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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, 2000 Commission File Number 0-13147
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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 May 2, 2000
-------------------------------- -----------------
Common shares, without par value 8,506,158 shares
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<TABLE>
<CAPTION>
LESCO, INC.
CONSOLIDATED BALANCE SHEETS
March 31 March 31 December 31
(In thousands except share data) 2000 1999 1999
----------- ----------- -----------
(unaudited) (audited)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash $ 4,545 $ 2,000 $ 2,110
Accounts receivable -- net 87,818 75,932 67,759
Inventories
Raw material 8,653 10,538 7,886
Work in process/finished goods 113,307 97,040 92,785
----------- ----------- -----------
Total Inventories 121,960 107,578 100,671
Deferred income taxes 1,111 1,519 1,154
Prepaid expenses and other assets 7,892 5,531 5,480
----------- ----------- -----------
TOTAL CURRENT ASSETS 223,326 192,560 177,174
Property, Plant and Equipment 83,232 70,690 81,573
Less allowance for depreciation and amortization (37,359) (30,407) (35,412)
----------- ----------- -----------
45,873 40,283 46,161
Other Assets 8,915 9,216 9,448
----------- ----------- -----------
TOTAL ASSETS $ 278,114 $ 242,059 $ 232,783
=========== =========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 69,968 $ 61,368 $ 33,923
Other current liabilities 7,310 6,467 10,269
Current portion of debt 100 100 100
----------- ----------- -----------
TOTAL CURRENT LIABILITIES 77,378 67,935 44,292
Long-term debt 108,377 94,565 95,199
Deferred income taxes 2,731 2,372 2,750
SHAREHOLDERS' EQUITY:
Preferred shares-- without par value--
authorized 500,000 shares
Common shares--without par value--
19,500,000 shares authorized; 8,544,484 shares issued
and 8,506,158 outstanding at March 31, 2000, 8,376,598
at March 31, 1999, 8,499,093 at December 31, 1999 854 842 854
Paid-in capital 33,713 31,835 33,594
Retained earnings 56,416 45,353 57,610
Less treasury shares 38,326 at March 31, 2000, 5,728 at (699) (59) (684)
March 31, 1999, 37,317 at December 31, 1999
Unearned compensation (656) (784) (832)
----------- ----------- -----------
TOTAL SHAREHOLDERS' EQUITY 89,628 77,187 90,542
----------- ----------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 278,114 $ 242,059 $ 232,783
=========== =========== ===========
</TABLE>
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<TABLE>
<CAPTION>
LESCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31
-----------------------------------------
(In thousands except per share data) 2000 1999
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(unaudited)
<S> <C> <C>
Net sales $ 98,878 $ 83,054
Cost of sales 65,871 54,378
----------------- ----------------
GROSS PROFIT ON SALES 33,007 28,676
Warehouse & delivery expense 8,709 7,928
Selling, general & administrative expense 25,368 22,437
----------------- ----------------
34,077 30,365
----------------- ----------------
LOSS FROM OPERATIONS (1,070) (1,689)
Other deductions (income):
Interest expense 2,018 1,535
Joint venture results 0 342
Other - net (654) (622)
----------------- ----------------
1,364 1,255
----------------- ----------------
Loss Before Income Taxes (2,434) (2,944)
Income taxes (benefits) (1,239) (1,148)
----------------- ----------------
NET LOSS $ (1,195) $ (1,796)
================= ================
BASIC AND DILUTED LOSS PER SHARE $ (0.14) $ (0.21)
================= ================
</TABLE>
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<TABLE>
<CAPTION>
LESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31
---------------------------------
(In thousands) 2000 1999
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(unaudited)
OPERATING ACTIVITIES:
<S> <C> <C>
Net loss $ (1,195) $ (1,796)
Adjustments to reconcile net loss to net cash
used by operating activities:
Depreciation and amortization 2,234 1,633
Increase in accounts receivable (20,803) (11,085)
Provision for uncollectible accounts receivable 744 511
Increase in inventories (21,289) (20,916)
Increase in accounts payable 36,045 25,230
Increase in other current items (5,329) (2,105)
Other 367 372
--------------- --------------
NET CASH USED BY
OPERATING ACTIVITIES (9,226) (8,156)
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (1,799) (2,838)
--------------- --------------
NET CASH USED BY INVESTING ACTIVITIES (1,799) (2,838)
FINANCING ACTIVITIES:
Proceeds from borrowings 64,200 27,400
Reduction of borrowings (51,022) (16,533)
Issuance of common shares 282 286
--------------- --------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,460 11,153
--------------- --------------
Net increase in cash 2,435 159
Cash - Beginning of the period 2,110 1,841
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CASH - END OF THE PERIOD $ 4,545 $ 2,000
=============== ==============
</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 in the United States 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, 1999 included in the Company's Form 10-K.
