##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended June 30, 2006
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from          to
 Commission File No. 0-13147
 
 LESCO, Inc.
 (Exact name of registrant as specified in its charter)
 Ohio
    
    34-0904517(State or other jurisdiction of
    
    (I.R.S. Employer Identification No.)incorporation or organization)1301 East Ninth Street, Suite 1300
    
    44114Cleveland, Ohio(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code
(216) 706-9250
 þ o
  o þ o
 o þ




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TABLE OF CONTENTS  PART I FINANCIAL INFORMATIONITEM 1. FINANCIAL STATEMENTSITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONSITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKITEM 4. CONTROLS AND PROCEDURESPART II  OTHER INFORMATIONITEM 1. LEGAL PROCEEDINGSITEM 2(c) UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDSITEM 4. Submission of Matters to a Vote of Security HoldersITEM 6. EXHIBITSSIGNATURESEX-31.AEX-31.BEX-32.AEX-32.B    Table of Contents  
 PART I FINANCIAL INFORMATION
 
 ITEM 1. FINANCIAL STATEMENTS
 LESCO, INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS  UNAUDITED
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    181,950
    
    
    $
    190,201
    
    
    $
    281,788
    
    
    $
    288,255Cost of product (including
distribution costs)
    
    
    (138,299
    )
    
    
    (139,285
    )
    
    
    (214,206
    )
    
    
    (213,987
    )Gross profit on sales
    
    
    43,651
    
    
    
    50,916
    
    
    
    67,582
    
    
    
    74,268Selling expense
    
    
    (26,935
    )
    
    
    (25,590
    )
    
    
    (52,148
    )
    
    
    (50,746
    )General & administrative expense
    
    
    (3,961
    )
    
    
    (4,935
    )
    
    
    (10,360
    )
    
    
    (11,318
    )Merchant discounts and provision for
doubtful accounts
    
    
    (3,511
    )
    
    
    (3,803
    )
    
    
    (6,117
    )
    
    
    (5,853
    )Pre-opening expense
    
    
    (521
    )
    
    
    (533
    )
    
    
    (810
    )
    
    
    (730
    )Vendor contract termination
    
    
    
    
    
    
    (464
    )
    
    
    
    
    
    
    (464
    )Other expense
    
    
    (30
    )
    
    
    
    
    
    
    (30
    )
    
    
    (37
    )Other income
    
    
    32
    
    
    
    283
    
    
    
    167
    
    
    
    398Earnings (loss) before interest and taxes
    
    
    8,725
    
    
    
    15,874
    
    
    
    (1,716
    )
    
    
    5,518Interest income (expense), net
    
    
    175
    
    
    
    (124
    )
    
    
    2
    
    
    
    (441
    )Earnings (loss) before taxes
    
    
    8,900
    
    
    
    15,750
    
    
    
    (1,714
    )
    
    
    5,077Income tax (provision) benefit:Current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    
    (3,052
    )
    
    
    (4,314
    )
    
    
    1,209
    
    
    
    (774
    )Change in valuation allowance
    
    
    3,052
    
    
    
    4,314
    
    
    
    (1,209
    )
    
    
    774
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    8,900
    
    
    $
    15,750
    
    
    $
    (1,714
    )
    
    $
    5,077Earnings (loss) per common share:Diluted
    
    $
    0.95
    
    
    $
    1.71
    
    
    $
    (0.19
    )
    
    $
    0.55Basic
    
    $
    0.97
    
    
    $
    1.77
    
    
    $
    (0.19
    )
    
    $
    0.57Average number of common shares and
common share equivalents outstanding:Diluted
    
    
    9,353,088
    
    
    
    9,195,080
    
    
    
    9,096,032
    
    
    
    9,169,482Basic
    
    
    9,184,828
    
    
    
    8,887,944
    
    
    
    9,096,032
    
    
    
    8,853,033
  2




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##### Table of Contents



LESCO, INC.
CONSOLIDATED BALANCE SHEETS
 June 30, 2006
    
    
    June 30, 2005
    
    
    December 31, 2005(Dollars in thousands)
    
    (Unaudited)
    
    
    (Unaudited)CURRENT ASSETS:Cash and cash equivalents
    
    $
    19,854
    
    
    $
    8,495
    
    
    $
    21,030Accounts receivable, net
    
    
    13,909
    
    
    
    13,938
    
    
    
    16,310Inventories
    
    
    101,531
    
    
    
    133,859
    
    
    
    80,346Other
    
    
    1,564
    
    
    
    2,546
    
    
    
    2,667TOTAL CURRENT ASSETS
    
    
    136,858
    
    
    
    158,838
    
    
    
    120,353Property, plant and equipment, net
    
    
    9,076
    
    
    
    25,290
    
    
    
    9,624Other
    
    
    888
    
    
    
    1,155
    
    
    
    904$
    146,822
    
    
    $
    185,283
    
    
    $
    130,881CURRENT LIABILITIES:Accounts payable
    
    $
    83,997
    
    
    $
    88,510
    
    
    $
    61,381Accrued liabilities
    
    
    17,789
    
    
    
    18,837
    
    
    
    24,576Revolving credit facility
    
    
    
    
    
    
    2,979
    
    
    
    TOTAL CURRENT LIABILITIES
    
    
    101,786
    
    
    
    110,326
    
    
    
    85,957Deferred  other
    
    
    2,007
    
    
    
    1,804
    
    
    
    2,166TOTAL LIABILITIES
    
    
    103,793
    
    
    
    112,130
    
    
    
    88,123SHAREHOLDERS EQUITY:Common shareswithout par value19,500,000 shares
authorized; 9,242,415
shares issued and
9,150,893 outstanding at
June 30, 2006; 8,873,180
shares issued and
outstanding at June 30,
2005 and 8,949,921 shares
issued and outstanding at
December 31, 2005
    
    
    924
    
    
    
    886
    
    
    
    894Paid-in capital
    
    
    40,282
    
    
    
    37,384
    
    
    
    38,051Treasury stock; 91,522 at June 30, 2006; none in 2005
    
    
    (1,418
    )
    
    
    
    
    
    
    Retained earnings
    
    
    3,241
    
    
    
    36,714
    
    
    
    4,955Unearned compensation
    
    
    
    
    
    
    (1,831
    )
    
    
    (1,142
    )TOTAL SHAREHOLDERS EQUITY
    
    
    43,029
    
    
    
    73,153
    
    
    
    42,758$
    146,822
    
    
    $
    185,283
    
    
    $
    130,881
  3




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##### Table of Contents



LESCO, INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS  UNAUDITED
 Six Months Ended June 30,(Dollars in thousands)
    
    2006
    
    
    2005OPERATING ACTIVITIES:Net (loss) income
    
    $
    (1,714
    )
    
    $
    5,077Adjustments to reconcile net (loss) income to net cash used in
operating activities:Depreciation and amortization
    
    
    1,752
    
    
    
    3,381Increase in accounts receivable
    
    
    2,401
    
    
    
    2,993Increase in inventories
    
    
    (21,185
    )
    
    
    (33,277
    )Increase in accounts payable
    
    
    21,804
    
    
    
    25,552Decrease in accrued expenses
    
    
    (6,731
    )
    
    
    (6,124
    )Increase in other items
    
    
    1,104
    
    
    
    1,041NET CASH USED IN OPERATING ACTIVITIES
    
    
    (2,569
    )
    
    
    (1,357
    )INVESTING ACTIVITIES:Proceeds on the sale of property, plant and equipment
    
    
    4
    
    
    
    235Purchase of property, plant and equipment:Stores
    
    
    (952
    )
    
    
    (2,136
    )Other
    
    
    (289
    )
    
    
    (519
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (1,237
    )
    
    
    (2,420
    )FINANCING ACTIVITIES:Increase in overdraft balances
    
    
    812
    
    
    
    6,587Reduction of borrowings, net
    
    
    
    
    
    
    (3,574
    )Purchase of treasury shares
    
    
    (1,418
    )
    
    
    Exercised stock options
    
    
    3,236
    
    
    
    1,158NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    2,630
    
    
    
    4,171Net change in cash and cash equivalents
    
    
    (1,176
    )
    
