Strategic Analysis of LRH Enterprises, Inc.

1. Strategic Analysis of LRH Enterprises, Inc. Group 1 Final Project Fall 2009

2. Overview • Manufacturer of a wide variety of cutting tools • Competes in the North American Woodworking-Tool-Manufacturing Industry • Serves small- to medium-size cabinet shops • Known for quality, speedy delivery, and knowledgeable sales representatives • President is Curt Hubert • Headquartered in Chatsworth, California • Revenues in 2008 were $1.54M • For the first eight months of 2009, revenues are down by 40%, but NIAT up by 32%

3. History • Hubert Saw began operations in the 1950s • It was dissolved in 1975 and LRH Enterprises was begun • Established by Leo Remy Hubert • Switched from servicing to manufacturing • Switched focus from saws to cutters and bits • LRH received an industry award for leadership in ergonomics and safety • The company began to downsize in 2008 to cope with economic downturn • Curt Hubert took over the presidency of the company from his father in August 2009

4. Company Structure Three years ago • Employed 40 people • Ran two shifts at its manufacturing plant Today • Ten full-time and 2 part-time, on-call staff • President • Bookkeeper/CFO • One production manager • Five production personnel (+ two additional part-timers on call) • One drafting engineer/machine programmer • Three salesmen • One day shift

5. Company Structure (cont.) • President has full control of day-to-day operations • Three members of the Board of Directors vote on major decisions • The company has four major stakeholders • Two are members of the Board of Directors • Employees • Most have been with company over 20 years • Three employees are family members, including the bookkeeper

6. Recent Changes • Reduction of in-stock inventory parts by 1/3 • Animosity between sales and marketing being addressed • Managers creating the problems removed • Sales department shifting focus • New emphasis on increasing product awareness and demand • Prior emphasis was on customer service and order-taking • Culture becoming more corporate

7. Products • Catalog of standard products • Niche router bits used in • Yacht construction • Musical instruments • Custom, made-to-order cutters and bits • 100% American made • Open-style cutters • High quality • Technology used in production • Automatic CNC equipment • CAD/CAM design, scanner, and template system • Electronic spin-balancing for vibration-free and chatter-free performance

8. Product Lines • Magic Molder • Enables use of table saw to create moldings • Over 70 profile plug sets • Magic Shaper • Stackable shaper heads • Allows the Magic Molder Plugs to be used on a shaper • CO-STCutters • Two-wing cutters for light-duty shapers with ½” or ¾” spindles • 5 fluting cutters and 2 inlay rosette bits • King Cutters • Standard, high-quality, shaper cutters • Offer over 1,000 standard profiles • Router Shaper Bits • More than 90 anti-kickback router bits for making cabinet doors • Insert Tip Tooling • Insert heads and tips • Over 150 products

9. Generation Distributors – LRH provides education Tradeshows – limited benefit, rarely used Woodworking shows - limited Customer referrals Type Distributor Network Approx. 1,500 distributors and retailers in U.S. and Canada About 70% of sales Direct Sales Primarily from rural areas About 30% of sales Sales

10. North American Woodworking-Tool-Manufacturing Industry • Classified as part of the hand-and-edge-tool-manufacturing industry • In 2002, comprised 1,178 establishments • In 2002, totaled $6.03B in shipments • Between 1997 and 2002, establishments decreased 9% • Highly dependent on other industries, such as construction and furniture sales • Economic downturn causing a major shakeout • Limited technological innovation • Numerous manufacturing regulations • The degree of concentration is moderate but increasing • This industry is in the shakeout stage of the life-cycle

11. Industry Driving Forces • Demand for quick turn-around by customers • Poor economy causing fluctuations in demand • Cost of carrying too much inventory • Divergent responses within industry • Increasing efforts to reduce costs • Rising cost of metals and energy • Customers highly price sensitive • Increasing use of technology for process improvements • Demand for increased quality, speed, and durability