In the first quarter 2000, the deferred tax valuation allowance related to Tri
Delta Fertilizer, Inc.'s net operating loss carryforward was reversed because
realization of such deferred tax assets is considered "more likely than not".
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) 2000 1999
-----------------------------------------------------------------------------------
<S> <C> <C>
Numerator:
Net loss $(1,195) $(1,796)
Denominator:
Denominator for basic
Earnings per share -
Weighted average shares 8,455,513 8,376,598
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 8,455,513 8,376,598
Loss per share
Basic and Diluted $(0.14) $(0.21)
</TABLE>
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NOTE C - Segment Information
- ----------------------------
As a result of the Company's reorganization announced in January 2000, the
Company elected to change the reporting of its business segments as of January
1, 2000, and restated its prior years' presentation to conform to the revised
segment reporting. The Company changed from one reportable segment to four
reportable operating segments to include Product Supply, Lawn Care, Golf and
Corporate and are defined based on management responsibility.
The Product Supply division manufactures and distributes fertilizers,
combination products, and turfgrass seed and is also responsible for purchasing
raw materials in addition to purchasing and distributing turf protection
products, turf care equipment and related parts, and golf course accessories.
The Product Supply division sells exclusively to the Lawn Care and Golf
divisions of the Company.
The Lawn Care division operates 234 LESCO Service Centers(R), which enable the
Company to market its products on a localized basis. The primary products sold
by the Lawn Care division are turf care products, including turf control
products, fertilizer, grass seed and equipment. The Service Centers market and
sell its products principally to smaller lawn care companies, landscapers,
nurseries, municipalities, churches and condominium associations. This division
also markets and sells its products to large national and regional lawn care
customers through a separate group of sales representatives. This division
distributes selected products through Home Depot stores in the South,
Mid-Atlantic and Northeast areas of the country in addition to selling a
consumer line of lawncare products to nationwide retail stores under several
brand names, including TruGreen, ChemLawn and Barefoot.
The Golf division markets and sells its products to private and public golf
courses and other customers having large turf areas through salesmen who operate
a fleet of 75 LESCO Stores-on-Wheels(R). The primary products sold by the Golf
division are turf care products, including turf control products, fertilizer,
grass seed and equipment. These trucks are well-stocked with a wide variety of
turf care products and golf course accessories which are sold directly from the
trucks. The Golf division has conventional sales representatives strategically
located in the various markets to help support the Stores-on-Wheels and sell to
national golf customers. In addition, this division markets its products
internationally principally through foreign distributors.
The Corporate division includes the administrative functions of the Company
which support the Product Supply, Lawn Care and Golf divisions and include
Administration, Finance, Information Services, Legal and Human Resources.
The Company is principally engaged in the manufacturing and marketing of turf
care products to the professional sector of the green industry. There are no
significant intervening events which materially affected the financial
statements. The Company measures segment profit as operating profit. Net assets
is defined as the sum of net accounts receivable, inventory, and net property,
plant, and equipment less accounts payable. Management utilizes this information
as a basis to calculate the divisional return of capital employed. Depreciation
and operating leases for specific Product Supply assets are allocated to
Corporate for operating profit measures. Information on segments are as follows
(in thousands):
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<TABLE>
<CAPTION>
For the First Quarter Ended March 31, 2000
Corporate &
Product Supply Lawn Care Golf Elimination Consolidated
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<S> <C> <C> <C> <C>
Net Sales to External Customers $ $ 76,125 $ 22,753 $ $ 98,878
Intersegment Net Sales 60,691 (60,691)
Operating Profit (521) 7,437 111 (8,097) (1,070)
Total Assets 88,899 112,680 40,732 35,803 278,114
Net Assets 18,931 112,680 40,732 13,340 185,683
<CAPTION>
For the First Quarter Ended March 31, 1999
Corporate &
Product Supply Lawn Care Golf Elimination Consolidated
-------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Sales to External Customers $ $ 63,372 $ 19,682 $ $ 83,054
Intersegment Net Sales 54,688 (54,688)
Operating Profit 365 4,205 (526) (5,733) (1,689)
Total Assets 77,137 102,073 31,587 31,262 242,059
Net Assets 15,769 102,073 31,587 12,996 162,425
</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, 2000 increased $15.8 million to
$98.9 million from $83.1 million in 1999, a 19.0% increase. The increase in
sales is due primarily to volume increases in the Product Supply, Lawn Care and
Golf divisions in the first quarter 2000 compared to the first quarter 1999. Net
sales increased 11.0% for the Product Supply division, 20.1% for the Lawn Care
division and 15.6% for the Golf division in the first quarter 2000 compared to
the first quarter 1999.
