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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
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þ
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Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
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For the fiscal year ended December 31,
2004 Commission
File No. 0-13147 |
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or |
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o
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Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 |
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For the transition period
from to |
LESCO, Inc.
(Exact name of registrant as specified in its charter)
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Ohio
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34-0904517 |
(State or other jurisdiction of
incorporation or organization) |
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(I.R.S. Employer Identification No.) |
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1301 East Ninth Street, Suite 1300 |
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44114 |
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Cleveland, Ohio |
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(Zip Code) |
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(Address of principal executive offices) |
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Registrant’s telephone number, including area code
(216) 706-9250
Securities registered pursuant to Section 12(b) of the
Act: None
Securities registered pursuant to Section 12(g) of the
Act:
Common Shares, without par value
(Title of class)
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
12 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 þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K
(§ 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of registrant’s
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this
Form 10-K or any amendment to this
Form 10-K. þ
Indicate by check mark whether the registrant is an accelerated
filer (as defined in Rule 12b-2 of the
Act). Yes þ No o
As of June 30, 2004, the last business day of the
registrant’s most recently completed second fiscal quarter,
the aggregate market value of Common Shares held by
nonaffiliates was approximately $85,188,953.
Number of Common Shares outstanding on February 28, 2005:
8,741,036.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Registrant’s Proxy Statement for the Annual
Meeting of Shareholders to be held on May 11, 2005 (the
“Proxy Statement”) are incorporated by reference in
Part III.
TABLE OF CONTENTS
PART I
Item 1. Business
General
LESCO, Inc. was incorporated in 1962 under the laws of the State
of Ohio. As used in this report, the terms “Company,”
“LESCO”, “Registrant”, “we”,
“us” and “our” refer to LESCO, Inc. and its
consolidated subsidiaries, unless the context requires otherwise.
LESCO® is the largest provider of products for the
professional turf care segment of the green industry. The
professional users of our products include lawn care and
landscape firms and the employees of a variety of commercial,
governmental, institutional and industrial establishments,
including golf courses, sod farms, airports, cemeteries,
professional sports organizations, universities, schools,
commercial properties and numerous other organizations that use
in-house employees to maintain lawns, grounds and gardens. We
manage the business through two business segments: Selling,
which includes our LESCO Service Centers®,
Stores-on-Wheels® and direct sales representatives and
other direct sales efforts; and Support, which includes all
corporate, manufacturing and warehousing activities. See
Management’s Discussion and Analysis (MD&A) and
Note 1 of the Consolidated Financial Statements for further
discussion and analysis of these segments. We further track our
sales by two customer sectors (Lawn Care and Golf), by
transacting selling location (Service Center and Other Selling
Locations) and product lines. See MD&A for further
discussion of customer sectors and transacting selling
locations. See discussion of product lines below.
Products Lines
We sell an extensive array of consumable turf care products to
the green industry, including fertilizer and combination
products, control products, turfgrass seed, and pest control
products. Additionally, we offer equipment, parts and service.
These products are marketed under the LESCO name and LESCO
branded names. In addition, we sell a diverse line of turf
products under suppliers’ brand names.
Gross sales by product lines for the years ended
December 31, 2004, 2003, and 2002 are as follows:
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For the Year Ended | |
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December 31, | |
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2004 | |
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2003 | |
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2002 | |
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Fertilizer & combination products
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$ |
231.8 |
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$ |
204.5 |
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$ |
198.2 |
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Control products
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166.6 |
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159.2 |
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154.1 |
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Equipment, parts & service
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62.1 |
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59.6 |
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60.5 |
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Turfgrass seed
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68.6 |
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67.0 |
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65.8 |
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Pest control
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18.6 |
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18.2 |
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16.6 |
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Other
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17.8 |
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17.5 |
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18.2 |
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Gross Sales
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$ |
565.5 |
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$ |
526.0 |
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$ |
513.4 |
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Fertilizer and combination products. We sell a broad
assortment of standard blended fertilizers and combination
products that combine fertilizer with control products. We also
custom-blend fertilizer according to customer specifications.
Our fertilizers include products for use in the lawn care
industry along with specialized products for golf course
applications, including greens, tees and fairways, as well as
products for trees, shrubs and landscape beds. Fertilizers are
generally sold in a granular form, although specialized liquid
formulations are also available. The primary raw materials used
in the blending of fertilizer are nitrogen, phosphorus, potash
and sulfur.
The majority of our fertilizers are formulated with
sulfur-coated urea, Poly Plus®. Sulfur-coated fertilizers
are manufactured by spraying dry fertilizers first with sulfur,
then with a polymer sealant to seal the sulfur and meter the
release of nutrients. We are one of the few manufacturers of
these products in the world. Sulfur coating produces a gradual
release of nutrients over time, which reduces the number of
required
2
applications and the risk of over fertilization. Combination
products are processed by coating fertilizers with
technical-grade herbicides, insecticides or fungicides providing
dual action nutrition to the plant as well as the removal of
crabgrass, insects and fungus.
Control products. We offer a full line of turf control
products, including both LESCO and third-party branded
herbicides, fungicides, insecticides and other specialty
products. These products control weed growth, insects and fungal
diseases of turf, trees, shrubs and landscape beds. Specialty
products are used to stimulate growing conditions. In order to
offer our customers a more complete product line, we sell some
turf control products produced by major manufacturers.
Equipment, parts and service. We source a broad
assortment of equipment including rotary mowers, spreaders,
sprayers, aerators, renovation equipment and replacement parts
primarily from Commercial Turf Products, Ltd. (CTP), a
subsidiary of MTD Consumer Group, Inc. We believe that the LESCO
spreader, first introduced in 1982, is an industry leader in
sales to the professional sector of the turf-care market. In
addition, we offer a broad assortment of branded handheld power
tools produced by third parties. Equipment sales are supported
by a toll-free hotline staffed by trained technicians and repair
facilities in or near Service Centers. Parts support is fully
computerized, and we generally are able to provide overnight
parts delivery nationwide.
Turfgrass seed. We market LESCO and other brands of
turfgrass seed, most of which are certified by authorities of
various states to guarantee the purity of the seed. We contract
for the production of turfgrass seed with growers in the Pacific
Northwest, Western Canada and New Zealand for cool-season
grasses and in California for warm-season grasses. In 2004, we
had more than 34,000 production acres under contract in these
regions. Our seed line includes 31 proprietary varieties as well
as 28 standard blends and mixtures. Most of our turfgrass seed
is blended and packaged at our facilities. Our turfgrass seed
line includes a variety of mulches and soil amendments that are
packaged primarily through contract manufacturers under the
LESCO brand.
Pest control. We offer a full line of pest management
products, including LESCO and third-party branded products, all
of which are sourced from third-party suppliers. Our assortment
includes all of the top names in the pest management industry.
Our offering covers products to manage termites and
wood-destroying pests, general insects, rodents and a complete
line of application equipment. With 274 Service Centers
conveniently located across the United States, we are able to
provide the country’s pest management professionals with a
high level of service throughout in the industry.
Other. On a regional basis, our merchandise mix includes
ice melt and other snow removal products that are sourced from
third party suppliers. We offer underground irrigation
equipment, protective gear, such as goggles, masks and gloves,
and hand tools, such as tree pruners, shovels and rakes. We
utilize Par Aide Products Co. (Par Aide), a leading supplier of
golf course accessories, to distribute Par Aide-branded
products, including ball washers, tee markers, sand trap rakes,
putting green cups, flags and flagpoles.
Sources of supply. It is our policy to identify and use
multiple sources of supply or acceptable substitutes for all
products we sell and all raw materials used in our products. The
only exception to this policy is our purchase of specialty
products.
Service Centers, Stores-on-Wheels and Direct Sales
Our selling efforts are conducted through several channels. In
some instances, the same customer is often serviced through
multiple channels. Service centers are approximately
5,000-square-foot facilities that we generally lease for a
period of five years or more. More than 250 standard merchandise
items are prominently displayed in our Service Centers and
available for pick up or delivery to our professional turf care
customers. We also offer over 1,000 additional special order
items.
Our Stores-on-Wheels are a mobile fleet of stores that are
stocked with over 180 high-volume sales products that are
immediately available to golf course superintendents and other
caretakers of large areas of landscape. The unique marketing and
sales approach of our Stores-on-Wheels brings the LESCO brand of
personal service directly to our customers. Our direct sales
efforts include sales representatives that provide
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agronomic services and build customer relationships with
national lawn care customers as well as with golf course
superintendents.
Manufacturing and Distribution
We currently operate four manufacturing facilities that blend
fertilizers, combination products and grass seed, and
manufacture sulfur-coated urea. These plants are located in
Hatfield, MA, Martins Ferry, OH, Sebring, FL and Silverton, OR
and produced blended products representing approximately 80% of
LESCO’s sales in 2004. We also control a distribution
network consisting of eight distribution hubs and three,
third-party logistics provider operations. This
Company-controlled network distributes our products to our
Service Centers, Stores-on-Wheels and direct to customers
nationwide.
Intellectual Property
We own patents of various durations, trademarks, copyrights and
other intellectual property, and rely on them to protect our
interest in products and technology. LESCO Technologies, LLC, a
wholly owned subsidiary of LESCO, Inc., owns common law and
registered trademarks including, among others, LESCO, ELITE and
Poly Plus. LESCO Service Center and LESCO Stores-on-Wheels are
registered service marks of LESCO Technologies, LLC.; Aim Lawn
Products and Professional Turf Products are trademarks licensed
to Aim Lawn & Garden Products, Inc.
All intellectual property as a group is important to our
business, however, no individual item is material to our
operations except the LESCO name.
Product Improvement and Development
Our research and development efforts focus on improvements to,
and development of, new turf control products and fertilizers,
turf care equipment and golf course accessories and new grass
seed varieties. We also have a number of agreements with state
universities that test turf control products, grass seed and
fertilizers.
Competition
We compete with a number of companies within each of our product
lines including, national, regional and local distributors,
professional turf care product manufacturers, and local
nurseries. Some of these national competitors have greater name
brand recognition and greater financial and other resources than
we do. Our principal competitors for professional turf control,
fertilizer and grass seed product lines include The Andersons
Inc., J.R. Simplot Company, Lebanon Seaboard, Deere &
Company, ProSource One and Verdicon. Our principal competitors
for equipment are Deere & Company, Textron Inc. (Jacobsen),
Scag Power Equipment and Toro Company. We compete primarily on
the basis of service to customers, product quality, product
offering and price.
Seasonality
Our business is seasonal. Customers in northern states do not
have the same year-round requirements for our products as
customers in southern states. Nationwide, demand for our
products is generally greatest during the second calendar
quarter of the year.
Employees
As of December 31, 2004, we had 1,341 full-time employees,
of which 378 were involved in blending and warehouse operations,
772 in sales-related activities and 191 in management and
administration. Of the total number of full-time employees, 652
were salaried and 689 were hourly employees. We have 130
employees at our Martins Ferry facility that are represented by
a union, which ratified a three-year agreement on
November 14, 2002. On December 31, 2003, LESCO and the
union agreed to extend the existing contract through
September 30, 2008.
4
Environmental Matters
Turf control products we sell are subject to regulation and
registration by the Environmental Protection Agency (the
“EPA”) and similar regulatory authorities in various
states. The process of obtaining such registration may be
lengthy and expensive. The labeling and advertising of turf
control products are also subject to EPA regulation. While we
generally believe our turf control product labels and
advertising materials are consistent with EPA and state
guidelines, there can be no assurance that EPA or state
regulations or interpretations may not change in the future or
that the EPA or any state will not challenge our labeling or
advertising materials.
Fertilizer products are also regulated by individual state
departments of agriculture and must generally be registered or
licensed in most states in which they are sold. There can be no
assurance that the state regulations or interpretations of those
regulations will not change in the future or that our
registration in any state will not be challenged. We are also
required to obtain licenses and permits from a number of
governmental agencies in order to conduct various aspects of our
business. These licenses and permits are subject to modification
and revocation, which could impair our ability to conduct our
business in the manner in which, and at the places at which, it
is presently conducted.
Because of the nature of our business, we are subject to various
environmental laws and regulations and incur routine costs in
complying with these laws and regulations. It is our policy to
accrue for non-routine costs relating to environmental matters
when a loss is probable and the amount of the loss can be
reasonably estimated. For further discussion of environmental
matters, see Item 3. Legal Proceedings.
Insurance
We maintain comprehensive general and product liability
insurance coverage at levels which we believe are prudent and
most cost-effective. Our insurance programs include various
deductible amounts with respect to such coverages. Certain
coverages, including environmental pollution, are restricted or
have been excluded under current policies. The level of coverage
and deductible maintained generally reflect trends in the
liability insurance industry and are not unique to us. We
regularly evaluate the cost of insurance as compared to the
risks assumed in determining our insurance programs.
Securities and Exchange Commission Filings
The Company’s SEC filings are available through its web
site at www.lesco.com.
Item 2. Properties
We lease our corporate office facility and own or lease our
warehouse and blending facilities. We believe these facilities
are well-maintained, adequately insured and suitable for their
present and intended uses. We
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maintain sales offices at each of the following locations except
Wellington and Windsor. The location, principal use, size and
status of each of our principal properties as of
December 31, 2004 is as follows:
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| Location(1) |
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Principal Use |
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Square Feet | |
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Status |
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Anaheim, CA
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Distribution hub for various products |
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14,780 |
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Leased(2) |
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Atlanta, GA
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Distribution hub for various products |
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194,060 |
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Leased(3) |
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North Aurora, IL
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Distribution hub for various products |
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74,056 |
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Leased(2) |
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Hatfield, MA
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Blending facility for fertilizers |
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77,000 |
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Owned |
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Martins Ferry, OH
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Blending facility for fertilizers and combination products, and
manufacturing of sulfur-coated fertilizers |
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234,000 |
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Owned |
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Plano, TX
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Distribution hub for various products |
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10,000 |
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Leased(4) |
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Sebring, FL
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Blending facility for fertilizers and combination products and
distribution hub for principal products |
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276,000 |
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Owned/ Leased(5) |
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Silverton, OR
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Blending of grass seed and distribution hub |
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66,200 |
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Leased(6) |
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Stockton, CA
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Closed manufacturing facility for fertilizers and turf control
products |
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32,000 |
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Owned/ Leased(7) |
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Cleveland, OH
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Corporate office |
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38,643 |
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Leased(8) |
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Wellington, OH
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Asset held for sale — closed blending facility for
various products, approximately six acres |
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55,376 |
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Owned |
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Westfield, MA
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Distribution hub for various products |
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91,800 |
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Leased(9) |
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Windsor, NJ
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Asset held for sale — land previously used as a
manufacturing and distribution center, approximately
17 acres |
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Owned |
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Does not include Service Centers or Stores-on-Wheels. As of
December 31, 2004, we operated Service Centers in 274
leased facilities. These facilities range in size from 3,400 to
14,000 square feet. As of December 31, 2004, we owned or leased
72 tractor-trailers for our Stores-on-Wheels. |
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Lease term expires in 2008. |
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Lease term expires in 2009. |
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Lease term expires in 2006. |
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These facilities consist of five buildings. Two buildings are
subject to a month-to-month lease. Three buildings are subject
to leases expiring in 2006 and 2017. We own the manufacturing
facility, while the land is subject to a ground lease which
expires in 2017 with four, five-year renewal options. |
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Lease term expires in 2009. The lease includes an option to
purchase. |
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| (7) |
These facilities consist of two buildings we own. The land is
subject to ground leases, which expire in 2011. We have one,
five-year renewal option. |
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| (8) |
Lease term expires in 2010. We have one, five-year renewal
option. |
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| (9) |
This facility is subject to two leases, the terms of which
expire in 2006. |
All of these locations reside within the Company’s Support
segment.
Item 3. Legal
Proceedings
In 2003, an administrative complaint was filed against the
Company by the State of New York Department of Environmental
Conservation (“NYSDEC”) alleging violation of state
law regarding the registration of pesticides. The complaint
alleges that the Company distributed 3,400 bags of
Dimension® Crabgrass Preemergent Plus Fertilizer to one of
its retail customers in New York State without having proper
registration thereof. The complaint seeks a civil penalty of
$3,440,000. NYSDEC filed a similar complaint
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against the retail customer seeking a civil penalty of
$3,440,000. The Company intends to indemnify the retail customer
for such claim pursuant to a vendor agreement between the
parties. The Company has held discussions with the NYSDEC
relative to a settlement.
On November 29, 2004, the Company filed a declaratory
judgment action, LESCO vs. KPAC Holdings, Inc., Case
No. 1:04CV2573 pending in the United States District Court,
Northern District of Ohio, to obtain a judicial determination of
the amount of its liability arising from its termination of a
five-year agreement with KPAC Holdings, Inc. (KPAC), our
methylene urea supplier (“Supply Agreement”). The
Company had entered into the Supply Agreement in 2002 as part of
an overall transaction by which the supplier purchased certain
assets of the Company, including a plant used to produce
methylene urea. The Supply Agreement required the Company to
purchase, and the supplier to produce, minimum monthly
quantities of certain products.
We filed the declaratory judgment action after the supplier
refused the Company’s offer to settle its liability for
$2.2 million plus forgiveness of a $1.3 million note
receivable due from the supplier, which the Company believed
represented the extent of its potential liability under the
Supply Agreement. The supplier has asserted counterclaims
against the Company seeking damages in excess of $7 million
for breach of the Supply Agreement, breach of the asset purchase
agreement and breach of an alleged agreement to settle the
Company’s liability on more favorable terms to the
supplier. The supplier’s two shareholders have moved to
intervene to assert a claim for breach of the same alleged
settlement agreement. A case management conference is scheduled
for March 2005, at which time the parties will be given a
timeline for the progress of the litigation.
There are other legal actions, governmental investigations and
proceedings pending to which the Company is a party or to which
its property is subject. In the opinion of our management, after
reviewing the information that is currently available with
respect to these matters and consulting with counsel, any
liability that may be ultimately incurred with respect to these
matters is not expected to materially affect our consolidated
results of operations, cash flows or financial condition.
Item 4. Submission of
Matters to a Vote of Security Holders
Not Applicable.
Executive Officers of the Registrant
The following table sets forth certain information with respect
to the Company’s executive officers, including their
respective positions with the Company:
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Age | |
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Position |
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Michael P. DiMino
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47 |
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President and Chief Executive Officer |
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Steven E. Cochran
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37 |
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Senior Vice President, Sales |
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Jeffrey L. Rutherford
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44 |
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Senior Vice President, Chief Financial Officer, Treasurer and
Secretary |
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Bruce K. Thorn
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38 |
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Senior Vice President, Operations |
Michael P. DiMino has been President and Chief Executive Officer
of the Company since April 2002. He was elected director in May
2002. Mr. DiMino joined the Company on December 12,
2001, as President and Chief Operating Officer. From 1998 to
2001, Mr. DiMino was President and Chief Operating Officer
of Uniforms to You, a division of Cintas Corporation, a provider
of employee uniforms to a wide range of industries.
Steven E. Cochran was appointed Senior Vice President, Sales in
October 2002. He joined the Company in June 2002 as Senior Vice
President, Marketing and Strategic Sourcing. From 1999 to 2001,
Mr. Cochran was Director of National Accounts and Vice
President of Marketing of Uniforms to You, a division of Cintas
Corporation. From 1990 to 1999, he held various sales, marketing
and field operation positions at Cintas Corporation.
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Since October 2002, Jeffrey L. Rutherford has been Senior Vice
President, Chief Financial Officer, Treasurer and Secretary of
the Company. Mr. Rutherford joined the Company as Senior
Vice President and Chief Financial Officer on February 18,
2002. From 1997 to 2001, Mr. Rutherford served as Senior
Executive Vice President and Chief Financial Officer of
OfficeMax, Inc. a retailer of office supplies, and from February
1997 to July 1997 as Senior Vice President and Treasurer of that
company.
Since October 2004, Bruce K. Thorn has been Senior Vice
President, Operations, overseeing all aspects of the
Company’s marketing and supply chain functions.
Mr. Thorn joined the Company as Senior Vice President,
Logistics & Operations on March 18, 2002. From 2000 to
2002, Mr. Thorn was Senior Director for Global Engineering
Services for Gap, Inc., a specialty retailer in the apparel
industry. From 1997-2000, he was Director of the Distribution
Division for Cintas Corporation.
PART II
Item 5. Market for
Registrant’s Common Equity and Related Stockholder
Matters
Our common shares are traded on the NASDAQ National Market
System market under the symbol “LSCO.” The following
are the high and low closing prices of our common shares by
quarter:
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2004 | |
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2003 | |
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| (Quarter Ended) |
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High | |
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Low | |
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High | |
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Low | |
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March 31
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$ |
13.66 |
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$ |
10.40 |
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$ |
14.60 |
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$ |
10.25 |
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June 30
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13.60 |
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11.15 |
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13.00 |
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8.90 |
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September 30
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14.05 |
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12.20 |
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11.84 |
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8.17 |
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December 31
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13.48 |
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11.25 |
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14.27 |
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10.22 |
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We did not pay common share dividends in 2004 or 2003. Certain
provisions of our previous credit agreement prohibited the
Company from paying dividends. The current credit agreement
allows for the payment of dividends as long as certain
conditions are maintained.
As of February 28, 2005, there were 1,277 holders of record
of our common shares.
See also Item 12. Security Ownership of Certain Beneficial
Owners and Management and Related Stockholder Matters.
8
Item 6. Selected
Financial Data
Five Year Summary
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For the Year Ended December 31, | |
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2004 | |
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2003 | |
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2002 | |
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2001 | |
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2000 | |
| (Dollars in thousands, except per share data) |
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Net Sales
|
|
$ |
561,041 |
|
|
$ |
523,489 |
|
|
$ |
511,705 |
|
|
$ |
504,268 |
|
|
$ |
499,643 |
|
| |
Cost of product
|
|
|
(375,896 |
) |
|
|
(350,476 |
) |
|
|
(341,268 |
) |
|
|
(349,303 |
) |
|
|
(337,644 |
) |
| |
Cost of inventory markdown — contract termination
|
|
|
(799 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Cost of inventory markdown
|
|
|
— |
|
|
|
— |
|
|
|
(9,225 |
) |
|
|
— |
|
|
|
— |
|
| |
Distribution cost
|
|
|
(45,844 |
) |
|
|
(47,669 |
) |
|
|
(44,201 |
) |
|
|
(45,416 |
) |
|
|
(42,315 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sales
|
|
|
138,502 |
|
|
|
125,344 |
|
|
|
117,011 |
|
|
|
109,549 |
|
|
|
119,684 |
|
| |
Selling expense
|
|
|
(90,505 |
) |
|
|
(84,713 |
) |
|
|
(78,987 |
) |
|
|
(75,643 |
) |
|
|
(74,887 |
) |
| |
General & administrative expense
|
|
|
(28,326 |
) |
|
|
(29,389 |
) |
|
|
(30,591 |
) |
|
|
(30,318 |
) |
|
|
(25,030 |
) |
| |
Merchant discounts and provision for doubtful accounts
|
|
|
(10,758 |
) |
|
|
(3,045 |
) |
|
|
(2,363 |
) |
|
|
(1,268 |
) |
|
|
(885 |
) |
| |
Pre-opening expense
|
|
|
(770 |
) |
|
|
(601 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Early retirement of debt
|
|
|
— |
|
|
|
(2,333 |
) |
|
|
(4,550 |
) |
|
|
— |
|
|
|
— |
|
| |
Loss from sale of accounts receivable
|
|
|
— |
|
|
|
(4,626 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Asset rationalization
|
|
|
— |
|
|
|
— |
|
|
|
(12,044 |
) |
|
|
— |
|
|
|
— |
|
| |
Corporate relocation expense
|
|
|
(6,878 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Hurricane/flood expense
|
|
|
(1,243 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Vendor contract termination
|
|
|
(4,404 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Other expense
|
|
|
(664 |
) |
|
|
(1,065 |
) |
|
|
(3,627 |
) |
|
|
(1,119 |
) |
|
|
(612 |
) |
| |
Other income
|
|
|
508 |
|
|
|
1,521 |
|
|
|
812 |
|
|
|
53 |
|
|
|
832 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before interest and taxes
|
|
|
(4,538 |
) |
|
|
1,093 |
|
|
|
(14,339 |
) |
|
|
1,254 |
|
|
|
19,102 |
|
|
Interest expense, net
|
|
|
(747 |
) |
|
|
(4,730 |
) |
|
|
(4,899 |
) |
|
|
(6,098 |
) |
|
|
(6,885 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before taxes and cumulative effect of
accounting change
|
|
|
(5,285 |
) |
|
|
(3,637 |
) |
|
|
(19,238 |
) |
|
|
(4,844 |
) |
|
|
12,217 |
|
|
Income tax (provision) benefit
|
|
|
(340 |
) |
|
|
(1,634 |
) |
|
|
6,376 |
|
|
|
1,960 |
|
|
|
(4,829 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before cumulative effect of accounting
change
|
|
|
(5,625 |
) |
|
|
(5,271 |
) |
|
|
(12,862 |
) |
|
|
(2,884 |
) |
|
|
7,388 |
|
|
Cumulative effect of accounting change for goodwill charge, net
of tax benefit of $2,735
|
|
|
— |
|
|
|
— |
|
|
|
(4,597 |
) |
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$ |
(5,625 |
) |
|
$ |
(5,271 |
) |
|
$ |
(17,459 |
) |
|
$ |
(2,884 |
) |
|
$ |
7,388 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share before cumulative effect
of accounting change:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(1.52 |
) |
|
$ |
(0.34 |
) |
|
$ |
0.86 |
|
| |
Basic
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(1.52 |
) |
|
$ |
(0.34 |
) |
|
$ |
0.87 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change per diluted common share
|
|
|
— |
|
|
|
— |
|
|
|
(0.54 |
) |
|
|
— |
|
|
|
— |
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(2.06 |
) |
|
$ |
(0.34 |
) |
|
$ |
0.86 |
|
| |
Basic
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(2.06 |
) |
|
$ |
(0.34 |
) |
|
$ |
0.87 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares and common share equivalents
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
8,696,356 |
|
|
|
8,550,414 |
|
|
|
8,519,789 |
|
|
|
8,496,681 |
|
|
|
8,623,841 |
|
| |
Basic
|
|
|
8,696,356 |
|
|
|
8,550,414 |
|
|
|
8,519,789 |
|
|
|
8,496,681 |
|
|
|
8,469,063 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
|
2001 | |
|
2000 | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Working capital, excluding current debt
|
|
$ |
48,185 |
|
|
$ |
58,843 |
|
|
$ |
107,642 |
|
|
$ |
87,660 |
|
|
$ |
142,510 |
|
|
Total assets
|
|
$ |
155,993 |
|
|
$ |
161,365 |
|
|
$ |
204,732 |
|
|
$ |
204,596 |
|
|
$ |
244,893 |
|
|
Long-term debt, net of current portion
|
|
$ |
— |
|
|
$ |
5,875 |
|
|
$ |
10,227 |
|
|
$ |
11,390 |
|
|
$ |
94,707 |
|
|
Shareholder’s equity
|
|
$ |
66,523 |
|
|
$ |
71,270 |
|
|
$ |
76,933 |
|
|
$ |
93,916 |
|
|
$ |
97,436 |
|
|
|
| Item 7: |
Management’s Discussion and Analysis of Financial
Condition and Results of Operations |
Organization of Information
Management’s Discussion and Analysis provides a narrative
on the Company’s financial performance and condition that
should be read in conjunction with the accompanying consolidated
financial statements. It includes the following sections:
|
|
|
| |
• |
Overview |
| |
| |
• |
Consolidated Results |
|
|
|
| |
• |
2004 vs. 2003 |
| |
| |
• |
2003 vs. 2002 |
|
|
|
| |
• |
Business Segment Results |
| |
| |
• |
Liquidity and Capital Resources |
| |
| |
• |
Contractual Obligations, Commitments and Off Balance Sheet
Arrangements |
| |
| |
• |
Critical Accounting Policies and Estimates |
| |
| |
• |
Forward Looking Statements |
Overview
LESCO is the largest provider of products to the professional
turf care segment of the green industry. The professional users
of our products include lawn care and landscape firms and the
employees of a variety of commercial, governmental,
institutional and industrial establishments, including golf
courses, sod farms, airports, cemeteries, professional sports
organizations, universities, schools, commercial properties and
numerous other organizations that use in-house employees to
maintain lawns, grounds and gardens.
