Acuity Brands
Annual Report 2005

Plain-text annual report

ACUITY BRANDS WAY The Acuity Brands Way is our creed – it provides the fundamentals for creating and sustaining value for our customers, employees, and shareholders. It is the spirit of our business life together; it is what we create together. There are four building blocks to the Acuity Brands Way: • Our mission Our mission is to take good companies and make them great companies. • Our values Great companies show integrity by consistently behaving in ways that reflect their core values. We place confidence in our employees who demonstrate our four values: resolute, team-oriented, creative, and aspirational. • How we work together We work together constructively by demonstrating leadership, respect, and commitment. We are transparent with others and share our successes. We empower our employees to make decisions and contribute to our communities. • How we create value Great companies consistently create more value for their customers, employees, and shareholders than other companies. We are committed to creating value through setting high aspirations, measuring performance, achieving operating plans, committing to continuous improvement, and making changes faster than our competitors. The Acuity Brands Way guides how we do business and how we treat one another. Through the Acuity Brands Way, we’re on our way to high performance. A c u i t y B r a n d s , I n c . 2 0 0 5 A n n u a l R e p o r t Acuity Brands, Inc. 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 404-853-1400 www.acuitybrands.com ® 2005An n ual Report Bus iness Description Sh ar e holder Infor m ation Acuity Brands, Inc., with fiscal year 2005 net sales of approximately $2.2 billion, is comprised of Acuity Brands Lighting and Acuity Specialty Products. Acuity Brands Lighting is one of the world’s leading providers of lighting fixtures and includes brands such as Lithonia Lighting®, Holophane®, Peerless®, Hydrel®, American Electric Lighting®, and Gotham®. Acuity Specialty Products is a leading provider of specialty chemicals and includes brands such as Zep®, Zep Commercial®, Enforcer®, and Selig™. Headquartered in Atlanta, Georgia, Acuity Brands employs approximately 10,000 people and has operations throughout North America and in Europe and Asia. Fina ncial Highlights For the year ended August 31 (in millions of dollars, except earnings per share) Operations: Net sales Gross profit % Operating profit Operating profit % Net income Diluted earnings per share Diluted weighted average number of shares outstanding Return on average stockholders’ equity Net cash provided by operating activities Depreciation and amortization Capital expenditures Employees At August 31 (in millions of dollars) Financial Position: 2005 (1) 2004 % Change $ 2,172.9 $ 2,104.2 3% $ $ $ $ $ $ 39.1% 106.7 4.9% 52.2 1.17 44.8 10.3% 137.1 41.1 32.6 10,000 $ $ $ $ $ $ 40.4% 137.9 6.6% 67.2 1.56 43.2 15.4% 113.3 43.0 53.8 11,000 (23)% (22)% (25)% 21% (4)% (39)% (9)% 2005 2004 % Change Total assets Total cash and cash equivalents Total debt Total stockholders’ equity Total debt to capitalization Operating working capital as a percentage of net sales (2) $ 1,442.2 98.5 $ 372.3 $ 541.8 $ $ 1,356.5 $ 14.1 $ 395.7 $ 478.0 40.7% 15.6% 45.3% 16.5% 6% 599% (6)% 13% (1) 2005 results include a $23.0 million pre-tax restructuring charge (or $0.34 per diluted share). (2) Operating working capital is defined as net accounts receivable plus inventories minus accounts payable. Corporate Headquarters Acuity Brands, Inc. 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 404-853-1400 www.acuitybrands.com Acuity Brands Lighting One Lithonia Way Conyers, Georgia 30012-3957 770-922-9000 www.acuitybrandslighting.com Acuity Specialty Products 4401 Northside Parkway Suite 700 Atlanta, Georgia 30327-3093 404-352-1680 www.acuitysp.com Independent Registered Public Accounting Firm Ernst & Young LLP 600 Peachtree Street Suite 2800 Atlanta, Georgia 30308-2215 404-874-8300 Annual Meeting 1:00 p.m. Eastern Time Thursday, January 12, 2006 Four Seasons Hotel Ballroom 75 Fourteenth Street, NE Atlanta, Georgia 30309 Reports Available To Shareholders Copies of the following company reports may be obtained, without charge: 2005 Annual Report to the Securities and Exchange Commission, filed on Form 10-K, and Quarterly Reports to the Securities and Exchange Commission, filed on Form 10-Q. Requests should be directed to: Acuity Brands, Inc. Attention: Investor Relations 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 404-853-1400 www.acuitybrands.com a t n a l t A / e y e e e s e e s y b d e c u d o r p d n a d e n g i s e d Stock Listing New York Stock Exchange Ticker Symbol: AYI The Company’s CEO certified to the NYSE on November 15, 2004, that he is not aware of any violation by the Company of the NYSE’s Corporate Governance listing standards. Shareholders of Record The number of shareholders of record of Acuity Brands common stock was 5,234 as of October 25, 2005. Transfer Agent And Registrar Questions about shareholder accounts, dividend checks and lost stock certificates should be directed to: The Bank of New York Shareholder Relations Department P. O. Box 11258 Church Street Station New York, New York 10286-1258 800-432-0140 212-815-3700 shareowners@bankofny.com www.stockbny.com Send certificates for transfer and address change to: The Bank of New York Receive and Deliver Department P.O. Box 11002 Church Street Station New York, New York 10286-1258 Account Access Shareholders can access their account information at the Web site of Acuity Brands’ transfer agent, The Bank of New York, at www.stockbny.com or at www.acuitybrands.com. Shareholders can securely view their account information and check their holdings 24 hours a day. Cash Dividends Acuity Brands offers direct deposit of dividends to financial institutions’ checking, savings, or money market accounts. For more information contact The Bank of New York at 800-432-0140 or 212-815-3700. BuyDIRECTSM Acuity Brands’ transfer agent, The Bank of New York, offers the BuyDIRECT investment plan, a direct purchase and sale plan for investors wishing to purchase Acuity Brands common stock. Dividends can be automatically reinvested. The plan is not sponsored or administered by Acuity Brands. For information regarding the plan, contact: The Bank of New York Church Street Station P.O. Box 11258 New York, New York 10286-1258 800-432-0140 212-815-3700 Remittance of Optional Cash Investments and Plan Transaction Requests Mail the tear-off portion of transaction advice or account statements to: The Bank of New York Investment Services Department/ Acuity Brands P.O. Box 1958 Newark, New Jersey 07101-9774 Forward-Looking Statements This annual report includes forward- looking statements regarding: (a) expected future results and (b) the impact of initiatives in each of the Company’s businesses. A variety of factors could cause actual results to differ materially from expected results. Please see the risk factors more fully described in the accompanying financial information, which is separately filed with the Securities and Exchange Commission as part of the Annual Report on Form 10-K for the year ended August 31, 2005. © 2005 Acuity Brands, Inc. All referenced trademarks are the property of their respective owners. . To Our Stak eho ld ers s we embarked on 2005, our mission was clear, our plans specific, and our resolve unwavering on the promises made to our key stakeholders: to create a better, more effective company and to deliver financial results consistent with our longer- term objectives. And yet 2005 presented us with unprecedented economic challenges, proving once again the age-old axiom that the only constant in business is change. For Acuity Brands, to say that 2005 was a year of profound challenge and change would be an understatement. As I wrote to you a year ago, “At Acuity Brands, our mission is to take good companies and make them great.” Great companies create exceptional shareholder value by delivering profitable growth and consistent upper quartile performance, superior customer satisfaction, and excellence in everything they do, by having a team-oriented desire to be the best. Achieving these outcomes continues to be our priority; nevertheless, our financial results in 2005 were disappointing. We believe that these financial results do not fully reveal the extent to which rapidly evolving market conditions impacted our businesses, do not give a clear picture of just how well our 10,000 associates world-wide responded to those ever-changing dynamics, and, most importantly, do not convey the progress we made in becoming a “better,” more effective company. The purpose of this letter is to give you deeper insight into our activities and accomplish- ments in 2005, our vision for the future, and the basis for our confidence that the actions we are taking will transform Acuity Brands from a good company to a great company. 2005 RESULTS We entered 2005 with an expectation of delivering positive financial performance. Our results for the year fell well short of our expectations in certain key areas, particularly in earnings growth and operating profit margin. Overall, net sales edged up a respectable 3% in 2005 to $2.2 billion due primarily to price increases as both Acuity Brands Lighting (ABL) and Acuity Specialty Products (ASP) responded to unprecedented cost pressures. Diluted earnings per share declined to $1.17 from $1.56 reported in 2004. The decline was precipi- tated by three factors: 1) Unprecedented increases in costs, primarily raw materials and components that were up over $75 million; 2) The collective effects of a decline in unit volume sales in our primary end market, non-residential construction; and 3) A $23 million pretax charge for a reduction in workforce as part of our ongoing efforts to properly structure our organization. Our organization did an extraordinary job in responding to the challenges of managing unrelenting increases in costs while confronting sluggish demand in certain key markets. While we passed along much of the rising costs through higher selling prices, our price increases lagged 2005 Annual Report Le tter to stakeholders continued . . the rise in material costs, creating a drag on profits and margins. Non-residential construction, a core market for us, declined for the sixth year in a row, confounding industry experts who again predicted an acceleration in demand in 2005. The decline significantly encumbered our ability to fully leverage our supply chain capabilities. As a consequence, we made a very difficult decision in February to more properly size and streamline our business structure based on market conditions. This resulted in a special charge for the expected reduction of approximately 10% of our workforce. We have a great deal of empathy for our fellow associates impacted by this decision and have provided them with appropriate transition assistance. However, these actions were necessary to create a leaner, more efficient organization that is better con- nected to the customer, more nimble in its decision-making processes, and more cost effec- tive. These actions will allow Acuity Brands to be more capable of delivering profitable growth in the future. Despite the disappointing earnings results, the Company dramatically improved its financial position in 2005. We generated $137 million in cash flow from operations, up 21% from the year- ago period, while funding $33 million in capital expenditures and paying dividends of $26 million to shareholders. Our debt position of $372 million consisted primarily of fixed-rate, longer-term obli- gations, while our cash position swelled to almost $100 million by the end of August 2005. As a con- sequence, debt net of cash declined $108 million, or 28%, in 2005 to $274 million at year-end, pro- viding us with the best financial flexibility we have enjoyed in our short history as Acuity Brands. 2005 ACHIEVEMENTS We are a results-driven organization and take no comfort in offering explanations for our earnings shortfall. However, it is true that sometimes a company’s earnings are a lagging indicator of its true momentum. Looking beyond the numbers, we accomplished a great deal in 2005, rising to the challenges of a very competitive marketplace and streamlining many business processes that served to enhance our transactional capabilities and effectiveness. We committed in 2004 to a long-term journey of distinguishing ourselves in three mission-critical areas we refer to as the “3 C’s”: • Providing unparalleled customer service; • Pursuing world-class cost efficiency by eliminating non-value added activities and transactional costs; and • Creating a culture that demands excellence in everything we do through continuous improvement. In each of these areas, we significantly enhanced and strengthened our capabilities in 2005, thereby creating a stronger, more effective organization. Customers: Our focus is to deliver a competi- tively superior value proposition to our more than 300,000 customers throughout the world. We made great strides in enhancing the customer experience by improving our delivery capabilities and continu- ing to introduce new and innovative products. Our clear objective is to fulfill each customer’s order by delivering on time, complete, every time, without a defect in the product or an error in the process, and to do so faster and more cost-effectively than our competition. The ability to provide this level of Acuity Brands 2005 Annual Report . . unprecedented service in each of our core markets would be profound and industry-changing. We have established and closely monitor key metrics that measure our progress in these service areas. For example, we significantly enhanced the cus- tomer experience at ABL by dramatically improving our on-time service. While there is room for con- siderable improvement, we have reduced our late backlog to customers by over 80% to historical lows. Another goal was to augment the breadth and depth of our industry-leading product offering with a new product development and service cre- ation capability that is without equal. Overall, we excelled in bringing to market in 2005 new and innovative products and services incorporating technology and features that lead the industry, and we improved our development processes that enhance our speed to market for new products. For example, at ABL, the leading company in the commercial lighting industry, we introduced more than 200 new product platforms and strate- gic product line extensions marketed under 10 primary brands. At Lithonia Lighting, we intro- duced the RT5™, a revolutionary breakthrough lighting fixture for the indoor specification mar- ket, the largest in North America, which will transform how interior workspace is illuminated. At Holophane, we introduced numerous prod- ucts including ISD SuperGlass™, a reflector with dramatically more efficient prismatic qualities for the warehouse and industrial markets. Both the RT5 and SuperGlass incorporate innovative and proprietary technology that creates much more effective lighting output while allowing the customer to use substantially less energy. These products were recognized among the industry’s best at the most recent Light Fair International trade show. Similarly, at ASP, we introduced more than 160 new products in 2005, including 50 that were formulated to meet more stringent environ- mental standards for VOC emissions in several states. Our capability to specially formulate prod- ucts to meet customers’ exacting requirements, a core strength at ASP, continued to win us busi- ness in 2005. For example, Zep’s Big Orange™ degreaser was approved by the U.S. Coast Guard as the product of choice for use in the removal of oil from all vessels entering or exiting the Philadelphia harbor. Also in 2005, we implemented a process to more directly link the needs of our customers to our market and product development strategies. While we are in the early stages of implementation, we expect that this “outside-in” process will enhance our ability to respond to changing market condi- tions and to more rapidly bring innovation and technology to our customers. Cost: We made tremendous progress in reducing our overall cost structure in 2005. This was accomplished by introducing and training our associates in new techniques that are very effective at eliminating waste and non-value added activities in our transactional processes while advancing our customer service capabilities. Two years ago at Lithonia Lighting, we commenced a journey to reduce our production costs. This included the closure of eight facilities to date, impacting over 50% of our product lines. In 2005, we reduced our conversion cost by approximately 11% and, in the process, dramatically improved service to our customers at Lithonia Lighting by reducing late backlog as noted above. In addition, Acuity Brands 2005 Annual Report Le tter to stakeholders continued . . by accelerating our ongoing restructuring program announced in February, we were able to reduce consolidated overhead expense by $13 million in 2005 and we are on our way to an annualized goal of $50 million by the middle of fiscal 2006. Culture: All great companies have a competitive edge and an unrelenting passion to always be the very best. In 2005, we embarked on a path of change and a recommitment to delivering the kind of value that makes the brands of Acuity Brands the leaders in their industries. We live in a world of constant change occurring at speeds unthinkable only a few short years ago. And yet at Acuity Brands, we are not only learning to better manage change, we are the drivers of change. It is a deep and rich part of our culture that we are competitive, entre- preneurial winners. We have invested considerable resources on training our organization to deploy lean systems and on providing associates with new techniques and more advanced tools to drive improvements in our customer-facing business processes, product development, and supply chain. By arming our associates with these capabilities, we enable them to manage and thrive on change. I get excited about what we are doing when I see first-hand the sense of enthusiasm, accomplish- ment, and empowerment of associates who deploy these toolsets to challenge the “old ways” to gener- ate new ideas and improve performance in a very short period of time. These techniques and tools, which are part of a comprehensive, holistic busi- ness system, are aligning our strategy and tactics from the boardroom to the shop floor and from our vendors to our customers; and in the process, are eliminating non-value added activities while providing greater value to all key stakeholders. While we have a very long way to go to be consid- ered world class, our progress to date has been very encouraging. 2006 AND BEYOND At Acuity Brands, we aspire to be a substantially larger, more diversified organization capable of delivering consistent upper quartile performance to our shareholders. Today, Acuity Brands Lighting and Acuity Specialty Products are leaders in their respective industries, and yet there remains plenti- ful opportunity for substantial profitable growth that will allow Acuity Brands to achieve its long- term objectives. We see a bright future full of potential for Acuity Brands. So the question is, “What must we do to fully realize that potential?” First and foremost, we must continue to focus on improving our competitive position by having the courage to drive positive change. This means that we must confront our challenges head-on and take aggressive and necessary actions to drive future performance if we are to succeed in a rapidly changing marketplace. We must also be unrelenting at eliminating non-value added activities in our Company and much more effective at working with our supply partners to bring greater value to the marketplace in order to create clearer and more discernible value propositions for our cus- tomers. Second, we must have a common definition for success. Today, we now define success in terms of the 3 C’s of customer, cost and culture and how these will impact each of our key stakeholders. Key performance indicators that define our progress in each of these areas are permeating the organi- zation at every level and are becoming more visible throughout the Company for all associates Acuity Brands 2005 Annual Report . . to see. This intense focus is driving positive changes in our processes that impact delivery, quality, cost, and innovation, while further strengthening our environmental, health, and safety compliance programs. Our future success will largely be determined by the cultural trans- formation we make in becoming a leaner, more cross-functionally oriented organization. For the associates of Acuity Brands this means that we must continue to eliminate the remaining “silos” within our company that impede progress towards the shared mission of achieving excellence in everything we do. These legacy barriers to cross- functional, transparent communications are rapidly disappearing throughout the organization, benefiting our service to customers, our cost structure, and most importantly, the attitudes of our associates. Lastly, our success in achieving consistent upper quartile performance, like that experienced by only a very few companies, will be predicated on our ability to embrace and make good on the programs we are implementing to become a faster, leaner, and more team-oriented company that values being the best as defined by our customers, our employees, and our shareholders. Is all this easy? No. But we are focused, we have a very high sense of urgency, and we know what we need to do. Our successes in these areas to date, which are leading indicators of future performance, suggest that we are on the right path to unlocking the full potential at Acuity Brands. Our Board of Directors shares our confidence in the Company’s future. This confidence is reflected in the announcement of our plan to repurchase up to two million shares of the Company’s common stock. CLOSING COMMENTS In closing, I gratefully acknowledge John Morgan’s taking the helm of Acuity Brands Lighting as President and Chief Executive Officer. John, a 28-year veteran of the organization, has the right combination of diversified experiences and lead- ership skills to extend the proud legacy of the companies that make up Acuity Brands Lighting, the undisputed leader in the lighting industry. John takes over from Ken Honeycutt, Jr., who is retiring at the end of 2005. Ken has spent his entire 34-year career with our lighting company, the last three as the leader of ABL. I thank Ken for his vision, wisdom, and courage to lead the company through a period of extraordinary transformation. We will miss his keen intellect, his extraordinary strategic vision, and his unwav- ering commitment to our Company. Finally, on behalf of the Board of Directors, I thank all of our 10,000 associates for their con- tinued contributions and dedication. As I noted last year, our success in becoming a growth-oriented, top quartile performing company depends on the resolve of each of us to inspire team success and on our individual efforts toward making our collective aspirations a reality. It was true then, and it is still true today. Acuity Brands has the potential to be a great company. We are committed to delivering on that potential. Thank you for your support. Vernon J. Nagel Chairman, President, and Chief Executive Officer Acuity Brands 2005 Annual Report . . Acuity Brands Lighting (ABL) is one of the world’s leading providers of lighting fixtures. Our market-leading brands include Lithonia Lighting®, Holophane®, Peerless®, Hydrel®, American Electric Lighting®, and Gotham®. Through the efforts of our 7,000 employees, we manufacture approxi- mately 100,000 fixtures each day for various indoor and outdoor applications, including offices, homes, schools, manufacturing facilities, warehouses, hospitals, roadways, and parking lots. Products are manufactured in 18 plants in the United States, Europe, and Mexico and are delivered through strategically located distribution centers. Participating actively in both the new construction and renovation markets, ABL reaches the market with three selling and distribution strategies – identified projects, speculative stock, and international. Identified projects offer specialized and high-volume product packages for construction. Speculative stock includes products resold through commercial and retail stocking distributors. International sales efforts deliver ABL products for projects in over 50 countries. Per for mance Net Sales in millions of dollars 1,637.9 1,580.5 1,538.8 Operating Profit in millions of dollars Total Assets in millions of dollars 118.9 1,094.8 1,091.2 96.8 94.6 1,029.4 2003 2004 2005 2003 2004 2005 2003 2004 2005 U. S. L igh ting Market – $8.6 Billion * Product Segments* in billions of dollars Channels* in billions of dollars $2.0 Residential $2.0 Fluorescent $1.0 Architectural Indoor & Other $0.6 Electronic Systems $0.8 Industrial $2.2 Outdoor * Company estimates $0.2 Other $0.5 Utilities $0.5 Direct/Nat’l Accounts $0.7 Lighting Showrooms $1.1 Homecenters $5.6 Electrical Wholesalers Acuity Brands 2005 Annual Report . . AB L At-a-Glance Market Segments Leading Brands Key Products Value Proposition C&I Group Lithonia Lighting® Commercial, Institutional, Industrial, and Government markets Fluorescent, indoor HID, downlighting, track, emergency, rough service, area/site, floodlighting, building-mounted, lighting control, modular wiring Best Value in Lighting. Comprehensive line of commercial, institutional, and industrial products for indoor and outdoor use Primary Applications Key Channels/ Customers Offices, schools, retail, warehouses, manufacturing, parking, hotel, healthcare Electrical engineers, electrical distributors, electrical contractors, building owners Gotham® Peerless® Hydrel® Downlighting: recessed, accent, surface, decorative, pendant Design and performance leadership in indoor archi- tectural downlighting products Offices, schools, museums, libraries, stores, churches, airports Architects, engineers, lighting designers, interior designers, building owners Suspended lighting, indoor floodlighting, accent lighting Lighting for People®. Leaders in design, perfor- mance, and product innovation Offices, schools, museums, media centers, airports, churches, malls, retail, public spaces Architects, engineers, lighting designers, interior designers, building owners Floodlighting, area/site, landscape, wall-mounted, in-grade, accent, border, underwater Illuminating architecture and surroundings; placing outdoor light and color for dramatic effect Landscape, area, underwater, building illumination Architects, landscape architects, engineers, lighting designers, building owners Antique Street LampsTM Historical and contempo- rary decorative luminaires and post-tops Complete product line of historically styled outdoor lighting City redevelopments, parks, area, pedestrian walkways Municipalities, utilities, electrical distributors, electrical contractors SpecLight® and MetalOptics® Energy-efficient fluorescent specialty fixtures and retrofit kits Custom and specially designed energy-efficient indoor fluorescent lighting Offices, schools, ware- houses, manufacturing, stores. New and retrofit Electrical distributors, energy service companies, electrical contractors, building owners, end users Solutions Group Holophane® Infrastructure, Industrial, Commercial, and Institutional markets Municipal roadway and infrastructure highway, historical outdoor, contem- porary outdoor, low energy and high output fluorescent, HID industrial, Holophane- designed high performance electrical gear and ballasts Leader in Lighting Solutions®. Optics, sales, and the best total cost of ownership. The hallmark of Holophane luminaires is the borosilicate glass reflector/refractor American Electric Lighting® Roadway fixtures, historical, floodlights, DTL photocontrols Complete product line of public infrastructure light- ing and photocontrols Industrial manufacturing and warehousing, food processing, retail, college and university campuses and gyms, retail, sports arenas, highways, municipal roadway, parking, tunnels, signs, airports, rail yards, seaports Roadway, security, area Owners, engineers, architects, lighting designers, landscape architects, utilities, municipalities, public infrastructure, govern- ment, industrials Municipalities, utilities, roadway, distributors, contractors Retail Group Lithonia Lighting® Residential ‘Do It Yourself’ consumers as well as light commercial contractors Decorative fluorescent fixtures, including flush mounted products, pendants, outdoor and under-cabinet lighting. Also a broad assortment of Lithonia outdoor, emer- gency exit, and commercial products for the light commercial market Energy-efficient decorative residential lighting Residential, light commercial Home centers, lighting showrooms International Carandini® Holophane® UK All Acuity Brands Lighting Products Roadway fixtures, area lighting, high mast sys- tems, floodlights, accent HID industrial, fluorescent, emergency Leader in Lighting Solutions. A comprehen- sive portfolio including the full range of Acuity Brands Lighting products Manufacturing, warehouse facilities, street, roadway, tunnels, retail, commercial, offices, parks and area Consulting engineers, building owners, contractors, municipalities, architects, lighting designers Acuity Brands 2005 Annual Report . . Acuity Specialty Products (ASP) is a leading provider of spe- cialty chemicals to a wide variety of industrial and institutional (I&I) and retail customers. ASP’s proprietary brands include Zep®, Zep Commercial®, Selig™, and Enforcer®. Our 1,700 fully commissioned sales representatives make 25,000 to 35,000 customer calls each day in the United States, Canada, and Western Europe. Our sales force is committed to providing high-quality products, service, and industry knowledge to over 300,000 customers annually. Currently, we manufacture 2,300 different chemical formulas that are packaged in more than 9,000 catalog-listed products and resell over 6,000 additional complementary products. The quality and breadth of our product line allows our sales representatives to provide customized solutions to our broad customer base consisting of transportation industries including commercial car washes, schools, municipalities, repair shops, food preparation and processors, restaurants, hotels, and other hospitality industry providers. The reach of our sales representatives allows for penetration of national accounts while maintaining high-quality service and industry-leading product quality and efficacy. Net Sales in millions of dollars 535.0 523.7 510.6 Per for mance Operating Profit in millions of dollars 43.6 42.3 31.3 Total Assets in millions of dollars 236.4 222.9 215.1 2003 2004 2005 2003 2004 2005 2003 2004 2005 U .S . I&I C lea ning Chemicals Ma rket – $. Billion * Sales Channels* in billions of dollars $0.3 Other Direct Sales Product Segments* in billions of dollars $0.3 Other $2.9 Direct Sales $0.6 Vehicle $0.7 Food & Beverage $5.9 Distributor * Company estimates $0.6 Industrial $0.7 Schools, Hospitals, & Other Facilities Acuity Brands 2005 Annual Report . . ASP At-a-Glance Automotive & Vehicle Wash, cleaning, and maintenance products for automobiles, aircraft, public transport, trucks, trains, and construction vehicles Food Processing Food Preparation Industrial Government Integrated and customized dispensing systems and innovative approaches to antimicrobial control Suite of cleaning products designed specifically for prepared food industry Cleaning and maintenance products used by profes- sional maintenance staff Suite of products and maintenance solutions for cities, school districts, military, police, and fire departments Contractors & Homeowners Products for professional and home user for general cleaning, drain care, and pest control Leading Brands Leading Brands Leading Brands Leading Brands Leading Brands Leading Brands Zep® SeligTM Armor All® Professional (distributor) Zep® Zep® SeligTM Zep® SeligTM Zep® SeligTM Zep Commercial® Enforcer® Rubbermaid® Commercial (distributor) Key Products Key Products Key Products Key Products Key Products Key Products Exterior and interior cleaning products, solvents, and degreasers Cleaners and sanitizers for applications from farm to food retailer Cleaners and sanitizers Cleaners, degreasers, solvents, lubricants, parts washers, and hand cleaners Cleaners, sanitizers, floor care, vehicle wash, degreasers, and dispensing equipment Cleaners, sanitizers, drain care, and pest control Value Proposition Value Proposition Value Proposition Value Proposition Value Proposition Value Proposition High-quality products sold through numerous highly trained and certified sales reps Suite of products and cleaning solutions sold through highly trained food-certified sales specialists Suite of products and cleaning solutions sold through highly trained sales reps Highly-dilutable quality products sold through consultative sales approach to meet the needs of an ever-changing industrial environment Suite of products and cleaning solutions sold through trained, certified sales reps coordinated through centralized sales leadership Commercial quality suite of products and cleaning solutions sold through retail channels Key Channels/ Customers Key Channels/ Customers Key Channels/ Customers Key Channels/ Customers Key Channels/ Customers Key Channels/ Customers Customers include car washes, auto rental agencies, airlines, and construction companies serviced through the direct sales channel Customers include food processing plants through- out the United States and Canada through the direct sales channel Customers include grocery chains and restaurants throughout the United States, Canada, and Europe through the direct sales channel Customers include auto repair and manufacturing firms serviced through the direct sales channel Customers include cities, school districts, military, police, and fire depart- ments through the direct sales channel Customers include gen- eral contractors, contract cleaners, apartments, and home owners through retail channels such as home centers Acuity Brands 2005 Annual Report 0. Boar d of Dir ec tor s & Of ficers Board of Directors Acuity Leadership Team Vernon J. Nagel 1 Chairman, President, and Chief Executive Officer Acuity Brands, Inc. Vernon J. Nagel Chairman, President, and Chief Executive Officer Acuity Brands, Inc. Peter C. Browning Former Dean McColl Graduate School of Business at Queens University of Charlotte; Non-Executive Chairman Nucor Corporation John L. Clendenin 2 Chairman Emeritus BellSouth Corporation Jay M. Davis Chairman and Chief Executive Officer National Distributing Company, Inc. Earnest W. Deavenport, Jr. Former Chairman and Chief Executive Officer Eastman Chemical Company Robert F. McCullough Former Chief Financial Officer AMVESCAP PLC Julia B. North Former President and Chief Executive Officer VSI Enterprises, Inc.; Former President of Consumer Services BellSouth Corporation Ray M. Robinson 3 President East Lake Golf Club; Non-Executive Chairman Citizens Trust Bank Neil Williams 4 Former General Counsel AMVESCAP PLC; Former Managing Partner Alston & Bird LLP James H. Heagle Executive Vice President Acuity Brands, Inc.; President and Chief Executive Officer Acuity Specialty Products Group, Inc. Karen J. Holcom Vice President, Controller, and Interim Chief Financial Officer Acuity Brands, Inc. Kenneth W. Honeycutt, Jr. 5 Executive Vice President Acuity Brands, Inc. John K. Morgan Executive Vice President Acuity Brands, Inc.; President and Chief Executive Officer Acuity Lighting Group, Inc. Kenyon W. Murphy Senior Vice President and General Counsel Acuity Brands, Inc. Joseph G. Parham, Jr. Senior Vice President, Human Resources Acuity Brands, Inc.; Chief People Officer Acuity Lighting Group, Inc. Wesley E. Wittich Senior Vice President, Audit and Risk Management Acuity Brands, Inc. 1 Chairman of Executive Committee 2 Chairman of Audit Committee 3 Chairman of Compensation Committee 4 Chairman of Governance Committee 5 Retiring December 31, 2005 Acuity Brands UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) È ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended August 31, 2005. 