SiteOne Landscape Supply, Inc 10-Q for FY2021 Q3
SiteOne Landscape Supply, Inc. (SITE)
10-Q
2021-11-03
For: 2021-10-03
View Original
Added on
April 07, 2026
About this 10-Q
SiteOne Landscape Supply, Inc filed this 10-Q on November 3, 2021, covering the quarter ended October 3, 2021 (FY2021 Q3).
Headline figures
Quarter ended October 3, 2021, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $936.4M
- up 24.5% from $751.9M a year earlier
- Net income
- $80M
- up 66.0% from net income of $48.2M a year earlier
- Diluted EPS
- $1.74
- up 61.1% from $1.08 a year earlier
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 October 3, 2021
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 October 29, 2021 | |||||||
| Common Stock, $0.01 par value per share | ||||||||
| TABLE OF CONTENTS | |||||
1
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;
•climate change-related events, weather conditions, seasonality, and availability of water to end-users;
•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;
•competitive industry pressures, including competition for our talent base;
•cybersecurity incidents, including the July 2020 ransomware attack;
•supply chain disruptions, product shortages, and the loss of key suppliers;
•product price fluctuations;
•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;
•inflation and increased operating costs;
•risks associated with our large labor force (including work stoppages 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 or uncertain political conditions;
•our substantial indebtedness and our ability to obtain financing in the future;
•increases in interest rates;
•risks related to our common stock; and
•risks related to other factors discussed in this Quarterly Report on Form 10-Q.
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.
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 | October 3, 2021 | January 3, 2021 | ||||||||||||
| 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 | ||||||||||||||
| 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 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 | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Net sales | $ | $ | $ | $ | ||||||||||||||||||||||
| Cost of goods sold | ||||||||||||||||||||||||||
| Gross profit | ||||||||||||||||||||||||||
| Selling, general and administrative expenses | ||||||||||||||||||||||||||
| Other (income) expense, net | ( | ( | ( | |||||||||||||||||||||||
| Operating income | ||||||||||||||||||||||||||
| Interest and other non-operating expenses, net | ||||||||||||||||||||||||||
| 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 | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | ||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||
| Foreign currency translation adjustments | ( | ( | ( | |||||||||||||||||||||||
Interest rate swaps - net unrealized gains (losses) 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 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 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common shares under stock-based compensation plan | — | — | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at October 3, 2021 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Common Stock Shares | Common Stock Amount | Additional Paid-in-Capital | Retained Earnings | Accumulated Other Comprehensive Loss | Total Equity | |||||||||||||||||||||||||||||||||
| Balance at December 29, 2019 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net loss | — | — | — | ( | — | ( | ||||||||||||||||||||||||||||||||
| Other comprehensive loss | — | — | — | — | ( | ( | ||||||||||||||||||||||||||||||||
| Issuance of common shares under stock-based compensation plan | — | — | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at March 29, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common shares under stock-based compensation plan | — | — | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at June 28, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Other comprehensive income | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Issuance of common stock in public offering, net of issuance costs | — | — | — | |||||||||||||||||||||||||||||||||||
| Issuance of common shares under stock-based compensation plan | — | — | — | |||||||||||||||||||||||||||||||||||
| Stock-based compensation | — | — | — | — | ||||||||||||||||||||||||||||||||||
| Balance at September 27, 2020 | $ | $ | $ | $ | ( | $ | ||||||||||||||||||||||||||||||||
See Notes to Consolidated Financial Statements (Unaudited).
7
SiteOne Landscape Supply, Inc.
Consolidated Statements of Cash Flows (Unaudited)
(In millions)
| Nine Months Ended | ||||||||||||||
| October 3, 2021 | September 27, 2020 | |||||||||||||
| Cash Flows from Operating Activities: | ||||||||||||||
| Net income | $ | $ | ||||||||||||
| Adjustments to reconcile Net income to net cash 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 | ||||||||||||||
| Accrued expenses and other liabilities | ||||||||||||||
| Net Cash 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” or individually as “Holdings”) 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 four percent of sales and less than five percent of total assets in Canada for all periods presented. As of October 3, 2021, the Company had over 590 branches. Based on the nature of the Company’s products and customers’ business cycles, sales have been significantly higher in the second and third quarters of each fiscal year.
Stock Offering
On August 3, 2020, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with BofA Securities, Inc. (the “Underwriter”), relating to an underwritten public offering of 2,150,000 shares of the Company’s common stock, $0.01 par value per share (the “Common Stock”). Under the terms of the Underwriting Agreement, the Company granted the Underwriter an option, exercisable for 30 days, to purchase up to an additional 322,500 shares of Common Stock. The Underwriter did not exercise the option to purchase additional shares of Common Stock. The aggregate proceeds to the Company from the sale of shares of Common Stock in the offering were approximately $262.3 million before expenses of approximately $0.6 million. The offering closed on August 6, 2020. The Company has used a portion of the proceeds and intends to use the remaining net proceeds from the offering for general corporate purposes, which may include the acquisition of companies or businesses, the repayment and refinancing of debt, working capital, and capital expenditures.
The shares of Common Stock sold in the offering were issued pursuant to an automatically effective shelf registration statement on Form S-3ASR (Registration No. 333-240295) and the related prospectus that was filed with the Securities and Exchange Commission (“SEC”) on August 3, 2020, and a related prospectus supplement, dated August 3, 2020.
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 nine months ended October 3, 2021; 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 included 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 during the fiscal year ended January 3, 2021 which are required to be paid over two years, with 50 percent to be paid by December 31, 2021 and the remainder by December 31, 2022. As of October 3, 2021, the Company has $12.2 million of qualifying employer payroll taxes included in its Consolidated Balance Sheets, of which $6.1 million is included in Accrued compensation and $6.1 million is included in Other long-term liabilities.
11
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 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 3, 2021. The interim period unaudited financial results for the three and nine-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 materially from these estimates.
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 2, 2022 includes 52 weeks and the fiscal year ended January 3, 2021 included 53 weeks. The three months ended October 3, 2021 and September 27, 2020 both included 13 weeks. The nine months ended October 3, 2021 and September 27, 2020 both included 39 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 immediately below and by the Recently Issued and Adopted Accounting Pronouncements section, 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 3, 2021.
