SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For Quarter Ended September 30, 2001 Commission File Number 0-13147
- ------------------------------------ ------------------------------
LESCO, INC.
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(Exact name of registrant as specified in its charter)
OHIO 34-0904517
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State or other jurisdiction of (I.R.S. Employer Identification Number)
incorporation or organization)
15885 SPRAGUE ROAD
STRONGSVILLE, OHIO 44136
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(Address of principal executive offices) (Zip Code)
(440) 783-9250
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(Registrant's telephone number,
including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
---
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the close of the latest practical date.
OUTSTANDING AT
CLASS NOVEMBER 9, 2001
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Common shares, without par value 8,560,120 shares
1
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Three Months Ended September 30 Nine Months Ended September 30
--------------------------------------- --------------------------------------
(In thousands except per share data) 2001 2000 2001 2000
----------------- ----------------- ----------------- -----------------
Net sales $ 144,084 $ 139,640 $ 398,941 $ 396,806
Cost of sales 102,521 93,562 275,135 261,761
----------------- ----------------- ----------------- -----------------
GROSS PROFIT ON SALES 41,563 46,078 123,806 135,045
Warehouse & delivery expense 11,924 11,421 35,247 32,511
Selling, general & administrative expense 28,267 26,982 81,744 78,652
----------------- ----------------- ----------------- -----------------
40,191 38,403 116,991 111,163
----------------- ----------------- ----------------- -----------------
INCOME FROM OPERATIONS 1,372 7,675 6,815 23,882
Other deductions (income):
Interest expense 1,493 1,547 5,061 5,209
Joint venture results 148 (173) (36) (294)
Other expense 99 213 472 278
Customer finance charges and
other income (869) (1,008) (2,229) (2,533)
----------------- ----------------- ----------------- -----------------
871 579 3,268 2,660
----------------- ----------------- ----------------- -----------------
Income Before Income Taxes 501 7,096 3,547 21,222
Income taxes 164 2,851 1,277 8,212
----------------- ----------------- ----------------- -----------------
NET INCOME $ 337 $ 4,245 $ 2,270 $ 13,010
================= ================= ================= =================
BASIC EARNINGS PER SHARE $ 0.04 $ 0.50 $ 0.27 $ 1.54
================= ================= ================= =================
DILUTED EARNINGS PER SHARE $ 0.04 $ 0.49 $ 0.26 $ 1.51
================= ================= ================= =================
CASH DIVIDENDS PER SHARE $ 0.075 (a) $ 0.00 $ 0.075 (a) $ 0.15 (b)
================= ================= ================= =================
(a) Represents a dividend of $0.075 per share declared in August 2001 and
paid in September 2001.
(b) Represents a dividend of $0.15 per share declared in June 2000 and
paid in July 2000.
See Notes to Consolidated Financial Statements.
2
LESCO, INC.
CONSOLIDATED BALANCE SHEETS
September 30 September 30 December 31
(In thousands except share data) 2001 2000 2000
-------------------- ------------------ ---------------
(unaudited) (audited)
ASSETS
CURRENT ASSETS:
Cash $ 4,521 $ 2,653 $ 849
Accounts receivable - Net of allowance 51,503 91,619 78,529
of $4,640, $4,947 and $4,500, respectively
Inventories
Raw materials 9,173 8,154 7,112
Finished goods 100,931 102,014 92,931
-------------------- ------------------ -------------------
Total Inventories 110,104 110,168 100,043
Deferred income taxes 2,232 1,919 1,950
Prepaid expenses and other assets 2,175 2,921 5,595
-------------------- ------------------ -------------------
TOTAL CURRENT ASSETS 170,535 209,280 186,966
Property, Plant and Equipment 94,632 89,056 90,878
Less allowance for depreciation and amortization (45,932) (41,869) (42,674)
-------------------- ---------------- -------------------
Net Property, Plant and Equipment 48,700 47,187 48,204
Other Assets 10,476 10,137 9,723
-------------------- ------------------ -------------------
TOTAL ASSETS $ 229,711 $ 266,604 $ 244,893
==================== ================== ===================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 67,045 $ 51,408 $ 33,304
Other current liabilities 9,305 13,009 11,152
Current portion of debt 50,974 5,100 5,100
-------------------- ------------------ -------------------
TOTAL CURRENT LIABILITIES 127,324 69,517 49,556
Long-term debt 161 91,129 94,707
Deferred income taxes 3,176 2,959 3,194
SHAREHOLDERS' EQUITY:
Preferred shares-- without par value--
authorized 500,000 shares
Common shares--without par value--
19,500,000 shares authorized; 8,628,563 shares issued
and 8,560,120 outstanding at September 30, 2001,
8,569,724 at September 30, 2000, 8,554,235 at
December 31, 2000 863 862 862
Paid-in capital 34,780 34,710 34,768
Retained earnings 65,362 69,352 63,730
Accumulated other comprehensive loss 0 0 0
Less treasury shares 68,443 at September 30, 2001, 45,604 at
September 30, 2000, 61,093 at December 31, 2000 (1,263) (829) (1,154)
Unearned compensation (692) (1,096) (770)
-------------------- ------------------ -------------------
TOTAL SHAREHOLDERS' EQUITY 99,050 102,999 97,436
-------------------- ------------------ -------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 229,711 $ 266,604 $ 244,893
==================== ================== ===================
See Notes to Consolidated Financial Statements.
