UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

Form 10-K

 

 

 

 

 

Commission file number 001-16583.

 

 

ACUITY BRANDS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

 

(404) 853-1400

(Registrant’s telephone number, including area code)

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Securities registered pursuant to Section 12(g) of the Act: None

 

 

 

 

Indicate by checkmark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o

 

Indicate by checkmark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).  Yes o     No o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 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 o     No þ

 

Based on the closing price of the Registrant’s common stock of $38.98 as quoted on the New York Stock Exchange on February 28, 2010, the aggregate market value of the voting stock held by nonaffiliates of the registrant was $1,693,028,436.

 

The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 42,807,894 shares as of October 28, 2010.

 

 

DOCUMENTS INCORPORATED BY REFERENCE

 

 

 

ACUITY BRANDS, INC.

 

Table of Contents

 

 

 

($ in millions, except per-share data and as indicated)

 

Overview

 

Acuity Brands, Inc. (“Acuity Brands”), the parent company of Acuity Brands Lighting, Inc. (“ABL”), and other subsidiaries (collectively referred to herein as “the Company”), was incorporated in 2001 under the laws of the State of Delaware. The Company is one of the world’s leading providers of lighting fixtures, control devices, components, systems and services for commercial and institutional, industrial, infrastructure, and residential applications for various markets throughout North America and select international markets.

 

The Company designs, produces, and distributes a full range of indoor and outdoor lighting and control systems for commercial and institutional, industrial, infrastructure, and residential applications. The Company manufactures or procures lighting products primarily in North America, Europe, and Asia. These products and related services are marketed under numerous brand names, including Lithonia Lighting^®, Holophane^®, Peerless^®, Mark Architectural Lighting^tm, Hydrel^®, American Electric Lighting^®, Gotham^®, Carandini^®, Metal Optics^®, Antique Street Lamps^tm, Tersen^tm, Synergy^® Lighting Controls, Sensor Switch^®, Lighting Control & Design^tm, and ROAM^®. As of August 31, 2010, the Company manufactures products in 14 plants in North America and two plants in Europe.

 

Principal customers include electrical distributors, retail home improvement centers, national accounts, electric utilities, municipalities, and lighting showrooms located in North America and select international markets serving new construction, renovation, and facility maintenance applications. In North America, the Company’s products and lighting systems are sold by independent sales agents and factory sales representatives who cover specific geographic areas and market segments. Products are delivered directly or through a network of distribution centers, regional warehouses, and commercial warehouses using both common carriers and a company-owned truck fleet. To serve international customers, the Company employs a sales force that utilizes distribution methods to meet specific individual customer or country requirements. In fiscal 2010, North American sales accounted for approximately 97% of net sales. See the Geographic Information footnote of the Notes to Consolidated Financial Statements for more information concerning the domestic and international net sales of the Company. The Company has one operating segment.

 

Specialty Products Business Spin-off

 

Acuity Brands completed the spin-off of its specialty products business (the “Spin-off”), Zep Inc. (“Zep”), on October 31, 2007, by distributing all of the shares of Zep common stock, par value $.01 per share, to the Company’s stockholders of record as of October 17, 2007. The Company’s stockholders received one Zep share, together with an associated preferred stock purchase right, for every two shares of the Company’s common stock they owned. Stockholders received cash in lieu of fractional shares for amounts less than one full Zep share.

 

As a result of the Spin-off, the Company’s financial statements have been prepared with the net assets, results of operations, and cash flows of the specialty products business presented as discontinued operations. All historical statements have been restated to conform to this presentation. Refer to the Discontinued Operations footnote of the Notes to Consolidated Financial Statements.

 

Industry Overview

 

Based on industry sources and government information, the Company estimates that in fiscal 2010 the size of the North American market for lighting fixtures, lighting controls, and related product and services that is served by the Company was approximately $9.3 billion. This includes non-portable light fixtures (as defined by the National Electrical Manufacturers Association), poles for outdoor lighting products, emergency lighting fixtures, and energy management and architectural lighting control systems. This market estimate is based on a combination of external industry data and internal estimates, and excludes portable and vehicular lighting fixtures and related lighting

components, such as lighting ballasts and lamps. The U.S. market, which represents approximately 82% of the North American market, is relatively fragmented. The Company estimates that the top four manufacturers (including Acuity Brands Lighting) participate in varying degrees in the total North American lighting fixture and controls market and have approximately half of the total market share. The remainder of the North American market is served by hundreds of other lighting manufacturers, including privately-owned and primarily smaller companies.

 

The Company operates in a highly competitive industry that is affected by volatility in a number of general business and economic factors, such as gross domestic product growth, employment levels, credit availability and commodity costs. The Company’s primary market, non-residential construction, is sensitive to the volatility of these general economic factors. Based on industry sources, the Company estimates that new construction and additions in fiscal 2010 and 2009 accounted for approximately 74% and 78%, respectively, of the non-residential market while alterations, including renovation, accounted for approximately 26% and 22%, respectively. This mix can vary over time depending on economic conditions. As such, given the current economic environment, new construction in the non-residential market declined at a more rapid rate than alterations, which caused the change in mix. Construction spending on infrastructure projects such as highways, streets, and urban developments also has a material impact on the demand for the Company’s infrastructure-focused products. Demand for the Company’s lighting products sold through its retail channels are highly dependent on economic drivers, such as consumer spending and discretionary income, along with housing construction and home improvement spending.

 

A growing source of demand for the lighting industry is being attributed to the renovation and replacement of lighting systems in existing buildings. The potential U.S. market size is estimated to be significant (possibly greater than $100 billion of installed base) due to square footage of existing non-residential buildings containing older, less efficient lighting systems.

 

The industry is influenced by the development of new lighting technologies, including light emitting diode (“LED”), electronic ballasts, embedded controls, and more effective optical designs; federal and state requirements for updated energy codes; incentives by federal, state, and local municipal authorities, as well as utility companies for using more energy-efficient fixtures and controls; and design technologies addressing sustainability. Traditional lighting manufacturers, including the Company, are offering product solutions based on these technologies utilizing internally developed, licensed, or acquired intellectual property. In addition, traditional lighting manufacturers are experiencing competition from new entrants with a focus on new technology-based lighting solutions.

 

Consolidation remains a key trend in the lighting equipment and controls industry, as well as the broader electrical industry leading to more extensive product offerings and increased globalization. Evidence of this trend are the recent combinations among electrical distributors, the 2008 acquisition by Koninklijke Philips Electronics N.V. of The Gentlyte Group Incorporated, and the Company’s fiscal 2009 acquisitions of Sensor Switch, Inc. and Lighting Control & Design, Inc. and fiscal 2010 acquisition of Renaissance Lighting, Inc.

 

Products

 

The Company produces a wide variety of lighting fixtures and controls systems and related products and services used in the following applications:

 

Products and Services:

 

 

 

Sales of products accounted for approximately 99% of total consolidated net sales for Acuity Brands in fiscal 2010, 2009, and 2008.

 

Sales and Marketing

 

Sales.  The Company sells to customers in the North American market with separate sales forces targeted at delivering value added products and services to specific customer, channel, and geographic segments. As of August 31, 2010, these sales forces consist of approximately 300 company-employed salespeople and a network of approximately 200 independent sales agencies, each of which employs numerous salespeople. The Company also operates two separate European sales forces and an international sales group coordinating export sales outside of North America and Europe.

 

Marketing.  The Company markets its products to end users in multiple channels through a broad spectrum of marketing and promotional vehicles, including direct customer contact, trade shows, on-site training, print advertising in industry publications, product brochures, and other literature, as well as the Internet and other electronic media. The Company owns and operates training and display facilities in numerous locations throughout North America and Europe designed to enhance the lighting knowledge of customers and industry professionals.

 

Customers

 

Customers of the Company include electrical distributors, retail home improvement centers, national accounts, electric utilities, utility distributors, municipalities, contractors, lighting showrooms, and energy service companies. In addition, there are a variety of other professionals, which for any given project could represent a significant influence in the product specification process. These generally include contractors, engineers, architects, and lighting designers.

 

A single customer of the Company, The Home Depot, accounted for approximately 11% of net sales of the Company in fiscal 2010, 2009, and 2008. The loss of The Home Depot’s business could temporarily adversely affect the Company’s results of operations.

 

Manufacturing

 

The Company operates 16 manufacturing facilities, including eight facilities in the United States, six facilities in Mexico, and two facilities in Europe. The Company utilizes a blend of internal and outsourced manufacturing processes and capabilities to fulfill a variety of customer needs in the most cost-effective manner. Critical processes, including assembly, reflector forming and anodizing and high-end glass production, are primarily performed at company-owned facilities, offering the ability to differentiate end-products through superior capabilities. Other critical components, such as lamps, LEDs, sockets, ballasts, and power supplies are purchased primarily from outside vendors. Investment is focused on improving capabilities, product quality, and manufacturing efficiency. Outsourcing production and distribution to local suppliers’ factories and warehouses also provides an opportunity to lower Company-owned component inventory while maintaining high service levels through frequent just-in-time deliveries. The Company also utilizes contract manufacturing from U.S., Asian, and European sources for certain products and purchases certain finished goods, including poles, to complement its area lighting fixtures and a

variety of residential and commercial lighting equipment. In fiscal 2010, net sales of finished product manufactured by others accounted for approximately 22% of the Company’s net sales, while the Company’s U.S. operations produced approximately 25%; Mexico produced approximately 50%; and Europe produced approximately 3%.

 

Management continues to focus on certain initiatives to make the Company more globally competitive. One of these initiatives relates to enhancing the Company’s global supply chain and includes the consolidation of certain manufacturing facilities into more efficient locations. Since the beginning of fiscal 2002, the Company has closed 15 manufacturing facilities, including two separate facilities downsized in fiscal 2010 and 2009. These consolidation efforts reduced the total square footage used for manufacturing by approximately 39%.

 

Distribution

 

Products are delivered directly or through a network of strategically located distribution centers, regional warehouses, and commercial warehouses in North America using both common carriers and a company-owned truck fleet. For international customers, distribution methods are adapted to meet individual customer or country requirements.

 

Research and Development

 

Research and development (“R&D”) efforts are targeted toward the development of products with an ever-increasing performance-to-cost ratio and energy efficiency, while close relationships with lamp, ballast, LED, and power supply manufacturers are maintained to understand technology enhancements and incorporate them in the Company’s fixture designs. For fiscal 2010, 2009, and 2008, research and development expense totaled $28.0, $20.8, and $30.3, respectively. The increase in fiscal 2010 expense was due primarily to higher incentive compensation associated with R&D associates compared with fiscal 2009 amounts.

 

Competition

 

The lighting equipment and controls market served by the Company is highly competitive, with some of the largest suppliers serving many of the same markets and competing for the same customers. Competition is based on numerous factors, including brand name recognition, price, product quality, product and lighting system design, energy efficiency, customer relationships, and service capabilities. The Company’s primary competitors in the North American lighting fixture and controls market include Cooper Industries plc., Hubbell Incorporated, and Koninklijke Philips Electronics N.V. The Company estimates that the four largest manufacturers (including Acuity Brands Lighting), which participate in varying degrees in the total North American lighting fixture and controls market, have approximately half of the total market share. In addition to these primary competitors, the Company also competes with hundreds of smaller lighting manufacturers, numerous lighting controls manufacturers of varying size, and, to a lesser degree, large, diversified global electronics companies.

 

The market is competitive for lighting and lighting-related products and services and continues to evolve. Consolidation remains a key trend. Certain broader and more global electrical manufacturers may be able to obtain a competitive advantage over the Company by offering broader and more integrated electrical solutions utilizing electrical, lighting, and building automation products. In addition, there have been a growing number of new competitors offering solid-state (primarily LED) product solutions to compete with traditional lighting solutions.

 

Environmental Regulation

 

The operations of the Company are subject to numerous comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances, as well as solid and hazardous wastes, and to the remediation of contaminated sites. In addition, permits and environmental controls are required for certain of the Company’s operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. On an ongoing basis, the Company allocates considerable resources, including investments in capital and operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years, and state and federal governments domestically and internationally are considering new laws and regulations governing raw material composition, air emissions, and energy-efficiency. The Company is not aware of any pending legislation or

proposed regulation related to environmental issues that would have a material adverse effect on the Company. The cost of responding to future changes, however, may be substantial. See Item 3: Legal Proceedings for further discussion of environmental matters.

 

Raw Materials

 

The products produced by the Company require certain raw materials, including certain grades of steel and aluminum, electrical components, plastics, and other petroleum-based materials and components. In fiscal 2010, the Company purchased approximately 119,000 tons of steel and aluminum. The Company estimates that less than 10% of purchased raw materials are petroleum-based. Additionally, the Company estimates that approximately 3.5 million gallons of diesel fuel was consumed in fiscal 2010 through the Company’s distribution activities. The Company purchases most raw materials on the open market and relies on third parties for providing certain finished goods. Accordingly, the cost of products sold may be affected by changes in the market price of raw materials or the sourcing of finished goods.