Recently Issued and Adopted Accounting Pronouncements
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2016-13, “Financial Instruments - Credit Losses (Topic 326) - Measurement of Credit Losses on Financial Instruments,” amended by subsequent ASUs (collectively, “ASU 2016-13”), which changed the way companies evaluate credit losses for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans, and other instruments, entities are required to use a new forward-looking “expected loss” model to evaluate impairment, potentially resulting in earlier recognition of allowances for losses. The new standard also required enhanced disclosures, including the requirement to disclose the information used to track credit quality by year of origination for most financing receivables. The Company adopted ASU 2016-13 when it became effective in the first quarter of fiscal year 2020. The adoption of ASU 2016-13 did not have a material impact on its consolidated financial statements and related disclosures.
12
In August 2018, the FASB issued ASU 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement” (“ASU 2018-13”), which changed the fair value measurement disclosure requirements of ASC Topic 820. The ASU added new disclosure requirements and eliminated and modified existing disclosure requirements. Entities are no longer required to disclose the reasons for and amounts of transfers between Level 1 and Level 2 of the fair value hierarchy, but entities are required to disclose the range and weighted-average of significant unobservable inputs used to develop Level 3 fair value measurements. The Company adopted ASU 2018-13 when it became effective in the first quarter of fiscal year 2020. The adoption of ASU 2018-13 did not have a material impact on its consolidated financial statements and related disclosures.
In December 2019, the FASB issued 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 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 guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides 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. 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 amendments are effective upon issuance and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.
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 Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.
13
Note 2. Revenue from Contracts with Customers
The following table presents Net sales disaggregated by product category (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
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 reward 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 October 3, 2021, 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 October 3, 2021 and January 3, 2021, contract liabilities were $10.8 million and $5.7 million, respectively, and were included within Accrued liabilities in the accompanying Consolidated Balance Sheets. The increase in the contract liability balance during the nine months ended October 3, 2021 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 reward program during the period.
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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 $71.1 million and $74.6 million and deferred contingent consideration of $4.8 million and $7.0 million for the nine months ended October 3, 2021 and September 27, 2020, respectively.
•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.
•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.
•In December 2020, the Company acquired the assets and assumed the liabilities of Stone Center of Richmond, LLC and Stone Center of Fredericksburg, LLC (collectively, “Stone Center of Virginia”). With two locations in each of the Richmond and Fredericksburg, Virginia markets, Stone Center of Virginia is a distributor of hardscapes, natural stone, and landscape supplies to landscape professionals.
•In December 2020, the Company acquired the assets and assumed the liabilities of Dirt and Rock, LLC (“Dirt and Rock”). With one location in the greater Atlanta, Georgia market, Dirt and Rock is a distributor of hardscapes, natural stone, and landscape supplies to landscape professionals.
•In December 2020, the Company acquired the assets and assumed the liabilities of Alpine Materials (“Alpine”). With one location in the greater Dallas, Texas market, Alpine is a distributor of mulches, soils, and hardscape materials to landscape professionals.
•In October 2020, the Company acquired the assets and assumed the liabilities of Hedberg Supply (“Hedberg”). With two locations in the Twin Cities, Minnesota market, Hedberg is a distributor of hardscapes, nursery, and landscape supplies to landscape professionals.
•In October 2020, the Company acquired the assets and assumed the liabilities of BURNCO Landscape Centres Inc. (“BURNCO”). With 12 locations in the three Canadian provinces of British Columbia, Alberta, and Saskatchewan, BURNCO is a distributor of hardscapes and landscape supplies to landscape professionals.
•In August 2020, the Company acquired all of the outstanding stock of Modern Builders Supply, Inc. (“Modern Builders”). With two locations in the San Diego, Southern Orange County and Inland Empire markets in California, Modern Builders is a distributor of hardscapes and landscape supplies to landscape professionals.
•In August 2020, the Company acquired the assets and assumed the liabilities of Alliance Stone (“Alliance Stone”). With one location in the greater Atlanta, Georgia market, Alliance Stone is a distributor of hardscapes and natural stone to landscape professionals.
•In March 2020, the Company acquired the assets and assumed the liabilities of Big Rock Natural Stone and Hardscapes, Inc. (“Big Rock”). With one location in the greater Greenville, South Carolina market, Big Rock is a distributor of hardscapes and landscape supplies to landscape professionals.
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•In January 2020, the Company acquired the assets and assumed the liabilities of The Garden Dept. Corp. (“Garden Dept.”). With three locations in the greater Long Island, New York market, Garden Dept. is a distributor of nursery and landscape supplies to landscape professionals.
•In January 2020, the Company acquired the assets and assumed the liabilities of Empire Supplies (“Empire”). With three locations in the greater Newark-Union, New Jersey market, Empire is a distributor of hardscapes and landscape supplies to landscape professionals.
•In January 2020, the Company acquired the assets and assumed the liabilities of Wittkopf Landscape Supply (“Wittkopf”). With two locations in the Spokane Valley, Washington market, Wittkopf is a distributor of hardscapes and landscape supplies 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.
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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 forward-starting interest rate swap contracts 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 the amended Interest rate swap agreements mature on March 23, 2025 and effectively blended the liability positions of the Forward-starting interest rate swaps into the Interest rate swaps and extended the term of the hedged positions. 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 1. Nature of Business and Significant Accounting Policies” and “Note 9. Long-Term Debt” for additional information regarding the Company’s hybrid debt instruments.
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 and were recognized in earnings at the time the hedged interest payments impacted earnings.
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The following table provides additional information related to the swap contracts designated as hedging instruments as of October 3, 2021:
| 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 information related to 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 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 October 3, 2021 and January 3, 2021 (in millions):
| Derivative Assets | ||||||||||||||||||||||||||
| October 3, 2021 | January 3, 2021 | |||||||||||||||||||||||||
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||||||||
| Interest rate contracts | Other assets | $ | Other assets | $ | ||||||||||||||||||||||
| Total derivative assets | $ | $ | ||||||||||||||||||||||||
| Derivative Liabilities | ||||||||||||||||||||||||||
| October 3, 2021 | January 3, 2021 | |||||||||||||||||||||||||
| Balance Sheet Location | Fair Value | Balance Sheet Location | Fair Value | |||||||||||||||||||||||
| Derivatives designated as hedging instruments | ||||||||||||||||||||||||||
| Interest rate contracts | Accrued liabilities | $ | Accrued liabilities | $ | ||||||||||||||||||||||
| Other long-term liabilities | Other long-term liabilities | |||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | ||||||||||||||||||||||||||
| Interest rate contracts | Accrued liabilities | $ | Accrued liabilities | $ | ||||||||||||||||||||||
| Other long-term liabilities | Other long-term liabilities | |||||||||||||||||||||||||
| Total derivative liabilities | $ | $ | ||||||||||||||||||||||||
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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.
