# SiteOne Landscape Supply, Inc. (SITE) FY 2022 MD&A

Verbatim Item 7 Management's Discussion and Analysis from SiteOne Landscape Supply, Inc.'s 10-K for fiscal year 2022.

SEC filing source: https://www.sec.gov/Archives/edgar/data/1650729/000165072922000005/site-20220102.htm
Accession: 0001650729-22-000005
Filing date: 2022-02-24
Report date: 2022-01-02
Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary.
Confidence: high

Company profile: /company/SITE/
All MD&A years: /company/SITE/mda/
Next year: /company/SITE/mda/a-0001650729-23-000003/ (FY 2023)

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

    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 ended January 3, 2021 compared to the year ended December 29, 2019, 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 ended January 3, 2021 filed with the SEC on March 3, 2021, 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 in SiteOne Landscape Supply Holding, LLC (“Landscape Holding”). Landscape Holding is the parent and sole owner of SiteOne Landscape Supply, LLC (“Landscape”).

    We are the largest and only national wholesale distributor of landscape supplies in the United States and have a growing presence in Canada. Our customers are primarily residential and commercial landscape professionals who specialize in the design, installation, and maintenance of lawns, gardens, golf courses, and other outdoor spaces. As of January 2, 2022, we had over 590 branch locations in 45 U.S. states and six Canadian provinces. Through our expansive North American network, we offer a comprehensive selection of more than 135,000 SKUs, including irrigation supplies, fertilizer and control products (e.g., herbicides), hardscapes (including pavers, natural stone, and blocks), landscape accessories, nursery goods, outdoor lighting, and ice melt products to green industry professionals. We also provide value-added consultative services to complement our product offerings and to help our customers operate and grow their businesses.

Business Environment and Trends

    Despite rapid product cost inflation, certain supply shortages, ongoing freight and labor constraints, and overall economic uncertainty, we continue to experience a high demand for our products due primarily to the stay-at-home trends associated with the remote work environment and COVID-19. As consumers spend more time at home, they are upgrading their backyards and patios and investing in their outdoor living spaces. Homeowners are spending more on maintaining their yards which has increased demand for agronomic products. The stay-at-home trend combined with low interest rates has also driven strong growth in the new construction end market, which has resulted in increased demand for landscaping products. Housing starts have increased 23% from 1,292 million in 2019 to 1,585 million in 2021. We achieved Net sales growth of 29% for the 2021 Fiscal Year compared to Net sales growth of 15% for the 2020 Fiscal Year. Organic Daily Sales growth was 22% for the 2021 Fiscal Year compared to 8% for the 2020 Fiscal Year.

    In the 2021 Fiscal Year, significant price increases impacted the products we purchase and sell to our customers. We experienced higher prices in all product lines with significant increases in products like PVC pipe, fertilizer, and grass seed. 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. As a result, price inflation contributed approximately 11% to our Organic Daily Sales growth in the 2021 Fiscal Year. Due to ongoing product constraints, rising manufacturer input costs, and continued strong demand, we expect inflation to remain elevated for most of the 2022 Fiscal Year.

    In addition, we continued to experience negative impacts from broad-based supply chain disruptions in the 2021 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 resulting in increased safety stock which has allowed us to largely satisfy customer demand when products are not immediately available from our suppliers. We have also executed on our freight and logistical initiatives which have allowed us to better manage disruptions and mitigate challenges in the shipping and trucking markets. These actions and the effective management of price inflation described above helped drive gross margin expansion of 160 basis points to 34.9% for the 2021 Fiscal Year.

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    We established our fourth major distribution center in Hutchins, Texas during the fourth quarter of 2021 to support our growing company and to further enhance the competitive advantage derived from our strong supply chain capabilities. We are also completing the transition of our Southeast distribution center operations to a larger facility in Palmetto, Georgia and commenced operations in the new location at the end of the 2021 Fiscal Year, further expanding our supply chain capabilities. In the 2022 Fiscal Year, we do expect supply chain disruptions to continue; however, by executing our supply initiatives, we believe we can significantly minimize the impact on our customers and our business operations.

    As we continue to navigate the challenges discussed above, we remain confident in our ability to execute our commercial and operational initiatives to meet our customer’s needs and drive further improvements in our business. 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.

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.

