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Article by DailyStocks_admin    (04-09-08 04:50 AM)

The Daily Magic Formula Stock for 04/09/2008 is Acuity Brands Inc. According to the Magic Formula Investing Web Site, the ebit yield is 14% and the EBIT ROIC is 75-100%.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


Dailystocks.com makes NO RECOMMENDATIONS whatsoever, and provides this for informational purpose only.

BUSINESS OVERVIEW

Overview

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 Company was incorporated in 2001 under the laws of the State of Delaware. 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 is a producer, marketer, and service provider of a wide range of cleaning and maintenance solutions for commercial, industrial, institutional, and consumer end-markets primarily throughout North America and Europe. Of the Company’s fiscal 2007 net sales of approximately $2.5 billion, the lighting equipment segment generated approximately 78% of total net sales while the specialty products segment provided the remaining 22%. Financial information relating to the Company’s segments for the past three fiscal years is included in Note 13 of the Notes to Consolidated Financial Statements included in this report.

Specialty Products Business Spin-off

On July 23, 2007, the Company announced its intention to separate its lighting and specialty products businesses by spinning off the specialty products business of Acuity Specialty Products Group, Inc. into an independent, publicly traded company named Zep Inc. to Acuity Brands stockholders (“the spin-off”). The Board of Directors of Acuity Brands approved the completion of the spin-off on September 28, 2007, subject to the setting of the record date and the distribution date by the Executive Committee of the Board of Directors. The Executive Committee established the record date and distribution date for the spin-off on October 6, 2007.

Prior to the spin-off, the Company engaged in an internal restructuring, including a holding company reorganization. As part of the internal restructuring, the business that had previously been conducted by Acuity Specialty Products Group, Inc. was merged into the parent company and was subsequently transferred to Acuity Specialty Products, Inc. (“ASP”). ASP is now a wholly-owned subsidiary of Zep Inc., which is in turn a direct, wholly-owned subsidiary of Acuity Brands, Inc.

Acuity Brands expects to distribute pro rata to its stockholders all of the shares of Zep Inc. common stock by means of a stock dividend on October 31, 2007 (“the distribution”). The stock dividend of one share of Zep common stock for every two shares of Acuity Brands common stock will be paid pro rata to holders of Acuity Brands common stock who hold their shares at the close of business on October 17, 2007, which is the record date for the distribution. No fractional shares of Zep common stock will be distributed. Instead of fractional shares, Zep stockholders will receive cash. Following the distribution, Acuity Brands will not own any shares of Zep, and Zep will be an independent public company. The spin-off is intended to be tax-free to affected shareholders, and the Company has received a favorable ruling from the Internal Revenue Service as well as an opinion from its external counsel supporting the spin-off’s tax-free status. The stock of Zep Inc. is to be listed on the New York Stock Exchange under the ticker symbol “ZEP”.

Zep Inc. filed a registration statement on Form 10 with the Securities and Exchange Commission, which was declared effective on October 11, 2007. The financial presentation of Zep Inc. in the Form 10 differs from the financial presentation of the Acuity Specialty Products segment in Acuity Brands financial statements primarily due to adjustments made to reflect the allocation of corporate expenses. The basis of presentation herein remains unaffected by the decision to spin-off the specialty products business as the related distribution will not be transacted until October 31, 2007. However, after the October 31, 2007, distribution date, the Acuity Specialty Products segment will be reflected as discontinued operations in all periods presented within Acuity Brands’ financial statements in accordance with Statements of Financial Standards No. 144: Accounting for the Impairment or Disposal of Long-Lived Assets .


Business Segments

Acuity Brands Lighting

The lighting equipment business of Acuity Brands is operated by Acuity Brands Lighting (“ABL”). ABL is one of the world’s leading providers 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 or procures lighting products in the United States, Mexico, Europe, and China. These products are marketed under numerous brand names, including Lithonia Lighting ® , Holophane ® , Gotham ® , Hydrel ® , Peerless ® , Antique Street Lamps ™ , Carandini ® , American Electric Lighting ® , SpecLight ® , Metal Optics ® , and Mark Architectural Lighting ® . ABL manufactures products in 14 plants in North America and three plants in Europe.

Principal customers include electrical distributors, retail home improvement centers, national accounts, electric utilities, municipalities, and lighting showrooms located in North America and select international markets. 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 utilizes distribution methods to meet specific individual customer or country requirements. In fiscal 2007, North American sales accounted for approximately 96% of ABL’s net sales. See Note 13 of the Notes to Consolidated Financial Statements for more information concerning the domestic and international net sales of the Company.

Industry Overview

The current size of the North American lighting fixture market is estimated at $10.6 billion. The North American lighting fixture market consists of non-portable lighting fixtures as defined by the National Electrical Manufacturers Association and lighting related products such as emergency lighting equipment, poles, controls, and modular wiring systems. The U.S. market represents approximately 87% of the North American market. The Company estimates that the top four manufacturers (including Acuity Brands Lighting) represent approximately 54% of the total North American lighting market. The remainder of the market is made up of an estimated 1,200 lighting manufacturers.

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 urban developments also has a material impact on the demand for ABL’s infrastructure-focused products. Demand for ABL’s retail lighting products is highly dependent on economic drivers such as consumer spending and discretionary income, along with housing construction and home improvement spending.

Based on industry data for 2007, new construction accounts for approximately 84% of non-residential contract award values, while renovations account for approximately 16%, though this mix can vary depending on economic conditions. Major trends that can impact the industry include the development of new technologies for lamps, ballasts, and electronic light sources, more effective optical designs, federal and state regulatory requirements for updated energy codes, energy tax legislation, and design technologies addressing environmental sustainability.

