SITE 10-Q
SiteOne Landscape Supply, Inc. (SITE)
10-Q
2022-08-03
For: 2022-07-03
View Original
Added on
April 07, 2026
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
__________________________
FORM 10-Q
__________________________
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the quarterly period ended July 3, 2022
or
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |||||
For the Transition Period From __________ to ___________
Commission file number: 001-37760
(Exact name of registrant as specified in its charter)
__________________________
| (State or other jurisdiction of incorporation or organization) | (IRS Employer Identification No.) | ||||
(Address of principal executive offices) (Zip Code)
(470 ) 277-7000
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||||||||
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
| ☒ | Accelerated filer | ☐ | ||||||||||||
| Non-accelerated filer | ☐ | Smaller reporting company | ||||||||||||
| Emerging growth company | ||||||||||||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
| Title of each class | Shares Outstanding as of July 29, 2022 | |||||||
| Common Stock, $0.01 par value per share | ||||||||
| TABLE OF CONTENTS | |||||
1
Special Note Regarding Forward-Looking Statements and Information
This Quarterly Report on Form 10-Q, other periodic reports filed by us under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and other written or oral statements made from time to time by our management contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Terms such as “may,” “intend,” “might,” “will,” “should,” “could,” “would,” “expect,” “believe,” “estimate,” “anticipate,” “predict,” “project,” “potential,” or the negative of these terms, and similar expressions often signify forward-looking statements. Forward-looking statements are subject to risks and uncertainties that are beyond our control, and because they also relate to the future, they are likewise subject to inherent uncertainties and other factors that may cause actual results to differ materially from the views, beliefs, and projections expressed in such statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which it is made or to reflect the occurrence of anticipated or unanticipated events or circumstances. Factors that may cause actual results to differ materially from those expressed or implied by the forward-looking statements include, but are not limited to, the following:
•cyclicality in residential and commercial construction markets;
•economic downturn or recession;
•general economic and financial conditions;
•demand for our products;
•seasonality of our business;
•climate change-related events, weather conditions, seasonality, and availability of water to end-users;
•inflation and increased operating costs;
•increases in interest rates;
•the potential negative impact of the ongoing COVID-19 pandemic (which, among other things, may exacerbate each of the forward-looking statements discussed here);
•public perceptions that our products and services are not environmentally friendly or that our practices are not sustainable;
•competitive industry pressures, including competition for our talent base;
•supply chain disruptions, product or labor shortages, and the loss of key suppliers;
•cybersecurity incidents involving our systems or third party systems, including the July 2020 ransomware attack;
•prices for the products we purchase may fluctuate;
•ability to pass along product cost increases;
•inventory management risks;
•ability to implement our business strategies and achieve our growth objectives;
•acquisition and integration risks, including increased competition for acquisitions;
•risks associated with our large labor force and our customers’ labor force (including headwinds due to COVID-19) and ongoing labor market disruptions;
•retention of key personnel;
•construction defect and product liability claims;
•impairment of goodwill;
•adverse credit and financial markets events and conditions;
•credit sale risks;
•performance of individual branches;
•climate, environmental, health and safety laws and regulations;
•hazardous materials and related materials;
•laws and government regulations applicable to our business that could negatively impact demand for our products;
•failure or malfunctions in our information technology systems;
•security of personal information about our customers;
•intellectual property and other proprietary rights;
•unanticipated changes in our tax provisions;
•threats from terrorism, public health emergencies, violence, uncertain political conditions, and geopolitical conflicts such as the ongoing conflict between Russia and Ukraine;
•risks related to our current indebtedness and our ability to obtain financing in the future;
•risks related to our common stock; and
•risks related to other factors discussed in this Quarterly Report on Form 10-Q.
2
You should not place undue reliance on any forward-looking statements, which speak only as of the date made. Factors or events that could cause our actual results to differ may emerge from time to time, and it is not possible to predict all of them. We assume no obligation and do not intend to update or revise any forward-looking statements that are made from time to time, either as a result of future developments, new information or otherwise, except as may be required by law.
Comparisons of results for current and any prior periods are not intended to express any future trends, or indications of future performance, unless expressed as such, and should only be viewed as historical data.
3
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (Unaudited)
SiteOne Landscape Supply, Inc.
Consolidated Balance Sheets (Unaudited)
(In millions, except share and per share data)
| Assets | July 3, 2022 | January 2, 2022 | ||||||||||||
| Current assets: | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
Accounts receivable, net of allowance for doubtful accounts of $ | ||||||||||||||
| Inventory, net | ||||||||||||||
| Income tax receivable | ||||||||||||||
| Prepaid expenses and other current assets | ||||||||||||||
| Total current assets | ||||||||||||||
| Deferred tax assets | ||||||||||||||
| Other assets | ||||||||||||||
| Total assets | $ | $ | ||||||||||||
| Liabilities and Stockholders' Equity | ||||||||||||||
| Current liabilities: | ||||||||||||||
| Accounts payable | $ | $ | ||||||||||||
| Accrued compensation | ||||||||||||||
| Income tax payable | ||||||||||||||
| Accrued liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Deferred tax liabilities | ||||||||||||||
| Total liabilities | ||||||||||||||
| Stockholders' equity: | ||||||||||||||
Common stock, par value $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
| Retained earnings | ||||||||||||||
| Accumulated other comprehensive income (loss) | ( | |||||||||||||
| Total stockholders' equity | ||||||||||||||
| Total liabilities and stockholders' equity | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
4
SiteOne Landscape Supply, Inc.
Consolidated Statements of Operations (Unaudited)
(In millions, except share and per share data)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of goods sold | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Other income | ||||||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Interest and other non-operating expenses, net | ||||||||||||||||||||||||||
| Income before taxes | ||||||||||||||||||||||||||
| Income tax expense | ||||||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Net income per common share: | ||||||||||||||||||||||||||
| Basic | $ | $ | $ | $ | ||||||||||||||||||||||
| Diluted | $ | $ | $ | $ | ||||||||||||||||||||||
| Weighted average number of common shares outstanding: | ||||||||||||||||||||||||||
| Basic | ||||||||||||||||||||||||||
| Diluted | ||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
5
SiteOne Landscape Supply, Inc.
Consolidated Statements of Comprehensive Income (Unaudited)
(In millions)
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ||||||||||||||||||||||||
Interest rate swaps - net unrealized gains and reclassifications into earnings, net of taxes of $( | ||||||||||||||||||||||||||
| Total other comprehensive income (loss) | ( | |||||||||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | ||||||||||||||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
6
SiteOne Landscape Supply, Inc.
Consolidated Statements of Equity (Unaudited)
(In millions, shares in thousands)
| Common Stock Shares | Common Stock Amount | Additional Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Equity | |||||||||||||||||||||||||||||||||
| Balance at January 2, 2022 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common shares under stock-based compensation plan | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at April 3, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Issuance of common shares under stock-based compensation plan | ( | — | — | ( | ||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at July 3, 2022 | $ | $ | $ | $ | $ | |||||||||||||||||||||||||||||||||
| Common Stock Shares | Common Stock Amount | Additional Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Income (Loss) | Total Equity | |||||||||||||||||||||||||||||||||
| Balance at January 3, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common shares under stock-based compensation plan | — | ( | — | — | ( | |||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at April 4, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common shares under stock-based compensation plan | — | — | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at July 4, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
7
SiteOne Landscape Supply, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| Six Months Ended | ||||||||||||||
| July 3, 2022 | July 4, 2021 | |||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile Net income to net cash (used in) provided by operating activities: | ||||||||||||||
| Amortization of finance lease right-of-use assets and depreciation | ||||||||||||||
| Stock-based compensation | ||||||||||||||
| Amortization of software and intangible assets | ||||||||||||||
| Amortization of debt related costs | ||||||||||||||
| Loss on extinguishment of debt | ||||||||||||||
| Gain on sale of equipment | ( | ( | ||||||||||||
| Other | ( | |||||||||||||
| Changes in operating assets and liabilities, net of the effects of acquisitions: | ||||||||||||||
| Receivables | ( | ( | ||||||||||||
| Inventory | ( | ( | ||||||||||||
| Income tax receivable | ||||||||||||||
| Prepaid expenses and other assets | ( | ( | ||||||||||||
| Accounts payable | ||||||||||||||
| Income tax payable | ||||||||||||||
| Accrued expenses and other liabilities | ( | |||||||||||||
| Net Cash (Used In) Provided By Operating Activities | $ | ( | $ | |||||||||||
| Cash Flows from Investing Activities: | ||||||||||||||
| Purchases of property and equipment | ( | ( | ||||||||||||
| Purchases of intangible assets | ( | ( | ||||||||||||
| Acquisitions, net of cash acquired | ( | ( | ||||||||||||
| Proceeds from the sale of property and equipment | ||||||||||||||
| Net Cash Used In Investing Activities | $ | ( | $ | ( | ||||||||||
| Cash Flows from Financing Activities: | ||||||||||||||
| Equity proceeds from common stock | ||||||||||||||
| Borrowings under term loan | ||||||||||||||
| Repayments under term loan | ( | ( | ||||||||||||
| Borrowings on asset-based credit facility | ||||||||||||||
| Repayments on asset-based credit facility | ( | ( | ||||||||||||
| Payments of debt issuance costs | ( | |||||||||||||
| Payments on finance lease obligations | ( | ( | ||||||||||||
| Payments of acquisition related contingent obligations | ( | ( | ||||||||||||
| Other financing activities | ( | ( | ||||||||||||
| Net Cash Provided By Financing Activities | $ | $ | ||||||||||||
| Effect of exchange rate on cash | ( | |||||||||||||
| Net change In cash | ( | |||||||||||||
8
| Cash and cash equivalents: | ||||||||||||||
| Beginning | ||||||||||||||
| Ending | $ | $ | ||||||||||||
| Supplemental Disclosures of Cash Flow Information: | ||||||||||||||
| Cash paid during the year for interest | $ | $ | ||||||||||||
| Cash paid during the year for income taxes | $ | $ | ||||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
9
SiteOne Landscape Supply, Inc.
Notes to Consolidated Financial Statements
(Unaudited)
10
Note 1. Nature of Business and Significant Accounting Policies
Nature of Business
SiteOne Landscape Supply, Inc. (hereinafter collectively with all its consolidated subsidiaries referred to as the “Company”) is a wholesale distributor of irrigation supplies, fertilizer and control products (e.g., herbicides), hardscapes (including pavers, natural stone, and blocks), landscape accessories, nursery goods, outdoor lighting, and ice melt products to green industry professionals. The Company also provides value-added consultative services to complement its product offering and to help customers operate and grow their businesses. Substantially all of the Company’s sales are to customers located in the United States of America (“U.S.”), with less than five percent of sales and less than four percent of total assets in Canada for all periods presented. As of July 3, 2022, the Company had over 620 branches. Based on the nature of the Company’s products and customers’ business cycles, sales are significantly higher in the second and third quarters of each fiscal year.
COVID-19 Pandemic
As a result of the ongoing novel coronavirus (or “COVID-19”) pandemic, the Company could experience impacts including, but not limited to, charges from potential adjustments of the carrying amounts of receivables and inventory, goodwill and other asset impairment charges, or deferred tax valuation allowances. There has been no material adverse impact to the Company’s consolidated financial statements for the three and six months ended July 3, 2022; however, the extent to which the COVID-19 pandemic impacts the Company's business, results of operations, and financial condition will depend on future developments, which remain highly uncertain and cannot be predicted, including, but not limited to the duration, spread, and severity, of the COVID-19 pandemic, including the emergence of variant strains of the virus, the effects of the COVID-19 pandemic on the Company's customers, suppliers, vendors, and associates, and the remedial actions and stimulus measures adopted by local, state, and federal governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may experience an impact to its business as a result of any economic downturn, recession, or depression that has occurred or may occur in the future.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted which includes measures to assist companies in response to the COVID-19 pandemic. In accordance with the CARES Act, the Company deferred the payment of qualifying employer payroll taxes of $12.2 million during the fiscal year ended January 3, 2021, which are required to be paid over two years, with 50% to be paid by December 31, 2021 and the remainder by December 31, 2022. During the fiscal year ended January 2, 2022, the Company paid $6.1 million of the previously deferred employer payroll taxes. As of July 3, 2022, the Company had $6.1 million of qualifying employer payroll taxes included in Accrued compensation in its Consolidated Balance Sheets.
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as applicable to interim financial reporting. In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments, consisting of normal recurring accruals necessary for a fair statement of the financial position, results of operations, and cash flows. Certain information and disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended January 2, 2022. The interim period unaudited financial results for the three and six-month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates.
11
Fiscal Year
The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to December 31. The fiscal year ending January 1, 2023 and January 2, 2022 both include 52 weeks. Additionally, the Company’s fiscal quarters end on the Sunday nearest to March 31, June 30, and September 30, respectively. The three months ended July 3, 2022 and July 4, 2021 both include 13 weeks. The six months ended July 3, 2022 and July 4, 2021 both include 26 weeks.
Principles of Consolidation
The Company’s consolidated financial statements include the assets and liabilities used in operating the Company’s business, including entities in which the Company owns or controls more than 50% of the voting shares. All of the Company’s subsidiaries are wholly owned. All intercompany balances and transactions have been eliminated in consolidation.
Significant Accounting Policies
Except as updated by the Recently Issued and Adopted Accounting Pronouncements section below, a description of the Company’s significant accounting policies is included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
Recently Issued and Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments in ASU 2019-12 simplified the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) Topic 740, Income Taxes. The amendments also improved consistent application of and simplified U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. ASU 2019-12 required adoption on either a prospective or retrospective basis, dependent upon each amendment within this update. The Company adopted ASU 2019-12 when it became effective in the first quarter of fiscal year 2021. The adoption of ASU 2019-12 did not have a material impact on its consolidated financial statements and related disclosures.
Accounting Pronouncements Issued But Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”) to amend the scope of the guidance in ASU 2020-04 on the facilitation of the effects of reference rate reform on financial reporting. Specifically, the amendments in ASU 2021-01 clarify that “certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting can apply to derivatives that are affected by the discounting transition”. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The expedients are applicable to contract modifications made and hedging relationships entered into on or before December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. The Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contact Liabilities from Contracts with Customers” (“ASU 2021-08”). The guidance requires an acquirer in a business combination to recognize and measure contract assets and liabilities in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606) rather than at fair value. The new standard will be effective on a prospective basis for fiscal years beginning after December 15, 2022 and interim periods therein, with early adoption permitted. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.
