SITEONE LANDSCAPE SUPPLY, INC. The following information should be read in conjunction with the accompanying consolidated financial statements and related notes included in this Annual Report on Form 10-K.
For the discussion of the financial condition and results of operations for the year endedJanuary 2, 2022 compared to the year endedJanuary 3, 2021 , refer to "Part II - Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations - Results of Operations" and "Liquidity and Capital Resources" in our Annual Report on Form 10-K for the fiscal year endedJanuary 2, 2022 filed with theSEC onFebruary 24, 2022 , which discussion is incorporated herein by reference. 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 Annual Report on Form 10-K, particularly in "Special Note Regarding Forward-Looking Statements and Information" and "Risk Factors" included elsewhere in this Annual Report on Form 10-K.
Overview
SiteOne Landscape Supply, Inc. (collectively with all of its subsidiaries referred to in this Annual Report on Form 10-K as "SiteOne," the "Company," "we," "us," and "our" or individually as "Holdings") indirectly owns 100% of the membership interest inSiteOne Landscape Supply Holding, LLC ("Landscape Holding ").Landscape Holding is the parent and sole owner ofSiteOne Landscape Supply, LLC ("Landscape"). We are the largest and only national full product line wholesale distributor of landscape supplies inthe United States and have a growing presence inCanada . Our customers are primarily residential and commercial landscape professionals who specialize in the design, installation, and maintenance of lawns, gardens, golf courses, and other outdoor spaces. As ofJanuary 1, 2023 , we had over 630 branch locations in 45 U.S. states and six Canadian provinces. Through our expansive North American network, we offer a comprehensive selection of approximately 155,000 SKUs, including irrigation supplies, fertilizer and control products (e.g., herbicides), hardscapes (including pavers, natural stone, and blocks), landscape accessories, nursery goods, outdoor lighting, and ice melt products to green industry professionals. We also provide value-added consultative services to complement our product offerings and to help our customers operate and grow their businesses.
Business Environment and Trends
We achieved another year of double-digit growth in Net sales andOrganic Daily Sales in the 2022 Fiscal Year on top of the record growth for our company in the 2021 Fiscal Year, despite the challenges of continued high inflation, ongoing labor constraints, reduced product volume, and the potential and evolving effects of weakness in the new residential construction end market as well as general economic uncertainty. For the 2022 Fiscal Year, we achieved Net sales growth of 16% and Organic Daily Sales grew 11%. These results follow the strong Net sales growth of 29% and Organic Daily Sales growth of 22% in the 2021 Fiscal Year. While we did experience a volume decline in the 2022 Fiscal Year compared to the 2021 Fiscal Year, we remained above the 2019 Fiscal Year volume levels and the trends of consumers spending more time at home and investing in their outdoor living spaces, remains in place. We also completed 16 acquisitions and added 48 new locations through these acquisition transactions in the 2022 Fiscal Year. Looking forward, we expect macroeconomic and market conditions to remain challenging, including as a result of inflation and rising interest rates. In addition to broad-based supply chain disruptions, certain geopolitical events, specifically the conflict betweenRussia andUkraine , have increased global economic and political uncertainty. For the 2022 Fiscal Year, this conflict did not have a material impact on our supply availability. However, we are continuing to monitor for any significant escalation or expansion of economic or supply chain disruptions or broader inflationary costs, which may result in effects on our operations. For the 2022 Fiscal Year, we experienced price increases across most product lines, with the largest increases in commodity products such as PVC pipe and fertilizer. To date, we have successfully mitigated the effects of product cost inflation by working with our suppliers and customers to pass through the cost increases that have occurred in the market. Based upon year-over-year price increases in our highest selling SKUs, we estimate price inflation contributed approximately 18% to our Organic Daily Sales growth in the 2022 Fiscal Year. We are starting to see product cost inflation moderate as our prior year comparable product costs include the increases incurred in the 2022 Fiscal Year. We expect low single digits price inflation during the 2023 Fiscal Year with the majority of price inflation expected in the first half of the year. 39
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We continued to be negatively affected by broad-based supply chain disruptions in the 2022 Fiscal Year. To date, such impacts have been minimized mainly through our ongoing supply chain initiatives, as discussed further below in "Strategic Initiatives". We have benefited from strategic inventory purchases ahead of supplier cost increases, which resulted in increased safety stock that allowed us to largely satisfy customer demand when products were not immediately available from our suppliers. Our decision to increase stocking levels during the 2022 Fiscal Year to mitigate supply chain disruptions resulted in elevated inventory levels as ofJanuary 1, 2023 . However, we continue to make progress reducing excess inventory at our branches and distribution centers. These strategic actions and the effective management of price inflation, in addition to contributions from acquisitions and supplier programs, helped increase gross margin by 50 basis points to 35.4% for the 2022 Fiscal Year. As ofJanuary 1, 2023 , we are operational in four distribution center facilities acrossthe United States that expanded our supply chain capabilities during the 2022 Fiscal Year. These distribution centers are located inHutchins, Texas (338,000 square feet),Palmetto, Georgia (335,000 square feet),Carlisle, Pennsylvania (201,000 square feet), andColton, California (179,000 square feet). In addition, we are in the process of completing the transition of our West distribution center fromColton, California to a new location of approximately 392,000 square feet inPhoenix, Arizona . We intend to complete this transition during the first half of the 2023 Fiscal Year and operate a single West distribution center going forward. While we expect supply chain challenges to continue as discussed above, we believe we can significantly minimize the impact on our customers and our business operations through the execution of our supply initiatives. In addition to challenging market conditions and broad-based supply chain disruptions, uncertainty remains regarding the full impact and duration of the COVID-19 pandemic, including, the impact of new strains and variants of the coronavirus and the pandemic's impact on theU.S. and global economies and supply chains. Although we have experienced operational and other challenges to date, and may again in the future, there has been no material adverse impact as a result of the pandemic on our results of operations during the 2022 Fiscal Year. Throughout the pandemic, the safety of our associates, customers, and suppliers has remained a top priority while we strive to deliver quality products and exceptional service to our customers and communities. We will continue to monitor the ongoing COVID-19 pandemic and may take further actions that alter our business operations if required or that we determine are in the best interests of our associates, customers, suppliers, and stockholders. As we continue to navigate through the current uncertainty presented by short-term market conditions, we believe that we are well prepared to meet the challenges ahead due to our balanced business, strong financial condition, dedicated and experienced teams, and focused business strategy. We've also made great progress in the 2022 Fiscal Year in building SiteOne as a company of excellence, one that creates exceptional value for our associates, customers, suppliers, shareholders, and communities and remains resilient for the longer term. As we face softer markets in 2023, our improved capabilities and robust acquisition pipeline along with our industry leading position, flexible business model, and ongoing margin expansion initiatives have us well positioned to address the challenges ahead and achieve continued success. We will continue to closely monitor the impact of the war inUkraine , COVID-19, and the challenging market conditions discussed above on our business and the related uncertainties and risks. While we have taken, and will continue to take, measures to mitigate the effects of these conditions, we cannot estimate with certainty the full extent of their impact on our business, results of operations, cash flows and/or financial condition. See Part I, Item 1A. - "Risk Factors", for a discussion of risks related to inflation and increased operating costs as well as risks associated with supply chain delays or interruptions that could have a material adverse effect on our operations and financial results.