Gross profit as a percentage of sales was 33.4% for the first quarter ended
March 31, 2000 compared to 34.5% in 1999. The decrease in gross profit, as a
percent of sales, was due primarily to lower than anticipated production levels
associated with the start-up of the Novex(TM) plant (.8%), and increased
reserves for obsolete inventory (.8%). However, the gross profit decrease, as a
percent of sales, was primarily offset by the positive effect of favorable
product mix (.6%).
Delivery and warehouse expenses, as a percent of sales, decreased to 8.8% for
the first quarter ended March 31, 2000 from 9.5% in the first quarter 1999. This
decrease is primarily due to an increase in the amount of warehouse and delivery
expenses capitalized into inventory as a result of higher inventory levels on
hand as of March 31, 2000 compared to March 31, 1999.
Selling, general and administrative expenses increased by $3.0 million, a 13.1%
increase, to $25.4 million for the first quarter 2000 compared to $22.4 million
in the first quarter 1999. However, as a percent of sales, selling, general and
administrative expenses decreased 1.3% to 25.7% for the first quarter 2000
compared to 27.0% in the first quarter 1999. Selling, general and administrative
expenses were up primarily due to the increase in sales and administrative
support personnel added in the latter half of 1999 and the first quarter of 2000
to support the continuing business growth.
Interest expense increased to $2.0 million in the first quarter 2000 from $1.5
million in 1999. This increase was primarily due to higher average levels of
outstanding debt and higher average interest rates in 2000 compared to 1999. In
2000, average borrowings were higher due to higher inventory levels and higher
levels of accounts receivable due to early order programs and increased first
quarter 2000 sales.
Commercial Turf Products, Ltd. (CTP), the Company's 50% owned equity investment,
reported income of $898,000 in the first quarter 2000 compared with a $684,000
loss in 1999. The Company's share of CTP's income was $449,000 in the first
quarter 2000 (prior to elimination) and a $342,000 loss in the first quarter
1999. The first quarter 2000 equity income was eliminated due to the purchased
inventory from CTP remaining on hand as of March 31, 2000. The improvement in
CTP's performance was primarily attributable to increased production volumes
from year to year.
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Other-net is primarily customer finance charges which totaled $636,000 in the
first quarter 2000 and $622,000 in 1999. Customer finance charges decreased as a
percent of sales to .6% in 2000 from .7% in 1999 due to the impact of
outsourcing the Company's equipment financing programs.
Income tax benefit increased by $91,000, a 7.9% increase, to $1.2 million for
the first quarter 2000 compared to $1.1 million in the first quarter 1999.
Income taxes were calculated at 39.6% for 2000 compared to 39% in 1999 due to
the impact of projected increased earnings and therefore, rate increases. In the
first quarter 2000, the valuation allowance related to Tri Delta Fertilizer,
Inc.'s net operating loss carryforward was reversed because realization of such
deferred tax assets is considered "more likely than not".
Product Supply Division - Net sales for the Product Supply division were $60.7
million for the first quarter 2000 compared to $54.7 million in the first
quarter 1999. This increase was due to higher sales volumes to the Lawn Care and
Golf divisions to support the seasonal inventory requirements for first and
second quarter sales volumes. Operating loss was $521,000 for the first quarter
2000 compared to a $365,000 operating profit for the first quarter 1999. This
decrease was primarily due to lower than anticipated production levels
associated with the start-up of the Company's new Novex plant.
Lawn Care Division - Net sales for the Lawn Care division were $76.1 million for
the first quarter 2000 compared to $63.4 million in the first quarter 1999. This
increase was due primarily to an increase in service center sales where same
store sales for the first quarter 2000 compared to 1999 increased 19.8%. Retail
sales also had a significant impact on sales in the first quarter 2000 with a
49.7% increase compared to the first quarter 1999. Operating profit was $7.4
million for the first quarter 2000 compared to $4.2 million in the first quarter
1999. This increase was due primarily to increased gross margin and decreased
selling, general and administrative costs as a percent of sales.