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Note 2. Revenue from Contracts with Customers
The following table presents Net sales disaggregated by product category (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||
Landscaping products(a) | $ | $ | $ | $ | ||||||||||||||||||||||
Agronomic and other products(b) | ||||||||||||||||||||||||||
| $ | $ | $ | $ | |||||||||||||||||||||||
(a) Landscaping products include irrigation supplies, hardscapes, landscape accessories, nursery goods, and outdoor lighting.
(b) Agronomic and other products include fertilizer, control products, ice melt, equipment, and other products.
Remaining Performance Obligations
Remaining performance obligations related to ASC Topic 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year that are fully or partially unsatisfied at the end of the period. Remaining performance obligations include the outstanding points balance related to the customer loyalty rewards program. The program allows enrolled customers to earn loyalty rewards on purchases to be used on future purchases, to pay for annual customer trips hosted by the Company, or to obtain gift cards to other third-party retailers.
As of July 3, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $10.8 million. The Company expects to recognize revenue on the remaining performance obligations over the next 12 months.
Contract Balances
The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, deferred revenue, and billings in excess of revenue recognized in the Company’s Consolidated Balance Sheets.
Contract liabilities
As of July 3, 2022 and January 2, 2022, contract liabilities were $10.8 million and $8.8 million, respectively, and were included within Accrued liabilities in the accompanying Consolidated Balance Sheets. The increase in the contract liability balance during the six months ended July 3, 2022 is primarily a result of cash payments received in advance of satisfying performance obligations, partially offset by $3.3 million of revenue recognized and the expiration of points related to the customer loyalty rewards program during the period.
13
Note 3. Acquisitions
From time to time, the Company enters into strategic acquisitions in an effort to better service existing customers and to attract new customers. The Company completed the following acquisitions for an aggregate purchase price of $125.8 million and $63.2 million and deferred contingent consideration of $8.2 million and $4.8 million for the six months ended July 3, 2022 and July 4, 2021, respectively.
•In July 2022, the Company acquired all of the outstanding stock of A&A Stepping Stone Manufacturing, Inc. (“A&A Stepping Stone”). With four locations in Sacramento, California, A&A Stepping Stone is a wholesale distributor of hardscapes and landscape supplies to landscape professionals.
•In June 2022, the Company acquired the assets and assumed the liabilities of Prescott Dirt, LLC (“Prescott Dirt”). With two locations in Prescott and Prescott Valley, Arizona, Prescott Dirt is a wholesale distributor of landscape supplies to landscape professionals.
•In June 2022, the Company acquired the assets and assumed the liabilities of Yard Works, LLC (“Yard Works”). With 13 locations in Central Virginia, Yard Works is a wholesale distributor of bulk landscape supplies to landscape professionals.
•In June 2022, the Company acquired the assets and assumed the liabilities of Across the Pond, Inc. (“Across the Pond”). With one location in Huntsville, Alabama, Across the Pond is a wholesale distributor of hardscapes and bulk landscape supplies to landscape professionals.
•In April 2022, the Company acquired the assets and assumed the liabilities of Preferred Seed Company, Inc. (“Preferred Seed”). With one location in Buffalo, New York, Preferred Seed is a wholesale distributor of seed and agronomic products to landscape professionals.
•In April 2022, the Company acquired the assets and assumed the liabilities of RTSB Enterprises, Inc., doing business as Bellstone Masonry Supply (“Bellstone”). With one location in Fort Worth, Texas, Bellstone is a wholesale distributor of hardscapes and landscape supplies to landscape professionals.
•In March 2022, the Company acquired all of the outstanding stock of J K Enterprise, Inc., Culpeper Recycling Hauling LLC, Culpeper Recycling Transport LLC, Gateway Home & Garden Center, LLC, JK Enterprise Landscape Supply, Limited Liability Company, Madera Farm Transport, LLC, Saunders LS, LLC, and Tilden Farm Nursery, LLC, and also acquired the assets of Metro Landscape Supply, Limited and Culpeper Recycling, LLC (collectively, “JK Enterprise”). With six locations in Northern Virginia and one location in Maryland, JK Enterprise is a wholesale distributor of bulk and bagged mulches and soil, hardscapes, and nursery products to landscape professionals.
•In December 2021, the Company acquired the assets and assumed the liabilities of Bothe Trucking, Inc., doing business as Seffner Rock and Gravel (“Seffner”). With one location in Tampa, Florida, Seffner is a wholesale distributor of natural stone, bulk aggregates, mulch, soil, and other landscape supplies to landscape professionals.
•In November 2021, the Company acquired the assets and assumed the liabilities of Semco Distributing, Inc. (“Semco”). With four locations in Ohio and Missouri, Semco is a wholesale distributor of natural stone and landscape supplies to landscape professionals.
•In August 2021, the Company acquired the assets and assumed the liabilities of Green Brothers Earth Works and Southern Landscape Supply (“Green Brothers”). With four locations in the greater Atlanta, Georgia market, Green Brothers is a distributor of landscape supplies and hardscapes to landscape professionals.
•In May 2021, the Company acquired all of the outstanding stock of Rodvold Enterprises, Inc., doing business as Rock & Block Hardscape Supply (“Rock & Block”). With two locations in the San Diego, Southern Orange County and Inland Empire markets in California, Rock & Block is a distributor of hardscapes, masonry, and landscape supplies to landscape professionals.
•In April 2021, the Company acquired the assets and assumed the liabilities of Melrose Supply & Sales Corp (“Melrose”). With six locations throughout Florida, Melrose is a distributor of irrigation, lighting, and drainage products to landscape professionals.
•In April 2021, the Company acquired all of the outstanding stock of Timberwall Landscape & Masonry Products, Inc. (“Timberwall”). With one location in Victoria, Minnesota, Timberwall is a distributor of hardscapes and landscape supplies to landscape professionals.
•In April 2021, the Company acquired the assets and assumed the liabilities of Arizona Stone & Architectural Products and Solstice Stone (“Arizona Stone and Solstice”). With seven locations throughout Arizona and two locations in the Las Vegas, Nevada market, Arizona Stone and Solstice is a distributor of hardscapes, natural stone, and landscape supplies to landscape professionals.
14
•In February 2021, the Company acquired the assets and assumed the liabilities of Lucky Landscape Supply, LLC (“Lucky Landscape Supply”). With one location in the greater Houston, Texas market, Lucky Landscape Supply is a distributor of nursery products to landscape professionals.
These transactions were accounted for by the acquisition method, and accordingly, the results of operations were included in the Company’s consolidated financial statements from their respective acquisition dates.
Note 4. Fair Value Measurement and Interest Rate Swaps
Fair value is defined as an exit price, representing an amount that would be received to sell an asset or the amount paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The inputs used to measure fair value are prioritized into the following three-tiered value hierarchy:
•Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs, other than quoted prices in active markets, which are observable either directly or indirectly.
•Level 3: Unobservable inputs for which there is little or no market data.
The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The classification of fair value measurement within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivables, forward-starting interest rate swap contracts, interest rate swap contracts, and long-term debt. The variable interest rate on the long-term debt is reflective of current market borrowing rates. As such, the Company has determined that the carrying value of these financial instruments approximates fair value.
Interest Rate Swaps
The Company is subject to interest rate risk with regard to existing and future issuances of debt. The Company utilizes interest rate swap contracts to reduce its exposure to fluctuations in variable interest rates for future interest payments on existing debt. The Company is party to a forward-starting interest rate swap contract and interest rate swap contracts to convert the variable interest rate to a fixed interest rate on the borrowings under the term loans.
The Company recognizes any differences between the variable interest rate payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense over the life of the swaps. The Company has designated these swaps as cash flow hedges and records the estimated fair value of the swaps to Accumulated other comprehensive income (loss) (“AOCI”) on its Consolidated Balance Sheets. If it becomes probable the forecasted transactions will not occur, the hedge relationship will be de-designated and amounts accumulated in AOCI will be reclassified to Interest and other non-operating expenses, net in the current period.
On March 23, 2021, the Company restructured the interest rate swap positions of its Forward-starting interest rate swaps 4, 5, and 6 to extend the terms to maturity using a strategy commonly referred to as a “blend and extend” in order to continue to manage its exposure to interest rate risk on borrowings under the term loans. Refer to “Note 9. Long-Term Debt” for additional information regarding the Company’s term loans. As a result of these transactions, all existing agreements for Forward-starting interest rate swaps 4, 5, and 6 were amended and restructured as new agreements designated by the Company as Interest rate swaps 7, 8, and 9 with the same counterparties. Each of these amended Interest rate swap agreements blended the liability positions of the Forward-starting interest rate swaps into the Interest rate swaps and extended the term of the hedged positions to mature on March 23, 2025. The Interest rate swaps are indexed to three-month LIBOR and net settled on a quarterly basis with the counterparties for the difference between the fixed rates and the variable rates based upon three-month LIBOR (subject to a floor of 0.50 %) as applied to the notional amounts of each Interest rate swap. Due to the size of the initial net investment amounts resulting from the termination values of the Forward-starting interest rate swaps that were rolled into the Interest rate swap arrangements, Interest rate swaps 7, 8, and 9 were determined to be hybrid debt instruments containing embedded at-market interest rate swap derivatives. As a result, the Company bifurcated the derivative instruments from the debt host instruments for accounting purposes. Refer to “Note 9. Long-Term Debt” for additional information regarding the Company’s hybrid debt instruments.
15
The Company also de-designated the hedging relationships for Forward-starting interest rate swaps 1 and 2 on March 23, 2021. The swaps were not terminated upon de-designation; however, hedge accounting was discontinued since these swaps were no longer designated as hedging instruments. The related accumulated losses for these swaps remained in AOCI upon de-designation and were recognized in earnings at the time the hedged interest payments impacted earnings.
The following table provides additional details regarding the swap contracts designated as hedging instruments as of July 3, 2022:
| Derivatives designated as hedging instruments | Inception Date | Effective Date | Maturity Date | Notional Amount (in millions) | Fixed Interest Rate | Type of Hedge | ||||||||||||||||||||||||||||||||
| Forward-starting interest rate swap 3 | December 17, 2018 | July 14, 2020 | January 14, 2024 | $ | % | Cash flow | ||||||||||||||||||||||||||||||||
| Interest rate swap 7 | March 23, 2021 | March 23, 2021 | March 23, 2025 | $ | % | Cash flow | ||||||||||||||||||||||||||||||||
| Interest rate swap 8 | March 23, 2021 | March 23, 2021 | March 23, 2025 | $ | % | Cash flow | ||||||||||||||||||||||||||||||||
| Interest rate swap 9 | March 23, 2021 | March 23, 2021 | March 23, 2025 | $ | % | Cash flow | ||||||||||||||||||||||||||||||||
The following table provides additional details regarding the swap contracts not designated as hedging instruments, which were terminated upon maturity on June 11, 2021:
| Derivatives not designated as hedging instruments | Inception Date | Effective Date | Maturity Date | Notional Amount (in millions) | Fixed Interest Rate | |||||||||||||||||||||||||||
| Forward-starting interest rate swap 1 | June 30, 2017 | March 11, 2019 | June 11, 2021 | $ | % | |||||||||||||||||||||||||||
| Forward-starting interest rate swap 2 | June 30, 2017 | March 11, 2019 | June 11, 2021 | $ | % | |||||||||||||||||||||||||||
The Company recognizes the unrealized gains or unrealized losses for interest rate swap contracts as either assets or liabilities at fair value on its Consolidated Balance Sheets. The interest rate swap contracts are subject to master netting arrangements. The Company has elected not to offset the fair value of assets with the fair value of liabilities related to these contracts. The following tables summarize the fair value of the derivative instruments and the respective lines in which they were recorded in the Consolidated Balance Sheets as of July 3, 2022 and January 2, 2022 (in millions):
| Derivative Assets | ||||||||||||||||||||||||||
| July 3, 2022 | January 2, 2022 | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||||
| Interest rate contracts | Prepaid expenses and other current assets | $ | Prepaid expenses and other current assets | $ | ||||||||||||||||||||||
| Other assets | Other assets | |||||||||||||||||||||||||
| Total derivative assets | $ | $ | ||||||||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||||||||
| July 3, 2022 | January 2, 2022 | |||||||||||||||||||||||||
| Derivatives designated as hedging instruments | Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | ||||||||||||||||||||||
| Interest rate contracts | Accrued liabilities | $ | Accrued liabilities | $ | ||||||||||||||||||||||
| Other long-term liabilities | Other long-term liabilities | |||||||||||||||||||||||||
| Total derivative liabilities | $ | $ | ||||||||||||||||||||||||
For determining the fair value of the interest rate swap contracts, the Company uses significant observable market data or assumptions (Level 2 inputs) that market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. The fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves.
16
For the three and six months ended July 3, 2022 and July 4, 2021, there was no ineffectiveness recognized in earnings. The after-tax amount of unrealized gain on derivative instruments included in AOCI related to the interest rate swap contracts expected to be reclassified to earnings during the next twelve months was $2.1 million as of July 3, 2022. The ultimate amount recognized will vary based on fluctuations of interest rates through the maturity dates.
The tables below detail pre-tax amounts in AOCI and gain (loss) reclassified into income for derivatives designated as cash flow hedges for the three and six months ended July 3, 2022 and July 4, 2021 (in millions):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | Interest and other non-operating expenses, net | $ | ( | $ | ( | Interest and other non-operating expenses, net | $ | ( | |||||||||||||||||||||||||||||
| Six Months Ended | ||||||||||||||||||||||||||||||||||||||
| July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||||||||||||||||
| Derivatives in Cash Flow Hedging Relationships | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Recorded in OCI | Classification of Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Reclassified from AOCI into Income | ||||||||||||||||||||||||||||||||
| Interest rate contracts | $ | Interest and other non-operating expenses, net | $ | ( | $ | ( | Interest and other non-operating expenses, net | $ | ( | |||||||||||||||||||||||||||||
The tables below detail gain (loss) recorded in income and reclassified from AOCI into income for derivatives not designated as hedging instruments for the three and six months ended July 3, 2022 and July 4, 2021 (in millions):
| Three Months Ended | ||||||||||||||||||||||||||||||||
| Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Recognized in Income | |||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Location of Gain (Loss) | July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||||||
| Interest rate contracts | Interest and other non-operating expenses, net | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||||
| Six Months Ended | ||||||||||||||||||||||||||||||||
| Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Recognized in Income | |||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Location of Gain (Loss) | July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||||||
| Interest rate contracts | Interest and other non-operating expenses, net | $ | ( | $ | ( | $ | $ | ( | ||||||||||||||||||||||||
Failure of the swap counterparties to make payments would result in the loss of any potential benefit to the Company under the swap agreements. In this case, the Company would still be obligated to pay the variable interest payments underlying the debt agreements. Additionally, failure of the swap counterparties would not eliminate the Company’s obligation to continue to make payments under the existing swap agreements if it continues to be in a net pay position.