    
    394Cash and cash equivalents  Beginning of the period
    
    
    21,030
    
    
    
    8,101CASH AND CASH EQUIVALENTS  END OF THE PERIOD
    
    $
    19,854
    
    
    $
    8,495Supplemental disclosure of cash flow information:Interest paid, including letters of credit and unused facility fees
    
    $
    (140
    )
    
    $
    (507
    )Income taxes (paid) refunded
    
    $
    (103
    )
    
    $
    72
  4




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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Note 1. Description of Business and Segment Information
 ® ®
  Segment Information
   Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net salesStores
    
    $
    167,371
    
    
    $
    165,033
    
    
    $
    251,567
    
    
    $
    241,093Direct
    
    
    14,579
    
    
    
    25,168
    
    
    
    30,221
    
    
    
    47,162Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    181,950
    
    
    $
    190,201
    
    
    $
    281,788
    
    
    $
    288,255Earnings (loss) before interest and taxesStores
    
    $
    15,892
    
    
    $
    24,311
    
    
    $
    13,694
    
    
    $
    24,918Direct
    
    
    256
    
    
    
    1,068
    
    
    
    1,696
    
    
    
    286Corporate
    
    
    (7,423
    )
    
    
    (9,505
    )
    
    
    (17,106
    )
    
    
    (19,686
    )$
    8,725
    
    
    $
    15,874
    
    
    $
    (1,716
    )
    
    $
    5,518Capital expendituresStores
    
    $
    623
    
    
    $
    1,277
    
    
    $
    952
    
    
    $
    2,136Direct
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate
    
    
    38
    
    
    
    213
    
    
    
    289
    
    
    
    519$
    661
    
    
    $
    1,490
    
    
    $
    1,241
    
    
    $
    2,655Depreciation expenseStores
    
    $
    441
    
    
    $
    279
    
    
    $
    862
    
    
    $
    551Direct
    
    
    12
    
    
    
    13
    
    
    
    24
    
    
    
    33Corporate
    
    
    375
    
    
    
    1,397
    
    
    
    786
    
    
    
    2,718$
    828
    
    
    $
    1,689
    
    
    $
    1,672
    
    
    $
    3,302Intangible asset amortization expenseStores
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Direct
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Corporate
    
    
    40
    
    
    
    40
    
    
    
    80
    
    
    
    79$
    40
    
    
    $
    40
    
    
    $
    80
    
    
    $
    79
 June 30,2006
    
    
    2005Total assetsStores
    
    $
    114,460
    
    
    $
    100,006Direct
    
    
    1,351
    
    
    
    1,332Corporate
    
    
    31,011
    
    
    
    83,945$
    146,822
    
    
    $
    185,283
 5




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Note 2. Summary of Significant Accounting Policies
 Principles
of Consolidation
 Use of Estimates
 Earnings
per Share
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands, except per share data)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss) applicable to common shares
    
    $
    8,900
    
    
    $
    15,750
    
    
    $
    (1,714
    )
    
    $
    5,077Weighted average number of common shares
outstanding (basic)
    
    
    9,184,828
    
    
    
    8,887,944
    
    
    
    9,096,032
    
    
    
    8,853,033Weighted average dilutive stock options
    
    
    168,260
    
    
    
    307,136
    
    
    
    
    
    
    
    316,449Weighted
average number of common shares and common share equivalents
outstanding (diluted)
    
    
    9,353,088
    
    
    
    9,195,080
    
    
    
    9,096,032
    
    
    
    9,169,482Diluted earnings (loss) per share
    
    $
    0.95
    
    
    $
    1.71
    
    
    $
    (0.19
    )
    
    $
    0.55Basic earnings (loss) per share
    
    $
    0.97
    
    
    $
    1.77
    
    
    $
    (0.19
    )
    
    $
    0.57
  Stock Options Accounting for Stock-Based Compensation
  6




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##### Table of Contents



Three
Months
Ended June 30,
    
    

Six
Months
Ended June 30,(Dollars in thousands, except per share data)
    
    2005
    
    
    2005Net income as reported
    
    $
    15,750
    
    
    $
    5,077Add: stock option expense included in reported
net income, net of related tax effects
    
    
    
    
    
    
    Less: stock option expense, net of related tax effects
    
    
    (62
    )
    
    
    (134
    )Pro forma net income
    
    $
    15,688
    
    
    $
    4,943Earnings per diluted shareAs reported
    
    $
    1.71
    
    
    $
    0.55Pro forma
    
    $
    1.71
    
    
    $
    0.54Earnings per basic shareAs reported
    
    $
    1.77
    
    
    $
    0.57Pro forma
    
    $
    1.77
    
    
    $
    0.56
   Note 3. Accounts Receivable
 June 30,
    
    
    December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2005Supplier rebate programs
    
    $
    790
    
    
    $
    7,269
    
    
    $
    4,574Supplier other
    
    
    5,321
    
    
    
    
    
    
    
    4,635Trade receivablesOwned  domestic
    
    
    5,925
    
    
    
    6,420
    
    
    
    3,763Owned  international
    
    
    2,464
    
    
    
    2,275
    
    
    
    3,076Other
    
    
    1,223
    
    
    
    1,425
    
    
    
    1,879Allowance for doubtful accounts
    
    
    (1,814
    )
    
    
    (3,451
    )
    
    
    (1,617
    )$
    13,909
    
    
    $
    13,938
    
    
    $
    16,310
  
    
    Rebates calculated on a percentage of the value of merchandise purchased over a
definitive period of time, generally one year or less. Usually, there is a minimum
purchase requirement, and the rebate percentage may be tiered, increasing as the volume
purchased increases over the minimum requirement.
 
    
    Rebates calculated on a percentage of the purchased cost of merchandise sold by the
Company over a definitive period of time, generally one year or less.
  7




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June 30,
    
    
    December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2005Logistics charges
    
    $
    2,968
    
    
    $
    
    
    
    $
    3,791Grass seed
    
    
    435
    
    
    
    
    
    
    
    755Vendor rebates/other
    
    
    1,918
    
    
    
    
    
    
    
    89Supplier other
    
    $
    5,321
    
    
    $
    
    
    
    $
    4,635
      8




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##### Table of Contents



Note 4. Inventories
 June 30,
    
    
    December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2005Finished goods and purchased inventoriesSelling locations
    
    $
    91,054
    
    
    $
    88,399
    
    
    $
    72,523Non-selling locations
    
    
    9,538
    
    
    
    47,583
    
    
    
    8,377Less: Markdown, shrink and vendor discount reserves
    
    
    (1,956
    )
    
    
    (1,685
    )
    
    
    (3,887
    )Inventory held on consignment
    
    
    (5,811
    )
    
    
    (12,437
    )
    
    
    (3,961
    )92,825
    
    
    
    121,860
    
    
    
    73,052Raw materials
    
    
    
    
    
    
    11,999
    
    
    
    Grass seed
    
    
    8,706
    
    
    
    
    
    
    
    7,294$
    101,531
    
    
    $
    133,859
    
    
    $
    80,346
     Note 5. Property, Plant and Equipment
   9




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##### Table of Contents



June 30,
    

December 31,2006
    
    2005
    
    2005(Dollars in thousands)
    
    Stores
    
    Direct
    
    Corp.
    
    Total
    
    Stores
    
    Direct
    
    Corp.
    
    Total
    
    Stores
    
    Direct
    
    Corp.
    
