LSCO Lesco (MM)

LESCO Announces Second Quarter 2005 Results - Company Announces Agreement to Sell Supply Chain Assets - CLEVELAND, July 27 /PRNewswire-FirstCall/ -- LESCO, Inc. (NASDAQ:LSCO), a leading provider of products for the professional green and pest control industries, today announced second quarter and six month results for the period ending June 30, 2005 and the signing of a definitive agreement to sell its supply chain assets and to enter into a long-term supply agreement with Turf Care Supply Corp., an affiliate of Platinum Equity, a global acquisition firm based in Los Angeles. Second Quarter 2005 Results Net sales for the three months ended June 30, 2005 increased 4.4% to $190.2 million from $182.2 million in the comparable period a year ago. Lawn Care gross sales grew 9.7% to $154.9 million from $141.2 million in the second quarter of 2004, while Golf gross sales were $37.3 million versus $42.0 million in the same quarter last year. Total Service Center gross sales increased 12.1% to $142.0 million from $126.7 million, while same-store Service Center sales grew 8.3%. Gross profit on sales (defined as product margin less distribution costs) increased to 26.8% of net sales, or $50.9 million, compared to 25.8% of net sales, or $47.0 million, in the second quarter of 2004. Product margin was $68.0 million, or 35.8% of net sales, versus $62.3 million, or 34.2% of net sales, in the same quarter last year, and was driven by better sell-through on seed and combination products. Distribution expense rose to $17.1 million, or 9.0% of net sales, from $15.3 million, or 8.4% of net sales, in the comparable period in 2004, as higher fuel costs, along with the Company's larger store base and wider network of distribution end points, negatively impacted year-over-year results. Michael P. DiMino, President and Chief Executive Officer, stated, "I am pleased by the solid effort of the entire LESCO team to drive such strong results in our Service Center and Lawn Care business. Additionally, after fully evaluating our business model, we believe our greatest opportunity for growth and the highest level of return to our stakeholders will be achieved through our commitment of capital resources to our Service Centers and Stores- on-Wheels businesses." Selling expense was $24.3 million, or 12.8% of net sales, versus $22.9 million, or 12.6% of net sales, in the second quarter of 2004. Approximately $0.8 million is attributable to incremental operating costs for Service Centers opened in 2004 and 2005, while $0.5 million is related to new direct marketing initiatives, severance costs for sales management and related support staff, as well as the accelerated migration to an expanded Stores-on- Wheels(R) program. General and administrative expense was $6.3 million, or 3.3% of net sales, versus $6.6 million, or 3.6% of net sales, in the same quarter last year. Earnings before income tax increased 10.8% to $15.8 million in the second quarter of 2005 from $14.2 million in the second quarter of 2004, an improvement of 50 basis points to 8.3% of net sales. For the second quarter of 2005, the Company reported on generally accepted accounting principles (GAAP) basis net income of $15.8 million, or $1.71 per diluted share, compared to net income of $14.2 million, or $1.58 per diluted share last year. The second quarter 2005 results were reduced by $0.03 per diluted share for settlement costs related to the termination of its supply agreement with KPAC Holdings, Inc. (KPAC). The Company's GAAP results do not reflect a tax provision related to the Company's second quarter 2005 and second quarter 2004 earnings before income tax because of the required accounting treatment for LESCO's deferred tax assets. Assuming a 39% tax rate, which LESCO typically utilizes to evaluate year-over-year performance, net income would have been reduced by $0.67 per diluted share for the second quarter 2005 and $0.61 per diluted share for the second quarter 2004. First Six Months 2005 Results Net sales for the six months ended June 30, 2005 increased 1.4% to $288.3 million from $284.2 million in the comparable period a year ago. For the first six months of 2005, Lawn Care gross sales expanded 5.4% to $239.2 million from $226.9 million for the same period of 2004, while Golf gross sales were $52.8 million versus $59.2 million for the first six months in 2004. Same-store Service Center sales results rose 3.9%. Gross profit increased to $74.3 million, or 25.8% of net sales, from $70.6 