17
Note 5. Property and Equipment, Net
Property and equipment consisted of the following (in millions):
| July 3, 2022 | January 2, 2022 | |||||||||||||
| Land | $ | $ | ||||||||||||
| Buildings and leasehold improvements: | ||||||||||||||
| Buildings | ||||||||||||||
| Leasehold improvements | ||||||||||||||
| Branch equipment | ||||||||||||||
| Office furniture and fixtures and vehicles: | ||||||||||||||
| Office furniture and fixtures | ||||||||||||||
| Vehicles | ||||||||||||||
| Finance lease right-of-use assets | ||||||||||||||
| Tooling | ||||||||||||||
| Construction in progress | ||||||||||||||
| Total property and equipment, gross | ||||||||||||||
| Less: accumulated depreciation and amortization | ||||||||||||||
| Total property and equipment, net | $ | $ | ||||||||||||
Amortization of finance right-of-use (“ROU”) assets and depreciation expense was $11.1 million and $21.1 million for the three and six months ended July 3, 2022, and $8.4 million and $16.9 million for the three and six months ended July 4, 2021, respectively.
Capitalized software has an estimated useful life of three years . The amounts of total capitalized software costs, including purchased and internally developed software, included in Other assets at July 3, 2022 and January 2, 2022 were $13.1 million and $12.8 million, less accumulated amortization of $11.9 million and $11.1 million, respectively. Amortization of these software costs was $0.4 million and $0.4 million for the three months ended July 3, 2022 and July 4, 2021, and $0.8 million and $0.8 million for the six months ended July 3, 2022 and July 4, 2021, respectively.
Note 6. Goodwill and Intangible Assets, Net
Goodwill
The changes in the carrying amount of goodwill were as follows (in millions):
| January 2, 2022 | ||||||||
| to July 3, 2022 | ||||||||
| Beginning balance | $ | |||||||
Goodwill acquired during the period(a) | ||||||||
| Goodwill adjusted during the period | ( | |||||||
| Ending balance | $ | |||||||
______________
(a) Additions to goodwill during the six months ended July 3, 2022 related to the acquisitions completed in 2022 as described in Note 3.
Intangible Assets
Intangible assets include customer relationships as well as trademarks and other intangibles acquired through acquisitions. Intangible assets with finite useful lives are amortized on an accelerated method or a straight-line method over their estimated useful lives. An accelerated amortization method reflecting the pattern in which the asset will be consumed is utilized if that pattern can be reliably determined. If that pattern cannot be reliably determined, a straight-line amortization method is used. The Company considers the period of expected cash flows and underlying data used to measure the fair value of the intangible assets when selecting a useful life.
During the six months ended July 3, 2022, the Company recorded $57.1 million of intangible assets, including $50.0 million in Customer relationship intangibles and $7.1 million in Trademarks and other intangibles. The change in Customer relationship intangibles and Trademarks and other intangibles included additions of $49.2 million and $5.8 million, respectively, as a result of the acquisitions completed in 2022 as described in Note 3. Updates of purchase price allocations related to prior year acquisitions during the allowable measurement period and currency translation adjustments of Customer relationship intangibles and Trademarks and other intangibles were $0.8 million and $1.3 million, respectively.
During the six months ended July 4, 2021, the Company recorded $35.8 million of intangible assets, including $32.2 million in Customer relationship intangibles and $3.6 million in Trademarks and other intangibles. The change in Customer relationship intangibles and Trademarks and other intangibles included additions of $31.7 million and $3.6 million, respectively, as a result of the acquisitions completed in 2021 as described in Note 3. Adjustments to purchase price allocations related to prior year acquisitions during the allowable measurement period of Customer relationship intangibles and Trademarks and other intangibles were $0.5 million and zero , respectively.
The Customer relationship intangible assets will be amortized over a weighted-average period of approximately 20 years. The trademarks and other intangible assets recorded will be amortized over a weighted-average period of approximately five years .
The following table summarizes the components of intangible assets (in millions, except weighted average remaining useful life):
| July 3, 2022 | January 2, 2022 | |||||||||||||||||||||||||||||||||||||||||||
| Weighted Average Remaining Useful Life | Amount | Accumulated Amortization | Net | Amount | Accumulated Amortization | Net | ||||||||||||||||||||||||||||||||||||||
| Customer relationships | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
| Trademarks and other | ||||||||||||||||||||||||||||||||||||||||||||
| Total intangibles | $ | $ | $ | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||
Amortization expense for intangible assets was $11.6 million and $22.9 million for the three and six months ended July 3, 2022, and $11.5 million and $22.0 million for the three and six months ended July 4, 2021, respectively.
Total future amortization estimated as of July 3, 2022 is as follows (in millions):
| Fiscal year ending: | |||||
| 2022 (remainder) | $ | ||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| 2026 | |||||
| Thereafter | |||||
| Total future amortization | $ | ||||
18
Note 7. Leases
The Company determines if an arrangement is a lease at inception of a contract. The Company leases equipment and real estate including office space, branch locations, and distribution centers under operating leases. Finance lease obligations consist primarily of the Company’s vehicle fleet. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one year to five years or more. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases include options to purchase the leased property. ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the net present value of fixed lease payments over the lease term. As most of the Company's operating leases do not provide an implicit interest rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Finance lease agreements generally include an interest rate that is used to determine the present value of future lease payments. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or lease liabilities and are expensed as incurred and recorded as variable lease expense. Leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheets.
The components of lease expense were as follows (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||||||||
| Lease Cost | Classification | July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||||||
| Finance lease cost: | ||||||||||||||||||||||||||||||||
| Amortization of right-of-use assets | Selling, general and administrative expenses | $ | $ | $ | $ | |||||||||||||||||||||||||||
| Interest on lease liabilities | Interest and other non-operating expenses, net | |||||||||||||||||||||||||||||||
| Operating lease cost | Cost of goods sold | |||||||||||||||||||||||||||||||
| Operating lease cost | Selling, general and administrative expenses | |||||||||||||||||||||||||||||||
| Short-term lease cost | Selling, general and administrative expenses | |||||||||||||||||||||||||||||||
| Variable lease cost | Selling, general and administrative expenses | |||||||||||||||||||||||||||||||
| Sublease income | Selling, general and administrative expenses | ( | ( | ( | ( | |||||||||||||||||||||||||||
| Total lease cost | $ | $ | $ | $ | ||||||||||||||||||||||||||||
Supplemental cash flow information related to leases was as follows (in millions):
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| Other Information | July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | ||||||||||||||||||||||
| Cash paid for amounts included in the measurements of lease liabilities: | ||||||||||||||||||||||||||
| Operating cash flows from finance leases | $ | $ | $ | $ | ||||||||||||||||||||||
| Operating cash flows from operating leases | $ | $ | $ | $ | ||||||||||||||||||||||
| Financing cash flows from finance leases | $ | $ | $ | $ | ||||||||||||||||||||||
| Right-of-use assets obtained in exchange for new lease liabilities: | ||||||||||||||||||||||||||
| Finance leases | $ | $ | $ | $ | ||||||||||||||||||||||
| Operating leases | $ | $ | $ | $ | ||||||||||||||||||||||
19
The aggregate future lease payments for operating and finance leases as of July 3, 2022 were as follows (in millions):
| Maturity of Lease Liabilities | Operating Leases | Finance Leases | ||||||||||||
| Fiscal year: | ||||||||||||||
| 2022 (remainder) | $ | $ | ||||||||||||
| 2023 | ||||||||||||||
| 2024 | ||||||||||||||
| 2025 | ||||||||||||||
| 2026 | ||||||||||||||
| 2027 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total lease payments | ||||||||||||||
| Less: interest | ||||||||||||||
| Present value of lease liabilities | $ | $ | ||||||||||||
Weighted-average lease terms and discount rates were as follows:
| Lease Term and Discount Rate | July 3, 2022 | |||||||
| Weighted-average remaining lease term: | ||||||||
| Finance leases | ||||||||
| Operating leases | ||||||||
| Weighted-average discount rate: | ||||||||
| Finance leases | % | |||||||
| Operating leases | % | |||||||
Note 8. Employee Benefit and Stock Incentive Plans
The Company sponsors a defined contribution benefit plan for substantially all of its employees. Company contributions to the plan are based on a percentage of employee wages. The Company’s contributions to the plan were $3.8 million and $8.2 million for the three and six months ended July 3, 2022, and $3.0 million and $6.3 million for the three and six months ended July 4, 2021, respectively.
The Company’s Omnibus Equity Incentive Plan (the “2016 Plan”), which became effective on April 28, 2016, provided for the grant of awards in the form of stock options that may be either incentive stock options or non-qualified stock options; stock purchase rights; restricted stock; restricted stock units (“RSUs”); performance shares; performance stock units (“PSUs”); stock appreciation rights; dividend equivalents; deferred stock units (“DSUs”); or other stock-based awards. The Company also has outstanding stock-based awards under its stock incentive plan (“Stock Incentive Plan”), which commenced in May 2014 and terminated upon adoption of the 2016 Plan. However, awards previously granted under the Stock Incentive Plan were unaffected by the termination of the Stock Incentive Plan.
At the 2020 Annual Meeting of Stockholders of the Company on May 13, 2020 (the “Effective Date”), the Company’s stockholders approved the Company’s 2020 Omnibus Equity Incentive Plan (the “2020 Plan”), which replaced the 2016 Plan. The 2020 Plan reserves 2,155,280 shares of the Company’s common stock for issuance under the 2020 Plan, consisting of 1,600,000 new shares plus 555,280 shares that were previously authorized for issuance under the 2016 Plan and that, as of the Effective Date, were not subject to outstanding awards. No further grants of awards will be made under the 2016 Plan; however, outstanding awards granted under the 2016 Plan will remain outstanding and will continue to be administered in accordance with the terms of the 2016 Plan and the applicable award agreements. Any shares covered by an award, or any portion thereof, granted under the 2020 Plan, 2016 Plan, or Stock Incentive Plan that terminates, is forfeited, is repurchased, expires, or lapses for any reason will again be available for the grant of awards. Additionally, any shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligations pursuant to any award under the 2020 Plan, 2016 Plan, or Stock Incentive Plan will again be available for issuance. The aggregate number of shares that may be issued under the 2020 Plan is 2,155,280 shares of which 1,889,170 remain available as of July 3, 2022.
20
The stock options and RSUs granted to employees vest over a four-year 25 ten years three-year period, measured by the growth of the Company’s pre-tax income plus amortization relative to a select peer group, subject to adjustment based upon the application of a return on invested capital modifier.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes options pricing model. The DSUs, RSUs, and PSUs have grant date fair values equal to the fair market value of the underlying stock on the date of grant. Share-based compensation expense is recognized in the financial statements based upon fair value on the date of grant. The compensation cost for stock options and RSUs is recognized on a straight-line basis over the requisite vesting period. The Company recognizes compensation expense for PSUs when it is probable that the performance conditions will be achieved. The Company reassesses the probability of vesting at each reporting period and adjusts its compensation cost accordingly.
A summary of stock-based compensation activities during the six months ended July 3, 2022 was as follows (in thousands):
| Stock Options | RSUs | DSUs | PSUs | ||||||||||||||||||||
| Outstanding as of January 2, 2022 | |||||||||||||||||||||||
Granted(a) | |||||||||||||||||||||||
Exercised/Vested/Settled(a) | ( | ( | ( | ||||||||||||||||||||
| Expired or forfeited | ( | ( | ( | ||||||||||||||||||||
| Outstanding as of July 3, 2022 | |||||||||||||||||||||||
______________
(a) Includes 26.2 PSUs granted and settled during the six months ended July 3, 2022 at greater than 100 % of their original grant amount.
The weighted average grant date fair value of awards granted during the six months ended July 3, 2022 was as follows:
| Weighted Average Grant Date Fair Value | |||||
| Stock options | $ | ||||
| RSUs | $ | ||||
| DSUs | $ | ||||
PSUs(a) | $ | ||||
______________
(a) Includes the PSUs granted and settled during the six months ended July 3, 2022 at greater than 100 % of their original grant amount.
A summary of stock-based compensation expenses recognized during the periods was as follows (in millions):
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||
| July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | ||||||||||||||||||||
| Stock options | $ | $ | $ | $ | |||||||||||||||||||
| RSUs | |||||||||||||||||||||||
| DSUs | |||||||||||||||||||||||
| PSUs | |||||||||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | |||||||||||||||||||
21
A summary of unrecognized stock-based compensation expense as of July 3, 2022 was as follows:
| Unrecognized Compensation (in millions) | Weighted Average Remaining Period | ||||||||||
| Stock options | $ | ||||||||||
| RSUs | $ | ||||||||||
| DSUs | $ | ||||||||||
| PSUs | $ | ||||||||||
Note 9. Long-Term Debt
Long-term debt was as follows (in millions):
| July 3, 2022 | January 2, 2022 | |||||||||||||
| ABL facility | $ | $ | ||||||||||||
| Term loans | ||||||||||||||
| Hybrid debt instruments | ||||||||||||||
| Total gross long-term debt | ||||||||||||||
| Less: unamortized debt issuance costs and discounts on debt | ( | ( | ||||||||||||
| Total debt | $ | $ | ||||||||||||
| Less: current portion | ( | ( | ||||||||||||
| Total long-term debt | $ | $ | ||||||||||||
ABL Facility
SiteOne Landscape Supply Holding, LLC (“Landscape Holding”) and SiteOne Landscape Supply, LLC (“Landscape” and together with Landscape Holding, the “Borrowers”), each an indirect wholly-owned subsidiary of the Company, are parties to the credit agreement dated December 23, 2013 (as amended by the First Amendment to the Credit Agreement, dated June 13, 2014, the Second Amendment to the Credit Agreement, dated January 26, 2015, the Third Amendment to the Credit Agreement, dated February 13, 2015, the Fourth Amendment to the Credit Agreement, dated October 20, 2015, the Omnibus Amendment to the Credit Agreement, dated May 24, 2017, and the Sixth Amendment to the Credit Agreement, dated February 1, 2019, the “ABL Credit Agreement”) providing for an asset-based credit facility (the “ABL Facility”) of up to $375.0 million, subject to borrowing base availability. The ABL Facility is guaranteed by SiteOne Landscape Supply Bidco, Inc. (“Bidco”), an indirect wholly-owned subsidiary of the Company, and each direct and indirect wholly-owned U.S. restricted subsidiary of Landscape. The availability under the ABL Facility was $178.1 million and $364.1 million as of July 3, 2022 and January 2, 2022, respectively. Availability is determined using borrowing base calculations of eligible inventory and receivable balances less the current outstanding ABL Facility and letters of credit balances.
