The Genlyte Group Incorporated (“Genlyte”) was incorporated in the State of Delaware in 1985 as a wholly-owned subsidiary of Bairnco Corporation. In 1988 Genlyte was spun off from Bairnco Corporation and became an independent public company.

On August 30, 1998, Genlyte and Thomas Industries Inc. (“Thomas”) completed the combination of the business of Genlyte with the lighting business of Thomas (“Thomas Lighting”), in the form of a limited liability company named Genlyte Thomas Group LLC (“GTG”). Genlyte contributed substantially all of its assets and liabilities to GTG and received a 68% interest in GTG. Thomas contributed substantially all of the assets and certain related liabilities of Thomas Lighting and received a 32% interest in GTG. For more information regarding the formation of GTG, see note (1) in the “Notes to Consolidated Financial Statements” section of Item 8 “Financial Statements and Supplementary Data.”

As of the close of business on July 31, 2004, Genlyte, through its wholly-owned subsidiaries, acquired the 32% minority interest owned by Thomas in GTG. The transaction was structured as an asset purchase of various interests owned by Thomas and certain of its subsidiary entities. The purchase price was determined through arm’s length negotiations between Genlyte and Thomas. For more information regarding the acquisition of the 32% minority interest in GTG, see note (3) in the “Notes to Consolidated Financial Statements” section of Item 8 “Financial Statements and Supplementary Data.”

Throughout this report on Form 10-K, the term “Company” as used herein refers to The Genlyte Group Incorporated, including the consolidation of Genlyte, GTG, and all subsidiaries.

The Company designs, manufactures, markets, and sells lighting fixtures, controls, and related products for a wide variety of applications in the commercial, residential, and industrial markets primarily in North America. The Company operates in these three segments through the following divisions: Capri/Omega, Chloride Systems, Controls, Day-Brite, Gardco, Hadco, JJI, Lightolier, Shakespeare Composite Structures, Strand, Supply, Thomas Residential, and Wide-Lite in the United States, and Canlyte, Ledalite, Lumec, and Thomas Lighting Canada in Canada. The Company’s JJI and Strand divisions, which were acquired during 2006, also have operations in Germany and Hong Kong, respectively. The Company markets its products under the following brand names:

Alkco, Allscape, Ardee, Bronzelite, Canlyte, Capri, Carsonite, Chloride Systems, Crescent, D’ac, Day-Brite, Emco, Entertainment Technology, ExceLine, Forecast, Gardco, Guth, Hadco, Hanover Lantern, High-Lites, Hoffmeister, Horizon, Lam, Ledalite, Lightolier, Lightolier Controls, Lite-energy, Lumec, McPhilben, Metrolux, Morlite, Nessen, Omega, Quality, Shakespeare Composite Structures, Specialty, Stonco, Strand, Thomas Lighting, Thomas Lighting Canada, Translite Sonoma, USS Manufacturing, Vari-Lite, Vista, and Wide-Lite.

The Company’s products primarily utilize incandescent, fluorescent, light emitting diodes (“LED”), and high-intensity discharge (“HID”) light sources and are marketed primarily to distributors who resell the products for use in new commercial, residential, and industrial construction as well as in remodeling existing structures.

Because the Company does not principally sell directly to the end-user of its products, management cannot determine precisely the percentage of its revenues derived from the sale of products installed in each type of building or the percentage of its products sold for new construction versus remodeling. The Company’s sales, like those of the lighting fixture industry in general, depend significantly on the level of activity in new construction and remodeling.

Part of the Company’s strategy is to strengthen its product lines and profitably grow sales through the acquisition of other lighting companies. A description of recent acquisitions is contained in note (3) in the “Notes to Consolidated Financial Statements” section of Item 8 “Financial Statements and Supplementary Data.”

Financial Information About Industry Segments

Financial information about the Company’s industry segments for the last three fiscal years is set forth in note (20) in the “Notes to Consolidated Financial Statements” section of Item 8 “Financial Statements and Supplementary Data.”  

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Products and Distribution

The Company designs, manufactures, markets, and sells the following types of products:

Incandescent, fluorescent, LED, and HID lighting fixtures; lighting controls; poles; and accessories for commercial, residential, industrial, institutional, medical, entertainment, hospitality, theatrical and sports markets, and task lighting for all markets.