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 primarily from Asian manufacturers. Consolidation remains a key trend in the electrical industry. Recent announcements of combinations among electrical distributors are evidence of this continuing trend.


Products

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 products 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.

In addition to these product offerings, ABL provides services enabling customers to more effectively and efficiently manage their lighting assets. In fiscal 2007, ABL introduced the marketplace to Remote Operations Asset Management (ROAM ™ ), an innovative service utilizing Machine to Machine (M2M) wireless network technology that allows utilities and municipalities to monitor and control their lighting systems and provide savings in energy and maintenance operations. ABL also offers turn-key labor renovation services that leverage ABL’s technological advances to reduce the customer’s operational lighting costs and financially justify the renovation of existing facilities with outdated lighting systems. These services are provided in the commercial, industrial, retail, manufacturing and warehousing markets.

Lighting fixtures for numerous applications in a multitude of industry segments accounted for approximately 66%, 67%, and 65% of total consolidated net sales for Acuity Brands in fiscal years 2007, 2006, and 2005, respectively. This does not include sales related to items such as wiring products, controls, and emergency lighting.

Sales and Marketing

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 220 company-employed salespeople and a network of approximately 160 independent sales agencies, each of which employs numerous salespeople. ABL also operates two separate European sales forces and an international sales group coordinating export 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, trade shows, 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 and Austin, Texas. Additionally, in fiscal 2007 Holophane relocated and expanded its Light and Vision training center in Ohio. Acuity Brands Lighting also opened its Center for Light + Space during fiscal 2007, a new direct sales and marketing office dedicated to serving the New York City lighting market. New York continues to grow in importance in the world of lighting, with its influence accelerating around the country and the world. New technologies, new products and new applications are changing the industry, and Acuity Brands Lighting now offers lighting designers, architects, engineers, contractors and distributors the most efficient service with this new direct-to-market structure designed exclusively for this key metro area.



Customers

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 represent a significant influence in the product specification process. These generally include contractors, engineers, architects, and lighting designers.

A single customer of Acuity Brands Lighting, The Home Depot, accounted for approximately 15% of net sales of ABL during fiscal years 2007, 2006, and 2005, respectively. Approximately 85% of product purchased by The Home Depot is resold to end-users in the home improvement market as ABL serves both residential and commercial consumer needs of this customer. The remainder of product sourced to The Home Depot is installed in that retail center’s new and existing facilities. The loss of The Home Depot’s business could temporarily adversely affect the Company’s results of operations.

Manufacturing

Acuity Brands Lighting operates 17 manufacturing facilities, including eight facilities in the United States, six facilities in Mexico, and three facilities in Europe. 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 lamps, sockets, and 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 approximately 23% of the total net sales of ABL. Of total product manufactured by ABL, U.S. operations produce approximately 43%; Mexico produces approximately 53%; and Europe produces approximately 4%. ABL has one supplier of significance and purchased approximately $73.1 million in finished goods from this supplier in 2007. However, the Company believes that sourcing alternatives currently available to ABL serve to mitigate exposure that would otherwise exist due to ABL’s utilization of this supplier.

During fiscal years 2002 through 2006, management focused on certain 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. During those years, ABL closed ten facilities as part of this initiative. This initiative, the Manufacturing Network Transformation (“MNT”), resulted 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 was reduced by approximately 23% over those fiscal years as a result of MNT and other programs.

Distribution

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 international customers, distribution methods are adapted to meet individual customer or country requirements.



Research and Development

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, ballast, and LED 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 fiscal years 2007, 2006, and 2005, research and development expense at ABL totaled $31.3 million, $30.0 million, and $27.1 million, respectively.

Competition

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, design and energy efficiency, customer relationships, and service capabilities. Primary competitors in the lighting industry include Cooper Industries Ltd., The Genlyte Group Incorporated, and Hubbell Incorporated. The Company estimates that the four largest lighting manufacturers (including ABL) have approximately a 54% share of the total North American lighting market.

Acuity Specialty Products

The specialty products business of Acuity Brands is operated by Acuity Specialty Products (“ASP”). ASP is a leading producer, marketer, and service provider of a wide range of cleaning and maintenance solutions for commercial, industrial, institutional, and consumer end-markets. ASP’s product portfolio includes anti-bacterial and industrial hand care products, cleaners, degreasers, deodorizers, disinfectants, floor finishes, sanitizers, and pest and weed control products. ASP’s products and services are marketed under well recognized and established brand names, such as Zep ® , Zep Commercial ® , Enforcer ® , and Selig ™ , some of which have been in existence for more than 70 years. Customers are reached through an experienced, international organization composed of approximately 1,600 sales representatives, supported by highly skilled research and development and technical services teams, who collectively provide creative solutions for ASP’s customers’ diverse cleaning and maintenance needs by utilizing their extensive product expertise and providing customized value-added services that the Company believes distinguish ASP among its competitors.

Through ASP’s direct sales organization, convenient, highly effective cleaning and maintenance solutions are provided to approximately 350,000 customers in a broad array of commercial, industrial, and institutional end-markets, including transportation, food processing and service, manufacturing, government, and housekeeping. These customers include government entities and businesses ranging from small sole proprietorships to large corporations. In addition, ASP’s products are sold to contractors, small business owners, and homeowners who want to purchase professional strength cleaning products through large and small home improvement retailers. The home improvement channel is supported by sales and management personnel who focus on customers such as The Home Depot, Wal-Mart, Ace Hardware, True Value, Lowe’s, and Menard’s. In fiscal 2007, North American sales accounted for approximately 92% of ASP’s net sales. See Note 13 of the Notes to Consolidated Financial Statements for more information concerning the domestic and international net sales of the Company.

