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| AYI > SEC Filings for AYI > Form 10-Q on 14-Jan-2004 | All Recent SEC Filings |
14-Jan-2004
Quarterly Report
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.
Overview
Purpose
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 quarters ended November 30, 2003 and 2002. For a more complete understanding of this discussion, please read the Notes toConsolidated Financial Statements included in this report. Also, please refer to the Company's Annual Report on Form 10-K for the fiscal year ended August 31, 2003, filed with the Securities and Exchange Commission on October 31, 2003 (File No. 001-16583), for additional information regarding the Company.
Company
Acuity Brands is a holding company that owns and manages two business units, each operating a collection of businesses and product lines with well-known brands that design, produce, and distribute products and provide services to customers in numerous channels, primarily for consumer, commercial, institutional, and industrial applications. The business units of Acuity Brands operate in two distinct segments based on the different products produced and the customers served: Acuity Lighting Group ("Acuity Brands Lighting" or "ABL") and Acuity Specialty Products Group ("Acuity Specialty Products" or "ASP"). ABL produces a full range of indoor and outdoor lighting fixtures for commercial and institutional, industrial, and residential applications for markets throughout the United States, Canada, Mexico, and overseas. The Company believes 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 30 factories and distribution facilities to serve its extensive customer base. 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 markets throughout North America and Western Europe. ASP sells, through its salaried and commissioned direct sales force, over 9,000 different products, operates six plants, and serves over 300,000 customers through a network of distribution centers and warehouses. Acuity Brands, with its principal office in Atlanta, Georgia, has approximately 11,400 employees worldwide.
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, primarily from banks. 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 meet its obligations as they become due and 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 flows 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 during fiscal 2004 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 pay the same quarterly stockholder dividends in 2004 as were paid in 2003, and to make required contributions into the Company's pension plans. The Company expects to invest between $50 million and $55 million for new plant and equipment during fiscal 2004, as compared to $28 million in fiscal 2003. The increase in capital spending in fiscal 2004 compared to fiscal 2003 is due primarily to expenditures related to the consolidation of certain manufacturing facilities and enhancements to information technology capabilities at ABL and investments to improve manufacturing and waste management capabilities at ASP. The Company expects total indebtedness to increase by up to 10 percent in the first half of 2004 from $445.8 million reported at August 31, 2003, due primarily to the timing of certain expenses and capital spending associated with the consolidation of the manufacturing network at ABL. Overall, the Company expects to reduce total debt by the end of fiscal 2004 to approximately $400 million.
Cash Flow
Acuity Brands generated $4.4 million of cash flow from operations during the first three months of 2004 compared to $14.1 million generated in the prior year period. Cash flow from operations declined $9.7 million due primarily to higher operating working capital (defined as accounts receivable, net, plus inventory, minus accounts payable), partially offset by higher earnings and the timing of certain payroll distributions. Operating working capital increased by approximately $32.3 million to $357.7 million at November 30, 2003 from $325.4 million at August 31, 2003. The increase in operating working capital was due primarily to higher inventory and accounts receivable and lower accounts payable at ABL. Inventory increased at ABL to better enable the
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Company to meet customer service requirements while consolidating manufacturing facilities and implementing new information systems at certain of ABL's manufacturing facilities. Higher accounts receivable and lower accounts payable at ABL related primarily to the timing of certain payments from customers and payments to vendors, respectively.
Capital expenditures were $9.9 million in the first three months of 2004, an increase of approximately $2.6 million from the same period in the prior year. The Company continues to invest in new tooling and equipment primarily to improve productivity and product quality, increase manufacturing efficiencies, and enhance customer service capabilities in each segment. The increase in capital expenditures was due primarily to higher investment at ABL as the Company continues to consolidate certain manufacturing facilities and enhance its information technology capabilities. The Company used its available cash flow in the first three months of 2004 and 2003 primarily to fund capital expenditures and to pay dividends.
Capitalization
The capital structure of the Company is comprised principally of an asset-backed securitization program, borrowings from banks, senior notes, and the equity of its stockholders. Total debt outstanding increased modestly to $449.8 million at November 30, 2003 from $445.8 million at August 31, 2003.
Borrowings under the Company's primary bank financing agreement ("Revolving Credit Facility") are limited by financial covenants, the most restrictive of which is a leverage ratio calculated at the end of each fiscal quarter. The leverage ratio is calculated by dividing total indebtedness at the end of the quarter by EBITDA (earnings before interest, taxes, depreciation and amortization expense), as such terms are defined in the Revolving Credit Facility, for the trailing four quarters. At November 30, 2003, there were no outstanding borrowings under the Revolving Credit Facility.