3
LESCO, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30
---------------------------------------------
(In thousands) 2001 2000
--------------------- --------------------
(unaudited)
OPERATING ACTIVITIES:
Net income $ 2,270 $ 13,010
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 7,151 6,641
Decrease (increase) in accounts receivable 25,606 (26,097)
Provision for uncollectible accounts receivable 1,420 2,303
Increase in inventories (10,060) (9,293)
Increase in accounts payable 33,741 17,391
Increase in other current items 1,289 3,376
Other assets/liabilities (1,195) (142)
--------------------- --------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES 60,222 7,189
INVESTING ACTIVITIES:
Purchase of property, plant and equipment - net (7,144) (6,912)
--------------------- --------------------
NET CASH (USED IN) INVESTING ACTIVITIES (7,144) (6,912)
FINANCING ACTIVITIES:
Proceeds from borrowings 151,400 207,100
Reduction of borrowings (200,072) (206,170)
Issuance of common shares net of treasury shares (95) 604
Cash dividends (639) (1,268)
--------------------- --------------------
NET CASH (USED IN)/ PROVIDED BY (49,406) 266
--------------------- --------------------
FINANCING ACTIVITIES
Net increase in cash 3,672 543
Cash - Beginning of the period 849 2,110
--------------------- --------------------
CASH - END OF THE PERIOD $ 4,521 $ 2,653
===================== ====================
See Notes to Consolidated Financial Statements.
4
LESCO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A - Basis of Presentation
The accompanying unaudited financial statements have been prepared in accordance
with accounting principles generally accepted in the United States for interim
financial information and with the requirements of Regulation S-X and Form 10-Q.
The statements reflect all adjustments, consisting only of normal recurring
accruals, which are, in the opinion of management, necessary for a fair
presentation of the results for interim periods. For further information, refer
to the audited financial statements and footnotes thereto for the year ended
December 31, 2000 included in the Company's Form 10-K.
In the first quarter 2000, the deferred tax valuation allowance related to Tri
Delta Fertilizer, Inc.'s net operating loss carryforward was reversed because
realization of such deferred tax assets is considered "more likely than not".
Operating results for the nine months ended September 30, 2001 are not
necessarily indicative of the results to be expected for the year due to the
seasonal nature of the Company's business.
5
NOTE B - Earnings per Share
The following table sets forth the computation of basic and diluted earnings per
share:
Three Months Ended Nine Months Ended
September 30 September 30
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(In thousands, except share data) 2001 2000 2001 2000
----------------------------------------------------------------------------------------------------------------------
Numerator:
Net income $337 $4,245 $2,270 $13,010
Denominator:
Denominator for basic
earnings per share -
weighted average shares 8,507,651 8,479,438 8,490,603 8,464,671
Effect of dilutive securities:
Employee stock options 53,195 170,082 65,964 152,264
Restricted shares 10,895 15,274 16,343 9,826
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Diluted potential common
Shares 64,090 185,356 82,307 162,090
Denominator for diluted
earnings per share -
adjusted weighted average
shares and assumed
conversions 8,571,741 8,664,794 8,572,910 8,626,761
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Earnings per share
Basic $0.04 $0.50 $0.27 $1.54
Diluted $0.04 $0.49 $0.26 $1.51
6
NOTE C - Segment Information
The Company has four reportable operating segments, which are Product Supply,
Lawn Care, Golf and Corporate. These segments are defined based on management
responsibility.