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 (State or other jurisdiction of incorporation or organization) 58-2632672 (I.R.S. Employer Identification Number) 1170 Peachtree Street, N.E., Suite 2400, Atlanta, Georgia (Address of principal executive offices) 30309 (Zip Code) (404) 853-1400 (Registrant’s telephone number, including area code) Securities registered pursuant to Section 12(b) of the Securities Exchange Act of 1934: Title of Each Class Common Stock ($0.01 Par Value) Preferred Stock Purchase Rights Name of Each Exchange on which Registered New York Stock Exchange New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None 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 È No ‘ 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. ‘ Indicate by check mark whether Act). Yes È No ‘ Indicate by check mark whether Act). Yes ‘ No È the registrant is an accelerated filer (as defined in Rule 12b-2 of the the registrant is a shell company (as defined in Rule 12b-2 of the Based on the closing price of the Registrant’s common stock of $27.65 as quoted on the New York Stock Exchange on February 28, 2005, the aggregate market value of the voting stock held by nonaffiliates of the registrant, was $1,203,247,207. The number of shares outstanding of the registrant’s common stock, $0.01 par value, was 45,013,123 shares as of October 25, 2005. DOCUMENTS INCORPORATED BY REFERENCE Location in Form 10-K Part II, Item 5 Part III, Items 10, 11, 12, 13, and 14 Incorporated Document Proxy Statement for 2005 Annual Meeting of Stockholders Proxy Statement for 2005 Annual Meeting of Stockholders ACUITY BRANDS, INC. Table of Contents Page No. Part I Item 1. Item 2. Item 3. Item 4. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Submission of Matters to a Vote of Security Holders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3-11 11-12 12-13 13 Part II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 7a. Quantitative and Qualitative Disclosures about Market Risk . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Item 9. Disclosure . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 9a. Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Part III Item 10. Directors and Executive Officers of the Registrant . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 11. Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 13. Certain Relationships and Related Transactions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 14. Principal Accounting Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 14-15 16-27 27-28 29-63 64 64 65 65 65 65 65 Part IV Item 15. Exhibits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 66-74 75 76 2 PART I Item 1. Business Acuity Brands, Inc. (“Acuity Brands” or the “Company”) is a holding company that owns and manages two businesses that serve distinctive markets – lighting equipment and specialty products. The lighting equipment segment designs, produces, and distributes a broad array of indoor and outdoor lighting fixtures for commercial and institutional, industrial, infrastructure, and residential applications for various markets throughout North America and select international markets. The specialty products segment formulates, produces, and distributes specialty chemical products including cleaners, deodorizers, sanitizers, and pesticides for industrial and institutional, commercial, and residential applications primarily for various markets throughout North America and Europe. Of the Company’s fiscal 2005 net sales of approximately $2.2 billion, the lighting equipment segment generated approximately 75% of total net sales while the specialty products segment provided the remaining 25%. Financial information relating to the Company’s two segments for the past three fiscal years is reported in Note 11 to the Consolidated Financial Statements included in this report. Business Segments Lighting Equipment The lighting equipment business of Acuity Brands is operated by Acuity Lighting Group, commonly known as Acuity Brands Lighting (“ABL”). Acuity Brands Lighting is one of the world’s leading manufacturers of lighting fixtures for new construction, renovation, and facility maintenance applications. Products include a full range of indoor and outdoor lighting for commercial and institutional (“C&I”), industrial, infrastructure, and residential applications. ABL manufactures and procures lighting products in the United States, Mexico, Europe, including Lithonia Lighting®, and China. These products are marketed under numerous brand names, Holophane®, Gotham®, Hydrel®, Peerless®, Antique Street Lamps™, Carandini™, American Electric Lighting®, SpecLight®, and Metal Optics™. ABL manufactures products in 15 plants in North America and three plants in Europe. Principal customers include electrical distributors, retail home improvement centers, national accounts, lighting showrooms, municipalities, and electric utilities located in North America and select international markets. In North America, ABL’s products are sold through independent sales agents and factory sales representatives who cover specific geographic areas and market segments. Products are delivered 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, ABL employs a sales force that adopts distribution methods to meet individual customer or country requirements. In fiscal 2005, North American sales accounted for approximately 97% of ABL’s net sales. See Note 11 of the Notes to Consolidated Financial Statements for more information concerning the domestic and international net sales of the Company. Specialty Products The specialty products business of Acuity Brands is operated by Acuity Specialty Products (“ASP”). ASP is a leading provider of specialty chemical products in the industrial and institutional (“I&I”) and retail markets. Products include cleaners, sanitizers, disinfectants, polishes, floor finishes, degreasers, deodorizers, pesticides, insecticides, and herbicides. ASP manufactures products in four North American plants and two European plants. Acuity Specialty Products sells products to customers primarily in North America and Western Europe. In fiscal 2005, North American sales accounted for approximately 92% of the net sales of ASP. ASP serves a broad range of industrial and institutional customers, including municipalities and businesses ranging from small sole proprietorships to the largest corporations in the U.S. The core I&I business is made up of varying sized 3 customers to whom cleaning chemicals are important to the business and, typically, where the decision to purchase is local. While ASP services a wide array of business segments, individual markets in the I&I channel include food processing and preparation, transportation, education, automotive, government, and hospitality. Retail channels include large and small home improvement centers, mass merchandisers, and hardware stores. ASP sells numerous products under such well-known brands as Zep®, Enforcer®, Zep Commercial™, and Selig™. Industry Overview Lighting Equipment The current size of the North American lighting fixture market is estimated at $10.1 billion. The North American lighting fixture market consists of non-portable lighting fixtures and complementary lighting products such as emergency lighting, outdoor poles, and control and flexible wiring systems. The U.S. market, which represents approximately 85% of the North American market, is relatively fragmented. The Company estimates that the top four manufacturers (including Acuity Brands Lighting) represent approximately 50% of the total North American lighting market. The remainder of the market is made up of hundreds of providers. The primary demand driver for ABL’s core businesses is non-residential construction, which includes a broad range of commercial, institutional, and industrial buildings. Construction spending on infrastructure projects such as highways, streets, and downtown developments also has a material impact on ABL’s infrastructure-focused segments. ABL’s retail lighting segments are highly dependent on economic drivers such as consumer spending and discretionary income, along with housing construction and home improvement spending. Based on industry data, new construction and additions account the non-residential market, while renovations account for approximately 20%, though this mix can vary depending on economic conditions. Major trends that can impact the industry include the development of new technologies for lamps and ballasts, more effective optical designs, federal and state requirements for updated energy codes, and design technologies addressing environmental sustainability. for approximately 80% of There has been a significant increase in the size and relative presence of the retail home improvement center segment in the past several years. In addition, imports of foreign-sourced lighting fixtures continue to grow, driven by both the foreign production of U.S. manufacturers and imports of low-cost fixtures from Asian manufacturers. European-based electrical distributors have increased their presence in the U.S. with the acquisition of U.S.-based local and regional distributor chains, and smaller U.S. distributors continue to seek leverage through alignment with buying groups. Specialty Products The Company estimates that the current size of the U.S. I&I market is $9.1 billion and is highly fragmented. The Company believes that six major players (including Acuity Specialty Products) represent approximately 50% of the total U.S. I&I market with the remainder divided among hundreds of regional players. In general, the Company estimates that the U.S. I&I market grows at a rate approximating Gross Domestic Product (“GDP”). To some extent, consumption of janitorial cleaning and sanitation products is discretionary, but in a health-driven, sophisticated market such as the U.S., the Company believes that health and safety regulations and customer expectations somewhat buffer demand downturns. Increasing legislation in the areas of food and occupational health that require increased ranges of application and frequency of use is fueling growth in demand. In addition to the U.S. I&I market, there is a U.S. retail chemical market that is estimated at $4.3 billion, including an estimated $2.8 billion market for cleaners and an estimated $1.5 billion market for pest control. The Company believes that two major trends are continuing to reshape the industry. First, health and safety regulations are shrinking the pool of available chemicals while at the same time increasing total use rates. This 4 increased has pushed development of improved product formulations and application methods. Second, centralized corporate buying and consolidation of the supply chain are threatening reselling distributors and requiring increased base manufacturing and logistics skills. Products Lighting Equipment Acuity Brands Lighting produces a wide variety of lighting fixtures used in the following applications: • Commercial & Institutional — Applications are represented by stores, hotels, offices, schools, and hospitals, as well as other government and public buildings. Products that serve these applications include recessed, surface and suspended fluorescent lighting products, recessed downlighting, and track lighting, as well as special application lighting products. The outdoor areas associated with these application segments are addressed by a variety of outdoor lighting products, such as area and flood lighting, decorative site lighting, and landscape lighting. • • Industrial — Applications primarily include warehouses and manufacturing facilities. The lighting equipment business serves these applications with a variety of glass and acrylic high intensity discharge (“HID”) and fluorescent lighting products. Infrastructure — Applications include highways, tunnels, airports, railway yards, and ports. Products that serve these applications include street, area, high-mast, off-set roadway, and sign lighting. • Residential — Applications are addressed with a combination of decorative fluorescent and downlighting products, as well as utilitarian fluorescent products. • Other Applications & Products — Other products include emergency lighting fixtures, which are primarily used in non-residential buildings, and lighting control and flexible wiring systems. Lighting fixtures for numerous applications in a multitude of industry segments accounted for approximately 65% of total consolidated net sales for Acuity Brands during fiscal years 2005, 2004, and 2003. This does not include sales related to items such as wiring products, controls, and emergency lighting. Specialty Products ASP produces and supplies a wide variety of specialty chemical products that are used in numerous applications in a broad range of markets. These include: • Food Processing — Applications include integrated and customized dispensing systems and innovative approaches to antimicrobial control. • Food Preparation — Applications include a suite of cleaning products designed specifically for the prepared food industry. • • Transportation — Applications include cleaning and maintenance products for automobiles, aircraft, public transport, trucks, trains, and construction vehicles. Industrial — Applications maintenance staff. include cleaning and maintenance products used by professional • Hospitality — Applications include products and dispensing solutions for customers to supply maintenance, housekeeping, and laundry services. • Government — Applications include a suite of products and maintenance solutions for cities, school districts, military, and police and fire departments. • Contractors and Homeowners — Applications include products for contract cleaners, small business owners, and homeowners and are supplied through retail channels. Products include a comprehensive range of floor care, general-purpose cleaners and sanitizers, drain maintenance, and pest control in convenient ready-to-use packaging. 5 Sales of specialty chemical products, excluding items sold to facilitate the use of chemicals, accounted for approximately 20% of total consolidated net sales for Acuity Brands during fiscal years 2005, 2004, and 2003. Sales and Marketing Lighting Equipment Sales. ABL calls on customers in the North American market with separate sales forces targeted at delivering appropriate products and services to specific customer, channel, and geographic segments. These sales forces consist of approximately 200 company-employed salespeople and a network of approximately 200 independent sales agencies, each of which employs numerous salespeople. ABL also operates two separate European sales forces and an international sales group coordinating sales outside of North America and Europe. Marketing. ABL markets its products to a multitude of end users through a broad spectrum of marketing and promotional vehicles, including direct customer contact, on-site training, print advertising in industry publications, product brochures, and other literature, as well as the internet and other electronic media. On-site training is conducted at dedicated product training facilities in Conyers, Georgia, Newark, Ohio, and Austin, Texas. Specialty Products Sales. The sales organization at ASP consists of approximately 1,700 sales representatives worldwide. The compensation model in the I&I channel is primarily commission-based. Net sales are largely dependent on the hiring, training, and retention of the commissioned sales representatives. The ASP sales organization covers the U.S., Canada, Italy, the Benelux countries, and certain other smaller markets. The I&I market is serviced primarily through four U.S. divisions, as well as Canadian and European divisions. Each of the four U.S. divisions includes approximately 235 to 350 sales representatives, supplemented by a complement of customer and technical service personnel. The Canadian and European operations have approximately 150 and 270 sales representatives, respectively. The retail sales division utilizes approximately 50 salaried sales and management personnel to focus primarily on the home center channel. Marketing. ASP’s marketing efforts are focused on supporting a sell-through program from ASP through the sales organization and to the customer. ASP’s marketing focus is in four distinct areas: market planning, product management, market-based pricing, and marketing services. Market planning includes comprehensive strategic and tactical plan development and support emphasizing financial objectives and accountability. Product management includes new product development and chemical dispensing equipment management. Market-based pricing takes into account competitive analysis and leverages the flexibility of the ASP operating platform. Marketing services provides sales support tools and collateral sales information to ASP’s worldwide sales force and customer base. Customers A single customer in the home improvement channel, The Home Depot, accounted for approximately 13%, 12%, and 10% of net sales of Acuity Brands in fiscal years 2005, 2004, and 2003, respectively. The loss of that customer could adversely affect the Company’s results of operations. Lighting Equipment Customers of Acuity Brands Lighting include electrical distributors, retail home improvement centers, national accounts, electric utilities, utility distributors, municipalities, contractors, catalogs, and lighting showrooms. In addition, there are a variety of other buying influences, which for any given project could 6 represent a significant architects, and lighting designers. influence in the product specification process. These generally include engineers, Specialty Products Customers of ASP consist of I&I customers (approximately 80% of ASP net sales) and retail customers (approximately 20% of ASP net sales). I&I customers range from sole proprietorships to the largest corporations in the U.S. and government agencies. These customers are in various markets, including food processing and preparation, transportation, industrial, hospitality, government, and contractors and homeowners. The core I&I business is made up of varying sized customers to whom cleaning chemicals are important to the business and, typically, where the decision to purchase is local. Retail customers primarily include large and small home improvement centers, mass merchandisers, and hardware stores. Manufacturing Acuity Brands, through its businesses, operates 24 manufacturing facilities, including 12 facilities in the United States, one facility in Canada, six facilities in Mexico, and five facilities in Europe. Lighting Equipment ABL 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, such as 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 ballasts, are purchased primarily from outside vendors. Investment is focused on improving capabilities, product quality, and manufacturing efficiency. The integration of local suppliers’ factories and warehouses also provides an opportunity to lower ABL-owned component inventory while maintaining high service levels through frequent just-in-time deliveries. ABL 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. Net sales of product manufactured by others currently accounts for 20% of the total net sales of ABL. Of total product manufactured by ABL, U.S. operations produce approximately 45%; Mexico produces approximately 52%; and Europe produces approximately 3%. ABL has one supplier of significance and a loss of that supplier could have a material adverse impact on operations for up to approximately six months. ABL purchased approximately $76.1 million in finished goods from this supplier in 2005. During fiscal 2005, management continued to focus on initiatives to make the Company more globally competitive. One of these initiatives at ABL related to enhancing its global supply chain and included the consolidation of certain manufacturing facilities into more efficient locations. Since 2004, ABL has closed eight facilities as part of this initiative, with two additional facilities expected to be closed in the next twelve months. This initiative, the Manufacturing Network Transformation (“MNT”), will result in increased production in international locations, primarily Mexico, and greater sourcing from its network of worldwide vendors. Total square footage used for manufacturing at ABL has been reduced by approximately 15% over the past two years as a result of MNT. Specialty Products ASP manufactures products at six facilities located in the United States, Canada, Holland, and Italy. The three U.S. facilities produce approximately 89% of manufactured product; the Canadian facility produces approximately 5%; and the two European facilities produce approximately 6%. Certain finished goods purchased from contract manufacturers and finished goods suppliers supplement the manufactured product line. Sales of outsourced product currently account for approximately 26% of the net sales volume of ASP. Outsourced product 7 is predominately manufactured in the U.S. Management does not believe the loss of any one supplier of outsourced product would have a material adverse impact on the results of operations of ASP. Distribution Lighting Equipment Products are delivered 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 individual customer or country requirements. international customers, distribution methods are adapted to meet Specialty Products Products sold to I&I markets are shipped from strategically located distribution centers and local branch warehouses throughout North America and in Europe, while retail products are distributed nationwide from the Georgia plants and warehouses. Products are primarily delivered through common carriers. Research and Development Lighting Equipment Research and development efforts at ABL are targeted toward the development of products with an ever- increasing performance-to-cost ratio and energy efficiency, while close relationships with lamp and ballast manufacturers are maintained to understand technology enhancements and incorporate them in ABL’s fixture designs. ABL operates five separate product development model facilities, incorporating eight photometers for testing and optimizing fixture photometric performance. The Conyers, Georgia lab is approved by the National Voluntary Laboratory Accreditation Program for both fluorescent and high intensity discharge fixtures. For the fiscal years 2005, 2004, and 2003, research and development expense at ABL was $27.1 million, $27.9 million, and $26.1 million, respectively. Specialty Products At ASP, research and development is directed at developing product systems that provide comprehensive solutions for broad-based customer applications. Additionally, efforts to enhance existing formulations by utilizing new raw materials or combinations of raw materials have resulted in both new and improved products. Technical expertise is employed to move proven technologies into new applications. Research and development expense at ASP for the fiscal years 2005, 2004, and 2003, excluding technical services, was $1.8 million, $2.1 million, and $1.3 million, respectively. Competition Lighting Equipment The lighting equipment industry served by ABL is highly competitive, with 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 and design, customer relationships, and service capabilities. Primary competitors in the lighting industry include Cooper Industries Ltd., The Genlyte Group Incorporated, and Hubbell Incorporated. The management of Acuity Brands believes that the four largest lighting manufacturers (including ABL) possess approximately a 50% share of the total North American lighting market. Specialty Products The specialty products industry served by ASP is highly competitive. Overall, competition is fragmented, with numerous local and regional operators selling directly to customers, distributors, and a few national competitors. Many of these competitors offer products in some, but not all, of the markets served by ASP. Competition is based primarily on brand name recognition, price, product quality, and customer service. 8 Competitors in the specialty products industry include NCH Corporation, Rochester Midland Corporation, State Chemical Manufacturing Company, JohnsonDiversey, Inc., and Ecolab, Inc. Management estimates ASP and its major competitors have approximately 50% of the total U.S. I&I market and the remainder is divided among hundreds of regional competitors. 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, 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. See Item 3: Legal Proceedings below for a discussion of certain environmental matters. Raw Materials The products produced by Acuity Brands require certain raw materials, including aluminum, plastics, electrical components, solvents, surfactants, other petroleum-based materials and components, and certain grades of steel. For example, Acuity Brands purchases approximately 100,000 tons of steel and aluminum on an annual basis depending on various factors including product mix. The Company estimates that approximately 7% of the raw materials purchased are petroleum-based. Acuity Brands purchases most raw materials on the open market and relies on third parties for the sourcing of some finished goods. Accordingly, the cost of products sold may be affected by changes in the market price of the above-mentioned raw materials or the sourcing of finished goods. Due to the mix of purchases (raw materials, components parts, and finished goods), timing of price increases, and other economic and competitive forces within the supply chain, it is not possible to determine the financial impact of changes in the market price of these raw materials. Acuity Brands does not 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 twelve months. Significant increases in the prices of Acuity Brands’ products due to increases in the cost of raw materials could have a negative effect on demand for products and on profitability, as well as a material adverse effect on the results of operations of Acuity Brands. Each business constantly monitors and investigates alternative suppliers and materials based on numerous attributes including quality, service, and price. Additionally, each business has conducted internet auctions as a method of competitive bidding. 