We track our customers through two customer sectors: Lawn Care
and Golf.
Gross sales for these sectors were as follows for the past three
years:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Lawn Care
|
|
$ |
425.4 |
|
|
$ |
388.4 |
|
|
$ |
373.1 |
|
|
Golf
|
|
|
140.1 |
|
|
|
137.6 |
|
|
|
140.3 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
565.5 |
|
|
$ |
526.0 |
|
|
$ |
513.4 |
|
| |
|
|
|
|
|
|
|
|
|
The separation of our customers into these two sectors is
important as distribution to the sectors is vastly different and
their growth prospects vary significantly.
Our Lawn Care sector includes all non-golf related customers and
is dominated by lawn care and landscape firms. Historically,
industry-wide distribution of products into this sector has been
fragmented and inefficient. We believe that our model of Service
Centers and direct sales provides efficiency to the
sector’s distribution channels through easily accessible,
strategically positioned real estate, where we provide
10
agronomic expertise through our 274 Service Centers and direct
sales associates with products specifically targeted to the Lawn
Care sector. We generated $32.8 million of sales through
our 48 new Service Centers opened in the last two years. We
estimate the market for our consumable Lawn Care products at
$6.0 billion of which $2.8 billion is in the
professional sector and $3.2 billion is in the consumer
sector. Independent research indicates that organic growth in
the industry is expected to exceed 7% annually for the next
several years due to the aging of the “baby boomers”
and their increasing desire to contract lawn care professionals,
the higher number of two-income families and continued time
constraints on consumers.
The golf industry is a smaller market estimated at
$1.4 billion and is not expected to grow significantly
during the near future, nor do we believe our opportunities are
as great in this sector as they are in the Lawn Care sector.
Over the past few years, the industry has experienced a decline
in annual rounds of golf played, which has decreased the budgets
of golf course superintendents. The ability to capture
incremental market share is limited as distribution of products
to the golf industry is dominated by a few national and regional
distributors. However, we anticipate that we will be able to
extend our presence in under-serviced markets, as we implement a
more efficient and lower cost Stores-on-Wheels operating model,
which we believe will allow us to expand our fleet and our
customer base.
Our historical financial performance and returns on invested
capital through 2001 were unacceptable. We operated three
business lines that consumed capital: Selling, Support
(including manufacturing and distribution operations) and Credit
Financing. Based upon the opportunities that were available in
our customer sectors and opportunities for improvement in our
financial performance, beginning in 2002 we embarked on a
strategy to reposition LESCO in order to effectively capitalize
on our opportunities. The following is a summary of the changes
we made to our business, along with any financial impacts, over
the past two years:
|
|
| |
1. Asset Rationalization: Prior to 2003, we
performed an analysis of our manufacturing facilities, utilizing
a methodology balancing sales growth opportunities and Return on
Invested Capital (ROIC), and decided to rationalize certain
under-performing assets. The plan included ceasing operations
at, and deciding to sell, two manufacturing facilities (a
methylene-urea facility in Disputanta, Virginia and a blending
facility in Stockton, California) and the sale of certain other
properties. In conjunction with the announcement of the asset
rationalization plan, we recorded a reserve to provide for the
remaining obligations associated with each site. At
December 31, 2004, $450,000 remained in the reserve
pertaining to these properties primarily representing future
lease and real estate tax payments. The Disputanta facility was
sold in 2002 and the other rationalized facilities remain as
assets held for sale as of December 31, 2004. All future costs
incurred to prepare the sites for sale, including environmental
testing and environmental remediation costs will be capitalized
up to the realizable market value of each respective property. |
| |
| |
2. Launch of Sales Growth Programs: We launched
various programs designed to increase sales: |
|
|
| |
a. Selling Locations, Management Structure and
Reporting: We organized our selling locations into five
geographic zones (Northeast, Mid-Central, Transition, Southeast
and West) and a National Accounts zone. The geographic zones are
comprised of regional geographic areas. Additionally, we
developed separate operating statements (Four-Wall P&Ls) for
each selling location (see further discussion Business Segment
Results and Note 1 to Consolidated Financial Statements).
The restructured management structure and Four-Wall P&Ls
provide the requisite management oversight and reporting to
effectively identify and address geographic operational
opportunities. We have added a sixth geographic zone,
Mid-Atlantic, beginning in 2005, whose territory previously had
been included predominately in the Northeast and Mid-Central
Zones. |
| |
| |
b. New Service Center Program: LESCO did not open
any new Service Centers from 1998 until 2003. Our analysis of
Service Center Four-Wall P&Ls and Four-Wall ROIC indicated
that with a total capital and working capital investment of
$200,000 to $250,000, an average Service Center at maturity
generates approximately $1.3 million of sales and a ROIC of
approximately 45%. We thereafter performed a statistical
analysis utilizing historical Service Center operating
performance, published industry data and government data
relative to the U.S. metropolitan statistical areas. The
statistical results indicated ample opportunity to expand the
number of Service Centers in the |
11
|
|
| |
continental United States by over 250 locations. We began a
Service Center opening program resulting in 21 new Service
Centers in 2003 and 27 new Service Centers in 2004, with an
expectation to open an additional 30 to 35 Service Centers in
2005. |
| |
| |
c. Reduction of Direct Sales Force: Prior to 2003,
we expanded our direct sales force to 60 professionals. During
the first half of 2003, we evaluated the program’s
performance and determined that the program was not performing
to our expectations. As a result, we reduced the direct sales
force by 38 professionals. During 2003, we incurred
approximately $3.3 million of costs related to the program.
Through the workforce reduction in June 2003, $1.5 million
of these costs were eliminated on a go forward basis. |
|
|
| |
3. Capital Restructuring: During 2003 and 2004, we
restructured our debt and equity capital structure. The
following summarizes these initiatives: |
|
|
| |
a. 2003 Refinancing: The 2003 refinancing comprised
the following two initiatives: |
|
|
| |
i. Agreements with GE Business Credit
Services — On December 30, 2003, the Company
sold a majority of its trade accounts receivable portfolio to GE
Capital Financial Inc., dba GE Business Credit Services
(“GEBCS”), for cash proceeds of approximately
$57 million. In 2004, approximately $6 million of
additional cash proceeds were obtained through the sale of some
of our remaining receivable accounts. The transaction resulted
in a pre-tax charge of $4.6 million recorded in 2003. |
| |
| |
Concurrently with the sale, the Company and GEBCS entered into a
private label business credit program agreement (Credit
Agreement). Under the Credit Agreement, GEBCS extends commercial
credit to qualified customers of LESCO and funds the program
sales, less program fees and discounts, within three business
days. The Credit Agreement also provides the Company the option
of extending deferred payment terms to customers through the
payment of incremental promotional discounts. The in-transit
funds are recognized by the Company as cash equivalents. The
program fees and discounts and promotional discounts are
recognized as merchant discounts in the Consolidated Statement
of Operations. GEBCS is the exclusive owner of the program
accounts and, except for the recourse account portfolio retained
by the Company, bears all credit losses. The Credit Agreement
has a five-year term with automatic three-year renewals unless
either party terminates at least six months prior to the end of
the expiration of a term. |
| |
| |
ii. Debt refinancing — Additionally on
December 30, 2003, the Company entered into a
$50 million Revolving Credit Facility (the Facility) which
replaced our prior credit facility. Borrowings under the
Facility were used to retire the prior credit facility,
including the term loan, buy-out the interest rate swap
agreement for $1.2 million and buy-back outstanding
preferred stock, including accrued dividends, for
$1.7 million. A charge of $1.1 million was recorded in
2003 to expense the unamortized portion of the deferred
financing costs of the prior credit facility. |
| |
| |
The Facility matures December 30, 2006 and is secured by
inventory, owned receivables, equipment, investment interests,
real property interests, and general intangibles, including
intellectual property. The Facility bears interest at LIBOR plus
2.0% to 2.5%, based on the level of borrowings, and requires the
payment of a facility fee ranging from 0.4% to 0.5% on the
unused portion of availability. Availability under the Facility
is determined by a borrowing base formula calculated on eligible
inventory. As of December 31, 2004, there was
$46.4 million available, based on the borrowing base
formula, with unused borrowing capacity of $34.3 million.
Letters of credit, up to a maximum of $20 million, are also
available under the Facility and are considered outstanding
borrowings when calculating the unused portion of availability.
Letters of credit in the aggregate amount of $4.8 million
were outstanding as of December 31, 2004. Letter of credit
fees range from 2.0% to 2.5% with an issuance fee ranging from
0.125% to 0.150%. |
12
|
|
| |
The interest rate, facility fee, letter of credit fee and letter
of credit issuance fee are determined based on the
Company’s fixed charge coverage ratio. The weighted average
interest rate on the Company’s outstanding borrowing under
the Facility as of December 31, 2004 was 5.25%. The
Facility requires the maintenance of certain covenants, with the
only financial covenant being the fixed charge coverage ratio.
The Company was in compliance with the Facility covenants as of
December 31, 2004. The amount of deferred financing charges
associated with the Facility included in prepaid and other
non-current assets was $327,000 as of December 31, 2004. |
|
|
| |
b. 2004 Debt Reduction: During the fourth quarter of
2004, we elected to call our industrial development revenue
bonds prior to their maturity date. These bonds were related to
our Martins Ferry, Ohio facility. There was no prepayment
penalty for the early extinguishment of the $5.9 million
debt, which was financed by funding from our revolving credit
facility, which provided a lower interest rate than the rate
being charged by the bonds. |
|
|
| |
4. Relocation of Corporate Headquarters: During the
third quarter of 2004, we entered into agreements to relocate
our corporate headquarters from our approximately
94,000-square-foot facility in Strongsville, Ohio to an
approximately 39,000-square-foot facility in downtown Cleveland,
Ohio. Relocation costs incurred during 2004 were
$6.9 million and were primarily related to tenant and
landlord inducements along with broker commissions and legal
fees. Beginning in 2005, the financial effect of the relocation
is expected to be accretive to earnings on an annual, pre-tax
basis by approximately $1.0 million. We reduced our lease
commitment for corporate offices by five years as the lease on
the Strongsville facility expires in 2015 while the current
corporate headquarters lease expires in 2010. |
| |
| |
5. Vendor Contract Termination: In the fourth
quarter of 2004, we notified KPAC, our supplier of methylene
urea fertilizer, that we were terminating our performance under
a five-year supply agreement. The agreement, signed in November
2002, required the Company to purchase annually 8,000 tons of
methylene urea fertilizer at a fixed conversion cost of $500 per
ton (see Item 3. Legal Proceedings for further discussion).
Management believes that it will generate an annual, pre-tax
savings of more than $2 million over the remaining term of
the agreement, which aggregate savings are expected to exceed
the estimated $5.2 million cost to exit the supply
agreement. We already have secured an alternative, lower-cost
source of methylene urea fertilizer from other available market
sources with no annual purchase commitments. |
| |
| |
6. Exploring Supply Chain Alternatives: In January
2005, we announced that we have retained Western Reserve
Partners LLC to continue and advance our exploration of supply
chain alternatives, including the possibility of the disposition
of all or a portion of our distribution and manufacturing assets. |
| |
| |
7. Other: |
|
|
| |
a. Divestiture of Joint Venture: In 2003, we sold
our investment in Commercial Turf Products Ltd. (CTP) to
MTD Consumer Group, Inc. (MTD) for a $933,130 promissory
note and a release from our guarantee of certain of CTP’s
liabilities, including an $8.0 million industrial revenue
bond. CTP is a manufacturer of commercial-grade riding and
walk-behind turf mowers, blowers, turf renovators, spreaders,
sprayers, associated accessories and service parts. The note is
payable in five equal, annual installments of $186,626 which
began in November 2003. We recorded a $10,000 gain on the sale
in 2003. |
| |
| |
Concurrently with the sale, we entered into a five-year supply
agreement with CTP and MTD. During the term of the agreement, we
maintain the exclusive rights to market and sell proprietary
products, such as commercial grade spreaders, sprayers,
renovators and blowers and retain certain customer rights. We
are not required to exclusively source products from CTP and
MTD. Additionally, we have 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 our projected growth
rates: $28.9 million in 2005, $31.7 million in 2006,
$34.7 million |
13
|
|
| |
in 2007 and $37.8 million in 2008. To the extent our 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. |
| |
| |
b. Deferred Tax Asset Valuation Reserves: In
assessing the realizability of deferred tax assets, we
considered whether it is more likely than not that some portion
or all of our deferred tax assets will not be realized. The
ultimate realization of deferred tax assets is dependent upon
the generation of future taxable income during the periods in
which the temporary differences become deductible. In making
this assessment, we considered historical earnings, the
scheduled reversal of deferred tax assets and liabilities,
projected future taxable income, and tax planning strategies.
The recent cumulative losses create uncertainty about the
realization of the tax benefits in future years which cannot be
overcome by other available evidence. As a result, a valuation
allowance of $3.7 million was recorded as of
December 31, 2003 to fully reserve for the Company’s
net deferred tax assets and an additional $2.4 million was
recorded in 2004 to reserve for deferred tax assets generated in
2004. |
14
CONSOLIDATED RESULTS
We believe that the most useful analysis of our consolidated
results should reflect adjustments to our results on a generally
accepted accounting principles (GAAP) basis for the impacts
of certain of the previously discussed strategic initiatives
(excluding the growth initiatives and their positive and
negative effects) and other events that management does not
expect to recur on an annual basis. A reconciliation to GAAP of
our financial results excluding the operational impact of these
initiatives and events is as follows:
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, 2004 | |
|
For the Year Ended December 31, 2003 | |
| |
|
| |
|
| |
| |
|
|
|
Results | |
|
|
|
Results | |
| |
|
GAAP | |
|
Adjustments | |
|
Excluding | |
|
GAAP | |
|
Adjustments | |
|
Excluding | |
| |
|
Results | |
|
(a) | |
|
Adjustments | |
|
Results | |
|
(b) | |
|
Adjustments | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
(Dollars in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
561,041 |
|
|
$ |
— |
|
|
$ |
561,041 |
|
|
$ |
523,489 |
|
|
$ |
— |
|
|
$ |
523,489 |
|
| |
Cost of product
|
|
|
(375,896 |
) |
|
|
— |
|
|
|
(375,896 |
) |
|
|
(350,476 |
) |
|
|
— |
|
|
|
(350,476 |
) |
| |
Cost of inventory markdown — contract termination
|
|
|
(799 |
) |
|
|
(799 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Distribution cost
|
|
|
(45,844 |
) |
|
|
— |
|
|
|
(45,844 |
) |
|
|
(47,669 |
) |
|
|
— |
|
|
|
(47,669 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sales
|
|
|
138,502 |
|
|
|
(799 |
) |
|
|
139,301 |
|
|
|
125,344 |
|
|
|
— |
|
|
|
125,344 |
|
| |
Selling expense
|
|
|
(90,505 |
) |
|
|
— |
|
|
|
(90,505 |
) |
|
|
(84,713 |
) |
|
|
— |
|
|
|
(84,713 |
) |
| |
General & administrative expense
|
|
|
(28,326 |
) |
|
|
— |
|
|
|
(28,326 |
) |
|
|
(29,389 |
) |
|
|
— |
|
|
|
(29,389 |
) |
| |
Merchant discounts and provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
for doubtful accounts
|
|
|
(10,758 |
) |
|
|
— |
|
|
|
(10,758 |
) |
|
|
(3,045 |
) |
|
|
— |
|
|
|
(3,045 |
) |
| |
Pre-opening expense
|
|
|
(770 |
) |
|
|
— |
|
|
|
(770 |
) |
|
|
(601 |
) |
|
|
— |
|
|
|
(601 |
) |
| |
Early retirement of debt agreement
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(2,333 |
) |
|
|
(2,333 |
) |
|
|
— |
|
| |
Loss from sale of accounts receivable
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,626 |
) |
|
|
(4,626 |
) |
|
|
— |
|
| |
Corporate relocation expense
|
|
|
(6,878 |
) |
|
|
(6,878 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Hurricane/flood expense
|
|
|
(1,243 |
) |
|
|
(1,243 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Vendor contract termination
|
|
|
(4,404 |
) |
|
|
(4,404 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
| |
Other expense
|
|
|
(664 |
) |
|
|
— |
|
|
|
(664 |
) |
|
|
(1,065 |
) |
|
|
— |
|
|
|
(1,065 |
) |
| |
Other income
|
|
|
508 |
|
|
|
— |
|
|
|
508 |
|
|
|
1,521 |
|
|
|
— |
|
|
|
1,521 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(143,040 |
) |
|
|
(12,525 |
) |
|
|
(130,515 |
) |
|
|
(124,251 |
) |
|
|
(6,959 |
) |
|
|
(117,292 |
) |
|
Earnings (loss) before interest and taxes
|
|
|
(4,538 |
) |
|
|
(13,324 |
) |
|
|
8,786 |
|
|
|
1,093 |
|
|
|
(6,959 |
) |
|
|
8,052 |
|
|
Interest expense, net
|
|
|
(747 |
) |
|
|
— |
|
|
|
(747 |
) |
|
|
(4,730 |
) |
|
|
— |
|
|
|
(4,730 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before taxes
|
|
|
(5,285 |
) |
|
|
(13,324 |
) |
|
|
8,039 |
|
|
|
(3,637 |
) |
|
|
(6,959 |
) |
|
|
3,322 |
|
|
Income tax (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
(340 |
) |
|
|
2,795 |
|
|
|
(3,135 |
) |
|
|
1,452 |
|
|
|
424 |
|
|
|
1,876 |
|
| |
Deferred
|
|
|
2,363 |
|
|
|
— |
|
|
|
2,363 |
|
|
|
(270 |
) |
|
|
— |
|
|
|
(270 |
) |
| |
Change in valuation allowance
|
|
|
(2,363 |
) |
|
|
— |
|
|
|
(2,363 |
) |
|
|
(2,816 |
) |
|
|
— |
|
|
|
(2,816 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
(340 |
) |
|
|
2,795 |
|
|
|
(3,135 |
) |
|
|
(1,634 |
) |
|
|
424 |
|
|
|
(1,210 |
) |
|
Net income (loss)
|
|
$ |
(5,625 |
) |
|
$ |
(10,529 |
) |
|
$ |
4,904 |
|
|
$ |
(5,271 |
) |
|
$ |
(7,383 |
) |
|
$ |
2,112 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.65 |
) |
|
$ |
(1.20 |
) |
|
$ |
0.55 |
|
|
$ |
(0.63 |
) |
|
$ |
(0.86 |
) |
|
$ |
0.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.65 |
) |
|
$ |
(1.21 |
) |
|
$ |
0.56 |
|
|
$ |
(0.63 |
) |
|
$ |
(0.86 |
) |
|
$ |
0.23 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (a) |
2004 adjustments include $6.9 million for corporate
relocation, $1.2 million for hurricane and flood damage,
$5.2 million for a vendor contract termination, and
$2.8 million for estimated tax provision at 39%. |
| |
| (b) |
2003 adjustments include $2.3 million for early retirement
of debt, $4.6 million for loss on sale of accounts
receivable and $0.4 million for tax provision related to
the adjustments, net of valuation allowance for deferred tax
assets. |
15
2004 vs. 2003
Sales:
The following table provides supplemental detail of sales by
customer sector and transacting selling locations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
% Change | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Other | |
|
|
|
|
|
Other | |
|
|
|
|
|
Other | |
|
|
| |
|
Service | |
|
Selling | |
|
|
|
Service | |
|
Selling | |
|
|
|
Service | |
|
Selling | |
|
|
| |
|
Centers | |
|
Locations | |
|
Total | |
|
Centers | |
|
Locations | |
|
Total | |
|
Centers | |
|
Locations | |
|
Totals | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Lawn care
|
|
$ |
349.9 |
|
|
$ |
75.5 |
|
|
$ |
425.4 |
|
|
$ |
322.1 |
|
|
$ |
66.3 |
|
|
$ |
388.4 |
|
|
|
8.6 |
% |
|
|
13.9 |
% |
|
|
9.5 |
% |
|
Golf
|
|
|
34.5 |
|
|
|
105.6 |
|
|
|
140.1 |
|
|
|
29.1 |
|
|
|
108.5 |
|
|
|
137.6 |
|
|
|
18.6 |
|
|
|
(2.7 |
) |
|
|
1.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$ |
384.4 |
|
|
$ |
181.1 |
|
|
|
565.5 |
|
|
$ |
351.2 |
|
|
$ |
174.8 |
|
|
|
526.0 |
|
|
|
9.5 |
% |
|
|
3.6 |
% |
|
|
7.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency sales
|
|
|
|
|
|
|
|
|
|
|
(2.1 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
Freight revenue
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
(6.7 |
) |
|
Customer discounts and rebates
|
|
|
|
|
|
|
|
|
|
|
(3.8 |
) |
|
|
|
|
|
|
|
|
|
|
(4.0 |
) |
|
|
|
|
|
|
|
|
|
|
(5.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
$ |
561.0 |
|
|
|
|
|
|
|
|
|
|
$ |
523.5 |
|
|
|
|
|
|
|
|
|
|
|
7.2 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service Centers: Service Center gross sales reflect sales
transacted through our 274 Service Centers in operation as of
December 31, 2004, including 27 new Service Centers opened
during 2004. The total increase of 9.5% reflects a same-store
(excluding new and closed units) increase of 3.0% and an
increase of 9.3% from new (2003 and 2004 openings) Service
Center sales of $32.8 million. We plan to open an
additional 30 to 35 Service Centers in 2005.
Other Selling Locations: All other gross sales reflect
sales transacted through our direct sales programs and our
Stores-on-Wheels. The increase of 3.6% is attributable to the
year-over-year growth in sales to retail and international
customers along with the slight increase in sales to customers
in the golf industry. Although we experienced sales expansion in
our direct channels, we continue to evaluate the returns
relative to contract accounts and have instituted disciplines to
assure contracts meet acceptable return thresholds. This program
has, on occasion, resulted in lost contract sales, and we will
continue to cull out account sales that do not produce an
acceptable level of return on our investment.
Agency Sales, Freight Revenue and Customer Discounts and
Rebates: The Company has entered into agency agreements with
certain of its suppliers whereby the Company operates as a sales
agent of those suppliers. The suppliers retain title to their
merchandise until it is sold by the Company and determine the
prices at which LESCO can sell the suppliers’ merchandise.
As such, the Company recognizes sales on a net basis and records
only its product margin as revenue. Therefore, the
$2.1 million of agency sales for 2004 represent the portion
of gross revenue that exceeds the Company’s net product
margin. Freight revenue, which represents fees charged to
customers in sales transactions for shipping and handling,
remained relatively flat as a percentage of sales. Customer
discounts and rebates declined to 0.7% of gross sales from 0.8%
as the Company has implemented more stringent qualifications for
its customers to obtain rebates.
Gross Profit on Sales:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Dollars | |
|
% of Net Sales | |
|
Dollars | |
|
% of Net Sales | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
|
Product margin
|
|
$ |
184.3 |
|
|
|
32.9 |
% |
|
$ |
173.0 |
|
|
|
33.0 |
% |
|
Distribution cost
|
|
|
(45.8 |
) |
|
|
(8.2 |
) |
|
|
(47.7 |
) |
|
|
(9.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
138.5 |
|
|
|
24.7 |
% |
|
$ |
125.3 |
|
|
|
23.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
16
Our largest single purchased product or raw material is urea,
the nitrogen source for blended fertilizers and combination
products. Urea can represent from approximately 8% to 10% of our
cost of sales. Urea is a second derivative of natural gas and
its cost fluctuates with the changing cost of natural gas.
Average 2004 urea costs increased approximately 20% over 2003
costs, which unabated would have resulted in an estimated 2.0%
deterioration in product margin percentage. However, through
price increases and other cost of sales reductions, particularly
the cost per ton to blend fertilizer products, we successfully
mitigated its effect on product margin. The 0.1% decline in
product margin from 2003 was due to the markdown charge related
to the elimination of merchandise from the Company’s
product offering associated with a vendor contract termination.
