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UNITED STATES
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

LESCO, INC.

(440) 783-9250
(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 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.

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PART 1. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

LESCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED

See Notes to Consolidated Financial Statements.

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LESCO, INC.
CONSOLIDATED BALANCE SHEETS

See Notes to Consolidated Financial Statements.

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LESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

See Notes to Consolidated Financial Statements.

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LESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE A — Basis of Presentation

         The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted 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, 2001 included in the Company’s Form 10-K and the Company’s unaudited financial statements and footnotes for the quarter ended March 31, 2002 included in the Company’s Form 10-Q.

         Operating results for the six months ended June 30, 2002 are not necessarily indicative of the results to be expected for the year due to the seasonal nature of the Company’s business. Severance costs have been reclassified in the prior period to conform with current year presentation.

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NOTE B — Earnings per Share

The following table sets forth the computation of basic and diluted earnings per share:

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NOTE C – Segment Information

         The Company has three reportable operating segments, Lawn Care, Golf, and Corporate, and are defined by management responsibility.

         The Lawn Care segment operates 227 LESCO Service Centers®, and 9 market sales representatives which market products on a localized basis. Also included in the Lawn Care segment is the operation of National Accounts including 17 sales representatives. The primary products sold by the Lawn Care segment are turf care products, including turf control products, fertilizer, grass seed and equipment. The Service Centers market and sell products principally to smaller lawn care companies, landscapers, nurseries, municipalities, churches and condominium associations. This segment also markets and sells products to large national accounts and regional lawn care customers through a separate group of sales representatives. This segment also distributes selected products through Home Depot stores in the South, Southwest, Midwest, 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 Scenic Green, Aim Lawn & Garden Products and Professional Turf Products.

         The Golf segment markets and sells products to private and public golf courses and other customers having large turf areas through Company salespersons who operate a fleet of 77 LESCO Stores-on-Wheels®. The primary products sold by the Golf segment are turf care products, including turf control products, fertilizer, grass seed and hand held equipment. These Stores-on-Wheels are well stocked with a wide variety of turf care products and golf course accessories, which are sold directly from the trucks. The Golf segment has 49 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 segment markets its products internationally, principally through foreign distributors.

         The Corporate segment includes the supply chain and corporate support functions of the Company. This segment includes the manufacturing, warehouse and distribution functions for the Company, the direct costs of which are fully allocated to the Lawn Care and Golf segments. Indirect costs of these functions as well as the Company’s costs of administration, finance, information services, legal and human resources are included in the Corporate segment. Included in the Corporate segment for three months ended June 30, 2002 are one time charges for inventory markdown, asset rationalization and severance totaling $9.6 million, $12.0 million and $1.8 million, respectively. Results for the six months ended June 30, 2002 include one time charges for inventory markdown, asset rationalization and severance totaling $9.6 million, $12.0 million and $3.9 million respectively.

         With the asset rationalization and new senior management changes, including a reorganization of the sales group, the Company is reviewing its segment reporting structure.

         The Company measures segment profitability as operating profit. Certain prior year data has been reclassified to reflect the changes in management responsibility. Operating results by segment are as follows (in thousands):

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NOTE D – Other Assets

Other assets consist of the following:

         Deferred financing relates to costs incurred to obtain financing. These costs are amortized over the life of the various finance agreements. The lower of net book value or net realizable value of certain land and buildings, which are for sale, is included in assets held for sale. Brokers are actively marketing these assets and sales are expected in the next twelve months. The increase in assets held for sale relates to the Company’s asset rationalization, (see Note E). Deposits and other primarily includes deposits on properties the Company rents.

NOTE E – Asset Rationalization and Severance Expense

         During the second quarter, the Company completed an asset analysis and finalized plans to rationalize its under-performing assets. The plan includes ceasing operations at and the decision to sell the Company’s manufacturing facilities in Disputanta, Virginia and Stockton, California. The Company recorded a pretax charge totaling $13.8 million in the second quarter of 2002, which is included in the Company’s Consolidated Statements of Operations as Asset Rationalization of $12.0 million and Severance Expense of $1.8 million. In addition, during the first quarter the Company had recognized severance expenses of $2.1 million related to changes in executive management and other employee terminations. These charges of $13.8 million in the second quarter and $15.9 million for the first half, have reduced net income by $8.6 million, or $.99 per diluted share for the second quarter of 2002 and $9.9 million, or $1.14 per diluted share for the first half of 2002. Major components of the charge for the asset rationalization and severance expense and the related reserves and accruals as of June 30, 2002 are as follows:

(In thousands):

         The asset impairment charges of $9.2 million relates to the asset write-down of the Disputanta and Stockton facilities to net realizable value and the write-off of patents and trademarks related to products previously manufactured at the Disputanta facility. The net realizable value of $1.8 million for these facilities is included in Assets Held for Sale in Other Assets. The Company is accounting for the planned sales of the facilities in accordance with the guidelines of SFAS 144 “Accounting for the Impairment or Disposal of Long Lived Assets”, which was adopted as of January 1, 2002.