The Company’s products are marketed by independent sales representatives and Company direct sales personnel who sell to distributors, electrical wholesalers, mass merchandisers, and national accounts. In addition, the Company’s products are promoted through architects, engineers, contractors, and building owners. The products are sold principally throughout the United States, Canada, and Mexico. However, our recent acquisitions of JJI and Strand included operations in Germany and Hong Kong, respectively.

Raw Materials Sources and Availability

The Company purchases large quantities of raw materials and components -- mainly steel, aluminum, ballasts, sockets, wire, plastic, lenses, glass, and corrugated cartons -- from multiple sources. No significant supply problems have been encountered in recent years. Relationships with vendors have been satisfactory. Even though the industry has experienced significant cost increases relating to raw materials, the Company successfully procured adequate supplies of raw materials and initiated price increases for its products which more than offset the increased costs.

Patents and Trademarks

The Company has over 500 United States and foreign mechanical patents, design patents, and registered trademarks. The Company maintains such protections by periodic renewal of trademarks and payments of maintenance fees for issued patents. The Company vigorously enforces its intellectual property rights. The Company does not believe that a loss or expiration of any presently held patent or trademark is likely to materially impact its business.

Seasonal Effects on Business

There are no predictable significant seasonal effects on the Company’s results of operations.

Working Capital

The Company’s terms of collection vary but are generally consistent with lighting industry practices, including programs to extend terms beyond 30 days. The Company attempts to keep inventory levels at the minimum required to satisfy customer requirements. The Residential segment, as well as the commodity-type products in the Commercial and Industrial and Other segments, generally require substantial quantities of finished goods to satisfy quick shipment of customer orders. Other products that are made to order require less finished goods but more raw material and component inventories.

Backlog

Backlog was $131,160,000 as of December 31, 2006; $95,373,000 as of December 31, 2005; and $87,540,000 as of December 31, 2004. The Company expects to ship substantially the entire backlog at December 31, 2006 in 2007.

Competition

The Company estimates the U.S. and Canadian lighting market to consist of approximately $8.9 billion of annual revenues. The industry is very mature, and although it contains a few large companies, no single company is truly dominant. The Company believes its sales make it one of the two highest-selling lighting fixture manufacturers in North America, along with the lighting equipment segment of Acuity Brands, Inc.. However, the lighting industry is highly fragmented, with markets served by many international, national, and regional companies.

The Company’s products span major market segments in the lighting industry and therefore compete in a number of different markets with numerous competitors for each type of fixture. The principal measures of competition in indoor and outdoor fixtures are price, service (delivery), design, innovation, and product quality and performance. Certain commodity-type products compete primarily on price, delivery, and quality. More differentiated products compete on design, innovation, and product performance, including energy efficiency. The Company strives to compete in all of these measures of competition and seeks to differentiate itself through innovation and energy efficiency.

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Research and Development

The Company continues to develop new innovative lighting solutions to meet the needs of its customers. Costs incurred for research and development activities, as determined in accordance with accounting principles generally accepted in the United States, were $15,280,000, $11,459,000, and $11,497,000 during 2006, 2005, and 2004, respectively.

Environmental Regulations

The Company’s operations are subject to Federal, state, local, and foreign laws and regulations enacted to regulate the discharge of materials into the environment or otherwise relating to the protection of the environment. The Company establishes reserves for known environmental claims when the costs associated with the claims become probable and can be reasonably estimated. The Company had reserves of $3,920,000 and $3,257,000 at December 31, 2006 and 2005, respectively, related to estimated environmental remediation plans at several company facilities. Management believes these reserves to be sufficient to cover the Company’s estimated environmental liabilities at that time; however, management continually evaluates the adequacy of those reserves, and they could change. Management does not anticipate that compliance with current environmental laws and regulations will materially affect the Company’s capital expenditures, results of operations, or competitive position in 2007.

Employees

At December 31, 2006, the Company employed 3,891 union and nonunion production workers and 2,495 engineering, administrative, and sales personnel, for a total of 6,386 employees. Several of the collective bargaining agreements, covering 619 employees, which are 21.8% of the union employees and 15.9% of total production employees, expire in 2007. Relationships with unions are satisfactory. Expiration and re-negotiation of collective bargaining agreements is not expected to significantly impact 2007 production or results of operations.

International Operations

The Company has international operations in Canada, Mexico, Germany, and Hong Kong. Financial information about the Company’s operations by geographical area for the last three fiscal years is set forth in note (21) in the “Notes to Consolidated Financial Statements” section of Item 8 “Financial Statements and Supplementary Data.” Management generally believes there are no substantial differences in business risks with these international operations compared with domestic operations, except the Company is subject to different economic uncertainties in its foreign operations and is subject to foreign currency exchange rate fluctuations.

