<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended September 30,1998 Commission File Number 0-13147
----------------- -------
LESCO, INC.
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
OHIO 34-0904517
- ------------------------------ ---------------------------------------
State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
20005 Lake Road
Rocky River, Ohio 44116
- --------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(440) 333-9250
-------------------------------
(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practical date.
Outstanding at
Class November 9, 1998
- -------------------------------- ----------------
Common shares, without par value 8,401,418 shares
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LESCO, INC.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30 September 30 December 31
(In thousands except share data) 1998 1997 1997
------------ ------------ -----------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 3,044 $ 5,828 $ 3,403
Accounts receivable -- net 79,273 75,202 65,869
Inventories 94,095 82,335 82,174
Deferred income taxes 1,993 4,760 2,680
Prepaid expenses and other assets 1,725 1,822 5,989
--------- --------- ---------
TOTAL CURRENT ASSETS 180,130 169,947 160,115
Property, Plant and Equipment 66,044 56,050 58,454
Less allowance for depreciation and amortization (27,204) (28,638) (27,238)
--------- --------- ---------
38,840 27,412 31,216
Bond proceeds held for construction -- -- 4,761
--------- --------- ---------
38,840 27,412 35,977
Other Assets 9,909 4,714 4,226
--------- --------- ---------
TOTAL ASSETS $ 228,879 $ 202,073 $ 200,318
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 50,688 $ 42,152 $ 34,002
Other current liabilities 8,283 10,332 8,202
Current portion of debt 200 200 200
--------- --------- ---------
TOTAL CURRENT LIABILITIES 59,171 52,684 42,404
Long-term debt 86,770 75,098 83,353
Deferred income taxes 2,282 1,627 2,268
SHAREHOLDERS' EQUITY:
Preferred shares-- without par value--
authorized 500,000 shares
Common shares--without par value--
19,500,000 shares authorized; 8,407,146 shares issued
and 8,401,418 outstanding at September 30, 1998, 8,247,584
at September 30, 1997, 8,250,356 at December 31, 1997 841 825 825
Paid-in capital 31,158 28,758 29,268
Retained earnings 49,588 43,432 42,347
Less treasury shares (59) (17) (59)
Unearned compensation (872) (334) (88)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 80,656 72,664 72,293
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 228,879 $ 202,073 $ 200,318
========= ========= =========
</TABLE>
2
<PAGE> 3
LESCO, INC.
STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
------------------------------- ------------------------------
(In thousands, except per share data) 1998 1997 1998 1997
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 118,837 $ 103,244 $ 325,973 $ 279,638
Cost of sales 81,996 69,313 218,880 186,661
--------- --------- --------- ---------
GROSS PROFIT ON SALES 36,841 33,931 107,093 92,977
Selling, general and
administrative expenses 31,704 26,757 90,508 75,850
--------- --------- --------- ---------
INCOME FROM OPERATIONS 5,137 7,174 16,585 17,127
Other deductions (income):
Interest expense 1,153 1,122 4,197 3,446
Other - net (134) (1,234) (1,258) (2,238)
--------- --------- --------- ---------
1,019 (112) 2,939 1,208
--------- --------- --------- ---------
Income Before Income Taxes 4,118 7,286 13,646 15,919
Income taxes 1,605 2,842 5,321 6,209
--------- --------- --------- ---------
NET INCOME $ 2,513 $ 4,444 $ 8,325 $ 9,710
========= ========= ========= =========
BASIC EARNINGS PER SHARE $ 0.30 $ 0.54 $ 1.00 $ 1.19
========= ========= ========= =========
DILUTED EARNING PER SHARE $ 0.30 $ 0.51 $ 0.97 $ 1.14
========= ========= ========= =========
</TABLE>
3
<PAGE> 4
LESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30
-----------------------
(In thousands) 1998 1997
--------- --------
(unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 8,325 $ 9,710
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 4,065 3,131
Increase in accounts receivable (15,044) (18,188)
Provision for uncollectible accounts receivable 1,890 1,478
Increase in inventories (10,727) (13,784)
Increase in accounts payable 16,466 14,520
Increase in other current items 5,052 3,245
Other (743) 313
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 9,284 425
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (9,686) (4,934)
Acquisition of businesses (8,174) (2,949)
Bond proceeds held for construction 4,761 --
--------- --------
NET CASH USED IN INVESTING ACTIVITIES (13,099) (7,883)
FINANCING ACTIVITIES:
Proceeds from borrowings 153,097 80,514
Reduction of borrowings (149,680) (70,120)
Issuance of common shares 1,122 1,965
Cash Dividend (1,084) (973)
--------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 3,455 11,386
--------- --------
Net (Decrease) Increase in Cash (359) 3,928
Cash--Beginning of the Period 3,403 1,900
--------- --------
CASH - END OF THE PERIOD $ 3,044 $ 5,828
========= ========
</TABLE>
4
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LESCO, INC.