On February 1, 2019, the Company entered into the Sixth Amendment to the Credit Agreement, to among other things, (i) extend the termination date to February 1, 2024, (ii) increase the aggregate principal amount of the commitments under the ABL Credit Agreement to $375.0 million pursuant to an increase via use of the existing “incremental” commitment increase provisions of the ABL Credit Agreement, and (iii) amend certain terms of the ABL Credit Agreement and Guarantee and Collateral Agreement.
The interest rate on the ABL Facility is LIBOR plus an applicable margin ranging from 1.25 % to 1.75 % or an alternate base rate for U.S. denominated borrowings plus an applicable margin ranging from 0.25 % to 0.75 %. The interest rate on outstanding balances under the ABL Facility ranged from 2.62 % to 5.25 % as of July 3, 2022. There were no outstanding balances under the ABL Facility as of January 2, 2022. Additionally, the Borrowers paid a commitment fee of 0.25
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The ABL Facility is subject to mandatory prepayments if the outstanding loans and letters of credit exceed either the aggregate revolving commitments or the current borrowing base, in an amount equal to such excess. Additionally, the ABL Facility is subject to various covenants, including incurrence covenants that require the Company to meet minimum financial ratios, and additional borrowings and other corporate transactions may be limited by failure to meet these financial ratios. Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interest in collateral pledged under the agreement, or restrict the Borrowers’ ability to obtain additional borrowings under these agreements. The ABL Facility is secured by a first lien security interest over inventory and receivables and a second lien security interest over all other assets pledged as collateral.
The ABL Facility contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants consist of the following: financial condition, fundamental changes, dividends and distributions, acquisitions, dispositions of collateral, payments and modifications of restricted indebtedness, negative pledge clauses, changes in line of business, currency, commodity and other hedging transactions, transactions with affiliates, investments, indebtedness, and liens. The negative covenants are subject to the customary exceptions and also permit the payment of dividends and distributions, investments, permitted acquisitions and payments or redemptions of junior indebtedness upon satisfaction of a payment condition. As of July 3, 2022, the Company was in compliance with all of the ABL Facility covenants.
Term Loans
The Borrowers entered into a syndicated senior term loan facility dated April 29, 2016, which was amended on November 23, 2016, May 24, 2017, December 12, 2017, and August 14, 2018. On March 23, 2021, the Borrowers entered into the Fifth Amendment to the Amended and Restated Credit Agreement (the “Fifth Amendment”), in order to, among other things, incur $325.0 million of term loans (the “New Term Loans”) which were used in part to prepay all of the existing Tranche E Term Loans. The New Term Loans are guaranteed by Bidco and each direct and indirect wholly-owned U.S. restricted subsidiary of Landscape. The New Term Loans are secured by a second lien security interest over inventory and receivables and a first lien security interest over all other assets pledged as collateral. The New Term Loans will mature on March 23, 2028.
Amendments of the Term Loans
The Company through its subsidiaries entered into the Fifth Amendment, dated as of March 23, 2021, by and among the Borrowers, JPMorgan Chase Bank, N.A. (the “New Agent”), as administrative agent and collateral agent, the several banks and other financial institutions party thereto and certain other parties party thereto from time to time. The Fifth Amendment amends and restates the Amended and Restated Credit Agreement, dated as of April 29, 2016, among the Borrowers, the lenders from time to time party thereto and UBS AG, Stamford Branch (the “Existing Agent”) as administrative agent and collateral agent (as amended prior to March 23, 2021, the “Existing Credit Agreement” and, as so amended and restated pursuant to the Fifth Amendment, the “Second Amended and Restated Credit Agreement”) in order to, among other things, (i) incur $325.0 million of term loans, (ii) replace the Existing Agent as administrative and collateral agent with the New Agent, and (iii) make such other changes in the Second Amended and Restated Credit Agreement as agreed among the Borrowers and the lenders. Proceeds of the New Term Loans were used, among other things, (i) to repay in full the Tranche E Term Loans outstanding under the Existing Credit Agreement immediately prior to effectiveness of the Fifth Amendment, (ii) to pay fees and expenses related to the Fifth Amendment and the Second Amended and Restated Credit Agreement, and (iii) for working capital and other general corporate purposes.
The New Term Loans bear interest, at Landscape Holding’s option, at either (i) an adjusted LIBOR rate plus an applicable margin equal to 2.00 % (with a LIBOR floor of 0.50 %) or (ii) an alternative base rate plus an applicable margin equal to 1.00 %. Voluntary prepayments of the New Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty, subject to a 1.00 % premium payable in connection with certain repricing transactions within the first twelve months after the date of the initial funding of the New Term Loans. The interest rate on the outstanding balance of the New Terms Loans was 3.67 % at July 3, 2022.
The Second Amended and Restated Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following: limitations on indebtedness, restricted payments, restrictive agreements, sales of assets and subsidiary stock, transactions with affiliates, liens, fundamental changes, amendments, and lines of business. The negative covenants are subject to exceptions customary for transactions of the type.
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The New Term Loans are payable in consecutive quarterly installments equal to 0.25 % of the aggregate initial principal amount of the New Term Loans until the maturity date. In addition, the New Term Loans are subject to annual mandatory prepayments in an amount equal to 50 % of excess cash flow, as defined in the Second Amended and Restated Credit Agreement for the applicable fiscal year if 50 % of excess cash flow exceeds $15.0 million and the secured leverage ratio is greater than 3.00 to 1.00. There are also mandatory prepayments with the proceeds of certain asset sales and from the issuance of debt not permitted to be incurred under the Second Amended and Restated Credit Agreement. As of July 3, 2022, the Company was in compliance with all of the Second Amended and Restated Credit Agreement covenants.
During the three and six months ended July 3, 2022, the Company incurred total interest expense of $4.6 million and $8.9 million, respectively. Of these totals, $3.9 million and $7.5 million related to interest on the ABL Facility and the term loans for the three and six months ended July 3, 2022, respectively. The debt issuance costs and discounts are amortized as interest expense over the life of the debt. Amortization expense related to debt issuance costs and discounts was $0.3 million and $0.6 million for the three and six months ended July 3, 2022, respectively. The remaining $0.4 million and $0.8 million of interest expense is primarily related to interest attributable to finance leases for the three and six months ended July 3, 2022, respectively. Refer to “Note 13. Subsequent Events” for information regarding amendments to the existing Credit Agreement subsequent to July 3, 2022.
During the three and six months ended July 4, 2021, the Company incurred total interest expense of $4.3 million and $9.8 million, respectively. Of these totals, $3.7 million and $7.6 million related to interest on the ABL Facility and the term loans for the three and six months ended July 4, 2021, respectively. The debt issuance costs and discounts are amortized as interest expense over the life of the debt. As a result of the Fifth Amendment, unamortized debt issuance costs and discounts in the amount of $0.8 million were written off to expense and new debt fees and issuance costs of $2.4 million were capitalized during the six months ended July 4, 2021, in accordance with ASC 470-50, “Debt Modifications and Extinguishments”. No gain or loss was recorded as it related to all participating lenders. Amortization expense related to debt issuance costs and discounts was $0.3 million and $0.7 million for the three and six months ended July 4, 2021, respectively. The remaining $0.3 million and $0.7 million of interest expense primarily related to interest attributable to finance leases for the three and six months ended July 4, 2021, respectively.
Hybrid Debt Instruments
As a result of the determination that the Interest rate swap arrangements executed on March 23, 2021 are hybrid debt instruments containing embedded at-market swap derivatives, the Company reclassified $5.9 million from Accrued liabilities and Other long-term liabilities to long-term debt with $1.5 million classified as Long-term debt, current portion and $4.4 million classified as Long-term debt, less current portion on its Consolidated Balance Sheets during the first quarter of 2021. As of July 3, 2022, approximately $1.5 million was classified as Long-term debt, current portion and approximately $2.6 million was classified as Long-term debt, less current portion on the Company’s Consolidated Balance Sheets. Refer to “Note 4. Fair Value Measurement and Interest Rate Swaps” for additional information regarding interest rate swaps and hybrid debt instruments.
Note 10. Income Taxes
The Company’s effective tax rate was approximately 22.2 % for the six months ended July 3, 2022 and approximately 20.8 % for the six months ended July 4, 2021. The increase in the effective rate was due primarily to a decrease in the amount of excess tax benefits from stock-based compensation recognized as a component of Income tax expense in the Company’s Consolidated Statements of Operations. The Company recognized excess tax benefits of $7.4 million for the six months ended July 3, 2022, and $8.5 million for the six months ended July 4, 2021. The Company’s effective tax rate differs from its statutory rate based on a variety of factors, including overall profitability, the geographical mix of income taxes, and the related tax rates in the jurisdictions in which it operates.
The Company provides a valuation allowance against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment considers all available positive and negative evidence and is measured quarterly. The Company maintains a valuation allowance against certain state deferred tax assets where sufficient negative evidence exists to require a valuation allowance. During the six months ended July 3, 2022 and July 4, 2021, the Company recorded no material increases or decreases to the valuation allowance against deferred tax assets.
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Note 11. Commitments and Contingencies
Environmental liability: As part of the sale by LESCO, Inc. of its manufacturing assets in 2005, the Company retained the environmental liability associated with those assets. Remediation activities can vary substantially in duration and cost and it is difficult to develop precise estimates of future site remediation costs. The Company recorded in Other long-term liabilities the undiscounted cost estimate of future remediation efforts of $3.9 million and $3.9 million as of July 3, 2022 and January 2, 2022, respectively. As part of the CD&R Acquisition, Deere & Company agreed to pay the first $2.5 million of the liability and the Company’s exposure is capped at $2.4 million. The Company has recorded an indemnification asset in Other Assets against the liability as a result of these actions of $1.5 million and $1.5 million as of July 3, 2022 and January 2, 2022, respectively.
Letters of credit: As of July 3, 2022 and January 2, 2022, outstanding letters of credit were $10.9 million and $10.9 million, respectively. There were no
Note 12. Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share (“EPS”) by dividing Net income (loss) attributable to common shares by the weighted average number of common shares outstanding for the period. The Company includes vested DSUs and PSUs that have not been settled in common shares in the basic weighted average number of common shares calculation. The Company’s computation of diluted EPS reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock, which include in-the-money outstanding stock options and RSUs. PSUs are excluded from the calculation of dilutive potential common shares until the performance conditions have been achieved on the basis of the assumption that the end of the reporting period was the end of the contingency period, if such shares issuable are dilutive. Using the treasury stock method, the effect of dilutive securities includes the additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. The calculation of the effect of dilutive securities excludes any derived excess tax benefits or deficiencies from assumed future proceeds. RSUs and stock options with exercise prices that are higher than the average market prices of the Company’s common stock for the periods presented are excluded from the diluted EPS calculation because the effect is anti-dilutive.
The following table sets forth the computation of the weighted average number of diluted common shares outstanding for the three and six months ended July 3, 2022 and July 4, 2021:
| Three Months Ended | Six Months Ended | |||||||||||||||||||||||||
| July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||
| Shares used in the computation of basic earnings per share | ||||||||||||||||||||||||||
| Effect of dilutive securities: | ||||||||||||||||||||||||||
| Stock options | ||||||||||||||||||||||||||
| RSUs and PSUs | ||||||||||||||||||||||||||
| DSUs | ||||||||||||||||||||||||||
| Shares used in the computation of diluted earnings per share | ||||||||||||||||||||||||||
The diluted earnings per common share calculation for the three months ended July 3, 2022 and July 4, 2021 excluded the effect of 269,177 and 72,627 potential shares of common stock, respectively, because the assumed exercises of a portion of the Company’s employee stock options and RSUs were anti-dilutive. In addition, the diluted earnings per common share calculation for the six months ended July 3, 2022 and July 4, 2021 excluded the anti-dilutive effect of 246,083 and 59,979 potential shares of common stock, respectively.
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Note 13. Subsequent Events
On July 22, 2022, the Company, through its subsidiaries, entered into the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”), by and among Landscape Holding and Landscape as borrowers (collectively, the “Borrowers”), JPMorgan Chase Bank, N.A. (the “New Agent”), as administrative agent and collateral agent, the several banks and other financial institutions party thereto and certain other parties party thereto from time to time. The Seventh Amendment amends and restates the Credit Agreement, dated as of December 23, 2013, among the Borrowers, the lenders and other financial institutions from time to time party thereto and UBS AG, Stamford Branch (the “Existing Agent”) as administrative agent and collateral agent (as amended prior to July 22, 2022, the “Existing Credit Agreement” and, as so amended and restated pursuant to the Seventh Amendment, the “Amended and Restated Credit Agreement”) in order to, among other things, (i) increase the aggregate principal amount of the commitments under the Existing Credit Agreement to $600.0 million, (ii) extend the final scheduled maturity of the revolving credit facility under the Existing Credit Agreement to July 22, 2027, (iii) establish an alternate rate of interest to the LIBOR rate under the Existing Credit Agreement, (iv) replace the Existing Agent as administrative and collateral agent with the New Agent, and (v) make such other changes to the Existing Credit Agreement as agreed among the Borrowers and the lenders. Proceeds of the initial borrowings under the Amended and Restated Credit Agreement on the closing date were used, among other things, (i) to repay in full the loans outstanding under the Existing Credit Agreement immediately prior to effectiveness of the Seventh Amendment, (ii) to pay fees and expenses related to the Seventh Amendment and the Amended and Restated Credit Agreement, and (iii) for working capital and other general corporate purposes.
