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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 March 31,1999 Commission File Number 0-13147
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LESCO, INC.
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(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
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(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 May 10, 1999
-------------------------------- ---------------
Common shares, without par value 8,381,551 shares
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<TABLE>
<CAPTION>
LESCO, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31 March 31 December 31
(In thousands, except share data) 1999 1998 1998
----------------- --------------- ----------------
(unaudited) (audited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 2,000 $ 7,961 $ 1,841
Accounts receivable -- net 75,932 74,327 65,358
Inventories 107,578 99,800 86,662
Deferred income taxes 1,519 2,680 1,568
Prepaid expenses and other assets 5,531 4,264 3,598
--------- --------- ---------
TOTAL CURRENT ASSETS 192,560 189,032 159,027
Property, Plant and Equipment 70,690 64,147 67,874
Less allowance for depreciation and amortization (30,407) (28,484) (28,796)
--------- --------- ---------
40,283 35,663 39,078
Bond proceeds held for construction -- 1,825 --
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40,283 37,488 39,078
Other Assets 9,216 9,097 9,643
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TOTAL ASSETS $ 242,059 $ 235,617 $ 207,748
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 61,368 $ 55,648 $ 36,138
Other current liabilities 6,467 5,617 6,688
Current portion of debt 100 6,900 100
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TOTAL CURRENT LIABILITIES 67,935 68,165 42,926
Long-term debt 94,565 93,819 83,698
Deferred income taxes 2,372 2,268 2,427
SHAREHOLDERS' EQUITY:
Preferred shares-- without par value--
authorized 500,000 shares
Common shares--without par value--
19,500,000 shares authorized; 8,417,542 shares issued
and 8,376,598 outstanding at March 31, 1999, 8,299,034
at March 31, 1998, 8,366,202 at December 31, 1998 842 830 841
Paid-in capital 31,835 29,858 31,631
Retained earnings 45,353 40,824 47,156
Less treasury shares (59) (59) (59)
Unearned compensation (784) (88) (872)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 77,187 71,365 78,697
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 242,059 $ 235,617 $ 207,748
========= ========= =========
</TABLE>
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<TABLE>
<CAPTION>
LESCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31
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(In Thousands, Except per Share Data) 1999 1998
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(unaudited)
<S> <C> <C>
Net sales $ 83,054 $ 72,690
Cost of sales 54,378 48,174
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GROSS PROFIT ON SALES 28,676 24,516
Selling, general and
administrative expenses 30,365 25,914
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LOSS FROM OPERATIONS (1,689) (1,398)
Other deductions (income):
Interest expense 1,535 1,725
Other - net (280) (627)
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1,255 1,098
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Loss Before Income Taxes (2,944) (2,496)
Income taxes (1,148) (974)
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NET LOSS $ (1,796) $ (1,522)
============= ============
BASIC AND DILUTED LOSS PER SHARE $ (0.21) $ (0.18)
============= ============
</TABLE>
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<TABLE>
<CAPTION>
LESCO, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
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(In Thousands) 1999 1998
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(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net loss $ (1,796) $ (1,522)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 1,633 1,322
Increase in accounts receivable (11,085) (8,591)
Provision for uncollectible accounts receivable 511 383
Increase in inventories (20,916) (16,432)
Increase in accounts payable 25,230 21,426
Increase in other current items (2,105) (840)
Other 372 55
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NET CASH USED IN OPERATING ACTIVITIES (8,156) (4,199)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (2,838) (3,766)
Acquisition of businesses - (8,174)
Bond proceeds held for construction - 2,936
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NET CASH USED BY INVESTING ACTIVITIES (2,838) (9,004)
FINANCING ACTIVITIES:
Proceeds from borrowings 27,400 44,200
Reduction of borrowings (16,533) (27,034)
Issuance of common shares 286 594
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NET CASH PROVIDED BY FINANCING ACTIVITIES 11,153 17,760
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Net Increase in Cash 159 4,558
Cash -- Beginning of the Period 1,841 3,403
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CASH - END OF THE PERIOD $ 2,000 $ 7,961
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</TABLE>
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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, 1998
included in the Company's Form 10-K.