 

The Company does not currently engage in or expect to engage in significant commodity hedging transactions for raw materials, though the Company has and will continue to commit to purchase certain materials for a period of up to 12 months. Significant increases in the prices of the Company’s products due to increases in the cost of raw materials could have a negative effect on demand for products and on profitability. While the Company has generally been able to pass along these increases in cost in the form of higher selling prices for its products, there can be no assurance that future disruptions in either supply or price of these materials will not negatively affect future results. Decreases in the costs of raw materials generally are also passed along in the form of lower selling prices.

 

The Company constantly monitors and investigates alternative suppliers and materials based on numerous attributes including quality, service, and price. The Company’s ongoing efforts to improve the cost effectiveness of its products and services may result in a reduction in the number of its suppliers. A reduction in the number of suppliers could cause increased risk associated with reliance on a limited number of suppliers for certain raw materials, component parts (such as lamps, LEDs, ballasts, and power supplies), and finished goods.

 

Backlog Orders

 

The Company produces and stocks quantities of inventory at key distribution centers and warehouses throughout North America. The Company ships approximately 55% of sales orders during the month in which those orders are placed. Sales order backlogs, believed to be firm as of August 31, 2010 and 2009, were $137.6 and $137.0, respectively.

 

Patents, Licenses and Trademarks

 

The Company owns or has licenses to use various domestic and foreign patents and trademarks related to its products, processes, and businesses. These intellectual property rights are important factors for its businesses. To protect these proprietary rights, the Company relies on copyright, patent, trade secret, and trademark laws. Despite these protections, unauthorized parties may attempt to infringe on the intellectual property of the Company. Management is not aware of any pending claims asserting that the Company does not have the right to use intellectual property that is material to the Company. While patents and patent applications in the aggregate are important to the competitive position of the Company, no single patent or patent application is individually material to the Company.

 

Seasonality and Cyclicality

 

The Company’s business exhibits some seasonality, with net sales being affected by the impact of weather and seasonal demand on construction and installation programs, particularly during the winter months, as well as the annual budget cycles of major customers. Because of these seasonal factors, the Company has experienced, and generally expects to experience, its highest sales in the last two quarters of each fiscal year.

 

A significant portion of net sales relates to customers in the new construction and renovation markets. The new construction market is cyclical in nature and subject to changes in general economic conditions. Unit sales volume

has a major impact on the profitability of the Company. Economic downturns and the potential decline in key construction markets may have a material adverse effect on the net sales and operating income of the Company.

 

International Operations

 

The Company manufactures and assembles products at numerous facilities, some of which are located outside the United States. Approximately 53% of the products sold by the Company are manufactured by the Company outside the United States.

 

Of the Company’s total products sold, approximately 50% are produced at six facilities in Mexico. Most of these facilities are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows the Company to import certain items from the United States into Mexico duty-free, provided that such items, after processing, are re-exported from Mexico within 18 months. Maquiladora status, which is renewed every year, is subject to various restrictions and requirements, including compliance with the terms of the Maquiladora program and other local regulations. The Company may be required to make additional investments in automated equipment to partially offset potential increases in labor and wage costs.

 

The Company’s initiatives to become more globally competitive include streamlining its global supply chain by reducing the number of manufacturing facilities and enhancing the Company’s worldwide procurement and sourcing capabilities. Management believes these initiatives will result in increased worldwide procurement and sourcing of certain raw materials, component parts, and finished goods. As a consequence, economic, political, military, social, or other events in a country where the Company manufactures, procures, or sources a significant amount of raw materials, component parts, or finished goods, could interfere with the Company’s operations and negatively impact the Company’s business.

 

For fiscal 2010, net sales outside the U.S. represented approximately 11% of total net sales. See the Geographic 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.

 

Information Concerning Acuity Brands

 

The Company makes its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K (and all amendments to these reports), together with all reports filed pursuant to Section 16 of the Securities Exchange Act of 1934 by the Company’s officers, directors, and beneficial owners of 10% or more of the Company’s common stock, available free of charge through the “SEC Filings” link on the Company’s website, located at www.acuitybrands.com, as soon as reasonably practicable after they are filed with or furnished to the SEC. Information included on the Company’s website is not incorporated by reference into this Annual Report on Form 10-K. The Company’s reports are also available at the Securities and Exchange Commission’s Public Reference Room at 100 F. Street, NE, Washington, DC 20549 or on their website at www.sec.gov. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.

 

Additionally, the Company has adopted a written Code of Ethics and Business Conduct that applies to all of the Company’s directors, officers, and employees, including its principal executive officer and senior financial officers. The Code of Ethics and Business Conduct and the Company’s Corporate Governance Guidelines are available free of charge through the “Corporate Governance” link on the Company’s website. Additionally, the Statement of Responsibilities of Committees of the Board and the Statement of Rules and Procedures of Committees of the Board, which contain the charters for the Company’s Audit Committee, Compensation Committee, and Governance Committee, and the rules and procedures relating thereto, are available free of charge through the “Corporate Governance” link on the Company’s website. Each of the Code of Ethics and Business Conduct, the Corporate Governance Guidelines, the Statement of Responsibilities of Committees of the Board, and the Statement of Rules and Procedures of Committees of the Board is available in print to any stockholder of the Company that requests such document by contacting the Company’s Investor Relations department.

Employees

 

Acuity Brands employs approximately 6,000 people, of whom approximately 3,200 are employed in the United States, 2,500 in Mexico, 50 in Canada, and 200 in other international locations, including Europe and the Asia/Pacific region. Union recognition and collective bargaining arrangements are in place, covering approximately 3,600 persons (including approximately 1,400 in the United States). The Company believes that it has a good relationship with both its unionized and non-unionized employees.

 

 

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 Acuity Brands’ actual results to differ materially from the anticipated results or other expectations expressed in the Company’s forward-looking statements. See “Cautionary Statement Regarding Forward-Looking Statements” on page 36. These risks include, without limitation:

 

Risks Related to the Business of Acuity Brands, Inc.

 

General business and economic conditions may affect demand for the Company’s products and services, which could impact results from operations.

 

The Company competes based on such factors as name recognition and reputation, service, product features, innovation, and price. In addition, the Company operates in a highly competitive environment that is influenced by a number of general business and economic factors, such as general economic vitality, employment levels, credit availability, interest rates and commodity costs. Declines in general economic activity may negatively impact new construction, and renovation projects, which in turn may impact demand for the Company’s product and service offerings. The impact of these factors could adversely affect the Company’s financial position, results from operations, and cash flows.

 

Tight credit conditions could impair the ability of the Company and other industry parties to effectively access capital markets, which could negatively impact the Company’s capital position and demand for the Company’s products and services.

 

Tight credit conditions could impair the Company’s ability to effectively access capital. This could impair the Company’s ability to refinance debt as it becomes due or to obtain additional credit, if needed. The inability to effectively access capital markets could adversely affect the Company’s financial position, results from operations, and cash flows.

 

In addition, the impact of the tight credit conditions has and could continue to impair the ability of real estate developers, property owners, and contractors to effectively access capital markets or obtain reasonable costs of capital on borrowed funds, resulting in a decline in construction and renovation projects. The inability of these constituents to borrow money to fund construction and renovation projects reduces the demand for the Company’s products and services and could adversely affect the Company’s results from operations and cash flow. The lack of credit availability and the general economic conditions over the last two years have negatively impacted the Company’s results from operations by reducing customer demand.

 

Acuity Brands is heavily dependent on the strength of construction activity.

 

Sales of lighting equipment depend significantly on the level of activity in new construction and renovations. Demand for non-residential construction and renovation is driven by many factors, including but not limited to economic activity, employment levels, credit availability, interest rates, accessibility to financing, and trends in vacancy rates and rent values. Demand for new residential construction and remodeling is also affected by interest rates and credit availability, as well as the supply of existing homes, price appreciation, and household formation rates. Significant declines in either non-residential or residential construction activity could significantly impact the Company’s results from operations and cash flow. Since early fiscal 2009, both the Company and the industry

experienced declines in sales volumes resulting from weakness in both the non-residential and residential construction markets due to the weak economic environment.

 

Acuity Brands’ results may be adversely affected by fluctuations in the cost or availability of raw materials, components, and purchased finished goods.

 

The Company utilizes a variety of raw materials and components in its production process including steel, aluminum, lamps, LEDs, ballasts, power supplies, petroleum-based by-products, natural gas, and copper. Future increases in the costs of these items could adversely affect operating margins, as there can be no assurance that future raw material and component price increases will be successfully passed through to customers. The Company generally sources these goods from a number of suppliers and, therefore, is reasonably insulated from risks affecting any one supplier. However, there are a limited number of suppliers for certain components and certain purchased finished goods, and disruptions in supply for those items could negatively impact the Company’s short-term performance. Profitability and volume could be negatively impacted by limitations inherent within the supply chain of certain of these component parts, including competitive, governmental, legal, natural disasters, and other events that could impact both supply and price. Since mid-fiscal 2010, the industry has experienced shortages in certain electronic components used in the manufacturing of ballasts and power supplies, resulting in delays in sourcing these vital components. A persistent lack of availability of these components could adversely impact shipments in future periods. Variability in cost and availability could adversely affect the Company’s results from operations and cash flows.

 

Acuity Brand’s results may be adversely affected by the Company’s inability to maintain pricing.

 

Aggressive pricing actions by competitors may affect the Company’s ability to achieve desired unit volume growth and profitability levels under its current pricing strategies. The Company may also decide to lower pricing to match the competition. Additionally, the Company may not be able to increase prices to cover rising costs of components and raw materials. Even if the Company were able to increase prices to cover costs, competitive pricing pressures may not allow the Company to pass on any more than the cost increases which could negatively impact gross margin percentages. Alternatively, if component and raw material costs were to decline, the marketplace may not allow the Company to hold prices at their current levels, which could negatively impact both net sales and gross margins.

 

Acuity Brands may experience difficulties in the consolidation of manufacturing facilities which could impact the shipments to customers, product quality, and the ability to realize the expected savings from streamlining actions.

 

During fiscal 2009, the Company continued its ongoing programs to streamline operations, including the consolidation of certain manufacturing facilities and the reduction of overhead costs. Upon completion of these actions, the Company realized annualized benefits of more than $50.0. During fiscal 2010, the Company announced plans to relocate certain production and down-size two facilities, and, upon completion, the Company expects to realize $10.0 in annualized benefits. The Company will gain from such activity only to the extent that it 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.

 

Acuity Brands is subject to risks related to operations outside the United States.

 

The Company has substantial activities outside of the United States, including sourcing of products, materials, and components. The Company’s operations, as well as those of key vendors, are therefore subject to regulatory, economic, political, military, and other events in countries where these operations are located, particularly Mexico. In addition to the risks that are common to both the Company’s domestic and international operations, the Company faces risks specifically related to its foreign operations, including but not limited to: foreign currency fluctuations; unstable political, social, regulatory, economic, financial, and market conditions; potential for privatization and other confiscatory actions; trade restrictions and disruption; criminal activities; and unforeseen increases in tariffs and taxes. The Company continues to monitor conditions affecting its international locations. Some of these risks

could have a material adverse effect on the Company’s business, financial condition, results from operations, and cash flows in the future.

 

The Company is exposed to risks associated with fluctuations in foreign currency exchange rates against the U.S. dollar resulting from non-U.S. dollar denominated transactions, particularly in our international operations. Potential decreases in income could result from a strengthening or weakening in foreign exchange rates in relation to the U.S. dollar.

 

Acuity Brands is subject to a broad range of environmental, health, and safety laws and regulations in the jurisdictions in which it operates, and the Company may be exposed to substantial environmental, health, and safety costs and liabilities.

 

The Company is subject to a broad range of environmental, health, and safety laws and regulations in the jurisdictions in which the Company operates. These laws and regulations impose increasingly stringent environmental, health, and safety protection standards and permitting requirements regarding, among other things, air emissions, wastewater storage, treatment, and discharges, the use and handling of hazardous or toxic materials, waste disposal practices, and the remediation of environmental contamination and working conditions for the Company’s employees. Some environmental laws, such as Superfund, the Clean Water Act, and comparable laws in U.S. states and other jurisdictions world-wide, impose joint and several liability for the cost of environmental remediation, natural resource damages, third party claims, and other expenses, without regard to the fault or the legality of the original conduct, on those persons who contributed to the release of a hazardous substance into the environment. The Company may also be affected by future laws or regulations, including those imposed in response to energy, climate change, or similar concerns. These laws may impact the manufacture and distribution of the Company’s products and place restrictions on the products the Company can sell in certain geographical locations.

 

The costs of complying with these laws and regulations, including participation in assessments and remediation of contaminated sites and installation of pollution control facilities, have been, and in the future could be, significant. In addition, these laws and regulations may also result in substantial environmental liabilities associated with divested assets, third party locations, and past activities. The Company has established reserves for environmental remediation activities and liabilities where appropriate. However, the cost of addressing environmental matters (including the timing of any charges related thereto) cannot be predicted with certainty, and these reserves may not ultimately be adequate, especially in light of potential changes in environmental conditions, changing interpretations of laws and regulations by regulators and courts, the discovery of previously unknown environmental conditions, the risk of governmental orders to carry out additional compliance on certain sites not initially included in remediation in progress, the Company’s potential liability to remediate sites for which provisions have not previously been established, and the adoption of more stringent environmental laws. Such future developments could result in increased environmental costs and liabilities and could require significant capital and other ongoing expenditures, any of which could have a material adverse effect on the Company’s financial condition or results. In addition, the presence of environmental contamination at the Company’s properties could adversely affect its ability to sell a property, receive full value for a property, or use a property as collateral for a loan.