    TotalLand
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    600
    
    
    $
    600
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Buildings and improvements
    
    
    1,901
    
    
    
    
    
    
    
    246
    
    
    
    2,147
    
    
    
    2,275
    
    
    
    
    
    
    
    18,593
    
    
    
    20,868
    
    
    
    2,408
    
    
    
    
    
    
    
    669
    
    
    
    3,077Machinery and equipment
    
    
    5,612
    
    
    
    7
    
    
    
    221
    
    
    
    5,840
    
    
    
    5,008
    
    
    
    22
    
    
    
    19,846
    
    
    
    24,876
    
    
    
    5,189
    
    
    
    7
    
    
    
    349
    
    
    
    5,545Furniture and fixtures
    
    
    6,875
    
    
    
    308
    
    
    
    19,156
    
    
    
    26,339
    
    
    
    6,409
    
    
    
    412
    
    
    
    30,305
    
    
    
    37,126
    
    
    
    6,434
    
    
    
    308
    
    
    
    18,656
    
    
    
    25,398Subtotal
    
    
    14,388
    
    
    
    315
    
    
    
    19,623
    
    
    
    34,326
    
    
    
    13,692
    
    
    
    434
    
    
    
    69,344
    
    
    
    83,470
    
    
    
    14,031
    
    
    
    315
    
    
    
    19,674
    
    
    
    34,020Less: Accumulated depreciation
    
    
    (8,046
    )
    
    
    (246
    )
    
    
    (16,958
    )
    
    
    (25,250
    )
    
    
    (7,490
    )
    
    
    (258
    )
    
    
    (50,432
    )
    
    
    (58,180
    )
    
    
    (7,712
    )
    
    
    (222
    )
    
    
    (16,462
    )
    
    
    (24,396
    )Property, plant and equipment,
net
    
    $
    6,342
    
    
    $
    69
    
    
    $
    2,665
    
    
    $
    9,076
    
    
    $
    6,202
    
    
    $
    176
    
    
    $
    18,912
    
    
    $
    25,290
    
    
    $
    6,319
    
    
    $
    93
    
    
    $
    3,212
    
    
    $
    9,624
 Note 6. Borrowings:
 June 30,
    
    
    December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2005Current:Revolving credit facility
    
    $
    
    
    
    $
    2,979
    
    
    $
    
 Revolving Credit Facility
   June 30,
    
    
December
31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2005Supplier contract
    
    $
    10,000
    
    
    $
    
    
    
    $
    10,000Insurance programs
    
    
    2,658
    
    
    
    2,708
    
    
    
    2,708Other
    
    
    400
    
    
    
    570
    
    
    
    320$
    13,058
    
    
    $
    3,278
    
    
    $
    13,028
    10




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##### Table of Contents



Note 7. Asset Rationalization and Severance Expense:
 Asset Rationalization AccrualLease
    
    
    Other Exit
    
    
    
    
    
    
    Severance(Dollars in thousands)
    
    Costs
    
    
    Costs
    
    
    Total
    
    
    Accrual
    
    
    TotalAsset rationalization reserves and severance
accruals at December 31, 2005
    
    $
    1,551
    
    
    $
    578
    
    
    $
    2,129
    
    
    $
    840
    
    
    $
    2,9692006 Activity:Additions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    486
    
    
    
    486Utilized/payments
    
    
    (327
    )
    
    
    (268
    )
    
    
    (595
    )
    
    
    (766
    )
    
    
    (1,361
    )Asset rationalization reserves and
severance accruals at June 30, 2006
    
    $
    1,224
    
    
    $
    310
    
    
    $
    1,534
    
    
    $
    560
    
    
    $
    2,094
   Note 8. Stock Incentive Plans:
  Six Months Ended June 30, 2006Weighted AverageShares
    
    
    Exercise PriceOutstanding  beginning of year
    
    
    1,128,908
    
    
    $
    11.74Granted
    
    
    
    
    
    
    Exercised
    
    
    (330,114
    )
    
    
    9.44Canceled/forfeited
    
    
    (121,267
    )
    
    
    14.31Outstanding  end of quarter
    
    
    677,527
    
    
    $
    12.40Exercisable  end of quarter
    
    
    607,057
    
    
    $
    12.35Reserved for future grants
    
    
    828,449
 11




---



##### Table of Contents



Outstanding Options
    
    
    Exercisable OptionsWeighted
    
    
    Weighted
    
    
    
    
    
    
    Weighted
    
    
    WeightedAverage
    
    
    Average
    
    
    
    
    
    
    Average
    
    
    AverageNumber of
    
    
    Exercise
    
    
    Contractual
    
    
    Number of
    
    
    Exercise
    
    
    ContractualRange of Exercise Prices
    
    Options
    
    
    Price
    
    
    Life
    
    
    Options
    
    
    Price
    
    
    Life$0 to $10.00
    
    
    156,750
    
    
    $
    7.45
    
    
    5.7 years
    
    
    156,750
    
    
    $
    7.45
    
    
    5.7 years$10.01 to $15.00
    
    
    397,477
    
    
    
    12.73
    
    
    6.5 years
    
    
    327,007
    
    
    
    12.71
    
    
    5.0 years$15.01 to $20.00
    
    
    103,450
    
    
    
    16.72
    
    
    3.5 years
    
    
    103,450
    
    
    
    16.72
    
    
    3.5 years$20.01 and above
    
    
    19,850
    
    
    
    22.33
    
    
    1.8 years
    
    
    19,850
    
    
    
    22.33
    
    
    1.8 years677,527
    
    
    $
    12.40
    
    
    5.7 years
    
    
    607,057
    
    
    $
    12.35
    
    
    4.8 years(Dollars in thousands)Aggregate intrinsic value
at June 30, 2006
    
    $
    3,345
    
    
    
    
    
    
    
    
    
    
    $
    1,936
   Six Months Ended June 30, 2006Weighted AverageShares
    
    
    Grant Date Fair ValueNonvested  beginning of year
    
    
    156,220
    
    
    $
    13.38Granted
    
    
    
    
    
    
    Vested
    
    
    
    
    
    
    Canceled/forfeited
    
    
    (37,620
    )
    
    
    13.59Nonvested  end of quarter
    
    
    118,600
    
    
    $
    13.31
 Note 9. Supply Chain Transaction and Long-Term Supply Agreement with Turf Care Supply Corp.:
  12




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##### Table of Contents



Note 10. Detail of Certain Balance Sheets Accounts
 June 30,
    
    
    December 31,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2005Other current assets:Other prepaids
    
    $
    921
    
    
    $
    1,878
    
    
    $
    962Prepaid insurance
    
    
    356
    
    
    
    449
    
    
    
    1,424Notes receivable
    
    
    187
    
    
    
    187
    
    
    
    187Assets held for sale
    
    
    100
    
    
    
    32
    
    
    
    94$
    1,564
    
    
    $
    2,546
    
    
    $
    2,667Other non-current assets:Notes receivable
    
    $
    319
    
    
    $
    466
    
    
    $
    302Store deposits
    
    
    530
    
    
    
    532
    
    
    
    532Miscellaneous deposits
    
    
    39
    
    
    
    43
    
    
    
    70Other prepaids
    
    
    
    
    
    
    114
    
    
    
    $
    888
    
    
    $
    1,155
    
    
    $
    904Accounts payable:Accounts payable to TCS
    
    $
    62,575
    
    
    $
    
    
    
    $
    43,702Accounts payable  other trade
    
    
    15,809
    
    
    
    75,904
    
    
    
    12,878Overdraft balances
    
    
    5,613
    
    
    
    12,606
    
    
    
    4,801$
    83,997
    
    
    $
    88,510
    
    
    $
    61,381Accrued liabilities:Accrued non-income taxes
    
    $
    2,513
    
    
    $
    3,729
    
    
    $
    3,314Commissions and management bonuses
    
    
    2,780
    
    
    
    2,337
    
    
    
    5,707Salaries and wages
    
    
    424
    
    
    
    2,531
    
    
    
    358Insurance  hospitalization and workers compensation
    
    
    2,289
    
    
    
    2,662
    
    
    
    2,771Asset rationalization
    
    
    1,534
    
    
    
    300
    
    
    
    2,129Insurance  property and casualty
    
    
    1,888
    
    
    
    902
    
    
    
    2,430Severance
    
    
    560
    
    
    
    348
    
    
    
    840Customer rebates
    
    
    2,701
    
    
    
    2,352
    
    
    
    3,433Other
    
    
    3,100
    
    
    
    3,676
    
    
    
    3,594$
    17,789
    
    
    $
    18,837
    
    
    $
    24,576Deferred  other:Rent
    
    $
    1,086
    
    
    $
    904
    
    
    $
    931Other
    
    
    921
    
    
    
    900
    
    
    
    1,235$
    2,007
    
    
    $
    1,804
    
    
    $
    2,166
 13




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##### Table of Contents



Note 11. Detail of Certain Statements of Operations Accounts
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales:Gross sales
    
