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Acuity Brands (AYI)Stock (Consumer Products Industry, Manufacturing Industry)
 Acuity Brands, Inc. (NYSE:AYI) is the holding company for Acuity Brands Lighting, the world's largest manufacturer of lighting fixtures. Seventy percent of the company's sales are for outdoor lights - the federal highway system, with its purchases of street lights, is a key customer for acuity. Because few of the company's products are sold to residential customers (only 6% of revenues came from residential sales in 2007), the company isn't as affected by the 2008 plunge in the U.S. housing market as many of its competitors. Acuity's residential sales are largely to individuals through a partnership with Home Depot stores. Acuity's major competitors include three other integrated electronics manufacturers which, together with Acuity, make up nearly two-thirds of the U.S. lighting market - including 80% of commercial lighting sales. In 2007, North American sales accounted for 96% of Acuity's revenue, with the United States making up 87% of that market.[1] Acuity's major customers are municipal utilities (for street lights), the Federal highway system, home improvement centers, electrical wholesalers, and construction firms. [edit] Business FinancialsAcuity's revenue comes from the sale of lighting fixtures in retail home improvement stores such as Home Depot. Acuity also sells products to third party distributors and construction firms for use in residential, commercial and industrial new construction and renovations. Finally, Acuity sells lighting fixtures for use in infrastructure applications such as roadways, parking lots and sports arenas. Acuity's sales and profits (as shown in the graphic below)[2][3] have grown steadily since 2002.  Florescent outdoor lights are Acuity's best-selling product, at 50% of their revenues. The chart below shows the composition of Acuity's revenue by product type.[4] 
[edit] Spin Off of Zep, Inc.In 2007 Acuity Brands, Inc. spun off its specialty chemicals manufacturing business, formerly known as Acuity Specialty Products, to shareholders as Zep, Inc. (NYSE:ZEP). Before 2007, Acuity Specialty Products accounted for approximately 23% of Acuity Brands, Inc.'s total revenue.[5] According to the company, the spin off cost approximately $4-5 million in addition to an estimated more than $8 million in costs related to corporate restructuring following the divestiture. According to Acuity, the spin-off provided $62.5 million in cash which was spent entirely on a share buyback of common stock in Acuity Brands, Inc.[6] [edit] Key Trends and Forces[edit] Acuity's growth depends on a high pace of non-residential constructionThe table below compares Acuity's year/year sales growth with the growth of spending on commercial construction.[7]
The current relative unavailability of public financing for companies to undertake large investments in new physical structures may negatively impact Acuity's sales growth. In response to this, however, the Federal Reserve has kept interest rates low in 2008, which helps companies to inexpensively finance their projects when they can find the funding. This may help Acuity's non-residential business grow. While renovations focused on improving energy efficiency may help to balance any decrease in new non-residential construction (as explained below), Acuity estimates that in 2007 new construction accounted for 84% of the total value of non-residential construction contracts.[8] [edit] Because only 6% of Acuity's revenue comes from residential sales, it is unaffected by the pace of New Home ConstructionSome of Acuity's brands specialize in or sell products exclusively for residential use - however, at just 6% of revenues, this is a relatively small segment of the company's business. Demand for these products is driven by the pace of new home construction and renovation. The decreasing availability of mortgages especially subprime mortgages to finance new construction and the general depression of the U.S. Housing Market in late 2007 and early 2008 will likely have a negative impact on this market. As indicated by the chart at right, Acuity is not dependent on residential construction to drive its business, but fluctuations in the growth of residential construction do have a minor impact on the company's balance sheet.  [edit] Acuity is sensitive to the cost of Manufacturing in Mexico and free trade policyAcuity currently manufactures 53% of its products in Mexico and 5 of the 12 manufacturing facilities owned by Acuity are in Mexico, making Acuity vulnerable to changes in wages in Mexico or changes in the trade policy between Mexico and the United States.[10][11] This concentration also makes the company sensitive to fluctuations in the foreign exchange rate between the United States and Mexico. According to the company, a 10% increase of the value of the Mexican peso against the U.S. dollar would reduce profits by $4.9 million per year.[12] [edit] Increasing energy prices and tax incentives for improved energy efficiency will drive sales of Acuity's products for retrofit and renovationThe Energy Policy Act of 2005 provided tax incentives for companies to make improvements to the energy efficiency of commercial offices. These tax incentives originally only applied to improvements made in 2006 and 2007 but have since been extended through 2008 (See U.S. Environmental Legislation) . As shown above, approximately 50% of Acuity's revenue comes from the sale of fluorescent lighting fixtures.[13] According to "Energy Star" traditional incandescent lights are approximately 1/4 to 1/10 as efficient as fluorescent fixtures. Furthermore, they estimate that lighting accounts for 17% of energy costs in a typical commercial property and the retrofit of new, high efficiency fixtures can reduce that cost 30 to 50%.[14] The efficiency of its lights thus confer an economic benefit to Acuity's customers, increasing the attractiveness of these products. [edit] Products sold at Home Depot stores account for 15% of Acuity's total sales[15]The sale of Acuity's products at Home Depot stores makes up about 70% of its residential/consumer sales. Therefore, the profitability of that segment of Acuity's business is heavily tied to Home Depot. The sale of Acuity's products per Home Depot store has increased steadily since 2003 and Home Depot has consistently grown its number of stores over the same time period, providing more outlets for the sale of Acuity's products.
However, if Home Depot has a series of difficult quarters (a strong possibility in 2008 given the slow growth of residential construction), it will hurt Acuity's balance sheet. [edit] CompetitionIn 2007 Acuity Lighting was the world's largest manufacturer of lighting products with 17% of the market share.[16] It led the industry in sales of commercial & institutional, outdoor and industrial lighting.
[edit] Market ShareAcuity's internal estimates put its market share at 17% of the U.S. lighting market.[17] However, a 2006 sector market share estimate by BB&T Capital Markets put Acuity's market share at 19%. The chart below compares the relative market share of the four largest U.S. lighting equipment manufacturers, according to the BB&T report.[18]
Of its major competitors, only Acuity and Energy Focus are strictly manufacturers of lighting equipment and Acuity's 2007 Revenue was more than 100 times that of Energy Focus. Acuity's internal estimates place the market share of the top four manufacturers listed above at 54% with the remaining 46% being shared between an estimated 1,200 manufacturers.[19]
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