 

Acuity Brands may develop unexpected legal contingencies or matters that exceed insurance coverage.

 

The Company is subject to various claims, including legal claims arising in the normal course of business. The Company is insured up to specified limits for certain types of claims with a self-insurance retention of $0.5 per occurrence, including product liability claims, and is fully self-insured for certain other types of claims, including environmental, product recall, commercial disputes, and patent infringement. The Company establishes reserves for legal claims when the costs associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the level of insurance coverage held by the Company and/or the amounts reserved for such claims. In the event of unexpected future developments, it is possible that the ultimate resolutions of such matters, if unfavorable, could have a material adverse effect on the Company’s results from operations, financial position, or cash flows. The Company’s insurance coverage is negotiated on an annual basis, and insurance policies in the future may have coverage exclusions that could cause claim-related costs to rise.

Acuity Brands may pursue future growth through strategic acquisitions and alliances, which may not yield anticipated benefits.

 

The Company has and may continue to seek to improve its business through strategic acquisitions and alliances. The Company will gain from such activity only to the extent that it can effectively leverage the assets, including personnel, technology and operating processes, of the acquired businesses and alliances. Uncertainty is inherent within the acquisition and alliance process, and unforeseen circumstances arising from recent and future acquisitions or alliances could offset their anticipated benefits. In addition, unanticipated events, negative revisions to valuation assumptions and estimates, and/or difficulties in attaining synergies, among other factors, could adversely affect the Company’s ability to recover initial and subsequent investments, particularly those related to acquired goodwill and intangible assets. Any of these factors could adversely affect the Company’s financial condition, results from operations, and cash flows.

 

Technological developments and increased competition could affect the Company’s operating profit margins and sales volume.

 

The Company competes in an industry where technology and innovation play major roles in the competitive landscape. The Company is highly engaged in the investigation, development, and implementation of new technologies. Securing key partnerships and alliances as well as employee talent, including having access to technologies developed by others, and the obtaining of appropriate patents play a significant role in protecting the Company’s intellectual property and development activities. Additionally, the continual development of new technologies (e.g., LED, OLED, lamp/ballast systems, lighting controls systems, etc.) by existing and new source suppliers — including non-traditional competitors with significant resources — looking for either direct market access or partnership with competing large manufacturers, coupled with significant associated exclusivity and/or patent activity, could adversely affect the Company’s ability to sustain operating profit margin and desirable levels of sales volume. Consolidation remains a key trend. Certain broader and more global electrical manufacturers may be able to obtain a competitive advantage over the Company by offering broader and more integrated electrical solutions utilizing electrical, lighting, and building automation products.

 

Acuity Brands may be unable to sustain significant customer and/or channel partner relationships.

 

Relationships forged with customers, including The Home Depot which historically has represented slightly greater than 10% of the Company’s total net sales, are directly impacted by the Company’s ability to deliver high-quality products and services. The Company does not have a written contract obligating The Home Depot to purchase its products. The loss of or substantial decrease in the volume of purchases by The Home Depot would harm the Company’s sales, profitability and cash flow. The Company also has relationships with channel partners such as electrical distributors and independent sale agencies. While the Company has experienced positive, and in most cases long-term, relationships with these channel partners, the loss of some 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, at least in the short-term, adversely affect the Company’s sales, profitability, and cash flows.

 

If Acuity Brands’ products are improperly designed, manufactured, packaged, or labeled, the Company may need to recall those items and could be the target of product liability claims if consumers are injured.

 

The Company may need to recall products if they are improperly designed, manufactured, packaged, or labeled and does not maintain insurance for such events. The Company’s quality control procedures relating to the raw materials, including packaging, that it receives from third-party suppliers, as well as the Company’s quality control procedures relating to its products after those products are designed, manufactured, and packaged, may not be sufficient. The Company has previously initiated product recalls as a result of potentially faulty components, assembly, installation, and packaging of its products, and widespread product recalls could result in significant losses due to the costs of a recall, the destruction of product inventory, and lost sales due to the unavailability of product for a period of time. The Company may also be liable if the use of any of its products causes injury, and could suffer losses from a significant product liability judgment against the Company. A significant product recall or product liability case could also result in adverse publicity, damage to the Company’s reputation, and a loss of

consumer confidence in its products, which could have a material adverse effect on the Company’s business, financial results, and cash flows.

 

Acuity Brands could be adversely affected by disruptions of its operations.

 

The breakdown of equipment or other events, including labor disputes, pandemics or catastrophic events such as war or natural disasters, leading to production interruptions in the Company’s or one or more of its suppliers’ plants could have a material adverse effect on the Company’s financial results and cash flows. Approximately 50% of the Company’s sales of finished products are manufactured in Mexico, a country that is currently experiencing heightened civil unrest, which could also disrupt supply of products from these facilities. Further, because many of the Company’s customers are, to varying degrees, dependent on planned deliveries from the Company’s plants, those customers that have to reschedule their own production or delay opening a facility due to the Company’s missed deliveries could pursue financial claims against the Company. The Company may incur costs to correct any of these problems, in addition to facing claims from customers. Further, the Company’s reputation among actual and potential customers may be harmed and result in a loss of business. While the Company has developed business continuity plans to support responses to such events or disruptions and maintains insurance policies covering, among other things, physical damage and business interruptions, these policies may not cover all losses. The Company could incur uninsured losses and liabilities arising from such events, including damage to its reputation, loss of customers, and substantial losses in operational capacity, any of which could have a material adverse effect on its financial results and cash flows.

 

Failure of a Company operating or information system or a compromise of security with respect to an operating or information system or portable electronic device could adversely affect the Company’s results from operations and financial condition or the effectiveness of internal controls over operations and financial reporting.

 

The Company is highly dependent on automated systems to record and process Company and customer transactions and certain other components of the Company’s financial statements. The Company could experience a failure of one or more of these systems or could fail to complete all necessary data reconciliation or other conversion controls when implementing a new software system. The Company could also experience a compromise of its security due to technical system flaws, clerical, data input or record-keeping errors, or tampering or manipulation of those systems by employees or unauthorized third parties. Information security risks also exist with respect to the use of portable electronic devices, such as laptops and smartphones, which are particularly vulnerable to loss and theft. The Company may also be subject to disruptions of any of these systems arising from events that are wholly or partially beyond its control (for example, natural disasters, acts of terrorism, epidemics, computer viruses, and electrical/telecommunications outages). All of these risks are also applicable where the Company relies on outside vendors to provide services to it. Operating system failures, ineffective system implementation or disruptions, or the compromise of security with respect to operating systems or portable electronic devices could subject the Company to liability claims, harm the Company’s reputation, interrupt the Company’s operations, and adversely affect the Company’s internal control over financial reporting, business, results from operations, financial condition or cash flow.

 

The inability to attract and retain talented employees and/or a loss of key employees could adversely affect the effectiveness of the Company’s operations.

 

The Company relies upon the knowledge and experience of employees involved in functions throughout the organization that require technical expertise and knowledge of the industry. A loss of such employees could adversely impact the Company’s ability to execute key operational functions and could adversely affect the Company’s operations.

 

The risks associated with the inability to effectively execute its strategies could adversely affect the Company’s results from operations and financial condition.

 

Various uncertainties and risks are associated with the implementation of a number of aspects of the Company’s global business strategy, including but not limited to new product development, effective integration of acquisitions, and efforts to streamline operations. 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;

additional streamlining efforts; 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, and could adversely affect the Company’s financial condition and results from operations.

 

Risks Related to Ownership of Acuity Brands Common Stock

 

The market price and trading volume of the Company’s shares may be volatile.

 

The market price of the Company’s common shares could fluctuate significantly for many reasons, including for reasons unrelated to the Company’s specific performance, such as reports by industry analysts, investor perceptions, or negative announcements by customers, competitors or suppliers regarding their own performance, as well as general economic and industry conditions. For example, to the extent that other large companies within the Company’s industry experience declines in their share price, the Company’s share price may decline as well. In addition, when the market price of a company’s shares drops significantly, shareholders could institute securities class action lawsuits against the company. A lawsuit against the Company could cause the Company to incur substantial costs and could divert the time and attention of the Company’s management and other resources.

 

Risks Related to the Spin-off of Zep Inc.

 

Failure of the distribution to qualify as a tax-free transaction could result in substantial liability.

 

Acuity Brands has received a private letter ruling from the Internal Revenue Service (“IRS”) to the effect that, among other things, the Spin-off (including certain related transactions) qualifies as tax-free to Acuity Brands, Zep, and Acuity Brands’ stockholders for United States federal income tax purposes under section 355 and related provisions of the Internal Revenue Code (“IRC”). Although a private letter ruling generally is binding on the IRS, if the factual assumptions or representations made in the private letter ruling request are untrue or incomplete in any material respect, then Acuity Brands will not be able to rely on the ruling. Moreover, the IRS will not rule on whether a distribution of shares satisfies certain requirements necessary to obtain tax-free treatment under section 355 of the IRC. Rather, the private letter ruling is based upon representations by Acuity Brands that those requirements have been satisfied, and any inaccuracy in those representations could invalidate the ruling.

 

Acuity Brands has received an opinion of King & Spalding LLP, counsel to Acuity Brands, to the effect that, with respect to the requirements referred to above on which the IRS will not rule, those requirements will be satisfied. The opinion is based on, among other things, certain assumptions and representations as to factual matters made by Acuity Brands and Zep which, if untrue or incomplete in any material respect, could jeopardize the conclusions reached by counsel in its opinion. The opinion is not binding on the IRS or the courts, and the IRS or the courts may not agree with the opinion.

 

If the Spin-off fails to qualify for tax-free treatment, a substantial corporate tax would be payable by Acuity Brands, measured by the difference between (1) the aggregate fair market value of the shares of Zep common stock on the date of the Spin-off and (2) Acuity Brands’ adjusted tax basis in the shares of Zep common stock on the date of the Spin-off. The corporate level tax would be payable by Acuity Brands. However, Zep has agreed, under certain circumstances, to indemnify Acuity Brands for this tax liability. In addition, under the applicable Treasury regulations, each member of Acuity Brands’ consolidated group at the time of the Spin-off (including Zep) is severally liable for such tax liability.

 

Furthermore, if the Spin-off does not qualify as tax-free, each Acuity Brands stockholder generally would be taxed as if he or she had received a cash distribution equal to the fair market value of the shares of Zep common stock on the date of the Spin-off.

 

Even if the Spin-off otherwise qualifies as tax-free, Acuity Brands nevertheless could incur a substantial corporate tax liability under section 355(e) of the IRC, if 50 percent or more of the stock of Acuity Brands or Zep were to be acquired as part of a “plan (or a series of related transactions)” that includes the distribution. For this purpose, any acquisitions of the stock of Acuity Brands or of Zep stock that occurred within two years before or after the Spin-off are presumed to be part of such a plan, although Acuity Brands may be able to rebut that presumption. If such an acquisition of the stock of Acuity Brands or of Zep stock triggers the application of section 355(e), Acuity Brands would recognize taxable gain as described above, but the Spin-off would generally

remain tax-free to the Acuity Brands stockholders. If acquisitions of Zep’s stock trigger the application of section 355(e), Zep would be obligated to indemnify Acuity Brands for the resulting corporate-level tax liability.

 

 

The general corporate offices of Acuity Brands are located in Atlanta, Georgia. Because of the diverse nature of operations and the large number of individual locations, it is neither practical nor meaningful to describe each of the operating facilities owned or leased by the Company. The following listing summarizes the significant facility categories:

 

 

The following table provides additional geographic information related to Acuity Brands’ manufacturing facilities:

 

 

None of the individual properties of Acuity Brands is considered to have a value that is significant in relation to the assets of Acuity Brands as a whole. Though a loss at certain facilities could have an impact on the Company’s ability to serve the needs of its customers, the Company believes that the financial impact would be partially mitigated by various insurance programs in place. Acuity Brands believes that its properties are well maintained and are in good operating condition and that its properties are suitable and adequate for its present needs. The Company believes that it has additional capacity available at most of its production facilities and that it could increase production without substantial capital expenditures. As noted above, initiatives related to enhancing the global supply chain may continue to result in the consolidation of certain manufacturing facilities. However, the Company believes that the remaining facilities will have sufficient capacity to serve current and projected market demand.

