UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended February 28, 2002.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to .
--------------------- --------------------
Commission file number 001-16583
---------
ACUITY BRANDS, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 58-2632672
(State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
1420 Peachtree Street, N.E., Atlanta, Georgia 30309-3002
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(404) 853-1400
- --------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
None
- --------------------------------------------------------------------------------
(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
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 [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Common Stock - $0.01 Par Value - 41,346,730 shares as of March 31, 2002.
Page 2
ACUITY BRANDS, INC. AND SUBSIDIARIES
INDEX
Page No.
--------
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS (Unaudited) -
FEBRUARY 28, 2002 AND AUGUST 31, 2001 3
CONSOLIDATED STATEMENTS OF INCOME (Unaudited) -
THREE AND SIX MONTHS ENDED FEBRUARY 28, 2002 AND 2001 4
CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) -
SIX MONTHS ENDED FEBRUARY 28, 2002 AND 2001 5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
SIGNATURES 19
Page 3
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
ACUITY BRANDS, INC.
(In thousands, except share and per-share data)
February 28, August 31,
2002 2001
------------ ------------
ASSETS
Current Assets:
Cash and cash equivalents $ 1,225 $ 10,337
Receivables, less reserves for doubtful accounts of $8,301 at February 28,
2002 and $8,195 at August 31, 2001 311,418 297,762
Inventories 214,902 210,783
Deferred income taxes 16,059 16,326
Prepayments and other current assets 28,018 23,908
------------ ------------
Total Current Assets 571,622 559,116
------------ ------------
Property, Plant, and Equipment, at cost:
Land 15,354 16,009
Buildings and leasehold improvements 163,948 161,779
Machinery and equipment 346,141 326,160
------------ ------------
Total Property, Plant, and Equipment 525,443 503,948
Less-Accumulated depreciation and amortization 276,465 255,525
------------ ------------
Property, Plant, and Equipment-net 248,978 248,423
------------ ------------
Other Assets:
Goodwill and other intangibles 471,092 468,944
Other 49,144 54,092
------------ ------------
Total Other Assets 520,236 523,036
------------ ------------
Total Assets $ 1,340,836 $ 1,330,575
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Current maturities of long-term debt $ 325 $ 357
Credit line 21,200 105,000
Short-term secured borrowings 100,900 105,100
Notes payable 12,614 24,666
Accounts payable 124,377 108,380
Accrued salaries, commissions, and bonuses 33,074 36,070
Other accrued liabilities 79,072 62,494
------------ ------------
Total Current Liabilities 371,562 442,067
------------ ------------
Long-Term Debt, less current maturities 473,690 373,707
------------ ------------
Deferred Income Taxes 28,254 31,759
------------ ------------
Self-Insurance Reserves, less current portion 14,516 14,350
------------ ------------
Other Long-Term Liabilities 73,155 85,394
------------ ------------
Commitments and Contingencies (Note 10)
Stockholders' Equity:
NSI investment -- 400,296
Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued -- --
Common stock, $0.01 par value, 500,000,000 shares authorized, 41,311,229
shares issued and outstanding 413 --
Paid-in capital 394,949 --
Retained earnings 4,361 --
Unearned compensation on restricted stock (617) --
Accumulated other comprehensive income items (19,447) (16,998)
------------ ------------
Total Stockholders' Equity 379,659 383,298
------------ ------------
Total Liabilities and Stockholders' Equity $ 1,340,836 $ 1,330,575
============ ============
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
Page 4
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
ACUITY BRANDS, INC.
(In thousands, except per-share data)
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- --------------------------
February 28, February 28,
---------------------------- --------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net Sales $ 468,245 $ 471,283 $ 949,936 $ 973,929
Costs and Expenses:
Cost of products sold 281,390 270,617 566,409 557,101
Selling and administrative expenses 158,548 161,351 324,887 337,789
Interest expense, net 10,183 12,935 20,704 25,757
Amortization expense 1,097 4,556 2,193 8,889
Other (income) expense, net (6) 22 110 79
--------- --------- --------- ---------
Total Costs and Expenses 451,212 449,481 914,303 929,615
--------- --------- --------- ---------
Income before Provision for Income Taxes 17,033 21,802 35,633 44,314
Provision for Income Taxes 6,475 8,721 13,541 17,726
--------- --------- --------- ---------
Net Income $ 10,558 $ 13,081 $ 22,092 $ 26,588
========= ========= ========= =========
Earnings Per Share:
Basic Earnings per Share $ 0.26 n/a n/a n/a
========= ========= ========= =========
Basic Weighted Average Number of Shares Outstanding 41,273 n/a n/a n/a
========= ========= ========= =========
Diluted Earnings per Share $ 0.26 n/a n/a n/a
========= ========= ========= =========
Diluted Weighted Average Number of Shares Outstanding 41,303 n/a n/a n/a
========= ========= ========= =========
Pro Forma Earnings Per Share (Note 5):
Basic Earnings per Share n/a $ 0.32 $ 0.54 $ 0.65
========= ========= ========= =========
Basic Weighted Average Number of Shares Outstanding n/a 41,076 41,246 41,002
========= ========= ========= =========
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
Page 5
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
ACUITY BRANDS, INC.
(In thousands)
SIX MONTHS ENDED
-------------------------
FEBRUARY 28,
-------------------------
2002 2001
--------- ---------
Cash Provided by (Used for) Operating Activities
Net income $ 22,092 $ 26,588
Adjustments to reconcile net income to net cash provided by (used for) operating activities:
Depreciation and amortization 25,930 32,199
Provision for losses on accounts receivable 1,971 1,706
(Gain) loss on the sale of property, plant, and equipment (116) 128
Change in assets and liabilities net of effect of acquisitions and divestitures-
Receivables (16,939) 33,854
Inventories, net 6,845 (6,071)
Deferred income taxes (3,238) (18,732)
Prepayments and other current assets (6,204) (2,970)
Accounts payable and other current liabilities 28,064 (37,222)
Other long-term liabilities (9,395) (6,989)
--------- ---------
Net Cash Provided by Operating Activities 49,010 22,491
--------- ---------
Cash Provided by (Used for) Investing Activities
Purchases of property, plant, and equipment (16,456) (28,623)
Sale of property, plant, and equipment 1,691 978
Acquisitions (24,765) --
Change in other assets 6,821 4,959
--------- ---------
Net Cash Used for Investing Activities (32,709) (22,686)
--------- ---------
Cash Provided by (Used for) Financing Activities
Repayments of notes payable, net (12,052) 1,081
Issuances of commercial paper, net (less than 90 days) -- 27,581
Issuances of commercial paper (greater than 90 days) -- 1,347
Repayments of commercial paper (greater than 90 days) -- (10,200)
Proceeds from credit line, net 18,700 --
Repayments of short-term secured borrowings, net (4,200) --
Repayments of long-term debt (2,549) (586)
Net activity with NSI (18,633) (11,761)
Dividends (6,197) --
--------- ---------
Net Cash (Used for) Provided by Financing Activities (24,931) 7,462
--------- ---------
Effect of Exchange Rate Changes on Cash (482) 62
--------- ---------
Net Change in Cash and Cash Equivalents (9,112) 7,329
Cash and Cash Equivalents at Beginning of Period 10,337 1,510
--------- ---------
Cash and Cash Equivalents at End of Period $ 1,225 $ 8,839
========= =========
Supplemental Cash Flow Information:
Income taxes paid during the period $ 5,153 $ 17,174
Interest paid during the period $ 20,381 $ 20,911
The accompanying notes to the consolidated financial statements
are an integral part of these statements.