For the three and nine months ended October 3, 2021 and September 27, 2020, there was no ineffectiveness recognized in earnings. The after-tax amount of unrealized loss on derivative instruments included in Accumulated other comprehensive loss related to the interest rate swap contracts expected to be reclassified to earnings during the next twelve months was $3.4 million as of October 3, 2021. 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 nine months ended October 3, 2021 and September 27, 2020 (in millions):
| Three Months Ended | ||||||||||||||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||||||||||||||||
| 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 | $ | ( | |||||||||||||||||||||||||||||
| Nine Months Ended | ||||||||||||||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||||||||||||||||
| 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 nine months ended October 3, 2021 and September 27, 2020 (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) | October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||||||
| Interest rate contracts | Interest and other non-operating expenses, net | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||
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| Nine Months Ended | ||||||||||||||||||||||||||||||||
| Gain (Loss) Reclassified from AOCI into Income | Gain (Loss) Recognized in Income | |||||||||||||||||||||||||||||||
| Derivatives not designated as hedging instruments | Location of Gain (Loss) | October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||||||
| 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.
Note 5. Property and Equipment, Net
Property and equipment consisted of the following (in millions):
| October 3, 2021 | January 3, 2021 | |||||||||||||
| 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 $8.9 million and $25.8 million for the three and nine months ended October 3, 2021, and $7.3 million and $21.5 million for the three and nine months ended September 27, 2020, 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 as of October 3, 2021 and January 3, 2021 were $12.7 million and $12.9 million, less accumulated amortization of $10.7 million and $9.4 million, respectively. Amortization of these software costs was $0.5 million and $0.5 million for the three months ended October 3, 2021 and September 27, 2020, and $1.3 million and $1.6 million for the nine months ended October 3, 2021 and September 27, 2020, respectively.
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Note 6. Goodwill and Intangible Assets, Net
Goodwill
The changes in the carrying amount of goodwill were as follows (in millions):
| January 3, 2021 | ||||||||
| to October 3, 2021 | ||||||||
| Beginning balance | $ | |||||||
| Goodwill acquired during the period | ||||||||
| Goodwill adjusted during the period | ||||||||
| Ending balance | $ | |||||||
Additions to goodwill during the nine months ended October 3, 2021 related to the acquisitions completed in 2021 as described in Note 3.
Intangible Assets
Intangible assets include customer relationships, and trademarks and other intangibles. 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 nine months ended October 3, 2021, the Company recorded $39.4 million of intangible assets, including $35.8 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 $35.7 million and $3.6 million, respectively, as a result of the acquisitions completed in 2021 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 $0.1 million and zero , respectively.
During the nine months ended September 27, 2020, the Company recorded $36.9 million of intangible assets, including $34.6 million in Customer relationship intangibles and $2.3 million in Trademarks and other intangibles. The change in Customer relationship intangibles and Trademarks and other intangibles included additions of $32.9 million and $2.2 million, respectively, as a result of the acquisitions completed in 2020 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 $1.7 million and $0.1 million, 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):
| October 3, 2021 | January 3, 2021 | |||||||||||||||||||||||||||||||||||||||||||
| 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 $33.6 million for the three and nine months ended October 3, 2021 and $8.5 million and $25.9 million for the three and nine months ended September 27, 2020, respectively.
Total future amortization estimated as of October 3, 2021 is as follows (in millions):
| Fiscal year ending: | |||||
| 2021 (remainder) | $ | ||||
| 2022 | |||||
| 2023 | |||||
| 2024 | |||||
| 2025 | |||||
| Thereafter | |||||
| Total future amortization | $ | ||||
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. The lease agreements do not contain any material residual value guarantees or material restrictive covenants.
Leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheets. The Company accounts for each separate lease component of a contract and its associated non-lease components as a single lease component. 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.
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 commencement date based on the net present value of fixed lease payments over the lease term. ROU assets also include any advance lease payments and are adjusted for lease incentives. As most of the Company's operating leases do not provide an implicit rate, the Company uses an incremental borrowing rate based on the information available at 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. Operating fixed lease expense and finance lease amortization expense are recognized on a straight-line basis over the lease term.
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The components of lease expense were as follows (in millions):
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||||||||
| Lease Cost | Classification | October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||||||
| 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 | Nine Months Ended | |||||||||||||||||||||||||
| Other Information | October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||||
| 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 | $ | $ | $ | $ | ||||||||||||||||||||||
The aggregate future lease payments for operating and finance leases as of October 3, 2021 were as follows (in millions):
| Maturity of Lease Liabilities | Operating Leases | Finance Leases | ||||||||||||
| Fiscal year: | ||||||||||||||
| 2021 (remainder) | $ | $ | ||||||||||||
| 2022 | ||||||||||||||
| 2023 | ||||||||||||||
| 2024 | ||||||||||||||
| 2025 | ||||||||||||||
| 2026 | ||||||||||||||
| Thereafter | ||||||||||||||
| Total lease payments | ||||||||||||||
| Less: interest | ||||||||||||||
| Present value of lease liabilities | $ | $ | ||||||||||||
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Average lease terms and discount rates were as follows:
| Lease Term and Discount Rate | October 3, 2021 | |||||||
| 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 $2.7 million and $9.0 million for the three and nine months ended October 3, 2021, and $2.3 million and $7.5 million for the three and nine months ended September 27, 2020.
The Company’s Omnibus Equity Incentive Plan (the “2016 Plan”), which became effective on April 28, 2016, provides 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 (“SARs”); 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 which may be issued under the 2020 Plan is 2,155,280 shares of which 2,011,511 remain available as of October 3, 2021.
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.