 

 

General

 

Acuity Brands is subject to various legal claims arising in the normal course of business, including patent infringement and product liability claims. Acuity Brands is self-insured up to specified limits for certain types of claims, including product liability, and is fully self-insured for certain other types of claims, including environmental, product recall, and patent infringement. Based on information currently available, it is the opinion of management that the ultimate resolution of pending and threatened legal proceedings will not have a material adverse effect on the financial condition, results of operations, or cash flows of Acuity Brands. However, in the event of unexpected future developments, it is possible that the ultimate resolution of any such matters, if unfavorable, could have a material adverse effect on the financial condition, results of operations, or cash flows of Acuity Brands in future periods. Acuity Brands establishes reserves for legal claims when the costs associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher than the amounts reserved for such claims. However, the Company cannot make a meaningful estimate of actual costs to be incurred that could possibly be higher or lower than the amounts reserved.

Environmental Matters

 

The operations of the Company are subject to numerous comprehensive laws and regulations relating to the generation, storage, handling, transportation, and disposal of hazardous substances, as well as solid and hazardous wastes, and to the remediation of contaminated sites. In addition, permits and environmental controls are required for certain of the Company’s operations to limit air and water pollution, and these permits are subject to modification, renewal, and revocation by issuing authorities. On an ongoing basis, Acuity Brands invests capital and incurs operating costs relating to environmental compliance. Environmental laws and regulations have generally become stricter in recent years. The cost of responding to future changes may be substantial. Acuity Brands establishes reserves for known environmental claims when the costs associated with the claims become probable and can be reasonably estimated. The actual cost of environmental issues may be substantially higher or lower than that reserved due to difficulty in estimating such costs.

 

 

The common stock of Acuity Brands, Inc. (“Acuity Brands”) is listed on the New York Stock Exchange under the symbol “AYI”. At October 25, 2010, there were 3,994 stockholders of record. The following table sets forth the New York Stock Exchange high and low sale prices and the dividend payments for Acuity Brands’ common stock for the periods indicated.

 

 

The Company plans to pay quarterly dividends for fiscal 2011 on its common stock at an annual rate of $0.52 per share. All decisions regarding the declaration and payment of dividends are at the discretion of the Board of Directors of the Company and will be evaluated from time to time in light of the Company’s financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors that the Company’s Board deems relevant. The information required by this item with respect to equity compensation plans is included under the caption Equity Compensation Plans in the Company’s proxy statement for the annual meeting of stockholders to be held January 7, 2011, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference.

 

During fiscal 2010, the Company reacquired approximately 512,300 shares of the Company’s outstanding common stock, which completed the repurchase of 10 million shares previously authorized by the Board of Directors. In July 2010, the Company’s Board of Directors authorized the repurchase of an additional two million shares, or almost 5%, of the Company’s outstanding common stock. Approximately 535,500 shares were repurchased in fiscal 2010 under this plan.

 

During fiscal 2009, the Company reissued 2.1 million shares from treasury stock as partial consideration for the acquisitions of Sensor Switch, Inc. (“Sensor Switch”) and Lighting Controls & Design, Inc. (“LC&D”). As part

of the merger agreement, the Company reissued slightly more than 140,000 shares from treasury stock as partial consideration for the acquisition of LC&D during the current fiscal year.

 

 

The following table sets forth certain selected consolidated financial data of Acuity Brands which have been derived from the Consolidated Financial Statements of Acuity Brands for each of the five years in the period ended August 31, 2010. Amounts have been restated to reflect the specialty products business as discontinued operations as a result of the Spin-off. Refer to Part 1, Item 1 above for additional information regarding the Spin-off. This historical information may not be indicative of the Company’s future performance. The information set forth below should be read in conjunction with Management’s Discussion and Analysis of Financial Condition and Results of Operations and the Consolidated Financial Statements and the notes thereto.

 

 

 

 

 

($ in millions, except per-share data and as indicated)

 

The following discussion should be read in conjunction with the Consolidated Financial Statements and related notes included within this report. References made to years are for fiscal year periods.

 

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 and its subsidiaries for the years ended August 31, 2010 and 2009. For a more complete understanding of this discussion, please read the Notes to Consolidated Financial Statements included in this report.

 

Overview

 

Company

 

Acuity Brands is the parent company of Acuity Brands Lighting, Inc. (“ABL”), and other subsidiaries (collectively referred to herein as “the Company”). The Company, with its principal office in Atlanta, Georgia, employs approximately 6,000 people worldwide.

 

The Company designs, produces, and distributes a broad array of indoor and outdoor lighting fixtures, control devices, components, systems, and services for commercial and institutional, industrial, infrastructure, and residential applications for various markets throughout North America and select international markets. The Company is one of the world’s leading producers and distributors of lighting fixtures, with a broad, highly configurable product offering, consisting of roughly 500,000 active products as part of over 2,000 product groups, as well as lighting controls and other products, that are sold to approximately 5,000 customers. As of August 31, 2010, the Company operates 16 manufacturing facilities and six distribution facilities along with three warehouses to serve its extensive customer base.

 

On October 14, 2010, the Company acquired for cash all of the outstanding capital stock of Winona Lighting, Inc. (“Winona Lighting”), a premier provider of architectural and high-performance indoor and outdoor lighting products headquartered in Minnesota. Recognized throughout the architectural design community, Winona Lighting served the commercial, retail, and institutional markets with a product portfolio of high-quality and design-oriented luminaires suitable for decorative, custom, asymmetric, and landscape lighting applications. As this acquisition occurred after August 31, 2010, the operating results for Winona Lighting have not been included in the Company’s consolidated financial statements.

 

On July 26, 2010, the Company acquired the remaining outstanding capital stock of Renaissance Lighting, Inc. (“Renaissance”), a privately-held, pioneering innovator of solid-state light-emitting diode (“LED”) architectural lighting. Renaissance, based in Herndon, Virginia, offered a full range of LED-based specification-grade downlighting luminaires and developed an extensive intellectual property portfolio related to advanced LED optical solutions and technologies. Previously, the Company entered into a strategic partnership with Renaissance, which included a noncontrolling interest in Renaissance and a license to Renaissance’s intellectual property estate. The operating results of Renaissance have been included in the Company’s consolidated financial statements since the date of acquisition.

 

On April 20, 2009, the Company acquired 100% of the outstanding capital stock of Sensor Switch, Inc. (“Sensor Switch”), an industry-leading developer and manufacturer of lighting controls and energy management systems. Sensor Switch, based in Wallingford, Connecticut, offered a wide-breadth of products and solutions that substantially reduce energy consumption, including occupancy sensors, photocontrols, and distributed lighting control devices. The operating results of Sensor Switch have been included in the Company’s consolidated financial statements since the date of acquisition.

 

On December 31, 2008, the Company acquired for cash and stock substantially all the assets and assumed certain liabilities of Lighting Controls & Design (“LC&D”). Located in Glendale, California, LC&D is a manufacturer of comprehensive digital lighting controls and software that offered a breadth of products, ranging from dimming and building interfaces to digital thermostats, all within a single, scalable system. The operating

results of LC&D have been included in the Company’s consolidated financial statements since the date of acquisition.

 

Acuity Brands completed the Spin-off of its specialty products business, Zep, on October 31, 2007, by distributing all of the shares of Zep common stock, par value $.01 per share, to the Company’s stockholders of record as of October 17, 2007. The Company’s stockholders received one Zep share, together with an associated preferred stock purchase right, for every two shares of the Company’s common stock they owned. Stockholders received cash in lieu of fractional shares for amounts less than one full Zep share.

 

As a result of the Spin-off, the Company’s financial statements have been prepared with the net assets, results of operations, and cash flows of the specialty products business presented as discontinued operations. All historical statements have been restated to conform to this presentation.

 

Strategy

 

Our strategy is to extend our market leadership position by delivering superior lighting solutions. As a goal-oriented, market-driven company, we will continue to align the unique capabilities and resources of our organization to drive profitable growth through a keen focus on providing differentiated lighting solutions for our customers, driving world-class cost efficiency, and leveraging a culture of continuous improvement.

 

Throughout 2010, the Company believes it made significant progress towards achieving its strategic objectives, including expanding its access to market, introducing new products and lighting solutions, and enhancing its operations to create a stronger, more effective organization. The strategic objectives were developed to enable the Company to meet or exceed the following financial goals during an entire business cycle:

 

 

To increase the probability of the Company achieving these financial goals, management will continue to implement programs to enhance its capabilities at providing unparalleled customer service; creating a globally competitive cost structure; improving productivity; and introducing new and innovative products and services more rapidly and cost effectively. In addition, the Company has invested considerable resources to teach and train associates to utilize tools and techniques that accelerate success in these key areas, as well as to create a culture that demands excellence through continuous improvement. Additionally, the Company promotes a “pay-for-performance” culture that rewards achievement, while closely monitoring appropriate risk-taking. The expected outcome of these activities will be to better position the Company to deliver on its full potential, to provide a platform for future growth opportunities, and to allow the Company to achieve its long-term financial goals. See the Outlook section below for additional information.

 

Liquidity and Capital Resources

 

The Company’s principle sources of liquidity are operating cash flows generated primarily from its business operations, cash on hand, and various sources of borrowings. The ability of the Company to generate sufficient cash flow from operations and access certain capital markets, including banks, is necessary to fund its operations, to pay dividends, to meet its obligations as they become due, and to maintain compliance with covenants contained in its financing agreements.

 

In December 2009, the Company strengthened its liquidity position and extended its debt maturity profile following the issuance of $350.0 of senior unsecured notes due in fiscal 2020, as more fully described below under the Capitalization section.

 

Based on its cash on hand, availability under existing financing arrangements and current projections of cash flow from operations, the Company believes that it will be able to meet its liquidity needs over the next 12 months. These needs are expected to include funding its operations as currently planned, making anticipated capital

investments, funding certain potential acquisitions, funding foreseen improvement initiatives, paying quarterly stockholder dividends as currently anticipated, paying interest on borrowings as currently scheduled, and making required contributions into its employee benefit plans, as well as potentially repurchasing shares of its outstanding common stock as authorized by the Board of Directors. The Company currently expects to invest during fiscal 2011 up to $40.0 primarily for equipment, tooling, and new and enhanced information technology capabilities.

 

Cash Flow

 

The Company uses available cash and cash flow from operations, as well as proceeds from the exercise of stock options, to fund operations and capital expenditures, repurchase stock, fund acquisitions, and pay dividends. The Company’s cash position at August 31, 2010 was $191.0, an increase of $172.3 from August 31, 2009. In addition to $160.5 of net cash generated from operating activities during fiscal 2010, net proceeds from refinancing activities completed in the second quarter of fiscal 2010, as more fully described below under the Capitalization section, contributed $108.6 to the increase in the cash position, which was partially offset by stock repurchases of $36.1, dividends to stockholders of $22.6, acquisitions (net of cash assumed) and strategic investments of $22.6, and capital expenditures of $21.9.

 

During fiscal 2010, the Company generated $160.5 of net cash from operating activities compared with $92.7 generated in the prior-year period, an increase of $67.8. The prior-year period’s net cash from operating activities was negatively impacted by a decrease in other current liabilities due primarily to the payment of employee incentive compensation, which was attributable to record performance in fiscal 2008. Due to the sizable decline in the Company’s end-markets during fiscal 2009 and the resulting volume decline in sales and operating activities, cash in the prior-year period was negatively impacted by the decline in accounts payable and lower other current liabilities as previously noted, partially offset by a decline in accounts receivable. In comparison, the current year net cash from operating activities were not impacted to the extent as fiscal 2009 due to the relatively minor changes in operating working capital based on higher sales during the second half of fiscal 2010 and the drastically lower payouts of employee incentive compensation during fiscal 2010, which was attributable to fiscal 2009 performance.

 

Operating working capital (calculated by adding accounts receivable, net, plus inventories, and subtracting accounts payable) as a percentage of net sales increased to 12.9% at the end of fiscal 2010 from 12.4% at the end of fiscal 2009, due primarily to the effects of higher net sales during the fourth quarter of fiscal 2010 as compared to the prior-year period. At August 31, 2010, the current ratio (calculated as total current assets divided by total current liabilities) of the Company was 1.9 compared with 0.9 at August 31, 2009. This improvement in the current ratio during fiscal 2010 was due primarily to the increase in cash as described above and the repayment of the $200.0 of publicly traded notes that were scheduled to mature in August 2010 (the “2010 Notes”).

 

Management believes that investing in assets and programs that will over time increase the overall return on its invested capital is a key factor in driving stockholder value. The Company invested $21.9 and $21.2 in fiscal 2010 and 2009, respectively, primarily for new tooling, machinery, equipment, and information technology. As noted above, the Company expects to invest up to $40.0 for new plant, equipment, tooling, and new and enhanced information technology capabilities during fiscal 2011.

 

Contractual Obligations

 

The following table summarizes the Company’s contractual obligations at August 31, 2010:

 

 

 

Capitalization

 

The current capital structure of the Company is comprised principally of senior notes and equity of its stockholders. As of August 31, 2010, total debt outstanding increased $121.8 to $353.3 compared with $231.5 at August 31, 2009, due primarily to the issuance of debt further explained below, partially offset by the redemption of the 2010 Notes and the repayment of principal on a three-year 6% unsecured promissory note issued to the former sole shareholder of Sensor Switch.