Presentation
Our financial statements included in this report have been prepared in
accordance with generally accepted accounting principles in
The discussion of our financial condition is presented for the 2022 Fiscal Year, which ended onJanuary 1, 2023 and included 52 weeks and 252 Selling Days, and the 2021 Fiscal Year, which ended onJanuary 2, 2022 and included 52 weeks and 253 Selling Days. "Selling Days" are defined below within the "Key Business and Performance Metrics" section. We manage our business as a single reportable segment. Within our organizational framework, the same operational resources support multiple geographic regions and performance is evaluated at a consolidated level. We also evaluate performance based on discrete financial information on a regional basis. Since all of our regions have similar operations and share similar economic characteristics, we aggregate regions into a single operating and reportable segment. These similarities include (i) long-term financial performance, (ii) the nature of products and services, (iii) the types of customers we sell to, and (iv) the distribution methods utilized. Further, all of our product categories have similar supply chain processes and classes of customers. 40
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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 the purchase price paid to suppliers, net of any volume-based incentives, as
well as inbound freight and handling, and other costs associated with inventory.
Our Cost of goods sold excludes the cost to deliver the products to our
customers through our branches, which is included in Selling, general and
administrative expenses. Cost of goods sold is recognized primarily using the
first-in, first-out method of accounting for the inventory sold.
Gross profit and gross margin. We believe that Gross profit and gross margin
are useful for evaluating our operating performance. We define Gross profit as
Net sales less Cost of goods sold. We define gross margin as Gross profit
divided by Net sales.
Selling, general and administrative expenses (operating expenses). Our
operating expenses are primarily comprised of Selling, general and
administrative costs, which include personnel expenses (salaries, wages,
employee benefits, payroll taxes, stock-based compensation, and bonuses), rent,
fuel, vehicle maintenance costs, insurance, utilities, repairs and maintenance,
and professional fees. Operating expenses also include depreciation and
amortization.
Non-GAAP Adjusted EBITDA. In addition to the metrics discussed above, we
believe that Adjusted EBITDA is useful for evaluating the operating performance
and efficiency of our business. EBITDA represents our Net income (loss) plus the
sum of income tax (benefit) expense, interest expense, net of interest income,
and depreciation and amortization. Adjusted EBITDA represents EBITDA as further
adjusted for items such as stock-based compensation expense, (gain) loss on sale
of assets and termination of finance leases not in the ordinary course of
business, other non-cash items, financing fees, other fees and expenses related
to acquisitions, and other non-recurring (income) loss. Refer to "Results of
Operations - Quarterly Results of Operations Data" for more information
regarding how we calculate EBITDA and Adjusted EBITDA and the limitations of
those metrics.
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Key Factors Affecting Our Operating Results
In addition to the metrics described above, a number of other important factors may affect our results of operations in any given period.
Weather Conditions and Seasonality
In a typical year, our operating results are impacted by seasonality. Our Net sales and Net income have been higher in the second and third quarters of each fiscal year due to favorable weather and longer daylight conditions during these quarters. Our Net sales have been significantly lower in the first and fourth quarters due to lower landscaping, irrigation, and turf maintenance activities in these quarters, and historically, we have incurred net losses in these quarters. Seasonal variations in operating results may also be significantly impacted by inclement weather conditions, such as snow and ice 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, mortgage interest rates, 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 an ongoing interest in professional landscape services inspired by the popularity of home and garden television shows, magazines, and social media, 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 costs as we integrate acquired companies and seek to achieve synergies. As ofJanuary 1, 2023 , we have invested$395.9 million in 24 acquisitions since the start of the 2021 Fiscal Year. The following is a summary of the acquisitions completed during the 2022 Fiscal Year and the 2021 Fiscal Year:
•In
•In
•InOctober 2022 , we acquired the assets and assumed the liabilities ofMadison Block & Stone, LLC ("Madison Block & Stone"). With one location inMadison, Wisconsin , Madison Block & Stone is a wholesale distributor of natural stone, pavers, bulk materials, and landscape supplies to landscape professionals. •InAugust 2022 , we acquired the assets and assumed the liabilities ofKaknes Landscape Supply, Inc. ("Kaknes"). With one location inNaperville, Illinois , Kaknes is a wholesale distributor of nursery products to landscape professionals. 42
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•InAugust 2022 , we acquired the assets and assumed the liabilities ofStone Plus, LLC ("Stone Plus"). With three locations inNortheast Florida , Stone Plus is a wholesale distributor of landscape supplies and hardscapes to landscape professionals. •InAugust 2022 , we acquired the assets and assumed the liabilities ofJimStone Co. of Louisiana , LLC ("Jim Stone"). With three locations inSouthern Louisiana ,Jim Stone is a wholesale distributor of natural stone and other hardscapes to landscape professionals. •InAugust 2022 , we acquired the assets and assumed the liabilities ofLinzel Distributing Inc. ("Linzel"). With one location inHamilton, Ontario, Canada , Linzel is a wholesale distributor of outdoor lighting and landscape supplies to landscape professionals. •InAugust 2022 , we acquired the assets and assumed the liabilities ofCape Cod Stone & Masonry Supply, Inc. ("Cape Cod Stone"). With one location inOrleans, Massachusetts , Cape Cod Stone is a wholesale distributor of hardscapes to landscape professionals. •InJuly 2022 , we acquired the assets and assumed the liabilities ofRiver Valley Horticultural Products, Inc. andRiver Valley Equipment Rental and Sales, LLC (collectively, "River Valley"). With one location inLittle Rock, Arkansas , River Valley is a wholesale distributor of nursery products, hardscapes, and landscape supplies to landscape professionals. •InJuly 2022 , we acquired all of the outstanding stock ofA&A Stepping Stone Manufacturing, Inc. ("A&A Stepping Stone"). With four locations inSacramento, California ,A&A Stepping Stone is a wholesale distributor of hardscapes and landscape supplies to landscape professionals. •InJune 2022 , we acquired the assets and assumed the liabilities ofPrescott Dirt, LLC ("Prescott Dirt"). With two locations inPrescott andPrescott Valley, Arizona , Prescott Dirt is a wholesale distributor of landscape supplies to landscape professionals.