    $
    183,750
    
    
    $
    192,169
    
    
    $
    284,581
    
    
    $
    291,980Freight revenue
    
    
    345
    
    
    
    446
    
    
    
    578
    
    
    
    610Agency sales, customer discounts and
rebates, and sales adjustments
    
    
    (2,145
    )
    
    
    (2,414
    )
    
    
    (3,371
    )
    
    
    (4,335
    )$
    181,950
    
    
    $
    190,201
    
    
    $
    281,788
    
    
    $
    288,255Merchant discounts and provisions for
doubtful accounts:Merchant discountsMulti-purpose credit programs
    
    $
    (745
    )
    
    $
    (682
    )
    
    $
    (1,085
    )
    
    $
    (982
    )Private-label business credit programs
    
    
    (2,157
    )
    
    
    (2,451
    )
    
    
    (3,394
    )
    
    
    (3,855
    )Private-label promotional discounts
    
    
    150
    
    
    
    (505
    )
    
    
    (674
    )
    
    
    (792
    )Provision for doubtful accounts
    
    
    (260
    )
    
    
    (41
    )
    
    
    (96
    )
    
    
    (71
    )Customer finance revenue
    
    
    86
    
    
    
    68
    
    
    
    185
    
    
    
    152Other
    
    
    (585
    )
    
    
    (192
    )
    
    
    (1,053
    )
    
    
    (305
    )$
    (3,511
    )
    
    $
    (3,803
    )
    
    $
    (6,117
    )
    
    $
    (5,853
    )
 Note 12. Subsequent Event
  14




---



##### Table of Contents



LESCO, INC.
 
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 Organization of Information
  
    
    Overview
    
    Business Segment Results of Operation
    
    Liquidity and Capital Resources
    
    Critical Accounting Policies and Estimates
    
    Forward Looking Statements
 OVERVIEW
    Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in millions)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Lawn Care and Landscape
    
    $
    148.1
    
    
    $
    151.2
    
    
    $
    233.5
    
    
    $
    233.3Golf
    
    
    35.7
    
    
    
    41.0
    
    
    
    51.1
    
    
    
    58.7$
    183.8
    
    
    $
    192.2
    
    
    $
    284.6
    
    
    $
    292.0
    15




---



##### Table of Contents



BUSINESS SEGMENT RESULTS OF OPERATIONS
   Segment Income Statement
 Three Months Ended June 30,Stores
    
    
    Direct
    
    
    Corporate
    
    
    Total(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    167,371
    
    
    $
    165,033
    
    
    $
    14,579
    
    
    $
    25,168
    
    
    $
    
    
    
    $
    
    
    
    $
    181,950
    
    
    $
    190,201Direct cost of product (including
distribution costs)
    
    
    (114,694
    )
    
    
    (109,696
    )
    
    
    (11,295
    )
    
    
    (19,217
    )
    
    
    
    
    
    
    
    
    
    
    (125,989
    )
    
    
    (128,913
    )% to Net Sales
    
    
    (68.5
    )%
    
    
    (66.5
    )%
    
    
    (77.5
    )%
    
    
    (76.3
    )%
    
    
    
    
    
    
    
    
    
    
    (69.2
    )%
    
    
    (67.8
    )%Indirect supply chain costs
    
    
    (11,056
    )
    
    
    (7,832
    )
    
    
    (1,254
    )
    
    
    (2,540
    )
    
    
    
    
    
    
    
    
    
    
    (12,310
    )
    
    
    (10,372
    )% to Net Sales
    
    
    (6.6
    )%
    
    
    (4.7
    )%
    
    
    (8.6
    )%
    
    
    (10.1
    )%
    
    
    
    
    
    
    
    
    
    
    (6.8
    )%
    
    
    (5.4
    )%Gross profit on sales
    
    
    41,621
    
    
    
    47,505
    
    
    
    2,030
    
    
    
    3,411
    
    
    
    
    
    
    
    
    
    
    
    43,651
    
    
    
    50,916% to Net Sales
    
    
    24.9
    %
    
    
    28.8
    %
    
    
    13.9
    %
    
    
    13.6
    %
    
    
    
    
    
    
    
    
    
    
    24.0
    %
    
    
    26.8
    %Selling expense
    
    
    (22,726
    )
    
    
    (20,583
    )
    
    
    (1,266
    )
    
    
    (1,807
    )
    
    
    (2,943
    )
    
    
    (3,200
    )
    
    
    (26,935
    )
    
    
    (25,590
    )% to Net Sales
    
    
    (13.6
    )%
    
    
    (12.5
    )%
    
    
    (8.7
    )%
    
    
    (7.2
    )%
    
    
    
    
    
    
    
    
    
    
    (14.8
    )%
    
    
    (13.5
    )%Merchant discounts and
provision for doubtful accounts
    
    
    (3,003
    )
    
    
    (2,611
    )
    
    
    (508
    )
    
    
    (536
    )
    
    
    
    
    
    
    (656
    )
    
    
    (3,511
    )
    
    
    (3,803
    )% to Net Sales
    
    
    (1.8
    )%
    
    
    (1.6
    )%
    
    
    (3.5
    )%
    
    
    (2.1
    )%
    
    
    
    
    
    
    
    
    
    
    (1.9
    )%
    
    
    (2.0
    )%Pre-opening expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (521
    )
    
    
    (533
    )
    
    
    (521
    )
    
    
    (533
    )% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )%
    
    
    (0.3
    )%General & administrative expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,961
    )
    
    
    (4,935
    )
    
    
    (3,961
    )
    
    
    (4,935
    )% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2.2
    )%
    
    
    (2.6
    )%Vendor contract termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (464
    )
    
    
    
    
    
    
    (464
    )% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    %
    
    
    (0.2
    )%Other income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    283
    
    
    
    2
    
    
    
    283% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.1
    %Earnings (loss) before interest and taxes
    
    $
    15,892
    
    
    $
    24,311
    
    
    $
    256
    
    
    $
    1,068
    
    
    $
    (7,423
    )
    
    $
    (9,505
    )
    
    $
    8,725
    
    
    $
    15,874% to Net Sales
    
    
    9.5
    %
    
    
    14.7
    %
    
    
    1.8
    %
    
    
    4.2
    %
    
    
    
    
    
    
    
    
    
    
    4.8
    %
    
    
    8.3
    %Interest income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    175
    
    
    
    (124
    )% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.1
    %
    
    
    (0.1
    )%Earnings before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,900
    
    
    
    15,750% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.9
    %
    
    
    8.3
    %Income tax provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    % to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    %
    
    
    
    %Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    8,900
    
    
    $
    15,750% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4.9
    %
    
    
    8.3
    %
 16




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##### Table of Contents



Six Months Ended June 30,Stores
    
    
    Direct
    
    
    Corporate
    
    
    Total(Dollars in thousands)
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005
    
    
    2006
    
    
    2005Net sales
    
    $
    251,567
    
    
    $
    241,093
    
    
    $
    30,221
    
    
    $
    47,162
    
    
    $
    
    
    
    $
    
    
    
    $
    281,788
    
    
    $
    288,255Direct cost of product (including
distribution costs)
    
    
    (172,882
    )
    
    
    (162,955
    )
    
    
    (23,284
    )
    
    
    (35,637
    )
    
    
    
    
    
    
    
    
    
    
    (196,166
    )
    
    
    (198,592
    )% to Net Sales
    
    
    (68.7
    )%
    
    
    (67.6
    )%
    
    
    (77.0
    )%
    
    
    (75.6
    )%
    
    
    
    
    
    
    
    
    
    
    (69.6
    )%
    
    
    (68.9
    )%Indirect
supply chain costs
    
    
    (16,477
    )
    
    
    (10,673
    )
    
    
    (1,563
    )
    
    
    (4,722
    )
    
    
    
    
    
    
    
    
    
    
    (18,040
    )
    
    
    (15,395
    )% to Net Sales
    
    
    (6.6
    )%
    
    
    (4.4
    )%
    
    
    (5.2
    )%
    
    
    (10.0
    )%
    
    
    
    
    
    
    
    
    
    
    (6.4
    )%
    
    
    (5.3
    )%Gross profit on sales
    
    
    62,208
    
    
    