For 2005, we have entered a contract with our urea supplier to
fix the cost of a majority of our urea needs at a price
reflecting the prevailing market in mid-2004.
In 2004, we continued to optimize efficiencies in our
distribution network that was expanded late in 2002. The
expansion added fixed costs to our operations to support our
expected growth in Service Center units and comparable-sales
increases. As a result of growth in Service Center units and
comparable-sales increases, we leveraged the fixed costs
associated with our distribution operations and reduced our 2004
distribution costs as a percentage of net sales to 8.2% from
9.1% in 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
| |
|
| |
|
| |
|
| |
| |
|
Dollars | |
|
% of Net Sales | |
|
Dollars | |
|
% of Net Sales | |
|
Dollars | |
|
% | |
|
Basis Points | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Selling expense
|
|
$ |
90.5 |
|
|
|
16.1 |
% |
|
$ |
84.7 |
|
|
|
16.2 |
% |
|
$ |
5.8 |
|
|
|
6.8 |
% |
|
|
(10 bps |
) |
|
Merchant discounts/provision
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
for doubtful accounts
|
|
|
10.8 |
|
|
|
1.9 |
|
|
|
3.0 |
|
|
|
0.6 |
|
|
|
7.8 |
|
|
|
260.0 |
|
|
|
130 bps |
|
|
Corporate relocation expense
|
|
|
6.9 |
|
|
|
1.2 |
|
|
|
— |
|
|
|
— |
|
|
|
6.9 |
|
|
|
— |
|
|
|
— |
|
|
Hurricane/flood expense
|
|
|
1.2 |
|
|
|
0.2 |
|
|
|
— |
|
|
|
— |
|
|
|
1.2 |
|
|
|
— |
|
|
|
— |
|
|
Vendor contract termination
|
|
|
4.4 |
|
|
|
0.8 |
|
|
|
— |
|
|
|
— |
|
|
|
4.4 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
113.8 |
|
|
|
20.3 |
% |
|
$ |
87.7 |
|
|
|
16.8 |
% |
|
$ |
26.1 |
|
|
|
29.8 |
% |
|
|
350 bps |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense includes all operating expenses of Service
Centers and Stores-on-Wheels, direct sales, sales management,
customer service and marketing expense. The increase of
$5.8 million predominantly relates to new Service
Centers’ incremental operating costs of $5.2 million.
New Service Centers’ selling expense was $8.0 million
in 2004 for the 48 Service Centers opened in 2004 and 2003 while
selling expense in 2003 included $2.8 million for the 21
Service Centers opened in 2003.
|
|
|
Merchant Discounts and Provision for Doubtful Accounts |
As a percentage of net sales, merchant discounts and provision
for doubtful accounts expense increased 130 basis points
year-over-year. In December 2003, we sold our trade accounts
receivable portfolio to GEBCS for $57 million and entered
into a private label business credit program agreement with
GEBCS. In 2004, we sold an additional $6 million of trade
accounts receivable to GEBCS. This arrangement has resulted in
increased merchant discounts as we pay program fees and
discounts to GEBCS. Total merchant discount expense, including
GEBCS, for normal payment terms was 1.5% of net sales while
promotional discount expense was an additional 0.4% of net
sales. Although merchant discount expense increased
year-over-year, interest expense, provision for doubtful
accounts, the general and administrative costs to service the
previous in-house credit program and customer finance revenue
have been significantly reduced as compared to 2003.
|
|
|
Corporate Relocation Expense |
During the third quarter of 2004, we entered into agreements to
relocate our corporate headquarters from our approximately
94,000-square-foot facility in Strongsville, Ohio to an
approximately 39,000-square-foot
17
facility in downtown Cleveland, Ohio. Relocation costs incurred
during 2004 were $6.9 million primarily related to tenant
and landlord inducements along with broker commissions and legal
fees. Beginning in 2005, the financial effect of the relocation
is expected to be accretive to earnings on an annual, pre-tax
basis by approximately $1.0 million. We reduced our lease
commitment for corporate offices by five years as the lease on
the Strongsville facility expires in 2015 while the current
corporate headquarters lease expires in 2010.
During the third quarter of 2004, the Company incurred losses at
its Sebring, FL and Martins Ferry, OH manufacturing facilities
due to hurricane activity in Florida and the related rainfall
and flooding activity in Ohio. The total damages were
$1.2 million, primarily resulting from the loss of bulk
urea and sulfur coated urea that was stored at a third-party
terminal located adjacent to the Ohio River. Additionally, there
was roof and siding damage sustained at the Sebring facility. We
continue to evaluate our claims against the warehouse and other
possible avenues of assistance and intend to pursue all means
available to recoup this loss. Any future recovery will be
reported in the period in which the recovery is reasonably
certain.
|
|
|
Vendor Contract Termination |
In the fourth quarter of 2004, we informed our supplier of
methylene urea fertilizer, KPAC, that the Company will no longer
operate under the terms of the Supply Agreement with KPAC. The
five-year supply agreement between LESCO and KPAC was entered
into in November 2002 and requires the Company to purchase 8,000
tons of methylene urea fertilizer annually from KPAC at a fixed
conversion cost of $500 per ton plus the prevailing commodities
market prices which were approximately $270 per ton in 2004 (see
Item 3. Legal Proceedings for further discussion).
Management believes that termination of the agreement will
generate an annual, pre-tax savings of more than $2 million
over the remaining term of the agreement, which aggregate
savings is expected to exceed the $5.2 million cost to exit
the supply agreement. We have already secured an alternative,
lower-cost source of methylene urea fertilizer from other
available market sources with no annual purchase commitments.
|
|
|
General and Administrative Expense: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
General and administrative expense
|
|
$ |
28.3 |
|
|
$ |
29.4 |
|
|
$ |
(1.1 |
) |
General and administrative expense declined by $1.1 million
in 2004 to $28.3 million, or 5.0% of net sales, compared to
$29.4 million, or 5.6% of net sales, in 2003. The cost
savings recognized from tightened expense controls, along with
the strategic outsourcing of customer financing to GEBCS in
December 2003, have offset the increase in expense related to
more stringent governance guidelines (Sarbanes-Oxley
Section 404) as well as management bonus and employee
insurance/benefits.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Pre-opening expense
|
|
$ |
0.8 |
|
|
$ |
0.6 |
|
|
$ |
0.2 |
|
|
Number of Service Centers opened during the period
|
|
|
27 |
|
|
|
21 |
|
|
|
6 |
|
Pre-opening expense increased $0.2 million in 2004 compared
to 2003 results. Pre-opening expense remained consistent between
years at approximately $29,000 per new Service Center opened as
the Company opened 27 new Service Centers in 2004 and 21 in
2003. Pre-opening expense, which consists primarily of grand
opening advertising, payroll, supplies, distribution and storage
costs, is expensed as incurred.
18
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Early retirement of debt
|
|
$ |
— |
|
|
$ |
2.3 |
|
|
$ |
(2.3 |
) |
|
Loss on sale of accounts receivable
|
|
|
— |
|
|
|
4.6 |
|
|
|
(4.6 |
) |
|
Other expense
|
|
|
0.7 |
|
|
|
1.1 |
|
|
|
(0.4 |
) |
|
Other income
|
|
|
(0.5 |
) |
|
|
(1.5 |
) |
|
|
1.0 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
0.2 |
|
|
$ |
6.5 |
|
|
$ |
(6.3 |
) |
| |
|
|
|
|
|
|
|
|
|
The decline in other expense is primarily due to the higher
severance costs incurred in 2003 associated with a reduction in
sales force. A similar reduction did not occur in 2004. The
decline in other income predominantly relates to our former
joint venture that was sold in the fourth quarter of 2003. The
early retirement of debt charges and loss on sale of accounts
receivable in 2003 are discussed in the Overview.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Interest expense
|
|
$ |
0.7 |
|
|
$ |
4.7 |
|
|
$ |
(4.0 |
) |
Interest expense was dramatically reduced in 2004, which was
directly related to the sale of the Company’s accounts
receivable portfolio to GEBCS in December 2003. The sale of the
portfolio has reduced the year-over-year outstanding borrowings
on the revolving credit facility, allowed us to eliminate an
interest rate swap agreement at the end of 2003 and retire prior
to maturity our industrial revenue bonds in the fourth quarter
of 2004. Our improved cash flow allowed us to maintain lower
seasonal borrowing levels and minimize the related interest
expense. The effective interest rate of borrowings in 2004 was
6.86% versus 6.21% in 2003 as letter of credit fees are included
in interest expense. Excluding letter of credit fees, the 2004
effective rate was 5.26%.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Loss before taxes
|
|
$ |
(5.3 |
) |
|
$ |
(3.6 |
) |
|
$ |
(1.7 |
) |
During 2004, the Company opened 27 Service Center locations to
augment the 21 new Service Center openings in 2003. Management
views new Service Centers as the primary method to leverage our
cost base
19
and grow earnings consistently over the long term. Below are the
2004 and 2003 operating results for new Service Centers opened
during the last two years:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| |
|
Class of 2004 | |
|
Class of 2003 | |
|
|
|
Class of 2003 | |
| |
|
(27 Stores) | |
|
(21 Stores) | |
|
Total | |
|
(21 Stores) | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
|
Sales
|
|
$ |
13,834 |
|
|
$ |
18,990 |
|
|
$ |
32,824 |
|
|
$ |
9,827 |
|
|
Cost of product
|
|
|
(9,369 |
) |
|
|
(13,035 |
) |
|
|
(22,404 |
) |
|
|
(6,799 |
) |
|
Distribution cost
|
|
|
(830 |
) |
|
|
(809 |
) |
|
|
(1,639 |
) |
|
|
(441 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit on sales
|
|
|
3,635 |
|
|
|
5,146 |
|
|
|
8,781 |
|
|
|
2,587 |
|
|
Selling expense
|
|
|
(3,969 |
) |
|
|
(3,990 |
) |
|
|
(7,959 |
) |
|
|
(2,795 |
) |
|
Merchant discount expense
|
|
|
(190 |
) |
|
|
(264 |
) |
|
|
(454 |
) |
|
|
(26 |
) |
|
Pre-opening expense
|
|
|
(770 |
) |
|
|
— |
|
|
|
(770 |
) |
|
|
(600 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before interest and taxes
|
|
$ |
(1,294 |
) |
|
$ |
892 |
|
|
$ |
(402 |
) |
|
$ |
(834 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
As a result of the foregoing factors, including the operating
results of new Service Centers, the Company had a pre-tax loss
of $5.3 million for the year ended December 31, 2004
compared to a pre-tax loss of $3.6 million for the year
ended December 31, 2003. Management believes that a more
appropriate assessment of LESCO’s 2004 operating results
for comparative analysis should exclude the expenses associated
with the corporate relocation, hurricane and flood damages, and
for the termination of its methylene urea supply contract.
Excluding these charges, the Company’s pre-tax income for
2004 was $8.0 million. Additionally, management believes
that the comparative 2003 results should exclude the expense
associated with the sale of the Company’s accounts
receivable to GEBCS and the cost related to the early retirement
of debt. When excluding these charges, LESCO’s 2003 pre-tax
income was $3.3 million. A reconciliation of our pre-tax
results reported in accordance with GAAP, adjusted for these
items, follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
Pre-tax loss — GAAP
|
|
$ |
(5,285 |
) |
|
$ |
(3,637 |
) |
|
$ |
(1,648 |
) |
|
Cost of Inventory markdown — contract termination
|
|
|
799 |
|
|
|
— |
|
|
|
799 |
|
|
Loss on sale of accounts receivables
|
|
|
— |
|
|
|
4,626 |
|
|
|
(4,626 |
) |
|
Early retirement of debt agreement
|
|
|
— |
|
|
|
2,333 |
|
|
|
(2,333 |
) |
|
Corporate relocation expense
|
|
|
6,878 |
|
|
|
— |
|
|
|
6,878 |
|
|
Hurricane/flood expense
|
|
|
1,243 |
|
|
|
— |
|
|
|
1,243 |
|
|
Vendor contract termination
|
|
|
4,404 |
|
|
|
— |
|
|
|
4,404 |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted pre-tax earnings — Non-GAAP
|
|
$ |
8,039 |
|
|
$ |
3,322 |
|
|
$ |
4,717 |
|
| |
|
|
|
|
|
|
|
|
|
20
|
|
|
Income Taxes and Net Income: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
Change | |
| (Dollars in millions, except per share data) |
|
| |
|
| |
|
| |
|
Loss before income tax (provision) benefit
|
|
$ |
(5.3 |
) |
|
$ |
(3.6 |
) |
|
$ |
(1.7 |
) |
|
Income tax (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
(0.3 |
) |
|
|
1.4 |
|
|
|
(1.7 |
) |
| |
Deferred
|
|
|
2.4 |
|
|
|
(0.3 |
) |
|
|
2.7 |
|
| |
Change in valuation allowance
|
|
|
(2.4 |
) |
|
|
(2.8 |
) |
|
|
0.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(0.3 |
) |
|
|
(1.7 |
) |
|
|
1.4 |
|
|
Net Loss
|
|
$ |
(5.6 |
) |
|
$ |
(5.3 |
) |
|
$ |
(0.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
The net loss for 2004 was $5.6 million, or $0.65 per
diluted share, compared to a net loss of $5.3 million, or
$0.63 per diluted share, for 2003.
In accordance with the provisions of FAS 109, in the fourth
quarter of 2003, the Company recorded a charge to establish a
valuation allowance for its net deferred tax assets, including
amounts related to its net operating loss carryforwards. The
Company intends to maintain a full valuation allowance for its
net deferred tax assets and net operating loss carryforwards
until sufficient positive evidence exists to support a reversal
of some portion or the remainder of the allowance. Until such
time, except for minor state and local provisions and
adjustments to federal tax refunds, the Company expects to have
no reported tax provision or benefit, net of valuation allowance
adjustments. In 2004, the Company adjusted previously estimated
federal tax refunds by $0.3 million and increased its
valuation allowance an additional $2.4 million.
For 2004, the impact of the valuation allowance decreased the
Company’s income tax benefit, and increased its net loss by
$2.4 million, and increased the loss per diluted share by
$0.26.
2003 vs. 2002
Sales:
The following table provides supplemental detail of sales by
customer sector and transacting selling locations:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
% Change | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Other | |
|
|
|
|
|
Other | |
|
|
|
|
|
Other | |
|
|
| |
|
Service | |
|
Selling | |
|
|
|
Service | |
|
Selling | |
|
|
|
Service | |
|
Selling | |
|
|
| |
|
Centers | |
|
Locations | |
|
Total | |
|
Centers | |
|
Locations | |
|
Total | |
|
Centers | |
|
Locations | |
|
Total | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Lawn care
|
|
$ |
322.1 |
|
|
$ |
66.3 |
|
|
$ |
388.4 |
|
|
$ |
296.0 |
|
|
$ |
77.1 |
|
|
$ |
373.1 |
|
|
|
8.8 |
% |
|
|
(14.0 |
)% |
|
|
4.1% |
|
|
Golf
|
|
|
29.1 |
|
|
|
108.5 |
|
|
|
137.6 |
|
|
|
23.6 |
|
|
|
116.7 |
|
|
|
140.3 |
|
|
|
23.3 |
|
|
|
(7.0 |
) |
|
|
(1.9 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross sales
|
|
$ |
351.2 |
|
|
$ |
174.8 |
|
|
|
526.0 |
|
|
$ |
319.6 |
|
|
$ |
193.8 |
|
|
|
513.4 |
|
|
|
9.9 |
% |
|
|
(9.8 |
)% |
|
|
2.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Freight revenue
|
|
|
|
|
|
|
|
|
|
|
1.5 |
|
|
|
|
|
|
|
|
|
|
|
1.4 |
|
|
|
|
|
|
|
|
|
|
|
7.1 |
|
|
Customer discounts and rebates
|
|
|
|
|
|
|
|
|
|
|
(4.0 |
) |
|
|
|
|
|
|
|
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
29.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net sales
|
|
|
|
|
|
|
|
|
|
$ |
523.5 |
|
|
|
|
|
|
|
|
|
|
$ |
511.7 |
|
|
|
|
|
|
|
|
|
|
|
2.3% |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21
Service Centers: Service Center gross sales reflect sales
transacted through our 247 Service Centers in operation as of
December 31, 2003, including 21 new Service Centers opened
during 2003, and one Service Center closed during 2003 (gross
sales in 2003 and 2002 of $0.2 million and
$0.5 million, respectively). The total increase of 9.9%
includes an increase of 3.1% from new Service Center sales of
$9.8 million.
Other Selling Locations: All other gross sales reflect
sales transacted through our direct sales programs and our
Stores-on-Wheels. The decrease of 9.8% is attributable to the
decline in consumption of our products by the golf industry
through these sales channels. This decline was due to the
challenges within the industry and the industry experiencing
inclement weather during 2003, particularly in the Northeast
during the important spring selling season.
Freight Revenue and Customer Discounts and Rebates:
Freight revenue, which represents fees charged to customers in
sales transactions for shipping and handling, remained
relatively flat as a percentage of sales. Customer discounts and
rebates grew from 0.6% of gross sales to 0.8% due to a new
contract account which included a rebate program.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
Dollars | |
|
% of Net Sales | |
|
Dollars | |
|
% of Net Sales | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
|
Product margin
|
|
$ |
173.0 |
|
|
|
33.0 |
% |
|
$ |
170.4 |
|
|
|
33.3 |
% |
|
Inventory markdown
|
|
|
— |
|
|
|
— |
|
|
|
(9.2 |
) |
|
|
(1.8 |
) |
|
Distribution cost
|
|
|
(47.7 |
) |
|
|
(9.1 |
) |
|
|
(44.2 |
) |
|
|
(8.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
$ |
125.3 |
|
|
|
23.9 |
% |
|
$ |
117.0 |
|
|
|
22.9 |
% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
Our largest single purchased product or raw material is urea,
the nitrogen source for blended fertilizers and combination
products. Urea represented approximately 7% to 9% of our cost of
sales in 2003 and 2002. Urea is a second derivative of natural
gas and its cost has increased with the increased cost of
natural gas. Average 2003 urea costs increased approximately 50%
over 2002 costs, which negatively affected product margin
percentage by an estimated 4.0%. However, through price
increases of approximately 1% and other cost of sales
reductions, specifically in inventory shrinkage and the cost to
blend fertilizer products, we were successful in limiting the
deterioration of product margin percentage to 0.3%.
The inventory markdown in 2002 relates to the inventory product
life cycle program we implemented in 2002 which requires all
stock keeping units (SKUs) to be identified into one of five
categories: active, watch, phase out, discontinued and
liquidated. Under the program, the selling price of SKUs
identified as discontinued are progressively marked down to zero
and liquidated. For financial reporting purposes, the products
are marked down to estimated net realizable value when
identified as discontinued. In June 2002, in preparation for
conversion to the program, we identified 12,000 SKUs for
liquidation and recorded a $9.2 million pre-tax markdown
charge and subsequently liquidated the markdown product and
permanently purged the SKUs from our system.
In late 2002, we decided to expand our distribution network to
support our expected growth in Service Center units, and
comparable-sales increases, which added fixed costs to our
operations. As such, we opened distribution hubs in Chicago,
Atlanta, and Plano, Texas, adding a cumulative 278,116 square
feet of warehousing capacity to our distribution network at an
average lease cost of $3.21 per square foot. The opening of
these incremental hubs resulted in $1.0 million of
incremental start-up costs in 2003. Additionally, the
incremental fixed costs were not effectively leveraged by the
2.3% increase in net sales. The combination of start-up costs
and incremental fixed costs resulted in the 0.5% deterioration
in distribution expense leverage.
22
Operating Expenses:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Change | |
| |
|
| |
|
| |
|
| |
| |
|
Dollars | |
|
% of Net Sales | |
|
Dollars | |
|
% of Net Sales | |
|
Dollars | |
|
% | |
|
Basis Points | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Selling expense
|
|
$ |
84.7 |
|
|
|
16.2 |
% |
|
$ |
79.0 |
|
|
|
15.4 |
% |
|
$ |
5.7 |
|
|
|
7.2 |
% |
|
|
80 bps |
|
|
Merchant discounts/ provision for doubtful accounts
|
|
|
3.0 |
|
|
|
0.6 |
|
|
|
2.4 |
|
|
|
0.5 |
|
|
|
0.6 |
|
|
|
25.0 |
|
|
|
10 bps |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
$ |
87.7 |
|
|
|
16.8 |
% |
|
$ |
81.4 |
|
|
|
15.9 |
% |
|
$ |
6.3 |
|
|
|
7.7 |
% |
|
|
90 bps |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selling expense includes all operating expenses of Service
Centers and Stores-on-Wheels, direct sales, sales management,
customer service and marketing expense. The increase of
$5.7 million predominantly relates to new Service Center
operating costs of $2.8 million, incremental direct sales
programs of $3.3 million, of which $1.5 million were
eliminated on a go forward basis through our workforce reduction
in June 2003, and incremental costs of our new point-of-sale
system of $1.4 million.
|
|
|
Merchant Discounts and Provision for Doubtful Accounts |
As a percentage of net sales, these expenses remained relatively
flat year-over-year. As discussed in the Overview, on
December 30, 2003, we sold our trade accounts receivable
portfolio to GEBCS for $57 million and entered a private
label business credit program agreement with GEBCS. The
transaction did not have any significant effect on merchant
discounts expense in 2003.
|
|
|
General and Administrative Expense: |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Change | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
General and administrative expenses
|
|
$ |
29.4 |
|
|
$ |
30.6 |
|
|
$ |
(1.2 |
) |
We continue to analyze all general and administrative expenses
and have experienced increases related to Sarbanes-Oxley
requirements, insurance costs and sales and use taxes. These
increases have been offset by continued reductions in personnel
and the elimination of the payment of executive bonuses in 2003.
The executive bonus plan is paid based upon the Company
achieving specified sales growth, earnings per share and return
on invested capital targets, which were not achieved in 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Change | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Early retirement of debt
|
|
$ |
2.3 |
|
|
$ |
4.6 |
|
|
$ |
(2.3 |
) |
|
Loss on sale of accounts receivable
|
|
|
4.6 |
|
|
|
— |
|
|
|
4.6 |
|
|
Asset rationalization
|
|
|
— |
|
|
|
12.0 |
|
|
|
(12.0 |
) |
|
Other expense
|
|
|
1.1 |
|
|
|
3.6 |
|
|
|
(2.5 |
) |
|
Other income
|
|
|
(1.5 |
) |
|
|
(0.8 |
) |
|
|
(0.7 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
6.5 |
|
|
$ |
19.4 |
|
|
$ |
(12.9 |
) |
| |
|
|
|
|
|
|
|
|
|
The early retirement of debt charges and loss on sale of
accounts receivable and asset rationalization charge are
discussed in the Overview. The decline in other expense is due
to a $2.8 million decrease in
23
severance expense (2003 — $0.7 million vs.
2002 — $3.5 million). The increase in other
income predominantly relates to our former joint venture.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
|
Change | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Interest expense
|
|
$ |
4.7 |
|
|
$ |
4.9 |
|
|
$ |
(0.2 |
) |
The effective interest rate of borrowings in 2003 was 6.21%
versus 6.43% in 2002. Although LIBOR declined approximately 0.5%
year-over-year, we were unable to take full advantage of the
rate declines due to our interest rate swap agreement which
fixed our interest rate at approximately 7.0% on
$40.5 million of our borrowings. The interest rate swap was
terminated in conjunction with the 2003 refinancing discussed in
the Overview.
A reconciliation of our income tax provision (benefit) is
as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
| |
|
|
|
As a % of | |
|
|
|
As a % of | |
| |
|
Dollars | |
|
pre-tax loss | |
|
Dollars | |
|
pre-tax loss | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
| |
|
Provision (benefit) before valuation provision
|
|
$ |
(1.2 |
) |
|
|
(33.3 |
)% |
|
$ |
(7.3 |
) |
|
|
(37.9 |
)% |
|
Valuation provision
|
|
|
2.8 |
|
|
|
77.0 |
|
|
|
0.9 |
|
|
|
4.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit)
|
|
$ |
1.6 |
|
|
|
44.0 |
% |
|
$ |
(6.4 |
) |
|
|
(33.3 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
See the Overview for further discussion of the income tax
valuation provisions. The decrease in effective benefit results
from the effect of permanent, non-deductible items and their
relationship to pre-tax loss.
Net loss, before the cumulative effect of accounting change, on
a GAAP basis was $5.3 million, or $0.63 per diluted share,
in 2003 and $12.9 million, or $1.52 per diluted share, in
2002. Excluding charges previously discussed, net income in 2003
was $2.1 million, or $0.23 per diluted share, versus
$6.2 million, or $0.70 per diluted share in 2002. The
decrease in net income, excluding charges of $4.0 million,
is directly attributable to the increases in Operating Expenses
as discussed above.
Business Segment Results
We manage LESCO’s business utilizing two business
segments — Selling and Support.
Selling Segment
We maintain Four-Wall P&Ls for each of our selling locations
(Service Centers, Stores-on-Wheels, direct sales representatives
and all other direct selling efforts). These Four-Wall P&Ls
include the sales, cost of sales and operating expenses
(including payroll, benefits, rent, utilities, freight in-bound
to selling locations and out-bound to customers) necessary to
operate the individual selling locations. The Selling segment
operating results reflect the aggregate Four-Wall P&Ls of
selling locations adjusted for costs of zone and regional
management, sales commission expense and the portion of merchant
discounts and provision for doubtful accounts not previously
charged to the Four-Wall P&Ls.
24
Prior to 2003, Four-Wall P&Ls were not maintained using the
current format. To provide comparable segment results, certain
allocations, particularly related to distribution expense, were
estimated and reflected for 2002 based upon 2003 results.