•In
•InJune 2022 , we acquired the assets and assumed the liabilities of Across thePond, Inc. ("Across the Pond"). With one location inHuntsville, Alabama , Across the Pond is a wholesale distributor of hardscapes and bulk landscape supplies to landscape professionals. •InApril 2022 , we acquired the assets and assumed the liabilities ofPreferred Seed Company, Inc. ("Preferred Seed"). With one location inBuffalo, New York , Preferred Seed is a wholesale distributor of seed and agronomic products to landscape professionals. •InApril 2022 , we acquired the assets and assumed the liabilities ofRTSB Enterprises, Inc. , doing business as Bellstone Masonry Supply ("Bellstone"). With one location inFort Worth, Texas , Bellstone is a wholesale distributor of hardscapes and landscape supplies to landscape professionals. •InMarch 2022 , we acquired all of the outstanding stock ofJ K Enterprise, Inc. ,Culpeper Recycling Hauling LLC ,Culpeper Recycling Transport LLC ,Gateway Home & Garden Center, LLC ,JK Enterprise Landscape Supply , LimitedLiability Company ,Madera Farm Transport, LLC ,Saunders LS, LLC , andTilden Farm Nursery, LLC , and also acquired the assets ofMetro Landscape Supply, Limited andCulpeper Recycling, LLC (collectively, "JK Enterprise"). With six locations inNorthern Virginia and one location inMaryland , JK Enterprise is a wholesale distributor of bulk and bagged mulches and soil, hardscapes, and nursery products to landscape professionals. •InDecember 2021 , we acquired the assets and assumed the liabilities ofBothe Trucking, Inc. , doing business asSeffner Rock and Gravel ("Seffner"). With one location inTampa, Florida ,Seffner is a wholesale distributor of natural stone, bulk aggregates, mulch, soil, and other landscape supplies to landscape professionals. •InNovember 2021 , we acquired the assets and assumed the liabilities ofSemco Distributing, Inc. ("Semco"). With four locations inOhio andMissouri , Semco is a wholesale distributor of natural stone and landscape supplies to landscape professionals. •InAugust 2021 , we acquired the assets and assumed the liabilities ofGreen Brothers Earth Works and Southern Landscape Supply ("Green Brothers"). With four locations in the greaterAtlanta, Georgia market, Green Brothers is a distributor of landscape supplies and hardscapes to landscape professionals. •InMay 2021 , we acquired all of the outstanding stock ofRodvold Enterprises, Inc. , doing business as Rock & Block Hardscape Supply ("Rock & Block"). With two locations in theSan Diego ,Southern Orange County and Inland Empire markets inCalifornia , Rock & Block is a distributor of hardscapes, masonry, and landscape supplies to landscape professionals. •InApril 2021 , we acquired the assets and assumed the liabilities ofMelrose Supply & Sales Corp ("Melrose"). With six locations throughoutFlorida ,Melrose is a distributor of irrigation, lighting, and drainage products to landscape professionals. 43
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•InApril 2021 , we acquired all of the outstanding stock ofTimberwall Landscape & Masonry Products, Inc. ("Timberwall"). With one location inVictoria, Minnesota , Timberwall is a distributor of hardscapes and landscape supplies to landscape professionals. •InApril 2021 , we acquired the assets and assumed the liabilities ofArizona Stone & Architectural Products and Solstice Stone ("Arizona Stone and Solstice"). With seven locations throughoutArizona and two locations in theLas Vegas, Nevada market, Arizona Stone and Solstice is a distributor of hardscapes, natural stone, and landscape supplies to landscape professionals.
•In
We expect the execution of synergistic acquisitions to continue to be an integral part of our growth strategy, and we intend to continue expanding our product line, geographic reach, market share, and operational capabilities through future acquisitions.
Volume-Based Pricing
We generally procure our products through purchase orders rather than under long-term contracts with firm commitments. We work to develop strong relationships with select suppliers that we target based on a number of factors, including brand and market recognition, price, quality, product support, service levels, delivery terms, and strategic positioning. We typically have annual supplier agreements, and while they generally do not provide for specific product pricing, many include volume-based financial incentives that we earn by meeting or exceeding purchase volume targets. Our ability to earn these volume-based incentives is an important factor in our financial results. In certain cases, we have entered into supply contracts with terms that exceed one year for the manufacture of our LESCO® branded fertilizer, some nursery goods, and grass seed, which may require us to purchase products in the future.
Strategic Initiatives
We continue to undertake operational initiatives, utilizing our scale to improve our profitability, enhance supply chain efficiency, strengthen our pricing and category management capabilities, streamline and refine our marketing process, and invest in more sophisticated information technology systems and data analytics. We are focusing on our procurement and supply chain management initiatives to better serve our customers and reduce sourcing costs. We are also implementing new inventory planning and stocking system functionalities and new transportation management systems in an effort to reduce costs as well as improve our reliability and level of service. In addition, we continue to enhance our website and B2B e-Commerce platform. We also work closely with our local branches to improve sales, delivery, and branch productivity. We believe we will continue to benefit from the following initiatives, among others: •Category management initiatives, including the implementation of organic growth strategies, the development of our private label product strategy, the expansion of product lines, and the reorganization of brands and products by preferred suppliers.
•Supply chain initiatives, including the implementation of new inventory planning and stocking systems and functionalities, the installation of new distribution centers, local hubs in large markets, and local fleet utilization and cost improvements.
•Sales force performance initiatives, including the implementation of new compensation plans, the restructuring of our sales force, formal sales and product training for our sales force and sales force management, and the implementation of a comprehensive CRM.
•Marketing initiatives, including product marketing, customer strategy and
analytics, Hispanic customer engagement, implementation of our digital marketing
strategy, and the relaunch of our Partners Program.
•Digital initiatives, including increasing customer demand and adoption of our
website and B2B e-Commerce platform SiteOne.com, which provides the convenience
of an online sales channel, enhanced account management functionality, and
industry specific productivity tools for our customers.
•Operational excellence initiatives, including the implementation of best
practices in branch operations which encompasses safety, merchandising, stocking
and assortment, customer engagement, delivery, labor management, as well as the
additional automation and enhancement of branch systems, including the rollout
of barcoding.
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Working Capital
Our business is characterized by a relatively high level of reported working capital, the effects of which can be compounded by changes in prices. In addition to affecting our Net sales, fluctuations in prices of supplies tend to result in changes in our reported inventories, trade receivables, and trade payables, even when our sales volumes and our rate of turnover of these working capital items remain relatively constant. Our working capital needs are exposed to these price fluctuations, as well as to fluctuations in our cost for transportation and distribution. We may not always be able to reflect these increases in our pricing. The strategic initiatives described above are designed to reduce our exposure to these fluctuations and maintain and improve our efficiency. Results of Operations
In the following discussion of our results of operations, we make comparisons between the 2022 Fiscal Year and the 2021 Fiscal Year (in millions, except percentages).