    67,465
    
    
    
    5,374
    
    
    
    6,803
    
    
    
    
    
    
    
    
    
    
    
    67,582
    
    
    
    74,268% to Net Sales
    
    
    24.7
    %
    
    
    28.0
    %
    
    
    17.8
    %
    
    
    14.4
    %
    
    
    
    
    
    
    
    
    
    
    24.0
    %
    
    
    25.8
    %Selling expense
    
    
    (43,859
    )
    
    
    (38,888
    )
    
    
    (2,692
    )
    
    
    (5,324
    )
    
    
    (5,597
    )
    
    
    (6,534
    )
    
    
    (52,148
    )
    
    
    (50,746
    )% to Net Sales
    
    
    (17.4
    )%
    
    
    (16.1
    )%
    
    
    (8.9
    )%
    
    
    (11.3
    )%
    
    
    
    
    
    
    
    
    
    
    (18.5
    )%
    
    
    (17.6
    )%Merchant discounts and
provision for doubtful accounts
    
    
    (4,655
    )
    
    
    (3,659
    )
    
    
    (986
    )
    
    
    (1,193
    )
    
    
    (476
    )
    
    
    (1,001
    )
    
    
    (6,117
    )
    
    
    (5,853
    )% to Net Sales
    
    
    (1.9
    )%
    
    
    (1.5
    )%
    
    
    (3.3
    )%
    
    
    (2.5
    )%
    
    
    
    
    
    
    
    
    
    
    (2.2
    )%
    
    
    (2.0
    )%Pre-opening expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (810
    )
    
    
    (730
    )
    
    
    (810
    )
    
    
    (730
    )% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.3
    )%
    
    
    (0.3
    )%General & administrative expense
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,360
    )
    
    
    (11,318
    )
    
    
    (10,360
    )
    
    
    (11,318
    )% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3.7
    )%
    
    
    (3.9
    )%Vendor contract termination
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (464
    )
    
    
    
    
    
    
    (464
    )% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    %
    
    
    (0.2
    )%Other
income, net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137
    
    
    
    361
    
    
    
    137
    
    
    
    361% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    0.1
    %Earnings (loss) before interest and taxes
    
    $
    13,694
    
    
    $
    24,918
    
    
    $
    1,696
    
    
    $
    286
    
    
    $
    (17,106
    )
    
    $
    (19,686
    )
    
    $
    (1,716
    )
    
    $
    5,518% to Net Sales
    
    
    5.4
    %
    
    
    10.3
    %
    
    
    5.6
    %
    
    
    0.6
    %
    
    
    
    
    
    
    
    
    
    
    (0.6
    )%
    
    
    1.9
    %Interest income (expense), net
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2
    
    
    
    (441
    )% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    0.0
    %
    
    
    (0.2
    )%(Loss) earnings before taxes
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,714
    )
    
    
    5,077% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )%
    
    
    1.8
    %Income tax provision
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    % to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    %
    
    
    
    %Net (loss) earnings
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (1,714
    )
    
    $
    5,077% to Net Sales
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (0.6
    )%
    
    
    1.8
    %
 Sales by Customer Sector and Transacting Selling Locations
  Three Months Ended June 30,2006
    
    
    2005
    
    
    % Change(Dollars in millions)
    
    Stores Segment
    
    
    Direct Segment
    
    
    Total
    
    
    Stores Segment
    
    
    Direct Segment
    
    
    Total
    
    
    Stores Segment
    
    
    Direct Segment
    
    
    TotalLawn care and landscape
    
    $
    134.1
    
    
    $
    14.0
    
    
    $
    148.1
    
    
    $
    128.3
    
    
    $
    22.9
    
    
    $
    151.2
    
    
    
    4.5
    %
    
    
    (38.9
    )%
    
    
    (2.1
    )%Golf
    
    
    35.0
    
    
    
    0.7
    
    
    
    35.7
    
    
    
    38.2
    
    
    
    2.8
    
    
    
    41.0
    
    
    
    (8.4
    )
    
    
    (75.0
    )
    
    
    (12.9
    )Gross sales
    
    
    169.1
    
    
    
    14.7
    
    
    
    183.8
    
    
    
    166.5
    
    
    
    25.7
    
    
    
    192.2
    
    
    
    1.6
    
    
    
    (42.8
    )
    
    
    (4.4
    )Net sales adjustments (a)
    
    
    (1.7
    )
    
    
    (0.1
    )
    
    
    (1.8
    )
    
    
    (1.5
    )
    
    
    (0.5
    )
    
    
    (2.0
    )
    
    
    (13.3
    )
    
    
    80.0
    
    
    
    10.0Net sales
    
    $
    167.4
    
    
    $
    14.6
    
    
    $
    182.0
    
    
    $
    165.0
    
    
    $
    25.2
    
    
    $
    190.2
    
    
    
    1.5
    %
    
    
    (42.1
    )%
    
    
    (4.3
    )%
 
 (a)
    
    Net sales adjustments include freight revenue reduced by agency sales, customer discounts, and customer rebates. 17




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##### Table of Contents



Six Months Ended June 30,2006
    
    
    2005
    
    
    % ChangeStores
    
    
    Direct
    
    
    
    
    
    
    Stores
    
    
    Direct
    
    
    
    
    
    
    Stores
    
    
    Direct(Dollars in millions)
    
    Segment
    
    
    Segment
    
    
    Total
    
    
    Segment
    
    
    Segment
    
    
    Total
    
    
    Segment
    
    
    Segment
    
    
    TotalLawn care and landscape
    
    $
    204.4
    
    
    $
    29.1
    
    
    $
    233.5
    
    
    $
    192.1
    
    
    $
    41.2
    
    
    $
    233.3
    
    
    
    6.4
    %
    
    
    (29.4
    )%
    
    
    0.1
    %Golf
    
    
    49.8
    
    
    
    1.3
    
    
    
    51.1
    
    
    
    52.1
    
    
    
    6.6
    
    
    
    58.7
    
    
    
    (4.4
    )
    
    
    (80.3
    )
    
    
    (12.9
    )Gross sales
    
    
    254.2
    
    
    
    30.4
    
    
    
    284.6
    
    
    
    244.2
    
    
    
    47.8
    
    
    
    292.0
    
    
    
    4.1
    
    
    
    (36.4
    )
    
    
    (2.5
    )Net sales adjustments (a)
    
    
    (2.6
    )
    
    
    (0.2
    )
    
    
    (2.8
    )
    
    
    (3.1
    )
    
    
    (0.6
    )
    
    
    (3.7
    )
    
    
    16.1
    
    
    
    66.7
    
    
    
    24.3Net sales
    
    $
    251.6
    
    
    $
    30.2
    
    
    $
    281.8
    
    
    $
    241.1
    
    
    $
    47.2
    
    
    $
    288.3
    
    
    
    4.4
    %
    
    
    (36.0
    )%
    
    
    (2.3
    )%
 
 (a)
    
    Net sales adjustments include freight revenue reduced by agency sales, customer
discounts, and customer rebates. Stores Segment
  Sales
 Three Months Ended June 30,2006
    
    
    2005
    
    
    % ChangeStores
    
    
    
    
    
    
    
    
    
    
    StoresService
    
    
    on
    
    
    
    
    
    
    Service
    
    
    on
    
    
    
    
    
    
    
    
    
    
    Service
    
    
    Stores on(Dollars in millions)
    
    Centers
    
    
    Wheels
    
    
    Total
    
    
    Centers
    
    
    Wheels
    
    
    Other
    
    
    Total
    
    
    Centers
    
    
    Wheels
    
    
    Other
    
    
    TotalLawn care and landscape
    
    $
    133.4
    
    
    $
    0.7
    
    
    $
    134.1
    
    
    $
    127.5
    
    
    $
    0.8
    
    
    $
    
    
    
    $
    128.3
    
    
    
    4.6
    %
    
    
    (12.5
    )%
    
    
    
    %
    
    
    4.5
    %Golf
    
    
    13.4
    
    
    
    21.6
    
    
    
    35.0
    
    
    
    15.5
    
    
    
    22.7
    
    
    
    
    
    
    
    38.2
    
    
    
    (13.5
    )
    
    
    (4.8
    )
    