    Although we have experienced operational and other challenges to date, there has been no material adverse impact as a result of the pandemic on our results of operations during the 2021 Fiscal Year or 2020 Fiscal Year. 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 2021 Fiscal Year or 2020 Fiscal Year, 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 challenges on 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 $417.8 million as of January 2, 2022, consisting of cash on hand and available capacity under an asset-based credit facility (the “ABL Facility”). In addition, we have no debt maturing under our ABL Facility until 2024.

    As of the date of this Annual 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 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. See Part I, Item 1A. - “Risk Factors”, for a discussion of risks which 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 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.

    This discussion of our financial condition is presented for the 2021 Fiscal Year, which ended on January 2, 2022 and included 52 weeks and 253 Selling Days and the 2020 Fiscal Year, which ended on January 3, 2021 and included 53 weeks and 256 Selling Days. “Selling Days” are defined below within the “Key Business and Performance Metrics” section.

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    We manage our business as a single reportable segment. Within our organizational framework, the same operational resources support multiple geographic regions and performance is evaluated at a consolidated level. We also evaluate performance based on discrete financial information on a regional basis. Since all of our regions have similar operations and share similar economic characteristics, we aggregate regions into a single operating and reportable segment. These similarities include (i) long-term financial performance, (ii) the nature of products and services, (iii) the types of customers we sell to, and (iv) the distribution methods utilized. Further, all of our product categories have similar supply chain processes and classes of customers.

Key Business and Performance Metrics

    We focus on a variety of indicators and key operating and financial metrics to monitor the financial condition and performance of our business. These metrics include:

    Net sales. We generate Net sales primarily through the sale of landscape supplies, including irrigation supplies, fertilizer and control products, hardscapes, landscape accessories, nursery goods, outdoor lighting, and ice melt products to our customers who are primarily landscape contractors serving the residential and commercial construction sectors. Our Net sales include billings for freight and handling charges, and commissions on the sale of control products that we sell as an agent. Net sales are presented net of any discounts, returns, customer rebates, and sales or other revenue-based taxes.

    Non-GAAP Organic Sales. In managing our business, we consider all growth, including the opening of new greenfield branches, to be organic growth unless it results from an acquisition. When we refer to Organic Sales growth, we include increases in growth from newly-opened greenfield branches and decreases in growth from closing existing branches but exclude increases in growth from acquired branches until they have been under our ownership for at least four full fiscal quarters at the start of the fiscal reporting period.

    Non-GAAP Selling Days. Selling Days are defined as business days, excluding Saturdays, Sundays, and holidays, that our branches are open during the year. Depending upon the location and the season, our branches may be open on Saturdays and Sundays; however, for consistency, those days have been excluded from the calculation of Selling Days.

    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. 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 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. As of January 2, 2022, we have invested $307.8 million in 19 acquisitions since the start of the 2020 Fiscal Year. The following is a summary of the acquisitions completed during the 2021 Fiscal Year and the 2020 Fiscal Year:

•In December 2021, we acquired the assets and assumed the liabilities of Bothe Trucking, Inc., doing business as Seffner Rock and Gravel (“Seffner”). With one location in Tampa, Florida, Seffner is a wholesale distributor of natural stone, bulk aggregates, mulch, soil, and other landscape supplies to landscape professionals.

•In November 2021, we acquired the assets and assumed the liabilities of Semco Distributing, Inc. (“Semco”). With four locations in Ohio and Missouri, Semco is a wholesale distributor of natural stone and landscape supplies to landscape professionals.

•In August 2021, we acquired the assets and assumed the liabilities of Green Brothers Earth Works and Southern Landscape Supply (“Green Brothers”). With four locations in the greater Atlanta, Georgia market, Green Brothers is a distributor of landscape supplies and hardscapes to landscape professionals.

•In May 2021, we acquired all of the outstanding stock of Rodvold Enterprises, Inc., doing business as Rock & Block Hardscape Supply (“Rock & Block”). With two locations in the San Diego, Southern Orange County and Inland Empire markets in California, Rock & Block is a distributor of hardscapes, masonry, and landscape supplies to landscape professionals.

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•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.

    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.

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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. 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 branch systems automation and enhancement including the rollout of barcoding.

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 among the 2021 Fiscal Year and the 2020 Fiscal Year.