 

On December 8, 2009, ABL issued $350.0 of senior unsecured notes due in fiscal 2020 (the “Notes”) in a private placement transaction. As described below, the Notes were subsequently exchanged for SEC-registered notes with substantially identical terms. The Notes bear interest at a rate of 6% per annum and were issued at a price equal to 99.797% of their face value and for a term of 10 years. A portion of the net proceeds from the issuance of the Notes were used to retire the 2010 Notes. Additionally, management retired, without premium or penalty, the remaining $25.3 outstanding balance on the promissory note issued to the former sole shareholder of Sensor Switch.

 

The Notes are fully and unconditionally guaranteed on a senior unsecured basis by Acuity Brands and ABL IP Holding LLC (“ABL IP Holding”, and, together with Acuity Brands, the “Guarantors”), a wholly-owned subsidiary of Acuity Brands. The Notes are senior unsecured obligations of ABL and rank equally in right of payment with all of ABL’s existing and future senior unsecured indebtedness. The guarantees of Acuity Brands and ABL IP Holding are senior unsecured obligations of Acuity Brands and ABL IP Holding and rank equally in right of payment with their other senior unsecured indebtedness. Interest on the Notes is payable semi-annually on June 15 and December 15, which commenced on June 15, 2010.

 

In accordance with the registration rights agreement by and between ABL and the Guarantors and the initial purchasers of the Notes, ABL and the Guarantors to the Notes filed a registration statement with the SEC for an offer to exchange the Notes for SEC-registered notes with substantially identical terms. The registration became effective on August 17, 2010, and all of the Notes were exchanged.

 

As noted above, the Company retired all of the outstanding 2010 Notes through the execution of a cash tender offer and the subsequent redemption of any remaining 2010 Notes during fiscal 2010. The loss on the transaction,

including the premium paid, expenses, and the write-off of deferred issuance costs associated with the 2010 Notes, was approximately $10.5.

 

As a result of the second quarter financing activities, which included the issuance and exchange of the Notes, the retirement of the 2010 Notes, and the prepayment of the unsecured promissory note, the Company increased both its liquidity and debt positions, greatly extended its debt maturity profile, and lowered its average interest rate on outstanding debt. The Company expects to subsequently incur increased interest expense for the foreseeable reporting periods based on the higher outstanding debt balance as compared with prior periods, partially offset by the lower interest rate on the Notes as compared with the 2010 Notes. The Company also capitalized an estimated $3.1 of deferred issuance costs related to the Notes that are being amortized over the 10-year term of the Notes.

 

On October 19, 2007, the Company executed a $250.0 revolving credit facility (the “Revolving Credit Facility”). The Revolving Credit Facility matures in October 2012 and contains financial covenants including a minimum interest coverage ratio and a leverage ratio (“Maximum Leverage Ratio”) of total indebtedness to EBITDA (earnings before interest, taxes, depreciation, and amortization expense), as such terms are defined in the Revolving Credit Facility agreement. These ratios are computed at the end of each fiscal quarter for the most recent 12-month period. The Revolving Credit Facility allows for a Maximum Leverage Ratio of 3.50, subject to certain conditions defined in the financing agreement. As of August 31, 2010, the Company was compliant with all financial covenants under the Revolving Credit Facility. At August 31, 2010, the Company had additional borrowing capacity under the Revolving Credit Facility of $242.7 under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility less outstanding letters of credit of $7.3.

 

During fiscal 2010, the Company’s consolidated stockholders’ equity increased $22.2 to $694.4 at August 31, 2010 from $672.2 at August 31, 2009. The increase was due primarily to net income earned in the period, as well as amortization of stock-based compensation, and stock issuances resulting primarily from the exercise of stock options, partially offset by repurchases of common stock, payment of dividends, pension plan adjustments, and foreign currency translation adjustments. The Company’s debt to total capitalization ratio (calculated by dividing total debt by the sum of total debt and total stockholders’ equity) was 33.7% and 25.6% at August 31, 2010 and August 31, 2009, respectively. The second quarter financing activities, which include the issuance of the $350.0 of Notes and the early retirement of the $200.0 of 2010 Notes, increased the debt to total capitalization ratio. The ratio of debt, net of cash, to total capitalization, net of cash, was 18.9% at August 31, 2010 and 24.1% at August 31, 2009.

 

Dividends

 

Acuity Brands paid dividends on its common stock of $22.6 ($0.52 per share) during 2010 compared with $21.6 ($0.52 per share) in 2009. Acuity Brands currently plans to pay quarterly dividends at a rate of $0.13 per share. All decisions regarding the declaration and payment of dividends by Acuity Brands are at the discretion of the Board of Directors of Acuity Brands and will be evaluated from time to time in light of the Company’s financial condition, earnings, growth prospects, funding requirements, applicable law, and any other factors the Acuity Brands’ Board deems relevant.

Results of Operations

 

Fiscal 2010 Compared with Fiscal 2009

 

The following table sets forth information comparing the components of net income for the year ended August 31, 2010 with the year ended August 31, 2009:

 

 

Results from Continuing Operations

 

Net sales were $1,626.9 for fiscal 2010 compared with $1,657.4 for fiscal 2009, a decrease of $30.5, or approximately 2%. For fiscal 2010, the Company reported income from continuing operations of $79.0 compared with $85.2 earned in the prior-year period. Diluted earnings per share from continuing operations for fiscal 2010 decreased 10.9% to $1.79 from $2.01 for the prior-year period. Results for fiscal 2010 and 2009 include after-tax special charges of $5.5 and $16.8, respectively, related to estimated costs to be incurred to simplify and streamline operations and to consolidate certain manufacturing facilities. In addition, a $6.8 after-tax loss associated with the early extinguishment of debt was incurred during the second quarter of fiscal 2010. The special charges and loss on early extinguishment of debt negatively impacted fiscal 2010 results by $0.29 per diluted share; special charges recorded in the prior year negatively impacted the fiscal 2009 results by $0.40 per diluted share.

The table below reconciles certain U.S. generally accepted accounting principles (“U.S. GAAP”) financial measures to the corresponding non-U.S. GAAP measures, which exclude special charges associated with actions to streamline the organization, including the consolidation of certain manufacturing facilities, and the loss on the early extinguishment of debt. These non-U.S. GAAP financial measures, including adjusted operating profit, adjusted operating profit margin, adjusted income from continuing operations, and adjusted diluted earnings per share from continuing operations, 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 results of operations, excluding the impact of the special charges and loss on the early extinguishment of debt. These 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.

 

 

Net Sales

 

Net sales for the fiscal year ended August 31, 2010, declined approximately 2% compared with fiscal 2009. Market conditions remained challenging in fiscal 2010 with new U.S. non-residential construction declining 15% compared to the prior year due to weak economic conditions. Approximately 4% of the comparative annual decline in sales was due to unfavorable changes in product prices and the mix of products sold (“price/mix”), particularly in the non-residential commercial and industrial channel and certain international markets. Although it is not possible to precisely quantify the separate impact of price and product mix changes, the Company estimates that a majority of the decline was due to lower product selling prices in certain channels and geographies. Higher sales volume primarily related to the additional sales from acquired businesses and other investments made by the Company partially offset the negative impact of price/mix on net sales. The acquisitions of the lighting controls businesses in the prior year contributed approximately 3% in incremental net sales during the current year. In addition, the translation impact of the stronger dollar on international sales contributed approximately one percentage point to current year net sales.

 

Gross Profit

 

Fiscal 2010 gross profit margin increased by 240 basis points to 40.7% of net sales compared with 38.3% reported for the prior-year period. Gross profit for fiscal 2010 increased $26.4, or 4.2%, to $661.5 compared with $635.1 for the prior-year period. The increase was due primarily to lower materials and components costs, savings from streamlining actions, and favorable contributions from acquired businesses. These benefits were partially offset by the impact of lower pricing, unfavorable product mix, and higher pension and transportation costs.

Operating Profit

 

Selling, Distribution, and Administrative (“SD&A”) expenses for fiscal 2010 were $495.4 compared with $454.6 in the prior-year period, which represented a $40.8, or 9.0%, year-over-year increase. SD&A expenses as a percent of sales increased by 310 basis points to 30.5% for fiscal 2010. More than half of the year-over-year increase was due to higher incentive compensation due to current year performance relative to the Company’s served markets, as well as severely curtailed incentives earned in the prior fiscal year. The remainder of the increase in SD&A expenses was due primarily to higher commission and freight costs, selected investments in sales and marketing resources and new products and services, and structurally higher operating costs associated with acquired businesses.

 

As part of the Company’s initiative to streamline and simplify operations, the Company recorded in fiscal 2010 and 2009 pre-tax charges of $8.4 and $26.7, respectively, to reflect severance and related employee benefit costs associated with the consolidation of certain manufacturing facilities and a reduction in workforce, as well as non-cash asset impairment charges on certain assets related to those manufacturing facilities. The pre-tax, non-cash asset impairment charges for fiscal 2010 and 2009 were $5.1 and $1.6, respectively. The Company realized approximately $50.0 ($28.0 during fiscal 2009 and an additional $22.0 during fiscal 2010) in annualized benefits related to these streamlining actions, which were initiated in fiscal 2009.

 

Operating profit for fiscal 2010 was $157.7 compared with $153.8 reported for the prior-year period, an increase of $3.9, or 2.5%. Operating profit margin increased 40 basis points to 9.7% compared with 9.3% in the year-ago period. The increase was due primarily to the higher gross profit as noted above and the decrease in the special charge, partially offset by the increase in SD&A expenses as a percentage of net sales as discussed above.

 

Excluding the special charge in both periods, adjusted operating profit for fiscal 2010 decreased $14.4, or 8.0%, to $166.1 compared with $180.5 in fiscal 2009. Adjusted operating profit margin for fiscal 2010 of 10.2% was 70 basis points lower than the prior year’s adjusted margin of 10.9%. The decrease was due primarily to higher SD&A expenses as explained above.

 

Income from Continuing Operations before Provision for Taxes

 

Other expense (income) for the Company consists primarily of net interest expense and foreign exchange related gains and losses. Interest expense, net, was $29.4 and $28.5 for fiscal 2010 and 2009, respectively. The modest increase in interest expense, net, was due primarily to higher interest costs related to obligations associated with non-qualified retirement plans, while lower year-over-year interest expense on borrowings was largely offset by lower interest income — both of which were impacted by lower rates. Miscellaneous income for fiscal 2010 of $1.0 declined from the $2.0 reported in the prior-year period. The decline in miscellaneous income was due primarily to the impact of changes in exchange rates on foreign currency items.

 

Due to the early retirement of the 2010 Notes in the second quarter of fiscal 2010, the Company recognized a pre-tax loss of $10.5 during the fiscal year.

 

Provision for Income Taxes and Income from Continuing Operations

 

The effective income tax rate reported by the Company was 33.5% and 33.1% for fiscal 2010 and 2009, respectively. The discrete items for fiscal 2010, including federal tax credits, favorable state audit settlements, and benefits from increased export of goods manufactured in the U.S., were slightly lower than those experienced in the prior-year period. The Company estimates that the effective tax rate for fiscal year 2011 will be approximately 34% if the rates in its taxing jurisdictions remain generally consistent throughout the year.

 

Income from continuing operations for fiscal 2010 decreased $6.2 to $79.0 (including $12.3 for the after-tax special charge and loss on early debt extinguishment) from $85.2 (including $16.8 for the after-tax special charge) reported for the prior-year period. The decrease in income from continuing operations resulted primarily from the loss on the early debt extinguishment, partially offset by slightly higher operating profit.

 

Excluding the special charge in both periods and the loss on the early extinguishment of debt reported in fiscal 2010, adjusted income from continuing operations for fiscal 2010 was $91.3 compared with $102.0 in the year-ago period, a decrease of $10.7, or 10.5%. The year-over-year decline in adjusted income from continuing operations

was due primarily to higher SD&A expenses. Excluding the special charges and the loss on the early extinguishment of debt, adjusted diluted earnings per share from continuing operations for fiscal 2010 was $2.08 compared with $2.41 for the prior-year period. In addition to the items noted above that impacted adjusted income from continuing operations, adjusted diluted earnings per share from continuing operations for the current fiscal year were negatively impacted by an increase in the number of shares outstanding compared with the prior-year period. The increase in the average shares outstanding was due primarily to shares issued as partial consideration for the acquisitions of Sensor Switch and LC&D, partially offset by the share repurchases during the fourth quarter of fiscal 2010.

 

Results from Discontinued Operations and Net Income

 

The Company incurred a $0.6 gain from discontinued operations during fiscal 2010 due to revisions of estimates of certain legal reserves established at the time of the Spin-off compared with a fiscal 2009 loss from discontinued operations of $0.3 related to income tax adjustments.

 

Net income for fiscal 2010 decreased by $5.3, or 6.2%, to $79.6 from $84.9 reported for the prior-year period. The decrease in net income resulted primarily from the loss on the early debt extinguishment and lower miscellaneous income, partially offset by the above noted increase in operating profit, lower income tax expense, and the gain on discontinued operations compared with a loss in the prior-year period.