Operating results for the three months ended March 31 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>
(In thousands except share data) 1999 1998
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<S> <C> <C>
Numerator:
Net loss $(1,796) $(1,522)
Denominator:
Denominator for basic
earnings per share -
weighted average shares 8,376,598 8,258,993
Effect of dilutive securities:
Employee stock options - -
Performance shares - -
-------------------------------------
Diluted potential common
shares - -
Denominator for diluted
earnings per share -
adjusted weighted average
shares and assumed
conversions 8,376,598 8,258,993
Loss per share
Basic $(0.21) $(0.18)
Diluted $(0.21) $(0.18)
</TABLE>
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LESCO, INC.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
------------------------------------
Results of Operations
- ---------------------
Sales for the first quarter ended March 31, 1999 increased $10.4 million to
$83.1 million from $72.7 million in 1998, a 14.3% increase. Both consumable and
hard goods sales volumes increased in the first quarter 1999 compared to 1998.
Same store sales for the first quarter 1999 compared to 1998 increased 13.2%.
Gross profit as a percentage of sales was 34.5% compared to 33.7% in 1998. The
margin increase was primarily due to the change in product mix and lower cost of
raw materials in the first quarter 1999 compared to 1998.
Selling, general and administrative expenses increased by $4.5 million, a 17.4%
increase to $30.4 million for the first quarter 1999 compared to $25.9 million
in the first quarter 1998. Delivery and warehouse expenses increased slightly as
a percent of sales compared to last year due primarily to positioning the
inventory in the field to prepare for the anticipated seasonal sales volume
increase. Selling, general and administrative expenses were also up slightly as
a percent of sales due to the increase in sales and administrative support
personnel added in the later half of 1998 and the first quarter of 1999 to
prepare for the continuing business growth.
Interest expense decreased to $1.5 million in the first quarter 1999 from $1.7
million in 1998. This decrease was primarily due to a reduction in the average
level of outstanding debt in 1999 compared to 1998. In 1998 average borrowings
were higher due to the Agriturf and Cadwell & Jones asset purchases.
Other deductions-net include customer finance charges which totaled $622,000 in
the first quarter 1999 and $652,000 in 1998. Also included in other deductions -
net, the Company recognized a net operating loss of $284,000 in the first
quarter of 1999 compared to a net operating loss of $73,000 in 1998 related to
Commercial Turf Products, Ltd., the Company's 50/50 commercial equipment joint
venture with MTD Products Inc.
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Liquidity and Capital Resources
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As of March 31, 1999, total assets of the Company were $242.1 million compared
to $235.6 million as of March 31, 1998 and $207.8 million as of December 31,
1998. The asset increase from March 31, 1998 to March 31, 1999 is primarily
related to working capital increases, while the increase from December 31, 1998
is due primarily to seasonality. Accounts Receivable were $75.9 million as of
March 31, 1999 compared to $74.3 million as of March 31, 1998, a 2.2% increase
compared to an 14.3 % sales increase, due primarily to the impact of outsourcing
equipment financing and improved focus on the management of receivables, and
$65.4 million as of December 31, 1998. Inventories were $107.6 million as of
March 31, 1999 compared to $99.8 million as of March 31, 1998, and $86.7 million
as of December 31, 1998. The increase in inventory is due primarily to the
Company's seasonal build.
Funding for the asset changes was provided primarily by an increase in accounts
payable. The Company's long-term debt increased to $94.6 million as of March 31,
1999 through additional borrowings under the Company's credit facility. Accounts
payable increased to $61.4 million as of March 31, 1999 from $55.6 million as of
March 31, 1998 and $36.1 million as of December 31, 1998. The increase in
accounts payable from March to March was due to inventory purchases related to
year to year sales volume increases while the December to March increase
reflects seasonal supplier deferred payment programs which are due in the second
and third quarter of the year.
Outstanding debt under the Company's credit facility was $30.8 million as of
March 31, 1999 compared to $80.0 million as of March 31, 1998 and $19.9 million
as of December 31, 1998. As of March 31, 1999 the Company had $49.2 million
available under its credit facility. The decrease in outstanding debt under the
Company's credit facility is primarily related to the issuance of $50.0 million
private placement of long-term Senior Notes issued on June 23, 1998. The Company
had no outstanding debt under the $10.0 million money market line of credit as
of March 31, 1999 compared to $6.7 million as of March 31, 1998 and none
outstanding as of December 31, 1998. The Company believes its current borrowing
capacity is adequate for the foreseeable future.
