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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark one)

For the quarterly period ended September 30, 2003

or

For the transition period from                 to                

Commission File Number 0-13147

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      X        No

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes              No     X       

As of October 31, 2003 the registrant had outstanding 8,538,914 common shares, without par value.

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 consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and pursuant to rules and regulations of the Securities and Exchange Commission. 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, 2002 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, 2003 and June 30, 2003 included in the Company’s quarterly reports on Form 10-Q.

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires estimates and assumptions by management, and actual results may differ from these estimates.

     Operating results for the nine months ended September 30, 2003 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 and items have been reclassified in the prior period to conform with current year presentation.

     The Company recognizes revenue when goods are shipped to the customer and title passes to the customer. The Company has consigned inventory agreements on certain products. The Company reports gross revenue from the sales of consigned inventory in accordance with Emerging Issues Task Force 99-19, “Reporting Revenue Gross as a Principal versus Net as an Agent”. Sales of consigned inventory were $26.5 million and $25.7 million for the nine months ended September 30, 2003 and 2002, respectively.

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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 — 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. The long-term note receivable arose in connection with the sale of the Company’s Novex facility. Deposits and other primarily includes deposits on properties the Company rents.

NOTE D — Asset Rationalization and Severance Expense

     Major components of the asset rationalization and severance expense accrual as of September 30, 2003 and December 31, 2002 are as follows:

In 2003, the Company added $487,000 to the accrual for severance payments for employee terminations occurring before September 30, 2003.

NOTE E — Debt

     The Company’s $122.3 million senior secured credit facility, as amended (Debt Facility), includes an amortizing term loan of approximately $7.3 million of which $4.4 million remains outstanding and a revolving credit facility of up to $115 million, maturing in January 2005. The variable interest on the Debt Facility is based on LIBOR plus 2.75% to 3.00% or prime rate plus .25% to .50%. Availability under the revolving portion of the 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 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. As of September 30, 2003, the Company is in compliance with all of the restrictive covenants in the Debt Facility.

NOTE F — Derivatives and Comprehensive Income / Loss

     The Company utilizes an interest rate swap in conjunction with the Debt Facility. The Company will only enter into swap agreements with major financial institutions that are considered to be market makers.

     The interest rate swap agreement is a three-year, $40.5 million notional amount interest rate swap expiring in January 2005, which converts existing variable-rate payments (based on LIBOR or prime rates), plus applicable borrowing margins of 2.75% to 3.00%, to 4.2% fixed-rate plus applicable borrowing margin of 2.75% to 3.00%. The fair value of the interest rate swap is determined by the estimated cost to terminate the agreement, as determined by the issuing bank. The Company recognized the $1.5 million fair market value of the swap agreement as a liability on the balance sheet at September 30, 2003. 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 income (loss) for the nine months ended September 30, 2003 and September 30, 2002 were as follows:

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NOTE G — Stock Based Compensation

     The Company follows the disclosure-only provisions of Statement of Financial Accounting Standards No. 148 (SFAS No. 148), “Accounting for Stock-Based Compensation Transition and Disclosure, an amendment to SFAS No. 123.” The Company follows the accounting provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” which, if applicable, recognizes as compensation cost the difference between the fair market value and the exercise price of stock options at the date of grant. Accordingly, no compensation expense has been recognized for the stock option plans. Had compensation cost for the stock option plans been determined based on the fair value at the grant date in accordance with SFAS No. 148, the Company’s net income and related earnings per share would have been changed to the pro forma amounts indicated below:

     Included in these pro forma disclosures are stock options that vest at various times pursuant to the terms of the grants. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model, with the following assumptions: dividend yield of 0.00%; expected stock price volatility of 25% to 50%; risk-free interest rate of 1.10% to 6.60%; and expected lives of four years. This option valuation model requires input of highly subjective assumptions and, in management’s opinion, does not provide a reliable single measure of fair value of its employee stock options.

NOTE H — Subsequent Event

     On October 28, 2003, the Company announced that it had entered into a definitive agreement to sell its investment in Commercial Turf Products Ltd. (CTP) to MTD Consumer Group, Inc (MTD). CTP is a manufacturer of commercial grade riding and walkbehind turf mowers, blowers, turf renovators, spreaders, sprayers, associated accessories and service parts. The Company will sell its investment for a $933,130 promissory note and a release from all of its guarantees of certain of CTP’s liabilities, including an $8.0 million Industrial Revenue Bond. The note is payable in five equal annual installments of $186,626 beginning November 15, 2003. The Company expects to record a $10,000 gain on the sale in the fourth quarter of 2003.