 

Fiscal 2009 Compared with Fiscal 2008

 

The following table sets forth information comparing the components of net income for the year ended August 31, 2009 with the year ended August 31, 2008:

 

Results from Continuing Operations

 

Net sales were $1,657.4 for fiscal 2009 compared with $2,026.6 reported in the prior-year period, a decrease of $369.2, or 18.2%. For fiscal 2009, the Company reported income from continuing operations of $85.2 compared with $148.6 earned in fiscal 2008. Diluted earnings per share from continuing operations were $2.01 for fiscal 2009 as compared with $3.51 reported for fiscal 2008, a decrease of 42.7%. Results for fiscal 2009 and 2008 include after-tax special charges of $16.8 ($26.7 pre-tax), or $0.40 per diluted share, and $9.1 ($14.6 pre-tax), or $0.21 per diluted share, respectively.

 

On December 31, 2008, Acuity Brands acquired for cash and stock substantially all the assets and assumed certain liabilities of LC&D. LC&D had calendar year 2008 sales of approximately $18.0.

 

On April 20, 2009, the Company acquired Sensor Switch, an industry-leading developer and manufacturer of lighting controls and energy management systems, for an aggregate consideration of $205.0 comprised of (i) 2 million shares of common stock of Acuity Brands, (ii) a $30.0 note of Acuity Brands Lighting, and (iii) approximately $130.0 of cash. A cash payment of approximately $130.0 was funded from available cash on hand and from borrowings under the Company’s Revolving Credit Facility. The $30.0 unsecured promissory note was payable over three years. Sensor Switch generated sales in excess of $37.0 during its fiscal year ending October 31, 2008.

 

The operating results of Sensor Switch and LC&D have been included in the Company’s consolidated financial statements since their respective dates of acquisition.

 

The table below reconciles certain U.S. GAAP financial measures to the corresponding non-U.S. GAAP measures, which exclude special charges associated with actions to accelerate the streamlining of the organization, including the consolidation of certain manufacturing facilities. These non-U.S. GAAP financial measures, including adjusted operating profit, adjusted operating profit margin, adjusted income from continuing operations, 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 results of operations, excluding the impact of the special charges. These 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.

 

 

Net Sales

 

Net sales decreased approximately 18% in 2009 compared with 2008 due primarily to lower shipments and unfavorable impact of foreign currency fluctuation, partially offset by revenues from recent acquisitions. The lower volume of product shipments was due primarily to continued decline in demand on the residential and non-residential construction markets, particularly for commercial and office buildings. The Company estimates shipment volumes declined by approximately 19% in fiscal 2009 compared with 2008, partially offset by an

estimated 1% improvement in price and product mix. Additionally, unfavorable foreign currency rate fluctuations negatively impacted net sales in fiscal 2009 by slightly less than 2% compared with the prior year, which was largely offset by $26.0 of net sales from acquisitions.

 

Gross Profit

 

Gross profit margin decreased by 200 basis points to 38.3% of net sales for fiscal 2009 from 40.3% reported for the prior-year period. Gross profit for fiscal 2009 decreased $180.7, or 22.2%, to $635.1 compared with $815.8 for the prior-year period. The decline in gross profit and gross profit margin was largely attributable to the decline in net sales noted above, increased cost for raw material and components, and unfavorable foreign currency fluctuations. The Company estimates raw material and component costs increased cost of goods sold by approximately $40.0 compared with the year-ago period, with only a small portion of the increase recovered in higher prices. Savings from ongoing streamlining efforts, benefits from productivity improvements, and contributions from acquisitions helped to partially offset the negative impact of the aforementioned items on gross profit and gross profit margin.

 

Operating Profit

 

SD&A expenses for fiscal 2009 were $454.6 compared with $540.1 in the prior-year period, which represented a decrease of $85.5, or 15.8%. Approximately half of the decrease in SD&A expenses was due to lower commissions paid to the Company’s sales forces and agents and lower freight costs, which both typically vary directly with sales. Additionally, reduced incentive compensation and benefits from streamlining efforts contributed to lower fiscal 2009 SD&A expense. Partially offsetting these reductions was the additional SD&A expenses related to the businesses acquired in fiscal 2009.

 

As part of the Company’s initiative to streamline and simplify operations, the Company recorded in fiscal 2009 and 2008 pre-tax charges of $26.7 and $14.6, respectively, to reflect severance and related employee benefit costs associated with the elimination of certain positions worldwide and the costs associated with the early termination of certain leases. The fiscal 2009 charge included a non-cash expense of $1.6 for the impairment of assets associated with the closing of a facility. The Company estimates that it realized $39.0 ($28.0 and $11.0 from actions initiated in fiscal 2009 and 2008, respectively) in savings during fiscal 2009 compared with the prior year related to these actions.

 

Operating profit for fiscal 2009 was $153.8 compared with $261.1 reported for the prior-year period, a decrease of $107.3, or 41.1%. Operating profit margin decreased 360 basis points to 9.3% compared with 12.9% in the year-ago period. The decrease in operating profit in fiscal 2009 compared with the prior-year period was due primarily to the decrease in gross profit noted above and the $12.1 incremental special charge related to streamlining efforts, partially offset by decreased SD&A expenses as noted above.

 

Excluding the special charge in both periods, adjusted operating profit for fiscal 2009 decreased $95.2, or 34.5%, to $180.5 compared with $275.7 in fiscal 2008. Adjusted operating profit margin for fiscal 2009 of 10.9% was 270 basis points lower than prior year’s adjusted margin of 13.6%. The decrease was due to lower volume, increased raw material and component costs, and unfavorable foreign currency fluctuations, partially offset by savings from streamlining efforts, benefits from productivity improvements, and contributions from acquisitions. The Company believes this measure provides greater comparability and enhanced visibility into the improvements realized.

 

Income from Continuing Operations before Provision for Taxes

 

Other expense consists primarily of interest expense, net, and miscellaneous income (or expense) resulting from changes in exchange rates on foreign currency items as well as other non-operating items. Interest expense, net, was $28.5 and $28.4 for fiscal 2009 and 2008, respectively. Fiscal 2009 interest expense, net reflects lower interest expense resulting from the maturity of the $160.0 public notes that was more than offset by reduced interest income resulting from both lower cash balances and lower short-term interest rates. For fiscal 2009, the Company reported $2.0 of other miscellaneous income compared with $2.2 of other miscellaneous expense in the year-ago period. The $4.2 favorable year-over-over change was due primarily to the impact of changes in exchange rates on foreign currency items.

Provision for Income Taxes and Income from Continuing Operations

 

The effective income tax rate reported by the Company was 33.1% and 35.4% for fiscal 2009 and 2008, respectively. The decrease in the annual tax rate was due primarily to the greater impact of tax credits and deductions on the lower earnings amount and the adverse effect on prior year’s effective tax rate related to the repatriation of foreign cash. Income from continuing operations for fiscal 2009 decreased $63.4 to $85.2 (including $16.8 after-tax for the special charge) from $148.6 (including $9.1 after-tax for the special charge) reported for the prior-year period. The decrease in income from continuing operations was due primarily to the above noted decrease in operating profit, partially offset by lower tax expense.

 

Excluding the special charge in both periods, adjusted income from continuing operations for fiscal 2009 was $102.0 compared with $157.7 in the year-ago period, a decrease of $55.7, or 35.3%. The year-over-year decline in adjusted income from continuing operations was due primarily to the reduction in gross profit, partially offset by lower SD&A and income tax expenses. Excluding the special charges, adjusted diluted earnings per share from continuing operations for fiscal 2009 was $2.41 compared with $3.72 for fiscal 2008.

 

Results from Discontinued Operations and Net Income

 

The loss from discontinued operations for fiscal 2009 and 2008 was $0.3. The loss in both periods relate to tax adjustments associated with pre-spin activities.

 

Net income for fiscal 2009 decreased $63.4 to $84.9 from $148.3 reported for the prior-year period. The decrease in net income resulted primarily from the above noted decline in net sales.

 

Outlook

 

The performance of the Company, like most companies, is influenced by a multitude of factors or the vitality of the economy, including employment, credit availability and cost, consumer confidence, commodity costs, and government policy, particularly as it impacts capital formation and risk taking by businesses and commercial developers. As such, it is difficult at this time to precisely forecast the direction or intensity of future economic activity in general and more specifically with respect to overall construction demand in fiscal 2011. Key indicators suggest activity to be slightly down to flat for the North American non-residential construction market during fiscal 2011. However, the potential for energy savings and sustainability may buoy the demand for lighting fixtures and controls in relation to the renovation of commercial and institutional building and outdoor lighting markets.

 

Additionally, there is an industry-wide shortage of certain types of electronic ballasts and drivers due to a global shortage of certain common electronic components, and this has resulted in extended lead times and limited availability for some ballasts and drivers. This continues to be a concern of management. This situation is expected to persist for the near future and may adversely impact shipments. The Company has taken steps to procure and maintain sufficient materials and components stocks in the near term.

 

While prices for certain materials and components, including steel and petroleum, declined from their record highs in the summer and fall of 2008, prices for certain materials and components have once again begun to rise, placing pressure on the Company’s margins. The Company expects to respond to cost increases with higher selling prices where appropriate, including, but not limited to, the announced price increases on many products effective at the end of May 2010. However, due to the competitive forces in the current market environment, there can be no assurance that the Company will be able to pass along all cost increases or adjust prices quickly enough to offset all or a portion of potentially higher material and component prices. Notwithstanding efforts to recoup potentially higher costs, management believes pricing will continue to be competitive in certain channels and geographies but expects the negative impact to be offset through productivity improvements and benefits from new product introductions.

 

The Company realized approximately $50.0 of annualized benefits from the streamlining actions taken in fiscal 2009, of which approximately $28.0 of benefits were realized during fiscal 2009 and an additional $22.0 during fiscal 2010. Also, the Company anticipates additional annualized savings beginning in fiscal 2011 of approximately $10.0 due to the streamlining efforts announced during the second quarter of fiscal 2010. The Company projects realized savings at the annualized rate by the second quarter of fiscal 2011. These actions related

to the consolidation of certain manufacturing operations and a reduction in workforce. The Company initiated such actions in an effort to continue to redeploy and invest resources in other areas where the Company believes it can create greater value and accelerate profitable growth opportunities, including a continued focus on customer connectivity and industry-leading product innovation incorporating energy-efficiency and sustainable design.

 

In addition to the recent acquisitions, which significantly increased the Company’s presence in the growing lighting controls market, management believes the execution of the Company’s strategies to accelerate investments in innovative and energy-efficient products and services, enhance service to its customers, and expand market presence in key geographies and sectors such as home centers and the renovation market will provide growth opportunities, which should enable the Company to continue to outperform the overall markets it serves. The Company believes it is strategically positioned to take advantage of opportunities within the market, as complete lighting systems will likely become an integral part of the “smart building” energy management development. Additionally, management believes these actions and investments will position the Company to meet or exceed its financial goals over the longer term.

 

The Company expects cash flow from operations to remain strong for fiscal 2011 and intends to invest up to $40.0 in capital expenditures during the year. In addition, the Company expects to contribute approximately $5.8 and $1.0 to its domestic and international defined benefit plans, respectively, during fiscal 2011. The Company estimates the annual tax rate to approximate 34% for fiscal 2011.

 

Although fiscal 2011 results are expected to be negatively impacted by current economic conditions, management remains positive about the long-term potential of the Company and its ability to outperform the market. Although management anticipates short-term performance will likely continue to be negatively affected by further investments in the growing controls and renovation markets, the Company believes that these are necessary measures to further the Company’s long-term profitable growth opportunities. Looking beyond the current environment, management believes the lighting and lighting-related industry will experience solid growth over the next decade, particularly as energy and environmental concerns come to the forefront, and that the Company is well-positioned to fully participate in the industry.

 

Accounting Standards Adopted in Fiscal 2010

 

In June 2009, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 168, The FASB Accounting Standards Codification^tm and the Hierarchy of Generally Accepted Accounting Principles — a replacement of FASB Statement No. 162 (“SFAS 168”), which confirms that as of July 1, 2009, the FASB Accounting Standards Codification^tm (“Codification”) is the single official source of authoritative, nongovernmental U.S. GAAP. All existing accounting standard documents are superseded, and all other accounting literature not included in the Codification is considered nonauthoritative. SFAS 168 — which now resides in the Accounting Standards Codification (“ASC”) Topic 105, Generally Accepted Accounting Principles (“ASC 105”), within the Codification — was effective for interim and annual periods ending after September 15, 2009 and, therefore, was adopted by the Company on November 30, 2009. The Company determined, however, that the standard did not have an effect on the Company’s financial position, results of operations, or cash flows upon adoption.

 

In June 2009, the FASB issued Accounting Standards Update (“ASU”) No. 2009-1, Topic 105 — Generally Accepted Accounting Principles — amendments based on — Statement of Financial Accounting Standards No. 168 — The FASB Accounting Standards Codification^TM and the Hierarchy of Generally Accepted Accounting Principles (“ASU 2009-1”), which amends the Codification for the issuance of SFAS 168. See discussion on SFAS 168 above as adoption was concurrent with that standard.