We allocate resources, including working, fixed and leased
capital, to existing and potential selling locations based upon
projected sales and return on invested capital (ROIC). We define
ROIC as the percentage calculated by dividing net operating
profit after tax (NOPAT) by invested capital. For the
Selling segment, we calculate ROIC as follows:
| |
|
|
|
ROIC =
|
|
NOPAT/Invested Capital |
|
NOPAT =
|
|
Selling Segment Operating Results X 61% (1 - effective
tax rate) |
|
Invested Capital =
|
|
Accounts Receivable (excluding rebate receivable, see
Note 3 to Consolidated Financial Statements); plus |
| |
|
Inventory (excluding capitalized distribution and procurement
costs, markdown and shrink reserves and credit for inventory
held on consignment — see Note 4 to Consolidated
Financial Statements); plus |
| |
|
Fixed Capital (see Note 5 to Consolidated Financial
Statements) |
Our measures of ROIC may not be similar to other similarly
titled captions used by other companies. For example, we do not
capitalize operating leases or utilize average invested capital
over given periods.
|
|
|
Selling Segment Operating Results |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
561.0 |
|
|
$ |
523.5 |
|
|
$ |
511.7 |
|
|
Cost of product
|
|
|
(390.0 |
) |
|
|
(363.8 |
) |
|
|
(347.6 |
) |
|
Distribution cost
|
|
|
(24.5 |
) |
|
|
(20.7 |
) |
|
|
(20.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Gross profit on sales
|
|
|
146.5 |
|
|
|
139.0 |
|
|
|
143.8 |
|
|
Selling expense
|
|
|
(82.0 |
) |
|
|
(76.6 |
) |
|
|
(72.9 |
) |
|
Merchant discounts and provision for doubtful accounts
|
|
|
(10.7 |
) |
|
|
(3.0 |
) |
|
|
(2.4 |
) |
|
Pre-opening expense
|
|
|
(0.8 |
) |
|
|
(0.6 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
$ |
53.0 |
|
|
$ |
58.8 |
|
|
$ |
68.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
NOPAT
|
|
$ |
32.3 |
|
|
$ |
35.9 |
|
|
$ |
41.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
Invested capital at period end
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Accounts receivable
|
|
$ |
4.8 |
|
|
$ |
9.9 |
|
|
$ |
59.1 |
|
| |
Proforma adjustment for the proceeds from the sale of accounts
receivable to GEBCS in 2003
|
|
|
— |
|
|
|
56.9 |
|
|
|
— |
|
| |
Inventory
|
|
|
52.1 |
|
|
|
46.9 |
|
|
|
48.8 |
|
| |
Property, plant and equipment, net
|
|
|
5.3 |
|
|
|
5.1 |
|
|
|
2.4 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
62.2 |
|
|
$ |
118.8 |
|
|
$ |
110.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
ROIC
|
|
|
52.0 |
% |
|
|
30.2 |
% |
|
|
37.9 |
% |
| |
|
|
|
|
|
|
|
|
|
The Selling segment’s invested capital for 2003 has been
adjusted for the proceeds from the sale of accounts receivable
to GEBCS as NOPAT does not reflect the cost of incremental
merchant discounts from the GEBCS private label business credit
programs. In 2004, the Selling segment was charged for these
incremental merchant discounts (see Note 3 to Consolidated
Financial Statements). A proforma Selling
25
segment ROIC for 2003 reflecting this estimated charge, as if
the sale of accounts receivable to GEBCS had occurred on
January 1, 2003, is calculated as follows:
| |
|
|
|
|
|
EBIT, as determined above
|
|
$ |
58.8 |
|
|
Adjusted for incremental merchant discounts
|
|
|
(7.0 |
) |
| |
|
|
|
|
Adjusted EBIT
|
|
$ |
51.8 |
|
| |
|
|
|
|
Adjusted NOPAT
|
|
$ |
31.6 |
|
| |
|
|
|
|
Invested capital, as determined above
|
|
$ |
118.8 |
|
|
Less: Proceeds from the sale of accounts receivable to GEBCS
|
|
|
(56.9 |
) |
| |
|
|
|
|
Adjusted invested capital
|
|
$ |
61.9 |
|
| |
|
|
|
|
Adjusted ROIC
|
|
|
51.1 |
% |
| |
|
|
|
Support Segment
The Support segment includes the operating results and invested
capital of all non-selling locations including manufacturing
(blending facilities and seed processing plant), distribution
hubs (including in-bound freight costs to the distribution
hubs), and corporate costs (including corporate management of
sales, marketing, customer service, accounting and finance,
human resources, information systems, etc.). We believe that
these costs are essential to managing the selling locations and
to managing a public company, but are not costs that directly
translate into incremental sales or positive ROIC. Therefore,
resources are only allocated to the Support segment if the
result is a net reduction in expenses or the allocation is
necessary for the maintenance of facilities, support of the
expansion of selling locations, maintaining the corporate
structure or is mandated by law or governmental order. Below is
the non-GAAP, adjusted ROIC for the Support Segment which
excludes various charges recorded in 2004, 2003 and 2002.
|
|
|
Support Segment Operating Results |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| (Dollars in millions) |
|
|
|
|
|
|
|
Net sales
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Cost of product(a)
|
|
|
14.2 |
|
|
|
13.3 |
|
|
|
6.3 |
|
|
Cost of inventory markdown — contract termination
|
|
|
(0.8 |
) |
|
|
— |
|
|
|
— |
|
|
Cost of inventory markdown
|
|
|
— |
|
|
|
— |
|
|
|
(9.2 |
) |
|
Distribution cost(b)
|
|
|
(21.4 |
) |
|
|
(27.0 |
) |
|
|
(23.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Gross loss on sales
|
|
|
(8.0 |
) |
|
|
(13.7 |
) |
|
|
(26.7 |
) |
|
Selling expense(c)
|
|
|
(8.5 |
) |
|
|
(8.1 |
) |
|
|
(6.1 |
) |
|
General & administrative expense
|
|
|
(28.3 |
) |
|
|
(29.4 |
) |
|
|
(30.6 |
) |
|
Early retirement of debt(d)
|
|
|
— |
|
|
|
(2.3 |
) |
|
|
(4.6 |
) |
|
Loss from sale of accounts receivable(d)
|
|
|
— |
|
|
|
(4.6 |
) |
|
|
— |
|
|
Asset rationalization(d)
|
|
|
— |
|
|
|
— |
|
|
|
(12.0 |
) |
|
Corporate relocation expense(d)
|
|
|
(6.9 |
) |
|
|
— |
|
|
|
— |
|
|
Hurricane/flood expense(d)
|
|
|
(1.2 |
) |
|
|
— |
|
|
|
— |
|
|
Vendor contract termination(d)
|
|
|
(4.4 |
) |
|
|
— |
|
|
|
— |
|
|
Other expense(d)
|
|
|
(0.7 |
) |
|
|
(1.1 |
) |
|
|
(3.6 |
) |
|
Other income(d)
|
|
|
0.5 |
|
|
|
1.5 |
|
|
|
0.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
$ |
(57.5 |
) |
|
$ |
(57.7 |
) |
|
$ |
(82.8 |
) |
| |
|
|
|
|
|
|
|
|
|
26
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| (Dollars in millions) |
|
|
|
|
|
|
|
Adjustments(e):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate relocation expense
|
|
$ |
6.9 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Hurricane/flood expense
|
|
|
1.2 |
|
|
|
— |
|
|
|
— |
|
|
Vendor contract termination (including cost of inventory
markdown)
|
|
|
5.2 |
|
|
|
— |
|
|
|
— |
|
|
Early retirement of debt
|
|
|
— |
|
|
|
2.3 |
|
|
|
4.6 |
|
|
Loss from sale of accounts receivable
|
|
|
— |
|
|
|
4.6 |
|
|
|
— |
|
|
Cost of inventory markdown
|
|
|
— |
|
|
|
— |
|
|
|
9.2 |
|
|
Asset rationalization
|
|
|
— |
|
|
|
— |
|
|
|
12.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted EBIT
|
|
$ |
(44.2 |
) |
|
$ |
(50.8 |
) |
|
$ |
(57.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Adjusted NOPAT
|
|
$ |
(27.0 |
) |
|
$ |
(31.0 |
) |
|
$ |
(34.8 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Invested capital
|
|
$ |
73.8 |
|
|
$ |
149.6 |
|
|
$ |
145.3 |
|
| |
Less: Selling segment invested capital
|
|
|
(62.4 |
) |
|
|
(118.8 |
) |
|
|
(110.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total support segment invested capital
|
|
$ |
11.4 |
|
|
$ |
30.8 |
|
|
$ |
35.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted ROIC
|
|
|
(236.5 |
)% |
|
|
(100.6 |
)% |
|
|
(99.3 |
)% |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes various manufacturing and procurement costs reduced by
suppliers’ rebates. |
| |
|
(b) |
|
Reflects warehousing expense and freight costs incurred to
transport product from manufacturing facilities to hubs. |
| |
|
(c) |
|
Represents corporate costs incurred for marketing, customer
service and sales management. |
| |
|
(d) |
|
Includes all other non-selling, miscellaneous income and expense
items that are not incurred through the ordinary course of
business at the Service Centers, Stores-on-Wheels or direct
sales channel. |
| |
|
(e) |
|
Adjusted EBIT and NOPAT for 2004 exclude charges for corporate
relocation, expenses related to hurricane and flood damage, and
costs associated with the early termination of a vendor supply
contract. |
| |
|
(f) |
|
Adjusted EBIT and NOPAT for 2003 exclude charges incurred for
the sale of the Company’s accounts receivable portfolio to
GEBCS in December 2003 along with the expense associated with
the early termination of debt. |
| |
|
(g) |
|
Adjusted EBIT and NOPAT for 2002 exclude charges associated with
the rationalization of facilities, the product markdown cost
related to eliminating SKUs from the merchandise offering and
the expense incurred with the early termination of debt. |
27
As the Support segment operates at a negative ROIC, the Selling
segment must provide an adequate return in order for the
Consolidated Company results to generate a positive ROIC. The
Selling segment’s results continue to be sufficient to
support a positive, adjusted ROIC on a Consolidated basis as
reflected below:
Consolidated Operating Results
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
561.0 |
|
|
$ |
523.5 |
|
|
$ |
511.7 |
|
|
Cost of product
|
|
|
(375.8 |
) |
|
|
(350.5 |
) |
|
|
(341.3 |
) |
|
Cost of inventory markdown — contract termination
|
|
|
(0.8 |
) |
|
|
— |
|
|
|
— |
|
|
Cost of inventory markdown
|
|
|
— |
|
|
|
— |
|
|
|
(9.2 |
) |
|
Distribution cost
|
|
|
(45.9 |
) |
|
|
(47.7 |
) |
|
|
(44.1 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Gross profit on sales
|
|
|
138.5 |
|
|
|
125.3 |
|
|
|
117.1 |
|
|
Selling expense
|
|
|
(90.5 |
) |
|
|
(84.7 |
) |
|
|
(79.0 |
) |
|
General & administrative expense
|
|
|
(28.3 |
) |
|
|
(29.4 |
) |
|
|
(30.6 |
) |
|
Merchant discounts and provision for doubtful accounts
|
|
|
(10.7 |
) |
|
|
(3.0 |
) |
|
|
(2.4 |
) |
|
Pre-opening expense
|
|
|
(0.8 |
) |
|
|
(0.6 |
) |
|
|
— |
|
|
Early retirement of debt
|
|
|
— |
|
|
|
(2.3 |
) |
|
|
(4.6 |
) |
|
Loss from sale of accounts receivable
|
|
|
— |
|
|
|
(4.6 |
) |
|
|
— |
|
|
Asset rationalization
|
|
|
— |
|
|
|
— |
|
|
|
(12.0 |
) |
|
Corporate relocation expense
|
|
|
(6.9 |
) |
|
|
— |
|
|
|
— |
|
|
Hurricane/flood expense
|
|
|
(1.2 |
) |
|
|
— |
|
|
|
— |
|
|
Vendor contract termination
|
|
|
(4.4 |
) |
|
|
— |
|
|
|
— |
|
|
Other expense
|
|
|
(0.7 |
) |
|
|
(1.1 |
) |
|
|
(3.6 |
) |
|
Other income
|
|
|
0.5 |
|
|
|
1.5 |
|
|
|
0.8 |
|
| |
|
|
|
|
|
|
|
|
|
|
EBIT
|
|
$ |
(4.5 |
) |
|
$ |
1.1 |
|
|
$ |
(14.3 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Adjustments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate relocation expense
|
|
$ |
6.9 |
|
|
$ |
— |
|
|
$ |
— |
|
|
Hurricane/flood expense
|
|
|
1.2 |
|
|
|
— |
|
|
|
— |
|
|
Vendor contract termination (including cost of inventory
markdown)
|
|
|
5.2 |
|
|
|
— |
|
|
|
— |
|
|
Early retirement of debt
|
|
|
— |
|
|
|
2.3 |
|
|
|
4.6 |
|
|
Loss on sale of accounts receivable
|
|
|
— |
|
|
|
4.6 |
|
|
|
— |
|
|
Cost of inventory markdown
|
|
|
— |
|
|
|
— |
|
|
|
9.2 |
|
|
Asset rationalization
|
|
|
— |
|
|
|
— |
|
|
|
12.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted EBIT
|
|
$ |
8.8 |
|
|
$ |
8.0 |
|
|
$ |
11.5 |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted NOPAT
|
|
$ |
5.4 |
|
|
$ |
4.9 |
|
|
$ |
7.0 |
|
| |
|
|
|
|
|
|
|
|
|
|
Invested capital
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Debt
|
|
|
7.3 |
|
|
|
21.4 |
|
|
|
68.4 |
|
| |
Equity
|
|
|
66.5 |
|
|
|
71.3 |
|
|
|
76.9 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total Invested capital
|
|
$ |
73.8 |
|
|
$ |
92.7 |
|
|
$ |
145.3 |
|
| |
|
|
|
|
|
|
|
|
|
|
Adjusted ROIC
|
|
|
7.3 |
% |
|
|
5.3 |
% |
|
|
4.8 |
% |
| |
|
|
|
|
|
|
|
|
|
28
Liquidity and Capital Resources
A summary of the change in cash and cash equivalents (see
Statement of Cash Flows included in the attached Consolidated
Financial Statements) is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in millions) |
|
| |
|
| |
|
| |
|
Cash provided by (used in) operations
|
|
$ |
22.9 |
|
|
$ |
51.9 |
|
|
$ |
(6.5 |
) |
|
Cash used in investing activities
|
|
|
(2.5 |
) |
|
|
(5.6 |
) |
|
|
(1.3 |
) |
|
Cash (used in) provided by financing activities
|
|
|
(19.8 |
) |
|
|
(40.5 |
) |
|
|
4.1 |
|
| |
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
$ |
0.6 |
|
|
$ |
5.8 |
|
|
$ |
(3.7 |
) |
| |
|
|
|
|
|
|
|
|
|
In January 2005, the Securities and Exchange Commission issued
additional guidance for the reporting of cash flows from the
sale of accounts receivable. As such, the cash generated from
the sale of our accounts receivable is now reflected in the
Operating Activities section of our cash flows statement when,
historically, it was reflected in Financing Activities. Below is
a reconciliation of GAAP reported cash flows from Operations to
a Non-GAAP presentation that excludes the sale of accounts
receivable:
| |
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in thousands) |
|
| |
|
| |
|
Cash provided by operating activities — GAAP
|
|
$ |
22,874 |
|
|
$ |
51,890 |
|
| |
Less: Cash received for sale of accounts receivable
|
|
|
(5,946 |
) |
|
|
(56,881 |
) |
| |
|
|
|
|
|
|
|
Adjusted cash provided by (used in) operating
activities — non-GAAP
|
|
$ |
16,928 |
|
|
$ |
(4,991 |
) |
| |
|
|
|
|
|
|
Working Capital: During 2004 and 2003, we experienced net
decreases in working capital of $2.4 and $6.3 million,
respectively. With the sale of the accounts receivable portfolio
to GEBCS in 2003, we do not expect significant unfavorable
changes in our accounts receivable portfolio in the coming
periods. In the future, the working capital items that could
result in significant uses of cash are increases in inventory
and reductions in accounts payable.
We will merchandise new Service Centers with $150,000 to
$200,000 of inventory. As such, we anticipate that inventory
levels will increase with the opening of new Service Centers,
but continued improvements in supply chain efficiencies, along
with continued accounts payable leverage, could mitigate the
impact of incremental product requirements.
Accounts payable leverage is summarized as follows:
| |
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in millions) |
|
| |
|
| |
|
Accounts payable
|
|
$ |
56.3 |
|
|
$ |
50.4 |
|
|
Less: Payable to GEBCS
|
|
|
— |
|
|
|
(5.8 |
) |
| |
|
|
|
|
|
|
|
Adjusted accounts payable
|
|
$ |
56.3 |
|
|
$ |
44.6 |
|
| |
|
|
|
|
|
|
|
Inventory
|
|
$ |
100.6 |
|
|
$ |
93.6 |
|
| |
|
|
|
|
|
|
|
Accounts payable leverage
|
|
|
56.0 |
% |
|
|
47.6 |
% |
| |
|
|
|
|
|
|
Payable to GEBCS represents the portion of the receivable
portfolio sold to GEBCS on December 30, 2003 that remained
uncollected by GEBCS and secured by the Company. Substantially
all of these balances were collected by GEBCS as there were only
$14,000 of uncollected receivables at December 31, 2004. As
a
29
result, LESCO had a minimal liability to GEBCS at the end of
2004 compared to the 2003 balance of $5.8 million.
The 56% accounts payable leverage at the end of 2004 was high
due to certain year-end inventory purchases that remained fully
leveraged at December 31, 2004. We believe that an accounts
payable leverage ranging from 45% to 55% is sustainable.
Interest Payments: As discussed in the Overview, the 2003
refinancing and sale of accounts receivable to GEBCS
significantly changed our debt capital structure, which
dramatically reduced our interest expense in 2004. We believe
that market interest rates will continue to increase during
2005, and we may experience effective rates ranging from 6.0% to
7.0% for the year. We anticipate average revolving credit
borrowings of approximately $10.0 million and a related
interest expense of approximately $0.7 million in 2005.
Income Taxes: For internal modeling purposes, we utilize
a 39% effective income tax rate. In accordance with GAAP
requirements, our deferred tax assets at December 31, 2004
and 2003 are fully reserved. Certain of these unrecognized
deferred tax assets, including $0.7 million of Federal net
operating loss carryforwards, will be available to offset future
income tax liability. After these fully reserved assets are
utilized, we anticipate paying income taxes at a 39% effective
rate.
Capital Expenditures: Our 2004 capital expenditures can
be summarized as follows:
| |
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in millions) |
|
| |
|
| |
|
New Service Centers
|
|
$ |
1.1 |
|
|
$ |
1.3 |
|
|
Manufacturing facilities and corporate systems
|
|
|
3.2 |
|
|
|
4.3 |
|
| |
|
|
|
|
|
|
| |
|
$ |
4.3 |
|
|
$ |
5.6 |
|
| |
|
|
|
|
|
|
We expect to focus our future capital needs primarily on Service
Centers. We intend to open 30 to 35 units in 2005, relocate
another 20 existing sites to new locations with the intent to
increase customer traffic and invest in new fixtures for our
current base of stores to enhance merchandise adjacencies and
improve the in-store shopping experience. We will continue to
maintain information systems and manufacturing facilities. We
currently estimate that ongoing, annual capital needs will range
from $5 million to $6 million.
In the fourth quarter of 2003, the Company entered into a
$50 million Revolving Credit Facility (the Facility) which
replaced a prior credit facility. Borrowings under the Facility
were used to retire the prior credit facility, including a term
loan, buy-out an interest rate swap agreement and buy-back
outstanding preferred stock, including accrued dividends.
The Facility matures December 30, 2006 and is secured by
inventory, owned receivables, equipment, investment interests,
real property interests, and general intangibles, including
intellectual property. The Facility bears interest at LIBOR plus
2.0% to 2.5% per annum, based on the level of borrowings, and
requires the payment of a facility fee ranging from 0.4% to 0.5%
per annum on the unused portion of availability. Availability
under the Facility is determined by a borrowing base formula
calculated on eligible inventory. As of December 31, 2004,
there was $46.4 million available under the borrowing base
formula, $7.3 million was borrowed, with unused capacity of
$34.3 million. Letters of credit, up to a maximum of
$20 million, are also available under the Facility and are
considered outstanding borrowings when calculating the unused
portion of availability. Letters of credit in the aggregate
amount of $4.8 million were outstanding as of
December 31, 2004. Letter of credit fees range from 2.0% to
2.5% with an issuance fee ranging from 0.125% to 0.150%.
The interest rate, facility fee, letter of credit fee and letter
of credit issuance fee are determined based on the
Company’s fixed charge coverage ratio. The Facility
requires the maintenance of certain covenants, with the only
financial covenant being the fixed charge coverage ratio. The
Company was in compliance with the Facility covenants as of
December 31, 2004.
30
LESCO generated approximately $23 million in cash from
operations during 2004, a portion of which was utilized to repay
$14.1 million of borrowings and invest $4.3 million in
property, plant and equipment.
We believe that the Company’s financial condition continues
to be strong. Together, its cash balances, other liquid assets,
operating cash flows, access to debt and equity capital markets,
and borrowing capacity provide adequate resources to fund
short-term and long-term operating requirements and future
capital expenditures related to Service Center expansion and
other projects. However, the Company’s operating cash flow
and access to the capital markets can be impacted by factors
outside of its control.
Contractual Obligations, Commitments and Off Balance Sheet
Arrangements
We have various contractual obligations that are recorded as
liabilities in our consolidated financial statements. Other
items, such as certain purchase commitments and other executory
contracts are not recognized as liabilities in our consolidated
financial statements but are required to be disclosed. For
example, the Company is contractually committed to make certain
minimum lease payments for the use of property under operating
lease agreements.
The following table summarizes our significant contractual
obligations and commercial commitments at December 31, 2004
and the future periods in which such obligations are expected to
be settled in cash. The table also reflects the timing of
principal payments on outstanding borrowings. Additional details
regarding these obligations are provided in the footnotes to the
Consolidated Financial Statements.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
Less than | |
|
|
|
|
|
More than | |
| |
|
Total | |
|
1 Year | |
|
1-3 Years | |
|
3-5 Years | |
|
5 Years | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| (Dollars in millions) |
|
|
|
|
|
|
|
|
|
|
|
Long-term debt obligations
|
|
$ |
7.3 |
|
|
$ |
7.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
Capital lease obligations
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
Operating lease obligations
|
|
|
51.8 |
|
|
|
18.2 |
|
|
|
22.6 |
|
|
|
9.3 |
|
|
|
1.7 |
|
|
Purchase obligations Grass seed(a)
|
|
|
36.8 |
|
|
|
36.8 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Urea(b)
|
|
|
38.9 |
|
|
|
38.9 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Potash(c)
|
|
|
12.2 |
|
|
|
12.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Diammonium Phosphate (DAP)(d)
|
|
|
10.4 |
|
|
|
10.4 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Equipment(e)
|
|
|
133.1 |
|
|
|
60.6 |
|
|
|
72.5 |
|
|
|
— |
|
|
|
— |
|
| |
Other(f)
|
|
|
11.3 |
|
|
|
5.2 |
|
|
|
6.1 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Total purchase obligations
|
|
|
242.7 |
|
|
|
164.1 |
|
|
|
78.6 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations
|
|
$ |
301.8 |
|
|
$ |
189.6 |
|
|
$ |
101.2 |
|
|
$ |
9.3 |
|
|
$ |
1.7 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
For 2005, the Company is committed to purchase the grass seed
crop from approximately 38,000 acres of land at prices to be
determined by the prevailing market prices. For presentation
purposes, this obligation is estimated based upon 2004 purchases
of approximately $31.4 million, adjusted for an expected
crop yield increase of approximately 17%. |
| |
|
(b) |
|
For 2005, the Company is committed to purchase 190,000 tons of
urea at a fixed price reflecting market prices as of
July 30, 2004. The contracted price is $204.50 per ton. |
| |
|
(c) |
|
For 2005, the Company is committed to purchase 68,500 tons of
Potash at a fixed price reflecting market prices as of
August 27, 2004. The contracted price is in the range of
$173.50-$178.50 per ton depending on which LESCO facility the
product is to be delivered. |
| |
|
(d) |
|
For 2005, the Company is committed to purchase 40,000 tons of
Diammonium Phosphate (DAP) at a fixed price reflecting
market prices as of August 27, 2004. The contracted price
is in the range of $200-$260 per ton depending on which LESCO
facility the product is to be delivered. |
| |
|
(e) |
|
In 2003, the Company sold its investment in Commercial Turf
Products, Ltd. to MTD Consumer Group, Inc. Concurrently with the
sale, the Company entered into a five-year supply agreement with
CTP and MTD requiring minimum annual equipment purchases. |
| |
|
(f) |
|
Other commitments include computer hardware and software
maintenance commitments, hardware leases and telecommunications
contracts. |
31
Critical Accounting Policies and Estimates
Our consolidated financial statements are prepared in accordance
with accounting principles generally accepted in the United
States. The preparation of these financial statements requires
us to make estimates and judgments that affect the reported
amounts of assets, liabilities, revenues and expenses, and
related disclosure of contingent assets and liabilities. On an
on-going basis, we evaluate our estimates, including those
related to the allowance for doubtful accounts, inventories,
intangible assets, long-lived assets, income taxes, and
contingencies and litigation. We base our estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results
of which form the basis for making judgments about the carrying
values of assets and liabilities that are not readily apparent
from other sources. Management has discussed the development and
selection of the critical accounting estimates, and the
disclosures made herein, with the Audit Committee of the Board
of Directors and its external auditors. Actual results may
differ from these estimates under different assumptions or
conditions.
The Notes to Consolidated Financial Statements and this
discussion and analysis of financial condition contain various
references and disclosures concerning our accounting policies.
Additionally, we have identified each of the following as a
“critical accounting policy,” either because it has
the potential to have a significant impact on our consolidated
financial statements, because of the significance of the
financial item to which it relates, or because it requires
judgment and estimation due to the uncertainty involved in
measuring at a specific point in time events which will be
settled in the future.
Revenue Recognition
We recognize revenue when goods are shipped to the customer and
title and risk of loss passes to the customer. We have consigned
inventory agreements on certain products. We report 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.” Additionally, we
have agency agreements with vendors for which we recognize sales
“net” as an agent. Sales of consigned inventory were
$41.3 million and $38.9 million for the years ended
December 31, 2004 and 2003, respectively. Agency
commissions included in net sales were $0.5 million and $0
for the years ended December 31, 2004 and 2003,
respectively.