Golf Division - Net sales for the Golf division were $22.8 million for the first
quarter 2000 compared to $19.7 million in the first quarter 1999. This increase
was due primarily to the addition of 4 new Stores-on-Wheels. Operating profit
was $111,000 for the first quarter 2000 compared to an operating loss of
$526,000 for the first quarter 1999. This increase was due primarily to
increased gross margin and decreased selling, general and administrative costs
as a percent of sales.
Liquidity and Capital Resources
- -------------------------------
As of March 31, 2000, total assets of the Company were $278.1 million compared
to $242.1 million as of March 31, 1999 and $232.8 million as of December 31,
1999. The asset increase from March 31, 1999 to March 31, 2000 is primarily
related to working capital increases, while the increase from December 31, 1999
is due primarily to seasonality of the business. Net Accounts Receivable were
$87.8 million as of March 31, 2000 compared to $75.9 million as of March 31,
1999, a 15.7% increase compared to a 19.1 % sales increase, due primarily to the
impact of outsourcing equipment financing and improved focus on the management
of receivables, and $67.8 million as of December 31, 1999 due to the seasonality
of the business resulting in first quarter sales exceeding fourth quarter sales.
Inventories were $122.0 million as of March 31, 2000 compared to $107.8 million
as of March 31, 1999, and $100.7 million as of December 31, 1999. The increase
in inventory compared to March 31, 1999 was due primarily to higher turfseed and
equipment-related inventories
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while the increase from December 31, 1999 was due primarily to the Company's
seasonal build for anticipated sales.
Funding for the asset changes was provided primarily by an increase in accounts
payable and an increase in borrowings under the Company's credit facilities. The
Company's long-term debt increased to $108.4 million as of March 31, 2000
through additional borrowings under the Company's credit facility. Accounts
payable increased to $70.0 million as of March 31, 2000 from $61.4 million as of
March 31, 1999 and $33.9 million as of December 31, 1999. The increase in
accounts payable from March 1999 to March 2000 was due to inventory purchases
related to year to year sales volume increases. The December 1999 to March 2000
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 $52.2 million as of
March 31, 2000 compared to $30.8 million as of March 31, 1999 and $39.0 million
as of December 31, 1999. The Company's revolving credit facility, which will
mature on June 30, 2003, provides for maximum unsecured borrowing of $60.0
million with no prepayment penalty. As of March 31, 2000 the Company had $7.8
million available under its credit facility. In February 2000, the Company
entered into a short-term note, which will mature on May 31, 2000, that provides
for borrowings up to a maximum of $10.0 million to support seasonal working
capital needs. The Company had no outstanding debt under the $10.0 million line
of credit as of March 31, 2000. The Company believes its current borrowing
capacity is adequate for the foreseeable future.
Capital expenditures for the first three months of 2000 included improvements in
the Company's information systems, improvement costs for the Company's
fertilizer plant in Sebring, Florida, and improvements to the Company's other
manufacturing and distribution facilities.
Year 2000 Compliance
- --------------------
The Company still believes it is year 2000-compliant, and no adverse events have
occurred. No contingency plans were required to be implemented relating to the
year 2000 issue. The costs associated with identifying and remediating known
year 2000 problems were not material to the Company's operations.
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;
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- 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 4, 2000 By /s/ R. Breck Denny
- ------------- ---------------------------------
R. Breck Denny, Vice-President/
Chief Financial Officer
13
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-START> JAN-01-2000
<PERIOD-END> MAR-31-2000
<CASH> 4,545
<SECURITIES> 0
<RECEIVABLES> 92,088
<ALLOWANCES> 4,270
<INVENTORY> 121,960
<CURRENT-ASSETS> 223,326
<PP&E> 83,232
<DEPRECIATION> 37,359
<TOTAL-ASSETS> 278,114
<CURRENT-LIABILITIES> 77,378
<BONDS> 108,377
0
0
<COMMON> 854
<OTHER-SE> 88,774
<TOTAL-LIABILITY-AND-EQUITY> 278,114
<SALES> 98,878
<TOTAL-REVENUES> 98,878
<CGS> 65,871
<TOTAL-COSTS> 34,077
<OTHER-EXPENSES> (654)
<LOSS-PROVISION> 744
<INTEREST-EXPENSE> 2,018
<INCOME-PRETAX> (2,434)
<INCOME-TAX> (1,239)
<INCOME-CONTINUING> (1,195)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,195)
<EPS-BASIC> (.14)
<EPS-DILUTED> (.14)
</TABLE>