 

In January 2010, the FASB issued ASU No. 2010-06, Fair Value Measurements and Disclosures (Topic 820) — Improving Disclosures about Fair Value Measurements (“ASU 2010-06”). The updates to the Codification require new disclosures around transfers into and out of Levels 1 and 2 in the fair value hierarchy and separate disclosures about purchases, sales, issuances, and settlements related to Level 3 measurements. ASU 2010-06 is effective for interim and annual reporting periods beginning after December 15, 2009 with early adoption permitted, except for the disclosures about purchases, sales, issuances, and settlements in the rollforward of Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years with early adoption permitted. The Company adopted the provisions of ASU 2010-06 effective March 1, 2010. The Company determined that the update had no impact on its financial position, results of operations, or cash flows upon adoption.

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (Topic 855) — Amendments to Certain Recognition and Disclosure Requirements (“ASU 2010-09”). The amendments in this standard update define a SEC filer within the Codification and eliminate the requirement for an SEC filer to disclose the date through which subsequent events have been evaluated in order to remove potential conflicts with current SEC guidance. The relevant provisions of ASU 2010-09 were effective upon the date of issuance of February 24, 2010, and the Company adopted the amendments accordingly. As the update only pertained to disclosures, ASU 2010-09 had no impact on the Company’s financial position, results of operations, or cash flows upon adoption.

 

In December 2008, the FASB issued revisions to ASC Topic 715, Compensation — Retirement Benefits (“ASC 715”), that required additional disclosures around the fair value measurements of plan assets within an entity’s defined benefit and other post-retirement plans. The revised guidance require disclosures around plan assets related to: 1) investment allocation decisions, 2) major categories of plan assets, 3) inputs and valuation techniques, 4) effect of changes in value of Level 3 assets, and 5) concentrations of risk. The provisions of this standard were effective for fiscal years ending after December 15, 2009, and were therefore adopted by the Company as of the fiscal year ended August 31, 2010. As the revisions only pertained to disclosures, the adoption of these requirements had no impact on the Company’s financial position, results of operations, or cash flows upon adoption.

 

In June 2008, FASB issued guidance within ASC Topic 260, Earnings Per Share (“ASC 260”), to clarify that unvested share-based payment awards with a right to receive nonforfeitable dividends are participating securities. The standard provides guidance on how to allocate earnings to participating securities and compute earnings per share (“EPS”) using the two-class method. The provisions of this standard were effective for fiscal years beginning after December 15, 2008, and interim periods within those fiscal years, and were therefore adopted by the Company on September 1, 2009. The EPS amounts for previously reported periods have been adjusted due to retrospective adoption of this standard. The Company’s diluted EPS from continuing operations for the years ended August 31, 2009 and 2008, under this guidance are $2.01 and $3.51, respectively, as compared to $2.05 and $3.57 previously reported for these periods.

 

In December 2007, the FASB issued guidance within ASC Topic 805, Business Combinations (“ASC 805”), which changes the accounting for business combinations through a requirement to recognize 100% of the fair values of assets acquired, liabilities assumed, and noncontrolling interests in acquisitions of less than a 100% controlling interest when the acquisition constitutes a change in control of the acquired entity. Other requirements include capitalization of acquired in-process research and development assets, expensing, as incurred, acquisition-related transaction costs and capitalizing restructuring charges as part of the acquisition only if requirements of ASC Topic 420, Exit or Disposal Obligations, are met. The standard was effective for business combination transactions for which the acquisition date was on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and was therefore adopted by the Company on September 1, 2009. See the Acquisitions footnote of the Notes to Consolidated Financial Statements for the impact of business combinations under this guidance on the Company’s financial position, results of operations, and cash flows.

 

In December 2007, the FASB issued guidance within ASC Topic 810, Consolidation (“ASC 810”), that establishes the economic entity concept of consolidated financial statements, stating that holders of a residual economic interest in an entity have an equity interest in the entity, even if the residual interest is related to only a portion of the entity. Therefore, this standard requires a noncontrolling interest to be presented as a separate component of equity. The standard also states that once control is obtained, a change in control that does not result in a loss of control should be accounted for as an equity transaction. The statement requires that a change resulting in a loss of control and deconsolidation is a significant event triggering gain or loss recognition and the establishment of a new fair value basis in any remaining ownership interests. The standard was effective for fiscal years beginning on or after December 15, 2008 and was therefore adopted by the Company on September 1, 2009. The implementation of this guidance had no effect on the Company’s financial position, results of operations, or cash flows, as the Company does not currently consolidate an entity with a noncontrolling interest.

 

Accounting Standards Yet to Be Adopted

 

In September 2009, the FASB issued ASU No. 2009-14, Software (Topic 985) — Certain Revenue Arrangements That Include Software Elements (“ASU 2009-14”). ASU 2009-14 changes the accounting model for revenue

arrangements that include both tangible products and software elements to allow for alternatives when vendor-specific objective evidence does not exist. Under this guidance, tangible products containing software components and non-software components that function together to deliver the tangible product’s essential functionality and hardware components of a tangible product containing software components are excluded from the software revenue guidance in Subtopic 985-605, Software-Revenue Recognition; thus, these arrangements are excluded from this update. ASU 2009-14 is effective prospectively for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010 with early adoption permitted. ASU 2009-14 is therefore effective for the Company no later than the beginning of fiscal 2011. The Company is currently in the process of determining the impact, if any, of adoption of the provisions of ASU 2009-14.

 

In September 2009, the FASB issued ASU No. 2009-13, Revenue Recognition (Topic 605) — Multiple-Deliverable Revenue Arrangements (“ASU 2009-13”). ASU 2009-13 addresses the accounting for multiple-deliverable arrangements to enable vendors to account for products or services (“deliverables”) separately rather than as a combined unit. Specifically, this guidance amends the criteria in Subtopic 605-25, Revenue Recognition-Multiple-Element Arrangements, of the Codification for separating consideration in multiple-deliverable arrangements. A selling price hierarchy is established for determining the selling price of a deliverable, which is based on: (a) vendor-specific objective evidence; (b) third-party evidence; or (c) company-specific estimates. This guidance also eliminates the residual method of allocation and requires that arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method. Additional disclosures related to a vendor’s multiple-deliverable revenue arrangements are also required by this update. ASU 2009-13 is effective prospectively for revenue arrangements entered into, or materially modified, in fiscal years beginning on or after June 15, 2010 with early adoption permitted. ASU 2009-13 is therefore effective for the Company no later than the beginning of fiscal 2011. The Company is currently in the process of determining the impact, if any, of adoption of the provisions of ASU 2009-13.

 

Critical Accounting Estimates

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations addresses the financial condition and results of operations as reflected in the Company’s Consolidated Financial Statements, which have been prepared in accordance with U.S. GAAP. As discussed in the Description of Business and Basis of Presentation footnote of the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and reported amounts of revenue and expense during the reporting period. On an ongoing basis, management evaluates its estimates and judgments, including those related to inventory valuation; depreciation, amortization and the recoverability of long-lived assets, including goodwill and intangible assets; share-based compensation expense; medical, product warranty, and other reserves; litigation; and environmental matters. Management bases its estimates and judgments on its substantial historical experience and other relevant factors, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates. Management discusses the development of accounting estimates with the Company’s Audit Committee. See the Summary of Significant Accounting Policies footnote of the Notes to Consolidated Financial Statements for a summary of the accounting policies of Acuity Brands.

 

The management of Acuity Brands believes the following represent the Company’s critical accounting estimates:

 

Inventories

 

Inventories include materials, direct labor, and related manufacturing overhead, and are stated at the lower of cost (on a first-in, first-out or average-cost basis) or market. Management reviews inventory quantities on hand and records a provision for excess or obsolete inventory primarily based on estimated future demand and current market conditions. A significant change in customer demand or market conditions could render certain inventory obsolete and thus could have a material adverse impact on the Company’s operating results in the period the change occurs.

Goodwill and Indefinite Lived Intangible Assets

 

The Company reviews goodwill and indefinite lived intangible assets for impairment on an annual basis in the fiscal fourth quarter or on an interim basis, if an event occurs or circumstances change that would more likely than not indicate that the fair value of the long-lived asset is below its carrying value. All other long-lived and intangible assets are reviewed for impairment whenever events or circumstances indicate that the carrying amount of the asset may not be recoverable. An impairment loss for goodwill and indefinite lived intangibles would be recognized based on the difference between the carrying value of the asset and its estimated fair value, which would be determined based on either discounted future cash flows or other appropriate fair value methods. The evaluation of goodwill and indefinite lived intangibles for impairment requires management to use significant judgments and estimates in accordance with U.S. GAAP including, but not limited to, projected future net sales, operating results, and cash flow.

 

Although management currently believes that the estimates used in the evaluation of goodwill and indefinite lived intangibles are reasonable, differences between actual and expected net sales, operating results, and cash flow and/or changes in the discount rate or theoretical royalty rate could cause these assets to be deemed impaired. If this were to occur, the Company would be required to charge to earnings the write-down in value of such assets, which could have a material adverse effect on the Company’s results of operations and financial position, but not its cash flows from operations.

 

Goodwill

 

The Company is comprised of one reporting unit with a goodwill balance of $515.6. In determining the fair value of the Company’s reporting unit, the Company uses a discounted cash flow analysis, which requires significant assumptions about discount rates as well as short and long-term growth (or decline) rates, in accordance with U.S. GAAP. The Company utilized an estimated discount rate of 10% as of June 1, 2010, based on the Capital Asset Pricing Model, which considers the updated risk-free interest rate, beta, market risk premium, and entity specific size premium. Short-term growth (or decline) rates are based on management’s forecasted financial results, which consider key business drivers such as specific revenue growth initiatives, market share changes, growth (or decline) in non-residential and residential construction markets, and general economic factors such as credit availability and interest rates. The Company calculates the discounted cash flows using a 10-year period with a terminal value and compares this calculation to the discounted cash flows generated over a 40-year period to ensure reasonableness. The long-term growth rate used in determining terminal value is estimated at 3% for the Company and is primarily based on the Company’s understanding of projections for expected long-term growth in non-residential construction, the Company’s key market.

 

During fiscal 2010, the Company performed an evaluation of the fair value of goodwill. The goodwill analysis did not result in an impairment charge, as the estimated fair value of the reporting unit continues to exceed the carrying value by such a significant amount that any reasonably likely change in the assumptions used in the analysis, including revenue growth rates and the discount rate, would not cause the carrying value to exceed the estimated fair value for the reporting unit as determined under the step one goodwill impairment analysis.

 

Indefinite Lived Intangible Assets

 

The Company’s indefinite lived intangible assets consist of five unamortized trade names with an aggregate carrying value of approximately $96.1. Management utilizes significant assumptions to estimate the fair value of these unamortized trade names using a fair value model based on discounted future cash flows in accordance with U.S. GAAP. Future cash flows associated with each of the Company’s unamortized trade names are calculated by applying a theoretical royalty rate a willing third party would pay for use of the particular trade name to estimated future net sales. The present value of the resulting after-tax cash flow is management’s current estimate of the fair value of the trade names. This fair value model requires management to make several significant assumptions, including estimated future net sales, the royalty rate, and the discount rate.

 

Future net sales and short-term growth (or decline) rates are estimated for each particular trade name based on management’s forecasted financial results which consider key business drivers such as specific revenue growth initiatives, market share changes, expected growth (or decline) in non-residential and residential construction

markets, and general economic factors such as credit availability and interest rates. The long-term growth rate used in determining terminal value is estimated at 3% for the Company and is primarily based on the Company’s understanding of projections for expected long-term growth in non-residential construction, the Company’s key market. The theoretical royalty rate is estimated using a factor of operating profit margins and management’s assumptions regarding the amount a willing third party would pay to use the particular trade name. Differences between expected and actual results can result in significantly different valuations. If future operating results are unfavorable compared with forecasted amounts, the Company may be required to reduce the theoretical royalty rate used in the fair value model. A reduction in the theoretical royalty rate would result in lower expected future after-tax cash flow in the valuation model. With the exception of the LC&D trade names, the Company utilized a range of estimated discount rates between 10 and 14% as of June 1, 2010, based on the Capital Asset Pricing Model, which considers the updated risk-free interest rate, beta, market risk premium, and entity specific size premium.

 

During fiscal 2010, the Company performed an evaluation of the fair value of its five unamortized trade names. The Company’s expected revenues are based on the Company’s fiscal 2011 plan and recent lighting market growth or decline estimates for fiscal 2011 through 2015. The Company also included revenue growth estimates based on current initiatives expected to help the Company improve performance. During fiscal 2010, estimated theoretical royalty rates ranged between 1% and 4%. The indefinite lived intangible asset analysis did not result in an impairment charge, as the fair values exceeded the carrying values for each trade name by a significant amount, except for the Mark Lighting and LC&D trade names, which had fair values that exceeded each of its carrying values of $8.6 and $6.9, respectively, by approximately 31.4% and 4.5%, respectively. The estimated fair values of the indefinite lived intangible assets, other than the Mark Lighting and LC&D trade names, exceed the carrying values by such a significant amount that any reasonably likely change in the assumptions used in the analyses, including revenue growth rates and the discount rate, would not cause the carrying values to exceed the estimated fair values as determined by the fair value analyses. The Company determined that any estimated potential impairment related to the Mark Lighting or LC&D trade names based on reasonable changes in the assumptions that would be less likely to occur would not be material to the Company’s financial results, trend of earnings, or financial position.