Allowance for Doubtful Accounts
Accounts receivable consists primarily of amounts due from
vendors under purchase rebate, cooperative advertising and other
contractual programs and trade receivables not financed through
outside programs. The Company earns product discounts under
various supplier rebate programs, which are recorded as accounts
receivable and credited to inventory valuation reserves when
earned. The Company provides for expected losses from all owned
and recourse accounts in the allowance for doubtful accounts.
Expected losses are estimated based upon the number of days the
accounts are past due, historical loss experience of the
Company, historical loss experience of credit portfolios with
characteristics similar to the Company’s portfolio and the
current business environment.
Inventories
Inventories are valued principally at the lower of cost (average
cost method) or market. Procurement, warehousing and
distribution costs are capitalized to inventory on hand and
expensed to distribution cost when the inventory is sold. Vendor
rebates earned on purchases are recorded as a reduction to
inventory on hand and recognized when the inventory is sold. We
have an inventory life cycle program which requires the
classification of all Stock Keeping Units (“SKUs”)
into one of five categories: active, watch, phase out,
discontinued and liquidated. SKUs identified as discontinued
will be progressively marked-down to expected net realizable
value over specific periods until the costs are marked down to
zero. At that point, the products are liquidated and purged from
the inventory system. Estimated net realizable value of 20% of
cost is based on historical sales of discontinued inventory. At
December 31, 2004, a 1% change in net realizable value of
current discontinued inventory would affect the reserve by
approximately $6,000. We maintain a reserve for inventory shrink
on a specific location basis, based on historical Company-wide
experience of 0.2% of sales
32
until the location obtains two physical inventory audits
performed by a third-party inventory control organization. The
site-specific reserve rate is then adjusted to reflect the
average shrink rate from the two physical inventory counts.
Actual shrink at the time of each physical inventory count is
charged against the reserve. At December 31, 2004, a 0.1%
change in the rate of inventory shrink would have impacted the
reserve for shrink by approximately $200,000.
Income Taxes
The Company uses the liability method whereby income taxes are
recognized during the fiscal year in which transactions enter
into the determination of financial statement income. Deferred
tax assets and liabilities are recognized for the expected
future tax consequences of temporary differences between
financial statement and tax bases of assets and liabilities. The
Company assesses the recoverability of its deferred tax assets
in accordance with the provisions of Statement of Financial
Accounting Standards No. 109, “Accounting for Income
Taxes” (SFAS 109). In accordance with that standard,
the Company recorded a $6.1 million valuation allowance
equal to its net deferred tax assets, including amounts related
to its net operating loss carryforwards, as of December 31,
2004. The Company intends to maintain a full valuation allowance
for its net deferred tax assets until sufficient positive
evidence exists to support the reversal of some portion or the
remainder of the allowance. Until such time, the Company will
have no reported tax provision, net of valuation allowance
adjustments. Any future decision to reverse a portion or all of
the remaining valuation allowance will be based on consideration
of several factors including, but not limited to, the
Company’s expectations regarding future taxable income and
the Company’s cumulative income or loss in the then most
recent three-year period. In the event the Company was to
determine, based on the existence of sufficient positive
evidence, that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, a
reduction of the valuation allowance would increase income in
the period such determination was made. See Note 7 of Notes
to Consolidated Financial Statements of the Company for
additional information regarding income taxes.
Impairment of Long-Lived and Intangible Assets
The Company assesses the recoverability of its long-lived and
intangible assets by determining whether the amortization of the
remaining balance over its remaining useful life can be
recovered through undiscounted future operating cash flows. If
impairment exists, the carrying amount of the related asset is
reduced to fair value.
In September 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 142 (SFAS 142), “Goodwill and Other
Intangible Assets.” SFAS 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).
The Company adopted SFAS No. 142 effective
January 1, 2002. Upon adoption, the Company determined that
goodwill impairment existed. The impairment loss was measured by
evaluating the fair value of the goodwill using discounted cash
flow appraisal models. These models indicated that the goodwill
of $7.3 million was fully impaired. Upon the adoption of
SFAS 142, the Company wrote off all of its goodwill
recording a $4.6 million charge, representing the write-off
of $7.3 million of goodwill net of a tax benefit of
$2.7 million, as a cumulative effect of accounting change
as of January 1, 2002.
Accrued Liabilities
Certain accrued liabilities, including employee health insurance
and workers’ compensation, are estimated based on
historical experience and lag analysis due to the difference
between the time the expense is incurred and when the expense is
paid. A valuation analysis is performed to estimate the accrual
required for property and casualty insurance claims expense.
Accrued environmental costs are estimated based on the
Company’s previous environmental contamination and
remediation experience along with site-specific conditions.
33
Forward Looking Statements
This Annual Report on Form 10-K and the documents
incorporated by reference herein, the Company’s Annual
Report to Shareholders, any Form 10-Q or any Form 8-K
of the Company, or any other written or oral statements made by
or on behalf of the Company may include or incorporate by
reference forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as
amended. Forward-looking statements represent the Company’s
expectations or beliefs concerning future events and include,
without limitation, the following: any statements regarding
future sales and gross profit, any statements regarding the
continuation of historical trends, any statements regarding the
sufficiency of the Company’s cash balances and cash
generated from operating and financing activities for the
Company’s future liquidity and capital resources, and any
statements regarding the Company’s plans to open new
Service Centers. Without limiting the foregoing, the words
“may,” “will,” “should,”
“expects,” “plans,” “anticipates,”
“estimates,” “believes,” “thinks,”
“continues,” “indicates,”
“outlook,” “looks,” “goals,”
“initiatives,” “projects,” and similar
expressions are intended to identify forward-looking statements.
The forward-looking statements, which speak only as of the date
the statement was made, are subject to risks, uncertainties and
other factors that could cause actual results to differ
materially from those stated, projected or implied in the
forward-looking statements. Except to the limited extent
required by applicable law, the Company undertakes no obligation
to update or revise any forward-looking statements, whether as a
result of new information, future events, or otherwise.
The Company’s actual results could differ materially from
those stated or implied in the forward-looking statements as a
result of, among other things, the following:
|
|
|
| |
• |
Weather conditions in North America and, to a lesser extent
Europe, which could have a significant impact on the timing of
sales in the spring selling season and overall annual sales; |
| |
| |
• |
Local, state, federal and foreign laws and regulations relating
to environmental factors, which could increase the
Company’s costs of doing business and limit its ability to
introduce new products; |
| |
| |
• |
Uncertainties relating to general economic, business and
industry conditions, including, but not limited to, continued
softness in demand in the golf industry and the economy in
general which affects consumers’ willingness to use
professional landscapers; |
| |
| |
• |
Changes to the presentation of financial results and position
resulting from adoption of new accounting principles or from the
advice of the Company’s independent auditors or the staff
of the Securities and Exchange Commission; |
| |
| |
• |
Changes in government regulations or the Company’s failure
to comply with those regulations; |
| |
| |
• |
The costs and other effects of legal and administrative
proceedings; |
| |
| |
• |
Injury to person or property resulting from the Company’s
manufacture or sale of products; |
| |
| |
• |
Competitive factors in the Company’s business, including
pricing pressures; |
| |
| |
• |
Failure to retain or continue to attract senior management or
key personnel; |
| |
| |
• |
Difficulties or delay in the development, production,
manufacturing and marketing of new products; |
| |
| |
• |
Strikes and other labor disruptions; |
| |
| |
• |
Labor and employee benefit costs; |
| |
| |
• |
The Company’s ability to add new Service Centers in
accordance with its plans, which can be affected by local zoning
and other governmental regulations and its ability to find
favorable store locations, to negotiate favorable leases, to
hire qualified individuals to operate the Service Centers, and
to integrate new Service Centers into the Company’s systems; |
| |
| |
• |
The time it takes new Service Centers to reach profitability and
the possibility that new Service Centers will not be profitable
or as profitable as existing Service Centers; |
34
|
|
|
| |
• |
Fluctuations in the Company’s quarterly operating results
which have occurred in the past and may occur in the future
because of a variety of factors, including the effects of
seasonality, changes in the Company’s product mix and new
Service Center openings (with their concurrent pre-opening
expenses); |
| |
| |
• |
The Company’s credit facility, which contains restrictive
covenants that require the Company to maintain a fixed charge
coverage ratio and satisfy other conditions relating to the
payment of dividends and leasing activity; the Company’s
ability to meet this ratio, which can be affected by events
beyond the Company’s control; and the consequences of a
breach of any of these covenants, which could result in a
default under the Company’s credit facility and as a result
of which the lenders could elect to declare the applicable
outstanding indebtedness to be immediately due and payable; |
| |
| |
• |
Lack of availability or instability in the cost of raw
materials, such as urea, which affects the costs of certain
products; |
| |
| |
• |
The Company’s ability to impose price increases on
customers without a significant loss in revenues; |
| |
| |
• |
Potential rate increases by third-party carriers which affect
the cost of delivery of products; |
| |
| |
• |
The Company’s ability to consummate a transaction regarding
its manufacturing and distribution assets on acceptable
conditions; |
| |
| |
• |
The possibility that the Court could disagree with the
Company’s assessment of its liability to its former
methylene urea supplier; and |
| |
| |
• |
Other factors described in this Form 10-K or other
documents the Company files with the SEC. |
Item 7A. Quantitative
and Qualitative Disclosures about Market Risk
As part of our ongoing business, we are exposed to certain
market risks, including fluctuations in interest rates and
commodity prices. We have used derivative financial and other
instruments, where appropriate, to manage those risks. We do not
enter into transactions for trading or speculative purposes. As
of December 31, 2004, we do not have contracts outstanding
relative to interest rate risk. We do have certain supply
contracts that are discussed further under the heading
Contractual Obligations, Commitments and Off Balance Sheet
Arrangements of the MD&A.
Item 8. Consolidated
Financial Statements and Supplementary Data
The following consolidated financial statements of LESCO, Inc.
and the reports thereon of KPMG LLP and Ernst & Young LLP,
independent auditors, are set forth on the following pages,
which are included at the end of this report:
| |
|
|
|
|
|
Report of KPMG LLP Independent Auditors
|
|
|
F-1 |
|
|
Report of Ernst & Young LLP Independent Auditors
|
|
|
F-2 |
|
|
Consolidated Statements of Operations — Years ended
December 31, 2004, 2003 and 2002
|
|
|
F-3 |
|
|
Consolidated Balance Sheets — December 31, 2004
and 2003
|
|
|
F-4 |
|
|
Consolidated Statements of Cash Flows — Years ended
December 31, 2004, 2003 and 2002
|
|
|
F-5 |
|
|
Consolidated Statements of Shareholders’ Equity —
Years ended December 31, 2004, 2003 and 2002
|
|
|
F-6 |
|
|
Notes to Consolidated Financial Statements
|
|
|
F-7 |
|
|
|
| Item 9. |
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure |
On May 14, 2003, the Company, upon recommendation by the
Audit Committee and approval by its Board of Directors,
dismissed Ernst & Young LLP (“E&Y”) as its
independent auditors. On May 23, 2003,
35
the Company, upon recommendation by the Audit Committee and
approval by its Board of Directors, engaged KPMG LLP
(“KPMG”) as the Company’s principal independent
accountants to audit the consolidated financial statements of
the Company for the fiscal year ending December 31, 2003.
E&Y’s report on the consolidated financial statements
of the Company for the fiscal year ended December 31, 2002
did not contain an adverse opinion or disclaimer of opinion, and
was not qualified or modified as to uncertainty, audit scope or
accounting principles.
In connection with the audit for the fiscal year ended
December 31, 2002 and the subsequent interim period through
May 14, 2003, there were no disagreements (as that term is
defined in Item 304 (a)(1)(iv) of Regulation S-K)
between the Company and E&Y on any matter of accounting
principles or practices, financial statement disclosure, or
auditing scope or procedure, which disagreement, if not resolved
to the satisfaction of E&Y, would have caused E&Y to
make reference to the subject matter of the disagreement in
connection with its report. During the fiscal year ended
December 31, 2002 and the subsequent interim period through
May 14, 2003, there were no reportable events as defined in
Item 304(a)(1)(v) of Regulation S-K. Attached as
Exhibit 16.1 to the Company’s Current Report on
Form 8-K filed with the Securities and Exchange Commission
on May 21, 2003 is a copy of E&Y’s letter, dated
May 21, 2003, stating that it has no basis for disagreement
with the above statements.
During the fiscal year ended December 31, 2002 and the
subsequent interim period through May 14, 2003, neither the
Company nor anyone on its behalf consulted KPMG regarding either
(i) the application of accounting principles to any
specified transaction (completed or proposed) or the type of
audit report that might be rendered on the Company’s
financial statements or (ii) any matter that was the
subject of a disagreement as defined in Item 304(a)(1)(iv)
of Regulation S-K or any reportable event as defined in
Item 304(a)(1)(v) of Regulation S-K.
|
|
| Item 9A. |
Controls and Procedures |
Controls and Procedures
The Company performed an evaluation under the supervision, and
with the participation, of the Company’s management,
including the President and Chief Executive Officer and Senior
Vice President and Chief Financial Officer, of the effectiveness
of the Company’s disclosure controls and procedures as of
the end of the period covered by this report. Based on that
evaluation, the Company’s management, including the Chief
Executive Officer and Senior Vice President and Chief Financial
Officer, concluded that the Company’s disclosure controls
and procedures were effective in ensuring that material
information relating to the Company with respect to the period
covered by this Annual Report was recorded, processed,
summarized and reported on a timely basis.
During the fourth quarter, management did not identify any
significant changes in the Company’s internal controls in
connection with its evaluation thereof that have materially
affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting.
Management’s Annual Report on Internal Control over
Financial Reporting
Pursuant to the exemption provided by Release No. 50754
issued by the Securities and Exchange Commission on
November 30, 2004, the Company has not provided in this
Annual Report on Form 10-K a report by the Company’s
management on the Company’s internal control over financial
reporting (as required by Item 308(a) of SEC
Regulation S-K) or the related attestation report of the
Company’s public accounting firm (as required by
Item 308(b) of SEC Regulation S-K). As permitted by
Release No. 50754, the Company intends to provide these
reports in an amendment to this Annual Report on Form 10-K
to be filed by the Company not later than April 30, 2005.
36
PART III
Item 10. Directors and
Executive Officers of the Registrant
Reference is made to the information concerning our directors,
members of our Audit Committee and audit committee financial
expert set forth under the captions “Election of
Directors” and “Business Experience of Nominees for
Director” in the Proxy Statement, which information is
incorporated herein by reference.
The information required with respect to executive officers is
set forth in Part I of this Form 10-K under the
heading “Executive Officers of the Registrant.”
Officers are elected annually and serve at the pleasure of the
Board of Directors.
We have adopted a written code of ethics that applies to our
senior financial officers, including our President and Chief
Executive Officer, Chief Financial Officer and Treasurer,
Controller, and Chief Internal Auditor. This code is available
on our website at www.lesco.com and is filed as Exhibit 14
to this Form 10-K.
Item 11. Executive
Compensation
Reference is made to the information set forth under the caption
“Executive Compensation” in the Proxy Statement, which
information is incorporated herein by reference.
|
|
| Item 12. |
Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters |
Reference is made to the information set forth under the caption
“Security Ownership of Certain Beneficial Owners and
Management” in the Proxy Statement, which information is
incorporated herein by reference.
Equity Compensation Plan Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
COL. A | |
|
COL. B | |
|
COL. C | |
| |
|
| |
|
| |
|
| |
| |
|
Number of | |
|
|
|
Number of securities | |
| |
|
securities to be | |
|
|
|
remaining available for | |
| |
|
issued upon | |
|
|
|
future issuance under | |
| |
|
exercise of | |
|
Weighted-average | |
|
equity compensation | |
| |
|
outstanding | |
|
exercise price of | |
|
plans (excluding | |
| |
|
options, warrants | |
|
outstanding options, | |
|
securities reflected in | |
| Plan Category |
|
and rights | |
|
warrants and rights | |
|
column (A)) | |
| |
|
| |
|
| |
|
| |
|
Equity compensation plans approved by security holders
|
|
|
1,272,374 |
|
|
$ |
11.89 |
|
|
|
568,514 |
|
|
Equity compensation plans not approved by security holders(1)
|
|
|
348,516 |
|
|
|
10.64 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,620,890 |
|
|
$ |
11.62 |
|
|
|
568,514 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
See Note 9 to Consolidated Financial Statements. |
Item 13. Certain
Relationships and Related Transactions
Reference is made to the information set forth under the caption
“Certain Transactions” in the Proxy Statement, which
information is incorporated herein by reference.
Item 14. Principal
Accountant Fees and Services
Reference is made to the information set forth under the caption
“Independent Auditors” in the Proxy Statement, which
information is incorporated herein by reference.
37
PART IV
Item 15. Exhibits,
Financial Statement Schedules and Reports on
Form 8-K
(a)(1) and (2) Financial Statements and Financial
Statement Schedules
The following financial statements of LESCO, Inc. are included
in Item 8:
Consolidated Statements of Operations — Years ended
December 31, 2004, 2003 and 2002
Consolidated Balance Sheets — December 31, 2004
and 2003
Consolidated Statements of Cash Flows — Years ended
December 31, 2004, 2003 and 2002
Consolidated Statements of Shareholders’ Equity —
Years ended December 31, 2004, 2003 and 2002
Notes to Consolidated Financial Statements
The following financial statement schedule is included herewith:
Schedule II — Valuation and Qualifying Accounts
— December 31, 2004, 2003 and 2002
All other schedules for which provision is made in the
applicable accounting regulation of the Securities and Exchange
Commission are not required under the related instructions or
are inapplicable, and therefore have been omitted.
(3) See Exhibit Index following the signature page to
this report.
(b) Reports on Form 8-K
On December 21, 2004, the Company filed a report on
Form 8-K relating to the Company’s press release
announcing that it would record a fourth quarter charge related
to a supply contract.
On October 29, 2004, the Company filed a report on
Form 8-K relating to the Company’s press releases
announcing the Company’s losses due to hurricane and flood
damage in Florida and Ohio and the Company’s Earnings
Release for the third quarter ended September 30, 2004.
(c) Exhibits — See Exhibit Index
(d) Financial Statement Schedule
38
SCHEDULE II
VALUATION AND QUALIFYING ACCOUNTS
LESCO, INC.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| COL. A |
|
COL. B | |
|
COL. C | |
|
COL. D | |
|
COL. E | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
Additions | |
|
Deductions | |
|
|
| |
|
|
|
| |
|
| |
|
|
| |
|
Balance at | |
|
Charged to | |
|
Charged to | |
|
|
|
Balance | |
| |
|
Beginning | |
|
Costs and | |
|
Other Accounts — | |
|
Costs | |
|
at End | |
| Description |
|
of Period | |
|
Expenses | |
|
Describe | |
|
Incurred | |
|
of Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts — Reserve for
discontinued inventory
|
|
$ |
222,000 |
|
|
$ |
363,000 |
|
|
|
|
|
|
$ |
(319,000 |
)(1) |
|
$ |
266,000 |
|
|
Year Ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts — Reserve for
discontinued inventory
|
|
$ |
1,034,000 |
|
|
$ |
64,000 |
|
|
|
|
|
|
$ |
(876,000 |
)(1) |
|
$ |
222,000 |
|
|
Year Ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts — Reserve for
discontinued inventory
|
|
$ |
1,837,000 |
|
|
$ |
9,875,000 |
|
|
|
|
|
|
$ |
(10,678,000 |
)(1) |
|
$ |
1,034,000 |
|
|
|
| (1) |
Reserve is reduced as discontinued inventory is sold or is
otherwise disposed. See Note 2 to Consolidated Financial
Statements. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| COL. A |
|
COL. B | |
|
COL. C | |
|
COL. D | |
|
COL. E | |
| |
|
| |
|
| |
|
| |
|
| |
| |
|
|
|
Additions | |
|
Deductions | |
|
|
| |
|
|
|
| |
|
| |
|
|
| |
|
Balance at | |
|
Charged to | |
|
|
|
|
|
|
| |
|
Beginning | |
|
Costs | |
|
Charged to | |
|
|
|
Balance at | |
| |
|
of | |
|
and | |
|
Other Accounts — | |
|
Costs | |
|
End of | |
| Description |
|
Period | |
|
Expenses | |
|
Describe | |
|
Incurred | |
|
Period | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Year Ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts — Reserve for
uncollectible trade receivables
|
|
$ |
4,886,000 |
|
|
$ |
677,000 |
|
|
|
|
|
|
$ |
(2,733,000 |
)(2) |
|
$ |
2,830,000 |
|
|
Year Ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deducted from assets accounts — Reserve for
uncollectible trade receivables
|
|
$ |
4,980,000 |
|
|
$ |
2,140,000 |
|
|
|
|
|
|
$ |
(2,234,000 |
)(2) |
|
$ |
4,886,000 |
|
|
Year Ended December 31, 2002:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Reserve for uncollectible trade receivables
|
|
$ |
4,370,000 |
|
|
$ |
2,243,000 |
|
|
|
|
|
|
$ |
(1,633,000 |
)(2) |
|
$ |
4,980,000 |
|
|
|
| (2) |
Reserve is reduced as account balances are written-off
throughout the year. See Note 2 to Consolidated Financial
Statements. |
39
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
| |
|
| |
Michael P. DiMino |
| |
President and Chief Executive Officer |
Date: March 16, 2005
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
| |
|
|
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
|
|
|
|
| |
/s/ Michael P. DiMino
Michael
P. DiMino |
|
President, Chief Executive Officer and Director
(Principal Executive Officer) |
|
March 16, 2005 |
| |
/s/ Jeffrey L.
Rutherford
Jeffrey
L. Rutherford |
|
Senior Vice President, Chief Financial Officer (Principal
Financial and Accounting Officer) |
|
March 16, 2005 |
| |
/s/ Ronald Best
Ronald
Best |
|
Director |
|
March 16, 2005 |
| |
/s/ Robert F. Burkhardt
Robert
F. Burkhardt |
|
Director |
|
March 16, 2005 |
| |
/s/ J. Martin Erbaugh
J.
Martin Erbaugh |
|
Director and Chairman of the Board |
|
March 16, 2005 |
| |
/s/ Michael E. Gibbons
Michael
E. Gibbons |
|
Director |
|
March 16, 2005 |
| |
/s/ Enrique Foster
Gittes
Enrique
Foster Gittes |
|
Director |
|
March 16, 2005 |
| |
/s/ Lee C. Howley
Lee
C. Howley |
|
Director |
|
March 16, 2005 |
| |
/s/ Christopher H. B.
Mills
Christopher
H. B. Mills |
|
Director |
|
March 16, 2005 |
| |
/s/ R. Lawrence Roth
R.
Lawrence Roth |
|
Director |
|
March 16, 2005 |
40
LESCO, INC.
Form 10-K
EXHIBIT INDEX
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description of Document |
| | |
|
|
| |
3 |
(a) |
|
Amended Articles of Incorporation of the Registrant (included as
an exhibit to the Registrant’s Form 10-Q for quarter
ended March 31, 2002 and incorporated herein by reference). |
| |
3 |
(b) |
|
Amended Code of Regulations of the Registrant (included as an
exhibit to the Registrant’s Form 10-K for fiscal year
2002 and incorporated herein by reference). |
| |
4 |
(a) |
|
Specimen certificate for the Registrant’s Common Shares
(included as an exhibit to the Registrant’s Registration
Statement on Form S-1 (File No. 2-90900) and
incorporated herein by reference). |
| |
4 |
(b) |
|
Reimbursement Agreement dated March 1, 1993, between
Pittsburgh National Bank and the Registrant (included as an
exhibit to the Registrant’s Form 10-K for fiscal year
2002 and incorporated herein by reference). |
| |
4 |
(c) |
|
Revolving Credit and Security Agreement dated December 30,
2003 by and among PNC Bank, National Association, as agent, and
the Registrant, LESCO Services, Inc., LESCO Technologies, LLC
and Aim Lawn & Garden Products Inc. |
| |
*10 |
(a) |
|
1992 Stock Incentive Plan (included as an exhibit to the
Registrant’s Form 10-K for fiscal year 2002 and
incorporated herein by reference). |
| |
*10 |
(b) |
|
Consulting Agreement by and between the Registrant and Robert F.
Burkhardt (included as an exhibit to the Registrant’s
Form 10-K for fiscal year 2002 and incorporated herein by
reference). |
| |
*10 |
(c) |
|
2000 Stock Incentive Plan (included as an exhibit to the
Registrant’s Form 10-K for fiscal year 2002 and
incorporated herein by reference). |
| |
*10 |
(d) |
|
2000 Broad Based Stock Option Plan, as amended and restated
(included as an exhibit to the Registrant’s Form 10-K
for fiscal year 2002 and incorporated herein by reference). |
| |
*10 |
(e) |
|
Employment Agreement by and between LESCO and Michael P. DiMino,
dated February 23, 2004 (included as an exhibit to the
Registrant’s Form 10-K for fiscal year 2003 and
incorporated herein by reference). |
| |
*10 |
(f) |
|
Employment Agreement by and between LESCO and Jeffrey L.
Rutherford (included as an exhibit to the Registrant’s
Form 10-K for fiscal year 2002 and incorporated herein by
reference). |
| |
*10 |
(g) |
|
Amended and Restated Retention Agreement by and between the
Registrant and Michael P. DiMino, dated November 1,
2003 (included as an exhibit to the Registrant’s
Form 10-K for fiscal year 2003 and incorporated herein by
reference). |
| |
*10 |
(h) |
|
Amended and Restated Retention Agreement by and between the
Registrant and Jeffrey L. Rutherford, dated November 1,
2003 (included as an exhibit to the Registrant’s
Form 10-K for fiscal year 2003 and incorporated herein by
reference). |
| |
*10 |
(i) |
|
Retention Agreement by and between LESCO and Steven E.
Cochran, dated November 1, 2003 (included as an exhibit to
the Registrant’s Form 10-K for fiscal year 2003 and
incorporated herein by reference). |
| |
*10 |
(j) |
|
Retention Agreement by and between LESCO and Bruce K.
Thorn, dated November 1, 2003 (included as an exhibit to
the Registrant’s Form 10-K for fiscal year 2003 and
incorporated herein by reference). |
| |
10 |
(k) |
|
Portfolio Purchase and Sale Agreement, by and among LESCO Inc.,
LESCO Services, Inc., Aim Lawn & Garden Products, Inc.,
LESCO Technologies, LLC and GE Capital, dated December 16,
2003 (included as an exhibit to the Registrant’s
Form 8-K report dated December 30, 2003 and
incorporated herein by reference). |
41
| |
|
|
|
|
| Exhibit | |
|
|
| Number | |
|
Description of Document |
| | |
|
|
| |
10 |
(l) |
|
Private Label Business Credit Program Agreement by and among
LESCO, Inc., LESCO Services, Inc., Aim Lawn & Garden
Products, Inc., LESCO Technologies, LLC and GE Capital, dated
December 16, 2003 (included as an exhibit to the
Registrant’s Form 8-K report dated December 30,
2003 and incorporated herein by reference). |
| |
10 |
(m) |
|
First Amendment to Private Label Business Credit Program
Agreement, dated December 29, 2003 (included as an exhibit
to the Registrant’s Form 8-K report dated
December 30, 2003 and incorporated herein by reference). |
| |
10 |
(n) |
|
Assignment & Assumption of Lease (included as an exhibit to
the Registrant’s Form 10-Q for quarter ended
September 30, 2004 and incorporated herein by reference). |
| |
10 |
(o) |
|
Consent of Landlord’s Lender (included as an exhibit to the
Registrant’s Form 10-Q for quarter ended
September 30, 2004 and incorporated herein by reference). |
| |
*10 |
(p) |
|
LESCO Bonus Plan (included as an exhibit to the
Registrant’s Form 8-K report dated March 3, 2005
and incorporated herein by reference). |
| |
*10 |
(q) |
|
Form of Restricted Stock Award Agreement |
| |
14 |
|
|
Code of Ethics. |
| |
21 |
|
|
Subsidiaries of the registrant. |
| |
23 |
(a) |
|
Consent of KPMG LLP Independent Registered Public Accounting
Firm. |
| |
23 |
(b) |
|
Consent of Ernst & Young LLP Independent Registered Public
Accounting Firm. |
| |
31 |
(a) |
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a). |
| |
31 |
(b) |
|
Certification Pursuant to Rule 13a-14(a)/15d-14(a). |
| |
32 |
(a) |
|
Certification Pursuant to 18 U.S.C. Section 1350. |
| |
32 |
(b) |
|
Certification Pursuant to 18 U.S.C. Section 1350. |
|
|
| * |
Management contract or compensatory plan or arrangement. |
42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
LESCO, Inc.,
To the Board of Directors and Shareholders
We have audited the accompanying consolidated balance sheet of
LESCO, Inc. and subsidiaries as of December 31, 2004 and
2003, and the related consolidated statements of operations,
stockholders’ equity and cash flows for each of the years
ended December 31, 2004 and 2003. In connection with our
audits of the consolidated financial statements, we have also
audited the financial statement schedule listed in the index at
Item 15(a) for the years ended December 31, 2004 and
2003. These consolidated financial statements and financial
statement schedule are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedule based on our audits. The accompanying consolidated
financial statements and financial statement schedule of LESCO,
Inc. as of December 31, 2002, were audited by other
auditors whose report, dated February 1, 2003, on those
statements was unqualified and included an explanatory paragraph
that described the adoption of the provisions of Statement of
Financial Accounting Standards No. 142, Goodwill and
other Intangible Assets, effective January 1, 2002
discussed in Note 2 to the consolidated financial
statements.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the financial
position of LESCO, Inc. and subsidiaries as of December 31,
2004 and 2003, and the results of their operations and their
cash flows for each of the years ended December 31, 2004
and 2003, in conformity with U.S. generally accepted accounting
principles. Also in our opinion, the related financial statement
schedule, when considered in relation to the basic consolidated
financial statements taken as a whole, present fairly, in all
material respects, the information set forth therein.
March 11, 2005
Cleveland, Ohio
F-1
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
LESCO, Inc.
Board of Directors and Shareholders LESCO, Inc.
We have audited the accompanying consolidated balance sheet of
LESCO, Inc. as of December 31, 2002 and the related
consolidated statements of operations, shareholders’
equity, and cash flows for the year then ended. Our audit also
included the financial statement schedule listed in the index at
Item 15(a) as it relates to information as of
December 31, 2002 and for the year then ended. These
financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an
opinion on these financial statements and schedule based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above
present fairly, in all material respects, the consolidated
financial position of LESCO, Inc. at December 31, 2002, and
the consolidated results of its operations and its cash flows
for the year ended December 31, 2002, in conformity with
U.S. generally accepted accounting principles. Also, in our
opinion, the related financial statement schedule as it relates
to information as of December 31, 2002 and for the year
then ended, when considered in relation to the basic financial
statements taken as a whole, presents fairly in all material
respects the information set forth therein.
As discussed in Note 2 to the consolidated financial statements,
the Company adopted the provisions of Statement of Financial
Accounting Standards No. 142, “Goodwill and Other
Intangible Assets,” effective January 1, 2002.
Cleveland, Ohio
February 1, 2003
F-2
LESCO, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in thousands, except per share data) |
|
| |
|
| |
|
| |
|
Net sales
|
|
$ |
561,041 |
|
|
$ |
523,489 |
|
|
$ |
511,705 |
|
| |
Cost of product
|
|
|
(375,896 |
) |
|
|
(350,476 |
) |
|
|
(341,268 |
) |
| |
Cost of inventory markdown — contract termination
(Note 15)
|
|
|
(799 |
) |
|
|
— |
|
|
|
— |
|
| |
Cost of inventory markdown (Note 4)
|
|
|
— |
|
|
|
— |
|
|
|
(9,225 |
) |
| |
Distribution cost
|
|
|
(45,844 |
) |
|
|
(47,669 |
) |
|
|
(44,201 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Gross profit on sales
|
|
|
138,502 |
|
|
|
125,344 |
|
|
|
117,011 |
|
| |
Selling expense
|
|
|
(90,505 |
) |
|
|
(84,713 |
) |
|
|
(78,987 |
) |
| |
General & administrative expense
|
|
|
(28,326 |
) |
|
|
(29,389 |
) |
|
|
(30,591 |
) |
| |
Corporate relocation expense (Note 12)
|
|
|
(6,878 |
) |
|
|
— |
|
|
|
— |
|
| |
Hurricane/flood expense
|
|
|
(1,243 |
) |
|
|
— |
|
|
|
— |
|
| |
Vendor contract termination (Note 15)
|
|
|
(4,404 |
) |
|
|
— |
|
|
|
— |
|
| |
Merchant discounts and provision for doubtful accounts
|
|
|
(10,758 |
) |
|
|
(3,045 |
) |
|
|
(2,363 |
) |
| |
Early retirement of debt (Note 6)
|
|
|
— |
|
|
|
(2,333 |
) |
|
|
(4,550 |
) |
| |
Loss from sale of accounts receivable (Note 3)
|
|
|
— |
|
|
|
(4,626 |
) |
|
|
— |
|
| |
Asset rationalization (Note 13)
|
|
|
— |
|
|
|
— |
|
|
|
(12,044 |
) |
| |
Pre-opening expense
|
|
|
(770 |
) |
|
|
(601 |
) |
|
|
— |
|
| |
Other expense
|
|
|
(664 |
) |
|
|
(1,065 |
) |
|
|
(3,627 |
) |
| |
Other income
|
|
|
508 |
|
|
|
1,521 |
|
|
|
812 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before interest and taxes
|
|
|
(4,538 |
) |
|
|
1,093 |
|
|
|
(14,339 |
) |
|
Interest expense, net
|
|
|
(747 |
) |
|
|
(4,730 |
) |
|
|
(4,899 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss before taxes and cumulative effect of accounting change
|
|
|
(5,285 |
) |
|
|
(3,637 |
) |
|
|
(19,238 |
) |
|
Income tax (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Current
|
|
|
(340 |
) |
|
|
1,452 |
|
|
|
6,376 |
|
| |
Deferred
|
|
|
2,363 |
|
|
|
(270 |
) |
|
|
— |
|
| |
Change in valuation allowance
|
|
|
(2,363 |
) |
|
|
(2,816 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
|
(340 |
) |
|
|
(1,634 |
) |
|
|
6,376 |
|
| |
|
|
|
|
|
|
|
|
|
|
Loss before cumulative effect of accounting change
|
|
|
(5,625 |
) |
|
|
(5,271 |
) |
|
|
(12,862 |
) |
|
Cumulative effect of accounting change for goodwill charge,
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
net of tax benefit of $2,735 (Note 2)
|
|
|
— |
|
|
|
— |
|
|
|
(4,597 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$ |
(5,625 |
) |
|
$ |
(5,271 |
) |
|
$ |
(17,459 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss per common share before cumulative effect of accounting
change:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(1.52 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(1.52 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change per diluted common share
|
|
|
— |
|
|
|
— |
|
|
|
(0.54 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss per common share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(2.06 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(2.06 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Average number of common shares and common share equivalents
outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
|
8,696,356 |
|
|
|
8,550,414 |
|
|
|
8,519,789 |
|
| |
|
|
|
|
|
|
|
|
|
| |
Basic
|
|
|
8,696,356 |
|
|
|
8,550,414 |
|
|
|
8,519,789 |
|
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-3
LESCO, INC.
CONSOLIDATED BALANCE SHEETS
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in thousands) |
|
| |
|
| |
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
| |
Cash and cash equivalents
|
|
$ |
8,101 |
|
|
$ |
7,505 |
|
| |
Accounts receivable
|
|
|
16,931 |
|
|
|
19,278 |
|
| |
Inventories
|
|
|
100,582 |
|
|
|
93,580 |
|
| |
Other
|
|
|
3,126 |
|
|
|
6,980 |
|
| |
|
|
|
|
|
|
| |
|
TOTAL CURRENT ASSETS
|
|
|
128,740 |
|
|
|
127,343 |
|
|
Property, plant and equipment, net
|
|
|
26,019 |
|
|
|
31,481 |
|
|
Other
|
|
|
1,234 |
|
|
|
2,541 |
|
| |
|
|
|
|
|
|
| |
|
$ |
155,993 |
|
|
$ |
161,365 |
|
| |
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
| |
Accounts payable
|
|
$ |
56,371 |
|
|
$ |
50,431 |
|
| |
Accrued liabilities
|
|
|
24,184 |
|
|
|
18,069 |
|
| |
Revolving credit facility
|
|
|
7,303 |
|
|
|
15,513 |
|
| |
Current portion of debt
|
|
|
— |
|
|
|
28 |
|
| |
|
|
|
|
|
|
| |
|
TOTAL CURRENT LIABILITIES
|
|
|
87,858 |
|
|
|
84,041 |
|
|
Long-term debt
|
|
|
— |
|
|
|
5,875 |
|
|
Deferred — other
|
|
|
1,612 |
|
|
|
179 |
|
| |
|
|
|
|
|
|
| |
|
TOTAL LIABILITIES
|
|
|
89,470 |
|
|
|
90,095 |
|
|
SHAREHOLDERS’ EQUITY:
|
|
|
|
|
|
|
|
|
| |
Common shares — without par value —
19,500,000 shares authorized; 8,697,194 shares issued and
outstanding at December 31, 2004; 8,668,914 shares issued
and outstanding at December 31, 2003
|
|
|
870 |
|
|
|
867 |
|
| |
Paid-in capital
|
|
|
34,846 |
|
|
|
34,619 |
|
| |
Retained earnings
|
|
|
31,637 |
|
|
|
37,262 |
|
| |
Unearned compensation
|
|
|
(830 |
) |
|
|
(1,478 |
) |
| |
|
|
|
|
|
|
| |
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
66,523 |
|
|
|
71,270 |
|
| |
|
|
|
|
|
|
| |
|
$ |
155,993 |
|
|
$ |
161,365 |
|
| |
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-4
LESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Net loss before cumulative effect of accounting change
|
|
$ |
(5,625 |
) |
|
$ |
(5,271 |
) |
|
$ |
(12,862 |
) |
| |
Adjustments to reconcile net loss to net cash provided by
(used in) operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation
|
|
|
7,289 |
|
|
|
7,724 |
|
|
|
8,483 |
|
| |
|
Amortization of deferred financing fees and other
|
|
|
168 |
|
|
|
1,043 |
|
|
|
1,062 |
|
| |
|
Asset rationalization expense
|
|
|
— |
|
|
|
— |
|
|
|
12,044 |
|
| |
|
Inventory markdown (Note 15)
|
|
|
799 |
|
|
|
— |
|
|
|
9,225 |
|
| |
|
Early retirement of debt expense (Note 6)
|
|
|
— |
|
|
|
2,333 |
|
|
|
4,550 |
|
| |
|
Loss from sale of accounts receivable (Note 3)
|
|
|
— |
|
|
|
4,626 |
|
|
|
— |
|
| |
|
Loss on sale/disposal of fixed assets
|
|
|
658 |
|
|
|
313 |
|
|
|
93 |
|
| |
|
Deferred income taxes
|
|
|
— |
|
|
|
2,351 |
|
|
|
(2,977 |
) |
| |
|
Increase in accounts receivable
|
|
|
(3,599 |
) |
|
|
(14,353 |
) |
|
|
(1,653 |
) |
| |
|
Sale (purchase) of accounts receivable
|
|
|
5,946 |
|
|
|
56,881 |
|
|
|
(31,200 |
) |
| |
|
Provision for uncollectible accounts receivable
|
|
|
— |
|
|
|
2,140 |
|
|
|
2,243 |
|
| |
|
Increase in inventories
|
|
|
(7,801 |
) |
|
|
(6,743 |
) |
|
|
(3,066 |
) |
| |
|
Increase in accounts payable
|
|
|
11,853 |
|
|
|
2,112 |
|
|
|
2,868 |
|
| |
|
Amortization of unearned compensation
|
|
|
607 |
|
|
|
87 |
|
|
|
— |
|
| |
|
Decrease (increase) in current income tax
|
|
|
3,961 |
|
|
|
(669 |
) |
|
|
390 |
|
| |
|
Increase (decrease) in other items
|
|
|
8,618 |
|
|
|
(684 |
) |
|
|
4,258 |
|
| |
|
|
|
|
|
|
|
|
|
| |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
|
|
|
22,874 |
|
|
|
51,890 |
|
|
|
(6,542 |
) |
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Proceeds on the sale of fixed assets
|
|
|
1,822 |
|
|
|
— |
|
|
|
1,387 |
|
| |
Purchase of property, plant and equipment
|
|
|
(4,345 |
) |
|
|
(5,580 |
) |
|
|
(2,660 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
NET CASH USED IN INVESTING ACTIVITIES
|
|
|
(2,523 |
) |
|
|
(5,580 |
) |
|
|
(1,273 |
) |
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Increase (decrease) in overdraft balances
|
|
|
(5,913 |
) |
|
|
9,866 |
|
|
|
(11,276 |
) |
| |
Proceeds from borrowings
|
|
|
647,187 |
|
|
|
604,183 |
|
|
|
622,703 |
|
| |
Reduction of borrowings
|
|
|
(661,300 |
) |
|
|
(651,194 |
) |
|
|
(605,387 |
) |
| |
Exercised stock options, net of treasury shares
|
|
|
271 |
|
|
|
23 |
|
|
|
101 |
|
| |
Deferred financing fees
|
|
|
— |
|
|
|
(416 |
) |
|
|
(2,000 |
) |
| |
Payment to terminate interest rate swap
|
|
|
— |
|
|
|
(1,248 |
) |
|
|
— |
|
| |
Repurchase of preferred stock
|
|
|
— |
|
|
|
(1,739 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES
|
|
|
(19,755 |
) |
|
|
(40,525 |
) |
|
|
4,141 |
|
| |
|
|
|
|
|
|
|
|
|
|
Net change in cash and cash equivalents
|
|
|
596 |
|
|
|
5,785 |
|
|
|
(3,674 |
) |
|
Cash and cash equivalents — Beginning of the period
|
|
|
7,505 |
|
|
|
1,720 |
|
|
|
5,394 |
|
| |
|
|
|
|
|
|
|
|
|
| |
CASH AND CASH EQUIVALENTS — END OF THE PERIOD
|
|
$ |
8,101 |
|
|
$ |
7,505 |
|
|
$ |
1,720 |
|
| |
|
|
|
|
|
|
|
|
|
|
Supplemental disclosure of cash flow information:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Interest paid, including letters of credit and unused facility
fees
|
|
$ |
(776 |
) |
|
$ |
(5,579 |
) |
|
$ |
(4,351 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
Income taxes refunded (paid)
|
|
$ |
3,575 |
|
|
$ |
68 |
|
|
$ |
(19 |
) |
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-5
LESCO, INC.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated | |
|
|
| |
|
Preferred Shares | |
|
Common Shares | |
|
|
|
|
|
|
|
|
|
Other | |
|
|
| |
|
| |
|
| |
|
Paid-in | |
|
Retained | |
|
Treasury | |
|
Unearned | |
|
Comprehensive | |
|
|
| |
|
Shares | |
|
Dollars | |
|
Shares | |
|
Dollars | |
|
Capital | |
|
Earnings | |
|
Shares | |
|
Compensation | |
|
Loss | |
|
Total | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Balance at January 1, 2002
|
|
|
— |
|
|
$ |
— |
|
|
|
8,628,563 |
|
|
$ |
863 |
|
|
$ |
34,800 |
|
|
$ |
60,208 |
|
|
$ |
(1,263 |
) |
|
$ |
(692 |
) |
|
$ |
— |
|
|
$ |
93,916 |
|
| |
Exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
9,000 |
|
|
|
1 |
|
|
|
101 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
102 |
|
| |
Forfeiture of restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(692 |
) |
|
|
692 |
|
|
|
— |
|
|
|
— |
|
| |
Issuance of preferred stock
|
|
|
1,523 |
|
|
|
1,523 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,523 |
|
| |
Preferred stock dividend
|
|
|
107 |
|
|
|
107 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(107 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Change in value of interest rate swap
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,149 |
) |
|
|
(1,149 |
) |
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17,459 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17,459 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002
|
|
|
1,630 |
|
|
$ |
1,630 |
|
|
|
8,637,563 |
|
|
$ |
864 |
|
|
$ |
34,901 |
|
|
$ |
42,642 |
|
|
$ |
(1,955 |
) |
|
$ |
— |
|
|
$ |
(1,149 |
) |
|
$ |
76,933 |
|
| |
Exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
15,000 |
|
|
|
1 |
|
|
|
109 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
110 |
|
| |
Issuance of restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
16,351 |
|
|
|
2 |
|
|
|
(391 |
) |
|
|
— |
|
|
|
1,955 |
|
|
|
(1,565 |
) |
|
|
— |
|
|
|
1 |
|
| |
Amortization of unearned compensation related to restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
87 |
|
|
|
— |
|
|
|
87 |
|
| |
Preferred stock dividend
|
|
|
109 |
|
|
|
109 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(109 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
Repurchase of preferred stock
|
|
|
(1,739 |
) |
|
|
(1,739 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,739 |
) |
| |
Change in value of interest rate swap
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
228 |
|
|
|
228 |
|
| |
Termination of interest rate swap
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
921 |
|
|
|
921 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,271 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,271 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
— |
|
|
$ |
— |
|
|
|
8,668,914 |
|
|
$ |
867 |
|
|
$ |
34,619 |
|
|
$ |
37,262 |
|
|
$ |
— |
|
|
$ |
(1,478 |
) |
|
$ |
— |
|
|
$ |
71,270 |
|
| |
Exercise of stock options
|
|
|
— |
|
|
|
— |
|
|
|
33,500 |
|
|
|
4 |
|
|
|
268 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
272 |
|
| |
Issuance of restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
14,780 |
|
|
|
1 |
|
|
|
197 |
|
|
|
— |
|
|
|
— |
|
|
|
(199 |
) |
|
|
— |
|
|
|
(1 |
) |
| |
Forfeiture of restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
(20,000 |
) |
|
|
(2 |
) |
|
|
(238 |
) |
|
|
— |
|
|
|
— |
|
|
|
240 |
|
|
|
— |
|
|
|
— |
|
| |
Amortization of unearned compensation related to restricted stock
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
607 |
|
|
|
— |
|
|
|
607 |
|
| |
Net loss
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,625 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,625 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
— |
|
|
$ |
— |
|
|
|
8,697,194 |
|
|
$ |
870 |
|
|
$ |
34,846 |
|
|
$ |
31,637 |
|
|
$ |
— |
|
|
$ |
(830 |
) |
|
$ |
— |
|
|
$ |
66,523 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive loss is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended | |
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
Net loss
|
|
$ |
(5,625 |
) |
|
$ |
(5,271 |
) |
|
$ |
(17,459 |
) |
|
Change in value of interest rate swap
|
|
|
— |
|
|
|
228 |
|
|
|
(1,149 |
) |
|
Termination of interest rate swap
|
|
|
— |
|
|
|
921 |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Comprehensive loss
|
|
$ |
(5,625 |
) |
|
$ |
(4,122 |
) |
|
$ |
(18,608 |
) |
| |
|
|
|
|
|
|
|
|
|
See Notes to Consolidated Financial Statements.
F-6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Description of
Business and Segment Information
LESCO, Inc. (“LESCO” or “The Company”) is
the largest provider of products for the professional turf care
segment of the green industry. Products distributed include turf
control products, fertilizer, combination fertilizer and control
products (combination products), grass seed and equipment. The
Company distributes products through 274 Service Centers, 72
Stores-on-Wheels, 74 direct sales representatives and other
direct sales efforts. The Company operates eight distribution
hubs, three fertilizer blending facilities and a grass seed
processing plant.
Segment Information: The Selling and Support segments
reported below are the segments of the Company for which
separate information is available and for which operating
results are evaluated regularly by the Chief Executive Officer
in deciding how to allocate resources and in assessing
performance.
The Company maintains separate operating statements (Four-Wall
P&Ls) for each selling location. These Four-Wall P&Ls
include the sales and cost of product and operating expenses
necessary to operate the individual selling locations. The
Selling segment operating results reflect the aggregate
Four-Wall P&Ls of the selling locations adjusted for costs
of zone and regional management, sales commission expense and
the portion of merchant discounts and provision for doubtful
accounts not previously charged to the Four-Wall P&Ls.
Prior to 2003, Four-Wall P&Ls were not maintained using the
current format. To provide comparable segment results, certain
allocations, particularly related to distribution expense, were
estimated and reflected for 2002 based upon 2003 results.
The Support segment represents the operating results and
invested capital of all non-selling locations including
manufacturing facilities (blending facilities and seed
processing plant), distribution hubs and the corporate office.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
Net sales
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling
|
|
$ |
561,041 |
|
|
$ |
523,489 |
|
|
$ |
511,705 |
|
| |
Support
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
561,041 |
|
|
$ |
523,489 |
|
|
$ |
511,705 |
|
| |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before interest and taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling
|
|
$ |
52,961 |
|
|
$ |
58,846 |
|
|
$ |
68,511 |
|
| |
Support
|
|
|
(57,499 |
) |
|
|
(57,753 |
) |
|
|
(82,850 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
(4,538 |
) |
|
$ |
1,093 |
|
|
$ |
(14,339 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Capital expenditures
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling
|
|
$ |
1,263 |
|
|
$ |
3,249 |
|
|
$ |
304 |
|
| |
Support
|
|
|
3,082 |
|
|
|
2,331 |
|
|
|
2,356 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
4,345 |
|
|
$ |
5,580 |
|
|
$ |
2,660 |
|
| |
|
|
|
|
|
|
|
|
|
|
Depreciation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling
|
|
$ |
1,118 |
|
|
$ |
750 |
|
|
$ |
832 |
|
| |
Support
|
|
|
6,171 |
|
|
|
6,974 |
|
|
|
7,651 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
7,289 |
|
|
$ |
7,724 |
|
|
$ |
8,483 |
|
| |
|
|
|
|
|
|
|
|
|
F-7
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
Intangible asset amortization expense
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
| |
Support
|
|
|
168 |
|
|
|
1,043 |
|
|
|
1,062 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
168 |
|
|
$ |
1,043 |
|
|
$ |
1,062 |
|
| |
|
|
|
|
|
|
|
|
|
|
Identifiable assets
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Selling
|
|
$ |
71,644 |
|
|
$ |
70,392 |
|
|
$ |
113,238 |
|
| |
Support
|
|
|
84,349 |
|
|
|
90,973 |
|
|
|
91,494 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
155,993 |
|
|
$ |
161,365 |
|
|
$ |
204,732 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Note 2. |
Summary of Significant Accounting Policies |
Principles of Consolidation: The consolidated financial
statements include the accounts of LESCO and its subsidiaries
after elimination of intercompany transactions and accounts.
Use of Estimates: The preparation of financial statements
in conformity with accounting principles generally accepted in
the United States of America requires management to make
estimates and assumptions that affect the amounts reported in
the financial statements and footnotes thereto. Actual results
may differ from those estimates.
Revenue Recognition: The Company recognizes revenue when
goods are shipped and title and risk of loss passes to the
customer.
Cash and Cash Equivalents: Cash and cash equivalents
consist of cash on hand and highly liquid instruments with
original maturities of three months or less. Cash equivalents
include accounts receivable from multi-purpose credit programs,
such as American Express, Visa and MasterCard, and from the
private label business credit program with GE Capital Financial
Inc. (Note 3). Cash equivalents are carried at cost, which
approximates fair value.
Accounts Receivable: Accounts receivable consists
primarily of amounts due from vendors under purchase rebate,
cooperative advertising and other contractual programs and trade
receivables not financed through outside programs. The Company
earns product discounts under various supplier rebate programs,
which are recorded as accounts receivable and a reduction to the
cost of inventory when earned. The Company provides for expected
losses from all owned and recourse accounts in the allowance for
doubtful accounts. Expected losses are estimated based upon the
number of days the accounts are past due, historical loss
experience of the Company, historical loss experience of credit
portfolios with characteristics similar to the Company’s
portfolio and the current business environment.