NOTES TO FINANCIAL STATEMENTS
-----------------------------
NOTE A - Basis of Presentation
- ------------------------------
The accompanying unaudited financial statements have been prepared in accordance
with generally accepted accounting principles for interim financial information
and with the requirements of Regulation S-X and Form 10-Q. The statements
reflect all adjustments, consisting only of normal recurring accruals, which
are, in the opinion of management, necessary for a fair presentation of the
results for interim periods. For further information, refer to the audited
financial statements and footnotes thereto for the year ended December 31, 1997
included in the Company's Form 10-K.
Operating results for the nine months ended September 30 are not necessarily
indicative of the results to be expected for the year due to the seasonal nature
of the Company's business.
NOTE B - Earnings per Share
- ---------------------------
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
(In thousands except share data) 1998 1997 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Numerator:
Net Income $ 2,513 $ 4,444 $ 8,325 $ 9,710
Denominator:
Denominator for basic
earnings per share -
weighted average shares 8,341,510 8,219,525 8,308,997 8,127,314
Effect of dilutive securities:
Employee stock options 140,570 434,657 284,385 337,149
Performance shares 18,301 18,301 18,301 18,301
----------------------------------------------------------------
Diluted potential common
shares 158,871 452,958 302,686 355,450
Denominator for diluted
earnings per share -
adjusted weighted average
shares and assumed
conversions 8,500,381 8,672,483 8,611,683 8,482,764
Earnings per share
Basic $ 0.30 $ 0.54 $ 1.00 $ 1.19
Diluted $ 0.30 $ 0.51 $ 0.97 $ 1.14
</TABLE>
5
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NOTE C - Acquisitions
- ---------------------
On January 30,1998, the Company acquired certain assets of Agriturf, Inc. and
Cadwell & Jones, Inc. for $6.0 million in cash, plus the assumption of $2.1
million of debt. The asset purchase included land, a fertilizer manufacturing
facility and related warehouse, working capital and manufacturing equipment. The
asset purchase was financed by the Company's credit facility.
6
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LESCO, INC.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Results of Operations
- ---------------------
Three Months ended September 30, 1998 compared with
the Three Months ended September 30, 1997
Net sales for the three-month period ended September 30, 1998 of $118.8 million
increased 15.1% over the net sales of $103.2 million for the same period in
1997. The increase in net sales is primarily due to volume increases which
reflect strong demand for control products, with other products growing at a
slower pace. The Company had 235 Service Centers in operation for the
three-month period ended September 30, 1998 compared to 215 Service Centers in
operation for the same period a year ago. Comparable store sales increased 10.6%
for the three-month period ended September 30, 1998.
Gross profit for the third quarter of $36.8 million, constituting 31.0% of
sales, increased 8.6% over the $33.9 million gross profit, constituting 32.9% of
sales, for the same period in 1997. The gross profit percentage decrease
occurred primarily as a result of increased sales of chemical control products
which traditionally are sold at lower margins than other products.
Selling, general and administrative expenses for the third quarter of $31.7
million increased 18.3% over the $26.8 million incurred during the same period
in 1997. Expense increases are largely attributable to expenses associated with
the addition of 20 new Service Centers and two additional Stores-on-Wheels(R),
and increases in the Company's distribution and freight expenses associated with
a higher level of sales. During the three months ended September 30, 1998, the
Company completed the consolidation of its warehouse operations in Sebring,
Florida and also began operations at its new manufacturing facility in Sebring,
Florida. The Company had originally planned for these events to be completed in
the first and second quarters, however, as a result of weather-related
construction delays, the Company incurred an additional $.2 million of
incremental third-quarter Sebring, Florida warehouse expense compared to 1997.
Interest expense was $1.2 million in the current quarter compared with $1.1
million a year ago and is largely attributable to increased debt levels
associated with the January 30, 1998 Agriturf and Cadwell & Jones asset
purchases, capital requirements for the construction of the Company's new plant
facility in Sebring, Florida, and increases in working capital associated with
sales increases compared to a year ago.
Other deductions - net include customer finance charges which total $1.0 million
for the three-month period ended September 30, 1998 compared to $1.1 million in
1997. Also included in other deductions - net, the Company recognized a net
operating loss of $.9 million for the three-month period ended September 30,
1998 compared to a net operating loss of $.3 million in 1997 relating to
Commercial Turf Products, Ltd., the Company's 50/50 commercial equipment joint
venture with MTD Products Inc.
