AYI » Topics » Item 1a. Risk Factors

This excerpt taken from the AYI 10-K filed Nov 2, 2006.

Item 1a. Risk Factors

This filing contains forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995. A variety of risks and uncertainties could cause 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:

Uncertainty of General Business and Economic Conditions

The Company operates in a highly competitive environment that is affected by a number of factors. Demand for its product offerings is sensitive to both volatility within the non-residential construction and other industrial markets, and to the effect of consolidation of the Company’s competitors. Changes in interest and foreign currency exchange rates could impair the Company’s ability to effectively access capital markets. The Company’s primary competitors have the ability to drive both pricing and product innovation within the marketplace. These competitive pressures may affect the Company’s ability to achieve desired volume growth and profitability levels under its current pricing models, which could adversely impact results from operations. See above discussion of seasonality and cyclicality.

Foreign Economic, Political, Military, or Other Events

The Company manufactures and sources certain amounts of raw materials, component parts, or finished goods outside of the United States. The Company’s operations as well as those of key vendors are therefore subject to regulatory, economic, political, military, and other events in countries where these operations are located. Barriers to trade and other uncertainties within these foreign domiciles could affect the Company’s ability to continue to manufacture and source material from abroad as well as future expansion into emerging markets outside of the United States.

Fluctuation in Raw Material and Component Costs

The Company utilizes a variety of raw materials and components in its production process including petroleum based chemicals, steel, copper, ballasts, and aluminum. Failure to effectively manage future increases in the costs of these items could adversely affect the ability to achieve operating margins acceptable to shareholders. The Company sources these goods from a number of suppliers and is, therefore, reasonably insulated from risks affecting any one supplier. However, profitability and volume could be negatively impacted by limitations inherent within the supply chain of certain of these materials, including competitive governmental, legal, natural disasters, and other events that could impact both supply and price.

Future Growth through Strategic Acquisition

The Company has previously endeavored, and may again endeavor to improve the business through strategic acquisition. The Company will gain from such activity only to the extent that it can effectively leverage the assets, including personnel, and operating processes of the acquired businesses. Uncertainty is inherent within the acquisition process, and unforeseen circumstances arising from future acquisitions could offset their anticipated benefits. Any of these factors could adversely affect the Company’s results of operations, including its ability to generate positive operating cash flows.

Susceptibility to Disruptive Technologies

Acuity Brands is highly engaged in the investigation, development, and implementation of new technologies. Securing key partnerships and alliances, including having access to technologies generated by others and the obtaining of appropriate patents, play a significant role in protecting Acuity Brand’s intellectual property and development activities. However, the continual development of new technologies (e.g., LEDs and



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lamp ballast systems) by existing and new source suppliers looking for either direct market access or partnership with competing large manufacturers, coupled with significant associated exclusivity and/or patent activity, could adversely affect the Company’s, and specifically ABL’s, ability to sustain operating profit margin and desirable levels of volume.

Unexpected Development of Legal and Environmental Contingencies

Acuity Brands is subject to various legal claims arising in the normal course of business, including patent infringement, environmental, and product liability claims. The Company establishes reserves for legal claims when the costs associated with the claims become probable and can be reasonably estimated. The actual costs of resolving legal claims may be substantially higher or lower than the amounts reserved for such claims. Changes from expectations for the resolution of outstanding legal and environmental claims and assessments, including the investigation related to the operation of ASP’s wastewater pretreatment plant and other waste management practices at a facility in Atlanta, Georgia, could have a material impact on the Company’s financial condition, including loss of governmental and related business, disruption of production, and higher operating costs at the Atlanta facility.

Inability to Sustain Customer Relationships

Acuity Brands is focused on improving product quality and enhancing its customer service capabilities in each segment. Relationships forged with customers, including The Home Depot, which represents approximately 13% of the Company’s total net sales, are directly impacted by the Company’s ability to deliver high quality products and service. Innovation in design and technology achieved by competitors could have a negative impact on customer acceptance of the Company’s products. Additionally, the Company sources many materials and components used in our production processes from third-party suppliers. The Company has recently incurred recall costs associated with faulty items purchased from third-party suppliers. While the Company anticipates reimbursement for the majority of the recall costs, the inability to effectively manage customer relationships during the recall process could have an adverse effect on the Company’s ability to maintain desired levels of profitability and volume.

Attraction and Retention of a Highly Skilled Workforce

The success of the Company is dependent upon the continued service of its highly skilled workforce, and its ability to attract and retain new personnel. The challenge to attract top talent is a formidable one given the competition for such talent within the Company’s markets. Failure to maintain a qualified workforce could have a material adverse effect on the Company’s results of operations.

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