ITEM 1. BUSINESS
Our Company
We are a leading provider of comprehensive corporate visual image solutions
through the combination of extensive screen and digital graphics capabilities, a
wide variety of high quality indoor and outdoor lighting products, and related
professional services. We also provide graphics and lighting products and
professional services on a stand-alone basis. Our company is the leading
provider of corporate visual image solutions to the petroleum/convenience store
industry. We use this leadership position to penetrate national retailers and
multi-site retailers, including quick service and casual restaurants, video
rental and eyewear chains, retail chain stores and automobile dealerships
located primarily in the United States.
Our focus on product development and innovation creates products that are
essential components of our customers' corporate visual image strategy. We
develop and manufacture lighting and graphics products and distribute them
through an extensive multi-channel distribution network that allows us to
effectively service our target markets. Representative customers include British
Petroleum/Amoco/Arco, Chevron Texaco, Conoco Phillips, ExxonMobil, Shell, Burger
King, McDonalds, Taco Bell, Wendy's, Best Buy, Target Stores, Chrysler, Ford,
General Motors, Nissan, Saturn, and Toyota. We service our customers at the
corporate, franchise and local levels.
We believe that national retailers and niche market companies are increasingly
seeking single-source suppliers with the project management skills and service
expertise necessary to execute a comprehensive visual image program. The
integration of our graphics, lighting and professional services capabilities
allows our customers to outsource to us the development of an entire visual
image program from the planning and design stage through installation. Our
approach is to bundle standard, high-production lighting products, custom
graphics applications and professional services to create complete
customer-focused visual image solutions. We also offer products and services on
a stand-alone basis to service our existing image solutions customers, to
establish a presence in a new market or to create a relationship with a new
customer. We believe that our ability to combine graphics and lighting products
and professional services into a comprehensive visual image solution
differentiates us from our competitors who offer only stand-alone products for
lighting or graphics and who lack professional services offerings. During the
past several years, we have continued to enhance our ability to provide
comprehensive corporate visual image solutions by adding additional graphics
capabilities, lighting products and professional services through acquisitions
and internal development.
Our business is organized in two segments: the Lighting Segment, which
represented 66% of our fiscal 2004 net sales, and the Graphics Segment, which
represented 34% of our fiscal 2004 net sales. Our most significant market, which
includes sales of both the Lighting Segment and the Graphics Segment, is the
petroleum / convenience store market with approximately 28%, 29%, and 34% of
total net sales concentrated in this market in the fiscal years ended June 30,
2004, 2003, and 2002, respectively. See Note 2 of Notes to Consolidated
Financial Statements beginning on page S-19 of this Form 10-K for additional
information on business segments. Net sales by segment are as follows (in
thousands):
2004 2003 2002
Lighting Segment $ 159,748 $ 133,076 $ 147,930
Graphics Segment 81,657 77,057 111,331
Total Net Sales $ 241,405 $ 213,133 $ 259,261
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Lighting Segment
Our lighting segment manufactures and markets outdoor, indoor, and landscape
lighting for the commercial, industrial and multi-site retail markets, including
the petroleum / convenience store market. Our products are designed and
manufactured to provide maximum value and meet the high-quality,
competitively-priced product requirements of our niche markets. We generally
avoid specialty or custom-designed, low-volume products for single order
opportunities. We do, however, design proprietary products used by our national
account customers in large volume, and occasionally also provide custom products
for large, specified projects. Our concentration is on our high-volume, standard
product lines that meet our customers' needs. By focusing our product offerings,
we achieve significant manufacturing and cost efficiencies.
Our lighting fixtures, poles and brackets are produced in a variety of designs,
styles and finishes. Important functional variations include types of mounting,
such as pole, bracket and surface, and the nature of the light requirement, such
as down-lighting, wall-wash lighting, canopy lighting, flood-lighting, area
lighting and security lighting. Our engineering staff performs photometric
analyses, wind load safety studies for all light fixtures and also designs our
fixtures and lighting systems. Our lighting products utilize a wide variety of
different lamps, including high-intensity discharge metal-halide lamps. All of
our products are designed for energy efficiency, performance, reliability, ease
of installation and service, as well as attractive appearance.
The major products and services offered within our lighting segment include:
exterior area lighting, interior lighting, canopy lighting, landscape lighting,
L.E.D. lighting (light emitting diodes), light poles, lighting analysis and
photometric layouts.