Disclosure Regarding Forward-Looking Statements

The Private Securities Litigation Reform Act of 1995 provides a “safe harbor” for forward-looking statements. Certain information in Items 1, 2, 3, 5, 7 and 8 of this report on Form 10-K includes information that is forward-looking. The matters referred to in such information could be affected by the risks and uncertainties involved in the Company’s business. Such factors include, but are not limited to, the following: the highly competitive nature of the lighting business; the overall strength or weakness of the economy, construction activity, and the commercial, residential, and industrial lighting markets; terrorist activities or war and the effects they may have on the Company or the overall economy; the ability to maintain or increase prices; customer acceptance of new product offerings; ability to sell to targeted markets; the performance of the Company’s specialty and niche businesses; availability and cost of steel, aluminum, copper, zinc coatings, corrugated packaging, ballasts, and other raw materials; work interruption or stoppage by union employees; increases in energy and freight costs; workers’ compensation, casualty and group health insurance costs; the costs and outcomes of various legal proceedings; increases in interest costs arising from an increase in rates; the operating results of recent acquisitions; future acquisitions; the loss of key management personnel; foreign currency exchange rates; changes in tax rates or laws; market response to the Energy Policy Act of 2005; and changes in accounting standards. The Company will not undertake and specifically declines any obligation to update or correct any forward-looking statements to reflect events or circumstances after the date of such statements or to reflect the occurrence of anticipated or unanticipated events.

Available Information

The Company makes available free of charge through its Internet web site its annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, any amendments to those reports, and proxy statements for its annual meeting of stockholders as soon as reasonably practicable after this material has been electronically filed with, or furnished to, the Securities and Exchange Commission (“SEC”). This material may be accessed by visiting the Investor Relations section of the Company’s web site at http://www.Genlyte.com.

The public may read and copy any materials the Company files with the SEC at the SEC’s Public Reference Room at 450 Fifth Street, M.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, since the Company is an electronic filer, reports, proxy, information statements, and other statements regarding the Company can be obtained on the SEC’s website at http://www.sec.gov.

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ITEM 1A. RISK FACTORS

The Company’s business, financial condition, operating results and cash flows can be impacted by a number of factors, including, but not limited to those set forth below, any one of which could cause the Company’s actual results to vary materially from recent results or from anticipated future results.

 

The Highly Competitive Nature of the Lighting Business

The Company’s products span major market segments in the lighting industry, competing in a number of different markets with numerous competitors for each type of fixture. The principal measures of competition in indoor and outdoor fixtures are price, service (delivery), design, innovation, and product quality and performance. Certain commodity-type products compete primarily on price, delivery, and quality. More differentiated products compete on design, innovation, and product performance, including energy efficiency. Some of the Company's competitors may drive down industry prices if the competitors' costs are significantly lower. In addition, some of the Company's competitors' financial, technological and other resources may be greater than Genlyte's resources, and such competitors may be better able to withstand changes in market conditions. The Company's competitors may respond more quickly to new or emerging technologies and changes in customer requirements. Further, consolidation of the Company's competitors in any of the markets in which it competes may result in reduced demand for the Company's products. In addition, in some of the Company’s businesses, new competitors could emerge by modifying existing production facilities to manufacture products that directly compete with the Company's products. The occurrence of any of these events could significantly impact results of operations.

The Overall Strength or Weakness of Construction Activity, and the Commercial, Residential, and Industrial Lighting Markets

The Company’s sales, like those of the lighting fixture industry in general, depend significantly on the level of activity in new construction and remodeling. Because the Company does not principally sell directly to the end-user of its products, management cannot determine precisely the percentage of revenues derived from the sale of products installed in each type of building or the percentage of products sold for new construction versus remodeling. However, a significant fluctuation in commercial, residential, or industrial construction activity could significantly impact results of operations.

The commercial market is sensitive to changes in office vacancy rates, interest rates, as well as overall demand for retail, healthcare, school, hospitality, and entertainment facilities. The residential market is sensitive to changes in economic conditions such as the level of employment, consumer confidence, consumer income, consumer price index, housing starts, availability of financing and interest rate levels. The industrial market is sensitive to changes in gross domestic product, capacity utilization rates, factory operating rates, producer price index and available warehouse space. Adverse changes in any of these conditions generally, or in the market regions where the Company operates, could significantly impact results of operations.

