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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 June 30,1999 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 August 10, 1999
- -------------------------------- ----------------
Common shares, without par value 8,427,397 shares
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<TABLE>
<CAPTION>
LESCO, INC.
CONSOLIDATED BALANCE SHEETS
June 30 June 30 December 31
(In thousands except share data) 1999 1998 1998
--------- --------- ---------
(unaudited)
<S> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash $ 2,473 $ 3,102 $ 1,841
Accounts receivable -- net 80,874 82,873 65,358
Inventories 110,471 98,813 86,662
Deferred income taxes 1,852 2,742 1,568
Prepaid expenses and other assets 2,284 1,846 3,598
--------- --------- ---------
TOTAL CURRENT ASSETS 197,954 189,376 159,027
Property, Plant and Equipment 75,343 68,140 67,874
Less allowance for depreciation and amortization (32,036) (29,320) (28,796)
--------- --------- ---------
43,307 38,820 39,078
Bond proceeds held for construction -- 341 --
--------- --------- ---------
43,307 39,161 39,078
Other Assets 9,084 8,703 9,643
--------- --------- ---------
TOTAL ASSETS $ 250,345 $ 237,240 $ 207,748
========= ========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 69,859 $ 66,021 $ 36,138
Other current liabilities 10,947 7,716 6,688
Current portion of debt 18,500 200 100
--------- --------- ---------
TOTAL CURRENT LIABILITIES 99,306 73,937 42,926
Long-term debt 63,743 82,895 83,698
Deferred income taxes 1,967 2,282 2,427
SHAREHOLDERS' EQUITY:
Preferred shares-- without par value--
authorized 500,000 shares
Common shares--without par value--
19,500,000 shares authorized; 8,464,249 shares issued and 8,401,533
outstanding at June 30, 1999, 8,395,560 shares issued and 8,389,832
outstanding at June 30, 1998, 8,401,418 shares issued and 8,366,202
outstanding at December 31, 1998 846 839 841
Paid-in capital 32,492 31,143 31,631
Retained earnings 53,126 47,075 47,156
Less treasury shares (59) (59) (59)
Unearned compensation (1,076) (872) (872)
--------- --------- ---------
TOTAL SHAREHOLDERS' EQUITY 85,329 78,126 78,697
--------- --------- ---------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 250,345 $ 237,240 $ 207,748
========= ========= =========
</TABLE>
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<TABLE>
<CAPTION>
LESCO, INC.
STATEMENTS OF INCOME
Three Months Six Months Ended
Ended June 30 June 30
---------------------- ----------------------
(In Thousands, Except per Share Data) 1999 1998 1999 1998
--------- --------- --------- ---------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Net sales $ 150,716 $ 134,446 $ 233,769 $207,136
Cost of sales 99,524 88,709 153,903 136,883
--------- --------- --------- ---------
GROSS PROFIT ON SALES 51,192 45,737 79,866 70,253
Selling, general and
administrative expenses 36,025 32,891 66,388 58,805
--------- --------- --------- ---------
INCOME FROM OPERATIONS 15,167 12,846 13,478 11,448
Other deductions (income):
Interest expense 1,407 1,319 2,942 3,044
Other - net (923) (497) (1,203) (1,124)
--------- --------- --------- ---------
484 822 1,739 1,920
--------- --------- --------- ---------
Income Before Income Taxes 14,683 12,024 11,739 9,528
Income taxes 5,726 4,690 4,578 3,716
--------- --------- --------- ---------
NET INCOME $ 8,957 $ 7,334 $ 7,161 $ 5,812
========= ========= ========= ========
BASIC EARNINGS PER SHARE $ 1.07 $ 0.88 $ 0.85 $ 0.70
========= ========= ========= ========
DILUTED EARNING PER SHARE $ 1.04 $ 0.85 $ 0.84 $ 0.67
========= ========= ========= ========
</TABLE>
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LESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30
----------------------
(In Thousands) 1999 1998
--------- ---------
(unaudited)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 7,161 $ 5,812
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 3,240 2,667
Increase in accounts receivable (16,834) (17,809)
Provision for uncollectible accounts receivable 1,318 1,055
Increase in inventories (23,809) (15,445)
Increase in accounts payable 33,721 31,799
Increase in other current items 5,288 3,615
Other 99 464
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 10,184 12,158
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (7,469) (8,268)
Acquisition of businesses -- (8,174)
Bond proceeds held for construction -- 4,420
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (7,469) (12,022)
FINANCING ACTIVITIES:
Proceeds from borrowings 57,400 131,897
Reduction of borrowings (58,955) (132,355)