The Lighting Segment includes the operations of LSI Lighting Systems, LSI
Petroleum Lighting, LSI Automotive, Courtsider Sports Lighting, LSI Metal
Fabrication, Greenlee Lighting, LSI Marcole, LSI MidWest Lighting and LSI
Lightron.
The increase in Lighting Segment net sales in fiscal 2004 as compared to fiscal
2003 is attributed primarily to increased sales to our national account
(including to the largest national retailer in the U.S.) and niche market
business, as well as to increased sales to the commercial and industrial markets
(due in part to the improving economy and in part to increased volume coming in
from our improved independent commercial sales representatives).
The decrease in Lighting Segment net sales in fiscal 2003 as compared to fiscal
2002 is attributed to economic weakness in the commercial / industrial market,
and, to an unknown degree, to several independent sales representative agency
changes made by the Company during fiscal 2003. The Company believes these
changes, which are now complete, will have a long term effect of increasing net
sales through utilization of a more experienced and effective representative
sales force.
Graphics Segment
The Graphics Segment manufactures and sells exterior and interior visual image
elements related to graphics, and menu board systems. These products are used in
visual image programs in several markets, including the petroleum/convenience
store market and multi-site retail operations. Our extensive lighting and
graphics expertise, product offering, visual image solution implementation
capabilities and other professional services represent significant competitive
advantages. We work with corporations and design firms to establish and
implement cost effective corporate visual image programs. Increasingly, we
become the primary supplier of exterior and interior graphics for our customers.
We also offer installation or installation management (utilizing pre-qualified
independent subcontractors throughout the United States) services for those
customers who desire that we become involved in the installation of either menu
board systems, or interior or exterior graphics products.
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Our business can be significantly impacted by participation in a customer's
"image conversion program," especially if it were to involve a "roll out" of
that new image to a significant number of that customer's and its franchisees'
retail sites. The impact to our business can be very positive with growth in net
sales and profitability when we are engaged in an image conversion program. This
can be followed in subsequent periods by lesser amounts of business or negative
comparisons following completion of an image conversion program, unless we are
successful in replacing that completed business with participation in a new
image conversion program of similar size with one or more customers. An image
conversion program can potentially involve any or all of the following
improvements, changes or refurbishments at a customer's retail site: interior or
exterior lighting, (see discussion above about our lighting segment) interior or
exterior store signage and graphics, interior or exterior menu board systems,
exterior pre-sell menu boards, and installation of these products in both the
prototype and roll out phases of their program. We believe our retail customers
are implementing image conversions on a more frequent basis than in the past,
say approximately every five to seven years versus ten to fifteen years in the
past, in order to maintain a safe, fresh look or new image on their site in
order to continue to attract customers to their site, and maintain or grow their
market share.
The major products and services offered within our Graphics Segment include the
following: signage and canopy graphics, pump dispenser graphics, building fascia
graphics, decals, interior signage and marketing graphics, aisle markets, wall
mural graphics, fleet graphics, prototype program graphics, installation
services for graphics products, exterior and interior menu board systems, site
surveying and permitting, site specific engineering services, and installation
management services.
The Graphics Segment includes the operations of Grady McCauley, LSI Retail
Graphics, LSI Integrated Graphic Systems, LSI Images and LSI Adapt.
The increase in Graphics net sales in fiscal 2004 as compared to fiscal 2003 is
primarily attributed to increased sales to a retail store customer and increased
sales to the petroleum / convenience store market, partially offset by reduced
menu board system sales (one quick service restaurant customer).
The decrease in Graphics Segment net sales in fiscal 2003 as compared to fiscal
2002 primarily reflects three factors: 1) the Burger King menu board program in
North America was very large in fiscal 2002 and much lower in fiscal 2003 as the
program neared completion; 2) the image conversion program of a major petroleum
/ convenience store customer slowed down significantly in fiscal 2003; and 3)
the petroleum / convenience store market in general was off significantly in
fiscal 2003, due in part to the Iraq war in the Middle East.