Customer Acceptance of New Product Offerings

The Company is committed to product innovation, with a goal to generate 30% of annual sales from new products released within the past three years. The Company estimates that approximately 26% of its net sales for 2006 were from new products released within the past three years and finds that it’s most profitable divisions achieve or come very close to the 30% goal.

Development of new products for targeted markets requires the Company to develop or otherwise leverage leading technologies in a cost-effective and timely manner. Failure to meet these changing demands could result in a loss of competitive position and seriously impact future revenues.  Products or technologies developed by others may render the Company’s products or technologies obsolete or noncompetitive. A fundamental shift in technologies in key product markets could have a material adverse effect on the Company’s competitive position within the industry.

The Availability and Cost of Raw Materials and the Ability to Maintain or Increase Prices

The Company purchases large quantities of raw materials and components -- mainly steel, aluminum, ballasts, sockets, wire, plastic, lenses, glass, and corrugated cartons. Materials comprise the largest component of costs, representing over 70% of the cost of sales in 2006. Further increases in the price of these items could further increase the Company’s operating costs and materially adversely affect margins. Although the Company attempts to pass along increased costs in the form of price increases, the Company may be unsuccessful due to competitive pressures, and even when successful, the timing of such price increases may lag significantly behind the incurrence of higher costs.

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The Costs and Outcomes of Various Legal Proceedings

 

The Company’s results may be affected by the outcome of legal proceedings and other contingencies that cannot be predicted. As required by accounting principles generally accepted in the U.S. (GAAP), the Company estimates loss contingencies and establishes reserves based on its assessment of contingencies where liability is deemed probable and reasonably estimable in light of the facts and circumstances known at a particular point in time. Subsequent developments in legal proceedings may affect the Company’s assessment and estimates of the loss contingency recorded as a liability or as a reserve against assets in the financial statements and could result in an adverse effect on results of operations in the period in which a liability would be recognized or cash flows for the period in which damages would be paid. For a further description of legal proceedings, see Item 3 “Legal Proceedings.”

Integrating Future Acquisitions into Existing Operations

The Company seeks to grow through strategic acquisitions. In the past several years, the Company made various acquisitions and entered into joint venture arrangements intended to complement and expand its businesses, and may continue to do so in the future. The success of these transactions depends on the Company’s successful integration of assets and personnel, application of its internal controls processes, and cooperation with its strategic partners. The Company may encounter difficulties in integrating acquisitions with its operations, and in managing strategic investments. Furthermore, the Company may not realize the degree, or timing, of anticipated benefits when entering into a transaction. Any of the foregoing could adversely affect the Company’s business and results of operations.

The Loss of Key Personnel

 

The Company’s future success depends on the ability to attract and retain highly skilled design, engineering, technical, managerial, marketing, sales and finance personnel, and, to a significant extent, upon the efforts and abilities of senior management. The Company’s management philosophy of cost-control results in a very lean workforce, and the commitment to decentralized operations (discussed further below) also places greater emphasis on the strength of local management. Future success of the Company will depend on, among other factors, the ability to attract and retain qualified personnel, particularly management, engineers and technical sales professionals. The loss of key employees or the failure to attract or retain other qualified personnel, domestically or abroad, could have a material adverse effect on the Company’s results of operations.

Decentralized Operations

The Company is relatively decentralized in comparison with its peers. While management believes this practice has catalyzed growth and enabled the Company to remain responsive to opportunities and to customers’ needs, it necessarily places significant control and decision-making powers in the hands of local management. This means that “company-wide” business initiatives are often more challenging to implement than they would be in a more centralized environment. Depending on the nature of the initiative in question, such failure could adversely affect financial condition or results of operations.

Significant Union Workforce

As of December 31, 2006, approximately 73% of the Company’s production workforce was comprised of union employees. Several of the collective bargaining agreements, covering approximately 16% of production workers, will expire in 2007. Although the Company believes its relations with unionized employees are generally good, the Company is subject to risks of work interruption or stoppage and/or may incur additional administrative expenses associated with union negotiations. If the Company is unable to reach agreement with any of its unionized work groups on the amended terms of their collective bargaining agreements, the Company may be subject to work interruptions and/or stoppages. Any sustained work stoppages could have a material adverse effect on the Company’s financial condition and results of operations.

ITEM 1B. UNRESOLVED STAFF COMMENTS

The Company has received no written comments regarding its periodic or current reports from the staff of the Securities and Exchange Commission that were issued 180 days or more preceding the end of its 2006 fiscal year and that remain unresolved.

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