SITEONE LANDSCAPE SUPPLY, INC. The following information should be read in conjunction with the "Selected Financial Data" and 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 endedDecember 29, 2019 compared to the year endedDecember 30, 2018 , 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 endedDecember 29, 2019 filed with theSEC onFebruary 26, 2020 , 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. OverviewSiteOne Landscape Supply, Inc. (collectively with all 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 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. Through our expansive North American network of over 570 branch locations in 45 U.S. states and six Canadian provinces, we offer a comprehensive selection of more than 130,000 SKUs, including irrigation supplies, fertilizer and control products (e.g., herbicides), landscape accessories, nursery goods, hardscapes (including pavers, natural stone, and blocks), 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 customers operate and grow their businesses.
Impact of COVID-19 on Our Business
With the global outbreak of the novel coronavirus, COVID-19, and the declaration of a pandemic by theWorld Health Organization onMarch 11, 2020 , 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. The ongoing COVID-19 pandemic has resulted, and is likely to continue to result, in significant economic disruption and has and will likely continue to negatively affect our business. As of the date of this Annual Report, significant uncertainty remains concerning the magnitude of the impact and duration of the COVID-19 pandemic. Factors arising from the COVID-19 response that have negatively impacted or may negatively impact sales and gross margin in the future include, but are not limited to: limitations on the ability of our suppliers to manufacture, or procure from manufacturers, the products we sell, or to meet delivery requirements and commitments; limitations on the ability of our associates to perform their work due to impacts caused by the pandemic or local, state, or federal orders that restrict our operations or the operations of our customers; limitations on the ability of carriers to deliver our products to our branches and customers; limitations on the ability of our customers to conduct their business and purchase our products and services; decreased demand for our customers' services; limitations on the ability of our customers to pay us on a timely basis; prolonged economic downturn and/or an extended unemployment; and impairments in our ability to operate in a typical manner or at all. While Net sales were negatively affected by shelter-in-place restrictions and declined 3% inApril 2020 compared to the same period of 2019, our branches and other facilities continued to operate effectively, and we achieved Net sales growth of 15% for the 2020 Fiscal Year compared to Net sales growth of 12% for the 2019 Fiscal Year. Organic Daily Sales growth was 8% for the 2020 Fiscal Year compared to 5% for the 2019 Fiscal Year. The increase was driven by higher demand in our end markets as consumers are spending more time at home and investing in their outdoor living spaces. We believe that we remain well positioned for long-term growth. Although we have experienced operational and other challenges to date, there has been no material adverse impact on our results of operations for the 2020 Fiscal Year as a result of the pandemic. We believe we have sufficient liquidity on hand to continue 38 -------------------------------------------------------------------------------- Table of Contents business operations during this volatile period. OnAugust 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 approximately$418 million as ofJanuary 3, 2021 , consisting of cash on hand and available capacity under an asset-based credit facility (the "ABL Facility"). In addition, we have no debt maturities under our credit facilities until 2024. In response to the uncertainty brought on by the COVID-19 pandemic, we took actions in the second quarter to reduce costs and spending across our organization including a reduction in hiring activities, furloughed associates, and limited discretionary spending. 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. The situation surrounding COVID-19 remains fluid and the potential for a material impact to our Company increases the longer the virus impacts the level of economic activity inthe United States and globally. For this reason, we cannot reasonably estimate with any degree of certainty the future impact COVID-19 may have on our results of operations, financial position, and liquidity. 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 inthe United States of America ("GAAP"). We use a 52/53 week fiscal year with the fiscal year ending on the Sunday nearest toDecember 31 in each year. Our fiscal quarters end on the Sunday nearest toMarch 31 ,June 30 andSeptember 30 , respectively. This discussion of our financial condition is presented for the 2020 Fiscal Year, which ended onJanuary 3, 2021 and included 53 weeks and 256 Selling Days and the 2019 Fiscal Year, which ended onDecember 29, 2019 and included 52 weeks and 252 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 (1) long-term financial performance, (2) the nature of products and services, (3) the types of customers we sell to, and (4) the distribution methods utilized.