Industry Overview

According to the 2006 Kline Group report, the United States commercial, industrial, and institutional cleaning chemicals market is an estimated $9.6 billion market. The Company believes it is one of the top four market leaders, which together hold slightly more than 40% of the total market share. The market is highly fragmented and is served by hundreds of regional and niche participants who sell either directly to end-users or through distributors. Approximately two-thirds of the market is currently served through distributors while one-third of the market is currently served through direct sales. ASP is a market leader in the direct sales channel and the significant majority of the specialty products business’ historical revenues have come from this channel. In general, the commercial, industrial, and institutional end-market enjoys growth consistent with GDP due to favorable end-market demographics, increasing government regulations, health and safety concerns, and consumer demand for cleanliness.

Additionally, based on company estimates and industry research, ASP estimates that the total size of the retail cleaning chemicals market is approximately $5.5 billion. This market is served through channels including grocery, mass merchandisers, home improvement, drug, and other specialty retailers. ASP primarily sells through the home improvement channel, which only serves a portion of the overall retail cleaning chemicals market. The Company believes sales through the home improvement channel are experiencing above market growth as customers diversify their purchasing locations.

While consumption of cleaning and maintenance products is somewhat discretionary, in health-driven, sophisticated markets such as North America and Western Europe, health and safety regulations and customer expectations buffer demand downturns. Increased legislation regulating food, health, and safety requires increased frequency of use, thus fueling increases in demand. Health and safety regulations are also shrinking the pool of available chemicals. Together, these trends are driving demand and development of improved product formulations and application methods. Also, the Company believes end-users in ASP’s markets are beginning to demand more effective and efficient products. Additionally, many corporate buyers are increasing centralized corporate buying activities and consolidating their respective purchases and suppliers.

CEO BACKGROUND

ROBERT F. McCULLOUGH

• 65 years old
• Director since March 2003
• Former Chief Financial Officer of AMVESCAP PLC (now known as Invesco PLC), from April 1996 to May 2004, and from which he retired in December 2006.
• Joined the New York audit staff of Arthur Andersen LLP in 1964, served as Partner from 1972 until 1996, and served as Managing Partner in Atlanta from 1987 until April 1996
• Certified Public Accountant
• Member of the American Institute of Certified Public Accountants and the Georgia Society of Certified Public Accountants
• Director: Comverge, Inc. and Schweitzer-Mauduit International, Inc.
• Chairman of the Audit Committee and a member of the Executive and Governance Committees of the Board
• If elected, three-year term expires at the Annual Meeting for Fiscal Year 2010


NEIL WILLIAMS
• 71 years old
• Director since December 2001
• General Counsel of AMVESCAP PLC (now known as Invesco PLC), from October 1999 until his retirement in December 2002
• Partner with the law firm Alston & Bird LLP and its predecessors from 1965 to October 1999 and served as managing partner from 1984 to 1996
• Trustee of The Duke Endowment, Charlotte, North Carolina
• Chairman of the Governance Committee and a member of the Executive and Audit Committees of the Board
• If elected, three-year term expires at the Annual Meeting for Fiscal Year 2010


PETER C. BROWNING
• 66 years old
• Director since December 2001
• Lead Director of Nucor Corporation since 2006
• Non-executive Chairman of Nucor Corporation from September 2000 to 2006
• Dean of the McColl Graduate School of Business at Queens University of Charlotte, North Carolina, from March 2002 to May 2005
• Executive of Sonoco Products Company 1993 to 2000. Last served as President and Chief Executive Officer from 1998 to July 2000
• Executive of National Gypsum Company 1989 to 2003. Last served as Chairman, President and Chief Executive Officer.
• Executive of Continental Can Company 1964 to 1989. Last served as Executive Vice President.
• Director: EnPro Industries, Inc., Lowe’s Companies, Inc., Nucor Corporation, The Phoenix Companies, Inc., and Wachovia Corporation
• Member of the Compensation and Governance Committees of the Board
• Term expires at the Annual Meeting for Fiscal Year 2008

JOHN L. CLENDENIN
• 73 years old
• Director since December 2001
• Chairman Emeritus of BellSouth Corporation since December 1997; also served as Chairman from December 1996 to December 1997 and as Chairman, President, and Chief Executive Officer from 1983 until December 1996
• Director: Equifax Inc., The Home Depot, Inc., The Kroger Company, and Powerwave Technologies, Inc.
• Member of the Audit and Governance Committees of the Board
• Has been appointed, effective as of the annual meeting, to complete the term expiring at the Annual Meeting for Fiscal Year 2008

JULIA B. NORTH
• 60 years old
• Director since June 2002
• President and Chief Executive Officer of VSI Enterprises, Inc., a Georgia-based manufacturer of video conferencing systems, from November 1997 to July 1999
• Held various positions at BellSouth Corporation from 1972 through October 1997, most recently as President, Consumer Services, presiding over BellSouth’s largest business unit
• Director: Community Health Systems, Inc.
• Member of the Compensation and Governance Committees of the Board
• Term expires at the Annual Meeting for Fiscal Year 2009

RAY M. ROBINSON
• 60 years old
• Director since December 2001
• Non-executive Chairman of Citizens Trust Bank since May 2003
• President Emeritus of Atlanta’s East Lake Golf Club from May 2003 to December 2005
• Vice Chairman of Atlanta’s East Lake Community Foundation since January 2005 and Chairman from November 2003 until January 2005
• President of the Southern Region of AT&T Corporation from 1996 to May 2003
• Director: Aaron Rents, Inc., American Airlines, Avnet, Inc., Choicepoint, and Citizens Trust Bank (trading as Citizens Bancshares)
• Chairman of the Compensation Committee and a member of the Executive and Governance Committees of the Board
• Term expires at the Annual Meeting for Fiscal Year 2008