12. Porter’s Five-Forces Model

13. Industry Attractiveness

14. Competitive Strength

15. G.E. Matrix Industry Attractiveness High Invest Medium Low Divest Weak Avg. High Competitive Strength

16. Competitive Analysis • LRH has three main competitors • Freeborn Tool • Amana Tool • Freud Tool • All produce woodworking cutting tools • Compete on price, quality, and speed of delivery • All serve North American woodworking industry • Freud also serves Europe, Russia, and China

17. Competitive Analysis Freeborn Tool • Founded in 1976 as a saw-sharpening shop • Headquartered in Spokane, WA • Small private company • Approximately 55 employees • Manufactures European style spindle cutters • Produced domestically and abroad • Products sold through a dealer network; no direct sales

18. Competitive Analysis Amana Tool • Founded in 1972 as a router bit manufacturer • Headquartered in Farmingdale, New York • Fulfillment center in El Cajon, CA • Small private company • Approximately 70 employees • Estimated annual revenues of $7.2M • Manufactures router bits, CNC bits, European style shaper cutters saw blades, boring bits, and planar knives • Produced abroad • Products sold through a distributor network and online dealers; no direct sales

19. Competitive Analysis Freud Tools (Freud America, Inc.) • Founded in 1960s as a cutting tool manufacturer • Headquartered in Milan, Italy • Manufacturing facilities in Italy and Spain • Subsidiaries in Britain, Poland, Russia, China, Canada, and U.S. • Large company • Over 1000 employees • Acquired by Robert Bosch GmbH in 2008 • 2007 revenues of 100 million euros • 2007 revenues of Bosch Power Tool Division of 3.1 billion euros • Manufactures router bits, saw blades, European style shaper cutters, drill bits, and accessories; also power tools routers, saws, jointers, and planers • Vast distributor network (B&M and online); no direct sales

20. Freeborn Imports Amana LRH Freud Strategic Group Map High Quality Low Open European Cutter Style

21. Market Analysis • Target market comprises any individual or company requiring high-quality woodworking cutters and bits, in North America • Served market is small- to medium-size businesses that produce custom cabinets, interior & exterior entry doors, and furniture in North America • Distribution channels • Distributors • Catalog sales • Internet sales • Sales representatives • Customers expect higher speeds and longer lifetimes from their tools • Customers are extremely sensitive to price and speed of delivery

22. Environmental Trends • Increasing demand for quality – positive • More companies using Computer Numerically Controlled (CNC) machines – positive • More companies outsourcing – negative • Economic downturn getting worse – negative • Decline in construction industry • Decline in furniture sales • Decline in customization

23. Revenues ($M)

24. NIAT ($K)

25. Current Ratio

26. D/A Ratio

27. Coverage Ratio

28. Inventory to NWC Ratio

29. Net Profit Margin

30. Altman’s Z-Score Safe Zone Bankruptcy Zone

31. Financial Conclusion LRH Enterprises is not well managed. It has not performed well financially and the company is in seriously declining financial condition In 2008… • Revenues declined 30%, third year of decline • NIAT is a negative $200K, third year of net losses • D/A Ratio is 1.22 and equity is negative • NPM is a negative 17.5%, third year in a row • Current ratio is 1.75 but has been declining for four years • Coverage Ratio is a negative 2.9, negative for three years (cannot even pay the interest on its debt) • Inventory to NWC ratio is 0.86 and has been increasing for two years Needed to show a chart of cash and comment it was negative.

32. Strengths Strong brand name and reputation Produces very high quality products Expertise in high-tolerance and precision manufacturing Loyal employees Provides some unique products to the industry

33. Weaknesses • Negative NIAT, NPM, and cash for three years • And negative equity last year (debt is too high) • Declining revenues, current ratio, and Altman’s Z-Score • Narrow target market • Excess capacity • Lack of marketing and advertising • Dependent on distributors for marketing • Expensive products • Limited product line • Inadequate Internet presence • Inability to cope with economic downturn • Management

34. Core Competence and Competitive Advantage

35. Threats Economic downturn Less expensive foreign-made competition High raw-material costs Competition that produce both the cutting tool and the cutting machine Cheaper, imported, finished carpentry goods (e.g., cabinets) that reduce demand for tools

36. TOWS Matrix

37. SPACE Analysis

38. SPACE Analysis

39. Key Strategic Issues How can LRH Enterprises… • … increase revenues? • … improve NIAT (turn a net profit)? • … improve its cash flow and balance? • … reduce its debt? • … improve management?