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 ballasts), and finished goods. As a result of limited availability of certain materials due to recent hurricanes in the Gulf region of the United States, ASP is receiving certain raw materials on an allocation basis and through force majeure, which excuses vendors’ performance under existing contracts. Current prices for these materials have risen dramatically in 2005, reflecting these market conditions. However, the Company has received and expects to continue to receive these goods, at acceptable quality standards, without interruption, at prevailing market prices. While the Company has generally been able to pass along these increases in cost in the form of higher selling prices for its products, the higher selling prices have lagged behind the increases in cost. There can be no assurance that future disruptions in either supply or price of these materials will not negatively affect future results. Backlog Orders The Company produces and stocks large quantities of inventory at key distribution centers and warehouses throughout North America. ASP satisfies a significant portion of customer demand within 24 to 48 hours from 9 the time a customer’s order is placed, and therefore, sales order backlogs for the specialty products business were not material. Sales order backlogs of the lighting equipment business believed to be firm as of August 31, 2005 and 2004 were $152.2 million and $152.8 million, respectively. Patents, Licenses and Trademarks Acuity Brands owns or has licenses to use various domestic and foreign patents and trademarks related to its products, processes, and businesses. These intellectual property rights, particularly the trademarks relating to the products of Acuity Brands, are important factors for its businesses. To protect these proprietary rights, Acuity Brands relies on copyright, patent, trade secret, and trademark laws. Despite these protections, unauthorized parties may attempt to infringe on the intellectual property of Acuity Brands. Management of Acuity Brands is not aware of any such material unauthorized use or of any pending claims where Acuity Brands does not have the right to use any intellectual property material to the businesses of Acuity Brands. While patents and patent applications in the aggregate are important to the competitive position of Acuity Brands, no single patent or patent application is material to the Company. Seasonality and Cyclicality The businesses of Acuity Brands exhibit some seasonality, with net sales being affected by the impact of weather and seasonal demand on construction and installation programs, as well as the annual budget cycles of major customers. Because of these seasonal factors, Acuity Brands has experienced, and generally expects to experience, its highest sales in the last two quarters of its fiscal year ended August 31. A significant portion of the net sales of ABL relates to customers in the new construction and renovation industries, primarily for commercial and institutional applications. These industries are cyclical in nature and subject to changes in general economic conditions. Volume has a major impact on the profitability of ABL and Acuity Brands as a whole. In addition, net sales at ASP are dependent on the retail, wholesale, and industrial markets and demand for these markets is generally associated with GDP in the United States. Economic downturns and the potential decline in key construction markets and demand for specialty chemicals may have a material adverse effect on the net sales and operating income of Acuity Brands. International Operations Acuity Brands manufactures and assembles products at numerous facilities, some of which are located outside the United States. Approximately 55% and 11% of the products manufactured by the lighting equipment and specialty products segments, respectively, are manufactured outside the United States. Of total product manufactured by ABL, approximately 52% is produced in Mexico. Most of these operations are authorized to operate as Maquiladoras by the Ministry of Economy of Mexico. Maquiladora status allows Acuity Brands 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. Many companies have established Maquiladora operations, increasing demand for labor, particularly skilled labor and professionals. This increase in demand, from new and existing Maquiladora operations, has resulted in increased labor costs and could result in increased labor costs in the future. Acuity Brands may be required to make additional investments in automated equipment to partially offset potential increased labor and wage costs and limited availability of outbound trucking. The Company’s initiatives to become more globally competitive include streamlining each segment’s 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 production in international locations, primarily Mexico, and will result in increased worldwide procurement and sourcing of certain raw materials, component parts, and finished goods. As a consequence, economic, political, military, or other events in a country where the Company manufactures, procures, or sources a significant amount of raw 10 materials, component parts, or finished goods, could interfere with the Company’s operations and negatively impact the Company’s business. For fiscal year 2005, net sales outside the U.S. represented approximately 10% and 18% of the total net sales of the lighting equipment and specialty products businesses, respectively. See Note 11 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. 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. This Code of Ethics and Business Conduct is being filed as Exhibit 14 to this Annual Report on Form 10-K. 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 10,000 people, of whom approximately 6,600 are employed in the United States, 2,600 in Mexico, 300 in Canada, and 500 in other international locations, including Europe and the Asia/Pacific region. Union recognition and collective bargaining arrangements are in place, covering approximately 4,500 persons (including approximately 2,000 in the United States). Management believes that it generally has a good relationship with both its unionized and non-unionized employees. Item 2. Properties 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 by business: Division Lighting Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Specialty Products . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Owned Leased Nature of Facilities 13 — 1 7 4 4 — — 5 Manufacturing Facilities 6 Warehouses 6 23 Distribution Centers Offices 2 Manufacturing Facilities 39 Warehouses/Branches 3 8 Distribution Centers Offices 11 The following table provides additional geographic information related to Acuity Brands’ manufacturing facilities: United States Canada Mexico Europe Total Lighting Equipment Owned . . . . . . . . . . . . . . . . . . . . . . . . . . Leased . . . . . . . . . . . . . . . . . . . . . . . . . . 7 2 Specialty Products Owned . . . . . . . . . . . . . . . . . . . . . . . . . . Leased . . . . . . . . . . . . . . . . . . . . . . . . . . — 3 Total . . . . . . . . . . . . . . . . . . . . . . . . 12 — — — 1 1 5 1 — — 6 1 2 1 1 5 13 5 4 2 24 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 in the lighting equipment segment 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 the current and projected needs of the customers of ABL. Item 3. Legal Proceedings General Acuity Brands 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, and except as described below, 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 or results of operations 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 results of operations 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. 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 and potential changes in the status of government regulations. 12 Certain environmental laws can impose liability regardless of fault. The federal Superfund law is an example of such an environmental law. However, management believes that the Company’s potential 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 Brands is currently a party to, or otherwise involved in, legal proceedings in connection with state and federal Superfund sites. With respect to each of the currently active sites which it does not own and where it has been named as a responsible party or a potentially responsible party (“PRP”), the Company believes its liability is immaterial, based on information currently available, due to its limited involvement at the site and/or the number of viable PRPs. For example, the preliminary allocation among 48 PRPs at the Crymes Landfill site in Georgia indicates that the Company’s liability is not significant, and there are more than 1,000 PRPs at the M&J Solvents site in Georgia, which has included Acuity Brands as a PRP. With respect to the only active site involving property which Acuity Brands does own and where it has been named as a PRP—ASP’s property on Seaboard Industrial Boulevard in Atlanta, Georgia—the Company, together with current and former owners of adjoining properties (the “Site Group”), has conducted an investigation on its property and adjoining properties (the “Site”) and submitted a Compliance Status Report (“CSR”) and a proposed Corrective Action Plan (“CAP”) to the State of Georgia Environmental Protection Division (“EPD”) pursuant to the Georgia Hazardous Site Response Act. The EPD approved the CAP in May 2004, and the Company has reached agreement with the other members of the Site Group to share the expected costs and responsibilities of implementing the CAP. The CAP requires the Site Group to periodically monitor the Site for a period of five years to confirm the Site Group’s model predicting that the site is not expected to violate applicable regulatory standards. The first several sampling results obtained pursuant to this monitoring requirement have confirmed the Site Group’s model, but adverse future sampling results could cause the Company to record additional charges to earnings in future periods. However, based on information currently available, the Company believes that its liability is immaterial in connection with the Site. In August 2003, ASP received a grand jury subpoena from the United States Department of Justice through the United States Attorney for the Northern District of Georgia concerning the operation of ASP’s wastewater pretreatment plant and ASP’s management of hazardous waste at a facility in Atlanta, Georgia. ASP received a supplemental subpoena in April 2005 related to this matter. The grand jury investigation appears to relate to the discharge of wastewater from the facility to the City of Atlanta’s sanitary sewer system and ASP’s practices in connection with the sampling and reporting of the facility’s wastewater discharges for permitting purposes. ASP is cooperating fully with the investigation by the Department of Justice. The Department of Justice investigation follows an inquiry by the City of Atlanta, which regulates the wastewater discharge at the facility. The Company has settled with the City of Atlanta all issues arising from the inquiry. As of August 31, 2005, the Company had an accrued liability for the estimated costs of resolution of proceedings with the Department of Justice and certain associated legal expenses. The grand jury proceedings are ongoing, and developments in the investigation and the terms of any final settlement or adjudication of this matter, including whether the final resolution results in civil or criminal charges against the Company, could result in actual costs higher or lower than the amount reserved. Item 4. Submission of Matters to a Vote of Security Holders No matters were submitted for a vote of the security holders during the three months ended August 31, 2005. 13 PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities The common stock of Acuity Brands is listed on the New York Stock Exchange under the symbol “AYI”. At October 25, 2005, there were 5,234 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. 2005 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2004 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2003 First Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Second Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Third Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Fourth Quarter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Price per Share High Low Dividends Per Share $30.34 $32.24 $29.07 $29.67 $24.34 $26.44 $26.89 $27.83 $15.60 $15.26 $16.57 $19.05 $22.75 $24.53 $23.22 $23.90 $17.73 $22.60 $21.63 $21.44 $11.00 $12.24 $12.71 $14.90 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 $0.15 The information required by this item with respect to equity compensation plans is included under the caption Disclosure with Respect to Equity Compensation Plans in the Company’s proxy statement for the annual meeting of stockholders to be held January 12, 2006, to be filed with the Securities and Exchange Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 6. Selected Financial Data 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, 2005. The 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. Prior to November 30, 2001, Acuity Brands was a wholly-owned subsidiary of National Service Industries, Inc. (“NSI”) owning and operating the lighting equipment and specialty products businesses. Acuity Brands was spun off from NSI into a separate publicly traded company with its own management and Board of Directors through a tax-free distribution (“Distribution”) of 100% of the outstanding shares of common stock of Acuity Brands on November 30, 2001. Operating expenses in the historical income statements prior to December 1, 2001 reflect direct expenses of the businesses of Acuity Brands together with allocations of certain NSI corporate expenses that were charged to Acuity Brands based on usage or other methodologies appropriate for such expenses. In the opinion of Acuity Brands management, these allocations have been made on a reasonable basis. Actual per-share data prior to August 31, 2003 has not been presented since the businesses that comprise Acuity Brands were wholly-owned subsidiaries of NSI during all or a portion of such periods. Pro forma basic earnings per share as shown is calculated as net income divided by the historical NSI weighted average shares outstanding during the period. 14 2005 2004 2003 2002 2001 Years Ended August 31, Net sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . Net income . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share . . . . . . . . . . . . . . . . Diluted earnings per share . . . . . . . . . . . . . . . Pro forma basic earnings per share . . . . . . . . Cash and cash equivalents . . . . . . . . . . . . . . . Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . Long-term debt (less current maturities) . . . . Total debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stockholders’ equity . . . . . . . . . . . . . . . . . . . Cash dividends declared per common $2,172,854 52,229 1.21 1.17 n/a 98,533 1,442,215 371,736 372,303 541,793 (In thousands, except per-share data) $2,049,308 47,782 1.15 1.15 n/a $2,104,167 67,214 1.60 1.56 n/a $1,972,796 52,024 n/a n/a 1.26 14,135 1,356,452 390,210 395,721 477,977 16,053 1,284,113 391,469 445,808 408,294 2,694 1,357,954 410,630 543,121 401,952 $1,982,700 40,503 n/a n/a 0.99 8,006 1,330,575 373,707 608,830 383,298 share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 0.60 0.60 0.60 0.45 n/a 15 Item 7. 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. References made to years are for fiscal year periods. Dollar amounts are in thousands, except share and per-share data and as indicated. 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, 2005, 2004, and 2003. For a more complete understanding of this discussion, please read the Notes to Consolidated Financial Statements included in this report. Overview Company Acuity Brands, Inc. (“Acuity Brands” or the “Company”), is a holding company that owns and manages two businesses that serve distinctive markets—lighting equipment and specialty products. The lighting equipment segment designs, produces, and distributes a broad array of indoor and outdoor lighting fixtures for commercial and institutional, industrial, infrastructure, and residential applications for various markets throughout North America and select international markets. The specialty products segment formulates, produces, and distributes specialty chemical products including cleaners, deodorizers, sanitizers, and pesticides for industrial and institutional, commercial, and residential applications primarily for various markets throughout North America and Europe. Acuity Brands, with its principal office in Atlanta, Georgia, employs approximately 10,000 people worldwide. Acuity Lighting Group, commonly known as Acuity Brands Lighting (“ABL”), produces a broad array of indoor and outdoor lighting fixtures for commercial and institutional, industrial, infrastructure, and residential applications for various markets throughout North America and select international markets. ABL 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 that are sold to approximately 5,000 customers. ABL operates 25 factories and distribution facilities to serve its extensive customer base. Acuity Specialty Products (“ASP”) is a leading producer of specialty chemical products including cleaners, deodorizers, sanitizers, and pesticides for industrial and institutional, commercial, and residential applications primarily for various markets throughout North America and Europe. ASP sells over 9,000 catalog- listed products and over 6,000 other products through its salaried and commissioned direct sales force, operates six plants, and serves over 300,000 customers through a network of distribution centers and warehouses. While Acuity Brands has been publicly held as a stand-alone company for approximately four years, the two segments that make up the Company are comprised of organizations with long histories and well-known brands. Strategy A long-term objective of Acuity Brands is to be a broader, more diversified industrial manufacturing company capable of delivering consistent growth in earnings and cash flow. A broader and more diversified company has less dependency on a single customer or market and generally experiences reduced volatility in earnings and cash flow caused by the cyclicality of a dominant industry. In 2005, Acuity Brands continued to focus on key initiatives designed to enhance and streamline its business processes to create a stronger, more effective organization that is capable of consistently achieving its long-term financial goals, which are as follows: • Generating consolidated operating margins in excess of 10% • Growing earnings per share in excess of 15% per annum • Providing a return on stockholders’ equity of 15% or better • Maintaining the Company’s debt to total capitalization ratio below 40% • Generating cash flow from operations less capital expenditures that is in excess of net income. 16 To increase the probability for the Company to achieve its long-term financial goals, management will continue to implement programs to enhance its capabilities at providing unparalleled customer service, creating a globally competitive cost structure by eliminating non-value added activities and lowering transactional costs, and introducing new and innovative products 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. 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 Principal sources of liquidity for the Company are operating cash flows generated primarily from its business segments and various sources of borrowings. The ability of the Company to generate sufficient cash flow from operations and to be able to access certain capital markets, including banks, is necessary for the Company to fund its operations, to pay dividends, and to meet its obligations as they become due and to maintain compliance with covenants contained in its financing agreements. The Company’s ongoing liquidity will depend on a number of factors, including available cash resources, cash flow from operations, and the Company’s ability to comply with covenants contained in certain of its financing agreements. Based on current earnings projections and prevailing market conditions, both for customer demand and various capital markets, the Company believes that over the next twelve months it will have sufficient liquidity and availability under its financing arrangements to fund its operations as currently planned and its anticipated capital investment and profit improvement initiatives, to repay borrowings as currently scheduled, to repurchase up to two million shares of the Company’s outstanding common stock as authorized by the Company’s Board of Directors, to pay the same quarterly stockholder dividends in 2006 as were paid in 2005, and to make required contributions into the Company’s defined benefit plans. The Company expects to invest between $40.0 million and $45.0 million for new plant and equipment and new and enhanced information technology capabilities at both businesses during 2006. See further information in the Outlook section below. The Company expects to contribute approximately $5.2 million in 2006 to fund its defined benefit plans. Cash Flow Acuity Brands used available cash, cash flow from operations, and borrowings in 2005 to fund operations and capital expenditures, to reduce outstanding debt, and to pay dividends. Contributing to available cash was $27.1 million in cash received from the stock issuances during the year. The Company’s available cash position at August 31, 2005 was $98.5 million, up $84.4 million from August 31, 2004 and $82.5 million from August 31, 2003. In 2005, the Company generated $137.1 million in cash flow from operations compared to $113.3 million and $160.3 million reported in 2004 and 2003, respectively. Cash flow from operations increased in 2005 compared to 2004 by $23.8 million due primarily to improvement in cash flow from operating working capital (operating working capital is calculated by adding accounts receivable, net, plus inventory, and subtracting 17 accounts payable). The Company used its cash flow in 2005 primarily to reduce debt, expenditures, and to fund quarterly dividend payments. to fund capital 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 spent $32.6 million and $53.8 million in 2005 and 2004, respectively, for new tooling, machinery, and equipment. The Company continues to invest in these items primarily to improve productivity and product quality, increase manufacturing efficiencies, and enhance customer service capabilities in each segment. The significant amount of capital spending in 2004 was due primarily to the consolidation of certain manufacturing facilities and enhancements to information technology capabilities within ABL and investments to improve manufacturing and waste management capabilities at ASP. As noted above, management expects capital spending in 2006 to increase over spending in 2005, primarily for greater investments in tooling for new products and for further enhancements in its manufacturing and service capabilities. The Company believes that these investments will enhance its operations and financial performance in the future. Consolidated working capital (calculated as current assets minus current liabilities) at August 31, 2005 was $318.3 million compared to $255.4 million at August 31, 2004, an increase of $62.9 million. The increase in working capital in 2005 compared to 2004 was due primarily to the significant increase in cash and cash equivalents and an increase in accounts receivable, partially offset by increases in accounts payable and accrued compensation. Accrued compensation was higher than the prior year due primarily to severance to be paid in connection with the reduction in workforce in 2005 – see further discussion in Results of Operations. Operating working capital decreased $7.8 million to $339.5 million at August 31, 2005 from the end of 2004. The decrease in operating working capital was due primarily to better working capital management, partially offset by the impact of greater net sales during the year. Operating working capital as a percentage of net sales at the end of 2005 decreased to 15.6% from 16.5% in 2004. At August 31, 2005, the current ratio (calculated as current assets divided by current liabilities) of the Company improved to 1.8 compared to 1.7 at the end of 2004. Contractual Obligations The following table summarizes the Company’s contractual obligations at August 31, 2005: Long-Term Debt (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Leases (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . Purchase Obligations (3) . . . . . . . . . . . . . . . . . . . . . . . . . Other Long-term Liabilities (4) . . . . . . . . . . . . . . . . . . . . Payments Due by Period Less than One Year 1 to 3 Years 4 to 5 Years $ — $ 19,162 100,658 6,121 848 26,837 — 10,111 $359,738 19,895 — 14,826 After 5 Years $11,150 26,611 — 25,597 Total $371,736 92,505 100,658 56,655 Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $621,554 $125,941 $37,796 $394,459 $63,358 (1) These amounts (which represent the amounts outstanding at August 31, 2005) are included in the Company’s Consolidated Balance Sheets. See Note 4: Short-Term Borrowings and Long-Term Debt for additional information regarding debt and other matters. (2) The Company’s operating lease obligations are described in Note 6: Commitments and Contingencies. (3) Purchase obligations include commitments to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders. (4) These amounts are included in the Company’s Consolidated Balance Sheets and largely represent other liabilities for which the Company is obligated to make future payments under certain long-term incentive programs. Estimates of the amounts and timing of these amounts are based on various assumptions, including expected return on plan assets, interest rates, stock price fluctuations, and other variables. The amounts in this table do not include amounts related to future funding obligations under the defined benefit 18 pension plans. The amount and timing of these future funding obligations are subject to many variables as well and also depend on whether or not the Company elects to make contributions to the pension plans in excess of those required under ERISA. Such voluntary contributions may reduce or defer the funding obligations absent those contributions. See Note 3: Pension and Profit Sharing Plans for additional information. Additionally, the amounts in this table do not include amounts related to certain deferred compensation arrangements for which there is an offsetting asset included in the Company’s Consolidated Balance Sheets. Capitalization The current capital structure of the Company is comprised principally of senior notes and the equity of its stockholders. As of August 31, 2005, the Company had no amounts outstanding under its asset-backed securitization program or borrowings from banks. Total debt outstanding at August 31, 2005 was $372.3 million compared to $395.7 million at August 31, 2004. Total debt decreased $23.4 million, or 5.9%, from August 31, 2004. The decrease in fiscal 2005 was due primarily to the strong cash flow from operations and cash from option exercises, partially offset by capital expenditures and the payment of dividends. On April 2, 2004, the Company executed a $200.0 million revolving credit facility (“Revolving Credit Facility”) maturing in January 2009. This facility replaced the Company’s $92.5 million, 364-day committed credit facility scheduled to mature in April 2004 and the Company’s $105.0 million, three-year credit facility scheduled to mature in April 2005. The Revolving Credit Facility contains financial covenants including 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, and a minimum interest coverage ratio. 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. The Company was in compliance with all financial covenants and had no borrowings outstanding at August 31, 2005. The Company was in compliance with all financial covenants and had $4.0 million in outstanding borrowings under the Revolving Credit Facility at August 31, 2004. At August 31, 2005, the Company had additional borrowing capacity of $186.3 million under the Revolving Credit Facility, under the most restrictive covenant in effect at the time, representing the full amount of the Revolving Credit Facility less $13.7 million of outstanding letters of credit issued under the facility. See Note 4 of the Notes to Consolidated Financial Statements for additional information regarding restrictions contained in the Revolving Credit Facility. During 2005, the Company’s consolidated stockholders’ equity increased $63.8 million to $541.8 million at August 31, 2005 due primarily to net income earned during the year, stock option exercises, the issuance of shares under its compensation programs, and the favorable impact of foreign currency translation adjustments, partially offset by dividend payments and an increase in the Company’s pension obligation. The Company’s debt to total capitalization ratio (calculated by dividing total debt by the sum of total debt and total stockholders’ equity) was approximately 40.7% at August 31, 2005, down from approximately 45.3% at August 31, 2004. The ratio of debt, net of cash, to total capitalization was 29.9% at August 31, 2005, down from approximately 43.7% at August 31, 2004. Dividends The Company paid cash dividends on common stock of $26.3 million ($0.60 per share) during 2005 compared to $25.4 million ($0.60 per share) in 2004. The Company does not currently have any plans to change its dividend rate; however, each quarterly dividend must be approved by the Board of Directors. 19 Results of Operations Fiscal 2005 Compared with Fiscal 2004 Consolidated Results Consolidated net sales were $2,172.9 million in 2005 compared to $2,104.2 million reported in 2004, an increase of $68.7 million, or 3.3%. For the year ended August 31, 2005, the Company reported net income of $52.2 million compared to $67.2 million earned in 2004. Diluted earnings per share were $1.17 in 2005 compared to $1.56 reported in 2004. Economic conditions in key markets continued to be challenging in fiscal 2005. The Company continued to experience weakness in certain key markets, including non-residential construction, electrical utilities, and industrial manufacturing, many of which have reported declines from the previous year. Non-residential construction is estimated to decline in calendar year 2005 for the sixth year in a row. For Acuity Brands, these conditions created a challenging business environment in 2005 characterized by weak demand in key markets coupled with significantly higher costs for certain components and raw materials. While the Company was able to pass along much of the cost increases through higher selling prices, the price increases lagged the rise in raw material costs creating a drag on profits and margins. Net sales increased approximately 3.6% and 2.2% at ABL and ASP, respectively, in spite of weak economic conditions in key markets. The growth in net sales was due primarily to improved pricing, a more favorable mix of product sold within certain channels in the commercial, institutional, and industrial portions of the lighting and chemical businesses, and benefits from foreign currency fluctuation, partially offset by lower shipments in certain channels of the commercial and institutional lighting business and the retail channel of ASP. Consolidated gross profit margins decreased to 39.1% of net sales in 2005 from 40.4% reported in 2004. The decrease in gross profit margins was due primarily to higher selling prices offsetting much of the raw material increases resulting in no significant increase in gross profit, thus negatively impacting the calculation for margins. Gross profit declined by approximately $2.2 million in 2005 compared to 2004 due primarily to increases in raw material costs and the negative impact of lower production and shipment volume, partially offset by higher selling prices. The Company estimates that material and component costs were approximately $75.0 million higher in 2005 as compared to 2004. Consolidated operating expenses were $741.8 million (34.1% of net sales), which included an aggregate special charge of $23.0 million, in 2005, compared to $712.9 million (33.9% of net sales) in 2004. On February 22, 2005, the Company announced additional actions to accelerate its efforts to streamline and improve the effectiveness of its operations. As part of this program, the Company recorded a pretax charge of $17.0 million to reflect the costs associated with the elimination of approximately 1,100 positions worldwide. This number is comprised of approximately 500 hourly and 600 salaried personnel. This ongoing Company-wide streamlining effort includes facility consolidations and process improvement initiatives and involves ABL, ASP, and the corporate office. The Company took an additional pretax charge of $6.0 million in the fourth quarter of 2005 related to the February reduction in workforce as well as certain follow-on actions under the Company’s ongoing restructuring program. The Company expects to have completed a significant portion of these efforts by the end of calendar 2005 and to have realized approximately $50.0 million in annualized savings by the end of its second quarter in fiscal 2006. As of August 31, 2005, the Company has realized approximately $13.0 million in benefits from these efforts. The remaining $5.9 million increase in operating expenses in 2005 was due primarily to costs related to product recalls and higher costs for commissions, freight, and distribution, partially offset by benefits from the streamlining efforts mentioned above. See further discussion in Note 7 of Notes to Consolidated Financial Statements. Consolidated operating profit was $106.7 million (4.9% of net sales) in 2005 compared to $137.9 million (6.6% of net sales) reported in 2004, a decrease of $31.2 million, or 22.6%. Operating profit in 2005 included the $23.0 million special charge discussed above. The decline in operating profit was due to the special charge, lower gross profit, and higher costs for commissions, freight, and distribution, partially offset by benefits from the streamlining efforts mentioned above. 