     Concurrent with the sale, the Company entered into a five-year supply agreement with CTP and MTD. During the term of the agreement, the Company maintains the exclusive right to market and sell proprietary products, such as commercial grade spreaders, sprayers, renovators and blowers and retains certain customer rights with respect to national accounts. However, the Company is not required to exclusively source products from CTP and MTD. Additionally, the Company has the option to exercise a buyout of the agreement prior to the expiration of the five-year term.

     The agreement provides for the following minimum annual purchase targets based on historical purchases and projected growth rates of the Company: $26.2 million in 2004, $28.9 million in 2005, $31.7 million in 2006, $34.7 million in 2007 and $37.8 million in 2008. To the extent the actual annual purchases are less than the applicable minimum purchase targets, the price on purchased products will increase. Pricing during the term of the agreement is based on pricing prior to the supply agreement, adjusted by changes in the Producers Price Index, not to exceed two percent (2%) annually.

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NOTE I — Impact of Recently Issued Accounting Standards

     Upon the adoption of SFAS No. 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.

     In May 2002, FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, amendment of FASB Statement No. 13 and technical corrections”. As required, the Company adopted this statement in the first quarter of 2003 and reclassified the extraordinary charge of $4.6 million related to the early extinguishment of debt in the first quarter 2002 to continuing operations.

     In April 2003, FASB issued SFAS No. 149, “Amendment of FASB Statement No. 13 on Derivative Instruments and Hedging Activities”. The Company is required to adopt this statement for agreements entered into or modified after June 30, 2003. Adoption has not impacted the Company’s consolidated financial position or results of operations.

     In May 2003, FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. This Statement is effective for financial instruments entered into or modified after May 31, 2003. The Company believes the adoption will not impact its consolidated financial position or results of operations.

LESCO, INC.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Sales Information

     The Company operates 246 LESCO Service Centers®, including one Service Center opened in the third quarter of 2003, for a total of 20 new Service Centers in the first nine months of 2003, compared to 227 Service Centers operated in 2002. Comparable Service Center sales rose 6.4% and 6.6% for the three and nine months ended September 30, 2003 over 2002, respectively . Service Centers opened in 2003 generated sales of $3.7 million and fully diluted earnings per share of $0.01 for the three months ended September 30, 2003 and generated sales of $7.1 million and fully diluted loss per share of $0.03 for the nine months ended September 30, 2003. The primary products sold are turf care products, including turf and pest control products, fertilizer, grass seed and equipment. The Service Centers market and sell products principally to lawn care companies, landscapers, public and private golf courses, nurseries, municipalities, churches and condominium associations. The Company plans to open one additional Service Center in November, 2003.

     The Company also 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 LESCO Stores-on-Wheels®. The Company operated 72 LESCO Stores-on-Wheels in 2003 compared to 77 in 2002. The primary products sold are turf care products, including turf and pest control products, fertilizer, grass seed and hand held equipment and golf course accessories. 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.

     Additionally, the Company markets and sells products to large national and regional lawn care customers through a separate group of 13 sales representatives. An additional six sales representatives sell selected products to The Home Depot stores in the South, Southwest, Midwest, Mid-Atlantic and Northeast areas of the country. The Company also markets products by mail order catalog and participates in national and regional lawn care trade shows. A telemarketing sales group calls on inactive accounts and contacts customers not currently serviced by the Company’s outside sales forces. In addition, products are marketed internationally, principally through foreign distributors.

Results of Operations

Operating Results for the Three Months Ended September 30, 2003

     The Company incurred certain charges in 2002 that were not incurred in 2003 (see following schedule). Management believes that the 2002 results excluding these charges are useful to investors because they provide a better comparison to the 2003 operating results. For purposes of reconciliation and better comparability, the following statements include the 2002 operating results with these charges, in accordance with generally accepted accounting principles (GAAP) in column 2, the charges in column 3 and the operating results excluding the charges in column 4. The statements include a reconciliation of earnings before interest and taxes, net loss and basic and fully diluted net loss per share for 2002 including the charges in column 2, the effect of the charges in column 3, and excluding the charges in column 4. The discussion following the statements references reported results unless otherwise indicated.

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LESCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS — UNAUDITED