7
<PAGE> 8
Nine Months ended September 30, 1998 Compared with
the Nine Months ended September 30, 1997
Net sales for the nine-month period ended September 30, 1998 of $326.0 million
increased 16.6% over the net sales of $279.6 million for the same period in
1997. The increase in net sales is primarily due to volume increases which
reflect strong demand for control products, with other products growing at a
slower pace. The Company had 235 Service Centers in operation for the nine-month
period ended September 30, 1998 compared to 215 Service Centers in operation for
the same period a year ago. Comparable store sales increased 10.5% for the
nine-month period ended September 30, 1998.
Gross profit for the nine-month period ended September 30, 1998 of $107.1
million, constituting 32.9% of sales, increased 15.2% over the $93.0 million
gross profit, constituting 33.2% of sales, for the same period in 1997. The
gross profit percentage decrease occurred primarily as a result of increased
sales of chemical control products which traditionally are sold at lower margins
than other products.
Selling, general and administrative expenses for the nine-month period ended
September 30, 1998 of $90.5 million increased 19.2% over the $75.9 million
incurred during the same period in 1997. Expense increases are largely
attributable to expenses associated with the addition of 20 new Service Centers
and two additional Stores-on-Wheels(R), and increases in the Company's
distribution and freight expenses associated with a higher level of sales.
During the first nine months ended September 30, 1998, the Company relocated its
distribution center in New Jersey. In addition, the Company completed the
consolidation of its warehouse operations in Sebring, Florida and also began
operations at its new manufacturing facility in Sebring, Florida. The Company
had originally planned for the Sebring, Florida relocation and consolidation to
be completed in the first and second quarters, however, as a result of
weather-related construction delays, the Company incurred an additional $.2
million of incremental Sebring, Florida warehouse expense compared to 1997.
Interest expense was $4.2 million in the current nine-month period compared with
$3.4 million a year ago. The higher interest expense is mainly attributable to
increased bank debt levels associated with the January 30, 1998 Agriturf and
Cadwell & Jones asset purchases, capital requirements for the construction of
the Company's new plant facility in Sebring, Florida, and increases in working
capital associated with sales increases compared to a year ago.
Other deductions - net included customer finance charges which total $2.4
million for the nine-month period ended September 30, 1998 compared to $2.3
million in 1997. Also included in other deductions - net, the Company recognized
a net operating loss of $1.7 million for the nine-month period ended September
30, 1998 compared to a net operating loss of $.6 million in 1997 relating to
Commercial Turf Products, Ltd., the Company's 50/50 commercial equipment joint
venture with MTD Products Inc.
8
<PAGE> 9
Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
On January 30, 1998, the Company acquired certain assets of Agriturf, Inc. and
Cadwell and Jones, Inc. for $6.0 million in cash, plus the assumption of $2.1
million in debt. The asset purchase included land, a fertilizer manufacturing
facility and related warehouse, working capital, and other manufacturing assets.
Funding for the asset purchase was financed by an extension of the Company's
credit facilities.
As of September 30, 1998, total assets of the Company were $228.9 million
compared to $202.1 million as of September 30, 1997 and $200.3 million as of
December 31, 1997. The asset increase compared to a year ago is primarily
attributable to increases in working capital and increases in property, plant,
and equipment associated with the acquisitions completed by the Company within
the past year, while the increase from December 31, 1997 is primarily due to
seasonality. Accounts receivable were $79.2 million as of September 30, 1998
compared to $75.2 million a year ago, and $65.9 million as of December 31, 1997.
Compared to a year ago, accounts receivable have increased by 5.4% compared to
the 16.6% increase in sales. Inventory was $94.1 million as of September 30,
1998 compared to $82.3 million a year ago, and $82.2 million as of December 31,
1997. Compared to a year ago, inventory has increased by 14.3% compared to the
16.6% increase in sales. The increase in inventory reflects the Company's
seasonal build combined with inventory associated with the increase in the
number of Service Centers.
Funding for the asset changes was provided primarily by an increase in long-term
debt, along with an increase in accounts payable. The Company's long-term debt
increased to $86.8 million as of September 30, 1998. Accounts payable increased
to $50.7 million as of September 30, 1998 from $42.2 million as of September 30,
1997, and $34.0 million as of December 31, 1997. The increase in accounts
payable year-over-year relates to the increases in inventories as noted above,
while the increase from December 31, 1997 is primarily related to seasonality.
On June 23, 1998, the Company completed a $50 million private placement of
Senior Notes with five lenders. The Senior Notes have an average life of seven
and one-half years, with average fixed-rate interest of 6.81%. Proceeds of the
Senior Notes were used to reduce the amounts outstanding under the Company's
bank credit facility.