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A summary of stock-based compensation activities during the nine months ended October 3, 2021 was as follows (in thousands):
| Stock Options | RSUs | DSUs | PSUs | ||||||||||||||||||||
| Outstanding as of January 3, 2021 | |||||||||||||||||||||||
| Granted | |||||||||||||||||||||||
| Exercised/Vested/Settled | ( | ( | |||||||||||||||||||||
| Expired or forfeited | ( | ( | ( | ||||||||||||||||||||
| Outstanding as of October 3, 2021 | |||||||||||||||||||||||
The weighted average grant date fair value of awards granted during the nine months ended October 3, 2021 was as follows:
| Weighted Average Grant Date Fair Value | |||||
| Stock options | $ | ||||
| RSUs | $ | ||||
| DSUs | $ | ||||
| PSUs | $ | ||||
A summary of stock-based compensation expenses recognized during the periods was as follows (in millions):
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||
| Stock options | $ | $ | $ | $ | |||||||||||||||||||
| RSUs | |||||||||||||||||||||||
| DSUs | |||||||||||||||||||||||
| PSUs | |||||||||||||||||||||||
| Total stock-based compensation | $ | $ | $ | $ | |||||||||||||||||||
A summary of unrecognized stock-based compensation expense as of October 3, 2021 was as follows:
| Unrecognized Compensation (in millions) | Weighted Average Remaining Period | ||||||||||
| Stock options | $ | ||||||||||
| RSUs | $ | ||||||||||
| DSUs | $ | ||||||||||
| PSUs | $ | ||||||||||
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Note 9. Long-Term Debt
Long-term debt was as follows (in millions):
| October 3, 2021 | January 3, 2021 | |||||||||||||
| 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 $364.1 million and $362.3 million as of October 3, 2021 and January 3, 2021, 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 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 %. There were no 0.25
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 October 3, 2021, the Company is in compliance with all of the ABL Facility covenants.
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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 2.50 % at October 3, 2021.
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.
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 October 3, 2021, the Company is in compliance with all of the Second Amended and Restated Credit Agreement covenants.
During the three and nine months ended October 3, 2021, the Company incurred total interest expense of $4.3 million and $14.1 million, respectively. Of these totals, $3.5 million and $11.1 million related to interest on the ABL Facility and the term loans for the three and nine months ended October 3, 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 nine months ended October 3, 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 $0.4 million and $1.1 million for the three and nine months ended October 3, 2021, respectively. The remaining $0.4 million and $1.1 million of interest expense is primarily related to interest attributable to finance leases for the three and nine months ended October 3, 2021, respectively.
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During the three and nine months ended September 27, 2020, the Company incurred total interest expense of $6.6 million and $21.9 million, respectively. Of this total, $6.0 million and $19.7 million related to interest on the ABL Facility and the Tranche E Term Loans for the three and nine months ended September 27, 2020, 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 $0.5 million and $1.5 million for the three and nine months ended September 27, 2020, respectively. The remaining $0.1 million and $0.7 million of interest expense primarily related to interest attributable to finance leases for the three and nine months ended September 27, 2020, 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 October 3, 2021, approximately $1.5 million was classified as Long-term debt, current portion and approximately $3.7 million was classified as Long-term debt, less current portion on the Company’s Consolidated Balance Sheets. Refer to “Note 1. Nature of Business and Significant Accounting Policies” and “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 20.2 % for the nine months ended October 3, 2021 and approximately 19.1 % for the nine months ended September 27, 2020. The increase in the effective rate was due primarily to an increase in Net income before taxes, partially offset by an increase 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 $15.0 million for the nine months ended October 3, 2021 and $8.8 million for the nine months ended September 27, 2020. 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 nine months ended October 3, 2021 and September 27, 2020, the Company recorded no material increases or decreases to the valuation allowance against deferred tax assets.
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 $4.0 million and $3.6 million as of October 3, 2021 and January 3, 2021, 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 $1.6 million and $1.2 million as of October 3, 2021 and January 3, 2021, respectively.
Letters of credit: As of October 3, 2021 and January 3, 2021, outstanding letters of credit were $10.9 million and $8.7 million, respectively. There were no
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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 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 nine months ended October 3, 2021 and September 27, 2020:
| Three Months Ended | Nine Months Ended | |||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | |||||||||||||||||||||||
| 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 October 3, 2021 and September 27, 2020 excluded the effect of 74,905 and 137,676 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 nine months ended October 3, 2021 and September 27, 2020 excluded the anti-dilutive effect of 63,422 and 123,532 potential shares of common stock, respectively.
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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 “Forward-Looking Statements” and the section entitled “Risk Factors” included herein and in the Annual Report on Form 10-K for the fiscal year ended January 3, 2021, as well as in the Quarterly Reports on Form 10-Q for the fiscal quarters ended April 4, 2021 and July 4, 2021.
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. Through our expansive North American network of over 590 branch locations in 45 U.S. states and six Canadian provinces, we offer a comprehensive selection of more than 130,000 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.
Impact of COVID-19 on Our Business
As a result of the ongoing COVID-19 global pandemic, we continue to keep the safety of our associates, customers, and suppliers as our top priority while striving to deliver quality products and exceptional service to our customers and communities. We continue to monitor developments and follow appropriate recommendations from health and government authorities while proactively implementing safe behaviors, minimizing potential exposures, and facilitating safe and healthy environments in our branches and other facilities.
We achieved Net sales growth of 15% for the 2020 Fiscal Year and Net sales growth of 25% and 32% for the three and nine months ended October 3, 2021, respectively, despite experiencing negative effects from the COVID-19 pandemic in the first half of 2020, including a 3% decline in Net sales in April 2020 compared to the same period of 2019.
Although we have experienced operational and other challenges to date, there has been no material adverse impact on our results of operations for the three and nine months ended October 3, 2021 as a result of the pandemic. In addition, we expect a continuing inflationary environment, marked by rising product and logistics costs as well as increased commodity costs. While we have not experienced significant disruptions in our operations during the three and nine months ended October 3, 2021, risks of future negative impacts due to transportation, logistical, or supply constraints and higher commodity costs for certain products remain present. We are continuing to address these impacts to our operations. We also believe we have sufficient liquidity on hand to continue business operations during this volatile period. On August 6, 2020, we completed a public offering of shares of our common stock and received approximately $261.7 million of net cash proceeds, further enhancing our cash position and increasing our financial flexibility. As disclosed in the Liquidity and Capital Resources section below, we had total available liquidity of $522.1 million as of October 3, 2021, consisting of cash on hand and available capacity under an asset-based credit facility (the “ABL Facility”). In addition, we have no debt maturities under our ABL Facility until 2024.