Issuance of common shares 656 1,105
Cash Dividend (1,184) (1,084)
---------
NET CASH USED IN FINANCING ACTIVITIES (2,083) (437)
--------- ---------
Net Increase (Decrease) in Cash 632 (301)
Cash -- Beginning of the Period 1,841 3,403
--------- ---------
CASH - END OF THE PERIOD $ 2,473 $ 3,102
========= =========
</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 six months ended June 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 June 30 Six Months Ended June 30
(In thousands except share data) 1999 1998 1999 1998
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<S> <C> <C> <C> <C>
Numerator:
Net Income $8,957 $7,334 $7,161 $5,812
Denominator:
Denominator for basic
earnings per share -
weighted average shares 8,398,410 8,326,488 8,387,504 8,292,741
Effect of dilutive securities:
Employee stock options 234,379 330,674 177,927 356,293
Performance shares 18,301 18,301
------------------------------------------------------------------------------
Diluted potential common
shares 234,379 348,975 177,927 374,594
Denominator for diluted
earnings per share -
adjusted weighted average
shares and assumed
conversions 8,632,789 8,675,463 8,565,431 8,667,335
Earnings per share
Basic $1.07 $0.88 $0.85 $0.70
Diluted $1.04 $0.85 $0.84 $0.67
</TABLE>
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LESCO, INC.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MANAGEMENT'S DISCUSSION AND ANALYSIS
Results of Operations
- ---------------------
For the second quarter ended June 30, 1999, sales increased 12.1% to $150.7
million from $134.4 million in 1998. Sales for the first six months of 1999
increased 12.9% to $233.8 million from $207.1 million in 1998. Sales volumes for
both consumable and hard goods increased in the second quarter and the first six
months of 1999 compared to 1998. Same store sales for the second quarter and the
first six months of 1999 compared to 1998 increased 12.3% and 12.6%
respectively.
Gross profit, as a percent of sales, for the second quarter ended June 30, 1999
and June 30, 1998 was 34.0%. For the first six months, gross profit, as a
percent of sales, in 1999 being 34.2% compared to 33.9% in 1998. Gross profit
increases occurred in all major product categories for the second quarter and
the first six months ended June 30.
The Company's selling, general and administrative expenses increased $3.1
million, a 9.4% increase to $36.0 million for the second quarter of 1999
compared to $32.9 million in the second quarter of 1998. Delivery and warehouse
expenses decreased as a percent of sales compared to last year as a result of
efficiencies gained by the warehouse consolidation that occurred in 1998.
Selling, general and administrative expenses were relatively unchanged as a
percent of sales compared to the second quarter a year ago. For the six months
ended selling, general and administrative expenses increased $7.6 million, a
12.9% increase to $66.4 million for 1999 compared to $58.8 million in 1998.
Selling, general and administrative expenses as a percent of sales were
relatively unchanged compared to a year ago. The expense increases for both the
second quarter and the first six months were primarily attributable to an
increase in the Company's freight expenses associated with higher sales volumes,
and an increase in sales and administrative support personnel added in the
second half of 1998 and the first half of 1999 to support the continuing
business growth.
Interest expense for the second quarter of 1999 increased to $1.4 million from
$1.3 million in 1998. For the first six months interest expense decreased to
$2.9 million in 1999 from $3.0 million in 1998. The slight year-to-date decrease
was primarily due to a lower average level of debt outstanding in 1999 compared
to 1998.
Other deductions-net include customer finance charges which totaled $625,000 in
the second quarter of 1999 compared to $723,000 in 1998 and year-to-date of $1.2
million in 1999 and $1.4 million in 1998. The slight decrease is primarily due
to the impact of outsourcing the Company's equipment financing programs. The
Company also recognizes the net operating performance of Commercial Turf
Products, Ltd., the Company's 50/50 commercial equipment joint venture with MTD
Products Inc in the other deductions-net line of the financial statements. The
Company recognized a net operating loss of $20,000 in the second quarter of 1999
compared to a net operating loss of $716,000 in the second quarter of 1998. For
the first six months the Company recognized a net operating loss of $302,000 in
1999 compared to a net operating loss of $789,000 in 1998.