Consolidated Statements of Operations
January 3, 2022 to January 1, 2023 January 4, 2021 to January 2, 2022
Net sales $ 4,014.5 100.0 % $ 3,475.7 100.0 %
Cost of goods sold 2,593.0 64.6 % 2,263.1 65.1 %
Gross profit 1,421.5 35.4 % 1,212.6 34.9 %
Selling, general and administrative
expenses 1,097.0 27.3 % 900.6 25.9 %
Other income 8.6 0.2 % 1.7 - %
Operating income 333.1 8.3 % 313.7 9.0 %
Interest and other non-operating
expenses, net 20.0 0.5 % 19.2 0.6 %
Income tax expense 67.7 1.7 % 56.1 1.6 %
Net income $ 245.4 6.1 % $ 238.4 6.9 %
Comparison of the 2022 Fiscal Year to the 2021 Fiscal Year
Net sales
Net sales for the 2022 Fiscal Year increased 16% to$4,014.5 million as compared to$3,475.7 million for the 2021 Fiscal Year primarily due to price inflation resulting from rising product costs and contributions from acquisitions. Organic Daily Sales for the 2022 Fiscal Year increased 11% due to price inflation in response to rising product costs, partially offset by dampened volume resulting from higher prices and moderating economic conditions. Based upon year-over-year price increases in our highest selling SKUs, we estimate price inflation contributed approximately 18% to ourOrganic Daily Sales growth in the 2022 Fiscal Year. Organic Daily Sales for landscaping products (irrigation supplies, hardscapes, landscape accessories, nursery goods, and outdoor lighting) grew 12%. Organic Daily Sales for agronomic products (fertilizer, control products, ice melt, equipment, and other products) increased 7%. The increases for both landscaping products and agronomic products were primarily due to price inflation as the costs for certain products such as PVC pipe and fertilizer increased significantly in response to strong demand and supply chain disruptions. Acquisitions contributed$186.8 million , or 5%, to Net sales growth for the 2022 Fiscal Year.
Cost of goods sold
Cost of goods sold for the 2022 Fiscal Year increased 15% to$2,593.0 million from$2,263.1 million for the 2021 Fiscal Year. The increase in Cost of goods sold was primarily attributable to acquisitions and product cost inflation.
Gross profit and gross margin
Gross profit for the 2022 Fiscal Year increased 17% to$1,421.5 million as compared to$1,212.6 million for the 2021 Fiscal Year. Gross profit growth was driven by Net sales growth, including acquisitions. Gross margin increased 50 basis points to 35.4% for the 2022 Fiscal Year as compared to 34.9% for the 2021 Fiscal Year. The increase in gross margin reflects contributions from acquisitions, supplier programs, and the benefit of supply chain initiatives, including strategic inventory purchases ahead of supplier cost increases. The improvement in gross margin during the first half of the year was partially offset as the larger price realization benefit achieved in the second half of the 2021 Fiscal Year was not repeated in the second half of the 2022 Fiscal Year. 45 -------------------------------------------------------------------------------- Table of Contents Selling, general and administrative expenses Selling, general and administrative expenses ("SG&A") for the 2022 Fiscal Year increased 22% to$1,097.0 million from$900.6 million for the 2021 Fiscal Year. The increase in SG&A 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 140 basis points to 27.3% for the 2022 Fiscal Year compared to 25.9% for the 2021 Fiscal Year. The increase in SG&A as a percentage of Net sales was primarily due to additional operating expenses supporting our growth, cost inflation, and contributions from acquisitions. Depreciation and amortization increased$20.8 million to$103.8 million primarily as a result of our acquisitions.
Interest and other non-operating expense, net
Interest and other non-operating expense, net increased 4% to$20.0 million in the 2022 Fiscal Year from$19.2 million in the 2021 Fiscal Year. The increase in interest expense was primarily due to higher borrowings in the 2022 Fiscal Year as compared to the 2021 Fiscal Year.
Income tax expense
Income tax expense was$67.7 million during the 2022 Fiscal Year as compared to$56.1 million during the 2021 Fiscal Year. The effective tax rate was 21.6% for the 2022 Fiscal Year as compared to 19.0% for the 2021 Fiscal Year. The increase in the effective tax rate was due primarily to a decrease in the amount of excess tax benefits from stock-based compensation recognized as a component of Income tax expense in the Consolidated Statements of Operations. Excess tax benefits of$10.4 million were recognized for the 2022 Fiscal Year as compared to$20.2 million for the 2021 Fiscal Year.
Net income
Net income for the 2022 Fiscal Year increased 3% to
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Quarterly Results of Operations Data
The following tables set forth certain financial data for each of the most recent eight fiscal quarters including our unaudited Net sales, Cost of goods sold, Gross profit, Selling, general and administrative expenses, Net income (loss), and Adjusted EBITDA data (including a reconciliation of Adjusted EBITDA to Net income (loss)). We have prepared the quarterly data on a basis that is consistent with the financial statements included in this Annual Report on Form 10-K. 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 Annual Report on Form 10-K. The results of historical periods are not necessarily indicative of the results of operations for a full year or any future period.
(In millions except per share information and percentages, unaudited)
2022 Fiscal Year 2021 Fiscal Year
Year Qtr 4 Qtr 3 Qtr 2 Qtr 1 Year Qtr 4 Qtr 3 Qtr 2 Qtr 1
Net sales $ 4,014.5 $ 890.0 $ 1,102.6 $ 1,216.6 $ 805.3 $ 3,475.7 $ 805.2 $ 936.4 $ 1,083.9 $ 650.2
Cost of goods sold 2,593.0 587.4 714.0 755.5 536.1 2,263.1 522.8 595.9 695.7 448.7
Gross profit 1,421.5 302.6 388.6 461.1 269.2 1,212.6 282.4 340.5 388.2 201.5
Selling, general and
administrative expenses 1,097.0 304.6 289.2 272.7 230.5 900.6 247.2 235.3 225.8 192.3
Other (income) expense, net (8.6) (2.0) (2.4) (1.7) (2.5) (1.7) (0.1) 1.8 (2.2) (1.2)
Operating income 333.1 - 101.8 190.1 41.2 313.7 35.3 103.4 164.6 10.4
Interest and other
non-operating expenses, net 20.0 5.5 5.6 4.6 4.3 19.2 5.1 4.3 4.3 5.5
Income tax (benefit)
expense 67.7 (4.6) 22.9 44.8 4.6 56.1 2.7 19.1 36.8 (2.5)
Net income (loss) $ 245.4 $ (0.9) $ 73.3 $ 140.7 $ 32.3 $ 238.4 $ 27.5 $ 80.0 $ 123.5 $ 7.4
Net income (loss) per
common share:
Basic $ 5.45 $ (0.02) $ 1.63 $ 3.12 $ 0.72 $ 5.35 $ 0.61 $ 1.79 $ 2.77 $ 0.17
Diluted $ 5.36 $ (0.02) $ 1.60 $ 3.07 $ 0.70 $ 5.20 $ 0.60 $ 1.74 $ 2.70 $ 0.16
Adjusted EBITDA(a) $ 464.3 $ 38.9 $ 135.6 $ 222.0 $ 67.8 $ 415.1 $ 61.8 $ 128.2 $ 190.6 $ 34.5
Net sales as a percentage
of annual Net sales 100.0 % 22.2 % 27.5 % 30.3 % 20.0 % 100.0 % 23.2 % 26.9 % 31.2 % 18.7 %
Gross profit as a
percentage of annual Gross
profit 100.0 % 21.3 % 27.3 % 32.4 % 19.0 % 100.0 % 23.3 % 28.1 % 32.0 % 16.6 %
Adjusted EBITDA as a
percentage of annual
Adjusted EBITDA 100.0 % 8.4 % 29.2 % 47.8 % 14.6 % 100.0 % 14.9 % 30.9 % 45.9 % 8.3 %
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(a) In addition to our Net income (loss) determined in accordance with GAAP, we present Adjusted EBITDA in this Annual Report on Form 10-K 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;
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•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.