As of the date of this Quarterly Report, significant uncertainty remains concerning the magnitude of the impact and duration of the COVID-19 pandemic, including, the impact of new strains and variants of the coronavirus, the pandemic’s impact on the U.S. and global economies and supply chains, the timing, scope, and effectiveness of federal, state, and local government plans to administer vaccines to the general public, especially in areas where conditions have recently worsened, as well as the timing and amount of fiscal stimulus and relief program packages that are available to the general public.
We continue to actively 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. While we are unable to determine or predict the nature, duration, or scope of the overall
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impact the ongoing COVID-19 pandemic will have on our business, results of operations, liquidity, or capital resources, we believe that it is important to provide this update on our Company, how our response to COVID-19 is progressing, and how our operations and financial condition may change as the fight against COVID-19 progresses.
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. Our fiscal quarters end on the Sunday nearest to March 31, June 30, and September 30, respectively. The fiscal year ending January 2, 2022 includes 52 weeks and the fiscal year ended January 3, 2021 included 53 weeks. The three months ended October 3, 2021 and September 27, 2020 both included 13 weeks. The nine months ended October 3, 2021 and September 27, 2020 both included 39 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.
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.
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 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.
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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. Historically, 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 we have historically 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.
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. We completed the following acquisitions since the start of the 2020 fiscal year:
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•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.
•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.
•In December 2020, we acquired the assets and assumed the liabilities of Stone Center of Richmond, LLC and Stone Center of Fredericksburg, LLC (collectively, “Stone Center of Virginia”). With two locations in each of the Richmond and Fredericksburg, Virginia markets, Stone Center of Virginia is a distributor of hardscapes, natural stone, and landscape supplies to landscape professionals.
•In December 2020, we acquired the assets and assumed the liabilities of Dirt and Rock, LLC (“Dirt and Rock”). With one location in the greater Atlanta, Georgia market, Dirt and Rock is a distributor of hardscapes, natural stone, and landscape supplies to landscape professionals.
•In December 2020, we acquired the assets and assumed the liabilities of Alpine Materials (“Alpine”). With one location in the greater Dallas, Texas market, Alpine is a distributor of mulches, soils, and hardscape materials to landscape professionals.
•In October 2020, we acquired the assets and assumed the liabilities of Hedberg Supply (“Hedberg”). With two locations in the Twin Cities, Minnesota market, Hedberg is a distributor of hardscapes, nursery, and landscape supplies to landscape professionals.
•In October 2020, we acquired the assets and assumed the liabilities of BURNCO Landscape Centres Inc. (“BURNCO”). With 12 locations in the three Canadian provinces of British Columbia, Alberta, and Saskatchewan, BURNCO is a distributor of hardscapes and landscape supplies to landscape professionals.
•In August 2020, we acquired all of the outstanding stock of Modern Builders Supply, Inc. (“Modern Builders”). With two locations in the San Diego, Southern Orange County and Inland Empire markets in California, Modern Builders is a distributor of hardscapes and landscape supplies to landscape professionals.
•In August 2020, we acquired the assets and assumed the liabilities of Alliance Stone (“Alliance Stone”). With one location in the greater Atlanta, Georgia market, Alliance Stone is a distributor of hardscapes and natural stone to landscape professionals.
•In March 2020, we acquired the assets and assumed the liabilities of Big Rock Natural Stone and Hardscapes, Inc. (“Big Rock”). With one location in the greater Greenville, South Carolina market, Big Rock is a distributor of hardscapes and landscape supplies to landscape professionals.
•In January 2020, we acquired the assets and assumed the liabilities of The Garden Dept. Corp. (“Garden Dept.”). With three locations in the greater Long Island, New York market, Garden Dept. is a distributor of nursery and landscape supplies to landscape professionals.
•In January 2020, we acquired the assets and assumed the liabilities of Empire Supplies (“Empire”). With three locations in the greater Newark-Union, New Jersey market, Empire is a distributor of hardscapes and landscape supplies to landscape professionals.
•In January 2020, we acquired the assets and assumed the liabilities of Wittkopf Landscape Supply (“Wittkopf”). With two locations in the Spokane Valley, Washington market, Wittkopf is a distributor of hardscapes and landscape supplies to landscape professionals.
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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, which we believe provides the convenience of an online sales channel, enhanced account management functionality, and industry specific productivity tools for our customers. 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, were initiated in the first quarter of 2015 and are expected to continue through 2023.
•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 improvement, were initiated in the fourth quarter of 2016 and are expected to continue through 2022.
•Sales force performance initiatives, including the implementation of new compensation plans, the restructuring of our sales force, the formal sales and product training for sales force and management, and the implementation of a comprehensive CRM, were initiated in the third quarter of 2015 and are expected to continue through 2023.
•Marketing initiatives, including the relaunch of our Partners Program and implementation of a digital marketing strategy, were initiated in the third quarter of 2015 and are expected to continue through 2023.
•Digital initiatives, including the relaunch of our website and the implementation of a B2B e-Commerce platform, which provides the convenience of an online sales channel, enhanced account management functionality, and industry specific productivity tools for our customers, are expected to continue through 2023.
•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 branch systems automation and enhancement including the rollout of barcoding, are expected to continue through 2023.
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.
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Results of Operations
In the following discussion of our results of operations, we make comparisons between the three and nine months ended October 3, 2021 and September 27, 2020.
