During the year ended August 31, 2019, we recognized pre-tax special charges of $1.8 million compared with pre-tax special charges of $5.6 million recorded during the year ended August 31, 2018. Further details regarding our special charges are included in the Special Charges footnote of the Notes to Consolidated Financial Statements.
Operating profit for fiscal 2019 was $462.9 million compared with $460.8 million reported for the prior-year period, an increase of $2.1 million, or 0.5%. Operating profit margin increased 10 basis points to 12.6% for fiscal 2019 compared with 12.5% for fiscal 2018. The increase in operating profit was due to a decrease in SD&A expenses and a lower net special charge, partially offset by lower gross profit.
Adjusted operating profit decreased $6.0 million, or 1.1%, to $528.1 million compared with $534.1 million for fiscal 2018. Adjusted operating profit margin was 14.4% and 14.5% for fiscal 2019 and 2018, respectively.
Other Expense
Other expense consists principally of net interest expense and net miscellaneous expense, which includes non-service related components of net periodic pension cost, gains and losses associated with foreign currency-related transactions, and non-operating gains and losses. Interest expense, net, was $33.3 million and $33.5 million for the years ended August 31, 2019 and 2018, respectively. We reported net miscellaneous expense of $4.7 million in fiscal 2019 compared with $1.4 million in fiscal 2018. Net miscellaneous expense for fiscal 2018 included a gain of $5.4 million associated with the sale of our former Spanish lighting business.
Income Taxes and Net Income
Our effective income tax rate was 22.2% and 17.9% for the years ended August 31, 2019 and 2018, 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. We estimate that our effective tax rate for fiscal 2020 will be approximately 23% before any discrete items, assuming the rates in our taxing jurisdictions remain generally consistent throughout the year.

25

Table of Contents

Net income for fiscal 2019 decreased $19.2 million, or 5.5%, to $330.4 million from $349.6 million reported for the prior year. The decrease in net income resulted primarily from a one-time tax benefit for income taxes related to the TCJA recorded in 2018 that did not recur in the current fiscal year. Adjusted net income for fiscal 2019 increased 5.1% to $381.4 million compared with $362.9 million in the year-ago period. Diluted earnings per share for fiscal 2019 was $8.29 compared with $8.52 for the prior-year period, which represented a decrease of $0.23 or 2.7%. Adjusted diluted earnings per share for fiscal 2019 was $9.57 compared with $8.84 for the prior-year period, which represented an increase of $0.73, or 8.3%.
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
2,194.7

 
2,024.0

 
170.7

 
8.4
 %
Gross profit
1,485.4

 
1,481.1

 
4.3

 
0.3
 %
Percent of net sales
40.4
%
 
42.3
%
 
(190
)
bps
 

Selling, distribution, and administrative expenses
1,019.0

 
942.3

 
76.7

 
8.1
 %
Special charges
5.6

 
11.3

 
(5.7
)
 
NM

Operating profit
460.8

 
527.5

 
(66.7
)
 
(12.6
)%
Percent of net sales
12.5
%
 
15.0
%
 
(250
)
bps
 

Other expense:
 

 
 

 
 

 
 

Interest expense, net
33.5

 
32.5

 
1.0

 
3.1
 %
Miscellaneous expense, net
1.4

 
2.4

 
(1.0
)
 
NM

Total other expense
34.9

 
34.9

 

 
 %
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, we 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.
Fiscal 2018 and fiscal 2017 results were retrospectively adjusted to reflect the impact of adopting ASU 2017-07. Upon adoption of ASU 2017-07, our previously reported operating profit and other expense both increased $6.2 million for the year ended August 31, 2018 and $8.7 million for the year ended August 31, 2017. The provisions of ASU 2017-07 had no impact to our previously reported net income or earnings per share. See New Accounting Pronouncements footnote of the Notes to Consolidated Financial Statements for further details.
The following table reconciles certain U.S. GAAP financial measures to the corresponding non-U.S. GAAP measures referred to in the discussion of our results of operations, which exclude the impact of acquisition-related items, certain manufacturing inefficiencies and excess inventory adjustments related to the closure of a facility, 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 our former Spanish lighting business, a gain on the sale of an investment in an unconsolidated affiliate, and certain discrete income tax benefits of the TCJA.

26

Table of Contents

(In millions, except per share data) 
Year Ended August 31,
 
Increase (Decrease)
Percent Change
 
2018
 
2017
 
Gross profit
$
1,485.4

 
$
1,481.1

 
 
 
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
$
1,490.2

 
$
1,482.7

 
$
7.5

0.5
 %
Percent of net sales
40.5
%
 
42.3
%
 
(180
)
bps
 
 
 
 
 
 
 
Selling, distribution, and administrative expenses
$
1,019.0

 
$
942.3

 
 
 
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
$
956.1

 
$
882.3

 
$
73.8

8.4
 %
Percent of net sales
26.0
%
 
25.2
%
 
80

bps
 
 
 
 
 
 
 
Operating profit
$
460.8

 
$
527.5

 
 
 
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 charges
5.6

 
11.3

 
 
 
Adjusted operating profit
$
534.1

 
$
600.4

 
$
(66.3
)
(11.0
)%
Percent of net sales
14.5
%
 
17.1
%
 
(260
)
bps
 
 
 
 
 
 
 
Other expense
$
34.9

 
$
34.9

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

 
7.2

 
 
 
Add-back: Gain on sale of business
5.4

 

 
 
 
Adjusted other expense
$
40.3

 
$
42.1

 
$
(1.8
)
(4.3
)%
 
 
 
 
 
 
 
Net income
$
349.6