The Product Supply division manufactures and distributes fertilizers,
combination products, golf course accessories and grass seed to the Lawn Care
and Golf divisions of the Company.
The Lawn Care division operates 228 LESCO Service Centers(R), which enable the
Company to market turf care products, including turf control products,
fertilizer, grass seed and equipment.
The Golf division markets and sells turf care products, including turf control
products, fertilizer, grass seed and equipment to private and public golf
courses and other customers having large turf areas through salesmen who operate
a fleet of 78 LESCO Stores-on-Wheels(R). In addition, this division markets its
products internationally, principally through foreign distributors.
The Corporate division includes the administrative functions of the Company,
which support the Product Supply, Lawn Care and Golf divisions.
The Company is principally engaged in the manufacturing and marketing of turf
care products to the professional sector of the green industry. The Company
measures segment profit as operating profit. Net assets is defined as the sum of
net accounts receivable, inventory, and net property, plant, and equipment less
accounts payable. Management utilizes this information as a basis to calculate
the divisional return of capital employed. Depreciation and operating leases for
specific Product Supply assets are allocated to Corporate for operating profit
measures. Information on segments are as follows (in thousands):
7
For the Three Months Ended September 30, 2001
--------------------------------------------------------------------------------------------
Product Lawn Elimination &
Supply Care Golf Corporate Consolidated
---------------- ---------------- --------------- ------------------- ------------------
Net Sales to External Customers $ 97,283 $ 46,801 $ 144,084
Intersegment Net Sales $ 91,435 $ (91,435)
Operating (Loss) Profit (4,709) 10,383 5,121 (9,423) 1,372
Total Assets 91,934 75,596 26,426 35,755 229,711
Net Assets $ 24,888 $ 75,596 $ 26,426 $ 16,351 143,261
For the Three Months Ended September 30, 2000
--------------------------------------------------------------------------------------------
Product Lawn Elimination &
Supply Care Golf Corporate Consolidated
---------------- ---------------- --------------- ------------------- ------------------
Net Sales to External Customers $ 92,513 $ 47,127 $ 139,640
Intersegment Net Sales $ 58,125 $ (58,125)
Operating Profit 984 10,706 5,007 (9,022) 7,675
Total Assets 98,552 96,501 38,897 32,654 266,604
Net Assets $ 47,144 $ 96,501 $ 38,897 $ 15,024 $ 197,566
For the Nine Months Ended September 30, 2001
--------------------------------------------------------------------------------------------
Product Lawn Elimination &
Supply Care Golf Corporate Consolidated
---------------- ---------------- --------------- ------------------- ------------------
Net Sales to External Customers $ 282,446 $ 116,495 $ 398,941
Intersegment Net Sales $ 265,992 $ (265,992)
Operating (Loss) Profit (6,355) 26,353 11,746 (24,929) 6,815
Total Assets 91,934 75,596 26,426 35,755 229,711
Net Assets $ 24,888 $ 75,596 $ 26,426 $ 16,351 143,261
For the Nine Months Ended September 30, 2000
--------------------------------------------------------------------------------------------
Product Lawn Elimination &
Supply Care Golf Corporate Consolidated
---------------- ---------------- --------------- ------------------- ------------------
Net Sales to External Customers $ 280,561 $ 116,245 $ 396,806
Intersegment Net Sales $ 237,144 $ (237,144)
Operating Profit 4,879 34,191 11,171 (26,359) 23,882
Total Assets 98,552 96,501 38,897 32,654 266,604
Net Assets $ 47,144 $ 96,501 $ 38,897 $ 15,024 $ 197,566
8
NOTE D - Other Expense and Other Income
Included in Other Expenses are losses on the sale of fixed assets, service
charge expense, royalty expense and other miscellaneous expenses. Interest,
service charge and other miscellaneous income are included in customer finance
charges and other income.