Page 6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
ACUITY BRANDS, INC.
(Dollar amounts in thousands, except share and per-share data and as indicated)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
Acuity Brands, Inc. ("Acuity" or the "Company") operates in two business
segments - lighting equipment and chemicals. Acuity's lighting equipment
segment, Acuity Lighting Group, is the largest manufacturer of lighting
equipment in North America. It produces and distributes a variety of fluorescent
and non-fluorescent fixtures for markets throughout the United States, Canada,
Mexico, and overseas. The Company's chemical segment, Acuity Specialty Products,
produces and distributes maintenance, sanitation, and water treatment products
for customers throughout the United States, Canada, and Western Europe.
On November 7, 2001, the board of directors of National Service Industries,
Inc. ("NSI") approved the spin-off of its lighting equipment and chemicals
businesses into a separate publicly-traded company with its own management and
board of directors. The spin-off was effected on November 30, 2001 through a
tax-free distribution ("Distribution" or "Spin-off") of 100% of the outstanding
shares of common stock of Acuity, at that time a wholly-owned subsidiary of NSI
owning and operating its lighting equipment and chemicals businesses. Each NSI
stockholder of record as of November 16, 2001, the record date for the
Distribution, received one share of Acuity common stock for each share of NSI
common stock held at that date, and on November 30, 2001, Acuity became a
separate, stand-alone company which wholly owns all subsidiaries comprising the
lighting equipment and chemicals businesses. Upon completion of the
Distribution, NSI retained its textile rental and envelope businesses.
The consolidated financial statements have been prepared on the historical cost
basis in accordance with accounting principles generally accepted in the United
States and present Acuity's financial position, results of operations, and cash
flows as derived from NSI's historical financial statements. All material
intercompany transactions between the entities included in Acuity's financial
statements have been eliminated. Acuity has been allocated certain NSI corporate
assets, liabilities, and expenses based on an estimate of the proportion of such
amounts allocable to Acuity, utilizing such factors as total revenues, employee
headcount, and other relevant factors. Acuity believes these allocations have
been made on a reasonable basis. Acuity believes all amounts allocated to Acuity
are a reasonable representation of the costs that would have been incurred if
Acuity had performed these functions as a stand-alone company.
In conjunction with the separation of their businesses, Acuity and NSI entered
into various agreements that addressed the allocation of assets and liabilities
and that defined Acuity's relationship with NSI after the Distribution,
including a distribution agreement, a tax disaffiliation agreement, an employee
benefits agreement, a transition services agreement, a lease agreement, and a
put option agreement. Under the tax disaffiliation agreement, Acuity will
indemnify NSI for certain taxes and liabilities that may arise related to the
Distribution. The agreement also sets out each party's rights and obligations
with respect to deficiencies and refunds, if any, of federal, state, local, or
foreign taxes for periods before and after the Distribution. The transition
services agreement provides that NSI and Acuity will provide each other
services in such areas as information management and technology, employee
benefits administration, payroll, financial accounting and reporting, claims
administration and reporting, legal, and other areas where NSI and Acuity may
need transitional assistance and support. Management believes the amounts paid
or received associated with these services are representative of the fair value
of the services provided. For additional information related to these
agreements, refer to the exhibits filed with the Company's Current Report on
Form 8-K filed with the Securities and Exchange Commission on December 14,
2001.
The interim consolidated financial statements included herein have been prepared
by the Company without audit and the balance sheet as of August 31, 2001 has
been derived from audited statements. These interim consolidated financial
statements reflect all normal and recurring adjustments which are, in the
opinion of management, necessary to present fairly the consolidated financial
position as of February 28, 2002, the consolidated results of operations for the
three and six months ended February 28, 2002 and 2001, and the consolidated cash
flows for the six months ended February 28, 2002 and 2001. Certain
reclassifications have been made to the prior year financial statements
to conform to the current year presentation. Certain information and footnote
disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States have been
condensed or omitted. The Company believes that the disclosures are adequate to
make the information presented not misleading. These financial statements should
be read in conjunction with the combined financial statements of Acuity as of
and for the three years ended August 31, 2001 and notes thereto included in the
Company's Registration Statement on Form 10 filed with the Securities and
Exchange Commission on November 9, 2001 (the "Form 10").
The results of operations for the three and six months ended February 28, 2002
are not necessarily indicative of the results to be expected for the full
fiscal year because the Company's net sales and income are generally higher in
the second half of its fiscal year and because of the uncertainty of general
economic conditions.
Page 7
For a discussion of certain risks and uncertainties related to the Distribution
(including, without limitation, the risk that the Distribution could be
challenged in court by creditors of NSI), see the disclosure under the caption
"Risk Factors" set forth on pages 9 to 18 of the Information Statement attached
as an exhibit to the Form 10, which disclosure is incorporated herein by
reference.
For additional information related to the businesses retained by NSI and NSI's
financial position, results of operations, and litigation, investors should
consult NSI's periodic filings with the Securities and Exchange Commission.
2. RECENT ACCOUNTING STANDARDS
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations,"
and Statement of Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill
and Other Intangible Assets." SFAS 141 prospectively prohibits the pooling of
interests method of accounting for business combinations initiated after June
30, 2001. SFAS 142 requires companies to cease amortizing goodwill that existed
at June 30, 2001 and establishes a new method for testing goodwill for
impairment on an annual basis (or an interim basis if an event occurs that
might reduce the fair value of a reporting unit below its carrying value). Any
goodwill resulting from acquisitions completed after June 30, 2001 will not be
amortized. SFAS 142 also requires that an identifiable intangible asset which
is determined to have an indefinite useful economic life not be amortized, but
be separately tested for impairment using a fair value based approach.