    
    
    
    
    
    (8.4
    )Gross sales
    
    
    146.8
    
    
    
    22.3
    
    
    
    169.1
    
    
    
    143.0
    
    
    
    23.5
    
    
    
    
    
    
    
    166.5
    
    
    
    2.7
    
    
    
    (5.1
    )
    
    
    
    
    
    
    1.6Net sales adjustments
    
    
    (1.1
    )
    
    
    (0.6
    )
    
    
    (1.7
    )
    
    
    (0.9
    )
    
    
    (0.6
    )
    
    
    
    
    
    
    (1.5
    )
    
    
    (22.2
    )
    
    
    
    
    
    
    
    
    
    
    (13.3
    )Net sales
    
    $
    145.7
    
    
    $
    21.7
    
    
    $
    167.4
    
    
    $
    142.1
    
    
    $
    22.9
    
    
    $
    
    
    
    $
    165.0
    
    
    
    2.5
    %
    
    
    (5.2)
    %
    
    
    
    %
    
    
    1.5
    %
 Six Months Ended June 30,2006
    
    
    2005
    
    
    % ChangeStores
    
    
    
    
    
    
    
    
    
    
    Stores
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    StoresService
    
    
    on
    
    
    
    
    
    
    Service
    
    
    on
    
    
    
    
    
    
    
    
    
    
    Service
    
    
    on(Dollars in millions)
    
    Centers
    
    
    Wheels
    
    
    Total
    
    
    Centers
    
    
    Wheels
    
    
    Other
    
    
    Total
    
    
    Centers
    
    
    Wheels
    
    
    Other
    
    
    TotalLawn care and landscape
    
    $
    203.1
    
    
    $
    1.3
    
    
    $
    204.4
    
    
    $
    190.2
    
    
    $
    1.0
    
    
    $
    0.9
    
    
    $
    192.1
    
    
    
    6.8
    %
    
    
    30.0
    %
    
    
    (100.0
    )%
    
    
    6.4
    %Golf
    
    
    19.3
    
    
    
    30.5
    
    
    
    49.8
    
    
    
    21.9
    
    
    
    30.0
    
    
    
    0.2
    
    
    
    52.1
    
    
    
    (11.9
    )
    
    
    1.7
    
    
    
    (100.0
    )
    
    
    (4.4
    )Gross sales
    
    
    222.4
    
    
    
    31.8
    
    
    
    254.2
    
    
    
    212.1
    
    
    
    31.0
    
    
    
    1.1
    
    
    
    244.2
    
    
    
    4.9
    
    
    
    2.6
    
    
    
    (100.0
    )
    
    
    4.1Net sales adjustments
    
    
    (1.4
    )
    
    
    (1.2
    )
    
    
    (2.6
    )
    
    
    (2.0
    )
    
    
    (1.1
    )
    
    
    
    
    
    
    (3.1
    )
    
    
    30.0
    
    
    
    (9.1
    )
    
    
    0.0
    
    
    
    16.1Net sales
    
    $
    221.0
    
    
    $
    30.6
    
    
    $
    251.6
    
    
    $
    210.1
    
    
    $
    29.9
    
    
    $
    1.1
    
    
    $
    241.1
    
    
    
    5.2
    %
    
    
    2.3
    %
    
    
    (100.0
    )%
    
    
    4.4
    %
 
 (a)
    
    Net sales adjustments include freight revenue reduced by agency sales, customer discounts, and rebates. Service Centers
 18




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##### Table of Contents



Three Months Ended June 30,Variance(Dollars in millions)
    
    2006
    
    
    2005
    
    
    Dollars
    
    
    %Stores opened:Prior to 2003
    
    $
    118.7
    
    
    $
    125.1
    
    
    $
    (6.4
    )
    
    
    (5.1
    )%2003
    
    
    7.6
    
    
    
    7.6
    
    
    
    
    
    
    
    2004
    
    
    9.6
    
    
    
    8.6
    
    
    
    1.0
    
    
    
    11.6Comparative stores
    
    
    135.9
    
    
    
    141.3
    
    
    
    (5.4
    )
    
    
    (3.8
    )2005
    
    
    8.2
    
    
    
    0.8
    
    
    
    7.4
    
    
    
    925.02006
    
    
    1.6
    
    
    
    
    
    
    
    1.6
    
    
    
    100.0Total
    
    $
    145.7
    
    
    $
    142.1
    
    
    $
    3.6
    
    
    
    2.5
    %
 Six Months Ended June 30,Variance(Dollars in millions)
    
    2006
    
    
    2005
    
    
    Dollars
    
    
    %Stores opened:Prior to 2003
    
    $
    182.4
    
    
    $
    186.1
    
    
    $
    (3.7
    )
    
    
    (2.0
    )%2003
    
    
    11.3
    
    
    
    11.2
    
    
    
    0.1
    
    
    
    0.92004
    
    
    13.9
    
    
    
    11.9
    
    
    
    2.0
    
    
    
    16.8Comparative stores
    
    
    207.6
    
    
    
    209.2
    
    
    
    (1.6
    )
    
    
    (0.8
    )2005
    
    
    11.6
    
    
    
    0.9
    
    
    
    10.7
    
    
    
    1,188.92006
    
    
    1.8
    
    
    
    
    
    
    
    1.8
    
    
    
    100.0Total
    
    $
    221.0
    
    
    $
    210.1
    
    
    $
    10.9
    
    
    
    5.2
    %
 Stores-on-Wheels:
 Other:
 Net sales adjustments
 19




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##### Table of Contents



Gross Profit on Sales
  Three Months Ended June 30,(Dollars in millions)
    
    2006
    
    2005
    
    VarianceNet Sales
    
    $
    167.4
    
    
    $
    165.0
    
    
    $
    2.4Direct cost of product (including distribution costs)
    
    $
    (114.7
    )
    
    $
    (109.7
    )
    
    $
    (5.0
    )% of Net Sales
    
    
    (68.5
    )%
    
    
    (66.5
    )%
    
    
    (2.0
    )%Indirect supply chain costs
    
    $
    (11.1
    )
    
    $
    (7.8
    )
    
    $
    (3.3
    )% of Net Sales
    
    
    (6.6
    )%
    
    
    (4.7
    )%
    
    
    (1.9
    )%Gross Profit
    
    $
    41.6
    
    
    $
    47.5
    
    
    $
    (5.9
    )% of Net Sales
    
    
    24.9
    %
    
    
    28.8
    %
    
    
    (3.9
    )%
 Six Months Ended June 30,(Dollars in millions)
    
    2006
    
    2005
    
    VarianceNet Sales
    
    $
    251.6
    
    
    $
    241.1
    
    
    $
    10.5Direct cost of product (including distribution costs)
    
    $
    (172.9
    )
    
    $
    (162.9
    )
    
    $
    (10.0
    )% of Net Sales
    
    
    (68.7
    )%
    
    
    (67.6
    )%
    
    
    (1.2
    )%Indirect supply chain costs
    
    $
    (16.5
    )
    
    $
    (10.7
    )
    
    $
    (5.8
    )% of Net Sales
    
    
    (6.6
    )%
    
    
    (4.4
    )%
    
    
    (2.1
    )%Gross Profit
    
    $
    62.2
    
    
    $
    67.5
    
    
    $
    (5.3
    )% of Net Sales
    
    
    24.7
    %
    
    
    28.0
    %
    
    
    (3.3
    )%
 Direct cost of product (including distribution costs):
 Indirect
supply chain costs:
 20




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##### Table of Contents



Gross Profit per Square Foot of Service Centers
 Six Months Ended June 30,2006
    
    2005Gross Profit per
    
    
    
    
    
    Gross Profit per# of Stores
    
    Square Foot
    
    # of Stores
    
    Square FootClass of 2006
    
    
    19
    
    
    $
    2.99
    
    
    
    
    
    
    $
    Class of 2005
    
    
    31
    
    
    $
    18.25
    
    
    
    11
    
    
    $
    2.94Class of 2004
    
    
    27
    
    
    $
    23.44
    
    
    
    27
    
    
    $
    21.14Class of 2003
    
    
    21
    
    
    $
    29.83
    
    
    