NOTE E - Other Assets
Included in Other Assets is $9.0 of intangible assets at September 30, 2001,
consisting primarily of goodwill of $7.5 million, patents of $1.4 million and
trademarks of $121,000. These intangible assets arose from recent acquisitions,
including Pro-Lawn (1996), Tri Delta Fertilizer, Inc. (Tri Delta) (1997),
Agriturf, Inc. (1998), Cadwell & Jones, Inc. (1998) and Southern Golf Products,
Inc. (2000) and the purchase of patents and trademarks. These assets are being
amortized using straight-line method over periods of 15 to 20 years for goodwill
and 15 years for patents and trademarks. Accumulated amortization was $2.6
million at September 30, 2001.
NOTE F - Obsolescence Reserve
The Company has maintained a reserve for inventory obsolescence. The reserve is
for slow moving equipment spare parts that over time can become obsolete and
inventory that becomes obsolete because of a change in new product development.
Additionally, the reserve is for certain fertilizer and control products that
lose potency over time and, therefore, have limited shelf lives. The Company
reserves a portion of its slow moving parts, discontinued inventory and products
with limited shelf lives and reviews the adequacy of such reserved amount on a
periodic basis. At September 30, 2001, the obsolescence reserve was $1.6
million.
NOTE G - Derivatives and Comprehensive Income / Loss
On January 1, 2001, the Company adopted Statement of Accounting Financial
Standards No. 133 "Accounting for Derivative Instruments and Hedging
Activities", as amended (FAS 133). The Company utilizes derivative financial
instruments to reduce its exposure to market risks from changes in interest
rates and foreign exchange rates. The Company will only enter into agreements
with major financial institutions that are considered to be market makers. The
Company has a seven-year, $7,000,000 notional amount interest rate swap
agreement expiring in June 2002, which effectively converts existing
floating-rate payments for 6.335% fixed-rate payments and therefore reduces the
impact of interest-rate changes on future interest expense. The Company
recognizes the negative fair market value ($189,000) of the swap agreement on
the balance sheet.
At January 1, 2001, a $58,000 liability and accumulated other comprehensive loss
of $35,000 (net-of-tax) was recognized as a transition adjustment for the value
of the Company's interest rate swap agreement. During the third quarter ended
September 30, 2001, due to changes in the Company's borrowings, the interest
rate swap became ineffective and the full amount of the comprehensive loss was
expensed.
NOTE H - Impact of Recently Issued Accounting Standards
In June 2001, the Financial Accounting Standards Board (FASB) issued Statements
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
No. 142, "Goodwill and Other Intangible Assets".
9
SFAS No. 141 addresses financial accounting and reporting for business
combinations superceding APB No. 16 "Business Combinations" and FASB Statement
No. 38 "Accounting for Preacquisition Contingencies of Purchased Enterprises".
Statement No. 142 provides that goodwill and indefinite lived intangible assets
are no longer amortized but are reviewed annually (or more frequently if
impairment indicators arise) for impairment. Separable intangible assets that
are not deemed to have an indefinite life will continue to be amortized over
their useful lives (but with no maximum life). The Company's operating results
for the nine month ended September 30, 2001 included $437,000 of amortization
for goodwill and $66,000 of amortization for patents. The Company is required to
adopt these statements effective January 1, 2002. The effects of adopting these
Statements have not been determined.
NOTE I - Debt
As of September 30, 2001, the Company violated certain covenants of its
revolving credit agreement with banks, term notes and industrial revenue bonds.
While management is currently negotiating waivers and forbearance agreements
with its creditors, management expects to be required to make payment of
nominal fees to the creditors and comply with additional restrictive covenants.
As a result, the Company has classified its $45 million of private placement
term notes and the $5.9 million Belmont County IRB as current portion of debt,
pending resolution of refinancing options the Company is pursuing. This
classification change results in a $45.2 million increase to the current portion
of debt and a corresponding $45.2 million decrease to long-term debt.
10
LESCO, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Results of Operations
Sales for the third quarter ended September 30, 2001 increased $4.4 million to
$144.1 million from $139.6 million in 2000, a 3.2% increase. The increase is due
to higher unit volume offset by lower prices for the quarter. Gross profit, as a
percentage of sales, was 28.8% for the third quarter ended September 30, 2001
compared to 33.0% in the third quarter 2000 or a reduction of $4.5 million. The
decrease in gross profit was due to increased raw material costs of $2.8
million, unfavorable inventory adjustments of $2.7 million, general price
decreases of $0.4 million and increased manufacturing costs of $0.2 million.