Loans under the Amended and Restated Credit Agreement will bear interest, at Landscape Holding’s option, at either (i) an adjusted term SOFR rate equal to term SOFR plus 0.10 % (subject to a floor of 0.00 %) plus an applicable margin of 1.25 % or 1.50 % or (ii) an alternate base rate plus an applicable margin of 0.25 % or 0.50 %, in each case depending on average daily excess availability under the Amended and Restated Credit Agreement, and in each case subject to a 0.125 % reduction when the Consolidated Total Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than 1.50 :1.00. Additionally, undrawn commitments under the Amended and Restated Credit Agreement bear a commitment fee of 0.20 % or 0.25 %, depending on the average daily undrawn portion of the commitments under the Amended and Restated Credit Agreement.
On July 22, 2022, the Company acquired the assets and assumed the liabilities of River Valley Horticultural Products, Inc. and River Valley Equipment Rental and Sales, LLC (collectively, “River Valley”). With one location in Little Rock, Arkansas, River Valley is a wholesale distributor of nursery products, hardscapes, and landscape supplies to landscape professionals.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following information should be read in conjunction with the unaudited consolidated financial statements and related notes included in this Quarterly Report on Form 10-Q. The following discussion may contain forward-looking statements that reflect our plans, estimates, and beliefs. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to these differences include those factors discussed below and elsewhere in this report, particularly in “Special Note Regarding Forward-Looking Statements and Information” included herein and the section entitled “Risk Factors” in the Annual Report on Form 10-K for the fiscal year ended January 2, 2022 and the Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2022.
Overview
SiteOne Landscape Supply, Inc. (collectively with all of its subsidiaries referred to in this Quarterly Report on Form 10-Q as “SiteOne,” the “Company,” “we,” “us,” and “our”) indirectly owns 100% of the membership interest in SiteOne Landscape Supply Holding, LLC (“Landscape Holding”). Landscape Holding is the parent and sole owner of SiteOne Landscape Supply, LLC (“Landscape”).
We are the largest and only national wholesale distributor of landscape supplies in the United States and have a growing presence in Canada. Our customers are primarily residential and commercial landscape professionals who specialize in the design, installation, and maintenance of lawns, gardens, golf courses, and other outdoor spaces. As of July 3, 2022, we had over 620 branch locations in 45 U.S. states and six Canadian provinces. Through our expansive North American network, we offer a comprehensive selection of more than 135,000 SKUs, including irrigation supplies, fertilizer and control products (e.g., herbicides), hardscapes (including pavers, natural stone, and blocks), landscape accessories, nursery goods, outdoor lighting, and ice melt products to green industry professionals. We also provide value-added consultative services to complement our product offerings and to help our customers operate and grow their businesses.
Business Environment and Trends
Despite rapid product cost inflation, certain supply shortages, ongoing freight and labor constraints, and overall economic uncertainty, we continue to experience solid demand for our products due primarily to the stay-at-home trends associated with the remote work environment and COVID-19. As consumers spend more time at home, they are upgrading their backyards and patios and investing in their outdoor living spaces which has resulted in continued demand for landscaping and agronomic products. For the three and six months ended July 3, 2022, we achieved Net sales growth of 12% and 17%, respectively, while Organic Daily Sales grew 8% and 12%, respectively.
During the three and six months ended July 3, 2022, significant price increases continued to impact the products we purchase and sell to our customers. To date, we have successfully mitigated the effects of product cost inflation by working with our suppliers and customers to pass through the cost increases that have occurred in the market. Based upon year-over-year price increases in our highest selling SKUs, we estimate price inflation contributed approximately 19% and 20% to our Organic Daily Sales growth in the three and six months ended July 3, 2022, respectively. Due to ongoing product constraints, rising manufacturer input costs, and continued solid demand, we expect inflation to remain elevated for most of the 2022 Fiscal Year.
We continued to experience negative impacts from broad-based supply chain disruptions during the three and six months ended July 3, 2022. To date, such impacts have been minimized mainly through our ongoing supply chain initiatives, as discussed further below in “Strategic Initiatives”. We have benefited from strategic inventory purchases resulting in increased safety stock which has allowed us to largely satisfy customer demand when products are not immediately available from our suppliers. In addition, rising fuel costs are further challenging the economic environment within our industry. To date, we have executed on our freight and logistical initiatives which have allowed us to better manage disruptions and mitigate challenges in the shipping and trucking markets. These actions and the effective management of price inflation described above helped drive gross margin expansion of 210 basis points to 37.9% during the three months ended July 3, 2022, and 210 basis points to 36.1% during the six months ended July 3, 2022.
As of the start of the 2022 Fiscal Year, we are operational in four distribution center facilities across the United States that have expanded our supply chain capabilities. These distribution centers are located in Hutchins, Texas (338,000 square feet), Palmetto, Georgia (335,000 square feet), Carlisle, Pennsylvania (201,000 square feet), and Colton, California (179,000 square feet). While we expect supply chain disruptions to continue, we believe we can significantly minimize the impact on our customers and our business operations through the execution of our supply initiatives.
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In addition, uncertainty remains regarding the full impact and duration of the COVID-19 pandemic, including, the impact of new strains and variants of the coronavirus and the pandemic’s impact on the U.S. and global economies and supply chains. Although we have experienced operational and other challenges to date, and may again in the future, there has been no material adverse impact as a result of the pandemic on our results of operations during the three and six months ended July 3, 2022. Throughout the pandemic, the safety of our associates, customers, and suppliers has remained a top priority while we strive to deliver quality products and exceptional service to our customers and communities. We will continue to monitor the ongoing COVID-19 pandemic and may take further actions that alter our business operations if required by federal, state, or local authorities or that we determine are in the best interests of our associates, customers, suppliers, and shareholders.
Although our operations are focused in the United States and Canada with no locations in or direct exposure to Russia and Ukraine, we are monitoring the geopolitical situation following Russia’s invasion of Ukraine. We may experience shortages in materials and increased costs for transportation, energy, and raw material due in part to the negative impact of the Russia-Ukraine military conflict on the global economy. To date, the conflict between Russia and Ukraine has not had a material negative impact on our business, financial condition, or results of operations. However, the full impact of the conflict on our business operations and financial performance remains uncertain and will depend largely on the nature and duration of uncertain and unpredictable events, such as the severity and duration of further military action, and its impact on regional and global economic conditions.
As we continue to navigate the challenges and uncertainties discussed above, we remain confident in our ability to execute our commercial and operational initiatives to meet our customer’s needs and drive further improvements in our business.
Presentation
Our financial statements included in this report have been prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”). We use a 52/53 week fiscal year with the fiscal year ending on the Sunday nearest to December 31 in each year. The fiscal year ending January 1, 2023 and January 2, 2022 both include 52 weeks. Additionally, our fiscal quarters end on the Sunday nearest to March 31, June 30, and September 30, respectively. The three months ended July 3, 2022 and July 4, 2021 both included 13 weeks. The six months ended July 3, 2022 and July 4, 2021 both included 26 weeks.
We manage our business as a single reportable segment. Within our organizational framework, the same operational resources support multiple geographic regions and performance is evaluated at a consolidated level. We also evaluate performance based on discrete financial information on a regional basis. Since all of our regions have similar operations and share similar economic characteristics, we aggregate regions into a single operating and reportable segment. These similarities include (i) long-term financial performance, (ii) the nature of products and services, (iii) the types of customers we sell to, and (iv) the distribution methods utilized. Further, all of our product categories have similar supply chain processes and classes of customers.
Key Business and Performance Metrics
We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of our business. These metrics include:
Net sales. We generate Net sales primarily through the sale of landscape supplies, including irrigation supplies, fertilizer and control products, hardscapes, landscape accessories, nursery goods, outdoor lighting, and ice melt products to our customers who are primarily landscape contractors serving the residential and commercial construction sectors. Our Net sales include billings for freight and handling charges, and commissions on the sale of control products that we sell as an agent. Net sales are presented net of any discounts, returns, customer rebates, and sales or other revenue-based taxes.
Non-GAAP Organic Sales. In managing our business, we consider all growth, including the opening of new greenfield branches, to be organic growth unless it results from an acquisition. When we refer to Organic Sales growth, we include increases in growth from newly-opened greenfield branches and decreases in growth from closing existing branches but exclude increases in growth from acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period.
Non-GAAP Selling Days. Selling Days are defined as business days, excluding Saturdays, Sundays, and holidays, that our branches are open during the year. Depending upon the location and the season, our branches may be open on Saturdays and Sundays; however, for consistency, those days have been excluded from the calculation of Selling Days.
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Non-GAAP Organic Daily Sales. We define Organic Daily Sales as Organic Sales divided by the number of Selling Days in the relevant reporting period. We believe Organic Sales growth and Organic Daily Sales growth are useful measures for evaluating our performance as we may choose to open or close branches in any given market depending upon the needs of our customers or our strategic growth opportunities. Refer to “Results of Operations – Quarterly Results of Operations Data” for a reconciliation of Organic Daily Sales to Net sales.
Cost of goods sold. Our Cost of goods sold includes all inventory costs, such as the purchase price paid to suppliers, net of any volume-based incentives, as well as inbound freight and handling, and other costs associated with inventory. Our Cost of goods sold excludes the cost to deliver the products to our customers through our branches, which is included in Selling, general and administrative expenses. Cost of goods sold is recognized primarily using the first-in, first-out method of accounting for the inventory sold.
Gross profit and gross margin. We believe that Gross profit and gross margin are useful for evaluating our operating performance. We define Gross profit as Net sales less Cost of goods sold. We define gross margin as Gross profit divided by Net sales.
Selling, general and administrative expenses (operating expenses). Our operating expenses are primarily comprised of Selling, general and administrative costs, which include personnel expenses (salaries, wages, employee benefits, payroll taxes, stock-based compensation, and bonuses), rent, fuel, vehicle maintenance costs, insurance, utilities, repairs and maintenance, and professional fees. Operating expenses also include depreciation and amortization.
Non-GAAP Adjusted EBITDA. In addition to the metrics discussed above, we believe that Adjusted EBITDA is useful for evaluating the operating performance and efficiency of our business. EBITDA represents our Net income (loss) plus the sum of income tax (benefit) expense, interest expense, net of interest income, and depreciation and amortization. Adjusted EBITDA represents EBITDA as further adjusted for items such as stock-based compensation expense, (gain) loss on sale of assets and termination of finance leases not in the ordinary course of business, other non-cash items, financing fees, other fees and expenses related to acquisitions, and other non-recurring (income) loss. Refer to “Results of Operations – Quarterly Results of Operations Data” for more information regarding how we calculate EBITDA and Adjusted EBITDA and the limitations of those metrics.
Key Factors Affecting Our Operating Results
In addition to the metrics described above, a number of other important factors may affect our results of operations in any given period.
Weather Conditions and Seasonality
In a typical year, our operating results are impacted by seasonality. Our Net sales and Net income have been higher in the second and third quarters of each fiscal year due to favorable weather and longer daylight conditions during these quarters. Our Net sales have been significantly lower in the first and fourth quarters due to lower landscaping, irrigation, and turf maintenance activities in these quarters, and historically, we have incurred net losses in these quarters. Seasonal variations in operating results may also be significantly impacted by inclement weather conditions, such as snow storms, wet weather, and hurricanes, which not only impact the demand for certain products like fertilizer and ice melt, but also may delay construction projects where our products are used.
Industry and Key Economic Conditions
Our business depends on demand from customers for landscape products and services. The landscape supply industry includes a significant amount of landscape products, such as irrigation systems, outdoor lighting, lawn care supplies, nursery goods, and landscape accessories, for use in the construction of newly built homes, commercial buildings, and recreational spaces. The landscape supply industry has historically grown in line with rates of growth in residential housing and commercial building. The industry is also affected by trends in home prices, home sales, and consumer spending. As general economic conditions improve or deteriorate, consumption of these products and services also tends to fluctuate. The landscape supply industry also includes a significant amount of agronomic products such as fertilizer, herbicides, and ice melt for use in maintaining existing landscapes or facilities. The use of these products is also tied to general economic activity, but levels of sales are not as closely correlated to construction markets.
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Popular Consumer Trends
Preferences in housing, lifestyle, and environmental awareness can also impact the overall level of demand and mix for the products we offer. Examples of current trends we believe are important to our business include a heightened interest in professional landscape services inspired by the popularity of home and garden television shows and magazines, the increasingly popular concept of “outdoor living,” which has been a key driver of sales growth for our hardscapes and outdoor lighting products, and the social focus on eco-friendly products that promote water conservation, energy efficiency, and the adoption of “green” standards.
Acquisitions
In addition to our organic growth, we continue to grow our business through acquisitions in an effort to better service our existing customers and to attract new customers. These acquisitions have allowed us to further broaden our product lines and extend our geographic reach and leadership positions in local markets. In accordance with GAAP, the results of the acquisitions are reflected in our financial statements from the date of acquisition forward. Additionally, we incur transaction costs in connection with identifying and completing acquisitions as well as ongoing integration costs as we integrate acquired companies and seek to achieve synergies. As of July 3, 2022, we completed the following acquisitions since the start of the 2021 fiscal year:
•In July 2022, we acquired all of the outstanding stock of A&A Stepping Stone Manufacturing, Inc. (“A&A Stepping Stone”). With four locations in Sacramento, California, A&A Stepping Stone is a wholesale distributor of hardscapes and landscape supplies to landscape professionals.
•In June 2022, we acquired the assets and assumed the liabilities of Prescott Dirt, LLC (“Prescott Dirt”). With two locations in Prescott and Prescott Valley, Arizona, Prescott Dirt is a wholesale distributor of landscape supplies to landscape professionals.
•In June 2022, we acquired the assets and assumed the liabilities of Yard Works, LLC (“Yard Works”). With 13 locations in Central Virginia, Yard Works is a wholesale distributor of bulk landscape supplies to landscape professionals.
•In June 2022, we acquired the assets and assumed the liabilities of Across the Pond, Inc. (“Across the Pond”). With one location in Huntsville, Alabama, Across the Pond is a wholesale distributor of hardscapes and bulk landscape supplies to landscape professionals.
•In April 2022, we acquired the assets and assumed the liabilities of Preferred Seed Company, Inc. (“Preferred Seed”). With one location in Buffalo, New York, Preferred Seed is a wholesale distributor of seed and agronomic products to landscape professionals.
•In April 2022, we acquired the assets and assumed the liabilities of RTSB Enterprises, Inc., doing business as Bellstone Masonry Supply (“Bellstone”). With one location in Fort Worth, Texas, Bellstone is a wholesale distributor of hardscapes and landscape supplies to landscape professionals.