Capital expenditures for the first three months of 1999 included improvements in
the Company's information systems, construction costs of the Company's new
fertilizer plant in Sebring, Florida, investment in new fertilizer technology
and improvements to the Company's other manufacturing and distribution
facilities.
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Year 2000 Compliance
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The Year 2000 issue concerns the potential inability of computer hardware or
software to properly recognize date-sensitive information relating to the Year
2000 and beyond. To address this potential problem, the Company has implemented
a work plan to identify information systems issues and has surveyed each
manufacturing location to identify mission-critical and support-function system
compliance issues. The Company has assessed potential risks that could impact
the Company's business and is developing appropriate contingency plans in the
event of a temporary disruption. The Company's Vice President, Chief Information
Officer leads this effort.
Since 1995, the Company has conducted a broad-based information systems program
to replace and upgrade computer application software and hardware in its
manufacturing, distribution, point-of-sale, financial and administrative
functions. The primary purpose of this program is to improve operating
efficiencies. With the implementation of a new receivables management system in
1999, the Company expects to complete this broad-based information systems
program by the end of 1999. At the time of purchase of these new systems from
various vendors, the Company required that these systems be Year-2000 compliant.
The Company has obtained written vendor representations as to the new systems'
Year 2000 compliance. It is the Company's belief that these new information
systems and the related hardware to operate these systems are compliant with
Year 2000 computing requirements.
During 1998, the Company completed construction of a new fertilizer
manufacturing plant in Sebring, Florida. It is the Company's belief that all
operating systems at this plant are Year-2000 compliant. During 1998, the
Company conducted a review of each manufacturing site, and internal assessments
with respect to Year 2000 compliance for its desktop and manufacturing process
technology and other potentially date-sensitive technology. The Company has
implemented a work plan to ensure all systems are compliant by the end of 1999.
The Company has been testing and will continue to test Year 2000 compliance
throughout its operations during 1999. In addition, the Company is communicating
with key business partners including suppliers, utilities and customers to
determine their risks associated with the Year 2000.
The primary focus of the Company's broad-based information systems upgrades has
been to improve operating efficiencies; however, Year 2000 compliance has been a
secondary benefit of this initiative. The Company has funded these system
improvements from capital funds and annual operating cash flows. The incremental
cost specifically associated with Year 2000 compliance efforts has been nominal,
and is expected to be less than $150,000 in 1999.
The potential risks associated with the Year 2000 issue include temporary
disruption of manufacturing operations, materials ordering, receiving and
shipping product, order entry, billing and collection of accounts receivable,
and disruption in services from vendors who supply materials or services
necessary to the Company in the conduct of its operations. While there can be no
complete assurances, we believe the risk of disruption to the Company has been
minimized as a result of the information systems upgrades that have occurred
since 1995, the ongoing testing and assessments of operating systems, and the
ongoing communication with key business partners. However, if disruptions
relating to the Year 2000 issue occur, the Company could experience some adverse
effects on its operations. The Company is developing contingency plans for
various functional areas, and anticipates completion of these plans by September
30, 1999. During 1999, the Company will continue to assess risks to minimize the
impact of any potential disruptions.
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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.
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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 6 - Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) Exhibits:
(27) Financial Data Schedule
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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.
May 11, 1999 By: /s/ Ware H. Grove
- ------------- ---------------------------------
Ware H. Grove, Vice-President/
Chief Financial Officer
11
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
<CASH> 2,000
<SECURITIES> 0
<RECEIVABLES> 79,480
<ALLOWANCES> 3,548
<INVENTORY> 107,578
<CURRENT-ASSETS> 192,560
<PP&E> 70,690
<DEPRECIATION> 30,407
<TOTAL-ASSETS> 242,059
<CURRENT-LIABILITIES> 67,935
<BONDS> 94,565
0
0
<COMMON> 842
<OTHER-SE> 76,345
<TOTAL-LIABILITY-AND-EQUITY> 242,059
<SALES> 83,054
<TOTAL-REVENUES> 83,054
<CGS> 54,378
<TOTAL-COSTS> 54,378
<OTHER-EXPENSES> (280)
<LOSS-PROVISION> 473
<INTEREST-EXPENSE> 1,535
<INCOME-PRETAX> (2,944)
<INCOME-TAX> (1,148)
<INCOME-CONTINUING> (1,796)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,796)
<EPS-PRIMARY> (.21)
<EPS-DILUTED> (.21)
</TABLE>