These unfavorable adjustments were partially offset by sales volume increases of
$1.6 million.
Sales for the first nine months of 2001 increased 0.5% to $398.9 million from
$396.8 million in 2000. With relatively flat year to year volume, a selective
price increase of 0.6% attributed to the slight increase for the first nine
months. For the first nine months, gross profit, as a percent of sales, was
31.0% in 2001 compared to 34.0% in 2000 or a reduction of $11.2 million. The
decrease in gross profit was due primarily to increased costs in raw materials
of $10.8 million, unfavorable inventory adjustments of $2.1 million, increased
manufacturing costs of $0.7 million and sales volume decreases of $0.1 million.
These unfavorable adjustments were partially offset by selective price increases
of $2.5 million.
The higher raw material costs were due primarily to higher natural gas prices
which have significantly impacted the cost of urea, the Company's largest and
most widely used raw material. The unfavorable inventory adjustments for the
quarter and first nine months include the results of a third quarter 2001
physical inventory and cycle counts performed throughout the period.
Delivery and warehouse expenses, as a percent of sales, increased slightly to
8.3% for the third quarter ended September 30, 2001 from 8.2% in the third
quarter 2000. For the first nine months of 2001, delivery and warehouse expenses
increased, as a percent of sales, to 8.8% compared to 8.2% in 2000. The
increases for the first both periods of 2001 are primarily due to increased
warehouse utilities and payroll related expenses in addition to increased costs
relating to outbound freight expense. The freight cost increases resulted from a
higher volume of direct ship orders to customers, increased freight costs due to
increased sales volumes and increased energy costs.
Selling, general and administrative expenses increased by $1.3 million, a 4.8%
increase, to $28.3 million for the third quarter 2001 compared to $27.0 million
in the third quarter 2000. For the nine months ended September 30, 2001,
selling, general and administrative expenses increased by $3.1 million, a 3.9%
increase, to $81.8 million in 2001 compared to $78.7 million in 2000. The
increase for the third quarter and the first nine months is primarily due to
significantly higher health care insurance costs, as well as higher facility
costs, outside professional and consulting services and other operating
expenses.
11
Interest expense decreased $54,000 for the third quarter 2001 compared to the
third quarter 2000 as a result of lower interest rates and lower levels of debt
due to the receivables securitization. Interest expense decreased by $148,000, a
2.8% decrease, to $5.1 million in the first nine months 2001 compared to $5.2
million in the first nine months 2000. This decrease was primarily due to lower
average interest rates during the first nine months 2001 compared to the same
period in 2000.
Other expense consists primarily of losses on the sale of fixed assets, service
charge expense, royalty expense and other miscellaneous expenses. Customer
finance charges totaled $738,000 in the third quarter 2001 and $726,000 in the
third quarter 2000. Customer finance charges were $1.7 million for the first
nine months 2001 compared to $1.8 million for the first nine months 2000. The
slight decrease in customer finance charges for first nine months is
attributable to more timely accounts receivable collection efforts.
The effective income tax rate reduced to 36.0% for 2001 compared to 38.7% in
2000 due to lower state income tax rates. In the first quarter 2000, the
valuation allowance related to Tri Delta Fertilizer, Inc.'s net operating loss
carryforward was reversed because realization of such deferred tax assets is
considered "more likely than not".
Product Supply Division - Net sales for the Product Supply division were $91.4
million for the third quarter 2001 compared to $58.1 million in the third
quarter 2000 and were $266.0 million for the first nine months 2001 compared to
$237.1 million in 2000. These increases were due to higher sales volumes to the
Lawn Care division and to support seasonal inventory requirements. The operating
loss was $4.7 million for the third quarter 2001 compared to $984,000 profit for
the third quarter 2000 and a $6.4 million loss for the first nine months 2001
compared to a $4.9 million profit in 2000. The operating profit decreases were
due primarily to higher raw material costs, an unfavorable physical inventory
adjustment, increased expenses for Southern Golf assets that were acquired in
August 2000, and increased costs of production at the manufacturing plants.