•In March 2022, we acquired all of the outstanding stock of J K Enterprise, Inc., Culpeper Recycling Hauling LLC, Culpeper Recycling Transport LLC, Gateway Home & Garden Center, LLC, JK Enterprise Landscape Supply, Limited Liability Company, Madera Farm Transport, LLC, Saunders LS, LLC, and Tilden Farm Nursery, LLC, and also acquired the assets of Metro Landscape Supply, Limited and Culpeper Recycling, LLC (collectively, “JK Enterprise”). With six locations in Northern Virginia and one location in Maryland, JK Enterprise is a wholesale distributor of bulk and bagged mulches and soil, hardscapes, and nursery products to landscape professionals.
•In December 2021, we acquired the assets and assumed the liabilities of Bothe Trucking, Inc., doing business as Seffner Rock and Gravel (“Seffner”). With one location in Tampa, Florida, Seffner is a wholesale distributor of natural stone, bulk aggregates, mulch, soil, and other landscape supplies to landscape professionals.
•In November 2021, we acquired the assets and assumed the liabilities of Semco Distributing, Inc. (“Semco”). With four locations in Ohio and Missouri, Semco is a wholesale distributor of natural stone and landscape supplies to landscape professionals.
•In August 2021, we acquired the assets and assumed the liabilities of Green Brothers Earth Works and Southern Landscape Supply (“Green Brothers”). With four locations in the greater Atlanta, Georgia market, Green Brothers is a distributor of landscape supplies and hardscapes to landscape professionals.
•In May 2021, we acquired all of the outstanding stock of Rodvold Enterprises, Inc., doing business as Rock & Block Hardscape Supply (“Rock & Block”). With two locations in the San Diego, Southern Orange County and Inland Empire markets in California, Rock & Block is a distributor of hardscapes, masonry, and landscape supplies to landscape professionals.
•In April 2021, we acquired the assets and assumed the liabilities of Melrose Supply & Sales Corp (“Melrose”). With six locations throughout Florida, Melrose is a distributor of irrigation, lighting, and drainage products to landscape professionals.
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•In April 2021, we acquired all of the outstanding stock of Timberwall Landscape & Masonry Products, Inc. (“Timberwall”). With one location in Victoria, Minnesota, Timberwall is a distributor of hardscapes and landscape supplies to landscape professionals.
•In April 2021, we acquired the assets and assumed the liabilities of Arizona Stone & Architectural Products and Solstice Stone (“Arizona Stone and Solstice”). With seven locations throughout Arizona and two locations in the Las Vegas, Nevada market, Arizona Stone and Solstice is a distributor of hardscapes, natural stone, and landscape supplies to landscape professionals.
•In February 2021, we acquired the assets and assumed the liabilities of Lucky Landscape Supply, LLC (“Lucky Landscape Supply”). With one location in the greater Houston, Texas market, Lucky Landscape Supply is a distributor of nursery products to landscape professionals.
Volume-Based Pricing
We generally procure our products through purchase orders rather than under long-term contracts with firm commitments. We work to develop strong relationships with select suppliers that we target based on a number of factors, including brand and market recognition, price, quality, product support, service levels, delivery terms, and strategic positioning. We typically have annual supplier agreements, and while they generally do not provide for specific product pricing, many include volume-based financial incentives that we earn by meeting or exceeding purchase volume targets. Our ability to earn these volume-based incentives is an important factor in our financial results. In certain cases, we have entered into supply contracts with terms that exceed one year for the manufacture of our LESCO® branded fertilizer, some nursery goods, and grass seed, which may require us to purchase products in the future.
Strategic Initiatives
We continue to undertake operational initiatives, utilizing our scale to improve our profitability, enhance supply chain efficiency, strengthen our pricing and category management capabilities, streamline and refine our marketing process, and invest in more sophisticated information technology systems and data analytics. We are focusing on our procurement and supply chain management initiatives to better serve our customers and reduce sourcing costs. We are also implementing new inventory planning and stocking system functionalities and new transportation management systems in an effort to reduce costs as well as improve our reliability and level of service. In addition, we continue to enhance our website and B2B e-Commerce platform. We also work closely with our local branches to improve sales, delivery, and branch productivity. We believe we will continue to benefit from the following initiatives, among others:
•Category management initiatives, including the implementation of organic growth strategies, the development of our private label product strategy, the expansion of product lines, and the reorganization of brands and products by preferred suppliers.
•Supply chain initiatives, including the implementation of new inventory planning and stocking systems and functionalities, the installation of new distribution centers, local hubs in large markets, and local fleet utilization and cost improvements.
•Sales force performance initiatives, including the implementation of new compensation plans, the restructuring of our sales force, formal sales and product training for our sales force and sales force management, and the implementation of a comprehensive CRM.
•Marketing initiatives, including product marketing, customer strategy and analytics, Hispanic customer engagement, implementation of our digital marketing strategy, and the relaunch of our Partners Program.
•Digital initiatives, including increasing customer demand and adoption of our website and B2B e-Commerce platform SiteOne.com, which provides the convenience of an online sales channel, enhanced account management functionality, and industry specific productivity tools for our customers.
•Operational excellence initiatives, including the implementation of best practices in branch operations which encompasses safety, merchandising, stocking and assortment, customer engagement, delivery, labor management, as well as the additional automation and enhancement of branch systems, including the rollout of barcoding.
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Working Capital
Our business is characterized by a relatively high level of reported working capital, the effects of which can be compounded by changes in prices. In addition to affecting our Net sales, fluctuations in prices of supplies tend to result in changes in our reported inventories, trade receivables, and trade payables, even when our sales volumes and our rate of turnover of these working capital items remain relatively constant. Our working capital needs are exposed to these price fluctuations, as well as to fluctuations in our cost for transportation and distribution. We might not always be able to reflect these increases in our pricing. The strategic initiatives described above are designed to reduce our exposure to these fluctuations and maintain and improve our efficiency.
Results of Operations
In the following discussion of our results of operations, we make comparisons between the three and six months ended July 3, 2022 and July 4, 2021.
| Consolidated Statements of Operations | |||||||||||||||||||||||||||||||||||
| Three Months Ended | Six Months Ended | ||||||||||||||||||||||||||||||||||
| (In millions, except percentages) | July 3, 2022 | July 4, 2021 | July 3, 2022 | July 4, 2021 | |||||||||||||||||||||||||||||||
| Net sales | $ | 1,216.6 | 100.0 | % | $ | 1,083.9 | 100.0 | % | $ | 2,021.9 | 100.0 | % | $ | 1,734.1 | 100.0 | % | |||||||||||||||||||
| Cost of goods sold | 755.5 | 62.1 | % | 695.7 | 64.2 | % | 1,291.6 | 63.9 | % | 1,144.4 | 66.0 | % | |||||||||||||||||||||||
| Gross profit | 461.1 | 37.9 | % | 388.2 | 35.8 | % | 730.3 | 36.1 | % | 589.7 | 34.0 | % | |||||||||||||||||||||||
| Selling, general and administrative expenses | 272.7 | 22.4 | % | 225.8 | 20.8 | % | 503.2 | 24.9 | % | 418.1 | 24.1 | % | |||||||||||||||||||||||
| Other income | 1.7 | 0.1 | % | 2.2 | 0.2 | % | 4.2 | 0.2 | % | 3.4 | 0.2 | % | |||||||||||||||||||||||
| Operating income | 190.1 | 15.6 | % | 164.6 | 15.2 | % | 231.3 | 11.4 | % | 175.0 | 10.1 | % | |||||||||||||||||||||||
| Interest and other non-operating expenses, net | 4.6 | 0.4 | % | 4.3 | 0.4 | % | 8.9 | 0.4 | % | 9.8 | 0.6 | % | |||||||||||||||||||||||
| Income tax expense | 44.8 | 3.7 | % | 36.8 | 3.4 | % | 49.4 | 2.4 | % | 34.3 | 2.0 | % | |||||||||||||||||||||||
| Net income | $ | 140.7 | 11.6 | % | $ | 123.5 | 11.4 | % | $ | 173.0 | 8.6 | % | $ | 130.9 | 7.5 | % | |||||||||||||||||||
Net sales
Net sales increased 12% to $1,216.6 million for the three months ended July 3, 2022 compared to $1,083.9 million for the three months ended July 4, 2021, and increased 17% to $2,021.9 million for the six months ended July 3, 2022 compared to $1,734.1 million for the six months ended July 4, 2021. These increases were primarily due to price inflation from rising product costs and contributions from acquisitions. Organic Daily Sales increased 8% in the second quarter of 2022 and 12% for the six months ended July 3, 2022, compared to the prior year periods. Organic Daily Sales benefited from price inflation in response to rising product costs, partially offset by dampened volumes resulting from higher prices, moderating economic conditions, and unfavorable weather in northern markets. Based upon year-over-year price increases in our highest selling SKUs, we estimate price inflation contributed approximately 19% and 20% to our Organic Daily Sales growth for the three and six months ended July 3, 2022, respectively. Organic Daily Sales for landscaping products (irrigation supplies, hardscapes, landscape accessories, nursery goods, and outdoor lighting) grew 9% in the second quarter of 2022 and 13% for the six months ended July 3, 2022, compared to the prior year periods. Organic Daily Sales for agronomic products (fertilizer, control products, ice melt, equipment, and other products) increased 7% in the second quarter of 2022 and 8% for the six months ended July 3, 2022, compared to the prior year periods. The increases for both landscaping products and agronomic products were primarily due to price inflation as the costs for certain products such as PVC pipe, fertilizer, and grass seed have increased dramatically in response to strong demand and supply chain disruptions. Acquisitions contributed $44.9 million, or 4%, to the Net sales growth for the second quarter of 2022, and $88.3 million, or 5%, to the Net sales growth for the six months ended July 3, 2022.
Cost of goods sold
Cost of goods sold increased 9% to $755.5 million for the three months ended July 3, 2022 compared to $695.7 million for the three months ended July 4, 2021, and increased 13% to $1,291.6 million for the six months ended July 3, 2022 compared to $1,144.4 million for the six months ended July 4, 2021. The increase in Cost of goods sold for the three and six months ended July 3, 2022 was primarily attributable to acquisitions and product cost inflation.
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Gross profit and gross margin
Gross profit increased 19% to $461.1 million for the three months ended July 3, 2022 compared to $388.2 million for the three months ended July 4, 2021, and increased 24% to $730.3 million for the six months ended July 3, 2022 compared to $589.7 million for the six months ended July 4, 2021. Gross profit growth for the three and six months ended July 3, 2022 was driven by Net sales growth, including acquisitions. Gross margin increased 210 basis points to 37.9% in the second quarter of 2022 as compared to 35.8% in the second quarter of 2021, and increased 210 basis point to 36.1% for the six months ended July 3, 2022 compared to 34.0% for the six months ended July 4, 2021. The increase in gross margin reflects price realization, contributions from acquisitions, and the benefit of supply chain initiatives, including strategic inventory purchases ahead of supplier cost increases.
Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) increased 21% to $272.7 million for the three months ended July 3, 2022 compared to $225.8 million for the three months ended July 4, 2021, and increased 20% to $503.2 million for the six months ended July 3, 2022 compared to $418.1 million for the six months ended July 4, 2021. The increase in SG&A for the three and six months ended July 3, 2022 was primarily due to the additional operating expenses supporting our sales growth as well as contributions from acquisitions. SG&A as a percentage of Net sales increased 160 basis points to 22.4% for the three months ended July 3, 2022 compared to 20.8% for the three months ended July 4, 2021, and increased 80 basis point to 24.9% for the six months ended July 3, 2022 compared to 24.1% for the six months ended July 4, 2021. These increases were primarily due to additional operating expense supporting our sales growth, cost inflation, and contributions from acquisitions. Depreciation and amortization expense increased $2.8 million to $23.1 million for the three months ended July 3, 2022 compared to $20.3 million for the three months ended July 4, 2021, and increased $5.1 million to $44.8 million for the six months ended July 3, 2022 compared to $39.7 million for the six months ended July 4, 2021. The increase in depreciation and amortization was primarily attributable to our acquisitions.
Interest and other non-operating expenses, net
Interest and other non-operating expenses, net increased $0.3 million to $4.6 million for the three months ended July 3, 2022 compared to $4.3 million for three months ended July 4, 2021, and decreased $0.9 million to $8.9 million for the six months ended July 3, 2022 compared to $9.8 million for the six months ended July 4, 2021. The increase in interest expense for the three months ended July 3, 2022 was primarily due to increased borrowings during the second quarter of 2022 compared to the same period of 2021. The decrease in interest expense for the six months ended July 3, 2022 was primarily due to the loss on the extinguishment of debt recorded in the first quarter of 2021.
Income tax expense
Income tax expense was $44.8 million for the three months ended July 3, 2022 compared to $36.8 million for the three months ended July 4, 2021. The effective tax rate was 24.2% for the three months ended July 3, 2022 compared to 23.0% for the three months ended July 4, 2021. The increase in the effective rate was due primarily to a decrease in the amount of excess tax benefits from stock-based compensation recognized as a component of Income tax expense in the Consolidated Statements of Operations. Excess tax benefits of $2.4 million were recognized for the three months ended July 3, 2022 compared to $4.8 million for the three months ended July 4, 2021.
Income tax expense was $49.4 million for the six months ended July 3, 2022 compared to $34.3 million for the six months ended July 4, 2021. The effective tax rate was 22.2% for the six months ended July 3, 2022 compared to 20.8% for the six months ended July 4, 2021. The increase in the effective rate was due primarily to a decrease in the amount of excess tax benefits from stock-based compensation recognized as a component of Income tax expense in the Consolidated Statements of Operations. Excess tax benefits of $7.4 million were recognized for the six months ended July 3, 2022 compared to $8.5 million for the six months ended July 4, 2021.
Net income
Net income increased $17.2 million to $140.7 million for the three months ended July 3, 2022 compared to $123.5 million for the three months ended July 4, 2021, and increased $42.1 million to $173.0 million for the six months ended July 3, 2022 compared to $130.9 million for the six months ended July 4, 2021 The increase in Net income was primarily due to strong sales growth and gross margin improvement.