20 Other expense for Acuity Brands was made up primarily of interest expense and other miscellaneous, non-operating activity including gains related to sales of property of $1.9 million. Interest expense, net, was $35.7 million and $34.9 million in 2005 and 2004, respectively. Interest expense, net, increased 2.3% in 2005 compared to 2004 due to a higher weighted average interest rate for 2005 as compared to 2004, partially offset by lower debt balances over the course of the year in comparison to 2004. The effective income tax rate reported by the Company was 30.2% and 34.5% in 2005 and 2004, respectively. The decrease in the rate in fiscal 2005 was primarily the result of certain tax credits associated with the Mexican operations and state tax benefits. The Company expects its effective income tax rate in fiscal 2006 to be approximately 35%. Acuity Brands Lighting Acuity Brands Lighting reported net sales of approximately $1,637.9 million and $1,580.5 million for the years ending August 31, 2005, and 2004, respectively, an increase of $57.4 million, or 3.6%. The increase in net sales during 2005 was due primarily to improved pricing, a more favorable mix of products sold, and benefits from foreign currency fluctuation, partially offset by a decline in shipments in the commercial and institutional channel and to a non-strategic customer in the home improvement channel. In 2005, non-residential construction, a core market for ABL, declined for the sixth consecutive year, negatively impacting both shipments and production. The backlog at ABL of $152.2 million at August 31, 2005 approximated the backlog at the end of the prior year. Operating profit decreased $24.3 million, or 20.4% in 2005 to $94.6 million from $118.9 million reported in 2004. Operating profit margins declined to 5.8% in 2005 from 7.5% in 2004. Operating profit in 2005 included $15.7 million of the special charge noted above. In addition to the special charge, operating profit was negatively impacted by higher raw material costs, lower absorption of manufacturing costs due to decreased production, and increased costs for freight and distribution. The decline in production volume was due primarily to lower orders from certain key channels, the impact of better inventory utilization, and greater sourcing from the Company’s network of worldwide vendors. These factors were partially offset by the improved pricing and a more favorable mix of products sold as well as benefits from the streamlining efforts noted above. Acuity Specialty Products Net sales at ASP were $535.0 million in 2005 compared to $523.7 million in 2004, representing an increase of $11.3 million or 2.2%. The increase in 2005 net sales was due primarily to improved pricing in the industrial and institutional channel and the favorable impact of foreign currency exchange rate fluctuations, partially offset by lower shipments to certain non-core customers in the retail channel. Operating profit decreased $1.3 million, or 3.0%, in 2005 to $42.3 million from $43.6 million reported in 2004. Operating profit margins declined to 7.9% in 2005 from 8.3% in 2004. Operating profit in 2005 included $3.6 million of the special charge discussed above. In addition to the special charge, operating profit was negatively impacted by rising raw material costs, largely offset by improved pricing and benefits from the streamlining efforts mentioned above. Corporate Corporate expenses increased to $30.2 million in 2005 (including $3.8 million of the special charge discussed above) from $24.5 million reported in 2004. The increase in corporate expense in 2005 was due primarily to the special charge, miscellaneous gains recognized in the year-ago period, increased expenses related to long-term incentive programs, and higher costs for compliance with the Sarbanes-Oxley Act, partially offset by lower employee-related costs. Fiscal 2004 Compared with Fiscal 2003 Consolidated Results Consolidated net sales were $2,104.2 million in 2004 compared to $2,049.3 million reported in 2003, an increase of 2.7%. For the year ended August 31, 2004, the Company reported net income of $67.2 million 21 compared to $47.8 million earned in 2003. Diluted earnings per share were $1.56 in 2004 compared to $1.15 reported in 2003. Net sales increased approximately 2.7% and 2.6% at ABL and ASP, respectively, in spite of weak economic conditions in key markets. The growth in net sales was due primarily to greater shipments to the home improvement channel at ABL, better pricing and product mix, and increased shipments to the industrial and institutional channel at ASP. This was partially offset by a decline in demand in the non-residential construction market and the absence of sales from a small product line divested during the first quarter of fiscal 2004. Consolidated gross profit margins increased to 40.4% of net sales in 2004 from 39.7% reported in 2003. Gross profit and margins increased due primarily to improvements in pricing, the mix of products sold, gains in manufacturing efficiencies, and the impact of initiatives to reduce product costs, partially offset by higher costs associated with certain raw materials and costs associated with programs to streamline the supply chain at ABL. Consolidated operating expenses at Acuity Brands in 2004 were 33.9% of net sales compared to 34.3% of net sales in 2003. Consolidated operating profit was $137.9 million (6.6% of net sales) in 2004 compared to $110.3 million (5.4% of net sales) reported in 2003, an increase of 25.0%. The increase was due primarily to the contribution margin from higher net sales, benefits from continuous improvement programs (including sourcing initiatives to lower product costs), efficiencies resulting from the Manufacturing Network Transformation (“MNT”) initiative at ABL, and certain pre-tax charges of $10.7 million that were not repeated in fiscal 2004 and are more fully described below. These improvements were partially offset by higher costs for certain purchased components and raw materials (particularly steel which increased approximately $9.0 million in 2004), higher costs associated with programs to streamline the supply chain at ABL, and costs associated with a product recall. Operating profit margins improved 120 basis points due primarily to higher gross profit margins. See further information related to the product recall in Note 6 of Notes to Consolidated Financial Statements. During fiscal 2004, management focused on initiatives to make the Company more globally competitive. One of these initiatives, MNT, related to enhancing its global supply chain, included the consolidation of certain manufacturing facilities into more efficient locations at ABL. This initiative is expected to result in increased production in international locations, primarily Mexico, and greater sourcing from its network of worldwide vendors. In 2004, total square footage was reduced to 3.2 million from 3.6 million as a result of MNT. The overall net impact of MNT on financial results in 2004 was minimal. Other expense for Acuity Brands was made up primarily of interest expense and other miscellaneous, non-operating activity including the gain or loss on the sale of assets and gains or losses on foreign currency transactions. Interest expense, net, was $34.9 million and $37.4 million in 2004 and 2003, respectively. Interest expense, net, was down 6.7% in 2004 compared to 2003 primarily because of reduced levels of debt outstanding throughout the period, offset slightly by a higher weighted average interest rate resulting from less short-term debt. Miscellaneous expense (income), net, was $1.4 million of expense and $1.9 million of income in 2004 and 2003, respectively. The change was due primarily to an increase in losses on the sale of property, plant, and equipment, and the unfavorable impact of foreign currency fluctuations. The effective tax rate reported by the Company was 34.5% and 35.9% in 2004 and 2003, respectively. The decrease in the rate in fiscal 2004 was primarily the result of the recognition of certain non-taxable gains. Acuity Brands Lighting Acuity Brands Lighting reported net sales of approximately $1,580.5 million and $1,538.8 million for the years ending August 31, 2004, and 2003, respectively, an increase of 2.7%. The increase in net sales during 2004 was due primarily to greater shipments of products to the home improvement channel and the impact of initiatives to improve price and product mix. This was partially offset by a decrease in shipments to certain key commercial, industrial, and electric utility channels, reflecting continued weakness in customer demand. The backlog at ABL increased $16.7 million, or 12.3%, to $152.8 million at August 31, 2004 from $136.1 million at August 31, 2003. 22 Operating profit increased 22.8% in 2004 to $118.9 million from $96.8 million reported in 2003. Operating profit margins improved to 7.5% in 2004 from 6.3% in 2003. The increase in operating profit and margin in 2004 was primarily the result of the contribution margin from the higher sales noted above, gains in manufacturing efficiencies, savings from sourcing initiatives, and a prior year charge of $8.0 million for a patent litigation settlement which was not repeated in fiscal 2004. These items were partially offset by higher costs of certain raw materials, unanticipated costs of approximately $11.0 million related to programs to streamline the supply chain, and estimated costs of $2.5 million associated with an expected product recall. See Note 6 in Notes to Consolidated Financial Statements for more information on the product recall. Acuity Specialty Products Net sales at ASP were $523.7 million in 2004 compared with $510.6 million in 2003, representing an increase of $13.1 million or 2.6%. The increase in 2004 net sales was due primarily to improved pricing in the U.S. I&I channel and greater shipments to I&I customers in international markets, partially offset by the absence of sales from a small product line divested during the first quarter of fiscal 2004, and lower shipments of non-core products. International sales were also favorably impacted by changes in exchange rates. Operating profit increased 39.3% in 2004 to $43.6 million from $31.3 million reported in 2003. Operating profit margins advanced to 8.3% in 2004 from 6.1% in 2003. The increase in operating profit and margin in 2004 was primarily the result of the contribution margin from the higher sales noted above, 2003 charges of $2.7 million related to environmental matters, and charges related to inventory that were recorded in the prior year. These items were partially offset by higher employee-related expenses. Corporate Corporate expenses increased to $24.5 million in 2004 from $17.9 million reported in 2003. The increase in corporate expense in 2004 was due primarily to greater expense for Company-wide restricted stock incentives and other share-based programs, reflecting, in part, a greater mix of restricted stock compared to stock options used in the year-ago period, the effect of appreciation in the Company’s stock price on certain share-based programs during fiscal 2004, and an increase in the number of awards outstanding. This increase was partially offset by miscellaneous corporate gains of $1.8 million. Corporate expenses in 2004 also included expenditures to facilitate compliance with the Sarbanes-Oxley Act of 2002. Outlook The Company expects the implementation of its many profit improvement programs and its ongoing continuous improvement efforts will result in more efficient and effective operations. The Company’s service to customers has improved in key channels and the Company continues to make progress in creating a leaner, more efficient company. The Company believes that it is on target to achieve the previously announced annualized savings run-rate of approximately $50.0 million by the end of its second quarter in fiscal 2006 from actions associated with the Company’s ongoing efforts to better structure and streamline operations. Additionally, the Company is encouraged by external forecasts that are projecting unit volume growth in calendar year 2006 in the non-residential construction industry, a core market for the Company. To the extent this occurs, the Company believes it will have a positive impact on its unit volume. In 2006, the Company expects to invest approximately $40.0 to $45.0 million in capital expenditures, to pay annual dividends consistent with the year-ago period, and to repurchase up to two million shares of the Company’s outstanding common stock as authorized by the Company’s Board of Directors. Although these influences should bode well for the Company in 2006, the Company expects to be faced with formidable challenges, including the impact of rising prices for commodities used in its products, generating profitable growth within the retail channel, and continued escalating costs in key portions of its operations. However, in spite of these challenges, the Company expects to make positive progress in growing its business 23 and improving its operations in 2006 sufficient to allow it to make meaningful progress towards the long-term goals including growing earnings per share in excess of 15% per annum and providing a return on stockholders’ equity of 15% or better. Accounting Standards Yet to Be Adopted In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 “Accounting Changes,” previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement is effective for the Company as of September 1, 2006 and the Company continues to evaluate the impact the adoption of the standard will have on the Company’s results of operations, if any. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. It does not specify a preference for a type of valuation model to be used to measure fair value. SFAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company adopted SFAS No. 123 (Revised 2004) on September 1, 2005 and expects to incur additional annual pretax expense of approximately $3.0 million as a result of adoption. The Company continues to evaluate the impact the adoption of the final standard will have on the Company’s results of operations. See Note 2 of Notes to Consolidated Financial Statements for further information. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The statement requires that items such as abnormal freight, handling costs, and amounts of wasted materials be recognized as current-period charges regardless of whether or not they meet the criteria currently dictated by ARB No. 43. Additionally, SFAS No. 151 requires that fixed overhead be allocated based on the normal capacity of the production capabilities. The Company adopted SFAS No. 151 on September 1, 2005 and has determined the impact of adoption to be immaterial to the Company’s results of operations. On October 22, 2004, the American Jobs Creation Act of 2004 (“Jobs Creation Act”) was signed into law. This legislation provides for the optional repatriation of cash from foreign subsidiaries allowing an 85% dividends received deduction. The deduction is subject to a number of limitations. In December 2004, the FASB issued Staff Position 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP No. 109-2”), indicating that the lack of clarification of certain provisions within the Jobs Creation Act and the timing of the enactment necessitate a practical exception to the SFAS No. 109, Accounting for Income Taxes, requirement to reflect in the period of enactment the effect of a new tax law. Accordingly, an enterprise is allowed time beyond the financial reporting period to evaluate the effect of the Jobs Creation Act on its plans for reinvestment or repatriation of foreign earnings. FSP No. 109-2 requires that the provisions of SFAS No. 109 be applied as an enterprise decides on its plan for reinvestment or repatriation of its unremitted foreign earnings. The Company has not yet determined if it will repatriate any overseas earnings pursuant to this provision. The FASB also recently issued Staff Position FSP 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“FSP No. 109-1”). Under the guidance in FSP No. 109-1, the deduction will be treated as a “special deduction” as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction, if any, will be reported in the period in which the deduction is claimed on our income tax return. The Company will not be able to claim this tax benefit until the first quarter of fiscal 2006. 24 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. generally accepted accounting principles. As discussed in Note 1 of the Notes to Consolidated Financial Statements, the preparation of financial statements in conformity with U.S. generally accepted accounting principles 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 intangible assets; 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 Note 2 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 Acuity Brands records inventory 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. Long-Lived and Intangible Assets and Goodwill Acuity Brands reviews goodwill and intangible assets with indefinite useful lives for impairment on an annual basis or on an interim basis if an event occurs that might reduce the fair value of the long-lived asset 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 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 intangibles with indefinite useful lives for impairment requires management to use significant judgments and estimates including, but not limited to, projected future net sales, operating results, and cash flow of each of the Company’s businesses. Although management currently believes that the estimates used in the evaluation of goodwill and intangibles with indefinite lives are reasonable, differences between actual and expected net sales, operating results, and cash flow 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 flow from operations. Specifically, Acuity Brands has two unamortized trade names with an aggregate carrying value of $65.0 million. Management estimates the fair value of these unamortized trade names using a fair value model based on discounted future cash flows. 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 25 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. Differences between expected and actual results can result in significantly different valuations. If future operating results are unfavorable compared to 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. Accordingly, an impairment charge would be recorded at that time. To illustrate the potential impact of unfavorable changes in the assumptions underlying the fair value model, a one hundred basis point reduction in the theoretical royalty rate related to the 2005 valuation of the Holophane trade name acquired in 1999 would result in a pre-tax impairment charge of approximately $19.6 million, or 31.4% of the carrying value of the trade name. Self-Insurance It is the policy of the Company to self-insure for certain insurable property and casualty risks consisting primarily of physical loss to property, business interruptions resulting from property losses, workers’ compensation, comprehensive general liability, 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, among others, changes in claim reporting patterns, claim settlement patterns, judicial decisions, legislation, and economic conditions. Although Acuity Brands 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. The Company is also self-insured for the majority of its medical benefit plans. 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, legislation, and general economic conditions could materially affect the Company’s medical benefit plan liabilities and future expense. Product Warranty Acuity Brands 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 in future periods. Litigation Acuity Brands 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. 26 Cautionary Statement Regarding Forward-Looking Information This filing contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. 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, including, without limitation, statements made relating to: (a) the expected lack of engagement in significant commodity hedging transactions for raw materials and advanced purchases of certain materials; (b) the expected impact of increases in the cost of raw materials or a reduction in the number of suppliers on the Company’s operations; (c) the seasonality of the business; (d) the expected impact of the Company’s initiatives to become more globally competitive; (e) the activities that will be implemented to help the Company achieve its long-term goals, the expected outcome of these activities, and the Company’s progress towards those goals; (f) the potential impact of the loss of certain of the Company’s facilities and the related impact of various insurance programs in place; (g) the ability to increase production without substantial capital expenditures; (h) the Company’s expectations regarding liquidity and availability under its financing arrangements to fund its operations as currently planned and its anticipated capital investment and profit improvement initiatives, debt payments, dividend payments, potential repurchase of up to two million shares of the Company’s outstanding common stock, and required contributions into its defined benefit plans; (i) the planned spending of approximately $40.0 million to $45.0 million for new plant and equipment and new and enhanced information technology capabilities at both businesses during 2006; (j) the expected contribution by the Company to fund its defined benefit plans and the planned payment of annual dividends in 2006 consistent with those paid in 2005; (k) the expected realization of benefits from the additional actions to accelerate its efforts to streamline and improve its operations and to enhance the efficiencies of its facilities, the timing of the realization of those benefits, and the impact on fiscal 2006; (l) the expected effective income tax rate in fiscal 2006; (m) external forecasts that are projecting unit volume growth in calendar 2006 in the non-residential construction industry and the impact on the Company’s unit volume; (n) the impact of SFAS No. 123 (Revised 2004) and SFAS No. 151 on the results of operations; and (o) the impact of changes in critical accounting estimates on the results of operations. 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 and other industrial markets, changes in interest rates, and fluctuations in commodity and raw material prices or foreign currency rates; (b) the risk of economic, political, military, or other events in a country where the Company manufactures, procures, or sources a significant amount of raw materials, component parts, or finished goods; (c) the Company’s ability to realize the anticipated benefits of initiatives expected to reduce costs, improve profits, improve working capital, enhance customer service, increase manufacturing efficiency, and expand product offerings and brands in the market through a variety of channels; (d) the risk that the Company will be unable to execute its various initiatives within expected timeframes; (e) unexpected developments in the Company’s legal and environmental matters, including CPSC proceedings and the investigation related to the operation of ASP’s wastewater pretreatment plant and ASP’s management of hazardous waste at a facility in Atlanta, Georgia; (f) the risk that projected future cash flows from operations are not realized; (g) the impact of unforeseen factors on the Company’s critical accounting estimates; (h) the impact of competition; (i) customer and supplier relationships and prices; and (j) unexpected changes in the Company’s share price. Item 7a. Quantitative and Qualitative Disclosures about Market Risk General. Acuity Brands is exposed to market risks that may impact the Consolidated Balance Sheets, Consolidated Statements of Income, and Consolidated Statements of Cash Flows due primarily to changing interest rates and foreign exchange rates. The following discussion provides additional information regarding the market risks of Acuity Brands. 27 Interest Rates. Interest rate fluctuations expose the variable-rate debt of Acuity Brands to changes in interest expense and cash flows. The variable-rate debt of Acuity Brands, primarily long-term industrial revenue bonds, amounted to $12.6 million at August 31, 2005. Based on outstanding borrowings at year end, a 10% increase in market interest rates at August 31, 2005 would have resulted in additional annual after-tax interest expense of approximately $0.04 million. A fluctuation in interest rates would not affect interest expense or cash flows related to the $360.0 million publicly traded notes, the Company’s primary fixed-rate debt. A 10% increase in market interest rates at August 31, 2005 would have decreased the fair value of these notes by approximately $7.4 million. See Note 4 of the Notes to Consolidated Financial Statements, contained in this Form 10-K, for additional information regarding the Company’s long-term debt. Foreign Exchange Rates. The majority of net sales, expense, and capital purchases of Acuity Brands are transacted in U.S. dollars. Acuity Brands does not believe a 10% fluctuation in average foreign currency rates would have a material effect on its consolidated financial position or results of operations. 28 Item 8. Financial Statements and Supplementary Data Index to Consolidated Financial Statements Management’s Report on Internal Control over Financial Reporting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reports of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Balance Sheets as of August 31, 2005 and 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations for the years ended August 31, 2005, 2004, and 2003 . . . . . . . . . . Consolidated Statements of Cash Flows for the years ended August 31, 2005, 2004, and 2003 . . . . . . . . . Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended August 31, 2005, 2004, and 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Schedule II — Valuation and Qualifying Accounts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 30 31-32 33 34 35 36 37-63 76 29 MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING ACUITY BRANDS, INC. 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, 2005. 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, 2005, the Company’s internal control over financial reporting is effective. The Company’s independent registered public accounting firm has issued an audit report on this assessment of the Company’s internal control over financial reporting. This report dated October 25, 2005 appears on page 32 of this Form 10-K. /s/ Vernon J. Nagel Vernon J. Nagel Chairman, President, and Chief Executive Officer /s/ Karen J. Holcom Karen J. Holcom Vice President, Controller, and Interim Chief Financial Officer 30 Report of Independent Registered Public Accounting Firm 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, 2005 and 2004, 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, 2005. 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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended August 31, 2005, 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), the effectiveness of Acuity Brands, Inc.’s internal control over financial reporting as of August 31, 2005, 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 25, 2005 expressed an unqualified opinion thereon. Ernst & Young LLP Atlanta, Georgia October 25, 2005 31 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Acuity Brands, Inc. We have audited management’s assessment, included in Management’s Report on Internal Control over Financial Reporting, that Acuity Brands, Inc. maintained effective internal control over financial reporting as of August 31, 2005, 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 is responsible for maintaining effective internal control over financial reporting and for its management assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express an opinion on management’s assessment and an opinion on the effectiveness of 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, evaluating management’s assessment, testing and evaluating the design and operating effectiveness of internal control, 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, management’s assessment that Acuity Brands, Inc. maintained effective internal control over financial reporting as of August 31, 2005, is fairly stated, in all material respects, based on the COSO criteria. Also, in our opinion, Acuity Brands, Inc. maintained, in all material respects, effective internal control over financial reporting as of August 31, 2005, 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, 2005 and 2004, 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, 2005 of Acuity Brands, Inc. and our report dated October 25, 2005 expressed an unqualified opinion thereon. Atlanta, Georgia October 25, 2005 Ernst & Young LLP 32 ACUITY BRANDS, INC. CONSOLIDATED BALANCE SHEETS (In thousands, except share and per-share data) ASSETS Current Assets: Cash and cash equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts receivable, less reserve for doubtful accounts of $6,999 at August 31, 2005 and $8,285 at August 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments and other current assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Current Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Property, Plant, and Equipment, at cost: Land . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Buildings and leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Machinery and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Property, Plant, and Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less-Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . Property, Plant, and Equipment, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 31, 2005 2004 $ 98,533 $ 14,135 345,770 215,590 24,873 33,008 717,774 12,303 166,934 382,729 561,966 342,772 219,194 331,157 222,260 18,152 36,534 622,238 13,037 167,707 375,750 556,494 330,195 226,299 Other Assets: Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other long-term assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Other Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 344,836 123,473 4,249 32,689 505,247 $1,442,215 343,595 126,658 3,271 34,391 507,915 $1,356,452 LIABILITIES AND STOCKHOLDERS’ EQUITY Current Liabilities: Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accrued compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accrued liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Current Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Long-Term Debt, less current maturities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Self-Insurance Reserves, less current portion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Long-Term Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Commitments and Contingencies (see Note 6) Stockholders’ Equity: Preferred stock, $0.01 par value, 50,000,000 shares authorized, none issued . . . . Common stock, $0.01 par value, 500,000,000 shares authorized, 44,976,720 and 42,596,015 shares issued and outstanding at August 31, 2005 and August 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unearned compensation on restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss items . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total Liabilities and Stockholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . $ 567 — 221,844 59,122 117,939 399,472 371,736 4,707 16,759 107,748 $ 1,511 4,000 206,064 45,335 109,973 366,883 390,210 16,767 17,484 87,131 — — 450 476,034 112,447 (12,536 ) (34,602 ) 541,793 $1,442,215 426 425,807 86,560 (5,609 ) (29,207 ) 477,977 $1,356,452 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 33 ACUITY BRANDS, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per-share data) Years Ended August 31, 2005 2004 2003 Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cost of Products Sold . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,172,854 1,324,311 $2,104,167 1,253,380 $2,049,308 1,235,900 Gross Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Selling, Distribution, and Administrative Expenses . . . . . . . . . . . . . . . . . Special Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Impairment Charge . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock Compensation Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Expense (Income): . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net (Gain) loss on sale of businesses . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous (income) expense, net . . . . . . . . . . . . . . . . . . . . . . . . Total Other Expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Income before Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . Provision for Income Taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 848,543 710,263 23,000 664 7,871 106,745 35,731 (538 ) (3,280 ) 31,913 74,832 22,603 850,787 704,470 — 1,929 6,461 137,927 34,876 (999 ) 1,433 35,310 102,617 35,403 813,408 701,217 — — 1,915 110,276 37,383 227 (1,915 ) 35,695 74,581 26,799 Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,229 $ 67,214 $ 47,782 Earnings Per Share: Basic Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.21 $ 1.60 $ 1.15 Basic Weighted Average Number of Shares Outstanding . . . . 43,135 41,906 41,459 Diluted Earnings per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.17 $ 1.56 $ 1.15 Diluted Weighted Average Number of Shares Outstanding . . . 44,752 43,201 41,721 Dividends Declared per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0.60 $ 0.60 $ 0.60 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 34 ACUITY BRANDS, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Years Ended August 31, 2005 2004 2003 Cash Provided by (Used for) Operating Activities: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Adjustments to reconcile net income to net cash provided by (used for) $ 52,229 $ 67,214 $ 47,782 operating activities: Depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Gain) loss on the sale of property, plant, and equipment . . . . . . . . (Gain) loss on sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for losses on accounts receivable . . . . . . . . . . . . . . . . . . . Other non-cash charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Change in assets and liabilities net of effect of acquisitions and 41,075 (1,871) (538) 4,570 9,110 42,960 623 (999) 3,200 4,619 divestitures - Accounts receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inventories . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prepayments and other current assets . . . . . . . . . . . . . . . . . . . . Accounts payable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other current liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (17,439) 6,670 (2,239) 2,213 14,657 19,518 9,132 (33,713) (34,114) 2,684 (2,107) 40,408 7,594 14,885 46,039 (699) 227 4,399 1,139 15,935 28,043 6,108 (3,782) 3,987 2,707 8,460 Net Cash Provided by Operating Activities . . . . . . . . . . . 137,087 113,254 160,345 Cash Provided by (Used for) Investing Activities: Purchases of property, plant, and equipment . . . . . . . . . . . . . . . . . . . . . . Proceeds from the sale of property, plant, and equipment . . . . . . . . . . . . Sale of business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (32,636) 2,987 251 (53,821) 1,761 2,477 (28,154) 1,907 (92) Net Cash Used for Investing Activities . . . . . . . . . . . . . . (29,398) (49,583) (26,339) Cash Provided by (Used for) Financing Activities: Repayments of revolving credit facility, net . . . . . . . . . . . . . . . . . . . . . . . Repayments of short-term secured borrowings . . . . . . . . . . . . . . . . . . . . Proceeds from issuances of long-term debt . . . . . . . . . . . . . . . . . . . . . . . Repayments of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee stock purchase plan issuances . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (4,000) — — (19,486) 1,589 25,519 (26,342) (1,000) (48,000) — (1,153) 1,506 8,158 (25,409) (35,000) (81,200) 22,202 (3,315) 1,666 128 (24,911) Net Cash Used for Financing Activities . . . . . . . . . . . . . . (22,720) (65,898) (120,430) Effect of Exchange Rate Changes on Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . (571) 309 (217) Net Change in Cash and Cash Equivalents . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash and Cash Equivalents at Beginning of Year 84,398 14,135 (1,918) 16,053 13,359 2,694 Cash and Cash Equivalents at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 98,533 $ 14,135 $ 16,053 Supplemental Cash Flow Information: Income taxes paid during the year . . . . . . . . . . . . . . . . . . . . . . Interest paid during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 27,147 36,517 $ 27,220 35,245 $ 25,674 37,650 The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 35 ACUITY BRANDS, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY AND COMPREHENSIVE INCOME (In thousands, except share and per-share data) Compre- hensive Income Common Stock Paid-in Capital Retained Earnings Accumulated Other Compre- hensive Income (Loss) Items Minimum Pension Liability Forward Contracts Currency Translation Adjustment Unearned Compen- sation on Restricted Stock Total Balance, August 31, 2002 . . . . . . . . . . . . . . . . . . . . . . $414 $403,389 $ 21,884 $ (8,391) $— $(14,844) $ (500) $401,952 Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 47,782 — Other comprehensive income (loss): Foreign currency translation adjustment Reclassification adjustment for translation . . . . loss included in net income . . . . . . . . . . . . Minimum pension liability adjustment (net of tax benefit of $13,197) . . . . . . . . . . . . . . . . 2,757 — 185 — (22,472) — Other comprehensive income (loss) . . . . . . . . (19,530) Comprehensive income . . . . . . . . . . . . . . . $ 28,252 — — — — 47,782 — — — — — — — — — (22,472) — — 2,757 185 — — — — 47,782 2,757 185 — (22,472) Amortization, issuance, and forfeitures of restricted stock grants . . . . . . . . . . . . . . . . . . . . . Employee Stock Purchase Plan issuances . . . . . . . Stock issued in connection with long-term incentive plan . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends of $0.60 per share paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . 1 2 — — — 2,259 1,664 181 — — — — (24,911) 128 — — — — — — — — — — — — — — — — (1,234) — — 1,026 1,666 181 — (24,911) 128 — Balance, August 31, 2003 . . . . . . . . . . . . . . . . . . . . . . 417 407,621 44,755 (30,863) — (11,902) (1,734) 408,294 Comprehensive income: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 67,214 — — 67,214 Other comprehensive income (loss): Foreign currency translation adjustment (net of tax benefit of $427) . . . . . . . . . . . . . . . . Forward contracts adjustment . . . . . . . . . . . . . Minimum pension liability adjustment (net of tax benefit of $4,623) . . . . . . . . . . . . . . . . . 5,740 — (54) — 7,872 — Other comprehensive income (loss) . . . . . . . . 13,558 Comprehensive income $ 80,772 Amortization, issuance, and forfeitures of restricted stock grants . . . . . . . . . . . . . . . . . . . . . Employee Stock Purchase Plan issuances . . . . . . . Stock issued in connection with long-term incentive plan . . . . . . . . . . . . . . . . . . . . . . . . . . . Cash dividends of $0.60 per share paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . Tax effect on stock options and restricted stock . . . Balance, August 31, 2004 . . . . . . . . . . . . . . . . . . . . . . Comprehensive income: 3 1 — — 5 — 426 — — — 6,496 1,505 140 — — — — — — — (25,409) 8,153 1,892 — — 7,872 — — — — — — — — — — — — — — — — — — — (54) 5,740 — — — — — — 67,214 5,740 (54) 7,872 — — — — — — (3,875) — — 2,624 1,506 140 — (25,409) 8,158 — 1,892 — 425,807 86,560 (22,991) (54) (6,162) (5,609) 477,977 Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 52,229 — — 52,229 Other comprehensive income (loss): Foreign currency translation adjustment (net of tax expense of $1,169) . . . . . . . . . . . . . . Forward contracts adjustment . . . . . . . . . . . . . Minimum pension liability adjustment (net of tax benefit of $6,801) . . . . . . . . . . . . . . . . . 6,131 — 54 — (11,580) — — — — Other comprehensive income (loss) . . . . . . . . (5,395) Comprehensive income . . . . . . . . . . . . . . . $ 46,834 — — — — — 54 — — — (11,580) — — 6,131 — — — — — 52,229 6,131 54 — (11,580) Amortization, issuance, and forfeitures of restricted stock grants . . . . . . . . . . . . . . . . . . . . . Employee Stock Purchase Plan issuances . . . . . . . Cash dividends of $0.60 per share paid on common stock . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . Tax effect on stock options and restricted stock . . . Balance, August 31, 2005 . . . . . . . . . . . . . . . . . . . . . . 6 1 14,941 1,588 — — — (26,342) 25,502 8,196 — — — 17 — $450 — — — — — — — — — — $— — — (6,927) — 8,020 1,589 — (26,342) — 25,519 — — 8,196 — — (31) $(12,536) $541,793 $ $476,034 $112,447 $(34,571) The accompanying Notes to Consolidated Financial Statements are an integral part of these statements. 36 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in thousands, except share and per-share data and as indicated) Note 1: Description of Business and Basis of Presentation Acuity Brands, Inc. (“Acuity Brands” or the “Company”) is a holding company that owns and manages two businesses that serve distinctive markets – lighting equipment and specialty products. The lighting equipment segment designs, produces, and distributes a broad array of indoor and outdoor lighting fixtures for commercial and institutional, industrial, infrastructure, and residential applications for various markets throughout North America and select international markets. The specialty products segment formulates, produces, and distributes specialty chemical products including cleaners, deodorizers, sanitizers, and pesticides for industrial and institutional, commercial, and residential applications, primarily for various markets throughout North America and Europe. The Consolidated Financial Statements have been prepared by the Company in accordance with U.S. generally accepted accounting principles and present the financial position, results of operations, and cash flows of Acuity Brands and its wholly-owned subsidiaries, including Acuity Lighting Group, Inc. (“Acuity Brands Lighting” or “ABL”) and Acuity Specialty Products Group, Inc. (“Acuity Specialty Products” or “ASP”), and their respective subsidiaries, all of which are wholly-owned. Note 2: Summary of Significant Accounting Policies Principles of Consolidation The Consolidated Financial Statements include the accounts of Acuity Brands and its wholly-owned subsidiaries after elimination of significant intercompany transactions and accounts. Revenue Recognition Acuity Brands records revenue when the following criteria are met: persuasive evidence of an arrangement exists, delivery has occurred, the Company’s price to the customer is fixed and determinable, and collectibility is reasonably assured. Delivery is not considered to have occurred until the customer assumes the risks and rewards of ownership. Customers take delivery at the time of shipment for terms designated free on board shipping point. For sales designated free on board destination, customers take delivery when the product is delivered to the customer’s delivery site. Provisions for certain rebates, sales incentives, product returns, and discounts to customers are recorded in the same period the related revenue is recorded. The Company provides for limited product return rights to certain distributors and customers primarily for slow moving or damaged items subject to certain defined criteria. The Company monitors product returns and records, at the time revenue is recognized, a provision for the estimated amount of future returns based primarily on historical experience and specific notification of pending returns. Although historical product returns generally 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 impact on the Company’s operating results in future periods. Use of Estimates The preparation of financial statements and related disclosures in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. 37 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Cash and Cash Equivalents Cash in excess of daily requirements is invested in time deposits and marketable securities and is included in the accompanying balance sheets at fair value. Acuity Brands considers time deposits and marketable securities purchased with an original maturity of three months or less to be cash equivalents. Accounts Receivable The Company records accounts receivable at net realizable value. This value includes an allowance for estimated uncollectible accounts to reflect losses anticipated on accounts receivable balances. The allowance is based on historical write-offs, an analysis of past due accounts based on the contractual terms of the receivables, and economic status of customers, if known. Management believes that the allowance is sufficient to cover uncollectible amounts; however, there can be no assurance that unanticipated future business conditions of customers will not have a negative impact on the Company’s results of operations. Concentrations of Credit Risk Concentrations of credit risk with respect to receivables, which are typically unsecured, are generally limited due to the wide variety of customers and markets using Acuity Brands’ products, as well as their dispersion across many different geographic areas. Receivables from The Home Depot were approximately $60.2 million and $55.5 million at August 31, 2005 and 2004, respectively. No other single customer accounted for more than 10% of consolidated receivables at August 31, 2005. Additionally, The Home Depot accounted for approximately 13% and 12% of the net sales of Acuity Brands in fiscal years 2005 and 2004, respectively. Reclassifications Certain prior period amounts have been reclassified to conform to the current year presentation. These reclassifications, among others, included tax-related balance sheet reclassifications between current and long- term deferred income tax assets and liabilities. Additionally, the Company reclassified certain costs related to field scrap, customer accommodations, and other product-related costs from selling, distribution, and administrative expenses to cost of products sold. Operating profit, net income, and earnings per share were not impacted by these reclassifications. Inventories Inventories are valued at the lower of cost (on a first-in, first-out or average cost basis) or market and consist of the following: Raw materials and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Work in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Finished goods . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 31, 2005 2004 $ 74,048 15,561 136,825 226,434 (10,844) $215,590 $ 86,027 19,623 126,255 231,905 (9,645) $222,260 38 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Goodwill and Other Intangibles Summarized information for the Company’s acquired intangible assets is as follows: August 31, 2005 August 31, 2004 Gross Carrying Amount Accumulated Amortization Gross Carrying Amount Accumulated Amortization Amortized intangible assets: Trademarks . . . . . . . . . . . . . . . . . Distribution network . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Total . . . . . . . . . . . . . . . . . . . $13,030 53,000 11,857 $77,887 $ (2,652) (10,750) (6,026) $(19,428) Unamortized intangible assets: Trade names . . . . . . . . . . . . . . . . . $65,014 $ (2,217) (8,981) (5,045) $(16,243) $13,030 53,000 11,857 $77,887 $65,014 The Company amortizes trademarks associated with specific products with finite lives and the distribution network over their estimated useful lives of 30 years. Other amortized intangible assets consist primarily of patented technology that is amortized over its estimated useful life of 12 years. Unamortized intangible assets consist of trade names that are expected to generate cash flows indefinitely. The Company tests unamortized intangible assets for impairment on an annual basis, as required by SFAS No. 142. This analysis did not result in an impairment charge during fiscal years 2005, 2004, or 2003. The Company recorded amortization expense of $3.2 million related to intangible assets with finite lives during fiscal 2005, fiscal 2004, and fiscal 2003. Amortization expense is projected to be approximately $3.2 million in each of the next five years. The changes in the carrying amount of goodwill during the year are summarized as follows: Balance as of August 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . Currency translation adjustments . . . . . . . . . . . . . . . . . . . . . . $312,703 910 $30,892 331 $343,595 1,241 Balance as of August 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . $313,613 $31,223 $344,836 ABL ASP Total The Company tests goodwill for impairment at the reporting unit level on an annual basis in the fiscal fourth quarter or sooner if events or changes in circumstances indicate that the carrying amount of goodwill may exceed its fair value. The Company’s reporting units are ABL and ASP. The goodwill impairment test has two steps. The first step identifies potential impairments by comparing the fair value of a reporting unit with its carrying value, including goodwill. The fair value of ABL and ASP are determined based on a combination of valuation techniques including the expected present value of future cash flows, a market multiple approach, and a comparable transaction approach. If the calculated fair value of a reporting unit exceeds the carrying value, goodwill is not impaired and the second step is not necessary. If the carrying value of a reporting unit exceeds the fair value, the second step calculates the possible impairment loss by comparing the implied fair value of goodwill with the carrying value. If the implied fair value of the goodwill is less than the carrying value, an impairment charge is recorded. This analysis did not result in an impairment charge during fiscal years 2005 or 2004. 39 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Other Long-Term Assets Other long-term assets consist of the following: Long-term investments (1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible pension asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Note receivable, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Debt issue costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assets held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . August 31, 2005 2004 $17,668 1,027 2,145 1,466 9,508 875 $23,903 1,464 — 1,573 5,956 1,495 $32,689 $34,391 (1) Long-term investments—The Company maintains certain investments that generate returns that offset changes in certain liabilities related to deferred compensation arrangements. The investments primarily consist of marketable equity securities and fixed income securities, are stated at fair value, and are classified as trading in accordance with SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities. Realized and unrealized gains and losses are included in the Consolidated Statements of Income and generally offset the change in the deferred compensation liability. The decrease since August 31, 2004 was due primarily to payments made to certain participants in these deferred compensation arrangements. Other Long-Term Liabilities Other long-term liabilities consist of the following: Accrued pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Postretirement benefits other than pensions (1) . . . . . . . . . . . . . . . . . . . . . . . . . Director stock unit plan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Postemployment benefit obligation (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 49,391 53,934 3,240 430 753 $31,827 52,042 2,135 430 697 $107,748 $87,131 August 31, 2005 2004 (1) Postretirement benefits other than pensions—The Company maintains several non-qualified retirement plans for the benefit of eligible employees, primarily deferred compensation plans. The deferred compensation plans provide for elective deferrals of an eligible employee’s compensation and, in some cases, matching contributions by the Company. In addition, one plan provides for an automatic contribution by the Company of 3% of an eligible employee’s compensation. Deferred compensation associated with these plans, together with the Company’s contributions and accumulated earnings, is generally distributable in cash pursuant to the terms of the plans, either after specified periods of time or after retirement. The Company maintains certain long-term investments that generally offset a portion of the deferred compensation liability. The Company maintains life insurance policies on certain current and former officers and other key employees as a means of satisfying a portion of these obligations. (2) Postemployment benefit obligation—SFAS No. 112, Employers’ Accounting for Postemployment Benefits, requires the accrual of the estimated cost of benefits provided by an employer to former or inactive employees after employment but before retirement. Acuity Brands’ accrual relates primarily to the liability for life insurance coverage for certain eligible employees. 40 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Shipping and Handling Fees and Costs The Company includes shipping and handling fees billed to customers in Net Sales. Shipping and handling costs associated with inbound freight and freight between manufacturing facilities and distribution centers are generally recorded in Cost of Products Sold. Other shipping and handling costs are included in Selling, Distribution, and Administrative Expenses and totaled $104.1 million, $103.4 million, and $98.6 million in fiscal 2005, 2004, and 2003, respectively. Stock-Based Compensation The Company issues stock options to employees and directors under certain of its benefit plans. Under all stock option plans, the options expire no later than 10 years from the date of grant and have an exercise price no less than the fair market value of the Company’s stock on the date of grant. The Company accounts for the employee and director plans under the Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees and related interpretations. Additionally, Acuity Brands has adopted the disclosure provisions portion only of SFAS No. 148, Accounting for Stock-Based Compensation – Transition and Disclosure – an Amendment to FASB Statement No. 123. Accordingly, no compensation expense has been recognized for these stock option plans in the Consolidated Financial Statements. Had compensation cost for the Company’s stock option plans been determined based on the fair value at the grant date for awards subsequent to the Distribution (see definition of Distribution in the Long-term debt section of Note 4 of Notes to Consolidated Financial Statements), consistent with the recognition provisions of SFAS No. 123, the Company’s net income and earnings per share would have been impacted as follows: Net income, as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Compensation expense related to the Employee Stock Purchase Plan, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less: Stock-based compensation determined under fair value based method for Year Ended August 31, 2005 2004 2003 $52,229 $67,214 $47,782 232 281 287 stock option awards, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,693 5,424 2,326 Net income, pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $49,304 $61,509 $45,169 Earnings per share: Basic earnings per share – as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Basic earnings per share – pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share – as reported . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Diluted earnings per share – pro forma . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ $ $ 1.21 1.14 1.17 1.10 $ $ $ $ 1.60 $ 1.15 1.47 $ 1.09 1.56 1.42 1.15 1.08 The above pro forma calculations only include the effects of options granted subsequent to the Distribution. The pro forma effect of applying SFAS No. 123 may not be representative of the effect on reported net income in future years because options vest over several years and varying amounts of awards are generally made each year. 41 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) The following weighted average assumptions were used to estimate the fair value of stock options granted in the fiscal year: Dividend yield . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected volatility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk-free interest rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected life of options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Weighted-average fair value of options granted . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.3% 42.4% 4.2% 3.1% 43.8% 3.3% 4.4% 43.8% 3.0% 6 years $ 10.89 8 years 8.71 $ 8 years 4.36 $ 2005 2004 2003 See Note 5 of Notes to Consolidated Financial Statements for more information. Depreciation For financial reporting purposes, depreciation is determined principally on a straight-line basis using estimated useful lives of plant and equipment (20 to 40 years for buildings and 5 to 15 years for machinery and equipment) while accelerated depreciation methods are used for income tax purposes. Leasehold improvements are amortized over the life of the lease or the useful life of the improvement, whichever is shorter. Research and Development Research and development costs are expensed as incurred. Research and development expenses amounted to $28.9 million, $30.0 million, and $27.4 million during fiscal years 2005, 2004, and 2003, respectively. Advertising Advertising costs are expensed as incurred and were $20.7 million, $21.0 million, and $16.3 million during fiscal years 2005, 2004, and 2003, respectively. Foreign Currency Translation The functional currency for the foreign operations of Acuity Brands is the local currency. The translation of foreign currencies into U.S. dollars is performed for balance sheet accounts using exchange rates in effect at the balance sheet dates and for revenue and expense accounts using a weighted average exchange rate each month during the year. The gains or losses resulting from the translation are included in Accumulated Other Comprehensive Income (Loss) Items in the Consolidated Statements of Stockholders’ Equity and Comprehensive Income and are excluded from net income. Gains or losses resulting from foreign currency transactions are included in Miscellaneous (income) expense, net in the Consolidated Statements of Operations and were insignificant in fiscal years 2005, 2004, and 2003. Interest Expense, Net Interest expense, net, is comprised primarily of interest expense on long-term debt, revolving credit facility borrowings, and short-term secured borrowings partially offset by interest income on cash and cash equivalents. The following table summarizes the components of interest expense, net: Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest expense, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $36,735 (1,004) $35,731 $35,553 (677) $34,876 $37,804 (421) $37,383 Years Ended August 31, 2005 2004 2003 42 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Miscellaneous (Income) Expense, Net Miscellaneous (income) expense, net, is comprised primarily of gains or losses resulting from the sale of property, plant, and equipment and gains or losses on foreign currency transactions. Accounting Standards Yet to Be Adopted In May 2005, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 154, Accounting Changes and Error Corrections, a replacement of APB No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods’ financial statements of a voluntary change in accounting principle unless it is impracticable. APB Opinion No. 20 “Accounting Changes,” previously required that most voluntary changes in accounting principle be recognized by including in net income of the period of the change the cumulative effect of changing to the new accounting principle. This statement is effective for the Company as of September 1, 2006 and the Company continues to evaluate the impact the adoption of the standard will have on the Company’s results of operations, if any. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), Share-Based Payment. The Statement requires that compensation cost relating to share-based payment transactions be recognized in financial statements and that this cost be measured based on the fair value of the equity or liability instruments issued. It does not specify a preference for a type of valuation model to be used to measure fair value. SFAS No. 123 (Revised 2004) covers a wide range of share-based compensation arrangements including share options, restricted share plans, performance-based awards, share appreciation rights, and employee share purchase plans. The Company adopted SFAS No. 123 (Revised 2004) on September 1, 2005 and expects to incur additional annual pretax expense of approximately $3.0 million as a result of adoption. The Company continues to evaluate the impact the adoption of the final standard will have on the Company’s results of operations. See Stock-Based Compensation section of this note for further information. In November 2004, the FASB issued SFAS No. 151, Inventory Costs, an amendment of ARB No. 43, Chapter 4. The statement requires that items such as abnormal freight, handling costs, and amounts of wasted materials be recognized as current-period charges regardless of whether or not they meet the criteria currently dictated by ARB No. 43. Additionally, SFAS No. 151 requires that fixed overhead be allocated based on the normal capacity of the production capabilities. The Company adopted SFAS No. 151 on September 1, 2005 and has determined the impact of adoption to be immaterial to the Company’s results of operations. On October 22, 2004, the American Jobs Creation Act of 2004 (“Jobs Creation Act”) was signed into law. This legislation provides for the optional repatriation of cash from foreign subsidiaries allowing an 85% dividends received deduction. The deduction is subject to a number of limitations. In December 2004, the FASB issued Staff Position 109-2, Accounting and Disclosure Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of 2004 (“FSP No. 109-2”), indicating that the lack of clarification of certain provisions within the Jobs Creation Act and the timing of the enactment necessitate a practical exception to the SFAS No. 109, Accounting for Income Taxes, requirement to reflect in the period of enactment the effect of a new tax law. Accordingly, an enterprise is allowed time beyond the financial reporting period to evaluate the effect of the Jobs Creation Act on its plans for reinvestment or repatriation of foreign earnings. FSP No. 109-2 requires that the provisions of SFAS No. 109 be applied as an enterprise decides on its plan for reinvestment or repatriation of its unremitted foreign earnings. The Company has not yet determined if it will repatriate any overseas earnings pursuant to this provision. The FASB also recently issued Staff Position FSP 109-1, Application of FASB Statement No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities Provided by the American Jobs Creation Act of 2004 (“FSP No. 109-1”). Under the guidance in FSP No. 109-1, the deduction will be 43 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) treated as a “special deduction” as described in SFAS No. 109. As such, the special deduction has no effect on deferred tax assets and liabilities existing at the enactment date. Rather, the impact of this deduction, if any, will be reported in the period in which the deduction is claimed on our income tax return. The Company will not be able to claim this tax benefit until the first quarter of fiscal 2006. Note 3: Pension and Profit Sharing Plans Acuity Brands has several pension plans covering certain hourly and salaried employees. Benefits paid under these plans are based generally on employees’ years of service and/or compensation during the final years of employment. Acuity Brands makes annual contributions to the plans to the extent indicated by actuarial valuations. Plan assets are invested primarily in equity and fixed income securities. The following tables reflect the status of Acuity Brands’ domestic (U.S. based) and international pension plans at August 31, 2005 and 2004, using measurement dates of May 31, 2005 and 2004, respectively: Domestic Plans August 31, International Plans August 31, 2005 2004 2005 2004 Change in Benefit Obligation: Benefit obligation at beginning of year . . . . . . . . . . . . . . . . . . . . . . . Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Curtailment Actuarial (gain) loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 96,896 2,396 6,121 — 18,432 (5,981) — $ 98,544 3,493 5,775 — (6,305) (4,611) — $ 26,111 743 1,517 23 1,414 (1,163) (18) $ 21,673 1,085 1,375 — (501) (573) 3,052 Benefit obligation at end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . $117,864 $ 96,896 $ 28,627 $ 26,111 Change in Plan Assets: Fair value of plan assets at beginning of year . . . . . . . . . . . . . . . . . . Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employer contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Employee contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Benefits paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 71,579 6,570 5,130 — (5,981) — $ 64,730 8,512 2,949 — (4,612) — $ 15,439 2,220 832 242 (1,090) (38) $ 12,214 994 661 300 (473) 1,743 Fair value of plan assets at end of year . . . . . . . . . . . . . . . . . . . . . . . $ 77,298 $ 71,579 $ 17,605 $ 15,439 Funded Status: Funded status . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized transition asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unrecognized prior service cost $ (40,566) $(25,317) $(11,021) $(10,672) 10,534 — — 45,946 (108) 754 29,423 (239) 1,148 10,300 — — Net amount recognized at end of year . . . . . . . . . . . . . . . . . . . . . . . . $ 6,026 $ 5,015 $ (721) $ (138) Amounts Recognized in the Consolidated Balance Sheets Consist of: Accrued benefit liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Intangible asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Accumulated other comprehensive loss . . . . . . . . . . . . . . . . . . . . . . $ (39,850) $(24,859) $(10,691) $ (8,167) 1,027 44,849 1,464 28,410 — 9,970 — 8,029 Net amount recognized at end of year . . . . . . . . . . . . . . . . . . . . . . . . $ 6,026 $ 5,015 $ (721) $ (138) 44 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for domestic defined benefit pension plans with both projected and accumulated benefit obligations in excess of plan assets were $117.9 million, $117.1 million, and $77.3 million, respectively, as of August 31, 2005, and $96.9 million, $96.4 million, and $71.6 million, respectively, as of August 31, 2004. The projected benefit obligation, accumulated benefit obligation, and fair value of plan assets for international defined benefit pension plans with both projected and accumulated benefit obligations in excess of plan assets were $28.6 million, $28.2 million, and $17.6 million, respectively, as of August 31, 2005, and $26.1 million, $23.5 million, and $15.4 million, respectively, as of August 31, 2004. Components of net periodic pension cost for the fiscal years ended August 31, 2005, 2004, and 2003 included the following: . . . . . . . . . . . . . . . . . . . Service cost Interest cost . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . Amortization of prior service cost . . . . . . . . . . . . . . . . . . . . . . . . Amortization of transitional asset . . Recognized actuarial loss (gain) . . . Domestic Plans International Plans 2005 2004 2003 2005 2004 2003 $ 2,396 6,121 (6,089) $ 3,493 5,775 (5,392) $ 2,729 5,532 (6,261) $ 743 1,517 (1,183) $1,085 1,375 (988) $ 928 1,196 (964) 89 (131) 1,428 102 (131) 2,259 385 (133) 764 — — 368 — — 375 — — (257) Net periodic pension cost . . . . . . . . . $ 3,814 $ 6,106 $ 3,016 $ 1,445 $1,847 $ 903 Weighted average assumptions used in computing the benefit obligation are as follows: Domestic Plans International Plans 2005 2004 2005 2004 Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . . . . . . . . . 5.3% 6.5% 5.0% 5.5% 5.5% 3.5% 5.8% 4.8% Weighted average assumptions used in computing net periodic benefit cost are as follows: Discount rate . . . . . . . . . . . . . . . . . . . . . . . . . . . Expected return on plan assets . . . . . . . . . . . . . Rate of compensation increase . . . . . . . . . . . . . 6.5% 6.0% 7.5% 5.8% 5.5% 6.0% 8.5% 8.5% 9.5% 7.3% 7.0% 8.0% 5.5% 5.1% 5.1% 4.8% 4.3% 4.3% Domestic Plans International Plans 2005 2004 2003 2005 2004 2003 It is the Company’s policy to adjust, on an annual basis, the discount rate used to determine the projected benefit obligation to approximate rates on high-quality, long-term obligations. The Company estimates that each 100 basis point reduction in the discount rate would result in additional net periodic pension cost, the Company’s primary pension obligation, of approximately $1.3 million and $0.4 million for domestic plans and international plans, respectively. The Company’s discount rate used in computing the net periodic benefit cost for its domestic plans decreased by 150 basis points in 2005. The expected return on plan assets is derived from a periodic study of long-term historical rates of return on the various asset classes included in the Company’s targeted pension plan asset allocation. As a result of this study during 2003, the expected return on plan assets for the Company’s domestic plans decreased by 100 basis points to 8.5% in 2004. The Company estimates that each 100 basis point reduction in the expected return on plan assets would result in additional net periodic pension cost of $0.8 million 45 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) and $0.2 million for domestic plans and international plans, respectively. The rate of compensation increase is also evaluated and is adjusted by the Company, if necessary, annually. The Company’s investment objective for U.S. plan assets is to earn a rate of return sufficient to match or exceed the long-term growth of the Plans’ liabilities without subjecting plan assets to undue risk. The plan assets are invested primarily in high quality equity and debt securities. The Company conducts a periodic strategic asset allocation study to form a basis for the allocation of pension assets between various asset categories. Specific allocation percentages are assigned to each asset category with minimum and maximum ranges established for each. The assets are then managed within these ranges. During 2005, the U.S. targeted asset allocation was 55% equity securities, 40% fixed income securities, and 5% real estate securities. The Company’s investment objective for the international plan assets is also to add value by matching or exceeding the long-term growth of the Plans’ liabilities. During 2005, the international asset allocation was 80% equity securities, 15% fixed income securities, and 5% real estate securities. Acuity Brands’ pension plan asset allocation at August 31, 2005 and 2004 by asset category is as follows: % of Plan Assets Domestic Plans International Plans 2005 2004 2005 2004 Equity securities . . . . . . . . . . . . . . . . . . Debt securities . . . . . . . . . . . . . . . . . . . . Real estate . . . . . . . . . . . . . . . . . . . . . . . Other . . . . . . . . . . . . . . . . . . . . . . . . . . . 58.0% 35.0% 6.0% 1.0% 58.0% 36.0% 5.0% 1.0% 83.8% 6.8% 2.3% 7.1% 82.1% 9.2% 4.4% 4.3% Total . . . . . . . . . . . . . . . . . . . . . . . 100.0% 100.0% 100.0% 100.0% The Company expects to contribute approximately $4.1 million and $1.1 million to its domestic and international defined benefit plans, respectively, during 2006. These amounts are based on the total contributions needed during 2006 to satisfy current law minimum funding requirements. Benefit payments are made from funded benefit plan trusts. Benefit payments are expected to be paid as follows for the years ending August 31: 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2011-2015 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 5,097 5,149 5,315 5,798 5,855 34,886 $ 344 354 388 411 436 3,365 Domestic International Acuity Brands also has defined contribution plans to which both employees and the Company make contributions. The cost to Acuity Brands for these plans was $5.6 million in 2005, $5.8 million in 2004, and $5.5 million in 2003. Effective February 2002, participants in all of the Company’s defined contribution plans were permitted to direct the investments of all funds in their respective plan, thereby eliminating the nonparticipant- directed funds. Employer matching amounts are allocated in accordance with the participants’ investment elections for elective deferrals. At August 31, 2005, assets of the defined contribution plans included shares of the Company’s common stock with a market value of approximately $13.5 million, which represented approximately 3.7% of the total fair market value of the assets in the Company’s defined contribution plans. 46 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Note 4: Short-Term Borrowings and Long-Term Debt Short-Term Borrowings The Company’s short-term borrowings at August 31, 2005 and 2004, consisted of the following: Current maturities of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Revolving credit facility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2005 $567 — $567 2004 $1,511 4,000 $5,511 The Company maintains an agreement (“Receivables Facility”) to borrow, on an ongoing basis, funds secured by undivided interests in a defined pool of trade accounts receivable of the lighting equipment and specialty products segments. Effective September 29, 2005, the Company renewed the $100.0 million Receivables Facility for a one-year period with similar terms and conditions. Net trade accounts receivable pledged as security for borrowings under the Receivables Facility totaled $301.2 million at August 31, 2005. There were no outstanding borrowings at August 31, 2005 and 2004 under the Receivables Facility. Interest rates under the Receivables Facility vary with commercial paper rates plus an applicable margin. On April 2, 2004, the Company executed a $200.0 million revolving credit facility (“Revolving Credit Facility”), which matures in January 2009. This facility replaced the Company’s $92.5 million, 364-day committed credit facility scheduled to mature in April 2004 and the Company’s $105.0 million, three-year credit facility scheduled to mature in April 2005. The Revolving Credit Facility contains financial covenants including 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, and a minimum interest coverage ratio. 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. The Company was in compliance with all financial covenants and had no outstanding borrowings at August 31, 2005 and had $4.0 million in outstanding borrowings under the Revolving Credit Facility at August 31, 2004. At August 31, 2005, the Company had additional borrowing capacity under the Revolving Credit Facility of $186.3 million 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 $13.7 million discussed below. The Company’s Receivables Facility and Revolving Credit Facility each contain “Material Adverse Effect” provisions. Generally, if the Company were to experience an event causing a material adverse effect on the Company’s financial condition, operations, or properties, as defined in the agreements, additional future borrowings under either facility could be denied and payments on outstanding borrowings could be accelerated. At August 31, 2005, the Company had outstanding letters of credit totaling $25.4 million primarily for the purpose of securing collateral requirements under the casualty insurance programs for Acuity Brands and for providing credit support for the Company’s industrial revenue bonds. At August 31, 2005, a total of $13.7 million of the letters of credit were issued under the Revolving Credit Facility, thereby reducing the total availability under the line by such amount. 47 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Long-Term Debt The Company’s long-term debt at August 31, 2005 and 2004, consisted of the following: Term Loan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6% notes due February 2009 with an effective interest rate of 6.04%, net of unamortized discount of $143 in 2005 and $184 in 2004 . . . . . . . . . . . . . . . 8.375% notes due August 2010 with an effective interest rate of 8.398%, net of unamortized discount of $121 in 2005 and $146 in 2004 . . . . . . . . . . . . . Other notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Less – Amounts payable within one year included in current liabilities . . . . . 2005 2004 $ — $ 18,734 159,857 159,816 199,879 12,567 372,303 567 199,854 13,317 391,721 1,511 $371,736 $390,210 Future annual principal payments of long-term debt are as follows: Fiscal Year 2006 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2007 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2008 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2010 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Thereafter . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amount $ 567 565 282 159,859 199,879 11,151 $372,303 In October 2002, Acuity Brands entered into a three-year loan agreement (“Term Loan”) secured by certain land and buildings of the Company. Proceeds from the Term Loan were used to reduce borrowings under the revolving credit facility then in effect and to provide the Company additional liquidity. The Term Loan was paid in full in July 2005. Outstanding borrowings under the Term Loan at August 31, 2004 were $18.7 million at an interest rate of approximately 3.0%. Prior to November 30, 2001, Acuity Brands was a wholly-owned subsidiary of National Service Industries, Inc. (“NSI”) owning and operating the lighting equipment and specialty products businesses. Acuity Brands was spun off from NSI into a separate publicly traded company with its own management and Board of Directors through a tax-free distribution (“Distribution”) of 100% of the outstanding shares of common stock of Acuity Brands on November 30, 2001. In January 1999, NSI issued $160.0 million in ten-year publicly traded notes bearing a coupon rate of 6.0%. In August 2000, NSI issued $200.0 million in ten-year publicly traded notes bearing a coupon rate of 8.375%. Pursuant to a supplemental indenture executed in contemplation of the Distribution, Acuity Brands and its principal operating subsidiaries have become the obligors of the notes, and NSI, effective as of the Distribution, was relieved of all obligations with respect to the notes. Because the $160.0 million and the $200.0 million notes trade infrequently, it is difficult to obtain an accurate fair market value of the notes. However, based on comparison of notes of similar size, ratings, and tenor, the fair values of the $160.0 million and $200.0 million notes are believed to approximate $164.8 million and $225.8 million, respectively at August 31, 2005. Excluding 48 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) the $160.0 million and $200.0 million notes, long-term debt recorded in the accompanying Consolidated Balance Sheets approximates fair value based on similar instruments with similar terms and average maturities. Other notes consist primarily of two industrial revenue bonds (a $7.1 million bond maturing in 2018 and a $4.0 million bond maturing in 2021) and a five-year note with an outstanding balance of approximately $1.5 million at August 31, 2005. The industrial revenue bonds are tax-exempt variable rate instruments that reset on a weekly basis. The interest rates were approximately 2.5% and 1.4% for the $4.0 million bond and 2.5% and 1.3% for the $7.1 million bond at August 31, 2005 and 2004, respectively. The five-year note is denominated in Euros and bears interest at a variable rate, which was 4.5% and 4.3% at August 31, 2005 and 2004, respectively. Principal payments are made in equal semi-annual installments. In addition, Acuity Brands also had uncommitted foreign bank lines of credit totaling $2.0 million at August 31, 2005 and 2004. There were no outstanding borrowings under the foreign bank lines at August 31, 2005 or 2004. None of the Company’s existing debt instruments, neither short-term nor long-term, include provisions that would require an acceleration of repayments based solely on changes in the Company’s credit ratings. Note 5: Common Stock and Related Matters Stockholder Protection Rights Agreement Prior to the Distribution, the Company’s Board of Directors adopted a Stockholder Protection Rights Agreement (the “Rights Agreement”). The Rights Agreement contains provisions that are intended to protect the Company’s stockholders in the event of an unsolicited offer to acquire the Company, including offers that do not treat all stockholders equally and other coercive, unfair, or inadequate takeover bids and practices that could impair the ability of the Company’s Board of Directors to fully represent stockholders’ interests. Pursuant to the Rights Agreement, the Company’s Board of Directors declared a dividend of one “Right” for each outstanding share of the Company’s common stock as of November 16, 2001. The Rights will be represented by, and trade together with, the Company’s common stock until and unless certain events occur, including the acquisition of 15% or more of the Company’s common stock by a person or group of affiliated or associated persons (with certain exceptions, “Acquiring Persons”). Unless previously redeemed by the Company’s Board of Directors, upon the occurrence of one of the specified triggering events, each Right that is not held by an Acquiring Person will entitle its holder to purchase one share of common stock or, under certain circumstances, additional shares of common stock at a discounted price. The Rights will cause substantial dilution to a person or group that attempts to acquire the Company on terms not approved by the Company’s Board of Directors. Thus, the Rights are intended to encourage persons who may seek to acquire control of the Company to initiate such an acquisition through negotiation with the Board of Directors. 49 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Common Stock Changes in common stock for the periods ended August 31, 2003, 2004, and 2005 were as follows: Common Stock Shares Amount Balance, August 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of restricted stock grants, net of forfeitures . . . . . . . . . . . . . . . . . . . . Employee stock purchase plan issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock issued in connection with long-term incentive plan . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, August 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of restricted stock grants, net of forfeitures . . . . . . . . . . . . . . . . . . . . Employee stock purchase plan issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Balance, August 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Issuance of restricted stock grants, net of forfeitures . . . . . . . . . . . . . . . . . . . . Employee stock purchase plan issuances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41,379 120 144 23 9 41,675 278 86 557 42,596 603 77 1,701 Balance, August 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 44,977 $414 1 2 — — $417 3 1 5 $426 6 1 17 $450 Preferred Stock The Company has 50,000,000 shares of preferred stock authorized, 5,000,000 of which have been reserved for issuance under the Stockholder Protection Rights Agreement. No shares of preferred stock had been issued at August 31, 2005 and 2004. Earnings per Share The Company computes earnings per share in accordance with SFAS 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. 50 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) The following table calculates basic earnings per common share and diluted earnings per common share for the years ended August 31, 2005, 2004, and 2003: Years Ended August 31, 2005 2004 2003 Basic earnings per share: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,229 43,135 Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . $67,214 41,906 $47,782 41,459 Basic earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.21 $ 1.60 $ 1.15 Diluted earnings per share: Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $52,229 43,135 Basic weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,617 Common stock equivalents (stock options and restricted stock) . . . . . . . $67,214 41,906 1,295 $47,782 41,459 262 Diluted weighted average shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . 44,752 43,201 41,721 Diluted earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1.17 $ 1.56 $ 1.15 Stock-Based Compensation NSI stock options held by employees of Acuity Brands were converted to, and replaced by, Acuity Brands stock options at the time of the Distribution using an agreed-upon conversion ratio. All other terms of the converted stock options remain the same as those in effect immediately prior to the Distribution. Accordingly, no compensation expense resulted from the replacement of the options. Effective November 30, 2001, Acuity Brands adopted the Acuity Brands, Inc. Long-Term Incentive Plan (the “Plan”) for the benefit of officers and other key management personnel (“Participants”). An aggregate of 8.1 million shares was originally authorized for issuance under the Plan. In October 2003, the Board of Directors approved the Acuity Brands, Inc. Amended and Restated Long-Term Incentive Plan (the “Amended Plan”), including an increase of 5.0 million in the number of shares available for grant. However, the Board of Directors subsequently committed that not more than 3.0 million are available without further shareholder approval. In December 2003, the shareholders approved the Amended Plan. Stock options generally become exercisable over a three or four-year period from the date of grant. The Amended Plan also provides for the issuance of performance-based and restricted stock awards. In January 2005, the Company awarded approximately 306,000 shares of restricted stock to officers and other key employees under the Plan. The shares vest over a four-year period. At August 31, 2005, approximately 290,000 shares had been issued under this award. Compensation expense recognized related to this award was $1.3 million in fiscal 2005. In December 2003, the Company awarded approximately 420,000 shares of restricted stock to officers and other key employees under the Amended Plan. The shares vest over a four-year period. Participants could elect to defer payments under this time-based restricted stock plan into a separate deferred compensation plan. If shares were deferred into the deferred compensation plan, the value of the restricted shares was converted to share units that ultimately would be paid in cash. Approximately 150,000 shares were deferred into the deferred compensation plan. At August 31, 2005, approximately 210,000 shares had been issued under this award. Compensation expense recognized related to this award was $2.3 million and $1.8 million in fiscal 2005 and 2004, respectively. 51 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) In December 2002, the Company reserved approximately 490,000 shares of performance-based restricted stock for issuance to officers and other key employees under the Plan. The shares are issued in 25% increments upon the achievement of at least two of three progressive defined performance measures and the completion of related target years (as defined in the agreement). The performance measures relate to specified levels of debt reduction, cumulative earnings per share measured at each fiscal quarter-end for the trailing four quarters, and stock price targets. The shares vest at the later of (a) determination by the Compensation Committee of the Board of Directors that at least two of the three performance measures are achieved or (b) November 30 of the specified target year. Originally, approximately two-thirds of the value of the restricted shares at the vesting date was paid to the participants in unrestricted shares of the Company and the remainder was paid in cash to offset taxes on the award. This provision was eliminated in August 2005 by an amendment to the award agreement that provides for the entire award to be payable in shares. Participants could elect to defer payments under this performance-based restricted stock plan into a separate deferred compensation plan. If shares were deferred into the deferred compensation plan, the value of the restricted shares was converted to share units that ultimately would be paid in cash. Approximately 110,000 shares were deferred into the deferred compensation plan. As of August 31, 2005, approximately 330,000 shares had been issued under this award, of which approximately 60,000 were subsequently cancelled and used to offset taxes. Compensation expense recognized related to this award was $2.6 million, $3.6 million, and $1.6 million in fiscal 2005, 2004 and 2003, respectively. In October 2000, NSI reserved approximately 240,000 shares of performance-based restricted stock for issuance to officers and other key employees. Under this award, restricted shares are granted in 20% increments when the Company’s stock price equals or exceeds certain stock price targets for thirty consecutive calendar days (the vesting start date) and vest ratably in four equal annual installments beginning one year from the vesting start date. At the time of the Distribution and in accordance with the employee benefits agreement, each employee of Acuity Brands holding outstanding shares of NSI restricted stock received a dividend of one Acuity Brands restricted share for each NSI restricted share held. Acuity Brands restricted shares received as a dividend on NSI restricted stock are subject to the same restrictions and terms, including vesting provisions, of the NSI restricted stock. Restricted share awards that had not reached a vesting start date, and their related stock price targets, were converted to Acuity Brands restricted share awards in the same manner as stock options. Shares that have not reached a vesting start date expire five years from the date of the grant. All other terms of the converted grants remain the same as those in effect immediately prior to the Distribution. As of August 31, 2005, approximately 210,000 shares had been issued under this award. Compensation expense recognized related to this award was $1.2 million, $0.9 million, and $0.3 million in fiscal 2005, 2004, and 2003, respectively. Additionally, the Company awarded restricted stock to certain employees on an individual basis in fiscal 2004 and 2005. As of August 31, 2005, approximately 60,000 shares related to these awards had been issued. Compensation expense recognized related to these awards was $0.5 million and $0.2 million in fiscal 2005 and fiscal 2004, respectively. In November 2001, the Company adopted the Acuity Brands, Inc. 2001 Directors’ Stock Option Plan, under which 300,000 shares are authorized for issuance. The stock options granted under this plan become exercisable one year from the date of grant. As of August 31, 2005 approximately 100,000 shares had been granted under this plan. Under all stock option plans, the options generally expire 10 years from the date of grant and have an exercise price equal to the fair market value of the Company’s stock on the date of grant. Shares available for grant under all plans were approximately 2,200,000 at August 31, 2005, with additional shares available upon further shareholder approval. Shares available for grant under all plans were 2,250,000 and 710,000 at August 31, 52 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) 2004 and 2003, respectively. Forfeited shares and shares that are exchanged to offset taxes are returned to the pool of shares available for grant. Stock option transactions for the stock option plans and stock option agreements during the years ended August 31, 2003, 2004, and 2005 were as follows: Outstanding Exercisable Number of Shares Weighted Average Exercise Price Number of Shares Weighted Average Exercise Price Outstanding at August 31, 2002 . . . . . . . . . . . . . . . . . . . . . 7,081,298 $19.15 2,712,343 $25.25 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 132,500 (8,448) (265,211) Outstanding at August 31, 2003 . . . . . . . . . . . . . . . . . . . . . 6,940,139 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,242,453 (573,107) (184,836) Outstanding at August 31, 2004 . . . . . . . . . . . . . . . . . . . . . 7,424,649 Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Cancelled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 212,000 (1,891,813) (187,075) Outstanding at August 31, 2005 . . . . . . . . . . . . . . . . . . . . . 5,557,761 Range of option exercise prices: $10.00 – $15.00 (average life – 6.3 years) . . . . . $15.01 – $20.00 (average life – 5.2 years) . . . . . $20.01 – $25.00 (average life – 6.6 years) . . . . . $25.01 – $30.00 (average life – 4.3 years) . . . . . $30.01 – $40.00 (average life – 3.5 years) . . . . . 1,492,454 1,005,513 1,483,060 1,020,864 555,870 $14.26 $13.80 $20.68 $19.08 $24.87 $14.94 $21.40 $20.32 $28.54 $16.36 $28.67 $21.70 $13.84 $16.59 $23.70 $28.36 $34.48 4,179,243 $21.78 4,936,004 $20.62 4,604,388 $20.87 1,485,794 1,005,513 933,347 723,864 455,870 $13.84 $16.59 $23.68 $28.58 $35.24 Employee Stock Purchase Plan In November 2001, the Company adopted the Acuity Brands, Inc. Employee Stock Purchase Plan for the benefit of eligible employees. Under the plan, employees could purchase, through payroll deduction, the Company’s common stock at a 15% discount. Shares are purchased quarterly at 85% of the lower of the fair market value of the Company’s common stock on the first business day of the quarterly plan period or the last business day of the quarterly plan period. Employee contributions to this plan were suspended at the end of the third quarter fiscal 2005. The Company expects to resume accepting contributions in the first quarter of 2006 under new terms. Employees will be able to purchase common stock at a 5% discount and shares will be purchased on a monthly basis. There were 1,500,000 shares of the Company’s common stock reserved for purchase under the plan, of which approximately 1,100,000 shares remain available as of August 31, 2005. Employees may participate at their discretion. 