The Company adopted SFAS 142 effective September 1, 2001. As a result, the
amortization of existing goodwill and intangibles with indefinite useful lives
ceased on August 31, 2001, which will result in an estimated decrease in
amortization expense of approximately $11,700 during fiscal 2002.
Summarized information for the Company's acquired intangible assets is as
follows:
February 28, 2002 August 31, 2001
--------------------------------- -------------------------------
Gross Carrying Accumulated Gross Carrying Accumulated
Amount Amortization Amount Amortization
-------------- ------------ -------------- ------------
Amortized intangible assets
Trade names and trademarks $ 13,030 $ (1,129) $ 13,030 $ (912)
Distribution network 53,000 (4,563) 53,000 (3,681)
Other 17,083 (7,275) 20,470 (6,889)
--------- --------- --------- ---------
Total $ 83,113 $ (12,967) $ 86,500 $ (11,482)
========= ========= ========= =========
Unamortized intangible assets
Trade names $ 65,014 $ 62,563
--------- --------
Total $ 65,014 $ 62,563
========= ========
The Company amortizes trade names with definite lives, trademarks, and the
distribution network over their estimated useful lives of 30 years. Other
amortized intangible assets consist primarily of patented technology and
restrictive covenant agreements, which are amortized over their estimated
useful lives of 12 years and 3 years, respectively. The Company recorded
amortization expense of $2,193 and $2,682 related to intangible assets with
definite lives in the first six months of fiscal 2002 and fiscal 2001,
respectively.
The changes in the carrying amount of goodwill during the period are summarized
as follows:
Lighting
Equipment Chemicals Total
--------- --------- ---------
Balance as of August 31, 2001 $ 301,350 $ 30,013 $ 331,363
Goodwill acquired during the period 2,739 -- 2,739
SFAS 141/142 adoption reclassification 2,692 -- 2,692
Other (661) (201) (862)
--------- -------- ---------
Balance as of February 28, 2002 $ 306,120 $ 29,812 $ 335,932
========= ======== =========
Page 8
The lighting equipment and chemical segments each tested goodwill and
intangible assets with indefinite useful lives for impairment during the first
quarter of 2002 as required by SFAS 142, utilizing a combination of valuation
techniques including the expected present value of future cash flows, a market
multiple approach and a comparable transaction approach. This process did not
result in an impairment to be recorded upon the adoption of SFAS 142 as of
September 1, 2001.
Prior to the adoption of SFAS 142, $3,460 of goodwill associated with a 1969
acquisition was not amortized. Remaining amounts of goodwill ($327,903 at
August 31, 2001) were amortized over estimated useful lives ranging from 10
years to 40 years. Had the Company accounted for goodwill consistent with the
provisions of SFAS 142 in prior periods, the Company's net income would have
been affected as follows:
Three months ended Six months ended
February 28 February 28
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Reported net income $ 10,558 $ 13,081 $ 22,092 $ 26,588
Add back: Goodwill amortization -- 2,658 -- 5,239
Add back: Trade name amortization -- 334 -- 582
--------- --------- --------- ---------
Adjusted net income $ 10,558 $ 16,073 $ 22,092 $ 32,409
========= ========= ========= =========
Basic earnings per share*:
Reported net income $ 0.26 $ 0.32 $ 0.54 $ 0.65
Add back: Goodwill amortization -- 0.06 -- 0.13
Add back: Trade name amortization -- 0.01 -- 0.01
--------- --------- --------- ---------
Adjusted earnings per share $ 0.26 $ 0.39 $ 0.54 $ 0.79
========= ========= ========= =========
* Earnings per share for the six months ended February 28, 2002 and all
periods in 2001 are pro forma. See note 5 for additional information.
The Company is required to test its goodwill and intangibles with indefinite
useful lives for impairment on an annual basis, which could have an adverse
effect on the Company's consolidated financial statements if these assets are
deemed impaired.
3. BUSINESS SEGMENT INFORMATION
DEPRECIATION CAPITAL
AND EXPENDITURES
NET OPERATING AMORTIZATION AND
THREE MONTHS ENDED FEBRUARY 28, 2002 SALES PROFIT EXPENSE ACQUISITIONS
--------- --------- ------------ -------------
Lighting Equipment $ 352,788 $ 22,161 $ 10,974 $ 4,635
Chemicals 115,457 8,172 2,000 1,214
Corporate -- (3,117) 200 40
--------- --------- --------- ---------
Total $ 468,245 $ 27,216 $ 13,174 $ 5,889
========= ========= ========= =========
DEPRECIATION CAPITAL
AND EXPENDITURES
NET OPERATING AMORTIZATION AND
THREE MONTHS ENDED FEBRUARY 28, 2001 SALES PROFIT EXPENSE ACQUISITIONS
--------- --------- ------------ -------------
Lighting Equipment $ 349,096 $ 28,338 $ 13,549 $ 14,804
Chemicals 122,187 10,350 2,919 2,370
Corporate -- (3,951) 158 100
--------- --------- --------- ---------
Total $ 471,283 $ 34,737 $ 16,626 $ 17,274
========= ========= ========= =========
Page 9
DEPRECIATION CAPITAL
AND EXPENDITURES
NET OPERATING AMORTIZATION AND
SIX MONTHS ENDED FEBRUARY 28, 2002 SALES PROFIT EXPENSE ACQUISITIONS
--------- --------- ------------ -------------
Lighting Equipment $ 716,898 $ 47,094 $ 21,488 $ 38,695
Chemicals 233,038 15,017 4,054 2,484
Corporate -- (5,774) 388 42
--------- --------- --------- ---------
Total $ 949,936 $ 56,337 $ 25,930 $ 41,221
========= ========= ========= =========
DEPRECIATION CAPITAL
AND EXPENDITURES
NET OPERATING AMORTIZATION AND
SIX MONTHS ENDED FEBRUARY 28, 2001 SALES PROFIT EXPENSE ACQUISITIONS
--------- --------- ------------ -------------
Lighting Equipment $ 726,490 $ 61,614 $ 26,132 $ 23,695
Chemicals 247,439 16,887 5,766 4,497
Corporate -- (8,430) 301 431
--------- --------- --------- ---------
Total $ 973,929 $ 70,071 $ 32,199 $ 28,623
========= ========= ========= =========
Total Assets
----------------------------------
February 28, August 31,
2002 2001
----------- -----------
Lighting Equipment $ 1,098,924 $ 1,082,676
Chemicals 210,564 211,579
----------- -----------
1,309,488 1,294,255
Corporate 31,348 36,320
----------- -----------
Total $ 1,340,836 $ 1,330,575
=========== ===========
4. INVENTORIES
Major classes of inventory as of February 28, 2002 and August 31, 2001 were as
follows:
February 28, August 31,
2002 2001
----------- -----------
Raw Materials and Supplies $ 78,434 $ 85,208
Work-in-Process 22,612 18,262
Finished Goods 113,856 107,313
----------- -----------
Total $ 214,902 $ 210,783
=========== ===========
Inventories are stated at the lower of cost (as determined on a first-in,
first-out basis) or market.