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Comparison of the 2021 Fiscal Year to the 2020 Fiscal Year

Net sales

    Net sales for the 2021 Fiscal Year increased 29% to $3,475.7 million as compared to $2,704.5 million for the 2020 Fiscal Year due to continued investment in outdoor living spaces as consumers spent more time at home, price inflation from rising product costs, and contributions from acquisitions. Organic Daily Sales for the 2021 Fiscal Year increased 22% due to the stay-at-home trend and price inflation. Price inflation contributed approximately 11% to Organic Daily Sales growth in the 2021 Fiscal Year. Organic Daily Sales for landscaping products (irrigation supplies, hardscapes, landscape accessories, nursery goods, and outdoor lighting) grew 21%. Organic Daily Sales for agronomic products (fertilizer, control products, ice melt, equipment, and other products) increased 24%. Acquisitions contributed 9%, or $241.6 million, to Net sales growth.

Cost of goods sold

    Cost of goods sold for the 2021 Fiscal Year increased 26% to $2,263.1 million from $1,803.2 million for the 2020 Fiscal Year. The increase in Cost of goods sold was primarily attributable to Net sales growth, including acquisitions and product cost inflation.

Gross profit and gross margin

    Gross profit for the 2021 Fiscal Year increased 35% to $1,212.6 million as compared to $901.3 million for the 2020 Fiscal Year. Gross profit growth was driven by the Net sales growth, including acquisitions. Gross margin increased 160 basis points to 34.9% in the 2021 Fiscal Year as compared to 33.3% in the 2020 Fiscal Year. The increase in gross margin reflects the benefit of supply chain initiatives and favorable pricing.

Selling, general and administrative expenses

    Selling, general and administrative expenses (“SG&A”) for the 2021 Fiscal Year increased 24% to $900.6 million from $728.2 million for the 2020 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 decreased 100 basis points to 25.9% for the 2021 Fiscal Year compared to 26.9% for the 2020 Fiscal Year. The decrease in SG&A as a percentage of Net sales was primarily due to operating leverage resulting from our strong Organic Sales growth combined with disciplined expense management. Depreciation and amortization increased $15.8 million to $83.0 million primarily as a result of our acquisitions.

Interest expense and other non-operating expense

    Interest expense and other non-operating expense decreased 38% to $19.2 million in the 2021 Fiscal Year from $31.0 million in the 2020 Fiscal Year. The decrease in interest expense primarily reflected a lower average outstanding debt balance and lower interest rates in the 2021 Fiscal Year as compared to the 2020 Fiscal Year.

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Income tax expense

    Income tax expense was $56.1 million during the 2021 Fiscal Year as compared to $27.5 million during the 2020 Fiscal Year. The effective tax rate was 19.0% for the 2021 Fiscal Year as compared to 18.5% for the 2020 Fiscal Year. The increase in the effective tax rate was due primarily to an increase in 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 $20.2 million were recognized for the 2021 Fiscal Year as compared to $10.9 million for the 2020 Fiscal Year.

 Net income

    Net income for the 2021 Fiscal Year increased 97% to $238.4 million as compared to $121.3 million for the 2020 Fiscal Year. The increase in Net income was primarily driven by higher Net sales, gross margin improvement, and SG&A leverage.

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 these 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.