53 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Note 6: Commitments and Contingencies Self-Insurance It is the current policy of Acuity Brands to self insure, up to certain limits, 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 revised and recorded annually. The Company is also self-insured for the majority of its medical benefits plans. 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 annually, if necessary. Leases Acuity Brands leases certain of its buildings and equipment under noncancelable lease agreements. Minimum lease payments under noncancelable leases for years subsequent to August 31, 2005, are as follows: 2006 — $19.2 million; 2007 — $14.4 million; 2008 — $12.4 million; 2009 — $10.6 million; 2010 — $9.3 million; after 2010 — $26.6 million. Total rent expense was $27.7 million in 2005, $25.2 million in 2004, and $23.4 million in 2003. Purchase Obligations The Company has incurred purchase obligations in the ordinary course of business that are enforceable and legally binding. Obligations for years subsequent to August 31, 2005 are as follows: 2006 — $121.3 million; 2007 — $22.9 million; 2008 — $6.8 million; 2009 — $6.9 million; and 2010 — $1.8 million. As of August 31, 2005, the Company had no purchase obligations extending past August 31, 2010. Collective Bargaining Agreements Approximately 45% of the Company’s total work force is covered by collective bargaining agreements. Collective bargaining agreements representing approximately 25% of the Company’s work force will expire within one year. Litigation Acuity Brands is subject to various legal claims arising in the normal course of business, including patent infringement and product is the opinion of liability claims. Based on information currently available, management that the ultimate resolution of pending and threatened legal proceedings will not have a material adverse effect on the financial condition or results of operations of Acuity Brands. 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 the results of operations 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 or lower than the amounts reserved for such claims. it The Company has certain matters pending before the United States Consumer Product Safety Commission (“CPSC”) involving certain product recalls and has accrued a liability for estimated costs associated with the recalls and CPSC proceedings. See further discussion in Product Warranty section of this note. 54 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) 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 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, management believes that the Company’s potential 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 Brands is currently a party to, or otherwise involved in, legal proceedings in connection with state and federal Superfund sites. With respect to each of the currently active sites which it does not own and where it has been named as a responsible party or a potentially responsible party (“PRP”), the Company believes its liability is immaterial, based on information currently available, due to its limited involvement at the site and/or the number of viable PRPs. For example, the preliminary allocation among 48 PRPs at the Crymes Landfill site in Georgia indicates that the Company’s liability is not significant, and there are more than 1,000 PRPs at the M&J Solvents site in Georgia, which has included Acuity Brands as a PRP. With respect to the only active site involving property which Acuity Brands does own and where it has been named as a PRP—ASP’s property on Seaboard Industrial Boulevard in Atlanta, Georgia—the Company, together with current and former owners of adjoining properties (the “Site Group”), has conducted an investigation on its property and adjoining properties (the “Site”) and submitted a Compliance Status Report (“CSR”) and a proposed Corrective Action Plan (“CAP”) to the State of Georgia Environmental Protection Division (“EPD”) pursuant to the Georgia Hazardous Site Response Act. The EPD approved the CAP in May 2004, and the Company has reached agreement with the other members of the Site Group to share the expected costs and responsibilities of implementing the CAP. The CAP requires the Site Group to periodically monitor the Site for a period of five years to confirm the Site Group’s model predicting that the site is not expected to violate applicable regulatory standards. The first several sampling results obtained pursuant to this monitoring requirement have confirmed the Site Group’s model, but adverse future sampling results could cause the Company to record additional charges to earnings in future periods. However, based on information currently available, the Company believes that its liability is immaterial in connection with the Site. In August 2003, ASP received a grand jury subpoena from the United States Department of Justice through the United States Attorney for the Northern District of Georgia concerning the operation of ASP’s wastewater pretreatment plant and ASP’s management of hazardous waste at a facility in Atlanta, Georgia. ASP received a supplemental subpoena in April 2005 related to this matter. The grand jury investigation appears to relate to the discharge of wastewater from the facility to the City of Atlanta’s sanitary sewer system and ASP’s practices in connection with the sampling and reporting of the facility’s wastewater discharges for permitting purposes. ASP 55 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) is cooperating fully with the investigation by the Department of Justice. The Department of Justice investigation follows an inquiry by the City of Atlanta, which regulates the wastewater discharge at the facility. The Company has settled with the City of Atlanta all issues arising from the inquiry. As of August 31, 2005, the Company had an accrued liability for the estimated costs of resolution of proceedings with the Department of Justice and certain associated legal expenses. The grand jury proceedings are ongoing, and developments in the investigation and the terms of any final settlement or adjudication of this matter, including whether the final resolution results in civil or criminal charges against the Company, could result in actual costs higher or lower than the amount reserved. Guarantees and Indemnities The Company is a party to contracts entered into in the normal course of business in which it is common for the Company to agree to indemnify third parties for certain liabilities that may arise out of or relate to the subject matter of the contract. In some cases, the Company cannot estimate the potential amount of future payments under these indemnities until events arise that would result in a liability under the indemnities. In connection with the sale of assets and the divestiture of businesses, the Company has from time to time agreed to indemnify the purchaser from liabilities relating to events occurring prior to the sale and conditions existing at the time of the sale. These indemnities generally include potential environmental liabilities, general representations and warranties concerning the asset or business, and certain other liabilities not assumed by the purchaser. Indemnities associated with the divestiture of businesses are generally limited in amount to the sales price of the specific business or are based on a lower negotiated amount and expire at various times, depending on the nature of the indemnified matter, but in some cases do not expire until the applicable statute of limitations expires. The Company does not believe that any amounts that it may be required to pay under these indemnities will be material to the Company’s results of operations, financial position, or liquidity. In conjunction with the separation of their businesses, Acuity Brands and NSI entered into various agreements that addressed the allocation of assets and liabilities and defined the Company’s relationship with NSI after the Distribution, including a distribution agreement and a tax disaffiliation agreement. The distribution indemnify NSI for pre-Distribution liabilities related to the agreement provides that Acuity Brands will businesses that comprise Acuity Brands and previously owned businesses in the lighting equipment and specialty products segments. The tax disaffiliation agreement provides that Acuity Brands will indemnify NSI for certain taxes and liabilities that may arise related to the Distribution and, generally, for deficiencies, if any, with respect to federal, state, local, or foreign taxes of NSI for periods before the Distribution. Liabilities determined under the tax disaffiliation agreement terminate upon the expiration of the applicable statutes of limitation for such liabilities. There is no stated maximum potential liability included in the tax disaffiliation agreement or the distribution agreement. The Company does not believe that any amounts it is likely to be required to pay under these indemnities will be material to the Company’s results of operations, financial position, or liquidity. The Company cannot estimate the potential amount of future payments under these indemnities until events arise that would result in a liability under the indemnities. Product Warranty Acuity Brands records an allowance for the estimated amount of future warranty claims when the related revenue is recognized, primarily based on historical experience of identified warranty claims. Excluding costs related to faulty components provided by third parties, warranty costs as a percentage of net sales have generally been consistent for the last several years. However, there can be no assurance that future warranty costs will not 56 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) exceed historical experience. If actual future warranty costs exceed historical amounts, additional allowances may be required, which could have a material adverse impact on the Company’s results of operations in future periods. The Company, in cooperation with the CPSC, is conducting a voluntary product recall involving approximately 93,000 lighting fixtures manufactured by ABL from April 2002 through October 2003 that may have incorporated faulty capacitors produced by one of ABL’s suppliers. The Company initiated this recall in March 2004 and expanded it in March 2005. The recalled fixtures are certain models of indoor high intensity discharge (“HID”) lighting fixtures with at least one acrylic component (reflector or lens). The capacitor used in the recalled fixtures can leak polypropylene glycol (“PPG”) fluid onto the acrylic lens and/or reflector of the fixture, causing the acrylic component(s) to degrade. In a number of reported instances, this has resulted in lenses or reflectors cracking and pieces of acrylic falling from the installed fixtures. To date, there have been only limited reports of personal injury and property damage. ABL is providing a replacement fixture or capacitor for every fixture that meets the product recall criteria. In addition to the expenses associated with this product recall, ABL expects to incur higher-than-normal warranty expenses in connection with certain other types of indoor and outdoor HID fixtures that may incorporate the faulty capacitor but exhibit a less serious failure mode. In the case of these fixtures, the PPG fluid may accumulate in or drip from the fixture. ABL will repair or replace these fixtures upon failure. The Company, in cooperation with the CPSC, is also conducting a voluntary product recall of certain indoor HID lighting fixtures involving approximately 120,000 lighting fixtures that incorporate acrylic reflectors and that utilize cords manufactured by one of ABL’s suppliers. The cords used in the fixtures may emit a plasticizer fluid that can potentially drip onto the exterior of the acrylic reflectors, which could cause them to degrade, crack, and fall. To date, there have been no reports of personal injury or significant property damage in connection with this issue. The product recall involves the replacement of the cord and reflector for each fixture subject to the recall. During the 2005 fiscal year, the Company received document and information requests from the CPSC in connection with investigations by the CPSC as to whether the Company had complied with the reporting requirements of section 15(b) of the Consumer Product Safety Act with respect to products involved in the initial scope and the expanded scope of the capacitor-related recall of HID fixtures, the cord-related recall of HID fixtures, and a 2001 recall of emergency lighting fixtures. Between February 2005 and August 2005, the Company received letters from the CPSC staff stating that the CPSC staff had concluded that the Company had violated those reporting requirements with respect to each of these matters and that the staff intended to recommend to the Commission that it take action to seek a civil penalty in each matter, and that the Company had the opportunity in each matter to negotiate a resolution by submitting a penalty settlement offer. The Company is currently negotiating with the CPSC staff the global resolution of these matters. The Company has also submitted to the CPSC staff additional information about capacitor-related issues outside the date range of the expanded recall. At August 31, 2005, the Company had an aggregate accrued liability of $7.8 million with respect to the current capacitor-related recall and its possible expansion, the cord-related recall, the matters pending before the CPSC, and associated legal expenses. The actual cost of these matters could be substantially different than the liability recorded by the Company. The Company expects to be reimbursed by a supplier for substantially all product recall expenses and additional warranty expenses regarding the current scope of the capacitor-related matter and at August 31, 2005 had a remaining receivable of $4.8 million from that supplier. The Company also intends to pursue vigorously the recovery of all costs associated with the cord-related product recall, but there can be no assurance it will be able to recover any portion of the costs because of the financial condition of the supplier. 57 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) The changes in product warranty reserve, which includes estimated recall costs, during the years ended August 31, 2005, 2004, and 2003 are summarized as follows: Balance, beginning of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Increase in warranty reserve related to capacitors . . . . . . . . . . . . . . . Warranty and recall expense during the year . . . . . . . . . . . . . . . . . . . Payments made during the year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $11,694 — 4,143 (5,799) $ 4,289 5,700 5,545 (3,840) $ 6,879 — 1,809 (4,399) Balance, end of year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $10,038 $11,694 $ 4,289 2005 2004 2003 Note 7: Special Charge and Impairment Charge On February 22, 2005, the Company announced additional actions to accelerate its efforts to streamline and improve the effectiveness of its operations. As part of this program, the Company recorded a pretax charge of $17.0 million in the second quarter of 2005 to reflect the costs associated with the elimination of approximately 1,100 positions worldwide. This number is comprised of approximately 500 hourly and 600 salaried personnel. This ongoing Company-wide streamlining effort includes facility consolidations and process improvement initiatives and involves ABL, ASP, and the corporate office. The Company took an additional pretax charge of $6.0 million in the fourth quarter of 2005 related to the previously announced reduction in force as well as certain follow-on actions under the Company’s ongoing restructuring program. The charges included severance and related employee benefits. The changes in the special charge reserve (included in Accrued compensation on the Consolidated Balance Sheets) during the year ended August 31, 2005 are summarized as follows: Balance as of August 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Payments made during the period . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Non-cash items . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ — 23,000 (6,094) (2,401) Balance as of August 31, 2005 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $14,505 As part of ABL’s ongoing initiative to enhance its global supply chain through the consolidation of certain manufacturing facilities, the Company recognized approximately $0.5 million and $1.9 million in impairment charges on assets held for sale related to these facilities in fiscal 2005 and 2004, respectively. The carrying amount of these assets at August 31, 2005 was approximately $9.0 million. The Company currently has the four facilities listed for sale and plans to sell the facilities during fiscal 2006. ABL also recognized $0.2 million in fiscal 2005 related to the impairment of a module of the Company’s enterprise resource planning system that is no longer used. Note 8: Derivative Financial Instruments During fiscal 2004, the Company entered into certain foreign currency contracts to hedge its exposure to variability in exchange rates on certain anticipated intercompany transactions with a Canadian business unit. At August 31, 2005, the Company had no foreign currency contracts outstanding. The Company accounts for these contracts in accordance with SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended by SFAS No. 137, SFAS No. 138, and SFAS No. 149. The 58 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Company’s foreign currency contracts have been designated as foreign currency cash flow hedges and, accordingly, gains or losses resulting from changes in the fair value of these contracts are included in Accumulated other comprehensive loss items until the hedged transaction occurs, at which time the related gains or losses are recognized. Amounts included in future earnings related to these contracts may differ from amounts currently recorded in Accumulated other comprehensive loss items. Note 9: Income Taxes Prior to the Distribution, Acuity Brands was included in the consolidated federal income tax return of NSI. The Company’s provision for income taxes in the accompanying Consolidated Statements of Income, prior to the Distribution, reflects federal, state, and foreign income taxes calculated using the separate return basis. Acuity Brands accounts for income taxes using the asset and liability approach as prescribed by SFAS No. 109, Accounting for Income Taxes. This approach requires recognition of deferred tax liabilities and assets for the expected future tax consequences of events that have been included in the financial statements or tax returns. Using the enacted tax rates in effect for the year in which the differences are expected to reverse, deferred tax liabilities and assets are determined based on the differences between the financial reporting and the tax basis of an asset or liability. The provision for income taxes consists of the following components: Years Ended August 31, 2005 2004 2003 Provision for current federal taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for current state taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for current foreign taxes . . . . . . . . . . . . . . . . . . . . . . . . . . Provision for deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 24,910 1,392 7,890 (11,589) $23,419 1,044 8,758 2,182 $16,168 1,097 6,623 2,911 Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . $ 22,603 $35,403 $26,799 A reconciliation from the federal statutory rate to the total provision for income taxes is as follows: Federal income tax computed at statutory rate . . . . . . . . . . . . . . . . . State income tax, net of federal income tax benefit . . . . . . . . . . . . . . Foreign permanent differences and rate differential . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other, net $26,191 722 (951) (3,359) $35,916 559 (513) (559) $26,103 891 13 (208) Total provision for income taxes . . . . . . . . . . . . . . . . . . . . . . . . $22,603 $35,403 $26,799 Years Ended August 31, 2005 2004 2003 59 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Components of the net deferred income tax asset at August 31, 2005 and 2004 include: August 31, 2005 2004 Deferred Income Tax Liabilities: Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Goodwill and intangibles . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,893 52,511 2,237 $ 6,095 50,068 303 Total deferred income tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 57,641 56,466 Deferred Income Tax Assets: Self-insurance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Pension . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Bonuses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Foreign tax losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other accruals not yet deductible . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Total deferred income tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Valuation allowance . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (9,386) (15,411) (29,391) (539) (1,020) (22,109) (6,515) (84,371) 2,315 (9,360) (10,442) (24,928) (1,095) (605) (13,160) (3,498) (63,088) 1,966 Net deferred income tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $(24,415) $ (4,656) Acuity Brands currently intends to indefinitely reinvest all undistributed earnings of and original investments in foreign subsidiaries, which amounted to approximately $56.0 million at August 31, 2005; however, this amount may be adjusted based on changes in business, economic, or other conditions. If these earnings were distributed to the U.S. in the form of dividends or otherwise, or if the shares of the relevant foreign subsidiaries were sold or otherwise transferred, the Company would be subject to additional U.S. income taxes (subject to an adjustment for foreign tax credits) and foreign withholding taxes. Determination of the amount of unrecognized deferred income tax liability related to these earnings or investments is not practicable. Deferred tax assets were partially offset by valuation allowances of $2.3 million and $2.0 million at August 31, 2005 and August 31, 2004, respectively. These allowances are required to reflect the net realizable value of certain foreign temporary differences and state tax credit carryforwards. At August 31, 2005, foreign net operating loss carryforwards were approximately $3.1 million. Approximately $1.6 million of the foreign net operating loss carryforwards have no expiration while the remaining carryforwards expire in 2015. Additionally, the Company has state tax credit carryforwards of approximately $2.1 million, which will expire between 2009 and 2014. 60 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Note 10: Quarterly Financial Data (Unaudited) Net Sales Gross Profit Income Before Taxes Net Income Basic Earnings Per Share Diluted Earnings Per Share 2005 1st Quarter . . . . . . . . . . . . . 2nd Quarter . . . . . . . . . . . . . 3rd Quarter . . . . . . . . . . . . . 4th Quarter . . . . . . . . . . . . . 2004 1st Quarter . . . . . . . . . . . . . 2nd Quarter . . . . . . . . . . . . . 3rd Quarter . . . . . . . . . . . . . 4th Quarter . . . . . . . . . . . . . $525,202 505,121 545,327 597,204 $517,538 491,039 532,226 563,364 $213,651 190,048 212,344 232,500 $210,181 196,891 214,882 228,833 $ 20,285 (13,056) 29,686 37,917 $13,165 (8,437) 19,692 27,809 $ 20,183 14,874 27,085 40,475 $12,917 9,519 18,012 26,766 $ 0.31 (0.20) 0.45 0.63 $ 0.31 0.23 0.43 0.63 $ 0.30 (0.20) 0.44 0.61 $ 0.30 0.22 0.42 0.62 Certain reclassifications were made to 2004 quarterly information to conform to 2005 presentation. The Company reclassified certain costs related to field scrap, customer accommodations, and other product-related costs from selling, distribution, and administrative expenses to cost of products sold. Gross profit in the table above is lower than what was previously reported by the following: $5.1 million, $5.2 million, and $3.7 million in the first, second, and third quarters of fiscal 2005, respectively, and $4.5 million, $4.6 million, $7.5 million, and $6.5 million in the first, second, third, and fourth quarters of fiscal 2004, respectively. Net sales, income before taxes, net income, basic earnings per share, and diluted earnings per share were not impacted by these reclassifications. 61 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) Note 11: Business Segment Information 2005 2004 2003 Net Sales: ABL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,637,902 534,952 $1,580,498 523,669 $1,538,751 510,557 Total Net Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $2,172,854 $2,104,167 $2,049,308 Operating (Loss) Profit: ABL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Special Charge* . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 110,267 (15,652) 45,901 (3,595) (26,423) (3,753) $ 118,904 — 43,570 — (24,547) — 96,825 — 31,313 — (17,862) — Total Operating Profit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 106,745 $ 137,927 $ 110,276 Depreciation: ABL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 28,470 8,947 473 $ 31,000 8,031 745 33,664 8,356 829 Total Depreciation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 37,890 $ 39,776 $ 42,849 Amortization: ABL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 3,159 26 — $ 3,158 26 — Total Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3,185 $ 3,184 $ 3,158 32 — 3,190 Capital Expenditures: ABL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ $ 19,787 12,505 344 $ 44,251 9,555 15 20,063 8,024 67 Total Capital Expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 32,636 $ 53,821 $ 28,154 * See further discussion of Special Charge in Note 7. ABL . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ASP . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Corporate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,091,244 236,363 114,608 $1,094,762 222,940 38,750 $1,442,215 $1,356,452 Total Assets August 31, 2005 August 31, 2004 62 ACUITY BRANDS, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued) (Dollar amounts in thousands, except share and per-share data and as indicated) The geographic distribution of Acuity Brands’ net sales, operating profit, and long-lived assets is summarized in the following table: Net sales (1) Domestic (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Operating profit Domestic (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International Long-lived assets (3) Domestic (2) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . International 2005 2004 (4) 2003 (4) $1,915,904 256,950 $1,853,669 250,498 $1,797,298 252,010 $2,172,854 $2,104,167 $2,049,308 $ 84,776 21,969 $ 112,322 25,605 $ 94,325 15,951 $ 106,745 $ 137,927 $ 110,276 $ 199,950 56,182 $ 209,073 54,888 $ 212,996 41,152 $ 256,132 $ 263,961 $ 254,148 (1) Net sales are attributed to each country based on the selling location. (2) Domestic amounts include net sales, operating profit, and long-lived assets for U.S. based operations. (3) Long-lived assets include net property, plant, and equipment, long-term deferred income tax assets, and other long-term assets. (4) Certain net sales amounts in 2004 and 2003 were reclassified for disclosure purposes only from international to domestic to more accurately reflect intercompany transactions. The reclasses do not impact total net sales and were not material. 63 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure None. Item 9a. Controls and Procedures Disclosure controls and procedures are controls and other procedures that are designed to reasonably ensure that information required to be disclosed in the reports filed or submitted by the Company under the Securities Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to reasonably ensure that information required to be disclosed by the Company in the reports filed under the Securities Exchange Act is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. As required by SEC rules, the Company has evaluated the effectiveness of the design and operation of its disclosure controls and procedures as of August 31, 2005. This evaluation was carried out under the supervision and with the participation of management, including the principal executive officer and principal financial officer. Based on this evaluation, these officers have concluded that the design and operation of the Company’s disclosure controls and procedures are effective at a reasonable assurance level. However, because all disclosure procedures must rely to a significant degree on actions or decisions made by employees throughout the organization, such as reporting of material events, the Company and its reporting officers believe that they cannot provide absolute assurance that all control issues and instances of fraud or errors and omissions, if any, within the Company will be detected. Limitations within any control system, including the Company’s control system, include faulty judgments in decision-making or simple errors or mistakes. In addition, controls can be circumvented by an individual, by collusion between two or more people, or by management override of the control. Because of these limitations, misstatements due to error or fraud may occur and may not be detected. Management’s annual report on the Company’s internal control over financial reporting and the independent registered public accounting firm’s attestation report are included in the Company’s 2005 Financial Statements in Item 8 of this Annual Report on Form 10-K, under the headings, “Management’s Report on Internal Control over Financial Reporting” and “Report of Independent Registered Public Accounting Firm”, respectively, and are incorporated herein by reference. There have been no changes in the Company’s internal control over financial reporting that occurred during the Company’s most recent completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. CEO and CFO Certifications The Company’s Chief Executive Officer and Vice President, Controller, and Interim Chief Financial Officer have filed with the Securities and Exchange Commission the certifications required by Section 302 of the Sarbanes-Oxley Act of 2002 as Exhibits 31.1 and 31.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005. In addition, on November 15, 2004 the Company’s CEO certified to the New York Stock Exchange that he was not aware of any violation by the Company of the NYSE corporate governance listing standards as in effect on November 14, 2004. The foregoing certification was unqualified. 