SHARE OWNERSHIP

Peter C. Browning Owns Shares of Common Stock Beneficially owned are 14,310 and Share Units Held in company plan 12,761
John L. Clendenin Owns Shares of Common Stock Beneficially owned are 30,662 and Share Units Held in company plan 38,350
William A. (Bill) Holl Owns Shares of Common Stock Beneficially owned are 4,222

Robert F. McCullough Owns Shares of Common Stock Beneficially owned are 6,445 and Share Units Held in company plan 9,956
John K. Morgan Owns Shares of Common Stock Beneficially owned are 292,968

Kenyon W. Murphy Owns Shares of Common Stock Beneficially owned are 40,271 and Share Units Held in company plan 21,477
Vernon J. Nagel Owns Shares of Common Stock Beneficially owned are 646,799

Julia B. North Owns Shares of Common Stock Beneficially owned are 8,260 and Share Units Held in company plan 17,096

Richard K. Reece Owns Shares of Common Stock Beneficially owned are 77,800

Ray M. Robinson Owns Shares of Common Stock Beneficially owned are 10,691 and Share Units Held in company plan 22,473
Neil Williams Owns Shares of Common Stock Beneficially owned are 24,607 and Share Units Held in company plan 18,218
All directors and executive officers as a group (11 persons) Owns Shares of Common Stock Beneficially owned are 1,157,035 140,361
Wellington Management Company, LLP(6) Owns Shares of Common Stock Beneficially owned are 2,398,274

MANAGEMENT DISCUSSION FROM LATEST 10K

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 is a producer, marketer, and service provider of a wide range of cleaning and maintenance solutions for commercial, industrial, institutional, and consumer end-markets primarily throughout North America and Europe. Acuity Brands, with its principal office in Atlanta, Georgia, employs approximately 10,000 people worldwide.

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 providers 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 23 factories and distribution facilities along with seven warehouses 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 has more than 2,300 unique formulations that are used in manufacturing products for its customers, operates six plants, and serves over 350,000 customers through a network of distribution centers and warehouses. While Acuity Brands has been publicly held as a stand-alone company for more than five years, the two segments that make up the Company have long histories and well-known brands.

Specialty Products Business Spin-off

The Board of Directors and management of Acuity Brands regularly review business conducted by Acuity Brands to ensure that resources are deployed and activities are pursued in the best interests of its stockholders. Management of Acuity Brands began discussing potential divestiture strategies relating to Acuity Brands’ specialty products business, including a potential sale of the business or a spin-off, in the fall of 2006. On July 23, 2007, the Company announced its intention to separate its lighting and specialty products businesses by spinning off the business of Acuity Specialty Products Group, Inc. into an independent, publicly traded company to Acuity Brands shareholders (“the spin-off”). The Board of Directors of Acuity Brands approved the completion of the previously announced spin-off on September 28, 2007, subject to the setting of the record date and the distribution date by the Executive Committee of the Board of Directors. The Executive Committee established the record date and distribution date for the spin-off on October 6, 2007. Plans to spin-off Acuity Specialty Products were ultimately pursued to allow the lighting and chemical businesses of Acuity Brands the financial and operational flexibility to separately take advantage of significant growth opportunities facing their respective businesses, which the Company believes is in the best interest of its stockholders.

Prior to the spin-off, the Company engaged in an internal restructuring, including a holding company reorganization. As part of the internal restructuring, the business that had previously been conducted by Acuity Specialty Products Group, Inc. was merged into its parent company and was subsequently transferred to Acuity Specialty Products, Inc. (“ASP”). ASP is now a wholly-owned subsidiary of Zep Inc., which is in turn a direct, wholly-owned subsidiary of Acuity Brands, Inc.

Zep Inc. (“Zep”) will be listed on the New York Stock Exchange under the ticker symbol “ZEP.” Acuity Brands expects to distribute pro rata to its stockholders all of the shares of Zep common stock by means of a stock dividend on October 31, 2007. The stock dividend of one share of Zep common stock for every two shares of Acuity Brands common stock will be paid pro rata to holders of Acuity Brands common stock who hold their shares at the close of business on October 17, 2007, which is the record date for the distribution. No fractional shares of Zep common stock will be distributed. Instead of fractional shares, Zep stockholders will receive cash. Following the distribution, Acuity Brands will not own any shares of Zep, and Zep will be an independent public company. The spin-off is intended to be tax free to affected shareholders, and the Company has received a favorable ruling from the Internal Revenue Service as well as a favorable opinion of external tax counsel supporting the spin-off’s tax-free status. To facilitate the separation of Zep Inc. from its parent, Acuity Brands will provide certain services to Zep Inc. during a transition period following completion of the spin-off. Additionally, the Company and Zep Inc. will enter into commercially reasonable service agreements in the normal course of business. As of August 31, 2007, Acuity Brands has incurred $2.1 million of incremental professional fees associated with the spin-off.

Zep Inc. filed a registration statement on Form 10 with the Securities and Exchange Commission, which was declared effective on October 11, 2007. The financial presentation of Zep Inc. in the Form 10 differs from the financial presentation of the Acuity Specialty Products segment in Acuity Brands financial statements primarily due to adjustments made to reflect the allocation of corporate expenses. The basis of presentation herein remains unaffected by the decision to spin-off the specialty products business as the related distribution will not be transacted until October 31, 2007. However, after the October 31, 2007 distribution date, the Acuity Specialty Products segment will be reflected as discontinued operations in all periods presented within Acuity Brands’ financial statements in accordance with Statements of Financial Standards No. 144: Accounting for the Impairment or Disposal of Long-Lived Assets .