Page 10
5. EARNINGS PER SHARE AND PRO FORMA EARNINGS PER SHARE (UNAUDITED)
The Company accounts for earnings per share using Statement of Financial
Accounting Standards No. 128, "Earnings per Share." Under this statement, basic
earnings per share is computed by dividing net earnings available to common
stockholders by the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed similarly but reflects the
potential dilution that would occur if dilutive options were exercised and
restricted stock awards were vested.
Pro forma basic earnings per share is calculated as net income divided by the
pro forma weighted average number of common shares outstanding. Pro forma
weighted average shares outstanding has been computed by applying the
distribution ratio of one share of Acuity common stock to the historical NSI
weighted average shares outstanding for the same period presented. Public
trading of Acuity stock did not commence until December 3, 2001; therefore, no
historical market share prices exist for the calculation of the potential
dilutive effect of stock options for periods prior to the second quarter of
fiscal 2002. As a result, pro forma diluted earnings per share is not presented.
The following table calculates basic earnings per common share and diluted
earnings per common share for the three months ended February 28, 2002 and pro
forma basic earnings per common share for the six months ended February 28,
2002 and the three and six months ended February 28, 2001:
PRO FORMA
---------------------------------------
Three Three
Months Months
Ended Ended Six Months Ended
------------ ------------ --------------------------
February 28, February 28, February 28, February 28,
2002 2001 2002 2001
------------ ------------ ------------ ------------
Basic earnings per common share:
Net income $ 10,558 $ 13,081 $ 22,092 $ 26,588
Basic weighted average shares outstanding (in thousands) 41,273 41,076 41,246 41,002
--------- --------- --------- ---------
Basic earnings per common share $ 0.26 $ 0.32 $ 0.54 $ 0.65
========= ========= ========= =========
Diluted earnings per common share:
Net income $ 10,558
Basic weighted average shares outstanding (in thousands) 41,273
Add - Unvested restricted stock (in thousands) 30
---------
Diluted weighted average shares outstanding (in thousands) 41,303
---------
Diluted earnings per common share $ 0.26
=========
6. COMPREHENSIVE INCOME
The Company accounts for comprehensive income as prescribed by Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 requires the reporting of a measure of all changes in equity
that result from recognized transactions and other economic events other than
transactions with owners in their capacity as owners. Other comprehensive
income (loss) for the three and six months ended February 28, 2002 and 2001
includes only foreign currency translation adjustments. The calculation of
comprehensive income is as follows:
Three Months Ended Six Months Ended
February 28 February 28
--------------------------- ---------------------------
2002 2001 2002 2001
--------- --------- --------- ---------
Net income $ 10,558 $ 13,081 $ 22,092 $ 26,588
Foreign currency translation adjustments (1,897) (499) (2,449) (3,017)
--------- --------- --------- ---------
Comprehensive Income $ 8,661 $ 12,582 $ 19,643 $ 23,571
========= ========= ========= =========
Page 11
7. STOCKHOLDERS' EQUITY
Upon completion of the Distribution on November 30, 2001, Acuity became an
independent company owned by the NSI shareholders of record as of November 16,
2001. Prior to November 30, 2001, Acuity and the subsidiaries comprising the
lighting equipment and chemicals businesses were wholly owned by NSI.
Accordingly, prior to November 30, 2001, stockholders' equity was comprised of
NSI's investment in these subsidiaries. Beginning on November 30, 2001
stockholders' equity reflects the outstanding stock, paid-in capital, and other
stockholders' equity items of Acuity and its wholly owned subsidiaries.
Pursuant to the employee benefits agreement, NSI stock options held by Acuity's
employees were converted to, and replaced by, Acuity stock options at the time
of the Distribution. Acuity multiplied the number of shares purchasable under
each converted stock option by a ratio determined at the time of the
Distribution, based on the respective fair values of NSI and Acuity, and
divided the exercise price per share of each option by the same ratio.
Fractional shares were rounded down to the nearest whole number of shares. All
other terms of the converted stock options remain the same as those in effect
immediately prior to the Distribution. Accordingly, no compensation expense
will result from the replacement of the options. At February 28, 2002, Acuity
employees held 7,152,200 stock options with exercise prices ranging from $13.80
to $39.83.
At February 28, 2002, approximately 221,000 shares of Acuity common stock were
subject to restricted stock awards held by Acuity's officers and other key
employees. The restricted shares are granted in 20 percent increments when the
Company's stock price equals or exceeds certain stock price targets for thirty
consecutive calendar days. Granted shares vest ratably in four equal annual
installments beginning one year from the date of grant. At the time of the
Distribution and in accordance with the employee benefits agreement, each Acuity
employee holding outstanding shares of NSI restricted stock that had reached a
vesting start date received a dividend of one Acuity restricted share for each
NSI restricted share held.
8. SECURED BORROWINGS
In May 2001, NSI entered into a three-year agreement (the "Receivables
Facility") to borrow, on an ongoing basis, up to $150.0 million secured by
undivided interests in a defined pool of trade accounts receivable of the
lighting equipment and chemicals segments. Effective November 30, 2001, Acuity
assumed all of the outstanding borrowings and other obligations under the
Receivables Facility. Net trade accounts receivable pledged as security for
borrowings under the Receivables Facility totaled $225.1 million at February
28, 2002. Interest rates under the Receivables Facility vary with commercial
paper rates plus an applicable margin.
9. ACQUISITION
During fiscal 2002, Acuity acquired certain assets and assumed certain
liabilities of the American Electric Lighting(R) and Dark-to-Light(R) product
lines of the Thomas & Betts Corporation for approximately $24.8 million in
cash. The preliminary allocation of the purchase price resulted in additional
goodwill of approximately $2.7 million. Additionally, the Company recorded $2.5
million related to the trade names American Electric Lighting(R) and
Dark-to-Light(R). The Company will not amortize these trade names as the
Company believes the useful lives are indefinite. The acquisition will provide
the lighting equipment segment with scale in the utility and transportation
infrastructure markets and will add breadth to the Company's current utility
offerings in high-end decorative street and area lighting.