These costs were slightly offset by increased production level efficiencies at
the Company's Novex facility.
Lawn Care Division - Net sales for the Lawn Care division were $97.3 million for
the third quarter 2001 compared to $92.5 million in the third quarter 2000. The
increase for the third quarter was due primarily to an increase in service
center sales, where same store sales increased 3.1% compared to the third
quarter 2000. Retail sales also increased by 7.4% for the third quarter 2001
compared to the third quarter 2000. National Accounts also increased 7.8% for
the third quarter 2001 compared to the third quarter 2000. Net sales were $282.4
million for the first nine months 2001 compared to $280.6 million in 2000. The
increase for the first nine months is due to an increase in service center sales
in the third quarter. Same store sales for the first nine months increased 0.1%
compared to the first nine months 2000. There was also an increase in retail
sales of 0.2% compared to the first nine months of 2000. Sales to large
customers with a national presence experienced a slight decline of 1.2% compared
to the first nine months of 2000. Spring weather related factors and customers'
difficult economic conditions had the largest impact on this division. Operating
profit was $10.4 million for the third quarter 2001 compared to $10.7 million in
the third quarter 2000. Operating profit was $26.4 million for the first nine
months 2001 compared to $34.2 million in 2000. These decreases were due
primarily to lower sales in the first quarter, the effect of higher raw material
costs over the first six months of 2001. Additionally selling, general and
administrative costs increased due to higher health care insurance costs, store
operating costs and general inflation.
12
Golf Division - Net sales for the Golf division were $46.8 million for the third
quarter 2001 compared to $47.1 million in the third quarter 2000. Net sales for
the first nine months 2001 were $116.5 million compared to $116.2 million in
2000. The sales decrease for the third quarter was primarily due to selective
price decreases (.5%). The sales increase for the first nine months was
primarily due to sales volume increase. Operating profit was $5.1 million for
the third quarter 2001 compared to $5.0 million in the third quarter 2000. The
increase in operating profit for the third quarter is a result of increased
volume. Operating profit was $11.7 million for the nine months 2001 compared to
$11.2 million in 2000. The increase in operating profit for the first nine
months was primarily due to higher sales levels.
Liquidity and Capital Resources
In April 2001, the Company completed a $50.0 million revolving accounts
receivable securitization program, at variable rates, maturing in April 2004, to
sell, without recourse, through a wholly owned subsidiary, certain trade
accounts receivable. At September 30, 2001, the Company had received $37.0
million from the sale of trade accounts receivable that had not yet been
collected. The proceeds from the sales were used to reduce borrowings under the
Company's revolving credit facility and to fund working capital needs. The
Company, as agent for the purchaser of the receivables, retains collection and
administrative responsibilities for the purchased receivables.
As of September 30, 2001, total assets of the Company were $229.7 million
compared to $266.6 million as of September 30, 2000 and $244.9 million as of
December 31, 2000. The asset decrease at September 30, 2001 from September 30,
2000 and from December 31, 2000 is primarily related to the Company's revolving
trade accounts receivable securitization program pursuant to which $37.0 million
of trade accounts receivable were sold as of September 30, 2001. The inventory
remained relatively stable compared to September 30, 2000 inventories, while the
increase from December 31, 2000 was due primarily to the Company's seasonal
build of control products and seed for anticipated fall sales. The increase in
accounts payable from December 2000 to September 2001 reflects seasonal supplier
deferred payment programs which are due in the fourth quarter of the year in
addition to the seasonal build of inventory.