         The severance benefits of $1.8 million for the second quarter relate to post employment benefits for employees of the Disputanta, Stockton and other facilities. The severance benefits of $2.1 million for the first quarter relate to changes in executive management and other employee terminations. As of June 30, 2002, $855,000 of the total severance benefits accrued have been paid, leaving a remaining balance to be paid of $3.0 million. The lease cost of $1.1 million includes the aggregate straight-line lease expense for the

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Disputanta, Stockton and other facilities. The other exit costs of $1.7 million relate to costs to maintain the facilities until they are sold and other exit costs.

NOTE F – Inventory Markdown

         The Company implemented an inventory life cycle program which requires the identification of all Stock Keeping Units (“SKUs”) into one of five categories: active, watch, phase out, discontinued and purge. SKUs identified as discontinued will be progressively marked-down over specific periods until the costs are marked down to zero. At that point SKUs will be purged and the applicable product destroyed. This progressive markdown policy will replace the Company’s existing obsolescence policy, which maintained a reserve for slow moving parts, discontinued inventory and products with limited shelf lives.

         In preparation for the conversion to the product life cycle program, twelve thousand existing SKUs were specifically identified as discontinued. The Company recorded a $9.6 million one-time charge, net of the obsolescence reserve, to markdown the cost of these discontinued SKUs to their expected liquidation value. The charge is included as cost of sales inventory markdown on the Consolidated Statements of Operations. The charge reduced second quarter net income by $6.0 million, or $.69 per diluted share.

NOTE G – Debt

         On January 14, 2002, the Company refinanced the private placement notes, revolving credit agreement and trade receivables facility with a $122.3 million senior secured credit facility. The new facility includes an amortizing term loan of approximately $7.3 million and a revolving credit facility of up to $115 million, maturing in January 2005. The variable interest on this facility is based on the LIBOR plus 2.75% to 3.00% or prime rates plus .25% to .50%. Availability under the new revolving facility is determined by a borrowing base formula based upon the Company’s eligible receivables and inventories. The senior secured credit facility contains various restrictive covenants, including limits on additional borrowings, lease payments and capital expenditures; maintenance of certain operating and financial ratios; and maintenance of $70.0 minimum net worth and restriction on dividend payments. The new facility is secured by substantially all of the Company’s assets.

         The Company recorded an extraordinary charge related to the early termination on debt of approximately $2.9 million after tax in the first quarter of 2002.

         On July 26, 2002, the Company amended its senior secured credit facility. The amendment addressed the impact of the one-time charges for inventory markdown, asset rationalization and severance expense on the facilities covenants. As of June 30, 2002, the Company is in compliance with all of the various restrictive covenants included in its credit facility, as amended.

NOTE H – Derivatives and Comprehensive Income / Loss

         The Company utilizes derivative financial instruments to reduce its exposure to market risks from changes in interest rates and foreign exchange rates. The Company will only enter into agreements with major financial institutions that are considered to be market makers.

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         In conjunction with the signing of its senior secured credit agreement on January 14, 2002, the Company entered into a three-year, $40.5 million notional amount interest rate swap agreement expiring in January 2005, which converts existing variable-rate (based on LIBOR or prime rates), plus applicable borrowing margin, payments to 4.2% fixed-rate, plus applicable borrowing margin, payments. The fair value of the interest rate swap is determined by the estimated cost to terminate the agreement, as determined by the bank. The Company recognizes the $648,950 fair market value of the swap agreement as a liability on the balance sheet at June 30, 2002. Since the Company considers this swap to be completely effective, changes in the fair market value are recorded in accumulated other comprehensive income, net of tax effect. The Company’s comprehensive loss for the six months ended June 30, 2002 and June 30, 2001 was as follows:

NOTE I – Goodwill and Other Intangible Assets

         In June 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”. Statement No. 142 provides that goodwill and indefinite lived intangible assets are no longer amortized but are reviewed annually (or more frequently if impairment indicators arise) for impairment. Separable intangible assets that are not deemed to have an indefinite life will continue to be amortized over their useful lives (but with no maximum life). As reported in the Company’s 10-K, the results of Step 1- goodwill impairment tests indicated that a potential impairment existed. The Company has completed, Step 2 – measurement of the impairment loss, by evaluating the fair value of the reporting units carrying goodwill through appraisals and discounted cash flow models. Step 2 results indicated that the goodwill recorded in the Company’s Golf ($2,148,000) and Lawn Care ($5,184,000) units was fully impaired. Upon the adoption of FAS 142 the Company wrote off all its goodwill taking a $4.6 million charge, net of taxes, as a cumulative effect of accounting change as of January 1, 2002.

         The following table reflects consolidated results adjusted as if the adoption of SFAS 142 occurred as of the beginning of the six month period ended June 30, 2001.