| Consolidated Statements of Operations | |||||||||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||||||||
| Three Months Ended | Nine Months Ended | ||||||||||||||||||||||||||||||||||
| October 3, 2021 | September 27, 2020 | October 3, 2021 | September 27, 2020 | ||||||||||||||||||||||||||||||||
| Net sales | $ | 936.4 | 100.0 | % | $ | 751.9 | 100.0 | % | $ | 2,670.5 | 100.0 | % | $ | 2,029.4 | 100.0 | % | |||||||||||||||||||
| Cost of goods sold | 595.9 | 63.6 | % | 501.8 | 66.7 | % | 1,740.3 | 65.2 | % | 1,350.4 | 66.5 | % | |||||||||||||||||||||||
| Gross profit | 340.5 | 36.4 | % | 250.1 | 33.3 | % | 930.2 | 34.8 | % | 679.0 | 33.5 | % | |||||||||||||||||||||||
| Selling, general and administrative expenses | 235.3 | 25.1 | % | 183.3 | 24.4 | % | 653.4 | 24.5 | % | 525.4 | 25.9 | % | |||||||||||||||||||||||
| Other (income) expense, net | 1.8 | 0.2 | % | (1.8) | (0.2) | % | (1.6) | (0.1) | % | (4.0) | (0.2) | % | |||||||||||||||||||||||
| Operating income | 103.4 | 11.0 | % | 68.6 | 9.1 | % | 278.4 | 10.4 | % | 157.6 | 7.8 | % | |||||||||||||||||||||||
| Interest and other non-operating expenses, net | 4.3 | 0.5 | % | 6.6 | 0.9 | % | 14.1 | 0.5 | % | 21.9 | 1.1 | % | |||||||||||||||||||||||
| Income tax expense | 19.1 | 2.0 | % | 13.8 | 1.8 | % | 53.4 | 2.0 | % | 25.9 | 1.3 | % | |||||||||||||||||||||||
| Net income | $ | 80.0 | 8.5 | % | $ | 48.2 | 6.4 | % | $ | 210.9 | 7.9 | % | $ | 109.8 | 5.4 | % | |||||||||||||||||||
Net sales
Net sales increased 25% to $936.4 million for the three months ended October 3, 2021 compared to $751.9 million for the three months ended September 27, 2020, and increased 32% to $2,670.5 million for the nine months ended October 3, 2021 compared to $2,029.4 million for the nine months ended September 27, 2020. Organic Daily Sales increased 15% in the third quarter of 2021 and 22% for the nine months ended October 3, 2021, compared to the prior year periods. Organic Daily Sales benefited from continued investment in outdoor living spaces and price inflation from rising product costs. Organic Daily Sales for landscaping products (irrigation supplies, hardscapes, landscape accessories, nursery goods, and outdoor lighting) grew 14% in the third quarter of 2021 and 21% for the nine months ended October 3, 2021, compared to the corresponding prior year periods. Organic Daily Sales for agronomic products (fertilizer, control products, ice melt, equipment, and other products) increased 19% in the third quarter of 2021 and 23% for the nine months ended October 3, 2021, compared to the prior year periods. Organic Daily Sales for landscaping products and agronomic products benefited from the stay at home trend and price inflation. Acquisitions contributed $73.5 million, or 10%, to the Net sales growth for the third quarter of 2021 and $197.4 million, or 10%, for the nine months ended October 3, 2021.
Cost of goods sold
Cost of goods sold increased 19% to $595.9 million for the three months ended October 3, 2021 compared to $501.8 million for the three months ended September 27, 2020, and increased 29% to $1,740.3 million for the nine months ended October 3, 2021, compared to $1,350.4 million for the nine months ended September 27, 2020. The increase in Cost of goods sold for the third quarter and the nine months ended October 3, 2021 was primarily attributable to Net sales growth, including acquisitions and product cost inflation.
Gross profit and gross margin
Gross profit increased 36% to $340.5 million for the three months ended October 3, 2021 compared to $250.1 million for the three months ended September 27, 2020, and increased 37% to $930.2 million for the nine months ended October 3, 2021, compared to $679.0 million for the nine months ended September 27, 2020. Gross profit growth for the third quarter and the nine months ended October 3, 2021 was driven by Net sales growth, including acquisitions. Gross margin increased 310 basis points to 36.4% for the third quarter of 2021 as compared to 33.3% for the third quarter of 2020, and increased 130 basis points to 34.8% for the nine months ended October 3, 2021, compared to 33.5% for the nine months ended September 27, 2020. The increase in gross margin reflects the benefit of supply chain initiatives, favorable pricing, and increased supplier incentives.
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Selling, general and administrative expenses
Selling, general and administrative expenses (“SG&A”) increased 28% to $235.3 million for the three months ended October 3, 2021 compared to $183.3 million for the three months ended September 27, 2020, and increased 24% to $653.4 million for the nine months ended October 3, 2021, compared to $525.4 million for the nine months ended September 27, 2020. The increase in SG&A for the third quarter and the nine months ended October 3, 2021 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 70 basis points to 25.1% for the three months ended October 3, 2021 compared to 24.4% for the three months ended September 27, 2020 primarily due to increased variable compensation. SG&A as a percentage of Net sales decreased 140 basis points to 24.5% for the nine months ended October 3, 2021, compared to 25.9% for the nine months ended September 27, 2020 primarily due to operating leverage resulting from our strong Organic Sales growth combined with disciplined expense management. Depreciation and amortization expense increased $4.7 million to $21.0 million for the three months ended October 3, 2021 compared to $16.3 million for the three months ended September 27, 2020, and increased $11.7 million to $60.7 million for the nine months ended October 3, 2021, compared to $49.0 million for the nine months ended September 27, 2020. The increase in depreciation and amortization in both the third quarter of 2021 and the nine months ended October 3, 2021 was primarily attributable to acquisitions.
Interest and other non-operating expenses, net
Interest and other non-operating expenses, net decreased $2.3 million to $4.3 million for the three months ended October 3, 2021 compared to $6.6 million for the three months ended September 27, 2020, and decreased $7.8 million to $14.1 million for the nine months ended October 3, 2021, compared to $21.9 million for the nine months ended September 27, 2020. The decrease in interest expense primarily reflected a lower average outstanding debt balance and lower interest rates over both the third quarter and the first nine months of 2021 compared to the same periods of 2020.
Income tax expense
Income tax expense was $19.1 million for the three months ended October 3, 2021 compared to $13.8 million for the three months ended September 27, 2020. The effective tax rate was 19.3% for the three months ended October 3, 2021 compared to 22.3% for the three months ended September 27, 2020. The decrease in the effective rate was due primarily to an increase 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 $6.5 million were recognized for the three months ended October 3, 2021 compared to $2.1 million for the three months ended September 27, 2020.
Income tax expense was $53.4 million for the nine months ended October 3, 2021 compared to $25.9 million for the nine months ended September 27, 2020. The effective tax rate was 20.2% for the nine months ended October 3, 2021 compared to 19.1% for the nine months ended September 27, 2020. The increase in the effective rate was due primarily to an increase in Net income before taxes, partially offset by an increase 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 $15.0 million were recognized for the nine months ended October 3, 2021 compared to $8.8 million for the nine months ended September 27, 2020.