Strategy

Throughout 2007, Acuity Brands made significant progress towards key initiatives designed to enhance and streamline its operations, including its product development and service capabilities, 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 20% or better;


• Maintaining the Company’s debt to total capitalization ratio below 40%; and


• Generating cash flow from operations less capital expenditures that is in excess of net income.

Acuity Brands, with ABL as its lone operating subsidiary after the spin-off, will pursue the above-stated goals on a continuing operations basis. To increase the probability for the Company to achieve these 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, lowering transaction costs, improving productivity, and introducing new and innovative products more rapidly and cost effectively. In addition, the Company has invested considerable resources to teach and train associates to utilize tools and techniques that accelerate success in these key areas as well as to create a culture that demands excellence through continuous improvement. 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 access certain capital markets, including banks, is necessary for the Company to fund its operations, to pay dividends, to meet its obligations as they become due, and to maintain compliance with covenants contained in its financing agreements. The Company’s ongoing liquidity will depend on a number of factors, including available cash resources, cash flow from operations, compliance with covenants contained in certain of its financing agreements, and its ability to access capital markets.

Based on its cash on hand, availability under existing financing arrangements, and current projections of cash flow from operations, the Company believes that it will be able to meet its liquidity needs over the next twelve months. These needs will include funding its operations as currently planned, making anticipated capital investments, funding foreseen improvement initiatives, repaying borrowings as currently scheduled, paying quarterly stockholder dividends as currently anticipated, making required contributions into the Company’s benefit plans, and repurchasing shares of the Company’s outstanding common stock as authorized by the Company’s Board of Directors. The Company’s Board of Directors has authorized the repurchase of eight million shares of the Company’s outstanding common stock, of which approximately six million had been acquired as of August 31, 2007. The Company, with ABL as its sole operating subsidiary, currently expects to invest approximately $35.0 million to $40.0 million for equipment, tooling, and new and enhanced information technology capabilities during fiscal 2008. The Company expects to contribute approximately $3.4 million in fiscal 2008 to fund its defined benefit plans.

Looking beyond fiscal 2008, the Company has $160.0 million of public notes scheduled to mature during January 2009 and $200.0 million of public notes scheduled to mature eighteen months later during 2010. The Company believes that it will be able to either refinance or retire these notes as they come due based on current cash balances; the recently executed $250.0 million 5-year Revolving Credit Facility maturing in October 2012; its $75.0 million Receivables Facility, which may be renewed annually; and future cash provided by operations.

Cash Flow

Acuity Brands uses available cash and cash flow from operations as well as proceeds from the exercise of stock options to fund operations and capital expenditures, to repurchase stock, to fund acquisitions, and to pay dividends. The Company applied $43.5 million of available cash towards acquisitions during fiscal year 2007. While the Company received $26.5 million in cash from stock issuances during fiscal year 2007, these receipts were more than offset by returns to shareholders in the form of repurchases of the Company’s common stock of $45.0 million and the payment of $26.4 million in dividends. In spite of these events, cash and cash equivalents at fiscal year-end totaled $222.8 million, an increase of $134.2 million since the beginning of the fiscal year.

In fiscal 2007, cash flow provided by operating activities totaled $241.2 million compared with $155.9 million and $137.1 million reported in 2006 and 2005, respectively. Cash flow provided by operating activities increased in 2007 compared with 2006 by $85.3 million or 54.7% due primarily to higher net income of $41.5 million, increased accrued liabilities of $49.1 million, and a $15.7 million decrease in cash required to fund consolidated operating working capital needs (operating working capital is calculated by adding accounts receivable, net, plus inventories, and subtracting accounts payable). The increase in accrued liabilities was due to several factors, the largest of which are as follows: greater accrued compensation of $14.9 million, which includes commissions and bonuses associated with positive operating performance; increased accrued taxes payable of $12.4 million, which was attributable to greater earnings and the timing of related payments; increased costs related to certain environmental matters totaling $5.0 million; increased costs of $3.7 million related to the Company’s property and casualty insurance programs; and other legal and professional fees primarily related to the spin-off of Acuity Specialty Products. Fluctuations in operating working capital are discussed below.

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 $36.9 million and $28.6 million in 2007 and 2006, respectively, primarily for new tooling, machinery, equipment, and information technology. The Company continues to invest appropriately in these items primarily to improve productivity and product quality, increase manufacturing efficiencies, and enhance customer service capabilities in each segment. As noted above, the Company, with ABL as its sole operating subsidiary, expects capital spending in 2008 to range between $35.0 million and $40.0 million, due primarily to greater anticipated investment in equipment and tooling for new products as well as for further enhancement of its information technology capabilities. The Company believes that these investments will enhance its operations and financial performance in the future. In the fourth quarter of fiscal 2007 the Company applied $43.5 million of available cash towards acquiring substantially all of the assets and assuming certain liabilities of Mark Lighting Fixture Company, Inc. This transaction is discussed further in Note 9 of the Notes to the Consolidated Financial Statements .

Consolidated working capital at August 31, 2007 was $397.6 million compared with $309.9 million at August 31, 2006, an increase of $87.7 million. The increase in working capital in 2007 compared with 2006 was due primarily to the $134.2 million increase in cash and cash equivalents, partially offset by a $17.2 million decrease in inventory and a $28.7 million increase in other current liabilities. Almost half of the increase in other current liabilities was attributable to taxes payable, and the primary components of the remainder of the difference have been discussed above. The decrease in inventory was achieved through the successful implementation of certain inventory management initiatives at select locations of both the lighting and chemical businesses, and was aided by record selling performance in the last quarter of fiscal 2007. Operating working capital decreased by approximately $11.8 million to $333.5 million at August 31, 2007 from $345.3 million at August 31, 2006. Decreased operating working capital levels resulted from the successful implementation of inventory and payables management initiatives coupled with continued favorable development of receivables collections. Operating working capital as a percentage of net sales at the end of fiscal 2007 decreased to 13.2% from 14.4% in fiscal 2006. At August 31, 2007, the current ratio (calculated as total current assets divided by total current liabilities) of the Company was 1.8 compared with 1.7 at August 31, 2006.