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.
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The following table presents a reconciliation of Adjusted EBITDA to Net income
(in millions, unaudited):
2022 Fiscal Year 2021 Fiscal Year
Year Qtr 4 Qtr 3 Qtr 2 Qtr 1 Year Qtr 4 Qtr 3 Qtr 2 Qtr 1
Reported Net income (loss) $ 245.4 $ (0.9) $ 73.3 $ 140.7 $ 32.3 $ 238.4 $ 27.5 $ 80.0 $ 123.5 $ 7.4
Income tax (benefit) expense 67.7 (4.6) 22.9 44.8 4.6 56.1 2.7 19.1 36.8 (2.5)
Interest expense, net 20.0 5.5 5.6 4.6 4.3 19.2 5.1 4.3 4.3 5.5
Depreciation & amortization 103.8 31.6 27.4 23.1 21.7 83.0 22.3 21.0 20.3 19.4
EBITDA 436.9 31.6 129.2 213.2 62.9 396.7 57.6 124.4 184.9 29.8
Stock-based compensation(a) 18.3 4.3 4.5 5.8 3.7 14.3 3.1 3.5 4.6 3.1
(Gain) loss on sale of assets(b) (0.8) 0.2 (0.7) (0.2) (0.1) (0.1) 0.2 (0.2) (0.2) 0.1
Financing fees(c) 0.3 - 0.1 0.2 - 0.7 - - - 0.7
Acquisitions and other
adjustments(d) 9.6 2.8 2.5 3.0 1.3 3.5 0.9 0.5 1.3 0.8
Adjusted EBITDA(e) $ 464.3 $ 38.9 $ 135.6 $ 222.0 $ 67.8 $ 415.1 $ 61.8 $ 128.2 $ 190.6 $ 34.5 _____________________________________
(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.
The following table presents a reconciliation of Organic Daily Sales to Net sales (in millions, except Selling Days; unaudited):
2022 Fiscal Year 2021 Fiscal Year
Year Qtr 4 Qtr 3 Qtr 2 Qtr 1 Year Qtr 4 Qtr 3 Qtr 2 Qtr 1
Reported Net sales $ 4,014.5 $ 890.0 $ 1,102.6 $ 1,216.6 $ 805.3 $ 3,475.7 $ 805.2 $ 936.4 $ 1,083.9 $ 650.2
Organic sales(a) 3,738.4 815.0 1,017.8 1,145.5 760.1 3,386.4 772.1 908.2 1,057.7 648.4
Acquisition contribution(b) 276.1 75.0 84.8 71.1 45.2 89.3 33.1 28.2 26.2 1.8
Selling Days 252 60 63 64 65 253 61 63 64 65
Organic Daily Sales $ 14.8 $ 13.6 $ 16.2 $ 17.9 $ 11.7 $ 13.4 $ 12.7 $ 14.4 $ 16.5 $ 10.0 _____________________________________
(a) Organic sales equal Net sales less Net sales from branches acquired in 2022
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 2022 Fiscal
Year. Includes Net sales from branches acquired in 2022 and 2021.
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Liquidity and Capital Resources
We assess our liquidity in terms of our cash and cash equivalents on hand and
the ability to generate cash to fund our operating and investing activities,
repurchase shares, and service our debt, taking into consideration available
borrowings and the seasonal nature of our business. We expect that cash and cash
equivalents on hand, cash provided from operations, and available capacity under
the ABL Facility will provide sufficient funds to operate our business, make
capital expenditures, complete acquisitions and share repurchases, and meet all
of our liquidity requirements for the next 12 months, including payment of
interest and principal on our debt. Longer-term projects or significant
investments in acquisitions may be financed through borrowings under our credit
facilities or other forms of financing and will depend on then-existing
conditions.
On October 20, 2022 , our Board of Directors approved a share repurchase
authorization for up to $400.0 million of our common stock. We intend to
purchase shares under the repurchase authorization from time to time on the open
market at the discretion of management, subject to strategic considerations,
market conditions, and other factors. The share repurchase authorization does
not have an expiration date and may be amended, suspended, or terminated by our
Board of Directors at any time. During the 2022 Fiscal Year, we repurchased
211,110 shares of our common stock at an average price per share of $118.40 . As
of January 1, 2023 , the dollar value of shares that may yet be purchased under
the share repurchase authorization was $375.0 million .
Our borrowing base capacity under the ABL Facility was $487.4 million as of
January 1, 2023 , after giving effect to $100.0 million of revolving credit loans
under the ABL Facility and outstanding letters of credit of $11.5 million . There
were no revolving credit loans outstanding and our borrowing base capacity under
the ABL Facility was $364.1 million as of January 2, 2022 . As of January 1,
2023 , we had total cash and cash equivalents of $29.1 million , total gross
long-term debt of $356.1 million , and total finance lease obligations (excluding
interest) of $58.7 million .
Working capital was $759.5 million as of January 1, 2023 , an increase of
$143.6 million as compared to $615.9 million as of January 2, 2022 . The change
in working capital was primarily attributable to higher receivables reflecting
our sales growth and higher inventory as a result of acquisitions, product cost
inflation, and our decision to increase inventory stocking levels to mitigate
supply chain disruptions.
Capital expenditures of $27.1 million for the 2022 Fiscal Year were 0.7% of
Net sales for the year. Capital expenditures have averaged $26.1 million
annually from the 2020 Fiscal Year to the 2022 Fiscal Year representing an
average of 0.8% of Net sales over this time period. We expect capital
expenditures to be in a range of 0.7% to 1.2% as a percentage of Net sales for
the 2023 Fiscal Year.