Net income
Net income increased $31.8 million to $80.0 million for the three months ended October 3, 2021 compared to $48.2 million for the three months ended September 27, 2020, and increased $101.1 million to $210.9 million for the nine months ended October 3, 2021, compared to $109.8 million for the nine months ended September 27, 2020. The increase in Net income was primarily driven by higher Net sales and gross margin improvement.
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.
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| (In millions, except per share information and percentages) | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2021 | 2020 | 2019 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Qtr 3 | Qtr 2 | Qtr 1 | Qtr 4 | Qtr 3 | Qtr 2 | Qtr 1 | Qtr 4 | ||||||||||||||||||||||||||||||||||||||||||||||
| Net sales | $ | 936.4 | $ | 1,083.9 | $ | 650.2 | $ | 675.1 | $ | 751.9 | $ | 817.7 | $ | 459.8 | $ | 535.0 | |||||||||||||||||||||||||||||||||||||
| Cost of goods sold | 595.9 | 695.7 | 448.7 | 452.8 | 501.8 | 531.6 | 317.0 | 365.0 | |||||||||||||||||||||||||||||||||||||||||||||
| Gross profit | 340.5 | 388.2 | 201.5 | 222.3 | 250.1 | 286.1 | 142.8 | 170.0 | |||||||||||||||||||||||||||||||||||||||||||||
| Selling, general and administrative expenses | 235.3 | 225.8 | 192.3 | 202.8 | 183.3 | 175.0 | 167.1 | 166.8 | |||||||||||||||||||||||||||||||||||||||||||||
| Other (income) expense, net | 1.8 | (2.2) | (1.2) | (2.7) | (1.8) | (1.2) | (1.0) | (1.2) | |||||||||||||||||||||||||||||||||||||||||||||
| Operating income (loss) | 103.4 | 164.6 | 10.4 | 22.2 | 68.6 | 112.3 | (23.3) | 4.4 | |||||||||||||||||||||||||||||||||||||||||||||
| Interest and other non-operating expenses, net | 4.3 | 4.3 | 5.5 | 9.1 | 6.6 | 7.6 | 7.7 | 7.5 | |||||||||||||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | 19.1 | 36.8 | (2.5) | 1.6 | 13.8 | 25.6 | (13.5) | (5.6) | |||||||||||||||||||||||||||||||||||||||||||||
| Net income (loss) | $ | 80.0 | $ | 123.5 | $ | 7.4 | $ | 11.5 | $ | 48.2 | $ | 79.1 | $ | (17.5) | $ | 2.5 | |||||||||||||||||||||||||||||||||||||
| Net income (loss) per common share: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Basic | $ | 1.79 | $ | 2.77 | $ | 0.17 | $ | 0.26 | $ | 1.11 | $ | 1.89 | $ | (0.42) | $ | 0.06 | |||||||||||||||||||||||||||||||||||||
| Diluted | $ | 1.74 | $ | 2.70 | $ | 0.16 | $ | 0.25 | $ | 1.08 | $ | 1.83 | $ | (0.42) | $ | 0.06 | |||||||||||||||||||||||||||||||||||||
Adjusted EBITDA(a) | $ | 128.2 | $ | 190.6 | $ | 34.5 | $ | 43.9 | $ | 87.8 | $ | 132.1 | $ | (3.6) | $ | 22.2 | |||||||||||||||||||||||||||||||||||||
| Net sales as a percentage of annual Net sales | 25.0 | % | 27.8 | % | 30.2 | % | 17.0 | % | 22.7 | % | |||||||||||||||||||||||||||||||||||||||||||
| Gross profit as a percentage of annual Gross profit | 24.7 | % | 27.8 | % | 31.7 | % | 15.8 | % | 22.0 | % | |||||||||||||||||||||||||||||||||||||||||||
| Adjusted EBITDA as a percentage of annual Adjusted EBITDA | 16.9 | % | 33.7 | % | 50.8 | % | (1.4) | % | 11.0 | % | |||||||||||||||||||||||||||||||||||||||||||
_____________________________________
(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 (loss) (in millions):
| 2021 | 2020 | 2019 | ||||||||||||||||||||||||||||||||||||||||||||||||
| Qtr 3 | Qtr 2 | Qtr 1 | Qtr 4 | Qtr 3 | Qtr 2 | Qtr 1 | Qtr 4 | |||||||||||||||||||||||||||||||||||||||||||
| Reported Net income (loss) | $ | 80.0 | $ | 123.5 | $ | 7.4 | $ | 11.5 | $ | 48.2 | $ | 79.1 | $ | (17.5) | $ | 2.5 | ||||||||||||||||||||||||||||||||||
| Income tax (benefit) expense | 19.1 | 36.8 | (2.5) | 1.6 | 13.8 | 25.6 | (13.5) | (5.6) | ||||||||||||||||||||||||||||||||||||||||||
| Interest expense, net | 4.3 | 4.3 | 5.5 | 9.1 | 6.6 | 7.6 | 7.7 | 7.5 | ||||||||||||||||||||||||||||||||||||||||||
| Depreciation and amortization | 21.0 | 20.3 | 19.4 | 18.2 | 16.3 | 16.4 | 16.3 | 14.8 | ||||||||||||||||||||||||||||||||||||||||||
| EBITDA | 124.4 | 184.9 | 29.8 | 40.4 | 84.9 | 128.7 | (7.0) | 19.2 | ||||||||||||||||||||||||||||||||||||||||||
Stock-based compensation(a) | 3.5 | 4.6 | 3.1 | 2.7 | 2.6 | 2.8 | 2.5 | 2.0 | ||||||||||||||||||||||||||||||||||||||||||
(Gain) loss on sale of assets(b) | (0.2) | (0.2) | 0.1 | (0.2) | (0.4) | 0.1 | 0.1 | 0.1 | ||||||||||||||||||||||||||||||||||||||||||
Financing fees(c) | — | — | 0.7 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||||
Acquisitions and other adjustments(d) | 0.5 | 1.3 | 0.8 | 1.0 | 0.7 | 0.5 | 0.8 | 0.9 | ||||||||||||||||||||||||||||||||||||||||||
Adjusted EBITDA(e) | $ | 128.2 | $ | 190.6 | $ | 34.5 | $ | 43.9 | $ | 87.8 | $ | 132.1 | $ | (3.6) | $ | 22.2 | ||||||||||||||||||||||||||||||||||
_____________________________________
(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):
| 2021 | 2020 | |||||||||||||||||||||||||||||||||||||
| Qtr 3 | Qtr 2 | Qtr 1 | Qtr 3 | Qtr 2 | Qtr 1 | |||||||||||||||||||||||||||||||||
| Reported Net sales | $ | 936.4 | $ | 1,083.9 | $ | 650.2 | $ | 751.9 | $ | 817.7 | $ | 459.8 | ||||||||||||||||||||||||||
Organic Sales(a) | 843.7 | 975.0 | 613.3 | 732.7 | 799.2 | 456.4 | ||||||||||||||||||||||||||||||||
Acquisition contribution(b) | 92.7 | 108.9 | 36.9 | 19.2 | 18.5 | 3.4 | ||||||||||||||||||||||||||||||||
| Selling Days | 63 | 64 | 65 | 63 | 64 | 64 | ||||||||||||||||||||||||||||||||
| Organic Daily Sales | $ | 13.4 | $ | 15.2 | $ | 9.4 | $ | 11.6 | $ | 12.5 | $ | 7.1 | ||||||||||||||||||||||||||
_____________________________________
(a) Organic Sales equal Net sales less Net sales from branches acquired in 2020 and 2021.