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Quarterly Results of Operations Data
The following tables set forth certain financial data for each of the most recent eight fiscal quarters including our unaudited Net sales, Cost of goods sold, Gross profit, Selling, general and administrative expenses, Net income (loss), and Adjusted EBITDA data (including a reconciliation of Adjusted EBITDA to Net income (loss)). We have prepared the quarterly data on a basis that is consistent with the financial statements included in this Quarterly Report on Form 10-Q. In the opinion of management, the financial information reflects all necessary adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of this data. This information is not a complete set of financial statements and should be read in conjunction with our financial statements and related notes included in this Quarterly Report on Form 10-Q. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.
| (In millions, except per share information and percentages) | |||||||||||||||||||||||||||||||||||||||||||||||
| 2022 | 2021 | 2020 | |||||||||||||||||||||||||||||||||||||||||||||
| Qtr 2 | Qtr 1 | Qtr 4 | Qtr 3 | Qtr 2 | Qtr 1 | Qtr 4 | Qtr 3 | ||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 1,216.6 | $ | 805.3 | $ | 805.2 | $ | 936.4 | $ | 1,083.9 | $ | 650.2 | $ | 675.1 | $ | 751.9 | |||||||||||||||||||||||||||||||
| Cost of goods sold | 755.5 | 536.1 | 522.8 | 595.9 | 695.7 | 448.7 | 452.8 | 501.8 | |||||||||||||||||||||||||||||||||||||||
| Gross profit | 461.1 | 269.2 | 282.4 | 340.5 | 388.2 | 201.5 | 222.3 | 250.1 | |||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 272.7 | 230.5 | 247.2 | 235.3 | 225.8 | 192.3 | 202.8 | 183.3 | |||||||||||||||||||||||||||||||||||||||
| Other (income) expense, net | (1.7) | (2.5) | (0.1) | 1.8 | (2.2) | (1.2) | (2.7) | (1.8) | |||||||||||||||||||||||||||||||||||||||
| Operating income | 190.1 | 41.2 | 35.3 | 103.4 | 164.6 | 10.4 | 22.2 | 68.6 | |||||||||||||||||||||||||||||||||||||||
| Interest and other non-operating expenses, net | 4.6 | 4.3 | 5.1 | 4.3 | 4.3 | 5.5 | 9.1 | 6.6 | |||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | 44.8 | 4.6 | 2.7 | 19.1 | 36.8 | (2.5) | 1.6 | 13.8 | |||||||||||||||||||||||||||||||||||||||
| Net income | $ | 140.7 | $ | 32.3 | $ | 27.5 | $ | 80.0 | $ | 123.5 | $ | 7.4 | $ | 11.5 | $ | 48.2 | |||||||||||||||||||||||||||||||
| Net income per common share: | |||||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 3.12 | $ | 0.72 | $ | 0.61 | $ | 1.79 | $ | 2.77 | $ | 0.17 | $ | 0.26 | $ | 1.11 | |||||||||||||||||||||||||||||||
| Diluted | $ | 3.07 | $ | 0.70 | $ | 0.60 | $ | 1.74 | $ | 2.70 | $ | 0.16 | $ | 0.25 | $ | 1.08 | |||||||||||||||||||||||||||||||
Adjusted EBITDA(a) | $ | 222.0 | $ | 67.8 | $ | 61.8 | $ | 128.2 | $ | 190.6 | $ | 34.5 | $ | 43.9 | $ | 87.8 | |||||||||||||||||||||||||||||||
| Net sales as a percentage of annual Net sales | 23.2 | % | 26.9 | % | 31.2 | % | 18.7 | % | 25.0 | % | 27.8 | % | |||||||||||||||||||||||||||||||||||
| Gross profit as a percentage of annual Gross profit | 23.3 | % | 28.1 | % | 32.0 | % | 16.6 | % | 24.7 | % | 27.8 | % | |||||||||||||||||||||||||||||||||||
| Adjusted EBITDA as a percentage of annual Adjusted EBITDA | 14.9 | % | 30.9 | % | 45.9 | % | 8.3 | % | 16.9 | % | 33.7 | % | |||||||||||||||||||||||||||||||||||
_____________________________________
(a) In addition to our Net income (loss) determined in accordance with GAAP, we present Adjusted EBITDA in this Quarterly Report on Form 10-Q to evaluate the operating performance and efficiency of our business. EBITDA represents our Net income (loss) plus the sum of income tax (benefit) expense, interest expense, net of interest income, and depreciation and amortization. Adjusted EBITDA is further adjusted for stock-based compensation expense, (gain) loss on sale of assets, other non-cash items, financing fees, other fees, and expenses related to acquisitions and other non-recurring (income) loss. We believe that Adjusted EBITDA is an important supplemental measure of operating performance because:
•Adjusted EBITDA is used to test compliance with certain covenants under our long-term debt agreements;
•Adjusted EBITDA is frequently used by securities analysts, investors, and other interested parties in their evaluation of companies, many of which present an Adjusted EBITDA measure when reporting their results;
•Adjusted EBITDA is helpful in highlighting operating trends, because it excludes the results of decisions that are outside the control of operating management and that can differ significantly from company to company depending on long-term strategic decisions regarding capital structure, the tax jurisdictions in which companies operate, age and book depreciation of facilities, and capital investments;
•we consider (gains) losses on the acquisition, disposal, and impairment of assets as resulting from investing decisions rather than ongoing operations; and
•other significant non-recurring items, while periodically affecting our results, may vary significantly from period to period and have a disproportionate effect in a given period, which affects comparability of our results.
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Adjusted EBITDA is not a measure of our liquidity or financial performance under GAAP and should not be considered as an alternative to Net income, operating income, or any other performance measures derived in accordance with GAAP, or as an alternative to cash flow from operating activities as a measure of our liquidity. The use of Adjusted EBITDA instead of Net income has limitations as an analytical tool. For example, this measure:
•does not reflect changes in, or cash requirements for, our working capital needs;
•does not reflect our interest expense, or the cash requirements necessary to service interest or principal payments, on our debt;
•does not reflect our Income tax (benefit) expense or the cash requirements to pay our income taxes;
•does not reflect historical cash expenditures or future requirements for capital expenditures or contractual commitments; and
•although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future and does not reflect any cash requirements for such replacements.
Management compensates for these limitations by relying primarily on the GAAP results and by using Adjusted EBITDA only as a supplement to provide a more complete understanding of the factors and trends affecting the business than GAAP results alone. Because not all companies use identical calculations, our presentation of Adjusted EBITDA may not be comparable to other similarly titled measures of other companies limiting their usefulness as a comparative measure.
The following table presents a reconciliation of Adjusted EBITDA to Net income (in millions):
| 2022 | 2021 | 2020 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Qtr 2 | Qtr 1 | Qtr 4 | Qtr 3 | Qtr 2 | Qtr 1 | Qtr 4 | Qtr 3 | |||||||||||||||||||||||||||||||||||||||||||
| Reported Net income | $ | 140.7 | $ | 32.3 | $ | 27.5 | $ | 80.0 | $ | 123.5 | $ | 7.4 | $ | 11.5 | $ | 48.2 | ||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | 44.8 | 4.6 | 2.7 | 19.1 | 36.8 | (2.5) | 1.6 | 13.8 | ||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 4.6 | 4.3 | 5.1 | 4.3 | 4.3 | 5.5 | 9.1 | 6.6 | ||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 23.1 | 21.7 | 22.3 | 21.0 | 20.3 | 19.4 | 18.2 | 16.3 | ||||||||||||||||||||||||||||||||||||||||||
| EBITDA | 213.2 | 62.9 | 57.6 | 124.4 | 184.9 | 29.8 | 40.4 | 84.9 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation(a) | 5.8 | 3.7 | 3.1 | 3.5 | 4.6 | 3.1 | 2.7 | 2.6 | ||||||||||||||||||||||||||||||||||||||||||
(Gain) loss on sale of assets(b) | (0.2) | (0.1) | 0.2 | (0.2) | (0.2) | 0.1 | (0.2) | (0.4) | ||||||||||||||||||||||||||||||||||||||||||
Financing fees(c) | 0.2 | — | — | — | — | 0.7 | — | — | ||||||||||||||||||||||||||||||||||||||||||
Acquisitions and other adjustments(d) | 3.0 | 1.3 | 0.9 | 0.5 | 1.3 | 0.8 | 1.0 | 0.7 | ||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA(e) | $ | 222.0 | $ | 67.8 | $ | 61.8 | $ | 128.2 | $ | 190.6 | $ | 34.5 | $ | 43.9 | $ | 87.8 | ||||||||||||||||||||||||||||||||||
_____________________________________
(a) Represents stock-based compensation expense recorded during the period.
(b) Represents any gain or loss associated with the sale of assets and termination of finance leases not in the ordinary course of business.
(c) Represents fees associated with our debt refinancing and debt amendments.
(d) Represents professional fees, retention and severance payments, and performance bonuses related to historical acquisitions. Although we have incurred professional fees, retention and severance payments, and performance bonuses related to acquisitions in several historical periods and expect to incur such fees and payments for any future acquisitions, we cannot predict the timing or amount of any such fees or payments.
(e) Adjusted EBITDA excludes any earnings or loss of acquisitions prior to their respective acquisition dates for all periods presented.
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The following table presents a reconciliation of Organic Daily Sales to Net sales (in millions, except Selling Days):
| 2022 | 2021 | |||||||||||||||||||||||||
| Qtr 2 | Qtr 1 | Qtr 2 | Qtr 1 | |||||||||||||||||||||||
| Reported Net sales | $ | 1,216.6 | $ | 805.3 | $ | 1,083.9 | $ | 650.2 | ||||||||||||||||||
Organic Sales(a) | 1,145.5 | 760.1 | 1,057.7 | 648.4 | ||||||||||||||||||||||
Acquisition contribution(b) | 71.1 | 45.2 | 26.2 | 1.8 | ||||||||||||||||||||||
| Selling Days | 64 | 65 | 64 | 65 | ||||||||||||||||||||||
| Organic Daily Sales | $ | 17.9 | $ | 11.7 | $ | 16.5 | $ | 10.0 | ||||||||||||||||||
_____________________________________
(a) Organic Sales equal Net sales less Net sales from branches acquired in 2021 and 2022.
(b) Represents Net sales from acquired branches that have not been under our ownership for at least four full fiscal quarters at the start of the 2022 Fiscal Year. Includes Net sales from branches acquired in 2021 and 2022.
Liquidity and Capital Resources
We assess our liquidity in terms of our cash and cash equivalents on hand and the ability to generate cash to fund our operating and investing activities and service our debt, taking into consideration available borrowings and the seasonal nature of our business. We expect that cash and cash equivalents on hand, cash provided from operations, and available capacity under the ABL Facility will provide sufficient funds to operate our business, make capital expenditures, complete acquisitions, and meet all of our liquidity requirements for the next 12 months, including payment of interest and principal on our debt. Longer-term projects or significant investments in acquisitions may be financed through borrowings under our credit facilities or other forms of financing and will depend on then-existing conditions.
Our borrowing base capacity under the ABL Facility was $178.1 million as of July 3, 2022, after giving effect to $186.0 million of revolving credit loans under the ABL Facility. There were no revolving credit loans outstanding and our borrowing base capacity under the ABL Facility was $364.1 million as of January 2, 2022. As of July 3, 2022, we had total cash and cash equivalents of $50.1 million, total gross long-term debt of $444.2 million, and total finance lease obligations (excluding interest) of $46.6 million.
Working capital was $885.1 million as of July 3, 2022, an increase of $269.2 million compared to $615.9 million as of January 2, 2022. The change in working capital was primarily attributable to the seasonality of our business.
The following table summarizes current and long-term material cash requirements related to our long-term debt as of July 3, 2022 (in millions):
| Total | Next 12 Months | Beyond 12 Months | |||||||||||||||
| Long-term debt, including current maturities | $ | 444.2 | $ | 4.0 | $ | 440.2 | |||||||||||
| Interest on long-term debt | $ | 57.8 | $ | 14.4 | $ | 43.4 | |||||||||||
Our gross long-term debt balance increased $184.0 million since January 2, 2022. This increase was primarily attributable to funding the seasonal increase in our working capital and our acquisition investments. We have current maturities on our long-term debt of $4.0 million, which includes $2.5 million related to the term loan facility and $1.5 million related to the hybrid debt instruments. The projected interest payments on our debt only pertain to obligations and agreements outstanding as of July 3, 2022 and expected payments for agent administration fees. The projected interest payments are calculated for future periods through maturity dates of our long-term debt using interest rates in effect as of July 3, 2022. Certain of these projected interest payments may differ in the future based on changes in floating interest rates or other factors and events, including our entry into amendments of the term loans and the ABL Facility. Refer to “Note 9. Long-Term Debt” in the notes to the consolidated financial statements for further information regarding our debt instruments.
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Cash Flow Summary
Information about our cash flows, by category, is presented in our statements of cash flows and is summarized below (in millions):
| Six Months Ended | ||||||||||||||
| Net cash (used in) provided by: | July 3, 2022 | July 4, 2021 | ||||||||||||
| Operating activities | $ | (23.6) | $ | 92.2 | ||||||||||
| Investing activities | $ | (144.7) | $ | (82.0) | ||||||||||
| Financing activities | $ | 164.9 | $ | 41.9 | ||||||||||
Cash flow (used in) provided by operating activities
Net cash used in operating activities for the six months ended July 3, 2022 was $23.6 million compared to net cash provided by operating activities of $92.2 million for the six months ended July 4, 2021. The increase in cash used in operating activities was primarily due to a larger seasonal inventory build reflecting supply chain uncertainly, cost inflation, and strategic purchases ahead of expected price increases from our suppliers.
Cash flow used in investing activities
Net cash used in investing activities was $144.7 million for the six months ended July 3, 2022 compared to $82.0 million for the six months ended July 4, 2021. The increase reflects higher acquisition investments during the first six months of 2022 compared to the same period of 2021. Capital expenditures of $16.6 million for the first six months of 2022 were unchanged compared to the same period of 2021.
Cash flow provided by financing activities
Net cash provided by financing activities was $164.9 million for the six months ended July 3, 2022 compared to $41.9 million for the six months ended July 4, 2021. The increase primarily reflects higher borrowings to fund the larger seasonal increase in working capital and our acquisition investments described above.