Under the terms of the Revolving Credit Facility, the Company's maximum permitted leverage ratio, currently at 3.25, decreases to 3.00 at May 31, 2004. Generally, the financial covenants included in the Company's other financing agreements are consistent with the financial covenants contained in the Revolving Credit Facility. The Company was in compliance with all financial covenants contained in its financing agreements at November 30, 2003 and had additional borrowing capacity under the Revolving Credit Facility of $77.1 million at November 30, 2003 under the most restrictive covenant in effect at that time.
During fiscal 2004, the Company's consolidated stockholders' equity increased $13.5 million to $421.8 million at November 30, 2003. The increase was due primarily to net income earned during the period and fluctuations in foreign exchange rates, partially offset by the payment of dividends. The Company's debt to total capital ratio was 51.6 percent at November 30, 2003, down from approximately 52.2 percent at August 31, 2003.
Dividends
The Company paid cash dividends on common stock of $6.3 million ($0.15 per share) during the first three months of fiscal 2004. The Company expects to pay annual stockholder dividends of $0.60 per share during fiscal 2004, consistent with fiscal 2003.
Results of Operations
First Quarter of Fiscal 2004 Compared to First Quarter of Fiscal 2003
Consolidated Results
Net sales for the quarter ended November 30, 2003 were $517.5 million compared to $505.2 million reported in the year ago period, an increase of $12.3 million, or 2.4 percent. The growth in net sales, which occurred in both of the Company's segments, was due primarily to greater shipments to the home improvement and retail channels. Overall, consolidated gross profit margins increased to 41.5 percent of net sales in the first quarter of fiscal 2004, from 41.0 percent reported in the year-ago period, due primarily to improvements in pricing, the mix of products sold, and the impact of initiatives to reduce product cost, partially offset by higher raw materials costs and expenses associated with the consolidation of certain manufacturing facilities at ABL. Consolidated operating expenses increased slightly to 36.0 percent of net sales in the first quarter of fiscal 2004, compared to 35.8 percent of net sales in the same period one year earlier. The increase was due primarily to higher corporate expenses, partially offset by the impact of programs to reduce operating expenses and improve efficiencies. Consolidated operating profit of $28.6 million was $2.3 million higher in the first quarter of fiscal 2004 compared to the year-ago period due primarily to higher sales and gross profit margin, partially offset by the increased operating expenses. Consolidated operating profit margins were 5.5 percent of net sales in the first quarter of fiscal 2004 compared to 5.2 percent reported in the prior year. Net income for the first quarter of fiscal 2004 increased 22.9 percent to $12.9 million from $10.5 million reported in the first quarter of fiscal 2003. The increase in net income resulted primarily from the increase in operating profit noted above, lower interest expense associated with the decrease in outstanding borrowings, and a gain recognized on the sale of a small product line at ASP. Earnings per share in the first quarter of 2004 was $0.30 compared to $0.25 reported in the first quarter of 2003, an increase of 20.0 percent.
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Acuity Brands Lighting
Net sales at ABL in the first quarter of fiscal 2004 were $391.0 million compared to $382.7 million reported in the year-ago period, an increase of $8.3 million, or 2.2 percent. The increase was due primarily to greater shipments of products to the home improvement channel. While net sales increased during the first quarter of 2004, incoming orders remained soft, reflecting continued weak economic conditions, particularly in the commercial and industrial construction channel. This, along with process improvement initiatives to reduce order cycle times and shorten lead times to customers, resulted in a modestly lower backlog at November 30, 2003. The backlog at ABL decreased approximately $12.8 million, or 9.4 percent, to $123.3 million at November 30, 2003 from August 31, 2003.
Operating profit at ABL increased $1.8 million to $27.9 million in the first quarter of fiscal 2004 from $26.1 million reported in the prior year. Operating profit margins improved to 7.1 percent of net sales in the first quarter of 2004 from 6.8 percent reported in the same period a year ago. The increase in operating profit and margins was due primarily to favorable product mix, better pricing, and benefits from initiatives to reduce product costs and contain expenses. The improvement in operating profit was partially offset by costs associated with the consolidation of certain manufacturing facilities.