Our Competitive Strengths
Single Source Comprehensive Visual Image Solution Provider. We believe that we
are the only company serving our target markets that combines significant
graphics capabilities, lighting products and professional services to create
comprehensive image solutions. We believe that our position as a single-source
provider creates a competitive advantage over competitors who can only address
either the lighting or the graphics component of a customer's corporate visual
image program. Using our broad visual image solutions capabilities, our
customers can maintain complete control over the creation of their visual image
programs while avoiding the added complexity of coordinating separate lighting
and graphics suppliers and service providers among multiple suppliers. We can
use high technology software to produce computer-generated virtual prototypes of
a customer's new or improved retail site image. We believe that these
capabilities are unique to our target markets and they allow our customers to
make educated, cost-effective decisions quickly.
Proven Ability to Penetrate Target Markets. We have grown our business by
establishing a leadership position in the majority, as defined by our revenues,
of our target markets, including petroleum/convenience stores, automobile
dealerships and specialty retailers. Although our relationship with our
customers may begin with the need for a single product or service, we leverage
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our broad product and service offering to identify additional products and
solutions. We combine existing graphics, lighting and image element offerings,
develop products and add services to create comprehensive solutions for our
customers.
Product Development Focus. We believe that our ability to successfully identify
and develop new products has allowed us to expand our market opportunity and
enhance our market position. Our product development initiatives are designed to
increase the value of our product offering by addressing the needs of our
customers and target markets through innovative retrofit enhancements to
existing products or the development of new products. In addition, we believe
our product development process creates value for our customers by producing
products that offer energy efficiency, low maintenance requirements and
long-term operating performance at a competitive price.
Strong Relationship with our Customers. We have used our innovative products and
high-quality services to develop close, long-standing relationships with a large
number of our customers. Many of our customers are recognized among the leaders
in their respective markets; including customers such as BP, Chrysler and Burger
King. Their use of our products and services raises the visibility of our
capabilities and facilitates the acceptance of our products and services in
their markets. Within each of these markets, our ability to be a single source
provider of image solutions often creates repeat business opportunities through
corporate reimaging programs. We have served some of our customers since our
inception in 1976.
Well-capitalized Balance Sheet. As part of our long-term operating strategy, we
maintain a conservative capital structure. With a strong equity base, we are
able to preserve operating flexibility in times of industry expansion and
contraction. In the current business environment, a strong balance sheet
demonstrates financial viability to our existing and targeted customers. In
addition, a strong balance sheet enables us to continue important R&D and
capital spending.
Aggressive Use of Our Image Center Capabilities. Our image center capabilities
in Cincinnati, North Canton and Houston provide us with a distinct competitive
advantage to demonstrate the effectiveness of integrating graphics and lighting
into a complete corporate visual image program. Our technologically advanced
image centers, which demonstrate the depth and breadth of our product and
service offerings, have become an effective component of our sales process.
Maintain our vertically integrated business model. We consider our company to be
a vertically integrated manufacturer rather than a product assembler. We focus
on developing unique customer-oriented products and solutions and outsource
certain non-core processes and product components as necessary.
Sales, Marketing and Customers
Our lighting products are sold primarily throughout the United States, but also
in Canada and Latin America (about 3% of total net sales are outside the United
States) using a combination of regional sales managers, independent sales
representatives and distributors. Although in some cases we sell directly to
national firms, more frequently we are designated as a preferred vendor for
product sales to customer-owned as well as franchised, licensed and dealer
operations. Our graphics products and services are sold through our own sales
force and select manufacturers' representatives. Our marketing approach and
means of distribution vary by product line and by type of market. For the
Graphics Segment, our engineering staff provides recommendations and full
technical support for site studies, photometric engineering, and environmental
factors.
Sales are developed by contacts with national retail marketers, franchise and
dealer operations. In addition, sales are also achieved through recommendations
from local architects, engineers, petroleum and electrical distributors and
contractors. Our sales are partially seasonal as installation of outdoor
lighting and graphic systems in the northern states decreases during the winter
months.
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Our image center capabilities are an important part of our sales process. The
image center, unique within the lighting and graphics industry, is a facility
that can produce a computer-generated virtual prototype of a customer's facility
on a large screen through the combination of high technology software and
audio/visual presentation. With these capabilities, our customers can instantly
explore a wide variety of lighting and graphics alternatives to develop
consistent day and nighttime images. Our image centers give our customers more
options, greater control, and more effective time utilization in the development
of lighting, graphics and visual image solutions, all with much less expense
than traditional prototyping. In addition to being cost and time effective for
our customers, we believe that our image center capabilities result in the best
solution for our customers' needs.