External Financing
Term Loans
Landscape Holding and Landscape, as borrowers (collectively, the “Borrowers”), entered into the Fifth Amendment to the Amended and Restated Credit Agreement, the (“Fifth Amendment”), dated as of March 23, 2021, with JPMorgan Chase Bank, N.A. (the “New Agent”), as administrative agent and collateral agent, the several banks and other financial institutions party thereto and certain other parties party thereto from time to time. The Fifth Amendment amends and restates the Amended and Restated Credit Agreement, dated as of April 29, 2016, among the Borrowers, the lenders from time to time party thereto and UBS AG, Stamford Branch (the “Existing Agent”) as administrative agent and collateral agent (as amended prior to March 23, 2021, the “Existing Credit Agreement” and, as so amended and restated pursuant to the Fifth Amendment, the “Second Amended and Restated Credit Agreement”) in order to, among other things, incur $325.0 million of term loans (the “New Term Loans”). The New Term Loans will mature on March 23, 2028.
Subject to certain conditions, without the consent of the then existing lenders (but subject to the receipt of commitments), the New Term Loans may be increased (or a new term loan facility, revolving credit facility, or letter of credit facility added) by up to (i) the greater of (a) $275.0 million and (b) 100% of Consolidated EBITDA (as defined in the Second Amended and Restated Credit Agreement) for the trailing 12-month period plus (ii) an additional amount that will not cause the net secured leverage ratio after giving effect to the incurrence of such additional amount and any use of proceeds thereof to exceed 4.00 to 1.00.
The New Term Loans are subject to mandatory prepayment provisions, covenants, and events of default. Failure to comply with these covenants and other provisions could result in an event of default under the Second Amended and Restated Credit Agreement. If an event of default occurs, the lenders could elect to declare all amounts outstanding under the New Term Loans to be immediately due and payable and enforce their interest in collateral pledged under the agreement.
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Amendments of the Term Loans
On March 23, 2021, the Borrowers entered into the Fifth Amendment in order to, among other things, (i) incur $325.0 million of term loans, (ii) replace the Existing Agent as administrative and collateral agent with the New Agent, and (iii) make such other changes in the Second Amended and Restated Credit Agreement as agreed among the Borrowers and the lenders. Proceeds of the New Term Loans were used to, among other things, (i) to repay in full the Tranche E Term Loans outstanding under the Existing Credit Agreement immediately prior to effectiveness of the Fifth Amendment, (ii) to pay fees and expenses related to the Fifth Amendment and the Second Amended and Restated Credit Agreement, and (iii) for working capital and other general corporate purposes.
The New Term Loans bear interest, at Landscape Holding’s option, at either (i) an adjusted LIBOR rate plus an applicable margin equal to 2.00% (with a LIBOR floor of 0.50%) or (ii) an alternative base rate plus an applicable margin equal to 1.00%. Voluntary prepayments of the New Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty, subject to a 1.00% premium payable in connection with certain repricing transactions within the first twelve months after the date of the initial funding of the New Term Loans. The interest rate on the outstanding balance of the New Term Loans was 3.67% as of July 3, 2022.
The Second Amended and Restated Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants limit the ability of Landscape Holding and Landscape to:
•incur additional indebtedness;
•pay dividends, redeem stock, or make other distributions;
•repurchase, prepay, or redeem subordinated indebtedness;
•make investments;
•create restrictions on the ability of Landscape Holding’s restricted subsidiaries to pay dividends or make other intercompany transfers;
•create liens;
•transfer or sell assets;
•make negative pledges;
•consolidate, merge, sell, or otherwise dispose of all or substantially all of Landscape Holding’s assets;
•change lines of business; and
•enter into certain transactions with affiliates.
ABL Facility
Landscape Holding and Landscape (collectively, the “ABL Borrower”) are parties to the credit agreement dated December 23, 2013 (as amended by the First Amendment to the Credit Agreement, dated June 13, 2014, the Second Amendment to the Credit Agreement, dated January 26, 2015, the Third Amendment to the Credit Agreement, dated February 13, 2015, the Fourth Amendment to the Credit Agreement, dated October 20, 2015, the Omnibus Amendment to the Credit Agreement, dated May 24, 2017, and the Sixth Amendment to the Credit Agreement, dated February 1, 2019, the “ABL Credit Agreement”) providing for an ABL Facility in the amount of up to $375.0 million with a maturity date of February 1, 2024. The ABL Facility is secured by a first lien on the inventory and receivables of the Borrowers. The ABL Facility is guaranteed by SiteOne Landscape Supply Bidco, Inc. (“Bidco”), an indirect wholly-owned subsidiary of the Company, and each direct and indirect wholly-owned U.S. restricted subsidiary of Landscape. Availability is determined using borrowing base calculations of eligible inventory and receivable balances. The interest rate on the ABL Facility is LIBOR (as defined in the ABL Credit Agreement) plus an applicable margin ranging from 1.25% to 1.75% or an alternate base rate for U.S. denominated borrowings plus an applicable margin ranging from 0.25% to 0.75%. The interest rate on outstanding balances under the ABL Facility ranged from 2.62% to 5.25% as of July 3, 2022. There were no outstanding balances under the ABL Facility as of January 2, 2022. Additionally, the Borrowers paid a commitment fee of 0.25% on the unfunded amount as of July 3, 2022 and January 2, 2022.
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The ABL Facility contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following: financial condition, fundamental changes, dividends and distributions, acquisitions, dispositions of collateral, payments and modifications of restricted indebtedness, negative pledge clauses, changes in line of business, currency, commodity and other hedging transactions, transactions with affiliates, investments, indebtedness, and liens. The negative covenants are subject to customary exceptions and also permit the payment of dividends and distributions, investments, permitted acquisitions, payments or redemptions of indebtedness under the Second Amended and Restated Credit Agreement, asset sales and mergers, consolidations, and sales of all or substantially all assets involving subsidiaries upon satisfaction of a “payment condition.” The payment condition is deemed satisfied upon 30-day specified excess availability and specified availability exceeding agreed upon thresholds and, in certain cases, the absence of specified events of default or known events of default and pro forma compliance with a consolidated fixed charge coverage ratio of 1.00 to 1.00.
Subject to certain conditions, without the consent of the then existing lenders (but subject to the receipt of commitments), the ABL Facility may be increased (or a new term loan facility added) by up to (i) the greater of (a) $175.0 million and (b) 100% of Consolidated EBITDA (as defined in the Amended and Restated Term Loan Credit Agreement) for the trailing 12-month period plus (ii) an additional amount that will not cause the net secured leverage ratio after giving effect to the incurrence of such additional amount and any use of proceeds thereof to exceed 5.00 to 1.00.
There are no financial covenants included in the ABL Credit Agreement, other than a springing minimum consolidated fixed charge coverage ratio of at least 1.00 to 1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the ABL Facility, and continuing until such time as specified availability has been in excess of such threshold for a period of 30 consecutive calendar days.
Failure to comply with the covenants and other provisions included in the ABL Credit Agreement could result in an event of default under the ABL Facility. If an event of default occurs, the lenders could elect to declare all amounts outstanding under the ABL Facility to be immediately due and payable, enforce their interest in collateral pledged under the agreement, or restrict the borrowers’ ability to obtain additional borrowings thereunder.
Subsequent Events
On July 22, 2022, Landscape Holding and Landscape, as borrowers (collectively, the “Borrowers”), entered into the Seventh Amendment to the Credit Agreement (the “Seventh Amendment”) with JPMorgan Chase Bank, N.A. (the “New Agent”), as administrative agent and collateral agent, the several banks and other financial institutions party thereto and certain other parties party thereto from time to time. The Seventh Amendment amends and restates the Credit Agreement, dated as of December 23, 2013, among the Borrowers, the lenders and other financial institutions from time to time party thereto and UBS AG, Stamford Branch (the “Existing Agent”) as administrative agent and collateral agent (as amended prior to July 22, 2022, the “Existing Credit Agreement” and, as so amended and restated pursuant to the Seventh Amendment, the “Amended and Restated Credit Agreement”) in order to, among other things, (i) increase the aggregate principal amount of the commitments under the Existing Credit Agreement to $600.0 million, (ii) extend the final scheduled maturity of the revolving credit facility under the Existing Credit Agreement to July 22, 2027, (iii) establish an alternate rate of interest to the LIBOR rate under the Existing Credit Agreement, (iv) replace the Existing Agent as administrative and collateral agent with the New Agent, and (v) make such other changes to the Existing Credit Agreement as agreed among the Borrowers and the lenders. Proceeds of the initial borrowings under the Amended and Restated Credit Agreement on the closing date were used, among other things, (i) to repay in full the loans outstanding under the Existing Credit Agreement immediately prior to effectiveness of the Seventh Amendment, (ii) to pay fees and expenses related to the Seventh Amendment and the Amended and Restated Credit Agreement, and (iii) for working capital and other general corporate purposes.
Loans under the Amended and Restated Credit Agreement will bear interest, at Landscape Holding’s option, at either (i) an adjusted term SOFR rate equal to term SOFR plus 0.10% (subject to a floor of 0.00%) plus an applicable margin of 1.25% or 1.50% or (ii) an alternate base rate plus an applicable margin of 0.25% or 0.50%, in each case depending on average daily excess availability under the Amended and Restated Credit Agreement, and in each case subject to a 0.125% reduction when the Consolidated Total Leverage Ratio (as defined in the Amended and Restated Credit Agreement) is less than 1.50:1.00. Additionally, undrawn commitments under the Amended and Restated Credit Agreement bear a commitment fee of 0.20% or 0.25%, depending on the average daily undrawn portion of the commitments under the Amended and Restated Credit Agreement.
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Limitations on Distributions and Dividends by Subsidiaries
The ability of our subsidiaries to make distributions and dividends to us depends on their operating results, cash requirements, financial condition, and general business conditions, as well as restrictions under the laws of our subsidiaries’ jurisdictions.
The agreements governing the Second Amended and Restated Credit Agreement and the ABL Facility restrict the ability of our subsidiaries to pay dividends, make loans, or otherwise transfer assets to us. Further, our subsidiaries are permitted under the terms of the Second Amended and Restated Credit Agreement and the ABL Facility and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends, or the making of loans to us.
Interest Rate Swaps
We are subject to interest rate risk with regard to existing and future issuances of debt. We utilize interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on existing debt. We are party to a forward-starting interest rate swap contract and interest rate swap contracts to convert the variable interest rate to a fixed interest rate on portions of the borrowings under the term loans. During the first quarter of 2021, we amended and restructured certain of our interest rate swap contracts using a strategy commonly referred to as a “blend and extend”. In a blend and extend arrangement, the liability position of the existing interest rate swap arrangement is blended into the amended or new interest rate swap arrangement and the term to maturity of the hedged position is extended.
We recognize any differences between the variable interest rate payments and the fixed interest rate settlements from the swap counterparties as an adjustment to interest expense over the life of the swaps. We have designated these swaps as cash flow hedges and record the changes in the estimated fair value of the swaps to Accumulated other comprehensive income (loss) (“AOCI”) on our Consolidated Balance Sheets. If it becomes probable that the forecasted transaction will not occur, the hedge relationship will be de-designated and amounts accumulated in AOCI will be reclassified to Interest and other non-operating expenses, net in the current period. To the extent the interest rate swaps are determined to be ineffective, we recognize the changes in the estimated fair value of the swaps in earnings.
Failure of the swap counterparties to make payments would result in the loss of any potential benefit to us under the swap agreements. In this case, we would still be obligated to pay the variable interest payments underlying the debt agreements. Additionally, failure of the swap counterparties would not eliminate our obligation to continue to make payments under the existing swap agreements if it continues to be in a net pay position.
As a result of the determination that the Interest rate swap arrangements executed on March 23, 2021 are hybrid debt instruments containing embedded at-market swap derivatives, we reclassified $5.9 million from Accrued liabilities and Other long-term liabilities to long-term debt with $1.5 million classified as Long-term debt, current portion and $4.4 million classified as Long-term debt, less current portion on our Consolidated Balance Sheets. As of July 3, 2022, approximately $1.5 million was classified as Long-term debt, current portion and approximately $2.6 million was classified as Long-term debt, less current portion on our Consolidated Balance Sheets. For additional information, refer to “Note 4. Fair Value Measurement and Interest Rate Swaps” and “Note 9. Long-Term Debt” in the notes to the consolidated financial statements.
Critical Accounting Estimates
The accounting estimates that we believe to be most sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations are: inventory valuation, acquisitions, and goodwill. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 for additional detail and discussion of these critical accounting estimates. There have been no material changes to our critical accounting estimates as described in our most recent Annual Report.
Recently Issued and Adopted Accounting Pronouncements
Refer to “Note 1. Nature of Business and Significant Accounting Policies” in the notes to the consolidated financial statements.
Accounting Pronouncements Issued But Not Yet Adopted
Refer to “Note 1. Nature of Business and Significant Accounting Policies” in the notes to the consolidated financial statements.
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Item 3. Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes from the information provided in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act), as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were designed at a reasonable assurance level and were effective to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure as of the end of the period covered by this Quarterly Report on Form 10-Q.
Changes in Internal Control over Financial Reporting
There were no significant changes in our internal control over financial reporting during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1. Legal Proceedings
We are not currently involved in any material litigation or arbitration. We anticipate that we will be subject to litigation and arbitration from time to time in the ordinary course of business. At this time, we do not expect any of these proceedings to have a material effect on our reputation, business, financial position, results of operations, or cash flows. However, we can give no assurance that the results of any such proceedings will not materially affect our reputation, business, financial position, results of operations, or cash flows.
Item 1A. Risk Factors
The significant factors known to us that could materially adversely affect our business, financial condition, or operating results are disclosed in our Annual Report on Form 10-K for the fiscal year ended January 2, 2022 and our Quarterly Report on Form 10-Q for the fiscal quarter ended April 3, 2022.
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Item 6. Exhibits.
| Exhibit Number | Description | |||||||
| 10.1 | ||||||||
| 31.1 | ||||||||
| 31.2 | ||||||||
| 32.1 | ||||||||
| 32.2 | ||||||||
| 101 | The following unaudited financial information from this Quarterly Report on Form 10-Q for the quarter ended July 3, 2022 is formatted in Inline XBRL (Inline Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements. | |||||||
| 104 | Cover Page Interactive Data File (formatted in Inline XBRL with applicable taxonomy extension information contained in Exhibit 101). | |||||||
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| SITEONE LANDSCAPE SUPPLY, INC. | |||||||||||
| Date: | August 3, 2022 | By: | /s/ John T. Guthrie | ||||||||
| John T. Guthrie | |||||||||||
Executive Vice President, Chief Financial Officer and Assistant Secretary | |||||||||||
(Principal Financial and Principal Accounting Officer) | |||||||||||
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