(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 2021 Fiscal Year. Includes Net sales from branches acquired in 2020 and 2021.
Liquidity and Capital Resources
Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as required, borrowings under the ABL Facility. We expect that cash provided from operations and available capacity under the ABL Facility will provide sufficient funds to operate our business, make expected capital expenditures, and meet our liquidity requirements for the following 12 months, including payment of interest and principal on our debt.
As of October 3, 2021 and January 3, 2021, we had no revolving credit loans outstanding. Our borrowing base capacity under the ABL Facility was $364.1 million and $362.3 million as of October 3, 2021 and January 3, 2021, respectively. As of October 3, 2021, we had total cash and cash equivalents of $158.0 million, total gross long-term debt of $328.6 million, and finance leases of $44.0 million.
Working capital was $715.2 million as of October 3, 2021, an increase of $232.2 million compared to $483.0 million as of January 3, 2021. The change in working capital was primarily attributable to the seasonality of our business.
Information about our cash flows, by category, is presented in our statements of cash flows and is summarized below (in millions):
| Nine Months Ended | ||||||||||||||
| Net cash provided by (used in): | October 3, 2021 | September 27, 2020 | ||||||||||||
| Operating activities | $ | 159.4 | $ | 180.7 | ||||||||||
| Investing activities | $ | (97.3) | $ | (86.9) | ||||||||||
| Financing activities | $ | 40.6 | $ | 161.9 | ||||||||||
Cash flow provided by operating activities
Net cash provided by operating activities for the nine months ended October 3, 2021 was $159.4 million compared to $180.7 million for the nine months ended September 27, 2020. The decrease was primarily due to increases in inventory and receivables supporting our sales growth.
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Cash flow used in investing activities
Net cash used in investing activities was $97.3 million for the nine months ended October 3, 2021 compared to $86.9 million for the nine months ended September 27, 2020. The increase reflects higher capital expenditures during the first nine months of 2021 compared to the same period of 2020. Capital expenditures were $24.2 million for the first nine months of 2021 compared to $11.8 million for the first nine months of 2020 due to increased investment in material handling equipment used in our branches.
Cash flow provided by financing activities
Net cash provided by financing activities was $40.6 million for the nine months ended October 3, 2021 compared to $161.9 million for the nine months ended September 27, 2020. The decrease primarily reflects $261.7 million of net cash proceeds we received on August 6, 2020 from our public offering of shares of our common stock.
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.
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) 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 2.50% at October 3, 2021.
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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%. There were no outstanding balances under the ABL Facility as of October 3, 2021 and January 3, 2021. Additionally, the Borrowers paid a commitment fee of 0.25% on the unfunded amount as of October 3, 2021 and January 3, 2021.
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 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 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.
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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.
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 have entered into forward-starting interest rate swap contracts 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 effectively 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 October 3, 2021, approximately $1.5 million was classified as Long-term debt, current portion and approximately $3.7 million was classified as Long-term debt, less current portion on our Consolidated Balance Sheets. For additional information, refer to “Note 1. Nature of Business and Significant Accounting Policies”, “Note 4. Fair Value Measurement and Interest Rate Swaps”, and “Note 9. Long-Term Debt” in the notes to the consolidated financial statements.
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Contractual Obligations and Commitments
The following table presents our contractual obligations as of October 3, 2021, related to our long-term debt. The changes during the nine months ended October 3, 2021 as compared to January 3, 2021 reflected increased borrowings and decreased interest rates.
| (In millions) | |||||||||||||||||||||||||||||
| Payments Due by Period | |||||||||||||||||||||||||||||
| Less than | More than | ||||||||||||||||||||||||||||
| Total | 1 Year | 1-3 Years | 3-5 Years | 5 Years | |||||||||||||||||||||||||
Long-term debt, including current maturities(a) | $ | 328.6 | $ | 4.7 | $ | 8.7 | $ | 7.3 | $ | 307.9 | |||||||||||||||||||
Interest on long-term debt(b) | $ | 59.5 | $ | 11.1 | $ | 20.0 | $ | 16.3 | $ | 12.1 | |||||||||||||||||||
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(a) For additional information, refer to “Note 9. Long-Term Debt” in the notes to the consolidated financial statements. In addition, the table excludes the debt issuance costs and debt discounts of $6.2 million.
(b) The interest on long-term debt includes payments for agent administration fees. Interest payments on debt are calculated for future periods using interest rates in effect as of October 3, 2021. 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. The projected interest payments only pertain to obligations and agreements outstanding as of October 3, 2021. 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 for further information regarding our debt instruments.
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Critical Accounting Policies and Estimates
The accounting policies and estimates that we believe to be most dependent upon the use of estimates and assumptions are: revenue recognition, inventory valuation, acquisitions, and goodwill and intangible assets. 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 3, 2021 for additional detail and discussion of these critical accounting policies and estimates. There have been no material changes in critical accounting policies and 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 3, 2021.
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 effective 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 3, 2021.
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Item 6. Exhibits.
| Exhibit Number | Description | |||||||
| 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 October 3, 2021 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: | November 3, 2021 | 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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