The image centers also contain comprehensive indoor and outdoor product display
areas that allow our customers to see many of our products and services in one
setting. This aids our customers in making quick and effective lighting and
graphic design decisions through hands-on product demonstrations and
side-by-side comparisons. More importantly, our image center capabilities allow
us to expand our customer's interest from just a single product into other
products and solutions. We believe that our image center capabilities have
further enhanced our position as a highly qualified outsourcing partner capable
of guiding a customer through image alternatives utilizing our lighting and
graphics products and services. We believe this capability distinguishes us from
our competitors and will become increasingly beneficial in attracting additional
customers. We currently have image centers in Cincinnati, Ohio, Houston, Texas
and North Canton, Ohio.
Manufacturing and Operations
We design, engineer and manufacture substantially all of our lighting and
graphics products through a vertically integrated business model. By emphasizing
high-volume production of standard product lines, we achieve significant
manufacturing efficiencies. When appropriate, we utilize alliances with vendors
to outsource certain products and assemblies. We are not dependent on any one
supplier for any of our component parts.
The principal raw materials and purchased components used in the manufacturing
of our products are steel, aluminum, wire, sockets, lamps, certain fixture
housings, acrylic and glass lenses, lighting ballasts, inks and various graphics
substrates such as decal material and vinyls. We source these materials and
components from a variety of suppliers. Although an interruption of these
supplies and components could disrupt our operations, we believe generally that
alternative sources of supply exist and could be readily arranged. With the
sharp price increase of steel (pole shafts as well as steel for fixture
housings) in the second half of fiscal 2004, there is a possibility that users
of this steel, including our Company, could be faced with allocations of the
supply of steel in the future. No allocations have been in effect to date. We
strive to reduce price volatility in our purchases of raw materials and
components through quarterly or annual contracts with certain of our suppliers.
Our lighting operations generally carry relatively small amounts of finished
goods inventory, except for certain products that are stocked to meet quick
delivery requirements. Most often lighting products are made to order and
shipped shortly after they are manufactured. Our graphics operations manufacture
custom graphics products for customers who frequently require us to stock
certain amounts of finished goods in exchange for their commitment to that
inventory. In some of these programs, customers also give us a cash advance for
the inventory that we stock for them.
We believe we are a low-cost producer for our types of products, and as such,
are in a position to promote our product lines with substantial marketing and
sales activities.
Our manufacturing operations are subject to various federal, state and local
regulatory requirements relating to environmental protection and occupational
health and safety. We do not expect to incur material capital expenditures with
regard to these matters and believe our facilities are in compliance with such
regulations.
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Competition
We experience strong competition in both segments of our business, and in all
markets served by our product lines. We have many competitors, some of which
have greater financial and other resources, however we do not compete with the
same companies across our entire product and service offerings. We believe
product quality and performance, price, customer service, prompt delivery, and
reputation to be important competitive factors.
We have several product and process patents which have been obtained in the
normal course of business. In general, we do not believe that patent protection
is critical to our business, however we do believe that patent protection is
important for a few select products.
Additional Information
Our sales are partially seasonal as installation of outdoor lighting and graphic
systems in the northern states lessens during the harshest winter months. We had
a backlog of orders, which we believe to be firm, of $24.3 million and $19.0
million at June 30, 2004 and 2003, respectively. All orders are believed to be
shippable within twelve months.
We have approximately 1,540 full-time and 200 temporary employees as of June 30,
2004. We offer a comprehensive compensation and benefit program to most
employees, including competitive wages, a discretionary bonus plan, a
profit-sharing plan and retirement plan, a 401(k) savings plan, a non-qualified
deferred compensation plan (for certain employees), an equity compensation plan,
and medical and dental insurance.
We file reports with the Securities and Exchange Commission on Forms 10-K, 10-Q
and 8-K. You may read and copy any materials filed with the SEC at its public
reference room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may also
obtain that information by calling the SEC at 1-800-SEC-0330. The SEC maintains
an internet site that contains reports, proxy and information statements and
other information regarding us. The address of that site is http://www.sec.gov.
Our internet address is http://www.lsi-industries.com. We make available free of
charge through our internet web site our annual report on Form 10-K, quarterly
reports on Form 10-Q, current reports on Form 8-K and any amendments to those
reports filed or furnished pursuant to Section 13(a) of the Securities Exchange
Act of 1934 as soon as reasonably practical after we electronically file them
with the SEC.
LSI Industries Inc. is an Ohio corporation, incorporated in 1976.
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