Results of Operations

Net sales increased $175.0 million , or 5.0% , to $3.68 billion for the year ended August 31, 2018 compared with $3.51 billion reported for the year ended August 31, 2017 . For the year ended August 31, 2018 , the Company reported net income of $349.6 million compared with $321.7 million for the year ended August 31, 2017 , an increase of $27.9 million , or 8.7% . For fiscal 2018 , diluted earnings per share increased 14.7% to $8.52 from $7.43 for the prior-year period.

The following table reconciles certain U.S. generally accepted accounting principles (“U.S. GAAP”) financial measures to the corresponding non-U.S. GAAP measures referred to in the discussion of the Company’s results of operations, which exclude the impact of acquisition-related items, excess inventory adjustments, certain manufacturing inefficiencies, amortization of acquired intangible assets, share-based payment expense, special charges associated primarily with continued efforts to streamline the organization, a gain associated with the sale of the Company's Spanish lighting business, a gain on the sale of an investment in an unconsolidated affiliate, and certain discrete income tax benefits of the Tax Cuts and Jobs Act (“TCJA”). Although the impacts of these items have been recognized in prior periods and could recur in future periods, management typically excludes these items during internal reviews of performance and uses these non-U.S. GAAP measures for baseline comparative operational analysis, decision making, and other activities. These non-U.S. GAAP financial measures, including adjusted gross profit and margin, adjusted selling, distribution, and administrative (“SD&A”) expenses, adjusted operating profit and margin, adjusted other expense, adjusted net income, and adjusted diluted earnings per share, are provided to enhance the user’s overall understanding of the Company’s current financial performance. Specifically, the Company believes these non-U.S. GAAP measures provide greater comparability and enhanced visibility into the Company's results of operations. The non-U.S. GAAP financial measures should be considered in addition to, and not as a substitute for or superior to, results prepared in accordance with U.S. GAAP.

⁽¹⁾ Acquisition-related items include profit in inventory and professional fees.

⁽²⁾ Incremental costs incurred due to manufacturing inefficiencies directly related to the closure of a facility.

⁽³⁾ Excess inventory related to the closure of a facility.

⁽⁴⁾ Discrete income tax benefits of the TCJA include provisional estimates recognized within Income tax expense on the Consolidated Statements of Comprehensive Income . See Income Taxes footnote within the Notes to Consolidated Financial Statements for additional details.

Net Sales

Net sales for the year ended August 31, 2018 increased by 5.0% compared with the prior-year period due primarily to an increase in sales volumes of approximately 7% and an approximately 1% favorable impact of acquired revenues from acquisitions, partially offset by the impact of an unfavorable change in product prices and the mix of products sold (“price/mix”) of approximately 3% . Sales of LED-based luminaires during the year ended August 31, 2018 accounted for approximately two-thirds of total net sales. The increase in volumes was due primarily to greater shipments of Atrius-based luminaires to customers in certain key vertical applications and higher shipments within the home center channel. The net unfavorable price/mix was primarily due to lower pricing on certain luminaires as a result of increased competition in portions of the market for more basic, lesser-featured products; changes in product mix reflecting the substitution of certain products with less costly form factors resulting in lower price points; and changes in sales channel mix, which reflected fewer large commercial projects that generally include higher priced solutions. Due to the changing dynamics of the Company's product portfolio, including the increase of integrated lighting and building management solutions, it is not possible to precisely quantify or differentiate the individual components of volume, price, and mix.

Gross Profit

Gross profit for fiscal 2018 increased $5.6 million , or 0.4% , to $1.49 billion compared with $1.48 billion for the prior year. Gross profit margin decreased to 40.4% for the year ended August 31, 2018 compared with 42.3% for the year ended August 31, 2017 . Gross profit margin was lower than the prior-year period primarily due to unfavorable price/mix; higher material, component, and freight costs; increased wages; and additional reserves for excess inventory related to the closure of a facility. These declines were partially offset by higher sales volumes, productivity improvements, and gross profit attributable to acquisitions. Adjusted gross profit for fiscal 2018 increased $8.8 million , or 0.6% , to $1.49 billion compared with $1.48 billion for the prior year. Adjusted gross profit margin decreased 180 basis points to 40.5% compared to 42.3% in the prior year.