During the course of the previous five years, Acuity Specialty Products’ annual contribution to its parent company’s aggregate operating and investing cash flows has averaged $37 million (amount is net of estimated corporate overhead costs). On October 31, 2007 (the “distribution date”), Acuity Brands will enter into a distribution agreement with Zep Inc. The distribution agreement will provide for the principal corporate transactions required to affect the spin-off. Pursuant to this distribution agreement, Zep Inc. will draw upon its credit facilities and remit a dividend to Acuity Brands in the amount of $62.5 million on the distribution date. Acuity Brands intends to use proceeds from this dividend to fund currently authorized share repurchases or to reduce its outstanding indebtedness. The distribution agreement further provides that after the spin-off, Acuity Brands will remit to Zep Inc. an amount equal to the positive net cash flow generated by Zep Inc. during the period from September 1, 2007 until the distribution date (less any cash in excess of $5.0 million held by Zep Inc. on the distribution date). Therefore, effective September 1, 2007, Acuity Brands will cease to benefit from positive operating cash flow generated by its specialty products business.


MANAGEMENT DISCUSSION FOR LATEST QUARTER

Overview

Company

Acuity Brands is a holding company that owns and manages two businesses that serve distinctive markets—lighting equipment and specialty products. While Acuity Brands has been publicly held as a stand-alone company for over five years, the two segments that make up the Company have long histories and well-known brands. Its lighting equipment segment is Acuity Brands Lighting (“ABL”) formerly known as Acuity Lighting Group, Inc.; its specialty products segment is Acuity Specialty Products Group (“ASP”). Acuity Brands, with its principal office in Atlanta, Georgia, employs approximately 10,000 people worldwide.

ABL 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. 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 22 factories and distribution facilities along with six warehouses to serve its extensive customer base.

ASP is a leading producer, marketer, and service provider of a wide range of cleaning and maintenance solutions for commercial, industrial, institutional, and consumer end markets, primarily located throughout North America and Europe. ASP’s product portfolio includes anti-bacterial and industrial handcare products, cleaners, degreasers, deodorizers, disinfectants, floor finishes, sanitizers, and pest and weed control products. ASP sells over 9,000 catalog-listed products and over 6,000 other products primarily through its salaried and commissioned direct sales force, supported by highly skilled research and development and technical service teams, operates six manufacturing facilities, and serves approximately 350,000 customers through a network of strategically located distribution centers and warehouses.

Liquidity and Capital Resources

Principle 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 access certain capital markets, including banks, is necessary for the Company to fund its operations, to pay dividends, to meet its obligations as they become due, and to maintain compliance with covenants contained in its financing agreements. The Company’s ongoing liquidity will depend on a number of factors, including available cash resources, cash flow from operations, compliance with covenants contained in certain of its financing agreements, and its ability to access capital markets.

Based on its cash on hand, availability under existing financing arrangements and current projections of cash flow from operations, the Company believes that it will be able to meet its liquidity needs over the next 12 months. These needs will
include funding its operations as currently planned, making anticipated capital investments, the funding of certain potential acquisitions, funding foreseen improvement initiatives, repaying borrowings as currently scheduled, paying quarterly stockholder dividends as currently anticipated, making required contributions into the Company’s employee benefit plans, as well as potentially repurchasing shares of the Company’s outstanding common stock as authorized by the Company’s Board of Directors. During fiscal year 2006, the Board of Directors authorized the repurchase of six million shares of the Company’s outstanding common stock, of which approximately five million six hundred-thirty thousand had been repurchased at May 31, 2007. The Company currently expects to invest approximately $40.0 million primarily for equipment, tooling, and new and enhanced information technology capabilities during fiscal year 2007, of which $24.9 million has already been invested. Current fiscal year capital has also been dedicated to furthering ABL’s presence within the New York City marketplace through the construction and furnishing of a Manhattan sales office. The Company expects to contribute approximately $7.6 million during fiscal year 2007 to fund its defined benefit plans.

Cash Flow

Acuity Brands used available cash and net cash provided by operating activities in the nine months ended May 31, 2007 to fund capital expenditures, to repurchase stock, to pay dividends, to repay a portion of its long-term debt, and to increase its cash and cash equivalents. The Company received $25.4 million in cash from stock issuances during the first nine months of fiscal year 2007 and used $30.0 million in cash to repurchase shares of its outstanding common stock during the same period. The Company’s available cash position at May 31, 2007 was $178.4 million, an increase of $89.7 million from August 31, 2006. The increase in the Company’s available cash position was due primarily to the contributions from operating activities discussed below, and the proceeds from the exercise of stock options.