10. COMMITMENTS AND CONTINGENCIES
Litigation
Acuity is subject to various legal claims arising in the normal course of
business, including patent infringement and product liability claims. 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 Acuity's financial condition or results of
operations. However, in the event of unexpected future developments, it is
possible that the ultimate resolution of such matters, if unfavorable, could
have a material adverse effect on Acuity's results of operations in future
periods. Acuity establishes reserves for legal claims when payments associated
with the claims become probable and the costs can be reasonably estimated.
Acuity's litigation reserves are immaterial for all periods presented. The
actual costs of resolving legal claims may be substantially higher than that
reserved.
Various legal claims are pending or may be instituted against NSI or its
various operating subsidiaries. Because Acuity and its subsidiaries are
separate corporations which did not engage in the activities giving rise to
these legal claims, Acuity's management believes the risk that Acuity's assets
could be subject to these claims and liabilities (except those claims and
liabilities expressly assumed in the distribution agreement entered into in
connection with the Spin-off) is remote.
Page 12
Environmental Matters
Acuity's operations, as well as similar operations of other companies, are
subject to comprehensive laws and regulations relating to the generation,
storage, handling, transportation, and disposal of hazardous substances and
solid and hazardous wastes and to the remediation of contaminated sites.
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. Acuity believes
that it is in substantial compliance with all material environmental laws,
regulations, and permits. On an ongoing basis, Acuity incurs capital and
operating costs relating to environmental compliance. Environmental laws and
regulations have generally become stricter in recent years, and the cost of
responding to future changes may be substantial.
Acuity establishes reserves for known environmental claims when payments
associated with the claims become probable and the costs can be reasonably
estimated. Acuity's environmental reserves, for all periods presented, are
immaterial. The actual cost of environmental issues may be higher than that
reserved due to difficulty in estimating such costs and potential changes in
the status of government regulations.
Certain environmental laws can impose liability regardless of fault. The
federal Superfund law is an example of such an environmental law. However,
liability under Superfund is mitigated by the presence of other parties who
will share in the costs associated with the clean-up of sites. The extent of
liability is determined on a case-by-case basis taking into account many
factors, including the number of other parties whose status or activities also
subjects them to liability regardless of fault.
Acuity is currently a party to, or otherwise involved in, legal proceedings in
connection with state and federal Superfund sites. Acuity believes its
liability is de minimis at each of the currently active sites which it does not
own where it has been named as a potentially responsible party ("PRP") due to
its limited involvement at the site and/or the number of viable PRPs.
Specifically, the preliminary allocation among 48 PRPs at the Crymes Landfill
site in Georgia indicates that Acuity's liability is not significant, and there
are more than 1,000 PRPs at the M&J Solvents site in Georgia. For property
which Acuity owns on Seaboard Industrial Boulevard in Atlanta, Georgia, Acuity
has conducted an investigation on its and adjoining properties and submitted a
Compliance Status Report ("CSR") to the State of Georgia Environmental
Protection Division ("EPD") pursuant to the Georgia Hazardous Site Response
Act. Acuity is currently addressing questions raised by EPD regarding the CSR.
Until the CSR is finalized and Acuity evaluates the necessity for and scope of
any appropriate clean-up action, Acuity will not be able to determine whether
clean-up will be required and what the costs of clean-up will be.
11. LONG-TERM DEBT
At February 28, 2002, Acuity's $240.0 million, 364-day committed credit
facility was scheduled to mature in October 2002. This facility contained
financial covenants including a leverage ratio of total indebtedness to EBITDA
and an interest coverage ratio. Interest rates under the facility were based on
the LIBOR rate or other rates, at Acuity's option. Acuity paid an annual fee on
the commitment based on Acuity's credit rating for unsecured long-term public
debt.
In April 2002, Acuity entered into a new financing agreement which replaced the
Company's $240.0 million, 364-day committed credit facility. This new credit
facility which has two components allows for borrowings of up to $205.0 million.
The first component is a 364-day committed credit facility of $102.5 million,
which is scheduled to mature in April 2003. The second component is a three-year
credit facility of $102.5 million and is scheduled to mature in April 2005.
Accordingly, $102.5 million of outstanding borrowings under the three-year
credit facility were reclassified as long-term in the accompanying "Consolidated
Balance Sheet" at February 28, 2002. The combined facility contains financial
covenants including a leverage ratio of total indebtedness to EBITDA and an
interest coverage ratio. Interest rates under the new facility are based on the
LIBOR rate plus a margin contingent on the Company's credit rating for unsecured
long-term public debt and leverage ratio. Acuity will pay an annual fee on the
commitment based on Acuity's credit rating for unsecured long-term public debt.
None of the Company's existing debt instruments include provisions that would
require an acceleration of repayments based on changes in the Company's credit
rating.
Page 13
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the consolidated
financial statements and related notes.
Acuity Brands, Inc. ("Acuity" or the "Company") operates in two business
segments - lighting equipment and chemicals. Acuity's lighting equipment
segment, Acuity Lighting Group, is the largest manufacturer of lighting
equipment in North America. It produces and distributes a variety of fluorescent
and non-fluorescent fixtures for markets throughout the United States, Canada,
Mexico, and overseas. The Company's chemical segment, Acuity Specialty Products,
produces and distributes maintenance, sanitation, and water treatment products
for customers throughout the United States, Canada, and Western Europe.
SEPARATION FROM NATIONAL SERVICE INDUSTRIES, INC. (NSI)
On November 7, 2001, the board of directors of National Service Industries,
Inc. ("NSI") approved the spin-off of its lighting equipment and chemicals
businesses into a separate publicly-traded company with its own management and
board of directors. The spin-off was effected on November 30, 2001 through a
tax-free distribution ("Distribution") of 100% of the outstanding shares of
common stock of Acuity, at that time a wholly-owned subsidiary of NSI owning
and operating the lighting equipment and chemicals businesses. Each NSI
stockholder of record as of November 16, 2001, the record date for the
Distribution, received one share of Acuity common stock for each share of NSI
common stock held at that date.
Acuity's financial statements have been prepared in accordance with accounting
principles generally accepted in the United States, and reflect the historical
financial position, results of operations, and cash flows of the businesses
transferred to Acuity from NSI as part of the Distribution. The financial
information included in this filing, however, is not necessarily indicative of
what Acuity's results of operations or financial position would have been had it
operated as an independent company during periods prior to the second quarter of
fiscal 2002, nor is it necessarily indicative of its future performance as an
independent company.