Key Business and Performance Metrics
We focus on a variety of indicators and key operating and financial metrics to
monitor the financial condition and performance of our business. These metrics
include:
Net sales. We generate Net sales primarily through the sale of landscape
supplies, including irrigation systems, fertilizer and control products,
landscape accessories, nursery goods, hardscapes, and outdoor lighting 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
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strategic growth opportunities. Refer to "Results of Operations-Quarterly
Results of Operations Data" for a reconciliation of Organic Daily Sales to Net
sales.
Cost of goods sold. Our Cost of goods sold includes all inventory costs, such as
purchase price paid to suppliers, net of any volume-based incentives, as well as
inbound freight and handling, and other costs associated with inventory. Our
Cost of goods sold excludes the cost to deliver the products to our customers
through our branches, which is included in Selling, general and administrative
expenses. Cost of goods sold is recognized primarily using the first-in,
first-out method of accounting for the inventory sold.
Gross profit and gross margin. We believe that Gross profit and gross margin are
useful for evaluating our operating performance. We define Gross profit as Net
sales less Cost of goods sold, exclusive of depreciation. 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), 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 about how
we calculate EBITDA and Adjusted EBITDA and the limitations of those metrics.
Key Factors Affecting Our Operating Results
In addition to the metrics described above, a number of other important factors may affect our results of operations in any given period.
Weather Conditions and Seasonality
In a typical year, our operating results are impacted by seasonality. Historically, our Net sales and Net income have been higher in the second and third quarters of each fiscal year due to favorable weather and longer daylight conditions during these quarters. Our Net sales have been significantly lower in the first and fourth quarters due to lower landscaping, irrigation, and turf maintenance activities in these quarters, and we have historically incurred net losses in these quarters. Seasonal variations in operating results may also be significantly impacted by inclement weather conditions, such as snow storms, wet weather, and hurricanes, which not only impact the demand for certain products like fertilizer and ice melt, but also may delay construction projects where our products are used.
Industry and Key Economic Conditions
Our business depends on demand from customers for landscape products and services. The landscape supply industry includes a significant amount of landscape products, such as irrigation systems, outdoor lighting, lawn care supplies, nursery goods, and landscape accessories, for use in the construction of newly built homes, commercial buildings, and recreational spaces. The landscape supply industry has historically grown in line with rates of growth in residential housing and commercial building. The industry is also affected by trends in home prices, home sales, and consumer spending. As general economic conditions improve or deteriorate, consumption of these products and services also tends to fluctuate. The landscape supply industry also includes a significant amount of agronomic products such as fertilizer, herbicides, and ice melt for use in maintaining existing landscapes or facilities. The use of these products is also tied to general economic activity, but levels of sales are not as closely correlated to construction markets.
Popular Consumer Trends
Preferences in housing, lifestyle, and environmental awareness can also impact
the overall level of demand and mix for the products we offer. Examples of
current trends we believe are important to our business include a heightened
interest in professional landscape services inspired by the popularity of home
and garden television shows and magazines, the increasingly popular concept of
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"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 3, 2021 , we have invested
approximately $231 million in 21 acquisitions since the start of the 2019 Fiscal
Year. The following is a summary of the acquisitions completed during the 2020
and 2019 Fiscal Years:
•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 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
•InAugust 2020 , we acquired all of the outstanding stock ofModern Builders Supply, Inc. ("Modern Builders "). With two locations in theSan Diego ,Southern Orange County and Inland Empire markets inCalifornia ,Modern Builders is a distributor of hardscapes and landscape supplies to landscape professionals.
•In
•In
•InJanuary 2020 , we acquired the assets and assumed the liabilities ofThe Garden Dept. Corp. ("Garden Dept ."). With three locations in the greaterLong Island ,New York market,Garden Dept . is a distributor of nursery and landscape supplies to landscape professionals. •InJanuary 2020 , we acquired the assets and assumed the liabilities ofEmpire Supplies ("Empire"). With three locations in the greaterNewark -Union, New Jersey market, Empire is a distributor of hardscapes and landscape supplies to landscape professionals.