The following table summarizes current and long-term material cash
requirements for our aggregate contractual obligations and other commercial
commitments as of
Total Next 12 Months Beyond 12 Months
Long-term debt, including current maturities
4.0 $ 352.1
Interest on long-term debt $ 97.9 $ 15.2 $ 82.7
Finance leases $ 64.7 $ 17.2 $ 47.5
Operating leases $ 387.6 $ 76.4 $ 311.2
Purchase obligations $ 174.7 $ 104.7 $ 70.0
Our gross long-term debt balance increased $95.9 million since January 2, 2022
to $356.1 million . This increase was primarily attributable to our acquisition
investments and funding the increase in our working capital. We have current
maturities on our long-term debt of $4.0 million , which includes $2.5 million
related to the term loan facility and $1.5 million related to the hybrid debt
instruments. The projected interest payments on our debt only pertain to
obligations and agreements outstanding as of January 1, 2023 and expected
payments for agent administration fees. The projected interest payments are
calculated for future periods through maturity dates of our long-term debt using
interest rates in effect as of January 1, 2023 . 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 loan facility and the ABL Facility. The total amount of interest on
long-term debt increased $51.2 million since January 2, 2022 to $97.9 million ,
primarily due to the increase in borrowings under the ABL Facility, rising
interest rates, and the extended maturity date under the Seventh Amendment to
the ABL Credit Agreement. Refer to " Note 8 . Long-Term Debt" in the notes to
the consolidated financial statements for further information regarding our debt
instruments.
Our finance leases consist primarily of leases for our vehicle fleet. Our
operating leases consist primarily of leases for equipment and real estate,
which includes office space, branch locations, and distribution centers. The
table above provides our expected payments of finance lease obligations
including interest and the undiscounted rental payment obligations under
operating lease agreements for the amounts due in the next 12 months and beyond
12 months. Refer to " Note 6 . Leases" in the notes to the consolidated
financial statements for additional information regarding our lease
arrangements.
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Our purchase obligations include various commitments with vendors to purchase goods and services, primarily inventory. The largest purchase obligations include contracts with various farmers that run through the 2025 Fiscal Year and obligate us to make payments for certain nursery products and grass seeds for approximately$125.0 million , which includes expected payments of$77.9 million for the 2023 Fiscal Year. There are also other supplier and service arrangements with vendors totaling$49.7 million , of which$26.8 million of payments are expected to be made in the 2023 Fiscal Year. These purchase obligations are generally cancelable, but we have no intent to cancel and incur a penalty for not meeting the minimum required purchases. We have excluded purchase orders and agreements made in the ordinary course of business that are cancelable without penalty. Any amounts for which we are liable under purchase orders for goods received are reflected in Accounts payable on our Consolidated Balance Sheets and are excluded from the table above. Refer to " Note 10 . Commitments and Contingencies" in the notes to the consolidated financial statements for additional information regarding our purchase commitments.
Cash Flow Summary
Information about our cash flows, by category, is presented in our statements of cash flows and is summarized below (in millions):
For the year
January 3, 2022 to January 4, 2021 to
Net cash provided by (used in): January 1, 2023 January 2, 2022
Operating activities $ 217.2 $ 210.8
Investing activities $ (284.4) $ (182.0)
Financing activities $ 43.4 $ (30.4)
Cash flow provided by operating activities
Net cash provided by operating activities for the 2022 Fiscal Year was$217.2 million compared to$210.8 million for the 2021 Fiscal Year. The improvement was primarily due to higher Net income, including the adjustments to reconcile Net income to net cash provided by operating activities, partially offset by an increase in working capital.
Cash flow used in investing activities
Net cash used in investing activities for the 2022 Fiscal Year was$284.4 million compared to$182.0 million for the 2021 Fiscal Year. The increase reflects higher acquisition investments during the 2022 Fiscal Year compared to the 2021 Fiscal Year. Capital expenditures of$27.1 million were$5.4 million lower in the 2022 Fiscal Year compared to$32.5 million in the 2021 Fiscal Year due to decreased investments in material handling equipment used in our branches.
Cash flow provided by (used in) financing activities
Net cash provided by financing activities was$43.4 million for the 2022 Fiscal Year compared to net cash used in financing activities of$(30.4) million in the 2021 Fiscal Year. The increase in net cash provided by financing activities primarily reflects higher borrowings to fund the increase in working capital and our acquisition investments, partially offset by repurchases of our common stock. External Financing Term LoansLandscape 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 ofMarch 23, 2021 , withJPMorgan 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 ofApril 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 toMarch 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 mature onMarch 23, 2028 . 51
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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 OnMarch 23, 2021 , the Borrowers entered into the Fifth Amendment in order to, among other things, (i) incur$325.0 million of term loans, (ii) replace the Existing Agent as administrative and collateral agent with the New Agent, and (iii) make such other changes in the Second Amended and Restated Credit Agreement as agreed among the Borrowers and the lenders. Proceeds of the New Term Loans were used to, among other things, (i) to repay in full the term loans outstanding under the Existing Credit Agreement immediately prior to effectiveness of the Fifth Amendment (the "Tranche E Term Loans"), (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, atLandscape 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 12 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 6.39% as ofJanuary 1, 2023 .
On
OnSeptember 30, 2020 andDecember 31, 2020 , we paid down$138.4 million and$31.0 million , respectively, of the Tranche E Term Loans principal with cash on hand. As a result of the repayments, unamortized debt issuance costs and discounts in the amount of$2.2 million were charged to interest expense for the year endedJanuary 3, 2021 .
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
•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
•create liens;
•transfer or sell assets;
•make negative pledges;
•consolidate, merge, sell, or otherwise dispose of all or substantially all of
•change lines of business; and
•enter into certain transactions with affiliates.