[[GREPCENT_TABLE]]
[["(In millions except per share information and percentages, unaudited)"],["","2021 Fiscal Year","","2020 Fiscal Year"],["","Year","","Qtr 4","","Qtr 3","","Qtr 2","","Qtr 1","","Year","","Qtr 4","","Qtr 3","","Qtr 2","","Qtr 1"],["Net sales","$","3,475.7","","","$","805.2","","","$","936.4","","","$","1,083.9","","","$","650.2","","","$","2,704.5","","","$","675.1","","","$","751.9","","","$","817.7","","","$","459.8"],["Cost of goods sold","2,263.1","","","522.8","","","595.9","","","695.7","","","448.7","","","1,803.2","","","452.8","","","501.8","","","531.6","","","317.0"],["Gross profit","1,212.6","","","282.4","","","340.5","","","388.2","","","201.5","","","901.3","","","222.3","","","250.1","","","286.1","","","142.8"],["Selling, general and administrative expenses","900.6","","","247.2","","","235.3","","","225.8","","","192.3","","","728.2","","","202.8","","","183.3","","","175.0","","","167.1"],["Other (income) expense, net","(1.7)","","","(0.1)","","","1.8","","","(2.2)","","","(1.2)","","","(6.7)","","","(2.7)","","","(1.8)","","","(1.2)","","","(1.0)"],["Operating income (loss)","313.7","","","35.3","","","103.4","","","164.6","","","10.4","","","179.8","","","22.2","","","68.6","","","112.3","","","(23.3)"],["Interest and other non-operating expenses, net","19.2","","","5.1","","","4.3","","","4.3","","","5.5","","","31.0","","","9.1","","","6.6","","","7.6","","","7.7"],["Income tax (benefit) expense","56.1","","","2.7","","","19.1","","","36.8","","","(2.5)","","","27.5","","","1.6","","","13.8","","","25.6","","","(13.5)"],["Net income (loss)","$","238.4","","","$","27.5","","","$","80.0","","","$","123.5","","","$","7.4","","","$","121.3","","","$","11.5","","","$","48.2","","","$","79.1","","","$","(17.5)"],["Net income (loss) per common share:"],["Basic","$","5.35","","","$","0.61","","","$","1.79","","","$","2.77","","","$","0.17","","","$","2.83","","","$","0.26","","","$","1.11","","","$","1.89","","","$","(0.42)"],["Diluted","$","5.20","","","$","0.60","","","$","1.74","","","$","2.70","","","$","0.16","","","$","2.75","","","$","0.25","","","$","1.08","","","$","1.83","","","$","(0.42)"],["Adjusted EBITDA(a)","$","415.1","","","$","61.8","","","$","128.2","","","$","190.6","","","$","34.5","","","$","260.2","","","$","43.9","","","$","87.8","","","$","132.1","","","$","(3.6)"],["Net sales as a percentage of annual Net sales","100.0","%","","23.2","%","","26.9","%","","31.2","%","","18.7","%","","100.0","%","","25.0","%","","27.8","%","","30.2","%","","17.0","%"],["Gross profit as a percentage of annual Gross profit","100.0","%","","23.3","%","","28.1","%","","32.0","%","","16.6","%","","100.0","%","","24.7","%","","27.8","%","","31.7","%","","15.8","%"],["Adjusted EBITDA as a percentage of annual Adjusted EBITDA","100.0","%","","14.9","%","","30.9","%","","45.9","%","","8.3","%","","100.0","%","","16.9","%","","33.7","%","","50.8","%","","(1.4)","%"]]
[[/GREPCENT_TABLE]]

_____________________________________

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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;

•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 (loss) (in millions, unaudited):

[[GREPCENT_TABLE]]
[["","","2021 Fiscal Year","","2020 Fiscal Year"],["","","Year","","Qtr 4","","Qtr 3","","Qtr 2","","Qtr 1","","Year","","Qtr 4","","Qtr 3","","Qtr 2","","Qtr 1"],["Reported Net income (loss)","$","238.4","","","$","27.5","","","$","80.0","","","$","123.5","","","$","7.4","","","$","121.3","","","$","11.5","","","$","48.2","","","$","79.1","","","$","(17.5)"],["","Income tax (benefit) expense","56.1","","","2.7","","","19.1","","","36.8","","","(2.5)","","","27.5","","","1.6","","","13.8","","","25.6","","","(13.5)"],["","Interest expense, net","19.2","","","5.1","","","4.3","","","4.3","","","5.5","","","31.0","","","9.1","","","6.6","","","7.6","","","7.7"],["","Depreciation & amortization","83.0","","","22.3","","","21.0","","","20.3","","","19.4","","","67.2","","","18.2","","","16.3","","","16.4","","","16.3"],["EBITDA","396.7","","","57.6","","","124.4","","","184.9","","","29.8","","","247.0","","","40.4","","","84.9","","","128.7","","","(7.0)"],["","Stock-based compensation(a)","14.3","","","3.1","","","3.5","","","4.6","","","3.1","","","10.6","","","2.7","","","2.6","","","2.8","","","2.5"],["","(Gain) loss on sale of assets(b)","(0.1)","","","0.2","","","(0.2)","","","(0.2)","","","0.1","","","(0.4)","","","(0.2)","","","(0.4)","","","0.1","","","0.1"],["","Financing fees(c)","0.7","","","\u2014","","","\u2014","","","\u2014","","","0.7","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["","Acquisitions and other adjustments(d)","3.5","","","0.9","","","0.5","","","1.3","","","0.8","","","3.0","","","1.0","","","0.7","","","0.5","","","0.8"],["Adjusted EBITDA(e)","$","415.1","","","$","61.8","","","$","128.2","","","$","190.6","","","$","34.5","","","$","260.2","","","$","43.9","","","$","87.8","","","$","132.1","","","$","(3.6)"]]
[[/GREPCENT_TABLE]]