All material intercompany transactions between the entities included in
Acuity's consolidated financial statements have been eliminated. Acuity has
been allocated certain NSI corporate assets, liabilities, and expenses based on
an estimate of the proportion of such amounts allocable to Acuity, utilizing
such factors as total revenues, employee headcount, and other relevant factors.
Acuity believes these allocations have been made on a reasonable basis. Acuity
believes all amounts allocated to Acuity are a reasonable representation of the
costs that would have been incurred if Acuity had performed these functions as
a stand-alone company.
In conjunction with the separation of their businesses, Acuity and NSI entered
into various agreements that addressed the allocation of assets and liabilities
and that defined Acuity's relationship with NSI after the Distribution,
including a distribution agreement, a tax disaffiliation agreement, an employee
benefits agreement, a transition services agreement, a lease agreement, and a
put option agreement.
CRITICAL ACCOUNTING POLICIES
Acuity's financial statements have been prepared in accordance with accounting
principles generally accepted in the United States. The preparation of the
financial statements requires Acuity to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses, and
the disclosure of contingent assets and liabilities. Acuity reviews its
estimates on a regular basis including those related to product returns, bad
debts, inventories, long-lived and intangible assets and goodwill, self-
insurance, litigation, and environmental matters. Acuity's estimates are based
on historical experience and other assumptions management believes are
reasonable under current circumstances. Actual results may differ from these
estimates under different assumptions or circumstances.
Acuity believes the following represent its critical accounting policies:
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin
No. 101 ("SAB 101"), "Revenue Recognition in Financial Statements." SAB 101
generally requires that the following four basic criteria must be met before
revenue can be recognized: (1) persuasive evidence of an arrangement exists;
(2) delivery has occurred or services have been rendered; (3) the seller's
price is fixed or determinable; and (4) collectibility is reasonably assured.
Page 14
SAB 101 requires management to reliably estimate product returns and future
collections. Acuity monitors product returns and records a provision for the
estimated amount of future returns based on historical experience and specific
notification of pending returns. Although historical product returns have been
within expectations, there can be no assurance that future product returns will
not exceed historical amounts. A significant increase in product returns could
have a material adverse impact on our operating results in future periods.
Allowance for Doubtful Accounts
Acuity monitors accounts receivable, historical bad debts, and changes in
customer payment trends to evaluate the adequacy of our allowance for doubtful
accounts. Although historical credit losses have been within expectations, there
can be no assurance that future credit losses will not exceed historical
amounts. A significant increase in credit losses could have a material adverse
impact on our operating results in future periods.
Inventories
Acuity records inventory at the lower of cost (on a first-in, first-out 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 have a material adverse impact on our operating
results in the period the change occurs.
Long-lived and Intangible Assets and Goodwill
Acuity reviews its long-lived assets for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable. An impairment loss is recognized when the undiscounted cash flows
estimated to be generated from an asset are not sufficient to recover the
unamortized balance. An impairment loss 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.
In July 2001, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 142 ("SFAS 142"), "Goodwill and Other
Intangible Assets." SFAS 142 requires companies to cease amortizing goodwill
that existed at June 30, 2001 and establishes a new method for testing goodwill
for impairment on an annual basis (or an interim basis if an event occurs that
might reduce the fair value of a reporting unit below its carrying value). SFAS
142 also requires that an identifiable intangible asset that is determined to
have an indefinite useful economic life not be amortized, but separately tested
for impairment using a fair value based approach. The evaluation of goodwill
and intangibles with indefinite useful lives for impairment requires management
to use significant judgments and estimates including, but not limited to,
projected future revenue and cash flow of each of our businesses. Acuity is
required to test its goodwill and intangibles with indefinite useful lives for
impairment on an annual basis, which could have a material adverse effect on
the Company's consolidated financial statements if these assets are deemed
impaired.
Self-Insurance
It is the Company's policy to self insure for certain insurable risks consisting
primarily of physical loss to property; business interruptions resulting from
such loss; and workers' compensation, comprehensive general, and auto liability.
Insurance coverage is obtained for catastrophic property and casualty exposures
as well as those risks required to be insured by law or contract. Based on an
independent actuary's estimate of the aggregate liability for claims incurred, a
provision for claims under the self-insured program is recorded and revised
annually. The actuarial estimates are subject to uncertainty from various
sources, including changes in claim reporting patterns, claim settlement
patterns, judicial decisions, legislation, and economic conditions. Although
Acuity believes that the actuarial estimates are reasonable, significant
differences related to the items noted above could materially affect the
Company's self-insurance obligations and future expense.
Litigation
Acuity is subject to various legal claims arising in the normal course of
business, including patent infringement and product liability claims. 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 Acuity's financial condition or results of
operations. However, in the event of unexpected future developments, it is
possible that the ultimate resolution of such matters, if unfavorable, could
have a material adverse effect on Acuity's results of operations in future
periods. Acuity reserves for legal claims when payments associated with the
claims become probable and the costs can be reasonably estimated. Acuity's
litigation reserves are immaterial for all periods presented. The actual costs
of resolving legal claims may be substantially higher than that reserved.
Environmental Matters
Acuity's operations, as well as similar operations of other companies, are
subject to comprehensive laws and regulations relating to the generation,
storage, handling, transportation, and disposal of hazardous substances and
solid and hazardous wastes and to the remediation of contaminated sites.
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. Acuity believes
that it is in substantial compliance with all material environmental laws,
regulations, and permits. On an ongoing basis, Acuity incurs capital and
operating costs relating to environmental compliance. Environmental laws and
regulations have generally become stricter in recent years, and the cost of
responding to future changes may be substantial.
Acuity reserves for known environmental claims when payments associated with the
claims become probable and the costs can be reasonably estimated. Acuity's
environmental reserves, for all periods presented, are immaterial. The actual
cost of environmental issues may be higher than that reserved due to difficulty
in estimating such costs and potential changes in the status of government
regulations.
Page 15
RESULTS OF OPERATIONS
Acuity generated sales of $468.2 million and $949.9 million in the three and six
months ended February 28, 2002, respectively, compared to sales of $471.3
million and $973.9 million, respectively, reported in the previous year.
Excluding sales associated with the acquisition of the American Electric
Lighting(R) and Dark-to-Light(R) product lines, which was completed in October
2001, and sales associated with the French and Australian operations of the
chemical segment, which were divested in the third quarter of fiscal 2001, sales
decreased 4.2 percent and 4.7 percent for the three and six months ended
February 28, 2002, respectively. The quarter-to-date and year-to-date decreases
were primarily due to lower sales volumes, product mix changes, and pricing
pressures caused by the continued weak economic environment.