64 Item 10. Directors and Executive Officers of the Registrant PART III The information required by this item, with respect to directors, is included under the captions Director Nominees for Terms Expiring at the 2008 Annual Meeting and Directors with Terms Expiring at the 2006 and 2007 Annual Meetings of the Company’s proxy statement for the annual meeting of stockholders to be held January 12, 2006, to be filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this item, with respect to executive officers, is included under the caption Management – Executive Officers of the Company’s proxy statement for the annual meeting of stockholders to be held January 12, 2006, to be filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. The information required by this item, with respect to beneficial ownership reporting, is included under the caption Section 16(a) Beneficial Ownership Reporting Compliance of the Company’s proxy statement for the annual meeting of stockholders to be held January 12, 2006, to be filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 11. Executive Compensation The information required by this item is included under the captions Compensation of Directors, Other Information Concerning the Board and its Committees, Compensation Committee Interlocks and Insider Participation, Summary Compensation Table, Option Grants in Last Fiscal Year, Aggregated Option Exercises and Fiscal Year-End Option Values, Employment Contracts, Severance Arrangements, and Other Agreements, and Pension and Supplemental Retirement Benefits of the Company’s proxy statement for the annual meeting of stockholders to be held January 12, 2006, to be filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters The information required by this item is included under the captions Beneficial Ownership of the Corporation’s Securities and Disclosure with Respect to Equity Compensation Plans of the Company’s proxy statement for the annual meeting of stockholders to be held January 12, 2006, to be filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 13. Certain Relationships and Related Transactions The information required by this item is included under the caption Certain Relationships and Related Party Transactions of the Company’s proxy statement for the annual meeting of stockholders to be held January 12, 2006, to be filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. Item 14. Principal Accounting Fees and Services The information required by this item is included under the caption Fees Billed by Independent Auditors of the Company’s proxy statement for the annual meeting of stockholders to be held January 12, 2006, to be filed with the Commission pursuant to Regulation 14A, and is incorporated herein by reference. 65 Item 15. Exhibits and Financial Statement Schedules (a) The following documents are filed as a part of this report: PART IV (1) Management’s Report on Internal Control over Financial Reporting Reports of Independent Registered Public Accounting Firm (Ernst & Young LLP) Consolidated Balance Sheets as of August 31, 2005 and 2004 Consolidated Statements of Income for the years ended August 31, 2005, 2004, and 2003 Consolidated Statements of Stockholders’ Equity and Comprehensive Income for the years ended August 31, 2005, 2004, and 2003 Consolidated Statements of Cash Flows for the years ended August 31, 2005, 2004, and 2003 Notes to Consolidated Financial Statements (2) Financial Statement Schedules: Schedule II Valuation and Qualifying Accounts Any of schedules I through V not listed above have been omitted because they are not applicable or the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits filed with this report (begins on next page): Copies of exhibits will be furnished to stockholders upon request at a nominal fee. Requests should be sent to Acuity Brands, Inc., Investor Relations Department, 1170 Peachtree Street, N.E., Suite 2400, Atlanta, Georgia 30309. 66 INDEX TO EXHIBITS EXHIBIT 2 Agreement and Plan of Distribution by and between National Service Industries, Inc. Inc., dated as of and Acuity Brands, November 30, 2001. is made Reference to Exhibit 2.1 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. EXHIBIT 3 (a) Restated Certificate of Incorporation of Acuity Brands, Inc. (b) Amended and Restated By-Laws of Acuity Brands, Inc. EXHIBIT 4 (a) Form of Certificate representing Acuity Brands, Inc. Common Stock. Protection Stockholder (b) Rights Agreement, dated as of November 12, 2001, between Acuity Brands, Inc. and Wells Fargo Bank Minnesota, N.A. (c) Letter Agreement appointing Successor Rights Agent. (d) First Supplemental Indenture, dated as of October 23, 2001, to Indenture dated January 26, 1999, between National Service Industries, Inc., L&C Spinco, Inc.*, L&C Lighting Group, Inc., The Zep Group, Inc. and SunTrust Bank. (e) Indenture dated as of January 26, 1999. (f) Form of 6% Note due February 1, 2009. (g) Form of 8.375% Note due August 1, 2010. 67 is made Reference to Exhibit 3.1 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 3(b) of registrant’s Form 10-Q as filed with the Commission on July 6, 2004, which is incorporated herein by reference. is made Reference to Exhibit 4.1 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. is made Reference to Exhibit 4.2 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 4(c) of registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated herein by reference. Reference is made to Exhibit 10.10 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.11 to Amendment No. 2 to the Registration Statement on Form 10, filed by L&C Spinco, Inc.* on September 6, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.12 to Amendment No. 2 to the Registration Statement on Form 10, filed by L&C Spinco, Inc.* on September 6, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.13 to Amendment No. 2 to the Registration Statement on Form 10, filed by L&C Spinco, Inc.* on September 6, 2001, which is incorporated herein by reference. EXHIBIT 10(i)A (1) Tax Disaffiliation Agreement, dated as of November 30, 2001, by and between National Service Industries, Inc. and Acuity Brands, Inc. Reference is made to Exhibit 10.1 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. (2) Transition Services Agreement, dated as of November 30, 2001, by and between National Service Industries, Inc. and Acuity Brands, Inc. Reference is made to Exhibit 10.2 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. is made Reference to Exhibit 2.1 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10(i)A(12) of the registrant’s Form 10-K as filed with the Commission on November 12, 2002, which is incorporated by reference. Reference is made to Exhibit 10(i)A(13) of the registrant’s Form 10-K as filed with the Commission on November 12, 2002, which is incorporated by reference. Reference is made to Exhibit 10(i)A(1) of the registrant’s Form 10-Q as filed with the Commission on April 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(i)A(3) of the registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(i)A(4) of the registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(i)A(5) of the registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(i)A(19) of the registrant’s Form 10-K as filed with the Commission on October 31, 2003, which is incorporated by reference. (3) Agreement and Plan of Distribution, dated as of November 30, 2001, by and Service Industries, Inc. and Acuity Brands, Inc. between National (4) Deed to Secure Debt and Security Agreement, dated as of October 11, 2002. (5) Promissory Note, dated as of October 11, 2002. (6) Amended Inc., 364-Day and Restated Revolving Credit Agreement dated as of April 4, 2003 among Acuity Brands, Subsidiary Borrowers from time to time hereto, the Lenders from time to time parties hereto, as Administrative Agent, and Wachovia Bank, N.A. as Syndication Agent. Bank One, NA, the (7) First Modification to Deed to Secure Debt and Security Agreement. (8) Agreement Letter Agreement and Plan of Distribution. amending (9) Agreement and Consent Relating to Tax Disaffiliation Agreement. (10) Credit and Security Agreement dated as of September 2, 2003 among Acuity Enterprise, Inc. and Acuity Unlimited Inc., as Borrowers, Acuity Lighting Group, and Acuity Inc., as Specialty Products Group, Servicers, Blue Ridge Asset Funding Corporation, the Liquidity Banks from and party time to National Bank, Wachovia Association, as Agent. hereto time Inc. 68 (11) Receivables Sale and Contribution Agreement dated as of September 2, 2003 Specialty Products Group, Inc., as Seller, and Acuity Enterprise, Inc., as Buyer. between Acuity Reference is made to Exhibit 10(i)A(20) of the registrant’s Form 10-K as filed with the Commission on October 31, 2003, which is incorporated by reference. (12) Amended and Restated Receivables Sale and Contribution Agreement dated as of September 2, 2003 between Acuity Lighting Group, Inc., Service successor Industries, Inc., as Seller, and Acuity Unlimited, formerly know as Inc., L&C Funding, Inc., as Buyer. National to Reference is made to Exhibit 10(i)A(21) of the registrant’s Form 10-K as filed with the Commission on October 31, 2003, which is incorporated by reference. (13) Performance Undertaking dated as of September 2, 2003, executed by Acuity Brands, Inc. in favor of Acuity Unlimited, Inc. Reference is made to Exhibit 10(i)A(22) of the registrant’s Form 10-K as filed with the Commission on October 31, 2003, which is incorporated by reference. (14) Performance Undertaking dated as of September 2, 2003, executed by Acuity Brands, Inc. in favor of Acuity Enterprise, Inc. Reference is made to Exhibit 10(i)A(23) of the registrant’s Form 10-K as filed with the Commission on October 31, 2003, which is incorporated by reference. Reference is made to Exhibit 10(i)A-1(1) of the registrant’s Form 10-Q as filed with the Commission on April 6, 2004, which is incorporated by reference. (15) 5-Year Revolving Credit Agreement, dated as of April 2, 2004 among Acuity Brands, Inc., the Subsidiary Borrowers from time to time parties thereto, the Lenders from time to time parties thereto, Bank One, NA (Main Office Chicago), Wachovia Bank, N.A. and LaSalle Bank National Association and Key Bank National Association, Banc One Capital Markets, Inc. (16) Reimbursement Agreement between Acuity Brands and The General Electric Company, dated February 27, 2004. Reference is made to Exhibit 10(iii)A-(1) of the registrant’s Form 10-Q as filed with the Commission on April 6, 2004, which is incorporated by reference. (17) Tax Disaffiliation Agreement, dated as of October 7, 2005, by and between National Service Industries, Inc. and Acuity Brands, Inc. Filed with the Commission as part of this Form 10-K. (18) Amendment to Receivables Facility, dated as of September 29, 2005. Filed with the Commission as part of this Form 10-K. EXHIBIT 10(iii)A Management Contracts and Compensatory Arrangements: (1) Acuity Brands, 2001 Nonemployee Directors’ Stock Option Plan. Inc. Reference is made to Exhibit 10.6 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. (2) Amendment No. 1 to Acuity Brands, Inc. Nonemployee Directors’ Stock Option Plan, dated December 20, 2001. Reference is made to Exhibit 10(iii)A(3) of registrant’s Form 10-Q as filed with the Commission on January 14, 2002, which is incorporated herein by reference. 69 (3) Form of Indemnification Agreement. (4) Form of Agreement. Severance Protection (5) Acuity Brands, Inc. Supplemental Deferred Savings Plan. (6) Acuity Brands, Inc. Executives’ Deferred Compensation Plan. (7) Acuity Inc. Management Benefit Plan. Brands, Senior (8) Acuity Brands, Inc. Nonemployee Director Deferred Stock Unit Plan. (9) Acuity Brands, Inc. Executive Benefits Trust. (10) Acuity Brands, Inc. Supplemental Retirement Plan for Executives. (11) Acuity Brands, Inc. Benefits Protection Trust. (12) Assumption Letter of Acuity Brands, Inc. with respect to Employment Letter Agreement between National Service Industries, Inc. and Joseph G. Parham, Jr. (13) Employment Agreement Letter between National Service Industries, Inc. and Joseph G. Parham, Jr., dated May 3, 2000. (14) Assumption Letter of Acuity Brands, Inc., with respect to Employment Letter Agreement between National Inc. and James Service Industries, H. Heagle. 70 Reference is made to Exhibit 10.7 to the Registration Statement on Form 10, filed by L&C Spinco, Inc.* with the Commission on July 3, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.8 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.14 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.15 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.16 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.17 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.18 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.19 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.21 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10.22(b)(i) of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10(iii)A(2) of the Form 10-Q of National Service Industries, Inc. for the quarter ended May 31, 2000, which is incorporated herein by reference. Reference is made to Exhibit 10.22(c) of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. (15) Employment Agreement Letter between National Service Industries, Inc. and James H. Heagle, dated March 28, 2000. (16) Employment Letter between Acuity Brands, Vernon October 30, 2001. J. Nagel, dated Agreement Inc. and of as (17) Form of Acuity Brands, Inc. Letter regarding Bonuses. (18) Amended Acuity Management Incentive Plan. Brands, Compensation Inc. and (19) Amendment No. 1 to Acuity Brands, Inc. Supplemental Deferred Savings Plan. (20) Amendment No. 1 to Acuity Brands, Deferred Executives’ Inc. Compensation Plan. (21) Amendment No. 1 to Acuity Brands, Inc. Supplemental Retirement Plan for Executives. (22) Acuity Brands, 2002 Supplemental Executive Retirement Plan. Inc. (23) Letter Agreement to Supplemental Executive Retirement Plan between Acuity Brands, Inc. and James H. Heagle. relating (24) Letter Agreement to Supplemental Executive Retirement Plan between Acuity Brands, Inc. and Vernon J. Nagel. relating (25) Letter Agreement to Supplemental Executive Retirement Plan between Acuity Brands, Inc. and Joseph G. Parham, Jr. relating (26) Letter Agreement to Supplemental Executive Retirement Plan between Acuity Brands, Inc. and Kenyon W. Murphy. relating (27) Amendment No. 2 to Acuity Brands, Inc. Supplemental Deferred Savings Plan. 71 Reference is made to Exhibit 10.22(d) to Amendment No. 3 to the Registration Statement on Form 10, filed by L&C Spinco, Inc.* on September 27, 2001, which is incorporated herein by reference. Reference is made to Exhibit 10(iii)A(20) of registrant’s Form 10-Q as filed with the Commission on January 14, 2002, which is incorporated herein by reference. Reference is made to Exhibit 10.25 of registrant’s Form 8-K as filed with the Commission on December 14, 2001, which is incorporated herein by reference. is made to Exhibit A of Reference registrant’s proxy statement for the Annual Meeting of Stockholders as filed with the Commission on November 12, 2002, which is incorporated herein by reference. Reference is made to Exhibit 10(iii)A(2) of the registrant’s Form 10-Q as filed with the Commission on January 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(3) of the registrant’s Form 10-Q as filed with the Commission on January 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(2) of the registrant’s Form 10-Q as filed with the Commission on April 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(3) of the registrant’s Form 10-Q as filed with the Commission on April 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(3) of the registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(4) of the registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(5) of the registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(6) of the registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(8) of the registrant’s Form 10-Q as filed with the Commission on July 14, 2003, which is incorporated by reference. (28) Form of Severance Agreement. (29) Severance Agreement between Acuity Brands, Inc. and James H. Heagle. (30) Amended Brands, Plan. and Restated Acuity Inc. Long-Term Incentive (31) Letter Agreement between Acuity Brands, Inc. and Vernon J. Nagel, dated June 29, 2004. (32) Amended and Restated Severance Agreement, of entered January 20, 2004, by and between Acuity Brands, Inc. and Vernon J. Nagel. into as Reference is made to Exhibit 10(iii)A(32) of the registrant’s Form 10-K as filed with the Commission on October 31, 2003, which is incorporated by reference. Reference is made to Exhibit 10(iii)A of the registrant’s Form 10-Q as filed with the Commission on January 14, 2004, which is incorporated by reference. is made to Exhibit A of Reference registrant’s proxy statement for the Annual Meeting of Stockholders as filed with the Commission on November 7, 2003, which is incorporated herein by reference. Reference is made to Exhibit 10(III)A(1) of the registrant’s Form 10-Q as filed with the Commission on July 6, 2004, which is incorporated by reference. Reference is made to Exhibit 10(III)A(2) of the registrant’s Form 10-Q as filed with the Commission on July 6, 2004, which is incorporated by reference. (33) Letter Agreement between Acuity Brands, Inc. and John K. Morgan, dated June 24, 2004. Reference is made to Exhibit 10(III)A(3) of the registrant’s Form 10-Q as filed with the Commission on July 6, 2004, which is incorporated by reference. (34) Amended and Restated Severance Agreement, entered into as of January 20, 2004, by and between Acuity Brands, Inc. and John K. Morgan. Reference is made to Exhibit 10(III)A(4) of the registrant’s Form 10-Q as filed with the Commission on July 6, 2004, which is incorporated by reference. (35) Letter Agreement between Acuity Brands, Inc. and Wesley E. Wittich, dated June 17, 2004. (36) Amendment No. 3 to Acuity Brands, Inc. Supplemental Deferred Savings Plan. Reference is made to Exhibit 10(III)A(5) of the registrant’s Form 10-Q as filed with the Commission on July 6, 2004, which is incorporated by reference. Reference is made to Exhibit 10(iii)A(36) of the registrant’s Form 10-K as filed with the Commission on October 29, 2004, which is incorporated by reference. (37) Acuity Brands, Inc. Nonemployee Director Deferred Stock Unit Plan, amended and restated effective as of January 1, 2004. Reference is made to Exhibit 10(III)A(1) of the registrant’s Form 10-Q as filed with the Commission on January 6, 2005, which is incorporated by reference. (38) Acuity Brands, Inc. Management Compensation and Incentive Plan Fiscal Year 2005 Plan Rules for Executive Officers. Reference is made to Exhibit 10(III)A(2) of the registrant’s Form 10-Q as filed with the Commission on January 6, 2005, which is incorporated by reference. (39) Form of Incentive Stock Option Agreement for Executive Officers. Reference is made to Exhibit 10(III)A(3) of the registrant’s Form 10-Q as filed with the Commission on January 6, 2005, which is incorporated by reference. 72 (40) Form of Nonqualified Stock Option Agreement for Executive Officers. Reference is made to Exhibit 10(III)A(4) of the registrant’s Form 10-Q as filed with the Commission on January 6, 2005, which is incorporated by reference. (41) Premium-Priced Nonqualified Stock Option Agreement for Executive Officers between Acuity Brands, Inc. and Vernon J. Nagel. Reference is made to Exhibit 10(III)A(5) of the registrant’s Form 10-Q as filed with the Commission on January 6, 2005, which is incorporated by reference. (42) Form of Restricted Stock Award Agreement for Executive Officers. (43) Acuity Brands, Inc. Long-Term Incentive Plan Fiscal Year 2005 Plan Rules for Executive Officers. (44) Acuity Brands, Program. Inc. Matching Gift (45) Letter Agreement dated April 26, 2005 between Acuity Brands, Inc. and Edward H. Bastian. (46) Amended and Restated Severance Agreement, entered into as of August 1, 2005, by and between Acuity Brands, Inc. and John K. Morgan. (47) Acuity Brands, Inc. Long-Term Incentive Plan Fiscal Year 2006 Plan Rules for Executive Officers. (48) Acuity Brands, Inc. Management Compensation and Incentive Plan for Fiscal Year 2006 Plan Rules Executive Officers. (49) Amendment to Severance Protection Agreement entered into as of August 1, 2005, by and between Acuity Brands, Inc. and John K. Morgan. (50) Letter Agreement dated August 1, 2005 between Acuity Brands, Inc. and John K. Morgan. Reference is made to Exhibit 10(III)A(6) of the registrant’s Form 10-Q as filed with the Commission on January 6, 2005, which is incorporated by reference. Reference is made to Exhibit 10(III)A(7) of the registrant’s Form 10-Q as filed with the Commission on January 6, 2005, which is incorporated by reference. Reference is made to Exhibit 10(III)A(1) of the registrant’s Form 10-Q as filed with the Commission on April 4, 2005, which is incorporated by reference. Reference is made to Exhibit 10.1 of registrant’s Form 8-K as filed with the Commission on April 27, 2005, which is incorporated herein by reference. Filed with the Commission as part of this Form 10-K. Filed with the Commission as part of this Form 10-K. Filed with the Commission as part of this Form 10-K. Filed with the Commission as part of this Form 10-K. Filed with the Commission as part of this Form 10-K. Code of Ethics and Business Conduct. Reference is made to Exhibit 14 of registrant’s Form 8-K as filed with the Commission on January 12, 2005, which is incorporated herein by reference. 73 EXHIBIT 14 EXHIBIT 21 List of Subsidiaries. Filed with the Commission as part of this Form 10-K. EXHIBIT 23 Consent Accounting Firm. of Registered Public Filed with the Commission as part of this Form 10-K. EXHIBIT 24 Powers of Attorney. Filed with the Commission as part of this Form 10-K. EXHIBIT 31 (a) EXHIBIT 31 (b) Rule Certification, J. Nagel. Rule Certification, Holcom. 13a-14(a)/15d-14(a) by Vernon signed Filed with the Commission as part of this Form 10-K. 13a-14(a)/15d-14(a) signed by Karen J. Filed with the Commission as part of this Form 10-K. EXHIBIT 32 EXHIBIT 32 (a) (b) Section 1350 Certification, signed by Vernon J. Nagel. Filed with the Commission as part of this Form 10-K. Section 1350 Certification, signed by Karen J. Holcom. Filed with the Commission as part of this Form 10-K. * Acuity Brands, Inc. operated under the name L&C Spinco, Inc. from July 27, 2001 – November 9, 2001. 74 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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. Date: November 1, 2005 By: /s/ VERNON J. NAGEL Vernon J. Nagel Chairman, President, and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature Title Date /S/ VERNON J. NAGEL Chairman, President, and Chief November 1, 2005 Vernon J. Nagel Executive Officer /S/ KAREN J. HOLCOM Karen J. Holcom Vice President, Controller, and Interim Chief Financial Officer November 1, 2005 * Peter C. Browning * John L. Clendenin * Jay M. Davis * Earnest W. Deavenport, Jr. * Robert F. McCullough * Julia B. North * Ray M. Robinson * Neil Williams Director Director Director Director Director Director Director Director November 1, 2005 November 1, 2005 November 1, 2005 November 1, 2005 November 1, 2005 November 1, 2005 November 1, 2005 November 1, 2005 *BY: /S/ KENYON W. MURPHY Attorney-in-Fact November 1, 2005 Kenyon W. Murphy 75 Schedule II Acuity Brands, Inc. Valuation and Qualifying Accounts for the Years Ended August 31, 2005, 2004, and 2003 (In thousands) Balance at Beginning of Year Additions Charged to Costs and Expenses Other Accounts (1) Deductions Balance at End of Year Year Ended August 31, 2005: Reserve for doubtful accounts . . . . . . . . . . . . . . . . . . . $ 8,285 Reserve for estimated warranty and recall costs . . . . . . $11,694 4,570 4,143 Reserve for estimated returns and allowances . . . . . . . $ 5,343 74,695 Self-insurance reserve (2) . . . . . . . . . . . . . . . . . . . . . . . $23,057 10,166 194 6,050 $ 6,999 — — — 5,799 $10,038 73,468 $ 6,570 11,908 $21,315 Year Ended August 31, 2004: Reserve for doubtful accounts . . . . . . . . . . . . . . . . . . . $ 8,634 Reserve for estimated warranty and recall costs . . . . . . $ 4,289 3,200 5,545 161 5,700 Reserve for estimated returns and allowances (3) . . . . $ 5,303 71,133 Self-insurance reserve (2) . . . . . . . . . . . . . . . . . . . . . . . $23,408 13,264 Year Ended August 31, 2003: Reserve for doubtful accounts . . . . . . . . . . . . . . . . . . . $ 8,560 Reserve for estimated warranty costs . . . . . . . . . . . . . . $ 6,879 4,399 1,809 Reserve for estimated returns and allowances (3) . . . . $ 4,317 68,960 Self-insurance reserve (2) . . . . . . . . . . . . . . . . . . . . . . . $21,650 14,165 — — — — — — 3,710 $ 8,285 3,840 $11,694 71,093 $ 5,343 13,615 $23,057 4,325 $ 8,634 4,399 $ 4,289 67,974 $ 5,303 12,407 $23,408 (1) Includes recoveries credited to the reserve. During fiscal 2004, the Company accrued a liability of $5.7 million for the estimated recall expenses and additional related warranty expenses. The Company also recorded a receivable equal to the liability accrued because the supplier of the faulty component entered into a reimbursement agreement pursuant to which it has committed to reimburse the Company on a monthly basis for recall and warranty expenses up to the amount of the liability the Company accrued. Includes reserves for workers’ compensation, auto, product, and general liability claims. (2) (3) Certain prior year amounts have been adjusted to show activity on a gross basis to be comparable to 2005 presentation. 76 Bus iness Description Sh ar e holder Infor m ation Acuity Brands, Inc., with fiscal year 2005 net sales of approximately $2.2 billion, is comprised of Acuity Brands Lighting and Acuity Specialty Products. Acuity Brands Lighting is one of the world’s leading providers of lighting fixtures and includes brands such as Lithonia Lighting®, Holophane®, Peerless®, Hydrel®, American Electric Lighting®, and Gotham®. Acuity Specialty Products is a leading provider of specialty chemicals and includes brands such as Zep®, Zep Commercial®, Enforcer®, and Selig™. Headquartered in Atlanta, Georgia, Acuity Brands employs approximately 10,000 people and has operations throughout North America and in Europe and Asia. Fina ncial Highlights For the year ended August 31 (in millions of dollars, except earnings per share) Operations: Net sales Gross profit % Operating profit Operating profit % Net income Diluted earnings per share Diluted weighted average number of shares outstanding Return on average stockholders’ equity Net cash provided by operating activities Depreciation and amortization Capital expenditures Employees At August 31 (in millions of dollars) Financial Position: 2005 (1) 2004 % Change $ 2,172.9 $ 2,104.2 3% $ $ $ $ $ $ $ 39.1% 106.7 4.9% 52.2 1.17 44.8 10.3% 137.1 41.1 32.6 10,000 $ $ $ $ $ $ $ 40.4% 137.9 6.6% 67.2 1.56 43.2 15.4% 113.3 43.0 53.8 11,000 (23)% (22)% (25)% 21% (4)% (39)% (9)% 2005 2004 % Change Total assets Total cash and cash equivalents Total debt Total stockholders’ equity Total debt to capitalization Operating working capital as a percentage of net sales (2) $ 1,442.2 98.5 $ 372.3 $ 541.8 $ $ 1,356.5 $ 14.1 $ 395.7 $ 478.0 40.7% 15.6% 45.3% 16.5% 6% 599% (6)% 13% (1) 2005 results include a $23.0 million pre-tax restructuring charge (or $0.34 per diluted share). (2) Operating working capital is defined as net accounts receivable plus inventories minus accounts payable. Corporate Headquarters Acuity Brands, Inc. 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 404-853-1400 www.acuitybrands.com Acuity Brands Lighting One Lithonia Way Conyers, Georgia 30012-3957 770-922-9000 www.acuitybrandslighting.com Acuity Specialty Products 4401 Northside Parkway Suite 700 Atlanta, Georgia 30327-3093 404-352-1680 www.acuitysp.com Independent Registered Public Accounting Firm Ernst & Young LLP 600 Peachtree Street Suite 2800 Atlanta, Georgia 30308-2215 404-874-8300 Annual Meeting 1:00 p.m. Eastern Time Thursday, January 12, 2006 Four Seasons Hotel Ballroom 75 Fourteenth Street, NE Atlanta, Georgia 30309 Reports Available To Shareholders Copies of the following company reports may be obtained, without charge: 2005 Annual Report to the Securities and Exchange Commission, filed on Form 10-K, and Quarterly Reports to the Securities and Exchange Commission, filed on Form 10-Q. Requests should be directed to: Acuity Brands, Inc. Attention: Investor Relations 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 404-853-1400 www.acuitybrands.com a t n a l t A / e y e e e s e e s y b d e c u d o r p d n a d e n g i s e d Stock Listing New York Stock Exchange Ticker Symbol: AYI The Company’s CEO certified to the NYSE on November 15, 2004, that he is not aware of any violation by the Company of the NYSE’s Corporate Governance listing standards. Shareholders of Record The number of shareholders of record of Acuity Brands common stock was 5,234 as of October 25, 2005. Transfer Agent And Registrar Questions about shareholder accounts, dividend checks and lost stock certificates should be directed to: The Bank of New York Shareholder Relations Department P. O. Box 11258 Church Street Station New York, New York 10286-1258 800-432-0140 212-815-3700 shareowners@bankofny.com www.stockbny.com Send certificates for transfer and address change to: The Bank of New York Receive and Deliver Department P.O. Box 11002 Church Street Station New York, New York 10286-1258 Account Access Shareholders can access their account information at the Web site of Acuity Brands’ transfer agent, The Bank of New York, at www.stockbny.com or at www.acuitybrands.com. Shareholders can securely view their account information and check their holdings 24 hours a day. Cash Dividends Acuity Brands offers direct deposit of dividends to financial institutions’ checking, savings, or money market accounts. For more information contact The Bank of New York at 800-432-0140 or 212-815-3700. BuyDIRECTSM Acuity Brands’ transfer agent, The Bank of New York, offers the BuyDIRECT investment plan, a direct purchase and sale plan for investors wishing to purchase Acuity Brands common stock. Dividends can be automatically reinvested. The plan is not sponsored or administered by Acuity Brands. For information regarding the plan, contact: The Bank of New York Church Street Station P.O. Box 11258 New York, New York 10286-1258 800-432-0140 212-815-3700 Remittance of Optional Cash Investments and Plan Transaction Requests Mail the tear-off portion of transaction advice or account statements to: The Bank of New York Investment Services Department/ Acuity Brands P.O. Box 1958 Newark, New Jersey 07101-9774 Forward-Looking Statements This annual report includes forward- looking statements regarding: (a) expected future results and (b) the impact of initiatives in each of the Company’s businesses. A variety of factors could cause actual results to differ materially from expected results. Please see the risk factors more fully described in the accompanying financial information, which is separately filed with the Securities and Exchange Commission as part of the Annual Report on Form 10-K for the year ended August 31, 2005. © 2005 Acuity Brands, Inc. All referenced trademarks are the property of their respective owners. ACUITY BRANDS WAY The Acuity Brands Way is our creed – it provides the fundamentals for creating and sustaining value for our customers, employees, and shareholders. It is the spirit of our business life together; it is what we create together. There are four building blocks to the Acuity Brands Way: • Our mission Our mission is to take good companies and make them great companies. • Our values Great companies show integrity by consistently behaving in ways that reflect their core values. We place confidence in our employees who demonstrate our four values: resolute, team-oriented, creative, and aspirational. • How we work together We work together constructively by demonstrating leadership, respect, and commitment. We are transparent with others and share our successes. We empower our employees to make decisions and contribute to our communities. • How we create value Great companies consistently create more value for their customers, employees, and shareholders than other companies. We are committed to creating value through setting high aspirations, measuring performance, achieving operating plans, committing to continuous improvement, and making changes faster than our competitors. The Acuity Brands Way guides how we do business and how we treat one another. Through the Acuity Brands Way, we’re on our way to high performance. A c u i t y B r a n d s , I n c . 2 0 0 5 A n n u a l R e p o r t Acuity Brands, Inc. 1170 Peachtree Street, NE Suite 2400 Atlanta, Georgia 30309-7676 404-853-1400 www.acuitybrands.com ® 2005An n ual Report 

Continue reading text version or see original annual report in PDF format above