_____________________________________

(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):

[[GREPCENT_TABLE]]
[["","","2021 Fiscal Year","","2020 Fiscal Year"],["","","Year","","Qtr 4","","Qtr 3","","Qtr 2","","Qtr 1","","Year","","Qtr 4","","Qtr 3","","Qtr 2","","Qtr 1"],["Reported Net sales","$","3,475.7","","","$","805.2","","","$","936.4","","","$","1,083.9","","","$","650.2","","","$","2,704.5","","","$","675.1","","","$","751.9","","","$","817.7","","","$","459.8"],["","Organic sales(a)","3,158.9","","","726.9","","","843.7","","","975.0","","","613.3","","","2,629.3","","","641.0","","","732.7","","","799.2","","","456.4"],["","Acquisition contribution(b)","316.8","","","78.3","","","92.7","","","108.9","","","36.9","","","75.2","","","34.1","","","19.2","","","18.5","","","3.4"],["Selling Days","253","","","61","","","63","","","64","","","65","","","256","","","65","","","63","","","64","","","64"],["Organic Daily Sales","$","12.5","","","$","11.9","","","$","13.4","","","$","15.2","","","$","9.4","","","$","10.3","","","$","9.9","","","$","11.6","","","$","12.5","","","$","7.1"]]
[[/GREPCENT_TABLE]]

_____________________________________

(a)    Organic sales equals reported 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.

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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 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 expected capital expenditures, complete acquisitions, and meet all of our liquidity requirements for the next 12 months, including payment of interest and principal on our debt. Longer-term projects or significant investments in acquisitions may be financed through borrowings under our credit facilities or other forms of financing and will depend on then-existing conditions.

    As of January 2, 2022 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 as of January 2, 2022 and January 3, 2021, respectively. As of January 2, 2022, we had total cash and cash equivalents of $53.7 million, total gross long-term debt of $260.2 million, and total finance lease obligations (excluding interest) of $45.4 million.

    Working capital was $615.9 million as of January 2, 2022, an increase of $132.9 million as compared to $483.0 million as of January 3, 2021. The change in working capital was primarily attributable to higher receivables reflecting our strong sales growth and higher inventory as a result of our decision to increase inventory stocking levels to mitigate supply chain disruptions and the impact of product cost inflation, as well as to support the expansion of our distribution center network.

    Capital expenditures of $32.5 million for the 2021 Fiscal Year were 0.9% of Net sales for the year. Capital expenditures have averaged $23.5 million annually from the 2019 Fiscal Year to the 2021 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 0.8% to 1.3% as a percentage of Net sales for the 2022 Fiscal Year.

    The following table summarizes current and long-term material cash requirements for our aggregate contractual obligations and other commercial commitments as of January 2, 2022 (in millions):

[[GREPCENT_TABLE]]
[["","Total","","Next 12 Months","","Beyond 12 Months"],["Long-term debt, including current maturities","$","260.2","","","$","4.0","","","$","256.2"],["Interest on long-term debt","$","46.7","","","$","9.4","","","$","37.3"],["Finance leases","$","48.9","","","$","12.4","","","$","36.5"],["Operating leases","$","366.5","","","$","68.8","","","$","297.7"],["Purchase obligations","$","210.7","","","$","105.1","","","$","105.6"]]
[[/GREPCENT_TABLE]]

    Our gross long-term debt balances have not significantly changed since January 3, 2021. 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 2, 2022 and expected payments for agent administration fees. The projected interest payments are calculated for future periods through maturity dates of our long-term debt using interest rates in effect as of January 2, 2022. Certain of these projected interest payments may differ in the future based on changes in floating interest rates or other factors and events, including our entry into amendments of the term loan facility. 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.

    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 $160.8 million, which includes expected payments of $82.4 million for the 2022 Fiscal Year. There are also other supplier and service arrangements with vendors totaling $49.9 million, of which $22.7 million of payments are expected to be made in the 2022 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.