Operating profit of $27.2 million and $56.4 million for the three and six months
ended February 28, 2002, respectively, was down from $34.7 million and $70.1
million in the respective prior year periods. The decline in operating profit
was primarily due to lost contribution margin on lower sales, higher insurance
costs, and greater expenses associated with investments in certain sales and
marketing programs. These items were partially offset by previously implemented
cost containment programs, profit improvement initiatives, the divestiture of
the French and Australian operations, which historically operated at a loss, and
the adoption of a new accounting standard that eliminated the amortization of
goodwill and certain intangibles.
Net income decreased 19.3 percent from $13.1 million, $0.32 per share, during
the second quarter of fiscal 2001 to $10.6 million, $0.26 per share, during the
second quarter of fiscal 2002. On a year-to-date basis, net income declined
$4.5 million from $26.6 million to $22.1 million. Net interest expense was
$10.2 million and $20.7 million for the three and six months ended February 28,
2002, respectively, down $2.8 million and $5.1 million, respectively, from the
prior year primarily due to lower interest rates.
Acuity Lighting Group
The lighting equipment segment reported sales of $352.8 million for the second
quarter compared to $349.1 million in the prior year. On a year-to-date basis,
sales declined 1.3 percent from $726.5 million to $716.9 million. Excluding
sales associated with the acquisition of the American Electric Lighting(R) and
Dark-to-Light(R) product lines, which was completed in October 2001, sales would
have declined 5.5 percent for the quarter and 5.9 percent for the six months
ended February 28, 2002. In general, the drop in sales of the lighting segment
was primarily due to the weak economic environment. This resulted in reduced
shipments across most major product lines, lower selling prices for certain
products due to competition for available business, and changes in product mix.
Operating profit in the lighting segment was $22.2 million and $47.1 million for
the three and six months ended February 28, 2002, respectively, compared to
$28.3 million and $61.6 million, respectively, in the prior year. The decline in
operating profit was primarily due to the lost contribution margin on the lower
sales and increased non-discretionary costs such as medical and property
insurance. These items were partially offset by reduced costs resulting from
numerous profit improvement initiatives. Operating profit was not materially
impacted in the quarter by the addition of the American Electric Lighting and
Dark-to-Light product lines. Additionally, operating profit benefited by
approximately $2.5 million in the second quarter of 2002 as a result of the
adoption of a new accounting standard related to the amortization of goodwill
and certain intangibles.
Acuity Specialty Products
Chemicals segment sales were $115.5 million and $233.0 million for the three and
six months ended February 28, 2002, respectively, down 5.5 percent and 5.8
percent, respectively, from the prior year. Excluding sales of the French and
Australian operations, which were divested in the third quarter of fiscal 2001,
sales were essentially flat with the prior year as decreases in sales in the
industrial and institutional channels primarily due to the weak economic
environment were mostly offset by increased sales in the retail channel. Sales
increased in the retail channel primarily due to greater penetration of mass
retailers. Operating profit of $8.2 million and $15.0 million for the three and
six months ending February 28, 2002, respectively, was down $2.2 million and
$1.9 million, respectively, compared to a year ago. Cost reduction initiatives
in the segment were more than offset by increased costs for certain
non-discretionary expenses and greater expenses associated with investments made
to enhance the segment's sales force capabilities in selected strategic markets.
Additionally, the segment benefited from the divestiture of the French and
Australian operations, which historically operated at a loss, and the
elimination of approximately $0.4 million of goodwill and intangible
amortization in the second quarter of 2002.
Corporate
For the three and six months ending February 28, 2002, corporate expenses
declined $0.8 million and $2.7 million, respectively, from the prior year due to
various items including the reorganization of the corporate staff.
Outlook
Although the Company remains optimistic about the long-term potential of the
solid businesses that comprise Acuity, management is cautious about the near
term results due to uncertainty in the economic environment. Accordingly,
management expects the full year earnings to be in the range of $1.10 to $1.30
per share. Acuity will continue to aggressively pursue initiatives that are
expected to reduce costs, improve customer service, increase manufacturing
efficiency, reduce debt, and expand product offerings and brands in the market
through a variety of channels.
Page 16
LIQUIDITY AND CAPITAL RESOURCES
Acuity's primary sources of liquidity during the six months ended February 28,
2002 and 2001 were available cash balances, cash flows from operations, and
borrowings under the Company's credit facilities and secured financing
arrangement. The primary uses of cash during these periods related to
investments in property, plant, and equipment and transactions with NSI. During
fiscal 2002, Acuity also used funds to acquire the American Electric Lighting(R)
and Dark-to-Light(R) product lines of the Thomas & Betts Corporation ("American
Electric") and to make dividend payments.
The Company generated $49.0 million in cash flow from operations during the
first six months of fiscal 2002 compared with $22.5 million during the
respective period of the prior year. Fiscal 2002 operating cash flow was higher
primarily as a result of lower working capital requirements offset partially by
lower net income. Improvements in working capital, excluding the impact of the
acquisition of American Electric, were primarily due to a reduction of inventory
and higher accounts payable and other current liabilities, partially offset by
an increase in accounts receivable. Inventory decreased primarily as a result of
more efficient production at certain facilities. The increase in accounts
payable and other current liabilities primarily related to modifications in
payment terms to certain vendors. Accounts receivable increased primarily due
to the acquisition of American Electric and slightly higher sales in certain
channels which generally have more lenient payment terms.
Investing activities used cash of $32.7 million versus $22.7 million in the
prior year. The change in investing cash flows related primarily to cash used
for the acquisition of American Electric partially offset by a decrease in
purchases of property, plant, and equipment. Capital expenditures during fiscal
2002 totaled $16.5 million compared to $28.6 million in the first half of last
year. The decrease in capital expenditures was primarily due to the elimination
or delay of certain projects as a result of decreased demand caused by the
current economic environment. Capital expenditures in the lighting equipment
segment related primarily to manufacturing upgrades and improvements. In the
chemicals segment, capital expenditures were associated with manufacturing and
computer equipment.
Debt as of February 28, 2002 was $608.7 million, essentially flat with August
31, 2001 and down $34.9 million from the end of the first quarter. The decrease
in borrowings during the second quarter primarily related to improvements in
operating cash flow as a result of reductions in working capital noted above and
the use of available cash balances for debt reduction. The reduction in
borrowings during the second quarter was offset in the first quarter primarily
by cash used for the acquisition of American Electric.