Outstanding debt under the Company's credit facility was $23.0 million as of
September 30, 1998 compared to $68.7 million as of September 30, 1997 and $69.5
million as of December 31, 1997. As of September 30, 1998, the Company had $57.0
million available under its bank credit facility. Outstanding debt decreased
primarily as a result of the $50 million private placement discussed above, in
addition to reduced seasonal third quarter working capital needs. The Company
believes its current borrowing capacity is adequate for the foreseeable future.
Capital expenditures for the first nine months of 1998 totaled $9.7 million of
which $6.2 million related to the construction of the new fertilizer
manufacturing facility in Sebring, Florida, improvements in the Company's
information systems and the opening of twenty new Service Centers.
9
<PAGE> 10
Year 2000 Compliance
- --------------------
Over the past three years, the Company has broadly implemented new information
systems and technology with respect to production, production planning,
inventory management, order entry, distribution and financial systems. This
broad-based strategic initiative, which also includes non-information systems,
will be completed by mid 1999. As a result, it is the Company's assessment that
these new systems and technology either have the capability now, or will by the
end of 1998, to adequately recognize the year 2000 and management believes the
risk of failure is minimal. The Company does not currently expect third-party
year 2000 compliance issues to have a material impact on its operations. An
internal initiative has been established to continue to evaluate the potential
impact of year 2000 on its operations.
New Accounting Requirements
- ---------------------------
In June 1997, the Financial Accounting Standards Board issued FAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." The
statement requires a "management" approach to reporting financial and
descriptive information about a Company's operating segments. Management
continues to study the potential effect of adopting this statement.
As of January 1, 1998 the Company adopted FAS No. 130, "Reporting Comprehensive
Income." The statement establishes new rules for the reporting and display of
comprehensive income and its components. The adoption of this statement had no
impact on the Company's net income or shareholders' equity and the Company has
no elements of other comprehensive income in any period presented.
Forward-Looking Statements
- --------------------------
Certain statements included in the report are forward-looking statements that
are based on management's current belief, assumptions and expectations. These
forward-looking statements can be identified by the use of predictive or future
tense terms such as "anticipate," "estimate," "project," "may," "will" or
similar terms. These statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company's actual
future performance may differ materially from that anticipated in
forward-looking statements. Risk factors that would cause or contribute to such
differences include, but are not limited to:
- regional weather conditions which have an impact on both timing and
volume of sales;
- the Company's successful execution of its operating plans;
- the Company's ability to integrate business acquisitions successfully;
- general economic and business conditions;
- changes in market demographics; and
- changes in the regulation of the Company's products, including
applicable environmental regulations.
10
<PAGE> 11
PART II - OTHER INFORMATION
---------------------------
Except as noted below, the items in Part II are inapplicable or, if applicable,
would be answered in the negative. These items have been omitted and no other
reference is made thereto.
Item 5 - Other Information
- --------------------------
Shareholders who intend to submit proposals included in the Company's proxy
materials may do so in compliance with Rule 14a-8 promulgated under the
Securities Exchange Act of 1934. As stated in the Company's proxy statement
dated April 9, 1998, the last date any such proposal will be received by the
Company for inclusion in the Company's proxy materials relating to the 1999
Annual Meeting is December 8, 1998. For those shareholder proposals which are
not submitted in accordance with Rule 14a-8, the Company's designated proxies
may exercise their discretionary voting authority for any proposal received
after February 23, 1999, without any discussion of the proposal in the Company's
proxy materials.
Item 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
(27) Financial Data Schedule
11
<PAGE> 12
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned thereunto duly authorized.
LESCO, INC.
November 13, 1998 By: /s/ Ware H. Grove
- ----------------- ----------------------------
Ware H. Grove, Vice-President/
Chief Financial Officer
12
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<CURRENCY> U.S.DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 3,044
<SECURITIES> 0
<RECEIVABLES> 83,192
<ALLOWANCES> 3,919
<INVENTORY> 94,095
<CURRENT-ASSETS> 180,130
<PP&E> 66,044
<DEPRECIATION> 27,204
<TOTAL-ASSETS> 228,879
<CURRENT-LIABILITIES> 59,171
<BONDS> 86,770
0
0
<COMMON> 841
<OTHER-SE> 79,815
<TOTAL-LIABILITY-AND-EQUITY> 228,879
<SALES> 325,973
<TOTAL-REVENUES> 325,973
<CGS> 218,880
<TOTAL-COSTS> 218,880
<OTHER-EXPENSES> (1,258)
<LOSS-PROVISION> 1,890
<INTEREST-EXPENSE> 4,197
<INCOME-PRETAX> 13,646
<INCOME-TAX> 5,321
<INCOME-CONTINUING> 8,325
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 8,325
<EPS-PRIMARY> 1.00
<EPS-DILUTED> 0.97
</TABLE>