As a result of weaker than expected operating results, the Company is in
violation of certain covenants, including a fixed charge test and similar other
covenants, contained in its revolving credit agreement with banks, its $45
million private placement term notes and its reimbursement agreement relating
to the $5.9 million Belmont County IRB. The Company is conducting active
discussions with its lenders which it hopes will lead to the execution within
the next several weeks of amendments or waivers, or agreements for the
forbearance from exercising any rights or remedies, that would cure the
violations. It is likely that such actions would require the payment of nominal
fees and compliance with new provisions in addition to the covenants set forth
in the credit, note purchase, reimbursement and related agreements. In
addition, the Company is currently considering refinancing its debt, together
with its asset securitization facility, including the possibility of entering
into an asset based lending facility. While the Company can make no assurances
that it will ultimately obtain the amendments, waivers or agreements to
forbear, or that it will be able to obtain a commitment to refinance these
facilities or be able to consummate such refinancing on terms and conditions
acceptable to the Company, management is encouraged by its discussions with its
lenders and prospective lenders. As a result of the covenant violations, the
Company has classified the outstanding portion ($39.3) of the $45 million of
private placement term notes and the $5.9 million Belmont County IRB as current
portion of debt, pending resolution of the refinancing options the Company is
13
pursuing. This classification change results in a $45.2 million increase to the
current portion of debt and a corresponding $45.2 million decrease to long-term
debt. The Company's long-term debt decreased to $0.2 million as of September
30, 2001 compared to $91.1 million as of September 30, 2000, and $94.7 million
as of December 31, 2000, due primarily to this changed classification of
long-term debt and the effects of the Company's trade accounts receivable
securitization program.
14
There was no outstanding debt under the Company's revolving credit facility
with banks as of September 30, 2001 compared to $40.0 million as of September
30, 2000 and $43.6 million as of December 31, 2000. The Company reduced its
availability under this revolving credit facility from $20.0 million to $15.0
million at the end of June 2001. The Company repaid $5.0 million due under its
$50.0 million private placement notes upon normal maturity in June 2001. In
early August 2001, the Company amended its $15.0 million revolving credit
facility with banks and extended the maturity to August 2002. Both the revolving
credit facility and the private placement notes were amended to provide the
revolving credit facility and the private placement note holders with a security
interest in the Company's inventories, machinery and equipment. As indicated in
the preceding paragraph, the Company is conducting active negotiations with its
lenders in order to receive relief for certain defaults under it revolving
credit agreement.
Capital expenditures for the first nine months of 2001 included improvements in
the Company's information systems, improvement costs for the Company's Novex(TM)
fertilizer plant in Disputanta, Virginia, furniture and fixtures for the
Company's headquarters and improvements to the Company's other manufacturing and
distribution facilities.
The Company believes its current borrowing capacity, once waivers of, or
forebearances with respect to, covenant violations are received from its lenders
and noteholders, is adequate through December 31, 2001. The Company also
believes that upon successful completion of its refinancing efforts its
borrowing capacity will be adequate to maintain operations and capital
requirements for the foreseeable future. However, the Company's borrowing
capacity, and its ability to refinance existing debt, will ultimately depend on
the Company's results of operations. No assurance can be made that the Company
will be able to obtain a commitment to refinance its debt facilities or will be
able to consummate such refinancing on terms and conditions acceptable to it.
The failure to retain sufficient borrowing capacity for the foreseeable future
would have a material adverse effect on the Company's results of operations and
financial condition.
Forward-Looking Statements
Certain statements included in the report are forward-looking statements that
are based on management's current belief, assumptions and expectations. These
forward-looking statements can be identified by the use of predictive or future
tense terms such as "anticipate," "estimate," "project," "may," "will" or
similar terms. These statements are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company's actual
future performance may differ materially from that anticipated in
forward-looking statements. Risk factors that would cause or contribute to such
differences include, but are not limited to:
- regional weather conditions which have an impact on both timing and
volume of sales;
- the Company's successful execution of its operating plans;
- the Company's ability to integrate business acquisitions successfully;
- general economic and business conditions;
- changes in market demographics
- changes in the regulation of the Company's products, including
applicable environmental regulations; and
- the Company's ability to effectively manufacture, market and
distribute new products.
- the Company's ability to refinance its debt.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE OF MARKET RISK
Not applicable.
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PART II - OTHER INFORMATION
Except as noted below, the items in Part II are inapplicable or, if applicable,
would be answered in the negative. These items have been omitted and no other
reference is made thereto.
Item 6 - Exhibits and Reports on Form 8-K
(a) Exhibits: None
(b) Reports on Form 8-K:
Form 8-K filed on August 24, 2001 relating to the redemption of rights
issued under the Company's shareholders rights plan.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
LESCO, INC.
November 14, 2001 By /s/ R. Breck Denny
R. Breck Denny, Vice-President/
Chief Financial Officer
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