million, or 24.8% of net sales, in the first half of 2004. Earnings before income taxes were $5.1 million for the first six months, or 1.8% of sales, compared to $6.6 million, or 2.3% of sales, for the same period in 2004. For the first half of 2005, the Company reported GAAP basis net income of $5.1 million, or $0.55 per diluted share, compared to net income of $6.3 million, or $0.70 per diluted share, last year. The first half 2005 results were reduced $0.03 per diluted share for settlement costs paid to KPAC. Assuming a tax rate of 39%, net income would have been reduced by $0.21 per diluted share for the first six months of 2005 and $0.25 per diluted share for the first six months of 2004. New Service Centers LESCO opened ten new Service Centers during the second quarter of 2005 in areas where the Company already had a market presence. On June 30, 2005, there were 285 Service Centers in operation, versus 272 at the end of the second quarter of 2004. The 59 Service Centers opened from 2003 through the second quarter of 2005 generated net sales of $17.0 million for the quarter and four-wall, pre-tax income of $1.4 million. These 59 Service Centers generated net sales of $24.0 million for the first six months of 2005 and four-wall, pre-tax income of $0.5 million. Sale of Supply Chain Assets On July 26, 2005, the Company signed a definitive agreement, subject to the satisfaction of customary closing conditions, to sell substantially all of its supply chain assets along with its consumable products inventory stored at those locations including fertilizer, seed, control products, combination products, pest control and related products. The supply chain assets to be sold are composed of all four of LESCO's blending facilities and the majority of the Company's warehouse and distribution centers. Turf Care Supply Corp. will pay the Company a cash purchase price equal to the value of the inventory at closing. The Company expects to harvest approximately $25.0 million in cash after settling all requirements associated with the transaction including the outstanding accounts payable due to vendors for the inventory. The Company anticipates the proceeds to be returned to shareholders in the form of a stock repurchase plan, tender offer, or special one-time dividend to be determined by LESCO's Board of Directors. The transaction is expected to close by the end of October 2005 and the Company expects a pre-tax charge associated with the proposed transaction of $27.0 million to $30.0 million. Concurrent with and subject to the execution of the sale agreement, the Company will enter into a long-term supply contract that includes negotiated pricing terms and built-in cost incentives. Mr. DiMino continued, "We have selected an elite business partner that we believe has the capital and the resources to leverage the production and distribution capacity of our supply chain network over the long-term. We continue to believe in our long-term strategic direction and expect that the continued expansion of our Stores-on-Wheels and Service Centers, along with other margin enhancing initiatives, including the right-sizing of our cost structure, will provide increased earnings in 2006." Operating Cash Flow and Balance Sheet As of June 30, 2005, LESCO's total debt was $3.8 million and consisted of $3.0 million in revolving bank debt along with a $0.8 million interest free, forgivable loan from the City of Cleveland, Ohio. This compares to total debt of $5.9 million as of June 30, 2004. The Company also reported a June 30, 2005 cash and cash equivalent balance of $8.5 million versus $26.9 million at the same time last year. Full Year 2005 Guidance The Company adjusted guidance for 2005 full-year revenue growth to range from 1.0% to 2.5%, with an 8.0% to 9.0% increase in Service Center sales. The sales of Other Selling Locations are expected to decline approximately $22.0 to $25.0 million related to the acceleration of the Company's strategy to reduce its sales representative model and to concentrate on the higher profit Service Center and Stores-on-Wheels models. For the full year, the Company estimates a diluted EPS range of $0.74 to $0.82 before the $27.0 to $30.0 million expected charge associated with the supply chain transaction. Assuming a 39% tax rate, the Company estimates a diluted EPS range of $0.45 to $0.50, which includes a $0.03 effect from the settlement of our dispute with KPAC. Mr. DiMino concluded, "Our historical direct golf business can be bifurcated between