At February 28, 2002, Acuity's $240.0 million, 364-day committed credit
facility was scheduled to mature in October 2002. This facility contained
financial covenants including a leverage ratio of total indebtedness to EBITDA
and an interest coverage ratio. Interest rates under the facility were based on
the LIBOR rate or other rates, at Acuity's option. Acuity paid an annual fee on
the commitment based on Acuity's credit rating for unsecured long-term public
debt.
In April 2002, Acuity entered into a new financing agreement which replaced the
Company's $240.0 million, 364-day committed credit facility. This new credit
facility which has two components allows for borrowings of up to $205.0
million. The first component is a 364-day committed credit facility of $102.5
million, which is scheduled to mature in April 2003. The second component is a
three-year credit facility of $102.5 million and is scheduled to mature in April
2005. Accordingly, $102.5 million of outstanding borrowings under the three-year
credit facility were reclassified as long-term in the accompanying "Consolidated
Balance Sheet" at February 28, 2002. The combined facility contains financial
covenants including a leverage ratio of total indebtedness to EBITDA and an
interest coverage ratio. Interest rates under the new facility are based on the
LIBOR rate plus a margin contingent on the Company's credit rating for unsecured
long-term public debt and leverage ratio. Acuity will pay an annual fee on the
commitment based on Acuity's credit rating for unsecured long-term public debt.
None of the Company's existing debt instruments include provisions that would
require an acceleration of repayments based on changes in the Company's credit
rating.
The Company's ongoing liquidity will depend upon a number of factors including
available cash resources and cash flows from operations. While the Company
believes it has sufficient liquidity including availability under its current
financing arrangements, the Company expects to enter into additional long-term
financing arrangements in order to provide the Company additional liquidity.
Proceeds generated from any additional long-term financing arrangements will be
used to reduce outstanding borrowings under the credit facility.
Page 17
Legal Proceedings
For information concerning legal proceedings, see footnote 10 to the financial
statements included in this filing.
Environmental Matters
For information concerning environmental matters, see footnote 10 to the
financial statements included in this filing.
Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risks that may impact its Consolidated Balance
Sheets, Statements of Income, and Statements of Cash Flows due to changing
interest rates and foreign exchange rates. The Company does not currently
participate in any significant hedging activities, nor does it currently
utilize any significant derivative financial instruments. The following
discussion provides additional information regarding the Company's market
risks.
Interest Rates- Interest rate fluctuations expose the Company's variable-rate
debt to changes in interest expense and cash flows. The Company's variable-rate
debt, primarily short-term secured borrowings and amounts outstanding under
Acuity's credit line, amounted to $248.4 million at February 28, 2002. Based on
outstanding borrowings at quarter end, a 10 percent adverse change in effective
market interest rates at February 28, 2002 would result in additional annual
after-tax interest expense of approximately $0.4 million. Although a
fluctuation in interest rates would not affect interest expense or cash flows
related to the publicly traded notes, the Company's primary fixed-rate debt, a
10 percent increase in effective market interest rates at February 28, 2002
would decrease the fair value of these notes to approximately $363.0 million.
Foreign Exchange Rates-The majority of the Company's revenue, expense, and
capital purchases are transacted in U.S. dollars. Acuity does not believe a 10
percent fluctuation in average foreign currency rates would have a material
effect on its consolidated financial statements or results of operations.
Acuity does not engage in speculative transactions, nor does Acuity hold or
issue financial instruments for trading purposes. To the extent possible,
Acuity mitigates its exposure to unfavorable foreign currency translation
adjustments through the use of foreign-currency denominated debt instruments.
Page 18
Cautionary Statement Regarding Forward-Looking Information
This filing contains forward-looking statements, within the meaning of the
Private Securities Litigation Reform Act of 1995, that involve risks and
uncertainties. Consequently, actual results may differ materially from those
indicated by the forward-looking statements. Statements made herein that may be
considered forward looking include statements concerning: (a) future earnings;
(b) the impact on the Company's operations of initiatives that are expected to
reduce costs, improve customer service, increase manufacturing efficiency,
reduce debt, and expand product offerings and brands in the market through a
variety of channels; and (c) the Company's ongoing liquidity. A variety of
risks and uncertainties could cause the Company's actual results to differ
materially from the anticipated results or other expectations expressed in the
Company's forward-looking statements. The risks and uncertainties include
without limitation the following: (a) the uncertainty of general business and
economic conditions, including the potential for a more severe slowdown in
non-residential construction, interest rate changes, and fluctuations in
commodity and raw material prices or foreign currency rates; (b) unexpected
developments and outcomes in the Company's legal and environmental proceedings;
(c) the risk that projected future cash flows from operations are not realized;
(d) the impact of competition; (e) the risk that underlying assumptions or
expectations related to the Distribution prove to be inaccurate or unrealized;
and (f) the Company's ability to realize the anticipated benefits of
initiatives related to increased productivity, new product development,
technological advances, cost synergies, sourcing, decreases in net working
capital, and the achievement of sales growth across the business segments.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
For information concerning legal proceedings, see footnote 10 to the financial
statements included in this filing.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits are listed on the Index to Exhibits (page 20).
(b) An 8-K was filed on December 14, 2001 related to the completion of the
distribution of the common stock of Acuity Brands, Inc.
Page 19
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACUITY BRANDS, INC.
REGISTRANT
/s/ Kenyon W. Murphy
DATE: April 12, 2002 ----------------------------------------
KENYON W. MURPHY
SENIOR VICE PRESIDENT AND
GENERAL COUNSEL
/s/ Vernon J. Nagel
DATE: April 12, 2002 ----------------------------------------
VERNON J. NAGEL
EXECUTIVE VICE PRESIDENT AND
CHIEF FINANCIAL OFFICER
Page 20
INDEX TO EXHIBITS
EXHIBIT 10(i)A (1) 364-Day Revolving Credit Agreement dated as Filed with the Commission as
of April 8, 2002, among Acuity Brands, part of this Form 10-Q.
Inc., the Subsidiary Borrowers from time to
time parties hereto, the Lenders, from time
to time parties hereto, Bank One, NA as
Administrative Agent, and Wachovia Bank,
N.A., as Syndication Agent.
(2) 3-Year Revolving Credit Agreement, dated as Filed with the Commission as
of April 8, 2002, among Acuity Brands, part of this Form 10-Q.
Inc., the Subsidiary Borrowers from time to
time parties hereto, Bank One, NA as
Administrative Agent, and Wachovia Bank,
N.A., as Syndication Agent.