    21
    
    
    $
    29.79Prior to 2003
    
    
    225
    
    
    $
    44.30
    
    
    
    227
    
    
    $
    47.47Total per square foot leased
    
    
    
    
    
    $
    36.34
    
    
    
    
    
    
    $
    41.74
  Selling Expense:
   Merchant Discounts and Provision for Doubtful Accounts:
   21




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##### Table of Contents



(Loss) Earnings before Interest and Taxes:
  Three Months Ended June 30, 2006Class of 2006
    
    
    Class of 2005
    
    
    Class of 2004
    
    
    Class of 2003(Dollars in thousands)
    
    (19 Stores)
    
    
    (31 Stores)
    
    
    (27 Stores)
    
    
    (21 Stores)
    
    
    TotalNet sales
    
    $
    1,632
    
    
    $
    8,147
    
    
    $
    9,643
    
    
    $
    7,576
    
    
    $
    26,998Direct cost of product
(including distribution costs)
    
    
    (1,280
    )
    
    
    (5,548
    )
    
    
    (6,545
    )
    
    
    (5,127
    )
    
    
    (18,500
    )Gross profit on sales
    
    
    352
    
    
    
    2,599
    
    
    
    3,098
    
    
    
    2,449
    
    
    
    8,498Selling expense
    
    
    (637
    )
    
    
    (1,551
    )
    
    
    (1,387
    )
    
    
    (1,022
    )
    
    
    (4,597
    )Merchant discount expense
    
    
    (18
    )
    
    
    (135
    )
    
    
    (165
    )
    
    
    (135
    )
    
    
    (453
    )(Loss) earnings before interest
and taxes
    
    $
    (303
    )
    
    $
    913
    
    
    $
    1,546
    
    
    $
    1,292
    
    
    $
    3,448
 Three Months Ended June 30, 2005Class of 2005
    
    
    Class of 2004
    
    
    Class of 2003(Dollars in thousands)
    
    (11 Stores)
    
    
    (27 Stores)
    
    
    (21 Stores)
    
    
    TotalNet sales
    
    $
    822
    
    
    $
    8,562
    
    
    $
    7,594
    
    
    $
    16,978Direct cost of product
(including distribution costs)
    
    
    (635
    )
    
    
    (5,936
    )
    
    
    (5,309
    )
    
    
    (11,880
    )Gross profit on sales
    
    
    187
    
    
    
    2,626
    
    
    
    2,285
    
    
    
    5,098Selling expense
    
    
    (509
    )
    
    
    (1,340
    )
    
    
    (1,122
    )
    
    
    (2,971
    )Merchant discount expense
    
    
    (14
    )
    
    
    (135
    )
    
    
    (121
    )
    
    
    (270
    )(Loss) earnings before interest and taxes
    
    $
    (336
    )
    
    $
    1,151
    
    
    $
    1,042
    
    
    $
    1,857
 22




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Six Months Ended June 30, 2006Class of 2006
    
    
    Class of 2005
    
    
    Class of 2004
    
    
    Class of 2003(Dollars in thousands)
    
    (19 Stores)
    
    
    (31 Stores)
    
    
    (27 Stores)
    
    
    (21 Stores)
    
    
    TotalNet sales
    
    $
    1,802
    
    
    $
    11,622
    
    
    $
    13,894
    
    
    $
    11,318
    
    
    $
    38,636Direct cost of product
(including distribution costs)
    
    
    (1,461
    )
    
    
    (8,311
    )
    
    
    (9,927
    )
    
    
    (7,977
    )
    
    
    (27,676
    )Gross profit on sales
    
    
    341
    
    
    
    3,311
    
    
    
    3,967
    
    
    
    3,341
    
    
    
    10,960Selling expense
    
    
    (831
    )
    
    
    (3,077
    )
    
    
    (2,757
    )
    
    
    (1,977
    )
    
    
    (8,642
    )Merchant discount expense
    
    
    (22
    )
    
    
    (191
    )
    
    
    (266
    )
    
    
    (210
    )
    
    
    (689
    )(Loss) earnings before interest
and taxes
    
    $
    (512
    )
    
    $
    43
    
    
    $
    944
    
    
    $
    1,154
    
    
    $
    1,629
 Six Months Ended June 30, 2005Class of 2005
    
    
    Class of 2004
    
    
    Class of 2003(Dollars in thousands)
    
    (11 Stores)
    
    
    (27 Stores)
    
    
    (21 Stores)
    
    
    TotalNet sales
    
    $
    862
    
    
    $
    11,953
    
    
    $
    11,205
    
    
    $
    24,020Direct cost of product
(including distribution costs)
    
    
    (669
    )
    
    
    (8,472
    )
    
    
    (7,954
    )
    
    
    (17,095
    )Gross profit on sales
    
    
    193
    
    
    
    3,481
    
    
    
    3,251
    
    
    
    6,925Selling expense
    
    
    (583
    )
    
    
    (2,652
    )
    
    
    (2,160
    )
    
    
    (5,395
    )Merchant discount expense
    
    
    (15
    )
    
    
    (175
    )
    
    
    (174
    )
    
    
    (364
    )(Loss) earnings before interest and taxes
    
    $
    (405
    )
    
    $
    654
    
    
    $
    917
    
    
    $
    1,166
  Direct Segment
  Sales :
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in millions)
    
    2006
    
    
    2005
    
    
    % Change
    
    
    2006
    
    
    2005
    
    
    % ChangeLawn care
and landscape
    
    $
    14.0
    
    
    $
    22.9
    
    
    
    (38.9
    )%
    
    $
    29.1
    
    
    $
    41.2
    
    
    
    (29.4
    )%Golf
    
    
    0.7
    
    
    
    2.8
    
    
    
    (75.0
    )
    
    
    1.3
    
    
    
    6.6
    
    
    
    (80.3
    )Gross sales
    
    
    14.7
    
    
    
    25.7
    
    
    
    (42.8
    )
    
    
    30.4
    
    
    
    47.8
    
    
    
    (36.4
    )Net sales
adjustments(a)
    
    
    (0.1
    )
    
    
    (0.5
    )
    
    
    (80.0
    )
    
    
    (0.2
    )
    
    
    (0.6
    )
    
    
    (66.7
    )Direct Segment net sales
    
    $
    14.6
    
    
    $
    25.2
    
    
    
    (42.1
    )%
    
    $
    30.2
    
    
    $
    47.2
    
    
    
    (36.0
    )%
  23




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##### Table of Contents



Direct Segment
   Net sales adjustments
 Gross Profit on Sales:
  Three Months Ended June 30,(Dollars in millions)
    
    2006
    
    2005
    
    VarianceNet Sales
    
    $
    14.6
    
    
    $
    25.2
    
    
    $
    (10.6
    )Direct cost of product (including distribution costs)
    
    $
    (11.3
    )
    
    $
    (19.2
    )
    
    $
    7.9% of Net Sales
    
    
    (77.5
    )%
    
    
    (76.3
    )%
    
    
    (1.2
    )%Indirect supply chain costs
    
    $
    (1.3
    )
    
    $
    (2.5
    )
    
    $
    1.3% of Net Sales
    
    
    (8.6
    )%
    
    
    (10.1
    )%
    
    
    1.5
    %Gross Profit
    
    $
    2.0
    
    
    $
    3.4
    
    
    $
    (1.4
    )% of Net Sales
    
    
    13.9
    %
    
    
    13.6
    %
    
    
    0.3
    %
 Six Months Ended June 30,(Dollars in millions)
    
    2006
    
    2005
    
    VarianceNet Sales
    
    $
    30.2
    
    
    $
    47.2
    
    
    $
    (16.9
    )Direct cost of product (including distribution costs)
    
    $
    (23.3
    )
    
    $
    (35.6
    )
    
    $
    12.4% of Net Sales
    
    
    (77.0
    )%
    
    
    (75.6
    )%
    
    
    (1.5
    )%Indirect supply chain costs
    
    $
    (1.6
    )
    
    $
    (4.7
    )
    
