CLEVELAND, Ohio – LESCO announced that the company will record an approximately $5.2 million charge during the fourth quarter ending Dec. 31, 2004 related to a contract with a supplier.
In Nov. 2002, LESCO and its supplier entered into a five-year supply agreement, which obligated LESCO to purchase annually 8,000 tons of methylene urea fertilizer at a fixed conversion cost of $500/ton plus the prevailing commodities market prices. In the professional green industry, the primary use of methylene urea fertilizer is in the golf market. Due to various issues, including the tepid state of the golf industry, LESCO has been challenged to sell its commitment of 8,000 tons, and has resorted to aggressive promotions and inventory write-downs to liquidate the product.
As disclosed in the company’s third quarter Form 10-Q, LESCO notified its supplier in October 2004 that it intended to cease performing under the agreement. After unproductive settlement negotiations, the company opted to invoke judicial assistance to determine its liability. On Nov. 29, 2004, LESCO filed a declaratory judgment action against its supplier in the Court of Common Pleas in Cuyahoga County, Ohio to ask the court to determine the Company’s liability to the supplier.
The approximate $5.2 million charge includes the company’s estimated costs related to the discontinuation of the contract of $2.2 million, forgiveness of a note receivable of $1.3 million, the markdown of inventory value of discontinued methylene urea products of approximately $1 million and miscellaneous costs of approximately $700,000. LESCO has secured an alternative, lower-cost source of methylene urea fertilizer. The alternative source does not require a tonnage commitment. The company anticipates that these actions will result in annual savings of over $2 million.