Operating Profit

SD&A expenses for the year ended August 31, 2018 increased $75.5 million , or 7.9% , to $1.03 billion compared with $951.1 million in the prior year. The increase in SD&A expenses was primarily due to higher employee related costs, including additional headcount from acquisitions, increased freight charges and commissions to support greater sales volume, higher professional fees related to recent acquisitions, and to a lesser degree, certain other operating expenses. Compared with the prior-year period, SD&A expenses as a percent of sales increased 80 basis points to 27.9% for fiscal 2018 from 27.1% in fiscal 2017 . Adjusted SD&A expenses were $963.7 million , or 26.2% of net sales, in fiscal 2018 compared to $891.1 million , or 25.4% of net sales, in the year-ago period.

During the year ended August 31, 2018 , the Company recognized pre-tax special charges of $5.6 million compared with pre-tax special charges of $11.3 million recorded during the year ended August 31, 2017 . Further details regarding the Company's special charges are included in the Special Charge footnote of the Notes to Consolidated Financial Statements .

Operating profit for fiscal 2018 was $454.6 million compared with $518.8 million reported for the prior-year period, a decrease of $64.2 million , or 12.4% . Operating profit margin decreased 240 basis points to 12.4% for fiscal 2018 compared with 14.8% for fiscal 2017 . The decrease in operating profit was due primarily to the impact of price/mix on gross profit as well as higher SD&A expenses, partially offset by higher sales volumes and a lower net special charge.

Adjusted operating profit decreased $63.8 million , or 10.8% , to $527.9 million compared with $591.7 million for fiscal 2017 . Adjusted operating profit margin was 14.3% and 16.9% for fiscal 2018 and 2017 , respectively.

Other Expense (Income)

Other expense (income) for the Company consists principally of net interest expense and net miscellaneous expense (income), which includes gains and losses related to foreign exchange rate changes. Interest expense, net, was $33.5 million and $32.5 million for the years ended August 31, 2018 and 2017 , respectively. The Company reported net miscellaneous income of $4.8 million in fiscal 2018 compared with net miscellaneous income of $6.3 million in fiscal 2017 . Net miscellaneous income included a gain of $5.4 million associated with the sale of the Company’s Spanish lighting business and a gain of $7.2 million associated with the sale of an investment in an unconsolidated affiliate for fiscal 2018 and 2017 , respectively.

Income Taxes and Net Income

The Company's effective income tax rate was 17.9% and 34.7% for the years ended August 31, 2018 and 2017 , respectively. The effective income tax rate for the year ended August 31, 2018 was significantly impacted by the provisions of the TCJA, which was enacted during the second quarter of fiscal 2018. Further details regarding the TCJA are included in the Income Taxes footnote of the Notes to Consolidated Financial Statements . The Company estimates that its effective tax rate for fiscal 2019 will be approximately 25% before any discrete items, assuming the rates in its taxing jurisdictions remain generally consistent throughout the year.

Net income for fiscal 2018 increased $27.9 million , or 8.7% , to $349.6 million from $321.7 million reported for the prior year. The increase in net income resulted primarily from the benefit recognized related to the TCJA, partially offset by a decrease in operating profit. Adjusted net income for fiscal 2018 decreased 0.8% to $362.9 million compared with $365.9 million in the year-ago period. Adjusted diluted earnings per share for fiscal 2018 was $8.84 compared with $8.45 for the prior-year period, which represented an increase of $0.39 , or 4.6% .

Fiscal 2017 Compared with Fiscal 2016

The following table sets forth information comparing the components of net income for the year ended August 31, 2017 with the year ended August 31, 2016 (in millions except per share data):

Net sales increased $213.8 million , or 6.5% , to $3.51 billion for the year ended August 31, 2017 compared with $3.29 billion reported for the year ended August 31, 2016 . For the year ended August 31, 2017 , the Company reported net income of $321.7 million compared with $290.8 million for the year ended August 31, 2016 , an increase of $30.9 million , or 10.6% . For fiscal 2017 , diluted earnings per share increased 12.1% to $7.43 from $6.63 for the prior-year period.

The following table reconciles certain U.S. generally accepted accounting principles (“U.S. GAAP”) financial measures to the corresponding non-U.S. GAAP measures referred to in the discussion of the Company’s results of operations, which exclude the impact of acquisition-related items, certain manufacturing inefficiencies, amortization of acquired intangible assets, share-based payment expense, impairment of intangible asset, special charges associated primarily with continued efforts to streamline the organization, and a gain on the sale of an investment in an unconsolidated affiliate.