The Company generated $123.4 million of net cash provided by operating activities during the first nine months of fiscal year 2007 compared with $63.9 million generated in the prior-year period, an increase of $59.6 million or 93.2%. Net cash provided by operating activities improved due primarily to increased net income as well as increased accrued liabilities. The increase in accrued liabilities was due in part to greater accrued taxes payable, charges pertaining to certain environmental matters accrued in accordance with SFAS No. 5, Accounting for Contingencies and other legal and professional fees. The benefit from higher net income was partially offset by the cash flow impact of increased operating working capital (calculated by adding accounts receivable, net, plus inventories, and subtracting accounts payable). Operating working capital increased by approximately $12.9 million to $358.3 million at May 31, 2007 from $345.3 million at August 31, 2006. Operating working capital increased due primarily to a reduction in accounts payable as well as to increased accounts receivable balances that were driven by higher net sales. These increases in operating working capital were partially offset by ABL’s efforts to reduce inventory levels. Also negatively impacting net cash provided by operating activities were increases in prepayments and other current assets as well as the effect of tax benefits from share-based payments (the offset of which is reflected as a financing activity within the statement of cash flows). Additionally, the Company’s defined benefit plan contributions totaled approximately $7.1 million in the first three quarters of fiscal year 2007.

Management believes that investing in assets and programs that will over time increase the overall return on its invested capital is a key factor in driving stockholder value. The Company invested $24.9 million and $16.1 million in the first nine months of fiscal year 2007 and 2006, respectively, primarily for new tooling, machinery, equipment, and information technology. The Company continues to invest appropriately in these items to improve productivity and product quality, increase manufacturing efficiencies and capacity, and enhance customer service capabilities in each segment. As noted above, the Company expects to invest approximately $40.0 million for new plant, equipment, tooling, and new and enhanced information technology capabilities at both businesses during fiscal year 2007.

Capitalization

The current capital structure of the Company is comprised principally of senior notes and equity of its stockholders. As of May 31, 2007, the Company had no amounts outstanding under its asset-backed securitization program or borrowings under the Revolving Credit Facility discussed below. At $371.6 million, total debt outstanding at May 31, 2007 remained substantially unchanged from August 31, 2006 and consisted primarily of long-term, fixed-rate obligations.

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 28, 2006, 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 $322.3 million at May 31, 2007. There were no outstanding borrowings at May 31, 2007 or August 31, 2006 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. 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 under the Revolving Credit Facility at May 31, 2007 and August 31, 2006. At May 31, 2007, the Company had additional borrowing capacity under the Revolving Credit Facility of $189.2 million under the most restrictive covenant in effect at the time, which represents the full amount of the Revolving Credit Facility less $10.8 million of outstanding letters of credit issued under the facility. See Note 8 of the Notes to Consolidated Financial Statements .

During the first nine months of fiscal year 2007, the Company’s consolidated stockholders’ equity increased $97.3 million to $639.6 million at May 31, 2007 from $542.3 million at August 31, 2006. The increase was due primarily to net income earned in the period as well as to stock issuances resulting from the exercise of stock options and purchases under the Employee Stock Purchase Plan, partially offset by the repurchase of outstanding common stock and the payment of dividends. The Company’s debt to total capitalization ratio (calculated by dividing total debt by the sum of total debt and total stockholders’ equity) was 36.7% and 40.7% at May 31, 2007 and August 31, 2006, respectively. The ratio of debt, net of cash, to total capitalization, net of cash, was 23.2% at May 31, 2007 and 34.3% at August 31, 2006.

Dividends

The Company paid cash dividends on common stock of $19.7 million ($0.45 per share) during the first nine months of fiscal year 2007 compared with $20.2 million ($0.45 per share) during the first nine months of fiscal year 2006. The Company does not currently plan to change its dividend rate; however, each quarterly dividend must be approved by the Board of Directors.

Results of Operations

Third Quarter of Fiscal 2007 Compared with Third Quarter of Fiscal 2006

Consolidated Results

Net sales for the quarter ended May 31, 2007 were $647.8 million compared with $603.3 million reported in the year-ago period, an increase of $44.6 million, or 7.4%. The increase in net sales, which occurred in both business segments, was due primarily to favorable higher selling prices, growth in sales of new products introduced over the last three years, and greater shipments of product offered by the lighting business. In addition, foreign currency fluctuations favorably impacted net sales by $3.1 million. The increase in net sales was partially offset by a decline in shipments by the chemical business. Overall, the Company estimates that the majority of the increase in net sales in the third quarter of 2007 compared with the year-ago period was driven by the Company’s continued ability to realize the benefit of pricing initiatives instituted within the previous 12 months.

Consolidated gross profit increased $24.5 million, or 9.8%, to $273.5 million for the quarter ended May 31, 2007 from $249.0 million in the year-ago period. Consolidated gross profit margins increased to 42.2% of net sales in the third quarter of fiscal year 2007 as compared with 41.3% of net sales reported in the year-ago period. The improvement in gross profit and gross profit margin was largely attributable to improved pricing at both segments, incremental margins on overall volume growth, and a better mix of products sold at ABL including new, more energy efficient products introduced over the last three years. These benefits more than offset increases in raw materials and component costs as well as compensation and employee benefits costs.

Consolidated operating expenses increased $9.3 million, or 4.7%, to $206.1 million (31.8% of net sales) in the third quarter of fiscal year 2007 from $196.8 million (32.6% of net sales) reported in the year-ago period. While operating expenses as a percentage of net sales decreased by 80 basis points, operating costs increased compared with the prior year due primarily to higher commissions and incentive compensation resulting from improved performance as well as increased costs associated with the Company’s property and casualty insurance programs. Operating expenses were impacted by two partially offsetting events that were unique to the third quarter of the current fiscal year. In April 2007, ABL received a $6.6 million pre-tax cash payment (net of related legal costs) as settlement for a commercial dispute involving reimbursement of warranty and product liability costs associated with a product line purchased from a third party in fiscal year 2001 (the “commercial dispute”). In May 2007, ASP recorded a $5.0 million pre-tax charge representing the Company’s best estimate of costs associated with a company-initiated remediation plan for groundwater contamination identified at ASP’s primary manufacturing facility located in Atlanta, Georgia. Environmental matters affecting the Company are discussed further in Note 9 of the Notes to Consolidated Financial Statements.