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ABL Facility
Landscape Holding and Landscape (collectively, the "ABL Borrowers") are parties to the credit agreement datedDecember 23, 2013 (as amended by the First Amendment to the Credit Agreement, datedJune 13, 2014 , the Second Amendment to the Credit Agreement, datedJanuary 26, 2015 , the Third Amendment to the Credit Agreement, datedFebruary 13, 2015 , the Fourth Amendment to the Credit Agreement, datedOctober 20, 2015 , the Omnibus Amendment to the Credit Agreement, datedMay 24, 2017 , the Sixth Amendment to the Credit Agreement, datedFebruary 1, 2019 , and the Seventh Amendment to the Credit Agreement, datedJuly 22, 2022 , the "ABL Credit Agreement") providing for an asset-based credit facility (the "ABL Facility") of up to$600.0 million , subject to borrowing base availability, with a maturity date ofJuly 22, 2027 . The ABL Facility is secured by a first lien on the inventory and receivables of the ABL Borrowers. The ABL Facility is guaranteed bySiteOne Landscape Supply Bidco, Inc. ("Bidco"), an indirect wholly-owned subsidiary of the Company, and each direct and indirect wholly-ownedU.S. restricted subsidiary of Landscape. Availability is determined using borrowing base calculations of eligible inventory and receivable balances less the current outstanding ABL Facility and letters of credit balances. OnJuly 22, 2022 , the ABL Borrowers, entered into the Seventh Amendment to the ABL Credit Agreement (the "Seventh Amendment"). The Seventh Amendment amended and restated the ABL Credit Agreement in order to, among other things, (i) increase the aggregate principal amount of the commitments to$600.0 million , (ii) extend the final scheduled maturity of the revolving credit facility toJuly 22, 2027 , (iii) establish an alternate rate of interest to the LIBOR rate, (iv) replace the administrative and collateral agent, and (v) make such other changes as agreed among the ABL Borrowers and the lenders. Proceeds of the initial borrowings under the ABL Credit Agreement on the closing date of the Seventh Amendment were used, among other things, (i) to repay in full the loans outstanding under the ABL Credit Agreement immediately prior to the effectiveness of the Seventh Amendment, (ii) to pay fees and expenses related to the Seventh Amendment and the ABL Credit Agreement, and (iii) for working capital and other general corporate purposes. Loans under the ABL Credit Agreement bear interest, atLandscape Holding's option, at either (i) an adjusted term SOFR rate equal to term SOFR plus 0.10% (subject to a floor of 0.00%) plus an applicable margin of 1.25% or 1.50% or (ii) an alternate base rate plus an applicable margin of 0.25% or 0.50%, in each case depending on average daily excess availability under the ABL Credit Agreement, and in each case subject to a 0.125% reduction when the Consolidated First Lien Leverage Ratio (as defined in the ABL Credit Agreement) is less than 1.50:1.00. Additionally, undrawn commitments under the ABL Credit Agreement bear a commitment fee of 0.20% or 0.25%, depending on the average daily undrawn portion of the commitments under the ABL Credit Agreement. The interest rate on outstanding balances under the ABL Facility ranged from 5.69% to 5.77% as ofJanuary 1, 2023 . There were no outstanding balances under the ABL Facility as ofJanuary 2, 2022 . Additionally, the ABL Borrowers paid a commitment fee of 0.20% on the unfunded amount as ofJanuary 1, 2023 , and a commitment fee of 0.25% on the unfunded amount as ofJanuary 2, 2022 . 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 ABL 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 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. 53
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Subject to certain conditions and 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)$450.0 million and (b) 100% of Consolidated EBITDA (as defined in the ABL Credit Agreement) for the period of the most recent four consecutive fiscal quarters ending prior to the date of such determination plus (ii) an additional amount that will not cause the Consolidated First Lien 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 20 consecutive calendar days. Failure to comply with the covenants and other provisions included in the ABL Credit Agreement could result in an event of default under the ABL Facility. If an event of default occurs, the lenders could elect to declare all amounts outstanding under the ABL Facility to be immediately due and payable, enforce their interest in collateral pledged under the agreement, or restrict the ABL 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 Second Amended and Restated Credit Agreement and the ABL Credit Agreement
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 Credit
Agreement and other indebtedness to incur additional indebtedness that may
restrict or prohibit the making of distributions, the payment of dividends, or
the making of loans to us.
Interest Rate Swaps
We are subject to interest rate risk with regard to existing and future
issuances of debt. We utilize interest rate swap contracts to reduce our
exposure to fluctuations in variable interest rates for future interest payments
on existing debt. We are party to a forward-starting interest rate swap contract
and interest rate swap contracts to convert the variable interest rate to a
fixed interest rate on portions of the borrowings under the term loans. During
the first quarter of 2021, we amended and restructured certain of our interest
rate swap contracts using a strategy commonly referred to as a "blend and
extend". In a blend and extend arrangement, the liability position of the
existing interest rate swap arrangement is blended into the amended or new
interest rate swap arrangement and the term to maturity of the hedged position
is extended.
We recognize any differences between the variable interest rate payments and
the fixed interest rate settlements from the swap counterparties as an
adjustment to interest expense over the life of the swaps. We have designated
these swaps as cash flow hedges and record the changes in the estimated fair
value of the swaps to Accumulated other comprehensive income (loss) ("AOCI") on
our Consolidated Balance Sheets. If it becomes probable that the forecasted
transaction will not occur, the hedge relationship will be de-designated and
amounts accumulated in AOCI will be reclassified to Interest and other
non-operating expenses, net in the current period. To the extent the interest
rate swaps are determined to be ineffective, we recognize the changes in the
estimated fair value of the swaps in earnings.
Failure of the swap counterparties to make payments would result in the loss
of any potential benefit to us under the swap agreements. In this case, we would
still be obligated to pay the variable interest payments underlying the debt
agreements. Additionally, failure of the swap counterparties would not eliminate
our obligation to continue to make payments under the existing swap agreements
if it continues to be in a net pay position.
As a result of the determination that the Interest rate swap arrangements
executed on March 23, 2021 are hybrid debt instruments containing embedded
at-market swap derivatives, we reclassified $5.9 million from Accrued
liabilities and Other long-term liabilities to long-term debt with $1.5 million
classified as Long-term debt, current portion and $4.4 million classified as
Long-term debt, less current portion on our Consolidated Balance Sheets. As of
January 1, 2023 , approximately $1.5 million was classified as Long-term debt,
current portion and approximately $1.8 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" and " Note 8 . Long-Term Debt" in the notes to the consolidated
financial statements.
54-------------------------------------------------------------------------------- Table of Contents Critical Accounting Estimates In order to prepare our financial statements in accordance with GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. Such estimates are based upon management's current judgments, which are normally based on knowledge and experience with regard to past and current events and assumptions about future events. Certain estimates are particularly sensitive due to their significance to the financial statements and the possibility that future events may be significantly different from our expectations. While there are a number of accounting policies and estimates affecting our financial statements, we have identified the following critical accounting estimates that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial statements.
Inventory Valuation
Summary:
Product inventories represent our largest asset and are recorded at the lower of actual cost or estimated net realizable value. Our goal is to manage our inventory so that we minimize out of stock positions. To do this, we maintain an adequate inventory of approximately 155,000 SKUs and manage inventory at each branch based on sales history. At the same time, we continuously strive to better manage our slower moving classes of inventory. During the year, we perform periodic cycle counts and write off excess or obsolete inventory as needed. Prior to year-end, we conduct a physical inventory at each branch and record any necessary additional write-offs to dispose of excess or obsolete products. Our inventories are generally not susceptible to technological obsolescence. Judgments and Uncertainties: Significant judgment is required to estimate the net realizable value of our inventory as it requires assumptions and projections to be made based off the historical recovery rates for our slower moving inventory. We monitor our inventory levels by branch and record provisions for excess inventories. The assumptions we make to record adjustments for excess or obsolete inventory are based on these historical recovery rates, such as recent history of usage of our products, expected future demand for our products, current market conditions, and other factors, including liquidation value.
