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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

(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   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.

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PART I. 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 annual report on Form 10-K and the Company’s unaudited financial statements and footnotes for the quarters ended March 31, 2002 and June 30, 2002 included in the Company’s quarterly reports on Form 10-Q.

     Operating results for the nine months ended September 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. Certain 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 — Sales Channel Information

     During the third quarter the Company completed its senior management restructuring and sales force reorganization. These initiatives have been ongoing since the April 2002 appointment of the new President and Chief Executive Officer. As a result of the restructuring and reorganization the Company’s internal reporting structure has been realigned to a single operating segment. The President and Chief Executive Officer is the Company’s chief operating decision maker and as such makes decisions on resource allocation and reviews the profit and loss of the single segment. While the Company will be reporting under a single segment, sales information for the current and prior periods will be presented for the Company’s three sales channels and five product lines. The sales channels are defined by the type of customer and product lines are based on products.

     The Lawn Care sales channel (Lawn Care) operates 227 LESCO Service Centers® and includes 62 lawn care sales representatives, who market products on a localized basis. The primary products sold by Lawn Care are turf care products, including turf and pest control products, fertilizer, grass seed and related equipment. The Lawn Care market and sell products principally to smaller lawn care companies, landscapers, nurseries, municipalities, churches and condominium associations.

     The Golf sales channel (Golf) 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® and through 40 golf sales representatives strategically located in various markets. The primary products sold by Golf are turf care products, including turf and pest control products, fertilizer, grass seed and hand held equipment. The 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. In addition, this sales channel markets its products internationally, principally through foreign distributors.

     The National Accounts sales channel (National Accounts) markets and sells products to large national accounts and regional lawn care customers through a separate group of sales representatives. National Accounts has 13 sales representatives strategically located in various markets. This sales channel 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 LESCO, Scenic Green, Aim Lawn & Garden Products and Professional Turf Products.

     Sales results by sales channel and product lines are as follows (in thousands):

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LESCO, INC.
Sales Channels

Product Lines

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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 finance agreement. (see Note G). Deposits and other primarily includes deposits on properties the Company rents.

NOTE E — Asset Rationalization and Severance Expense

     During the second quarter of 2002, the Company completed an asset analysis and finalized plans to rationalize 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 recorded severance expenses of $2.1 million related to changes in executive management and other employee terminations. Major components of the charge for the asset rationalization and severance expense and the related remaining reserves and accruals as of September 30, 2002 are as follows:

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( In thousands):

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     The asset impairment charges of $9.2 million relate 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. 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 lease cost of $1.1 million includes the aggregate straight-line lease expense for the 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. As of September 30, 2002, $1.3 million of the total severance benefits accrued have been paid, leaving a remaining balance to be paid of $2.5 million.

NOTE F — Inventory Markdown

     Effective July 1, 2002, the Company implemented an inventory life cycle program which requires the identification of all Stock Keeping Units (“SKU”) into one of five categories: active, watch, phase out, discontinued and purge. SKUs identified as discontinued are progressively marked-down over specified periods until the values are marked down to zero. At that point the SKUs will be purged and the applicable product destroyed. This progressive markdown policy replaced the Company’s prior 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. Since July, 2002, no additional SKU’s have been discontinued.

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 (Debt Facility). The new Debt 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 Debt Facility is based on LIBOR plus 2.75% to 3.00% or prime rates plus .25% to .50%. Availability under the revolving portion of the new Debt Facility is determined by a borrowing base formula calculated upon the Company’s eligible receivables and inventories. The Debt Facility contains restrictive covenants, including limits on additional borrowings, lease payments and capital expenditures; maintenance of certain operating and financial ratios; maintenance of $70.0 million minimum net worth; and a restriction on dividend payments. The Debt Facility is secured by substantially all of the Company’s assets.

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     On July 26, 2002, the Company amended its Debt 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 September 30, 2002, the Company is in compliance with all of the restrictive covenants in its Debt Facility, as amended.

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

NOTE H — Derivatives and Comprehensive Income / Loss

     The Company utilizes interest rate swap 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.

     In conjunction with the signing of its Debt Facility 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 of 2.75% to 3.00%, 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 $1.8 million fair market value of the swap agreement as a liability on the balance sheet at September 30, 2002. Since the swap is completely effective, changes in the fair market value are recorded in accumulated other comprehensive income under Shareholders Equity, net of tax. The Company’s comprehensive losses for the three and nine months ended September 30, 2002 and September 30, 2001 was as follows:

NOTE I — Goodwill and Other Intangible Assets

     In September 2001, the Financial Accounting Standards Board (FASB) issued Statements of Financial Accounting Standards (SFAS) 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 then completed, Step 2 – measurement of the impairment loss, by evaluating the fair value of goodwill through appraisals and discounted cash flow models. Step 2 results indicated that the goodwill of $7.3 million 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.

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     The following table reflects consolidated results adjusted as if the adoption of SFAS 142 occurred as of the beginning of the nine month period ended January 1, 2001.