40. Key Strategic Issues (cont.) Should LRH Enterprises… • … increase direct sales to customers? • … form alliances with colleges/trade schools? • … be acquired by another company? • … improve its website? • … replace its management? • … stop growing until it regains control of its financial performance and condition? • … continue product development?

41. LRH Enterprises Has Three Strategic Alternatives • Form collaborative alliances with colleges/trade schools • Reduce ratio of distributor/direct sales • Be acquired

42. Build relationships with universities and trade schools that teach woodworking to increase product awareness Starting in the Los Angeles metropolitan area, e.g. Cerritos College Demonstrate products Provide products at a discount Maintain strong distributor relationships Increase market share Maintain strong reputation through careful quality control Establish performance goals to improve health of the company generate cash flow pay down debt control costs Hold management responsible for attaining performance goals Strengthen controls over financial reporting hire a CPA to check books monthly and advise management The company needs to obtain an infusion of investor money or become profitable quickly in order to finance these efforts 1. Form collaborative alliances with colleges/trade schools

43. Upgrade company website Guarantee security Enhance image/branding Create product-video demonstrations, Blog Make it easy to purchase online Create new products and services based on customer feedback Develop customer mailing lists and send monthly e-mails Increase marketing to niche segments Hire marketing and design interns to minimize costs Maintain strong distributor relationships Increase market share Maintain strong reputation through careful quality control Establish performance goals to improve health of the company generate cash flow pay down debt control costs Hold management responsible for attaining performance goals Strengthen controls over financial reporting hire a CPA to check books monthly and advise management Company needs to obtain an infusion of investor money or become profitable quickly in order to finance these efforts 2. Reduce ratio of distributor/direct sales

44. Focus on increasing NIAT and reducing debt to improve company attractiveness and bargaining position Reduce overhead costs Increase sales Remove or replace low-performing management/staff members Hire broker to market the company Hire accounting-acquisition consultant Hire valuation consultant to value the company and advise on how to improve value quickly Continue current programs Maintain strong distributor relationships Increase market share Maintain strong reputation through careful quality control Establish performance goals to improve health of the company generate cash flow pay down debt control costs Hold management responsible for attaining performance goals Strengthen controls over financial reporting hire a CPA to check books monthly and advise management The company needs to obtain an infusion of investor money or become profitable quickly in order to finance these efforts 3. Be acquired

45. Criteria Matrix

46. Increase revenues 15% and NIAT to breakeven Contact universities to obtain interns with the capabilities needed to redesign the LRH website Redesign website Include product photos and demonstration videos Make it secure and navigable Start a website Blog Modernize company’s branding/image Emphasize product quality and that it is made in America Create new marketing campaign to niche segments Begin monthly e-mails Maintain market share Take advantage of discounts in purchasing where possible Maintain strong distributor relations Establish performance goals to improve health of the company generate cash flow pay down debt control costs Hold management responsible for attaining performance goals Maintain strong reputation through careful quality management Hire a CPA to check books monthly and advise management 2010 Recommendations

47. 2010 Recommendations (cont.) • If market preferences for other kinds of cutters cause revenues to lag projections by 15%, then LRH should start a new marketing program to promote the benefits of open-style cutters

48. 2012 Recommendations • Increase revenues by 15%/yr and NIAT by 10%/yr • Develop customized e-mails for niche segments • Evaluate customer suggestions from website Blog to create new products and services • Conduct an evaluation of demand for niche-router bits and begin carrying high-demand items • Increase market share • Re-evaluate performance goals and set new targets • Sales • Cash flow generation • Debt management • Cost Control • Replace underperforming managers and obtain commitment from managers to take responsibility for attaining performance goals • Continue to take advantage of discounts in purchasing • Maintain strong distributor relations • Maintain strong reputation through careful quality management

49. 2012 Recommendations • If costs of carrying inventory cause NIAT to lag projections by 15%, then LRH needs to refine its inventory management system

50. Thank You Any Questions?