 

Self-Insurance

 

The Company self-insures, up to certain limits, traditional risks including workers’ compensation, comprehensive general liability, and auto liability. The Company’s self-insured retention for each claim involving workers’ compensation, comprehensive general liability (including product liability claims), and auto liability is limited to $0.5 per occurrence of such claims. A provision for claims under this self-insured program, based on the Company’s estimate of the aggregate liability for claims incurred, is revised and recorded annually. The estimate is derived from both internal and external sources including but not limited to the Company’s independent actuary. The Company is also self-insured up to certain limits for certain other insurable risks, primarily physical loss to property ($0.5 per occurrence) and business interruptions resulting from such loss lasting two days or more in duration. Insurance coverage is maintained for catastrophic property and casualty exposures as well as those risks required to be insured by law or contract. The Company is fully self-insured for certain other types of liabilities, including environmental, product recall, and patent infringement. The actuarial estimates calculated are subject to uncertainty from various sources, including, among others, changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation, and economic conditions. Although the Company believes that the actuarial estimates are reasonable, significant differences related to the items noted above could materially affect the Company’s self-insurance obligations, future expense and cash flow.

 

The Company is also self-insured for the majority of its medical benefit plans with individual claims limited to $0.3. The Company estimates its aggregate liability for claims incurred by applying a lag factor to the Company’s historical claims and administrative cost experience. The appropriateness of the Company’s lag factor is evaluated and revised, if necessary, annually. Although management believes that the current estimates are reasonable, significant differences related to claim reporting patterns, plan designs, legislation, and general economic conditions could materially affect the Company’s medical benefit plan liabilities, future expense and cash flow.

Income Taxes

 

The Company uses certain assumptions and estimates in determining the income taxes payable or refundable for the current year, income tax expense, and deferred income tax liabilities and assets, which represent temporary and permanent differences between amounts within the financial statements and the income tax basis. ASC 740, Income Taxes (“ASC 740”), requires the evaluation and testing of the recoverability of deferred tax assets. Deferred tax assets are reduced by a valuation allowance if, based on the relevant factors, it is more likely than not that all or some portion of the deferred tax assets will not be realized. Reasonable judgment and estimates are required in determining whether a valuation allowance is necessary and, if so, the amount of such valuation allowance. In evaluating the need for a valuation allowance, the Company considers a number of factors, including, but not limited to: the nature and character of the deferred tax assets and liabilities; taxable income in prior carryback years; future reversals of existing temporary differences; and the length of time carryovers can be utilized.

 

In light of the multiple tax jurisdictions in which the Company operates, the Company’s tax returns are subject to routine audit by the Internal Revenue Service (“IRS”) and other taxation authorities. These audits at times produce uncertainty regarding particular tax positions taken in the year(s) of review. The Company records uncertain tax positions as prescribed by ASC 740, which requires recognition at the time when it is more likely than not that the position in question will be upheld. Although management believes that the judgment and estimates involved are reasonable and that the necessary provisions have been recorded, changes in circumstances or unexpected events could adversely affect the Company’s financial position, results from operations, and cash flows.

 

Retirement Benefits

 

The Company sponsors domestic and international defined benefit pension plans and domestic defined contribution plans and other postretirement plans. Assumptions are used to determine the estimated fair value of plan assets, the actuarial value of plan liabilities, and the current and projected costs for these employee benefit plans and include, among other factors, estimated discount rates, expected returns on the pension fund assets, estimated mortality rates, and the rates of increase in employee compensation levels. These assumptions are determined based on Company and market data and are evaluated annually as of the plans’ measurement date. See the Pensions and Profit Sharing Plans footnote of the Notes to Consolidated Financial Statements for further information on the Company’s plans.

 

Share-Based Compensation Expense

 

The Company recognizes compensation cost relating to share-based payment transactions in the financial statements based on the estimated fair value of the equity or liability instrument issued. The Company accounts for stock options, restricted shares, and share units representing certain deferrals into the Director Deferred Compensation Plan or the Supplemental Deferred Savings Plan (both of which are discussed further in the Share-Based Payments footnote of the Notes to Consolidated Financial Statements) using the modified prospective method. Under the modified prospective method, share-based expense recognized includes: (a) share-based expense for all awards granted prior to, but not yet vested as of September 1, 2005, based on the grant date fair value estimated under the previous guidance, and (b) share-based expense for all awards granted subsequent to September 1, 2005, based on the grant-date fair value estimated under the current provisions of ASC Topic 718, Compensation — Stock Compensation (“ASC 718”). The Company recorded $11.8, $13.0, and $12.0 of share-based expense in continuing operations for the years ended August 31, 2010, 2009, and 2008, respectively.

 

The Company employs the Black-Scholes model in deriving the fair value estimates of share-based awards and records estimates of forfeitures of share-based awards at the time of grant, which are revised in subsequent periods if actual forfeitures differ from initial estimates. Therefore, the expense related to share-based payments recognized in fiscal 2010, 2009, and 2008 has been reduced for estimated forfeitures. As of August 31, 2010, there was $16.8 of total unrecognized compensation cost related to unvested restricted stock. That cost is expected to be recognized over a weighted-average period of 2.2 years. As of August 31, 2010, there was $2.5 of total unrecognized compensation cost related to unvested options. That cost is expected to be recognized over a weighted-average period of 1.6 years. Forfeitures are estimated based on historical experience. If factors change causing different assumptions to be made in future periods, estimated compensation expense may differ significantly from that

recorded in the current period. See the Summary of Significant Accounting Policies and Share-Based Payments footnotes of the Notes to Consolidated Financial Statements for more information regarding the assumptions used in estimating the fair value of stock options.

 

Product Warranty and Recall Costs

 

The Company records an allowance for the estimated amount of future warranty costs when the related revenue is recognized, primarily based on historical experience of identified warranty claims. Excluding costs related to recalls due to faulty components provided by third parties, historical warranty costs have been within expectations. However, there can be no assurance that future warranty costs will not exceed historical amounts. If actual future warranty costs exceed historical amounts, additional allowances may be required, which could have a material adverse impact on the Company’s operating results and cash flow in future periods.

 

Litigation

 

The Company recognizes expense for legal claims when payments associated with the claims become probable and can be reasonably estimated. Due to the difficulty in estimating costs of resolving legal claims, actual costs may be substantially higher or lower than the amounts reserved.

 

Environmental Matters

 

The Company recognizes expense for known environmental claims when payments associated with the claims become probable and the costs can be reasonably estimated. The actual cost of resolving environmental issues may be higher or lower than that reserved primarily due to difficulty in estimating such costs and potential changes in the status of government regulations. The Company is self-insured for most environmental matters.

 

Cautionary Statement Regarding Forward-Looking Information

 

This filing contains forward-looking statements within the meaning of the federal securities laws. Statements made herein that may be considered forward-looking include statements incorporating terms such as “expects”, “believes”, “intends”, “anticipates” and similar terms that relate to future events, performance, or results of the Company. In addition, the Company, or the executive officers on the Company’s behalf, may from time to time make forward-looking statements in reports and other documents the Company files with the SEC or in connection with oral statements made to the press, potential investors, or others. Forward-looking statements include, without limitation: (a) the Company’s projections regarding financial performance, liquidity, capital structure, capital expenditures, and dividends; (b) expectations about the impact of volatility and uncertainty in general economic conditions; (c) external forecasts projecting industry unit volumes; (d) expectations about the impact of volatility and uncertainty in component and commodity costs and availability, and the Company’s ability to manage those challenges, as well as the Company’s response with pricing of its products; (e) the Company’s ability to execute and realize benefits from initiatives related to streamlining its operations, capitalizing on growth opportunities, expanding in key markets, enhancing service to the customer, and investing in product innovation; (f) the Company’s estimate of its fiscal 2011 annual tax rate; and (g) the Company’s ability to achieve its long-term financial goals and measures. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this annual report. Except as required by law, the Company undertakes no obligation to publicly update or release any revisions to these forward-looking statements to reflect any events or circumstances after the date of this annual report or to reflect the occurrence of unanticipated events. The Company’s forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from the historical experience of the Company and management’s present expectations or projections. These risks and uncertainties include, but are not limited to, customer and supplier relationships and prices; competition; ability to realize anticipated benefits from initiatives taken and timing of benefits; market demand; litigation and other contingent liabilities; and economic, political, governmental, and technological factors affecting the Company. Also, additional risks that could cause the Company’s actual results to differ materially from those expressed in the Company’s forward-looking statements are discussed in Part  I, “Item 1a. Risk Factors” of this Annual Report on Form 10-K, and are specifically incorporated herein by reference.

 

General.  The Company is exposed to worldwide market risks that may impact the Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows due primarily to changing interest and foreign exchange rates as well as volatility in commodity prices. The following discussion provides additional information regarding the market risks of Acuity Brands.

 

Interest Rates.  Interest rate fluctuations expose the variable-rate debt of the Company to changes in interest expense and cash flows. At August 31, 2010, the variable-rate debt of the Company was solely comprised of the $4.0 long-term industrial revenue bond. A 10% increase in market interest rates at August 31, 2010, would have resulted in a de minimus amount of additional annual after-tax interest expense. A fluctuation in interest rates would not affect interest expense or cash flows related to the Company’s fixed-rate debt which includes the $350.0 publicly-traded fixed-rate notes. A 10% increase in market interest rates at August 31, 2010, would have decreased the estimated fair value of these debt obligations by approximately $12.7. See the Debt and Lines of Credit footnote of the Notes to Consolidated Financial Statements, contained in this Form 10-K, for additional information regarding the Company’s debt.

 

Foreign Exchange Rates.  The majority of net sales, expense, and capital purchases of the Company are transacted in U.S. dollars. However, exposure with respect to foreign exchange rate fluctuation exists due to the Company’s operations in Canada, where a significant portion of products sold are sourced from the United States. A hypothetical decline in the Canadian dollar of 10% would negatively impact operating profit by approximately $7.0. In addition to products and services sold in Mexico, a significant portion of the goods sold in the United States are manufactured in Mexico. A hypothetical 10% increase in the Mexican peso would negatively impact operating profits by approximately $3.7. The impact of these hypothetical currency fluctuations has been calculated in isolation from any response the Company would undertake to address such exchange rate changes in the Company’s foreign markets.

 

Commodity Prices.  The Company utilizes a variety of raw materials and components in its production process including petroleum-based products, steel, and aluminum. In fiscal 2010, the Company purchased approximately 119,000 tons of steel and aluminum. The Company estimates that less than 10% of the raw materials purchased are petroleum-based and that approximately 3.5 million gallons of diesel fuel was consumed in fiscal 2010. Failure to effectively manage future increases in the costs of these items could adversely affect the ability to maintain or increase operating margins.

 

Index to Consolidated Financial Statements

 

 

The management of Acuity Brands, Inc. is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is defined in Rule 13a-15(f) and 15d-15(f) promulgated under the Securities Exchange Act of 1934. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

The Company’s management assessed the effectiveness of the Company’s internal control over financial reporting as of August 31, 2010. In making this assessment, the Company’s management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) in Internal Control-Integrated Framework. Based on this assessment, management believes that, as of August 31, 2010, the Company’s internal control over financial reporting is effective.

 

The Company’s independent registered public accounting firm has issued an audit report on their audit of the Company’s internal control over financial reporting. This report dated October 29, 2010 appears on page 41 of this Form 10-K.

 

 

The Board of Directors and Stockholders

Acuity Brands, Inc.

 

We have audited the accompanying consolidated balance sheets of Acuity Brands, Inc. as of August 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended August 31, 2010. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These consolidated financial statements and schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and schedule based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Acuity Brands, Inc. at August 31, 2010 and 2009, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2010, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth therein.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Acuity Brands, Inc.’s internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 29, 2010 expressed an unqualified opinion thereon.

 

 

Atlanta, Georgia

October 29, 2010

Report of Independent Registered Public Accounting Firm on Internal Control
Over Financial Reporting

 

The Board of Directors and Stockholders

Acuity Brands, Inc.

 

We have audited Acuity Brands, Inc.’s internal control over financial reporting as of August 31, 2010, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the COSO criteria). Acuity Brands, Inc.’s management is responsible for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting included in the accompanying Management’s Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the company’s internal control over financial reporting based on our audit.

 

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

 

A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.

 

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

 

In our opinion, Acuity Brands, Inc. maintained, in all material respects, effective internal control over financial reporting as of August 31, 2010, based on the COSO criteria.

 

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of Acuity Brands, Inc. as of August 31, 2010 and 2009, and the related consolidated statements of income, stockholders’ equity and comprehensive income, and cash flows for each of the three years in the period ended August 31, 2010 of Acuity Brands, Inc. and our report dated October 29, 2010 expressed an unqualified opinion thereon.

 

 

Atlanta, Georgia

October 29, 2010

 

 

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

 

 

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

 

 

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