Consolidated operating profit was $67.4 million compared with $52.2 million reported in the year-ago period, an increase of $15.2 million or 29.1%. Operating profit margin was 10.4%, 170 basis points higher than the prior year’s third quarter margin of 8.7%. The increase in operating profit was due primarily to greater gross profit as noted above, partially offset by higher operating expenses. The improvement in operating profit margin reflects the benefits of improved price realization and higher incremental margins on the increased shipments of ABL products. Net income for the third quarter of fiscal year 2007 increased $10.0 million, or 34.7%, to $38.7 million from $28.7 million reported in the third quarter of fiscal year 2006. The increase in net income resulted primarily from the above-noted increase in operating profit and reduced net interest expense partially offset by a higher effective tax rate.

Diluted earnings per share was $0.88 in the third quarter of fiscal year 2007 compared with $0.63 in the prior-year period, which represents a 39.7% increase over the year-ago period. Third quarter diluted earnings per share of $0.88 was negatively impacted by $0.01 per share due to a combination of several unusual items that include the special pre-tax charge of $5.0 million at Acuity Specialty Products for anticipated environmental remediation costs; higher corporate expense due to an increase in professional fees; and a non-recurring pre-tax gain of $6.6 million for a favorable legal settlement at Acuity Brands Lighting related to a long-standing commercial dispute.

Acuity Brands Lighting

Net sales at ABL in the third quarter of fiscal year 2007 were $502.4 million compared with $458.7 million reported in the year-ago period, an increase of $43.7 million, or 9.5%. The increase in net sales was due primarily to higher selling prices, enhanced mix of products sold, sales of new products, and increased shipments due largely to volume growth in key non-residential markets. More than half of the increase in net sales was due to sustained pricing actions made necessary by continued increases in certain raw materials and component costs. Net sales also benefited from foreign currency fluctuation of $2.0 million. The backlog at ABL decreased approximately $8.0 million, or 4.0%, to $190.0 million at May 31, 2007 from $198.0 million at May 31, 2006. However, the Company estimates that the third quarter fiscal 2006 backlog was inclusive of approximately $15.0 million in accelerated orders that were placed ahead of that period’s announced price increases.

Operating profit at ABL was $66.7 million for the third quarter of fiscal year 2007, compared with $45.0 million in the year-ago period, an increase of $21.7 million, or 48.3%. Operating profit margin advanced 350 basis points to 13.3% of net sales for the quarter ended May 31, 2007 from 9.8% of net sales in the year-ago period. Operating profit and margin were favorably impacted in the third quarter of fiscal year 2007 by improved pricing and an enhanced mix of products sold, a favorable $6.6 million (amount is net of related legal costs) cash settlement pertaining to a commercial dispute involving reimbursement of warranty and product liability costs associated with a product line purchased from a third party in fiscal year 2001, and incremental margin due to greater shipments. All amounts received and legal costs incurred in connection with this cash settlement were recorded within Selling, Distribution, and Administrative Expenses on the Consolidated Statements of Operations . The above-mentioned benefits were partially offset by greater expense related to incentive compensation, higher costs for certain raw materials and components, higher commissions, higher costs associated with property and casualty insurance, and costs related to efforts to improve productivity and customer service.

Acuity Specialty Products

Net sales at ASP for the third quarter of fiscal year 2007 were $145.4 million compared with $144.5 million reported for the year-ago period, representing an increase of $0.9 million, or 0.6%. The increase in net sales was due primarily to improved pricing in the North American commercial, industrial and institutional market as well as to greater shipments in ASP’s European markets. Also, the effect of foreign currency fluctuation favorably impacted net sales in the current quarter by $1.1 million. These gains were partially offset by a decline in unit volume in certain U.S. commercial, industrial and institutional markets as well as the home improvement channel of the consumer market.

Operating profit at ASP for the third quarter of fiscal year 2007 declined to $10.0 million from $15.4 million reported for the year-ago period, representing a decrease of $5.5 million, or 35.4%. Operating profit margin was 6.9% of net sales in the third quarter of fiscal year 2007 compared with 10.7% in the prior-year period. The decreases in operating profit and margin were due primarily to the $5.0 million pre-tax environmental remediation charge recorded in the third quarter of the current fiscal year. This incremental $5.0 million pre-tax charge represents the Company’s best estimate of remediation costs associated with the groundwater contamination matter discussed in Note 9 of the Notes to Consolidated Financial Statements. Additionally, operating profit was negatively affected by the increased costs of ASP’s property and casualty insurance programs due to higher claims experience and compensation costs related to inflationary wage adjustments and severances. Also, ASP experienced increased manufacturing and freight-related costs compared with the same period in the prior year to enhance service and productivity. The positive impact of ASP’s pricing strategies and certain cost containment initiatives only partially offset the effect of the above-mentioned increased costs.



Corporate

Corporate expenses were $9.3 million in the third quarter of fiscal year 2007 compared with $8.2 million in the year-ago period, an increase of $1.1 million, or 13.1%. This fluctuation is primarily attributable to an approximate $1.3 million increase in professional fees that are infrequent in nature.

Income Taxes

The effective tax rate for the third quarter of fiscal year 2007 was 36.1%, compared with 34.5% in the third quarter of fiscal year 2006. The current period tax rate was adversely affected by an increase in certain costs that are not deductible when computing taxable income.

Other Expense (Income)

Other expense consisted primarily of interest expense and other miscellaneous non-operating activity including foreign currency transactions. Interest expense, net, was $7.4 million, a decrease of $0.9 million, or 11.1%, from the year-ago period.

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