a high margin Stores-on-Wheels model and a low margin sales representative model. Consistent with our commitment to invest capital in our high growth, high return store model, we made the decision during the first quarter to convert the resources of our sales representative model to our Stores-on-Wheels model. The disbanding of our sales representative model included the conversion of these individuals to regional manager or Stores-on- Wheels positions. Unfortunately, the execution of this program was less than we desired, resulting in a golf sales decline greater than we had expected. We continue to manage this company and make the changes necessary to create long-term value for our shareholders." As part of the Company's refined strategy of opening new Service Centers throughout the entire year, the Company expects to open approximately 30 to 35 in 2005, with 9 to 10 openings in the third quarter 2005. This outlook is based upon various assumptions, which include industry trends and internal expectations, including, but not limited to the following: 1) the opening of up to 35 new Service Centers in 2005, 2) gross profit, including distribution costs, of 24.7% to 25.0%, 3) selling expense continuing to increase to approximately 17.0% of net sales due to new Service Centers, 4) merchant discount expense of approximately 1.9% of net sales related to the outsourcing of the Company's accounts receivable program, 5) general and administrative expenses flat on a comparable basis, 6) average borrowings being $10.0 million at an effective interest rate cost of approximately 7%, 7) an income tax rate of 39%, 8) no material change in the products or services offered at the Company's locations as of December 31, 2004 or in the terms or procedures for offering such products and services, and 9) no material adverse results from any litigation or regulatory proceedings against the Company, either currently existing or that may arise in the future. Conference Call The Company will host a conference call and webcast with investors, analysts and other interested parties today at 4:30 p.m. (Eastern). Hosting the call will be Michael P. DiMino, President and Chief Executive Officer, and Jeffrey L. Rutherford, Sr. Vice President, Chief Financial Officer. The live call can be accessed by dialing 1-866-831-6234, passcode 71850317. Participants should register at least fifteen minutes prior to the commencement of the call. The conference call will also include a question and answer session. Management's slide presentation will be available for downloading beginning today at 4:00 p.m. at LESCO's web site, http://www.lesco.com/. Additionally, a live webcast will be available to interested parties at http://www.lesco.com/. Participants should allow at least fifteen minutes prior to the commencement of the call to register, download and install necessary audio software. Questions can be submitted either in advance or during the webcast via email to or through the Company's corporate web site where a link will be provided on the "Home" page. LESCO's culture demands the highest of ethical standards and accountability manifested in full and fair financial disclosure to our shareholders. LESCO management encourages the participation of our shareholders and other interested parties in our conference calls and live webcasts. For those who cannot participate in the conference call or the live webcast, a replay will be available beginning approximately one hour after the conclusion of the event on LESCO's web site. About LESCO, Inc. LESCO serves more than 130,000 customers worldwide, through 285 LESCO Service Center(R) locations, 110 LESCO Stores-on-Wheels vehicles, the Internet, and other direct sales efforts, all of which are serviced by the support of eight distribution hubs. Additional information about LESCO can be found on the Internet at http://www.lesco.com/. Statements in this news release under the heading 2005 Guidance and other statements relating to sales and earnings expectations, new Service Center openings and profitability, and other statements that are not historical information are forward-looking statements and, as such, reflect only the Company's best assessment at this time. Investors are cautioned that forward- looking statements involve risks and uncertainties that may cause actual results to differ materially from such statements and that investors should not place undue reliance on such statements. Factors that may cause actual results to differ materially from those projected or implied in the forward- looking statements include, but are not limited to, the final resolution of certain contingencies relative to the collection of identified accounts receivable; 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 Company's ability to transition quickly and effectively from a golf sales representative model to a Stores-on-Wheels model; competitive factors in the Company's business, including pricing pressures; lack of availability or instability in the cost of raw materials which affects the costs of certain products; the Company's ability to close its proposed transaction with Turf Care Supply Corp. an affiliate of Platinum Equity LLC regarding its supply chain assets; 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; changes in existing law; the Company's ability to effectively manufacture, market and distribute new products; the success of the Company's operating plans; any litigation or regulatory proceedings against the Company; regional weather conditions; and the condition of the industry and the economy. For a further discussion of risk factors, investors should refer to the Company's Securities and Exchange Commission reports, including but not limited to its Form 10-K for the year ended December 31, 2004. Contact: Jeffrey L. Rutherford Sr. Vice President & Chief Financial Officer LESCO, Inc. (216) 706-9250 CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED Three Months Ended Six Months Ended June 30, June 30, (Dollars in thousands, except per share data) 2005 2004 2005 2004 Net sales $190,201 $182,189 $288,255 $284,233 Cost of product (122,224) (119,928) (187,237) (188,396) Distribution cost (17,061) (15,298) (26,750) (25,268) Gross profit on sales 50,916 46,963 74,268 70,569 Selling expense (24,296) (22,911) (48,107) (44,635) General & administrative expense (6,271) (6,603) (14,039) (13,982) Merchant discounts and provision for doubtful accounts (3,803) (2,554) (5,853) (4,181) Pre-opening expense (491) (597) (648) (910) Vendor contract termination (464) - (464) - Other expense - (90) (37) (78) Other income 283 139 398 306 Earnings before interest and taxes 15,874 14,347 5,518 7,089 Interest expense, net (124) (136) (441) (491) Earnings before taxes 15,750 14,211 5,077 6,598 Income tax (provision) benefit: Current - (905) - (1,245) Deferred (4,314) (4,637) (774) (1,328) Change in valuation allowance 4,314 5,542 774 2,233 - - - (340) Net income $15,750 $14,211 $5,077 $6,258 Earnings per share of common stock: Diluted $1.71 $1.58 $0.55 $0.70 Basic $1.77 $1.63 $0.57 $0.72 Average number of common shares and common share equivalents outstanding: Diluted 9,195,080 8,975,352 9,169,482 8,914,320 Basic 8,887,944 8,697,694 8,853,033 8,687,601 LESCO, INC. CONSOLIDATED BALANCE SHEETS June 30, June 30, December 31, (Dollars in thousands) 2005 2004 2004 (unaudited) (unaudited) (audited) CURRENT ASSETS: Cash and cash equivalents $8,495 $26,914 $8,101 Accounts receivable 13,938 12,839 16,931 Inventories 133,859 118,543 100,582 Other 2,546 2,864 3,126 TOTAL CURRENT ASSETS 158,838 161,160 128,740 Property, plant and equipment, net 25,290 28,192 26,019 Other 1,155 2,374 1,234 $185,283 $191,726 $155,993 CURRENT LIABILITIES: Accounts payable $88,510 $88,511 $56,371 Accrued liabilities 18,087 18,836 24,184 Revolving credit facility 2,979 - 7,303 TOTAL CURRENT LIABILITIES 109,576 107,347 87,858 Long-term debt 750 5,875 - Deferred - other 1,804 509 1,612 SHAREHOLDERS' EQUITY: Common shares--without par value-- 19,500,000 shares authorized; 8,873,180 shares issued and outstanding at June 30, 2005; 8,697,694 shares issued and outstanding at June 30, 2004 and December 31, 2004 886 870 870 Paid-in capital 37,384 34,934 34,846 Retained earnings 36,714 43,521 31,637 Unearned compensation (1,831) (1,330) (830) TOTAL SHAREHOLDERS' EQUITY 73,153 77,995 66,523 $185,283 $191,726 $155,993 LESCO, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, (Dollars in thousands) 2005 2004 OPERATING ACTIVITIES: Net Income $5,077 $6,258 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Depreciation 3,302 3,716 Amortization of deferred financing fees and other 79 85 Decrease in accounts receivable 2,993 1,225 Sale of accounts receivable - 5,214 Increase in inventories (33,277) (24,963) (Gain) loss on sale of fixed assets (92) 76 Increase in accounts payable 25,552 40,795 Amortization of unearned compensation 395 324 (Increase) decrease in current income tax (150) 3,984 (Decrease) increase in other current