    $
    3.2% of Net Sales
    
    
    (5.2
    )%
    
    
    (10.0
    )%
    
    
    4.9
    %Gross Profit
    
    $
    5.4
    
    
    $
    6.8
    
    
    $
    (1.4
    )% of Net Sales
    
    
    17.8
    %
    
    
    14.4
    %
    
    
    3.4
    %
 24




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##### Table of Contents



Direct cost of product (including distribution costs):
 Indirect
supply chain costs:
 Selling Expense:
  Merchant Discounts and Provision for Doubtful Accounts:
  Earnings before Interest and Taxes:
  Corporate
  Selling Expense:
  Merchant Discounts and Provision for Doubtful Accounts:
  25




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##### Table of Contents



Pre-Opening Expense:
 Three Months Ended June 30,
    
    Six Months Ended June 30,(Dollars in millions)
    
    2006
    
    2005
    
    Change
    
    2006
    
    2005
    
    ChangePre-opening expense
    
    $
    0.5
    
    
    $
    0.5
    
    
    $
    
    
    
    $
    0.8
    
    
    $
    0.7
    
    
    $
    0.1Number of Service Centers
opened during the period
    
    
    13
    
    
    
    10
    
    
    
    3
    
    
    
    19
    
    
    
    11
    
    
    
    8
  General and Administrative Expense:
   Vendor Contract Termination:
  Other Income/(Expense):
  Interest Income (Expense):
  26




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##### Table of Contents



Income Taxes and Net Earnings (Loss):
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,(Dollars in millions, except per share data)
    
    2006
    
    
    2005
    
    
    Change
    
    
    2006
    
    
    2005
    
    
    ChangeEarnings (loss) before income taxes
    
    $
    8.9
    
    
    $
    15.8
    
    
    $
    (6.9
    )
    
    $
    (1.7
    )
    
    $
    5.1
    
    
    $
    (6.8
    )Income tax (provision) benefit:Current
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Deferred
    
    
    (3.1
    )
    
    
    (4.3
    )
    
    
    1.2
    
    
    
    1.2
    
    
    
    (0.8
    )
    
    
    2.0Change in valuation allowance
    
    
    3.1
    
    
    
    4.3
    
    
    
    (1.2
    )
    
    
    (1.2
    )
    
    
    0.8
    
    
    
    (2.0
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss)
    
    $
    8.9
    
    
    $
    15.8
    
    
    $
    (6.9
    )
    
    $
    (1.7
    )
    
    $
    5.1
    
    
    $
    (6.8
    )Earnings (loss) per common share:Diluted
    
    $
    0.95
    
    
    $
    1.71
    
    
    
    
    
    
    $
    (0.19
    )
    
    $
    0.55Basic
    
    $
    0.97
    
    
    $
    1.77
    
    
    
    
    
    
    $
    (0.19
    )
    
    $
    0.57
  Accounting for Income Taxes
  LIQUIDITY AND CAPITAL RESOURCES
  Six Months Ended June 30,(Dollars in millions)
    
    2006
    
    
    2005Cash used in operations
    
    $
    (2.6
    )
    
    $
    (1.4
    )Cash used in investing activities
    
    
    (1.2
    )
    
    
    (2.4
    )Cash provided by financing activities
    
    
    2.6
    
    
    
    4.2(Decrease) increase in cash and cash equivalents
    
    $
    (1.2
    )
    
    $
    0.4
 27




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##### Table of Contents



June 30,
    
    
    December 31,(Dollars in millions)
    
    2006
    
    
    2005
    
    
    2005Accounts payable
    
    $
    84.0
    
    
    $
    88.5
    
    
    $
    61.4Inventory
    
    $
    101.5
    
    
    $
    133.9
    
    
    $
    80.3Accounts payable leverage
    
    
    82.8
    %
    
    
    66.1
    %
    
    
    76.5
    %
 Capital Expenditures
 Six Months Ended June 30,(Dollars in millions)
    
    2006
    
    
    2005StoresNew
    
    $
    0.8
    
    
    $
    0.8Other
    
    
    0.1
    
    
    
    1.4Manufacturing facilities
    
    
    
    
    
    
    0.3Corporate systems
    
    
    0.3
    
    
    
    0.2$
    1.2
    
    
    $
    2.7
   Financing Activities:
   28




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##### Table of Contents



Contractual Obligations, Commitments and Off Balance Sheet Arrangements
  CRITICAL ACCOUNTING POLICIES AND ESTIMATES
   Revenue Recognition
   29




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##### Table of Contents



Allowance for Doubtful Accounts
  Inventories
  Income Taxes
  Impairment of Long-Lived Assets
  30




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##### Table of Contents



Accrued Liabilities
  RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
 Income
Taxes
  FORWARD LOOKING STATEMENTS
  
 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   31




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##### Table of Contents



ITEM 4. CONTROLS AND PROCEDURES
    
 PART II  OTHER INFORMATION
  
 ITEM 1. LEGAL PROCEEDINGS
 ®
  ITEM 1(a). RISK FACTORS
  Our dependence on one supplier for substantially all consumable products makes us vulnerable to a
disruption in the supply of these products.
  The golf market has been contracting and the Company has transitioned to a revised model for sales
to this sector.
  32




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##### Table of Contents



ITEM
2(c). UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
 COL. A
    
    
    COL. B
    
    
    COL. C
    
    
    COL. DMaximum Number(or ApproximateTotal Number of
    
    
    Dollar Value) ofShares (or Units)
    
    
    Shares (or Units)Total Number
    
    
    
    
    
    
    Purchased as Part
    
    
    that May Yet Beof Shares (or
    
    
    Average Price
    
    
    of Publicly
    
    
    Purchased UnderUnits)
    
    
    Paid per Share
    
    
    Announced Plans
    
    
    the Plans orPeriod
    
    Purchased
    
    
    (or Unit)
    
    
    or Programs)
    
    
    ProgramsApril 1-30, 2006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,482,840
    (2)May 1-31, 2006
    
    
    16,918
    
    
    
    15.37
    (1)
    
    
    16,918
    
    
    
    1,465,922
    (2)June 1-30, 2006
    
    
    57,444
    
    
    
    15.71
    (1)
    
    
    57,444
    
    
    
    1,408,478
    (2)Total
    
    
    74,362
    
    
    $
    15.63
    (1)
    
    
    74,362
    
    
    
    1,408,478
    (2)
 
 (1)
    
    Average price paid per share is presented at gross amount, which includes commission and fees
paid to the broker.(2)
    
    On October 21, 2005, the Company announced that its Board of Directors approved a stock
repurchase program authorizing the Company to repurchase up to 1.5 million common shares and
common share equivalents. This program does not have a planned expiration date. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
   For
    
    
    WithheldJ. Martin Erbaugh
    
    
    8,748,133
    
    
    
    61,566Michael E. Gibbons
    
    
    8,682,864
    
    
    
    126,835Enrique Foster Gittes
    
    
    8,781,702
    
    
    
    27,997Lee C. Howley
    
    
    8,782,542
    
    
    
    27,157Christopher H. B. Mills
    
    
    7,555,706
    
    
    
    1,253,993R. Lawrence Roth
    
    
    8,748,665
    
    
    
    61,034Jeffrey L. Rutherford
    
    
    8,782,987
    
    
    
    26,712
 
 ITEM 6. EXHIBITS
 Exhibits
    
    Exhibits 3(a)
    
    Amended Articles of Incorporation of the Registrant
(included as an exhibit to the Registrants Quarterly
Report on Form 10-Q for the quarterly period ended March
31, 2006 and incorporated herein by reference).Exhibits 3(b)
    
    Amended Code of Regulations of the Registrant (included as
an exhibit to the Registrants Annual Report on Form 10-K
for the year ended December 31, 2002 and incorporated
herein by reference).Exhibit 31(a)
    
    Jeffrey L. Rutherford Rule 13a-14(a)/15d-14(a) CertificationExhibit 31(b)
    
    Michael A. Weisbarth Rule 13a-14(a)/15d-14(a) CertificationExhibit 32(a)
    
    Jeffrey L. Rutherford Section 1350 CertificationExhibit 32(b)
    
    Michael A. Weisbarth Section 1350 Certification
 33




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##### Table of Contents



LESCO, INC.Date: August 8, 2006
    
    By: /s/ Michael A. WeisbarthMichael A. WeisbarthVice President, Chief Financial Officer andTreasurer
 34