Lesco posts 6th year in row in the red; urea costs up 37 percent in 2006

Lesco Inc. officially reported last week that it posted a loss of $19.7 million in fiscal 2006 ending Dec. 31, its sixth year of losses since 2000, when it was in the plus column. Sales were also off, at $550.6 million from 2005’s $575.7 million. Losses in 2005 were $26.7 million; however, that included a $24 million charge the company incurred when it sold many of its production and distribution assets to Turf Care Supply Corp. (TSC).

Lesco blames much of its problems in 2006 on its ill-fated decision to eliminate the use of direct sales representatives in late 2005 in favor of an expanded fleet of stores-on-wheels vehicles. The market perception was that Lesco was abandoning the golf market, Lesco President and CEO Jeffrey Rutherford told his board last summer.

Lesco sought to turn around the situation in July 2006 and had hired 25 golf sales representatives by the end of December 2006.

Another problem for Lesco was the annual urea contract it negotiated with TSC. Urea represents 9-11 percent of Lesco’s cost of sales. It said the increase in urea costs was 37 percent in 2006, compared to 2005. Lesco added that in 2006, the prevailing market rate for urea averaged 15 percent below the contracted rate, resulting in downward pricing pressure on its products and reducing gross profit earned on sales by $6.4 million. The company also had higher-than-expected seed costs due to a soft harvest of fescue seed in third quarter 2006. Lesco has also cited lagging equipment and ice melt sales.

Six years of no net income and slim prospects of any near-term turnaround might sway shareholders to vote for Lesco’s acquisition by Deere & Co. (GM Feb. 26, p. 1) at a May 3 shareholder meeting. Last summer Lesco engaged a financial consultant to help it review its five-year strategic forecast and valuation and to assist in exploring operational and strategic options. Thereafter, Lesco said it entertained interest from five potential buyers, with Deere Landscapes the only one putting down a firm bid, initially at $13.00 per share. Negotiations later worked the bid up to $14.50.

Rutherford told the board that the five-year forecast and valuation was achievable, but with a high level of execution and market risk. He said it would take three years to create significant additional value for shareholders and four years to achieve the full implicit value of the plan, which in the best reasonable case had a discounted present value of $13-$16 per share. As a result, the board opted to pursue the deal with Deere. Lesco notes that the $14.50 price represents a 38.4 percent premium over the closing price prior to the deal’s announcement. Without the Deere deal, Lesco did not think the stock would see $14.50 any time in the near future. Despite the proposal, Hawkshaw Capital Management LLC, which holds 13 percent of Lesco stock, has objected to the deal, arguing that 2006 was simply a bad year and that the company can rebound.

Deere hopes to group its 300-store John Deere Landscapes locations with Lesco’s 332 stores. Lesco still owns a manufacturing and distribution center on 17 acres in Windsor, N.J., which it has been holding for sale. It has an idled manufacturing facility on leased property in Stockton, Calif., as well as two closed distribution hubs in Anaheim, Calif., and N. Aurora, Ill. (also leased).

As of Dec. 31, 2006, Lesco had some 1,122 full-time employees, with 902 involved in sales activities and 220 in management/administration. Of these, 646 were salaried, and 476 hourly.