Inventories: Inventories are valued at the lower of cost
(average cost method) or market. Consignment inventory is
considered purchased at time of sale while, concurrently, cost
of product is recognized. Procurement, warehousing and
distribution costs are capitalized to inventory on hand and
expensed to distribution cost when the inventory is sold. A
markdown reserve is provided for markdown of inventory to net
realizable value. Reserves are recorded for expected inventory
shrink and earned supplier discounts of inventory remaining on
hand. Throughout the year, the Company performs annual physical
inventories at all of its locations. For periods subsequent to
the date of each location’s last physical inventory, a
reserve for estimated shrinkage is provided based on various
factors including sales volume and the Company’s historical
shrink results.
Income Taxes: The Company uses the liability method
whereby income taxes are recognized during the fiscal year in
which transactions enter into the determination of financial
statement income. Deferred tax assets and liabilities are
recognized for the expected future tax consequences of temporary
differences between financial statement and tax bases of assets
and liabilities. The Company assesses the recoverability of its
deferred tax assets in accordance with the provisions of
Statement of Financial Accounting Standards
F-8
No. 109, “Accounting for Income Taxes”
(SFAS 109). In accordance with that standard, the Company
recorded a $6.1 million valuation allowance equal to its
net deferred tax assets, including amounts related to its net
operating loss carryforwards, as of December 31, 2004 and
$3.7 million at December 31, 2003. The Company intends
to maintain a full valuation allowance for its net deferred tax
assets until sufficient positive evidence exists to support the
reversal of some portion or the remainder of the allowance.
Until such time, the Company should have no reported tax
provision, net of valuation allowance adjustments. Any future
decision to reverse a portion or all of the remaining valuation
allowance will be based on consideration of several factors
including, but not limited to, the Company’s expectations
regarding future taxable income and the Company’s
cumulative income or loss in the then most recent three-year
period. In the event the Company was to determine, based on the
existence of sufficient positive evidence, that it would be able
to realize its deferred tax assets in the future in excess of
its net recorded amount, a reduction of the valuation allowance
would increase income in the period such determination was made.
See Note 7 for additional information regarding income
taxes.
Property, Plant and Equipment: Property, plant and
equipment are stated at cost and are depreciated using the
straight-line method over the estimated useful lives of the
respective assets. Buildings are depreciated over 15 to
20 years, and machinery, equipment and other depreciable
assets are depreciated over three to 12 years. Leasehold
improvements are depreciated over the life of the initial lease
term, which typically is five years. Expenditures for
maintenance and repairs are charged to expense as incurred.
Additions and improvements are capitalized.
Impairment of Long-Lived Assets: The Company assesses the
recoverability of its long-lived and intangible assets by
determining whether the amortization of the remaining balance
over its remaining useful life can be recovered through
undiscounted future operating cash flows. If impairment exists,
the carrying amount of the related asset is reduced to fair
value.
In September 2001, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 142 (SFAS 142), “Goodwill and Other
Intangible Assets.” SFAS 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. The Company adopted
SFAS No. 142 effective January 1, 2002. Upon
adoption, the Company determined that goodwill impairment
existed. The impairment loss was measured by evaluating the fair
value of the goodwill using discounted cash flow appraisal
models. These models indicated that the goodwill of
$7.3 million was fully impaired. Upon the adoption of
SFAS 142, the Company wrote off all its goodwill recording
a $4.6 million charge, which is the write-off of the
$7.3 million of goodwill net of a tax benefit of
$2.7 million, as a cumulative effect of accounting change
as of January 1, 2002.
Accrued Liabilities: Certain accrued liabilities,
including employee health insurance and workers’
compensation, are estimated based on historical experience and
lag analysis due to the difference between the time the expense
is incurred and when the expense is paid. A valuation analysis
is performed to estimate the accrual required for property and
casualty insurance claims expense. Accrued environmental costs
are estimated based on the Company’s previous environmental
contamination and remediation experience along with
site-specific conditions.
Advertising: Advertising costs are expensed as incurred.
There were no amounts capitalized as of December 31, 2003
and 2002. The Company and its vendors participate in cooperative
advertising programs in which the vendors reimburse the Company
for a portion of its advertising costs. Advertising expense, net
of vendor reimbursements, was $2,987,000, $2,537,000, and
$1,830,000 for fiscal years 2004, 2003 and 2002, respectively.
Net advertising expense is included in selling expense.
Financial Instruments: The carrying amount of financial
instruments, including cash and cash equivalents, accounts
receivable and accounts payable, approximated their fair value
as of December 31, 2004 and 2003 because of the relatively
short maturity of these instruments.
F-9
Earnings per Share: The Company presents both basic and
diluted earnings per share (EPS) amounts. Basic EPS is
calculated by dividing net loss, less the preferred dividend, if
any, by the weighted average number of common shares outstanding
during the year. Diluted EPS is based upon the weighted average
number of common and common equivalent shares outstanding during
the year utilizing the treasury stock method for stock options.
Common equivalent shares are excluded from the EPS computation
in periods in which they have an anti-dilutive effect. Stock
options for which the exercise price exceeds the average market
price over the period have an anti-dilutive effect on EPS and,
accordingly, are excluded from the calculation.
A reconciliation of net loss applicable to common stock and the
weighted average number of common and common equivalent shares
outstanding is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| (Dollars in thousands) |
|
|
|
|
|
|
|
Net loss
|
|
$ |
(5,625 |
) |
|
$ |
(5,271 |
) |
|
$ |
(17,459 |
) |
|
Preferred stock dividend
|
|
|
— |
|
|
|
(109 |
) |
|
|
(107 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stock
|
|
$ |
(5,625 |
) |
|
$ |
(5,380 |
) |
|
$ |
(17,566 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding (basic)
|
|
|
8,696,356 |
|
|
|
8,550,414 |
|
|
|
8,519,789 |
|
|
Weighted average dilutive stock options
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
|
Weighted average number of common and common equivalent shares
outstanding (diluted)
|
|
|
8,696,356 |
|
|
|
8,550,414 |
|
|
|
8,519,789 |
|
| |
|
|
|
|
|
|
|
|
|
Weighted average stock options of 246,850 for the year ended
December 31, 2004, and 139,569 and 192,391 for 2003 and
2002, respectively, were excluded from the dilutive EPS
calculation because they were anti-dilutive due to net losses.
Stock Options: The Company uses the intrinsic-value
method of accounting for stock-based awards granted to employees
and, accordingly, does not recognize compensation expense for
its stock-based awards to employees in the Consolidated
Statements of Operations.
The following table reflects pro forma net loss and loss per
share had the Company elected to adopt the fair value approach
of Statement of Financial Accounting Standards No. 123,
Accounting for Stock-Based Compensation:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| (Dollars in thousands, except per share data) |
|
|
|
|
|
|
|
Net loss as reported
|
|
$ |
(5,625 |
) |
|
$ |
(5,271 |
) |
|
$ |
(17,459 |
) |
|
Less: stock option expense
|
|
|
(499 |
) |
|
|
(627 |
) |
|
|
(1,051 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Pro forma net loss
|
|
$ |
(6,124 |
) |
|
$ |
(5,898 |
) |
|
$ |
(18,510 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Loss per diluted share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(2.06 |
) |
| |
Pro forma
|
|
$ |
(0.70 |
) |
|
$ |
(0.69 |
) |
|
$ |
(2.17 |
) |
|
Loss per basic share
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
As reported
|
|
$ |
(0.65 |
) |
|
$ |
(0.63 |
) |
|
$ |
(2.06 |
) |
| |
Pro forma
|
|
$ |
(0.70 |
) |
|
$ |
(0.69 |
) |
|
$ |
(2.17 |
) |
These pro forma amounts may not be representative of future
disclosures since the estimated fair value of stock options is
amortized to expense over the vesting period, and additional
options may be granted in future years.
F-10
The estimated fair value of each option granted is calculated
using the Black-Scholes option-pricing model. The weighted
average assumptions used in the model were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
|
Risk-free interest rate
|
|
|
3.20% |
|
|
|
1.12% |
|
|
|
4.25% |
|
|
Expected years until exercise
|
|
|
4 years |
|
|
|
4 years |
|
|
|
4 years |
|
|
Expected stock volatility
|
|
|
51.7% |
|
|
|
50.0% |
|
|
|
37.0% |
|
|
Dividend yield
|
|
|
0.0% |
|
|
|
0.0% |
|
|
|
0.0% |
|
The risk-free interest rate for 2004 was based on a five-year
treasury bill rate.
|
|
|
Recently Issued Accounting Pronouncements: |
SFAS 153: In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 153 (SFAS 153), Exchanges
of Nonmonetary Assets — An Amendment of APB Opinion
No. 29, Accounting for Certain Financial Instruments
with Characteristics of Both Liabilities and Equity.
SFAS 153 addresses the measurement of exchanges of
nonmonetary assets and amends APB No. 29, Accounting for
Nonmonetary Transactions. This statement is effective for
LESCO beginning with its third fiscal quarter in 2005. The
adoption of SFAS 153 is not expected to have a material
impact on the Company’s results of operations or financial
position.
SFAS 151: In November 2004, the FASB issued
Statement of Financial Accounting Standards No. 151
(SFAS 151), Inventory Costs — An Amendment of
ARB No. 43, Chapter 4 “Inventory
Pricing”. SFAS 151 amends and clarifies financial
accounting and reporting for abnormal amounts of idle facility
expense, freight, handling costs, and wasted material
(spoilage) under ARB No. 43. This statement is
effective for LESCO beginning with its third fiscal quarter in
2005. The adoption of SFAS 151 is not expected to have a
material impact on the Company’s results of operations or
financial position.
SFAS 123: In December 2004, the Financial Accounting
Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 123 (SFAS 123 —
revised), Share-Based Payments. This statement is a
revision of FASB No. 123 Accounting for Stock-Based
Compensation and supersedes APB Opinion No. 25,
Accounting for Stock Issued to Employees, and its related
implementation guidance. SFAS 123 establishes standards for
the accounting for transactions in which an entity exchanges its
equity instruments for goods or services. This statement is
effective for LESCO beginning with its third fiscal quarter in
2005. The adoption of SFAS 123(R) is expected to result in
stock option expense of approximately $0.5 million in 2005.
Reclassifications: Certain reclassifications have been
made in the 2003 and 2002 financial statements to conform to the
2004 presentation.
|
|
| Note 3. |
Accounts Receivable |
Accounts receivable consist of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in thousands) |
|
| |
|
| |
|
Supplier rebate programs
|
|
$ |
12,139 |
|
|
$ |
9,328 |
|
|
Trade receivables
|
|
|
|
|
|
|
|
|
| |
Recourse
|
|
|
14 |
|
|
|
5,751 |
|
| |
Owned — domestic
|
|
|
4,477 |
|
|
|
6,798 |
|
| |
Owned — international
|
|
|
1,848 |
|
|
|
1,578 |
|
|
Other
|
|
|
1,283 |
|
|
|
709 |
|
|
Allowance for doubtful accounts
|
|
|
(2,830 |
) |
|
|
(4,886 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
16,931 |
|
|
$ |
19,278 |
|
| |
|
|
|
|
|
|
F-11
The Company earns product discounts under various supplier
rebate programs, which are recorded as accounts receivable and a
reduction to the cost of inventory when earned. When the related
inventory is sold, the inventory valuation reserves are
recognized as reductions to cost of product.
On December 30, 2003, the Company sold a majority of its
trade accounts receivable portfolio to GE Capital Financial
Inc., dba GE Business Credit Services (“GEBCS”), for
cash proceeds of approximately $57 million. The transaction
resulted in a pre-tax charge of $4.6 million.
Concurrently with the sale, the Company and GEBCS entered a
private label business credit program agreement (Credit
Agreement). Under the Credit Agreement, GEBCS extends commercial
credit to qualified customers of LESCO and funds the program
sales, less program fees and discounts, within three business
days. The Credit Agreement also provides the Company the option
of extending deferred payment terms to customers through the
payment of incremental promotional discounts. The in-transit
funds are recognized by the Company as cash equivalents. The
program fees and discounts and promotional discounts are
recognized as merchant discounts in the Consolidated Statement
of Operations (Note 11). GEBCS is the exclusive owner of
the program accounts and, except for the recourse account
portfolio discussed below, bears all credit losses. The Credit
Agreement has a five-year term with automatic three-year
renewals unless either party terminates at least six months
prior to the end of the expiration of a term.
The owned domestic credit accounts are accounts that did not
qualify for sale to GEBCS or for the credit recourse portfolio.
LESCO has retained the ownership and management of the owned
domestic credit accounts.
The Credit Agreement does not allow for the ownership of
international credit accounts by GEBCS. As such, LESCO has
retained the ownership and management of international accounts.
All international accounts are denominated in U.S. dollars.
GEBCS has sole discretion under the Credit Agreement to approve
or decline prospective account holders. LESCO may request GEBCS
to include declined accounts in a portfolio of credit recourse
accounts. LESCO bears all credit losses on credit recourse
accounts and pays a fee to GEBCS to manage the credit recourse
portfolio. LESCO did not recognize the initial sale of recourse
accounts to GEBCS as of December 30, 2003. Therefore, all
recourse receivable balances that existed at December 30,
2003 (the date of the GEBCS transaction) are recognized as
accounts receivable by the Company, along with a corresponding
borrowing from GEBCS. Sales activity on recourse accounts
subsequent to December 30, 2003 is not recognized on the
Company’s balance sheet. A reconciliation of total recourse
account balances to the receivable portion owned by the Company
and recorded in the balance sheets is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in thousands) |
|
| |
|
| |
|
Total recourse account balances
|
|
$ |
4,679 |
|
|
$ |
5,751 |
|
|
Accounts owned by GEBCS
|
|
|
(4,665 |
) |
|
|
— |
|
| |
|
|
|
|
|
|
|
Recourse receivables owned by LESCO
|
|
$ |
14 |
|
|
$ |
5,751 |
|
| |
|
|
|
|
|
|
In the allowance for doubtful accounts, the Company provides for
expected losses from all owned receivables and GEBCS-owned
recourse accounts. Expected losses are estimated based upon the
number of days the accounts are past due, historical loss
experience of the Company, historical loss experience of credit
portfolios with characteristics similar to the Company’s
portfolio and the current business environment.
F-12
Inventories consist of the following:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in thousands) |
|
| |
|
| |
|
Finished goods and purchased inventories
|
|
|
|
|
|
|
|
|
| |
Selling locations
|
|
$ |
52,063 |
|
|
$ |
46,858 |
|
| |
Distribution hubs and plants
|
|
|
35,119 |
|
|
|
36,069 |
|
| |
Capitalized procurement, warehousing and distribution costs
|
|
|
8,512 |
|
|
|
6,681 |
|
| |
Less: Markdown, shrink and vendor discount reserves
|
|
|
(3,338 |
) |
|
|
(1,563 |
) |
| |
|
Inventory held on consignment
|
|
|
(6,919 |
) |
|
|
(5,832 |
) |
| |
|
|
|
|
|
|
| |
|
|
85,437 |
|
|
|
82,213 |
|
|
Raw Materials
|
|
|
15,145 |
|
|
|
11,367 |
|
| |
|
|
|
|
|
|
| |
|
$ |
100,582 |
|
|
$ |
93,580 |
|
| |
|
|
|
|
|
|
Inventories are valued at the lower of cost (average cost
method) or market. Consignment inventory is considered purchased
at time of sale while, concurrently, cost of product is
recognized. Procurement, warehousing and distribution costs to
bring the products to market are capitalized to inventory on
hand and expensed to distribution cost when the inventory is
sold. A markdown reserve is provided for markdown of inventory
to net realizable value. Shrink reserves are recorded for
expected inventory shrink and earned supplier discounts of
inventory remaining on hand.
The Company maintains 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 liquidated. The selling price of
SKUs identified as discontinued are progressively marked-down
over specified periods, until the selling price is marked down
to zero. At the time a SKU is identified as discontinued, a
markdown valuation reserve is recorded to adjust the inventory
cost to expected net realizable value.
During 2002 in preparation for the conversion to the product
life cycle program, twelve thousand existing SKUs were
specifically identified as discontinued. The Company recorded a
charge of approximately $9.2 million to markdown the cost
of these discontinued SKUs to their expected net realizable
value. As of December 31, 2002, these discontinued SKUs
were substantially liquidated.
|
|
| Note 5. |
Property, Plant and Equipment |
During the second quarter of 2004, the Company sold its Avon
Lake, Ohio distribution facility for $1.5 million in cash.
Based on the remaining net book value of the assets sold, this
resulted in a loss on sale of less than $0.1 million. The
distribution operations for customer orders previously fulfilled
from the Avon Lake facility were transferred to a third party
logistics provider based in Columbus, Ohio.
The Company currently retains certain properties of demised
operations that are being held for sale. There is no value
recorded as an asset for these properties. All future costs
incurred to prepare these sites for sale, including
environmental testing and environmental remediation costs will
be capitalized up to the realizable market value of each
respective property. Assets held for sale of $274,000 were sold
in 2004 incurring a $264,000 loss on sale.
F-13
Property, plant and equipment, net consists of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 | |
|
December 31, 2003 | |
| |
|
| |
|
| |
| |
|
Selling | |
|
|
|
Selling | |
|
|
| |
|
Locations | |
|
Support | |
|
Total | |
|
Locations | |
|
Support | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
$ |
— |
|
|
$ |
600 |
|
|
$ |
600 |
|
|
$ |
— |
|
|
$ |
834 |
|
|
$ |
834 |
|
|
Buildings and improvements
|
|
|
1,533 |
|
|
|
19,150 |
|
|
|
20,683 |
|
|
|
1,391 |
|
|
|
21,174 |
|
|
|
22,565 |
|
|
Machinery and equipment
|
|
|
4,177 |
|
|
|
20,459 |
|
|
|
24,636 |
|
|
|
3,746 |
|
|
|
20,549 |
|
|
|
24,295 |
|
|
Furniture and fixtures
|
|
|
6,783 |
|
|
|
29,334 |
|
|
|
36,117 |
|
|
|
6,262 |
|
|
|
29,636 |
|
|
|
35,898 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
12,493 |
|
|
|
69,543 |
|
|
|
82,036 |
|
|
|
11,399 |
|
|
|
72,193 |
|
|
|
83,592 |
|
|
Less: Accumulated depreciation
|
|
|
(7,171 |
) |
|
|
(48,846 |
) |
|
|
(56,017 |
) |
|
|
(6,324 |
) |
|
|
(45,787 |
) |
|
|
(52,111 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$ |
5,322 |
|
|
$ |
20,697 |
|
|
$ |
26,019 |
|
|
$ |
5,075 |
|
|
$ |
26,406 |
|
|
$ |
31,481 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation expense is included in the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| (Dollars in thousands) |
|
|
|
|
|
|
|
Cost of product
|
|
$ |
2,012 |
|
|
$ |
2,596 |
|
|
$ |
3,783 |
|
|
Distribution cost
|
|
|
838 |
|
|
|
629 |
|
|
|
443 |
|
|
Selling expense
|
|
|
1,118 |
|
|
|
750 |
|
|
|
832 |
|
|
General and administrative expense
|
|
|
3,321 |
|
|
|
3,749 |
|
|
|
3,425 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total
|
|
$ |
7,289 |
|
|
$ |
7,724 |
|
|
$ |
8,483 |
|
| |
|
|
|
|
|
|
|
|
|
Borrowings consist of the following:
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| |
|
| |
|
| |
| (Dollars in thousands) |
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
| |
Revolving credit facility
|
|
$ |
7,303 |
|
|
$ |
15,513 |
|
| |
Current portion of long-term debt
|
|
|
— |
|
|
|
28 |
|
| |
|
|
|
|
|
|
| |
|
$ |
7,303 |
|
|
$ |
15,541 |
|
| |
|
|
|
|
|
|
|
Long-term:
|
|
|
|
|
|
|
|
|
| |
Industrial revenue bonds
|
|
$ |
— |
|
|
$ |
5,875 |
|
| |
Other debt
|
|
|
— |
|
|
|
28 |
|
| |
Less: current portion
|
|
|
— |
|
|
|
(28 |
) |
| |
|
|
|
|
|
|
| |
|
$ |
— |
|
|
$ |
5,875 |
|
| |
|
|
|
|
|
|
|
|
|
Revolving Credit Facility |
On December 30, 2003, the Company entered into a
$50 million Revolving Credit Facility (the Facility) which
replaced a prior credit facility. Borrowings under the Facility
were used to retire the prior credit facility, including a term
loan, buy-out an interest rate swap agreement for
$1.2 million and buy-back outstanding preferred stock,
including accrued dividends, for $1.7 million.
The Facility matures December 30, 2006 and is secured by
inventory, owned receivables, equipment, investment interests,
real property interests, and general intangibles including
intellectual property. The
F-14
Facility bears interest at LIBOR plus 2.0% to 2.5%, based on the
level of borrowings, and requires the payment of a facility fee
ranging from 0.4% to 0.5% on the unused portion of availability.
Availability under the Facility is determined by a borrowing
base formula calculated on eligible inventory. As of
December 31, 2004, there was $46.4 million available,
with unused capacity of $34.3 million. Letters of credit,
up to a maximum of $20 million, are also available under
the Facility and are considered outstanding borrowings when
calculating the unused portion of availability. Letters of
credit in the aggregate amount of $4.8 million were
outstanding as of December 31, 2004. Letter of credit fees
range from 2.0% to 2.5% with an issuance fee ranging from 0.125%
to 0.150%.
The interest rate, facility fee, letter of credit fee and letter
of credit issuance fee are determined based on the
Company’s fixed charge coverage ratio. The weighted average
interest rate on the Company’s outstanding borrowing under
the Facility as of December 31, 2004 was 5.25%. The
Facility requires the maintenance of certain covenants, with the
only financial covenant being the fixed charge coverage ratio.
The Company was in compliance with the Facility covenants as of
December 31, 2004. The amount of deferred financing charges
associated with the Facility included in prepaid and other
non-current assets as of December 31, 2004 was $327,000,
which will be amortized to expense over the three-year term of
the facility.
Outstanding letters of credit issued under the Facility were as
follows as of December 31, 2004:
| |
|
|
|
|
| (Dollars in thousands) |
|
|
|
Insurance programs
|
|
$ |
4,528 |
|
|
Other
|
|
|
250 |
|
| |
|
|
|
| |
|
$ |
4,778 |
|
| |
|
|
|
Under the credit facility, the Company may distribute stock
dividends or redeem common shares up to $15 million in the
aggregate over the term of the agreement provided that the
Company maintains certain covenants. Among these covenants are
requirements to maintain at least $5 million of available,
undrawn borrowing capacity (and up to $10 million for
various periods during the year) along with a certain fixed
charge coverage ratio and a net worth requirement.
The prior credit facility, which was retired concurrently with
the entering of the Facility, was a $122.3 million senior
secured credit facility, including a $115.0 million
revolving credit facility and a term loan of original principal
of $7.3 million, bearing interest at LIBOR plus 2.75% to
3.00%.
The Company paid off $5.9 million of industrial revenue
bonds outstanding related to its Martins Ferry, Ohio facility on
December 3, 2004. The bonds were to mature in 2014. The
bonds were secured by property and equipment and backed by a
letter of credit of $6.2 million.
|
|
|
Interest Rate Swap Agreement |
In conjunction with the signing of the prior credit facility,
the Company entered into a three-year, $40.5 million
notional amount interest rate swap agreement (the Swap) which
was scheduled to expire in January 2005. The Swap converted
existing variable-rate payments (based on LIBOR or prime rates),
plus applicable borrowing margins of 2.75% to 3.00%, to a 4.2%
fixed-rate plus applicable borrowing margin of 2.75% to 3.00%.
In December 2003, the Swap was terminated in conjunction with
the entering of the Facility through a $1.2 million payment
which is included in the “early retirement of debt”
caption in the consolidated financial statements in the
December 31, 2003 results.
In conjunction with its 2002 refinancing, the Company issued
$1.5 million of Preferred Shares with a non-income tax
deductible, 7% payment-in-kind annual dividend. In conjunction
with entering the Facility in December 2003, these Preferred
Shares were repurchased for $1.7 million.
F-15
The carrying amount of the Company’s borrowings
approximates fair market value based upon consideration of
current market rates.
Income Tax (Provision) Benefit:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Federal
|
|
$ |
(340 |
) |
|
$ |
1,411 |
|
|
$ |
4,965 |
|
| |
State
|
|
|
— |
|
|
|
41 |
|
|
|
131 |
|
| |
|
|
|
|
|
|
|
|
|
|
Total current taxes
|
|
|
(340 |
) |
|
|
1,452 |
|
|
|
5,096 |
|
|
Deferred taxes
|
|
|
2,363 |
|
|
|
(270 |
) |
|
|
2,169 |
|
|
Valuation allowance
|
|
|
(2,363 |
) |
|
|
(2,816 |
) |
|
|
(889 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Total income tax (provision) benefit
|
|
$ |
(340 |
) |
|
$ |
(1,634 |
) |
|
$ |
6,376 |
|
| |
|
|
|
|
|
|
|
|
|
Reconciliation of Effective Income Tax Rate:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended
December 31, | |
| |
|
| |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (In percentages) |
|
| |
|
| |
|
| |
|
Income tax at statutory rate
|
|
|
34.0 |
% |
|
|
34.0 |
% |
|
|
34.0 |
|
|
State and local income taxes, net of federal income tax
|
|
|
— |
|
|
|
1.1 |
|
|
|
4.7 |
|
|
Other
|
|
|
4.3 |
|
|
|
(2.6 |
) |
|
|
(1.0 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
38.3 |
|
|
|
32.5 |
|
|
|
37.7 |
|
|
Change in valuation allowance
|
|
|
(44.7 |
) |
|
|
(77.4 |
) |
|
|
(4.6 |
) |
| |
|
|
|
|
|
|
|
|
|
|
Income tax (provision) benefit
|
|
|
(6.4 |
)% |
|
|
(44.9 |
)% |
|
|
33.1 |
% |
| |
|
|
|
|
|
|
|
|
|
F-16
Components of Deferred Tax Assets and Liabilities:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in thousands) |
|
| |
|
| |
|
Deferred Tax Assets
|
|
|
|
|
|
|
|
|
| |
Allowance for doubtful accounts
|
|
$ |
1,104 |
|
|
$ |
1,906 |
|
| |
Accrued compensation
|
|
|
572 |
|
|
|
721 |
|
| |
Accrued employee benefits
|
|
|
547 |
|
|
|
591 |
|
| |
Accrued insurance
|
|
|
522 |
|
|
|
401 |
|
| |
Accrued sales tax
|
|
|
287 |
|
|
|
— |
|
| |
Net operating loss carryforward — federal
|
|
|
683 |
|
|
|
1,682 |
|
| |
Net operating loss carryforward — state
|
|
|
889 |
|
|
|
889 |
|
| |
Goodwill
|
|
|
1,952 |
|
|
|
2,212 |
|
| |
Asset rationalization reserve
|
|
|
3,806 |
|
|
|
410 |
|
| |
Deferred rent
|
|
|
278 |
|
|
|
— |
|
| |
Other
|
|
|
366 |
|
|
|
131 |
|
| |
|
|
|
|
|
|
| |
|
Total deferred tax assets
|
|
|
11,006 |
|
|
|
8,943 |
|
|
Deferred Tax Liabilities
|
|
|
|
|
|
|
|
|
| |
Inventory
|
|
|
(2,269 |
) |
|
|
(1,780 |
) |
| |
Prepaid expenses
|
|
|
(783 |
) |
|
|
(587 |
) |
| |
Depreciation
|
|
|
(1,886 |
) |
|
|
(2,871 |
) |
| |
|
|
|
|
|
|
| |
|
Total deferred tax liabilities
|
|
|
(4,938 |
) |
|
|
(5,238 |
) |
|
Valuation allowance
|
|
|
(6,068 |
) |
|
|
(3,705 |
) |
| |
|
|
|
|
|
|
| |
|
Total
|
|
$ |
— |
|
|
$ |
— |
|
| |
|
|
|
|
|
|
As of December 31, 2004, the Company had net operating loss
carryforwards of $2.0 million for Federal income tax
reporting purposes of which the tax effect of $683,000 is
recorded as a deferred tax asset. These federal carryforwards
will expire in varying amounts, if unused, in years 2005 through
2011.