Sensitivity of Estimates to Change:
Changes to the relevant assumptions and projections would impact our consolidated financial results in periods subsequent to recording these estimates. If we anticipate a change in assumptions such as future demand or market conditions to be less favorable than our previous estimates, additional inventory write-downs may be required. Conversely, if we are able to sell inventories that had been written down to a level below the ultimate realized selling price in a previous period, sales would be recorded with a lower or no offsetting charge to cost of sales. A 10% change to our current reserve for excess and obsolete inventory would not result in a material change to our consolidated financial statements; however, given the value of inventory on hand, a significant change in demand or market conditions could result in a material adjustment to our reserve in future periods. We have not recorded any material net adjustments or such changes to our inventory reserves during the 2022 Fiscal Year or the 2021 Fiscal Year.
Acquisitions
Summary:
From time to time, we enter into strategic acquisitions in an effort to better
service existing customers and to attract new customers. When we acquire a
controlling financial interest in an entity or group of assets that are
determined to meet the definition of a business, we apply the acquisition method
described in Accounting Standards Codification Topic 805, Business Combinations.
In accordance with GAAP, the results of the acquisitions we have completed are
reflected in our financial statements from the date of acquisition forward.
We allocate the purchase consideration paid to acquire the business to the
assets acquired and liabilities assumed based on estimated fair values at the
acquisition date, with the excess of purchase price over the estimated fair
value of the net assets acquired recorded as goodwill. The value of residual
goodwill is not amortized but is tested at least annually for impairment as
described below in "Goodwill". If during the measurement period (a period not to
exceed 12 months from the acquisition date) we receive additional information
that existed as of the acquisition date but at the time of the original
allocation described above was unknown to us, we make the appropriate
adjustments to the purchase price allocation in the reporting period the amounts
are determined.
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Judgments and Uncertainties:
Significant judgment is required to estimate the fair value of intangible assets and in assigning their respective useful lives. Accordingly, we typically engage third-party valuation specialists, who work under the direction of management, for the more significant acquired tangible and intangible assets. The fair value of the assets acquired and liabilities assumed is determined through established valuation techniques, such as the income, cost, or market approach, and estimates are based on available historical information and on future expectations and assumptions deemed reasonable by management but are inherently uncertain. We use the multi-period excess earnings method to estimate the fair value of customer relationship intangible assets, which is based on forecasts of the expected future cash flows attributable to the respective assets and includes the selection of discount rates. Significant estimates and assumptions inherent in the valuations reflect a consideration of other marketplace participants and include the amount and timing of future cash flows (including expected growth rates and profitability), a brand's relative market position, and the appropriate discount rate applied to the cash flows. Changes in the underlying assumptions and estimates, including the selected discount rates, could have a significant impact on the fair value of intangible assets. Further, unanticipated market or macroeconomic events and circumstances may occur, which could affect the accuracy or validity of the estimates and assumptions. Determining the useful life of an intangible asset also requires judgment. All of our acquired intangible assets (e.g., customer relationships, trademarks, and non-compete arrangements) are expected to have finite useful lives. Our assessment as to whether trademarks have an indefinite life or a finite life is based on a number of factors including competitive environment, market share, brand history, underlying product life cycles, operating plans, and the macroeconomic environment of the regions in which the brands are sold. Our estimates of the useful lives of finite-lived intangible assets are primarily based on these same factors. We consider the period of expected cash flows and the underlying data used to measure the fair value of the intangible assets when selecting a useful life. Customer relationship intangible assets are amortized on an accelerated method.
Sensitivity of Estimates to Change:
We completed 16 acquisitions during the 2022 Fiscal Year for an aggregate purchase price of$248.7 million and the preliminary valuations of assets acquired included customer relationship intangible assets of$95.8 million and trademarks and other intangible assets of$15.4 million . Key assumptions used in determining the fair values of customer relationships included future earnings projections, customer attrition rates, and discount rates, among others. Additionally, assumptions used to calculate the fair values of trademarks and other intangible assets included relief-from-royalty models and revenue projections, royalty rates, future earnings projections, discount rates, and probabilities of competition and successful competition, among others. Estimates associated with the accounting for acquisitions may change as additional information becomes available regarding the assets acquired. We believe the estimates applied to be based on reasonable assumptions, but which are inherently uncertain. As a result, actual results may differ from the assumptions and judgments used to determine the fair values of the assets acquired, which could result in impairment losses in the future. Changes in business conditions may also require future adjustments to the useful lives of assets acquired. If we determine that the useful lives of assets acquired are shorter than we had originally estimated, the rate of amortization would be accelerated over the assets' new, shorter useful lives. Changes in key assumptions resulting in a 10% revision of the estimated fair values of finite-lived intangible assets acquired during the 2022 Fiscal Year would impact amortization of acquisition intangible assets by$11.1 million over a weighted-average amortization period of 17.9 years primarily on an accelerated basis. No material adjustments to the valuation of such assets, impairment loss, or accelerated amortization of intangible assets due to revised useful lives was recorded in the 2022 Fiscal Year or the 2021 Fiscal Year.
Summary:
Goodwill represents the acquired fair value of a business in excess of the fair values of tangible and identified intangible assets acquired and liabilities assumed. We test goodwill on an annual basis as of July fiscal month end and additionally if an event occurs or circumstances change that would indicate the carrying amount may be impaired. The goodwill impairment test requires us to estimate and compare the fair value of a reporting unit to its carrying amount, including goodwill. If the fair value exceeds the carrying amount, the goodwill is not considered impaired. To the extent a reporting unit's carrying amount exceeds its fair value, the reporting unit's goodwill is deemed impaired, and an impairment charge is recognized based on the excess of a reporting unit's carrying amount over its fair value. 56
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Judgments and Uncertainties:
Significant judgment is required to determine whether impairment indicators exist and to estimate the fair value of our reporting units. Estimating the fair value of reporting units using the discounted cash flow model requires us to make assumptions and projections of revenue growth rates, gross margins, SG&A, capital expenditures, working capital, depreciation, terminal values, and weighted average cost of capital, among other factors. The assumptions used to estimate fair value consider historical trends, macroeconomic conditions, and projections consistent with our operating strategy. Changes in these estimates could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Adverse market or economic events could result in impairment charges in future periods.
Sensitivity of Estimates to Change:
During the third quarter of the 2022 Fiscal Year, we performed our annual quantitative assessment of goodwill. No goodwill impairment charge was recorded as a result of the testing and the estimated fair value of each of our reporting units substantially exceeded its carrying value. In addition, a 10% decline in the projected cash flows or a 10% increase in the discount rate assumption utilized in our annual quantitative testing would not result in an impairment of any of our reporting units.
Recently Issued and Adopted Accounting Pronouncements
Refer to " Note 1 . Nature of Business and Significant Accounting Policies" to our audited consolidated financial statements included in this Annual Report on Form 10-K, for a description of recently issued and adopted accounting pronouncements.
Accounting Pronouncements Issued But Not Yet Adopted
Refer to " Note 1 . Nature of Business and Significant Accounting Policies"
to our audited consolidated financial statements included in this Annual Report
on Form 10-K, for a description of accounting pronouncements that have been
issued but not yet adopted.
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