items (5,236) 1,271 NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (1,357) 37,985 INVESTING ACTIVITIES: Proceeds on the sale of fixed assets 235 1,592 Purchase of property, plant and equipment (2,655) (2,095) NET CASH USED IN INVESTING ACTIVITIES (2,420) (503) FINANCING ACTIVITIES: (Increase) decrease in overdraft balances 6,587 (2,675) Proceeds from borrowings 338,268 295,059 Reduction of borrowings (341,842) (310,600) Exercised stock options, net of treasury shares 1,158 143 NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 4,171 (18,073) Net change in cash and cash equivalents 394 19,409 Cash and cash equivalents - Beginning of the period 8,101 7,505 CASH AND CASH EQUIVALENTS - END OF THE PERIOD $8,495 $26,914 Supplemental disclosure of cash flow information: Interest paid, including letters of credit and unused facility fees $(507) $(479) Income taxes refunded $72 $3,584 LESCO, INC. SALES BY CUSTOMER SECTOR AND TRANSACTING SELLING LOCATIONS Three Months Ended June 30, 2005 2004 Other Other Service Selling Service Selling (Dollars in millions) Centers Locations Total Centers Locations Total Lawn care $129.9 $25.0 $154.9 $116.1 $25.1 $141.2 Golf 12.1 25.2 37.3 10.6 31.4 42.0 Gross sales $142.0 $50.2 $192.2 $126.7 $56.5 $183.2 Agency sales (0.7) (0.4) Freight revenue 0.4 0.5 Customer discounts, rebates and sales adjustments (1.7) (1.1) Net sales $190.2 $182.2 % Change Service Other Selling (Dollars in millions) Centers Locations Total Lawn care 11.9% -0.4% 9.7% Golf 14.2 (19.7) (11.2) Gross sales 12.1% -11.2% 4.9% Agency sales 75.0 Freight revenue (20.0) Customer discounts, rebates and sales adjustments 54.5 Net sales 4.4% Six Months Ended June 30, 2005 2004 Other Other Service Selling Service Selling (Dollars in millions) Centers Locations Total Centers Locations Total Lawn care $194.8 $44.4 $239.2 $181.3 $45.6 $226.9 Golf 16.3 36.5 52.8 14.4 44.8 59.2 Gross sales $211.1 $80.9 $292.0 $195.7 $90.4 $286.1 Agency sales (1.0) (0.4) Freight revenue 0.6 0.8 Customer discounts, rebates and sales adjustments (3.3) (2.3) Net sales $288.3 $284.2 % Change Service Other Selling (Dollars in millions) Centers Locations Total Lawn care 7.4% -2.6% 5.4% Golf 13.2 (18.5) (10.8) Gross sales 7.9% -10.5% 2.1% Agency sales 150.0 Freight revenue (25.0) Customer discounts, rebates and sales adjustments 43.5 Net sales 1.4% LESCO, INC. SERVICE CENTER RESULTS BY YEAR OF OPENING For the Three Months Ended June 30, 2005 Class of Class of Class of 2005 2004 2003 (Dollars in thousands) (11 Stores) (27 Stores) (21 Stores) Total Sales $822 $8,562 $7,594 $16,978 Cost of product (546) (5,577) (4,961) (11,084) Distribution cost (89) (359) (348) (796) Gross profit on sales 187 2,626 2,285 5,098 Selling expense (509) (1,340) (1,122) (2,971) Merchant discount expense (14) (135) (121) (270) Pre-opening expense (491) - - (491) (Loss) income before interest and taxes $(827) $1,151 $1,042 $1,366 For the Three Months Ended June 30, 2004 Class of Class of 2004 2003 (Dollars in thousands) (25 Stores) (21 Stores) Total Sales $4,318 $6,283 $10,601 Cost of product (2,928) (4,253) (7,181) Distribution cost (277) (266) (543) Gross profit on sales 1,113 1,764 2,877 Selling expense (1,050) (1,080) (2,130) Merchant discount expense (56) (83) (139) Pre-opening expense (597) - (597) (Loss) income before interest and taxes $(590) $601 $11 For the Six Months Ended June 30, 2005 Class of Class of Class of 2005 2004 2003 (Dollars in thousands) (11 Stores) (27 Stores) (21 Stores) Total Sales $862 $11,953 $11,205 $24,020 Cost of product (574) (7,898) (7,400) (15,872) Distribution cost (96) (573) (553) (1,222) Gross profit on sales 192 3,482 3,252 6,926 Selling expense (583) (2,652) (2,159) (5,394) Merchant discount expense (15) (175) (174) (364) Pre-opening expense (648) - - (648) (Loss) income before interest and taxes $(1,054) $655 $919 $520 For the Six Months Ended June 30, 2004 Class of Class of 2004 2003 (Dollars in thousands) (25 Stores) (21 Stores) Total Sales $4,768 $9,240 $14,008 Cost of product (3,230) (6,259) (9,489) Distribution cost (376) (434) (810) Gross profit on sales 1,162 2,547 3,709 Selling expense (1,279) (2,126) (3,405) Merchant discount expense (62) (123) (185) Pre-opening expense (910) - (910) (Loss) income before interest and taxes $(1,089) $298 $(791) DATASOURCE: LESCO, Inc. CONTACT: Jeffrey L. Rutherford, Sr. Vice President & Chief Financial Officer of LESCO, Inc., +1-216-706-9250 Web site: http://www.lesco.com/

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