The Company has state net operating losses which will be
available to offset future taxable income. The Company has
recorded a deferred tax asset of $889,000 at December 31,
2004 and 2003. These state carryforwards will expire in varying
amounts, if unused, in years 2006 through 2023. In 2002, as a
result of the recent losses, the Company became uncertain
whether a benefit would be realized from the state net operating
losses. As a result, the Company recorded a full valuation
allowance against its recorded state net operating loss deferred
tax asset in 2002.
In assessing the realizability of deferred tax assets, the
Company considers whether it is more likely than not that some
portion or all of the deferred tax assets will not be realized.
The ultimate realization of deferred tax assets is dependent
upon the generation of future taxable income during the periods
in which the temporary differences become deductible. In making
this assessment, the Company considers historical earnings, the
scheduled reversal of deferred tax assets and liabilities,
projected future taxable income, and tax planning strategies.
The recent cumulative losses create uncertainty about the
realization of the tax benefits in future years which cannot be
overcome by other available evidence. As a result, a valuation
allowance of $6.1 million and $3.7 million has been
recorded at December 31, 2004 and 2003, respectively, to
fully reserve for the Company’s net deferred tax assets.
|
|
| Note 8. |
Defined Contribution Retirement Plan |
The Company maintains a defined contribution retirement plan
(the Plan) for its employees. The Company matches the
contributions of participating employees on the basis of
percentages specified in the
F-17
Plan. Participants have several investment options available
including investing in stock of the Company. The Plan does not
require participants to invest their contribution or the
Company’s matching contribution in the stock of the
Company. At December 31, 2004, approximately 16.4% of the
Plan’s assets, at market value, were invested in the
Company’s stock. Company contributions to the plan were
$1,157,000, $1,215,000 and $1,220,000 for 2004, 2003 and 2002,
respectively.
|
|
| Note 9. |
Stock Incentive Plans |
Stock Based Compensation: The Company has stock option
plans that provide for the issuance of incentive stock options;
non-qualified stock options; stock appreciation rights (SARs)
either in connection with, or independent of, any option; and
restricted and other share awards. The plans provide for the
issuance of a maximum of 2,014,168 common shares to employees or
directors. At December 31, 2004, there were 568,514 shares
reserved for future grants, consisting of 357,313 under the 1992
and 2000 Stock Incentive plans, 116,201 under the 2000
Broad-Based Stock Option Plan and 95,000 under the 1995
Directors’ Stock Option Plan. Options issued pursuant to
any of the Company’s plans have exercisable periods ranging
from six to 10 years at an option price equal to the fair
market value on the date the option was granted. The Company has
issued in the past, and may issue from time to time in the
future, options outside of the Company’s plans at an
exercise price equal to fair market value in connection with the
employment of key employees. There are 348,516 outstanding stock
options that have been issued outside of the plans.
Tax benefits of $46,000 and $17,000 for 2004 and 2003,
respectively, from the exercise of stock options were not
recorded as their ultimate realizability is not assured. In
2002, there was no tax benefit related to the exercise of stock
options. These benefits will be recorded when they are realized.
The following table summarizes the changes in the outstanding
stock options for the year ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 | |
|
2003 | |
|
2002 | |
| |
|
| |
|
| |
|
| |
| |
|
|
|
Weighted | |
|
|
|
Weighted | |
|
|
|
Weighted | |
| |
|
|
|
Average | |
|
|
|
Average | |
|
|
|
Average | |
| |
|
|
|
Exercise | |
|
|
|
Exercise | |
|
|
|
Exercise | |
| |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
|
Shares | |
|
Price | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
| |
|
Outstanding — beginning year
|
|
|
1,850,622 |
|
|
$ |
11.87 |
|
|
|
2,033,912 |
|
|
$ |
11.12 |
|
|
|
1,602,270 |
|
|
$ |
14.82 |
|
|
Granted
|
|
|
76,000 |
|
|
|
12.40 |
|
|
|
75,000 |
|
|
|
11.74 |
|
|
|
801,025 |
|
|
|
9.96 |
|
|
Exercise
|
|
|
(33,500 |
) |
|
|
8.12 |
|
|
|
(15,000 |
) |
|
|
7.33 |
|
|
|
(9,000 |
) |
|
|
11.33 |
|
|
Canceled/forfeited
|
|
|
(272,232 |
) |
|
|
13.85 |
|
|
|
(243,290 |
) |
|
|
15.44 |
|
|
|
(360,383 |
) |
|
|
15.40 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding — end of year
|
|
|
1,620,890 |
|
|
$ |
11.62 |
|
|
|
1,850,622 |
|
|
$ |
11.87 |
|
|
|
2,033,912 |
|
|
$ |
11.12 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable — end of year
|
|
|
1,438,991 |
|
|
$ |
11.49 |
|
|
|
1,497,886 |
|
|
$ |
12.06 |
|
|
|
1,409,885 |
|
|
$ |
10.96 |
|
|
Reserved for future grants
|
|
|
568,514 |
|
|
|
|
|
|
|
359,851 |
|
|
|
|
|
|
|
297,061 |
|
|
|
|
|
The following table summarizes information about stock options
outstanding as of December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted | |
|
Weighted | |
| |
|
|
|
|
|
Average | |
|
Average | |
| |
|
Options | |
|
Options | |
|
Exercise | |
|
Contractual | |
| Range of Exercise Prices |
|
Outstanding | |
|
Exercisable | |
|
Price | |
|
Life | |
| |
|
| |
|
| |
|
| |
|
| |
|
$0 to $10.00
|
|
|
644,183 |
|
|
|
644,183 |
|
|
$ |
8.17 |
|
|
|
5.2 years |
|
|
$10.01 to $15.00
|
|
|
760,707 |
|
|
|
578,808 |
|
|
|
12.18 |
|
|
|
7.1 years |
|
|
$15.01 to $20.00
|
|
|
188,250 |
|
|
|
188,250 |
|
|
|
16.59 |
|
|
|
4.3 years |
|
|
$20.01 and above
|
|
|
27,750 |
|
|
|
27,750 |
|
|
|
22.33 |
|
|
|
3.3 years |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
1,620,890 |
|
|
|
1,438,991 |
|
|
$ |
11.49 |
|
|
|
5.9 years |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
The Company granted 14,780 restricted stock units in 2004 from
new issuances. These units fully vest one year from the date of
grant. In 2003, LESCO granted 130,000 restricted stock units to
certain executives of which 113,649 shares were issued from
treasury shares and 16,351 from new issuances. The units vest
100% three years from the grant date and are forfeited if the
grantee terminates employment prior to vesting. The
F-18
Company recorded $607,000 and $87,000 of compensation expense
related to the restricted stock units for 2004 and 2003,
respectively.
The weighted average fair values of options at their grant date
during 2004, 2003 and 2002 were $5.36, $5.07 and $3.00,
respectively.
|
|
| Note 10. |
Detail of Certain Balance Sheets Accounts |
| |
|
|
|
|
|
|
|
|
|
| |
|
December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
| (Dollars in thousands) |
|
| |
|
| |
|
Other current assets:
|
|
|
|
|
|
|
|
|
| |
Income tax refund receivable
|
|
$ |
— |
|
|
$ |
3,740 |
|
| |
Other prepaids
|
|
|
1,426 |
|
|
|
1,548 |
|
| |
Prepaid insurance
|
|
|
1,513 |
|
|
|
1,033 |
|
| |
Notes receivable
|
|
|
187 |
|
|
|
385 |
|
| |
Assets held for sale
|
|
|
— |
|
|
|
274 |
|
| |
|
|
|
|
|
|
| |
|
$ |
3,126 |
|
|
$ |
6,980 |
|
| |
|
|
|
|
|
|
|
Other non-current assets:
|
|
|
|
|
|
|
|
|
| |
Notes receivable
|
|
$ |
443 |
|
|
$ |
1,466 |
|
| |
Store deposits
|
|
|
550 |
|
|
|
572 |
|
| |
Deferred financing charges
|
|
|
172 |
|
|
|
416 |
|
| |
Miscellaneous deposits
|
|
|
69 |
|
|
|
87 |
|
| |
|
|
|
|
|
|
| |
|
$ |
1,234 |
|
|
$ |
2,541 |
|
| |
|
|
|
|
|
|
|
Accounts payable:
|
|
|
|
|
|
|
|
|
| |
Account payable
|
|
|
50,519 |
|
|
|
32,744 |
|
| |
Overdraft balances
|
|
|
5,838 |
|
|
|
11,936 |
|
| |
Accounts payable to GEBCS for recourse accounts receivable
(Note 3)
|
|
|
14 |
|
|
|
5,751 |
|
| |
|
|
|
|
|
|
| |
|
$ |
56,371 |
|
|
$ |
50,431 |
|
| |
|
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
|
|
|
|
|
| |
Accrued non-income taxes
|
|
|
3,043 |
|
|
|
3,510 |
|
| |
Commissions
|
|
|
6,008 |
|
|
|
2,650 |
|
| |
Salaries and wages
|
|
|
469 |
|
|
|
1,918 |
|
| |
Insurance — hospitalization and workers’
compensation
|
|
|
2,794 |
|
|
|
2,383 |
|
| |
Asset rationalization (Note 13)
|
|
|
450 |
|
|
|
1,050 |
|
| |
Insurance — property and casualty
|
|
|
1,897 |
|
|
|
1,028 |
|
| |
Severance (Note 13)
|
|
|
209 |
|
|
|
532 |
|
| |
Vendor contract termination
|
|
|
3,287 |
|
|
|
— |
|
| |
Other
|
|
|
6,027 |
|
|
|
4,998 |
|
| |
|
|
|
|
|
|
| |
|
$ |
24,184 |
|
|
$ |
18,069 |
|
| |
|
|
|
|
|
|
F-19
|
|
| Note 11. |
Detail of Certain Statements of Operations Accounts |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the Year Ended December 31, | |
| |
|
| |
| |
|
2004 | |
|
2003 | |
|
2002 | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
Net sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Gross sales
|
|
$ |
565,545 |
|
|
$ |
526,041 |
|
|
$ |
513,451 |
|
| |
Agency sales
|
|
|
(2,156 |
) |
|
|
— |
|
|
|
— |
|
| |
Freight revenue
|
|
|
1,427 |
|
|
|
1,536 |
|
|
|
1,422 |
|
| |
Customer discounts and rebates
|
|
|
(3,775 |
) |
|
|
(4,088 |
) |
|
|
(3,168 |
) |
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
561,041 |
|
|
$ |
523,489 |
|
|
$ |
511,705 |
|
| |
|
|
|
|
|
|
|
|
|
|
Merchant discounts and provisions for doubtful accounts:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Merchant discounts
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Multi-purpose credit programs
|
|
$ |
1,771 |
|
|
$ |
1,510 |
|
|
$ |
1,091 |
|
| |
|
Private label business credit programs
|
|
|
6,212 |
|
|
|
100 |
|
|
|
— |
|
| |
|
Private label promotional discounts
|
|
|
2,271 |
|
|
|
202 |
|
|
|
— |
|
| |
Provision for doubtful accounts
|
|
|
— |
|
|
|
2,140 |
|
|
|
2,243 |
|
| |
Customer finance revenue
|
|
|
(307 |
) |
|
|
(1,860 |
) |
|
|
(1,822 |
) |
| |
Other
|
|
|
811 |
|
|
|
953 |
|
|
|
851 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
10,758 |
|
|
$ |
3,045 |
|
|
$ |
2,363 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Severance (Note 13)
|
|
$ |
393 |
|
|
$ |
728 |
|
|
$ |
3,523 |
|
| |
Loss on sale/disposal of fixed assets
|
|
|
244 |
|
|
|
313 |
|
|
|
93 |
|
| |
Other
|
|
|
27 |
|
|
|
24 |
|
|
|
11 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
664 |
|
|
$ |
1,065 |
|
|
$ |
3,627 |
|
| |
|
|
|
|
|
|
|
|
|
|
Other income:
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Joint venture income (Note 14)
|
|
$ |
— |
|
|
$ |
848 |
|
|
$ |
164 |
|
| |
Vendor payment discounts
|
|
|
357 |
|
|
|
651 |
|
|
|
533 |
|
| |
Other
|
|
|
151 |
|
|
|
22 |
|
|
|
115 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
508 |
|
|
$ |
1,521 |
|
|
$ |
812 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
| Note 12. |
Commitments and Contingencies |
The Company leases certain operating facilities and equipment.
Certain lease agreements provide for renewal options along with
provisions for adjusting the lease payments. Total rent expense
for 2004, 2003 and
F-20
2002 was approximately $23,055,000, $20,445,000 and $20,264,000,
respectively. Future minimum lease payments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Selling | |
|
|
|
|
| |
|
Locations | |
|
Support | |
|
Total | |
| (Dollars in thousands) |
|
| |
|
| |
|
| |
|
Years Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
$ |
13,130 |
|
|
$ |
5,102 |
|
|
$ |
18,232 |
|
|
2006
|
|
|
9,880 |
|
|
|
3,100 |
|
|
|
12,980 |
|
|
2007
|
|
|
7,168 |
|
|
|
2,486 |
|
|
|
9,654 |
|
|
2008
|
|
|
4,392 |
|
|
|
1,860 |
|
|
|
6,252 |
|
|
2009
|
|
|
1,984 |
|
|
|
1,041 |
|
|
|
3,025 |
|
|
Thereafter
|
|
|
1,083 |
|
|
|
597 |
|
|
|
1,680 |
|
| |
|
|
|
|
|
|
|
|
|
| |
|
$ |
37,637 |
|
|
$ |
14,186 |
|
|
$ |
51,823 |
|
| |
|
|
|
|
|
|
|
|
|
The Company has various contractual commitments for the purchase
of product and commodities, including:
|
|
|
| |
• |
For 2005, the purchase of the grass seed crop from approximately
38,000 acres of land at prices to be determined by the
prevailing market prices. |
| |
| |
• |
For 2005, the purchase of 190,000 tons of urea at a fixed price
reflecting the market price at July 30, 2004. |
| |
| |
• |
For 2005, the purchase of 68,500 tons of Potash at a fixed price
reflecting the market price at August 27, 2004. |
| |
| |
• |
For 2005, the purchase of 40,000 tons of Diammonium Phosphate
(DAP) at a fixed price reflecting the market price at
August 27, 2004. |
| |
| |
• |
For 2005 through 2008, the purchase of the following specified
values of equipment, including walk behind and riding mowers,
spreaders and sprayers: $28.9 million in 2005,
$31.7 million in 2006, $34.7 million in 2007 and
$37.8 million in 2008 (Note 14). |
During the third quarter of 2004, the Company entered into
agreements to relocate its corporate headquarters from its
approximately 94,000-square-foot facility in Strongsville, Ohio
to an approximately 39,000-square-foot facility in downtown
Cleveland, Ohio. The term of the Company’s new lease is
five and a half years. A division of a public company (the
Assignee) will assume the remaining 11 years of the
Company’s lease at the Strongsville location. Relocation
costs were $6.9 million including $4.8 million in
tenant and landlord inducements, and $2.1 million in broker
commissions, legal fees, letter of credit costs, move costs and
fixed-asset write offs. The Company remains liable under the
lease if the Assignee fails to perform. The Assignee has secured
and must maintain a $4.4 million letter of credit backing
its performance under the lease. The Company must pay the
Assignee approximately $100,000 annually for the remaining term
of the lease to defray the cost of the letter of credit.
The Company bears all credit losses on credit recourse accounts
maintained by GEBCS. At December 31, 2004, the Company had
$4.7 million of recourse risk of which $115,000 was
reserved for in its allowance for uncollectible accounts balance.
There are various pending lawsuits and claims arising out of the
conduct of the Company’s business. In the opinion of
management, the ultimate outcome of these lawsuits and claims
will not have a material adverse effect on the Company’s
consolidated financial position or results of operations. The
Company presently maintains product liability insurance coverage
in amounts and with deductibles that it believes are prudent.
F-21
|
|
| Note 13. |
Asset Rationalization |
During 2002, the Company completed an asset analysis and
finalized plans to rationalize under-performing assets. The plan
included ceasing operations at, and the decision to sell, the
Company’s manufacturing facilities in Disputanta, Virginia
(Disputanta) and Stockton, California (Stockton). The plan also
included the sale of properties in Wellington, Ohio and Windsor,
New Jersey (the Properties). The Company recorded a total
pre-tax charge of $15.5 million, including an asset
rationalization charge of $12.0 million and other expense
(severance) of $3.5 million.
The asset rationalization included asset impairment charges of
$8.8 million, related to the write-down of Disputanta,
Stockton and the Properties to net realizable value and the
write-off of patents and trademarks related to products
previously manufactured at Disputanta. The Company accounted for
the planned sales of Disputanta, Stockton and the Properties 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 asset
rationalization also included lease costs of $0.7 million
for the aggregate straight-line lease expense for Disputanta and
Stockton and other exit costs of $2.5 million. On
November 4, 2002 the Disputanta, Virginia facility was
sold. A net gain on the sale of $718,000 was recorded to the
asset rationalization reserves.
Activity in the accounts during 2004 includes additional
severance expense for normal, re-occurring employee terminations
and payments to discharge lease and other obligations, including
environmental matters, related to Disputanta, Stockton and the
Properties. Stockton and the Properties remain assets held for
sale. All future costs incurred to prepare the sites for sale,
including environmental testing and environmental remediation
costs will be capitalized up to the realizable market value of
each respective property
Major components of the charge for the asset rationalization and
severance expense and the related remaining reserves and
accruals as of December 31, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Asset Rationalization Accrual | |
|
|
|
|
| |
|
| |
|
|
|
|
| |
|
Lease | |
|
Other Exit | |
|
|
|
Severance | |
|
|
| |
|
Cost | |
|
Costs | |
|
Total | |
|
Accrual | |
|
Total | |
| |
|
| |
|
| |
|
| |
|
| |
|
| |
| (Dollars in thousands) |
|
|
|
|
|
|
|
|
|
|
|
Asset rationalization and severance accruals at
December 31, 2002
|
|
$ |
634 |
|
|
$ |
1,371 |
|
|
$ |
2,005 |
|
|
$ |
1,574 |
|
|
$ |
3,579 |
|
|
2003 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2003 additions/reclassifications
|
|
$ |
(357 |
) |
|
$ |
357 |
|
|
$ |
— |
|
|
$ |
728 |
|
|
$ |
728 |
|
| |
Utilized/payments
|
|
|
(57 |
) |
|
|
(898 |
) |
|
|
(955 |
) |
|
|
(1,770 |
) |
|
|
(2,725 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset rationalization and severance accruals at
December 31, 2003
|
|
$ |
220 |
|
|
$ |
830 |
|
|
$ |
1,050 |
|
|
$ |
532 |
|
|
$ |
1,582 |
|
|
2004 Activity
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
2004 additions/reclassifications
|
|
|
52 |
|
|
|
(52 |
) |
|
|
— |
|
|
|
393 |
|
|
|
393 |
|
| |
Utilized/payments
|
|
|
(44 |
) |
|
|
(556 |
) |
|
|
(600 |
) |
|
|
(716 |
) |
|
|
(1,316 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Asset rationalization and severance accruals at
December 31, 2004
|
|
$ |
228 |
|
|
$ |
222 |
|
|
$ |
450 |
|
|
$ |
209 |
|
|
$ |
659 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Note 14. |
Divestiture of Investment in Commercial Turf Products,
Ltd. |
In the fourth quarter of 2003, the Company sold 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 sold its investment for a $933,130 promissory note
and a release from its guarantee 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 that began November 15, 2003. The Company recorded
a $10,000 gain on the sale.
Concurrently 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 rights to market
and sell proprietary
F-22
products, such as commercial grade spreaders, sprayers,
renovators and blowers and retains certain customer rights. The
Company is not required to source products exclusively 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: $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.
|
|
| Note 15. |
Termination of Supply Contract with KPAC Holdings, Inc. |
In November 2004, the Company filed a declaratory judgment
action to obtain a judicial determination of the amount of its
liability for terminating a five-year agreement with KPAC, its
methylene urea supplier, (“Supply Agreement”). The
Company entered into the Supply Agreement in 2002 as part of an
overall transaction by which the supplier purchased certain
assets of the Company, including a plant used to produce
methylene urea. The Supply Agreement required the Company to
purchase, and the supplier to produce, minimum monthly
quantities of certain products.
Judicial involvement was sought after the supplier refused the
Company’s offer to settle its liability for
$2.2 million plus forgiveness of a $1.3 million note
receivable due from the supplier, which the Company believed
represented the extent of its potential liability under the
Supply Agreement. The supplier has asserted counterclaims
against the Company seeking damages in excess of $7 million
for breach of the Supply Agreement, breach of the asset purchase
agreement and breach of an alleged agreement to settle the
Company’s liability on more favorable terms to the
supplier. The supplier’s two shareholders have moved to
intervene to assert a claim for breach of the same alleged
settlement agreement. A case management conference is scheduled
for March 2005, at which time the parties will be given a
timeline for the progress of the litigation.
As a result of exiting the supply contract, LESCO recognized a
$5.2 million charge in the fourth quarter of 2004
consisting of the cash settlement and forgiveness of debt along
with $0.8 million for markdown costs associated with the
supplier product that the Company will no longer retain in its
merchandise offering and an estimated $0.9 million of other
miscellaneous costs of settlement.
Management believes that it will generate an annual, pre-tax
savings of more than $2 million over the remaining term of
the agreement, which aggregate amount is expected to exceed the
$5.2 million cost to exit the supply agreement. LESCO has
already secured an alternative, lower-cost source of methylene
urea fertilizer from other available market sources with no
annual purchase commitments.
|
|
| Note 16. |
Quarterly Financial Summary (Unaudited) |
The following is a summary of unaudited quarterly results of
operations for the years ended December 31, 2004 and 2003:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended 2004 | |
| |
|
| |
| |
|
Mar. 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
| |
|
| |
|
| |
|
| |
|
| |
| (Dollars in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
102,044 |
|
|
$ |
182,189 |
|
|
$ |
152,655 |
|
|
$ |
124,152 |
|
|
Gross profit
|
|
|
23,620 |
|
|
|
47,034 |
|
|
|
40,656 |
|
|
|
27,192 |
|
|
Net income (loss)
|
|
|
(7,952 |
) |
|
|
14,211 |
|
|
|
1,110 |
|
|
|
(12,994 |
) |
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.92 |
) |
|
$ |
1.58 |
|
|
$ |
0.12 |
|
|
$ |
(1.49 |
) |
| |
Basic
|
|
$ |
(0.92 |
) |
|
$ |
1.63 |
|
|
$ |
0.13 |
|
|
$ |
(1.49 |
) |
F-23
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Quarter Ended 2003 | |
| |
|
| |
| |
|
Mar. 31 | |
|
June 30 | |
|
Sept. 30 | |
|
Dec. 31 | |
| |
|
| |
|
| |
|
| |
|
| |
| (Dollars in thousands, except per share data) |
|
|
|
|
|
|
|
|
|
Net sales
|
|
$ |
94,450 |
|
|
$ |
172,560 |
|
|
$ |
147,721 |
|
|
$ |
108,758 |
|
|
Gross profit
|
|
|
20,330 |
|
|
|
42,988 |
|
|
|
38,710 |
|
|
|
23,316 |
|
|
Net income (loss)
|
|
|
(5,747 |
) |
|
|
6,737 |
|
|
|
5,718 |
|
|
|
(11,979 |
) |
|
Earnings (loss) earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
Diluted
|
|
$ |
(0.68 |
) |
|
$ |
0.77 |
|
|
$ |
0.65 |
|
|
$ |
(1.39 |
) |
| |
Basic
|
|
$ |
(0.68 |
) |
|
$ |
0.79 |
|
|
$ |
0.67 |
|
|
$ |
(1.39 |
) |
Earnings (loss) per share amounts for each quarter are
required to be computed independently and, therefore, may not
sum to the amount computed on an annual basis.
|
|
| Note 17. |
Subsequent Event (Unaudited) |
In January 2005, LESCO announced that it retained Western
Reserve Partners LLC to continue and advance its exploration of
supply chain alternatives, including the possibility of the
disposition of all or a portion of its distribution and
manufacturing assets that had a net book value of approximately
$15 million at December 31, 2004. Before the end of
2005, the Company expects to sell these assets to a financial or
strategic buyer and enter into a long-term supply contract with
the buyer.
F-24