Acuity Specialty Products
Net sales at ASP in the first quarter of fiscal 2004 were $126.5 million compared to $122.6 million reported in the year-ago period, representing an increase of $3.9 million, or 3.2 percent. The increase in net sales was due primarily to greater shipments through the retail channel and to institutional and industrial customers in key domestic and international markets. Operating profit at ASP in the first quarter of fiscal 2004 increased to $7.4 million from $3.7 million reported in the year-ago period. Operating margins advanced to 5.9 percent of net sales from 3.0 percent of net sales a year ago. The improvement in operating profit and margin was due primarily to the higher sales noted above, the impact of recently implemented price increases, lower product costs, and the reduction of costs associated with new product introductions and logistics programs in the prior year.
Corporate
Corporate expenses were $6.7 million in the first quarter of fiscal 2004 compared to $3.5 million in the year-ago period. The increase was primarily due to greater expense for Company-wide restricted stock incentives and other share-based programs, reflecting, in part, the 33 percent appreciation in the Company's stock price during the quarter. Corporate expenses also included expenditures to facilitate compliance with the Sarbanes-Oxley Act.
Other (Income) Expense
Other (income) expense for Acuity Brands consisted primarily of interest expense and other miscellaneous non-operating activity including gains or losses on the sale of assets and foreign currency transactions. Interest expense, net was $8.7 million, a decrease of $1.1 million, or 11.2 percent, from the year-ago period. This decrease was due to a reduction in outstanding debt, partially offset by a higher weighted-average interest rate. During the first quarter of fiscal 2004, miscellaneous income (expense), net, included a pre-tax gain of approximately $0.7 million related to the sale of a small product line at ASP and a pre-tax loss of approximately $0.6 million related to the impairment of certain long-lived assets associated with the consolidation of certain manufacturing facilities at ABL.
Stock Option Expense
The Company anticipated adopting certain provisions of Statement of Financial Accounting Standards No. 148 in the first quarter of fiscal 2004, which would have required stock options to be expensed. In light of recent public communications from the Financial Accounting Standards Board, the Company has elected to delay the recognition of expense related to stock options until the final standard is promulgated. The recognition of stock option expense was projected to reduce earnings in fiscal 2004 by approximately $0.02 per share for each quarter beginning with the second quarter. See Note 2 of Notes to Consolidated Financial Statements contained in this Form 10-Q.
Outlook
Management remains optimistic about the long-term potential of the businesses that comprise Acuity Brands. However, management continues to be cautious about near-term results due to continued softness in demand and uncertainties that exist in the Company's key markets, particularly non-residential construction. Although it appears that certain sectors of the economy are showing signs of renewed growth and some economists are again predicting growth in portions of the non-residential construction market starting in calendar year 2004, the Company has yet to benefit from such a rebound. Therefore, management expects that the second quarter of fiscal 2004 will be very challenging. Further, as indicated by the Company's most recent Form 10-K, management expects earnings for the first half of fiscal 2004 to approximate those reported in the same period in 2003. Adjusting for the delay in accounting for stock option expense noted above, management expects full year earnings for fiscal 2004 to be in the range of $1.31 to $1.51 per share.
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Critical Accounting Policies
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 accounting principles generally accepted in the United States. The preparation of financial statements in conformity with accounting principles generally accepted in the United States 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 revenues and expenses 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, casualty, 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. For a detailed discussion of significant accounting policies that may involve a higher degree of judgment, please refer to the Company's Form 10-K for the year ended August 31, 2003.
Cautionary Statement Regarding Forward-Looking Information
This filing contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties. Consequently, actual results may differ materially from those indicated by the forward-looking statements. Statements made herein that may be considered forward-looking include statements that relate to future performance or results of the Company, including without limitation: (a) the Company's expectations regarding liquidity and availability under its financing arrangements to fund its operations, capital investments, profit improvement initiatives, debt payments, dividend payments, and required contributions into its pension plans; (b) planned spending of between $50 million and $55 million for new plant and equipment during 2004; (c) expected changes in total indebtedness (including the timing of the changes in total indebtedness); and (d) future revenue and earnings (including the timing of the future revenue and earnings within fiscal 2004). 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 Company's ability to realize the anticipated benefits of initiatives expected to reduce costs, improve profits, enhance customer service, increase manufacturing efficiency, reduce debt, and expand product offerings and brands in the market through a variety of channels; (c) the risk that the Company will be unable to execute its various initiatives within expected timeframes; (d) unexpected developments in the Company's legal and environmental matters, including the matter related to the operation of ASP's wastewater pretreatment plant and ASP's management of hazardous waste at a facility in Atlanta, Georgia; (e) the risk that projected future cash flows from operations are not realized; (f) the possibility that a new accounting standard related to the recognition of expense associated with stock-based compensation will be promulgated by the Financial Accounting Standards Board; (g) the impact of competition; and (h) unexpected changes in the Company's share price.
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