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Cash Flow Summary

    Information about our cash flows, by category, is presented in our statements of cash flows and is summarized below (in millions):

[[GREPCENT_TABLE]]
[["","","For the year"],["Net cash provided by (used in):","","January 4, 2021 to January 2, 2022","","December 30, 2019 to January 3, 2021"],["Operating activities","","$","210.8","","","$","229.4"],["Investing activities","","$","(182.0)","","","$","(184.2)"],["Financing activities","","$","(30.4)","","","$","(9.1)"]]
[[/GREPCENT_TABLE]]

Cash flow provided by operating activities

    Net cash provided by operating activities for the 2021 Fiscal Year was $210.8 million compared to $229.4 million for the 2020 Fiscal Year. The decrease was primarily due to higher inventory and receivables reflecting our sales growth and our decision to increase inventory stocking levels as described above in “Liquidity and Capital Resources”, partially offset by the increase in Net income.

Cash flow used in investing activities

    Net cash used in investing activities for the 2021 Fiscal Year was $182.0 million compared to $184.2 million for the 2020 Fiscal Year. The decrease reflects a small decline in acquisition investments during the 2021 Fiscal Year. Capital expenditures of $32.5 million were $13.9 million higher in the 2021 Fiscal Year compared to $18.6 million in the 2020 Fiscal Year due to increased investments in material handling equipment used in our branches.

Cash flow used in financing activities

    Net cash used in financing activities was $30.4 million for the 2021 Fiscal Year compared to $9.1 million in the 2020 Fiscal Year. The increase in net cash used in financing actives primarily reflects a higher net amount of Long-term debt repayments partially offset by Equity proceeds, including the repayment of $68.0 million of the New Term Loans principal on December 31, 2021, as well as the payment of debt issuance costs in connection with the Fifth Amendment of the term loans and higher finance lease, acquisition related contingent obligation, and Other financing payments during Fiscal Year 2021 as compared to Fiscal Year 2020.

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.

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    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) 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 was 2.50% as of January 2, 2022.

    On December 31, 2021, we paid down $68.0 million of the New Term Loans principal with cash on hand. As a result of the repayment, unamortized debt issuance costs and discounts in the amount of approximately $0.9 million were charged to interest expense for the year ended January 2, 2022.

    On September 30, 2020 and December 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 ended January 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 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.

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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 the 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 January 2, 2022 and January 3, 2021. Additionally, the Borrowers paid a commitment fee of 0.25% on the unfunded amount as of January 2, 2022 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 Amended and Restated Term Loan Credit Agreement) for the trailing 12-month period plus (ii) an additional amount that will not cause the net secured leverage ratio after giving effect to the incurrence of such additional amount and any use of proceeds thereof to exceed 5.00 to 1.00.

    There are no financial covenants included in the ABL Credit Agreement, other than a springing minimum consolidated fixed charge coverage ratio of at least 1.00 to 1.00, which is tested only when specified availability is less than 10.0% of the lesser of (x) the then applicable borrowing base and (y) the then aggregate effective commitments under the ABL Facility, and continuing until such time as specified availability has been in excess of such threshold for a period of 30 consecutive calendar days.

    Failure to comply with the covenants and other provisions included in the ABL Credit Agreement could result in an event of default under the ABL Facility. If an event of default occurs, the lenders could elect to declare all amounts outstanding under the ABL Facility to be immediately due and payable, enforce their interest in collateral pledged under the agreement, or restrict the borrowers’ ability to obtain additional borrowings thereunder.

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.

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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 January 2, 2022, approximately $1.5 million was classified as Long-term debt, current portion and approximately $3.3 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.

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 more than 135,000 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.

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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 2021 Fiscal Year or 2020 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 ASC 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 and liabilities acquired 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.

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 and liabilities acquired 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. The majority of customer relationship intangible assets are amortized on an accelerated method.

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Sensitivity of Estimates to Change:

    We completed eight acquisitions during the 2021 Fiscal Year for an aggregate purchase price of $147.2 million and the preliminary valuations of assets acquired included customer relationship intangible assets of $54.2 million and trademarks and other intangible assets of $8.3 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 is 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 2021 Fiscal Year would impact amortization of acquisition intangible assets by $6.3 million over a weighted-average amortization period of 17.7 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 2021 Fiscal Year or 2020 Fiscal Year.

Goodwill

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.

Judgments and Uncertainties:

    Significant judgment is required to determine whether impairment indicators exist and to estimate the fair value of our reporting units requires significant judgment. 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, selling, general and administrative expenses, 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 2021 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 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 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 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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