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Financial Condition, Liquidity and Capital Resources
- ----------------------------------------------------
As of June 30, 1999, total assets of the Company were $250.3 million compared to
$237.2 million as of June 30, 1998 and $207.7 million as of December 31, 1998.
The asset increase from June 30, 1998 to June 30, 1999 is primarily related to
working capital increases and increases in property, plant and equipment, while
the working capital increase from December 31, 1998 is due primarily to
seasonality. Net accounts receivable were $80.9 million as of June 30, 1999
compared to $82.9 million as of June 30, 1998 and $65.4 million as of December
31, 1998. Compared to a year ago, net accounts receivable decreased 2.4%
compared to a 12.9% sales increase, due primarily to the impact of outsourcing
equipment financing and the continued focus on the overall management of
receivables. The increase in net accounts receivable from December 31, 1998 to
June 30, 1999 reflect the business seasonality. Inventories were $110.5 million
as of June 30, 1999 compared to $98.8 million as of June 30,1998 and $86.7
million as of December 31, 1998. The increase in inventory is due primarily to
the Company's seasonal build to support the anticipated sales growth combined
with the new approach being utilized to market equipment.
Funding for the asset increases was provided primarily by an increase in
accounts payable. The increase from June 30, 1998 to June 30, 1999 was due to
increased inventory purchased in preparation for anticipated sales increases.
The increase from December 31, 1998 to June 30, 1999 relates to sales volume
increases and the seasonal supplier deferred payment programs which are due in
the second and third quarter of the year. The Company's overall debt remained
relatively unchanged for the periods reported.
Outstanding debt under the Company's credit facility was $18.4 million as of
June 30, 1999 compared to $19.1 million as of June 30, 1998 and $36.1 million as
of December 31, 1998. As of June 30, 1999 the Company had $61.6 million
available under its bank credit facility. The increase in the current portion of
debt is a result of an April, 2000 due date for the Company's credit facility.
The Company believes its current borrowing capacity is adequate for the
foreseeable future and is currently negotiating a new long-term credit facility
which is expected to be completed by the end of the third quarter of 1999.
Capital expenditures for the first six months of 1999 included improvements in
the Company's information systems, construction costs for the Company's new
fertilizer plant in Sebring, Florida, investment in the new fertilizer
technology, and general improvements to the Company's other manufacturing and
distribution facilities.
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Year 2000 Compliance
- --------------------
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
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 4 - Submission of Matters to a Vote of Security Holders
- ------------------------------------------------------------
On May 19, 1999, the Registrant conducted its Annual Meeting of Shareholders,
The following matters were brought before the shareholders for vote at this
meeting:
Election of Directors for a One-Year Term
-----------------------------------------
Votes "For" Votes "Withheld"
---------- ----------------
Ronald Best 6,341,785 33,507
Drexel Bunch 6,342,762 32,530
Robert F. Burkhardt 6,351,860 23,432
Edward F. Crawford 6,193,944 181,348
J. Martin Erbaugh 6,271,162 104,130
Michael J. FitzGibbon 6,350,206 25,086
William A. Foley 6,347,176 28,116
Michael E. Gibbons 6,338,798 36,494
Lee C. Howley 6,343,351 31,941
Robert B. Stein, Jr. 6,337,200 38,092
David L. Swift 6,337,674 37,618
No other matters were brought before shareholders for a vote.
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.
August 13, 1999 By: /s/ R. Breck Denny
- --------------- -------------------------------
R. Breck Denny, Vice-President/
Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 2,473
<SECURITIES> 0
<RECEIVABLES> 85,542
<ALLOWANCES> 4,668
<INVENTORY> 110,471
<CURRENT-ASSETS> 197,954
<PP&E> 75,343
<DEPRECIATION> 32,036
<TOTAL-ASSETS> 250,345
<CURRENT-LIABILITIES> 99,306
<BONDS> 63,743
0
0
<COMMON> 846
<OTHER-SE> 84,483
<TOTAL-LIABILITY-AND-EQUITY> 250,345
<SALES> 233,769
<TOTAL-REVENUES> 233,769
<CGS> 153,903
<TOTAL-COSTS> 153,903
<OTHER-EXPENSES> (1,203)
<LOSS-PROVISION> 1,616
<INTEREST-EXPENSE> 2,942
<INCOME-PRETAX> 11,739
<INCOME-TAX> 4,578
<INCOME-CONTINUING> 7,161
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,161
<EPS-BASIC> .85
<EPS-DILUTED> .84
</TABLE>