•In
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•In December 2019 , we acquired the assets and assumed the liabilities of Daniel
Stone & Landscaping Supplies, Inc. ("Daniel Stone"). With one location in the
greater Austin, Texas market, Daniel Stone is a distributor of hardscapes and
landscape supplies to landscape professionals.
•In December 2019 , we acquired all of the members' interests of Dirt Doctors,
Inc. ("Dirt Doctors"). With three locations in the greater New England market,
Dirt Doctors is a distributor of hardscapes and landscape supplies to landscape
professionals.
•In September 2019 , we acquired the assets and assumed the liabilities of Design
Outdoor, Inc. ("Design Outdoor"). With one location in the greater Reno /Lake
Tahoe, Nevada area, Design Outdoor is a distributor of hardscapes products to
landscape professionals.
•In August 2019 , we acquired the assets and assumed the liabilities of Trendset
Concrete Products, Inc. ("Trendset"). With one location in the greater Seattle,
Washington market, Trendset is a distributor of hardscapes products to landscape
professionals.
•In July 2019 , we acquired the assets and assumed the liabilities of L.H. Voss
Materials Dublin and its affiliates, Mt. Diablo Landscape Centers and Clark's
Home & Garden (collectively, "Voss"). With five locations across the East Bay in
Northern California , Voss is a distributor of hardscapes and landscape supplies
to landscape professionals.
•In May 2019 , we acquired the assets and assumed the liabilities of Stone and
Soil Depot, Inc. ("Stone and Soil"). With three locations in the greater San
Antonio, Texas market, Stone and Soil is a market leader in the distribution of
hardscapes and landscape supplies to landscape professionals.
•In April 2019 , we acquired the assets and assumed the liabilities of Fisher's
Landscape Depot ("Fisher's"). With two locations in Western Ontario, Canada ,
Fisher's is a market leader in the distribution of hardscapes and landscape
supplies to landscape professionals.
•In April 2019 , we acquired the assets and assumed the liabilities of Landscape
Depot, Inc. ("Landscape Depot"). With three locations in the greater Boston,
Massachusetts market, Landscape Depot is a market leader in the distribution of
hardscapes and landscape supplies to landscape professionals.
•In February 2019 , we acquired the assets and assumed the liabilities of All Pro
Horticulture, Inc. ("All Pro"). With one location in Long Island , New York , All
Pro is a market leader in the distribution of agronomics and erosion control
products to landscape professionals.
•In January 2019 , we acquired the assets and assumed the liabilities of Cutting
Edge Curbing Sand & Rock ("Cutting Edge"). With one location in Phoenix,
Arizona , Cutting Edge is a market leader in the distribution 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.
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 a select group of 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
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management initiatives to better serve our customers and reduce sourcing costs.
We are also implementing new inventory planning and stocking system
functionalities and new transportation management systems in an effort to reduce
costs as well as improve our reliability and level of service. In addition, we
continue to enhance our website and B2B e-Commerce platform, which we believe
provides the convenience of an online sales channel, enhanced account management
functionality, and industry specific productivity tools for our customers. We
also work closely with our local branches to improve sales, delivery, and branch
productivity. We believe we will continue to benefit from the following
initiatives, among others:
Category management initiatives, including the implementation of organic growth
strategies, the development of our private label product strategy, the expansion
of product lines, and the reorganization of brands and products by preferred
suppliers, were initiated beginning in the first quarter of 2015 and are
expected to continue through 2023.
Supply chain initiatives, including the implementation of new inventory planning
and stocking systems and functionalities, the installation of new distribution
centers, local hubs in large markets, and local fleet utilization and cost
improvement, were initiated in the fourth quarter of 2016 and are expected to
continue through 2022.
Sales force performance initiatives, including the implementation of new
compensation plans, the restructuring of our sales force, the formal sales and
product training for sales force and management, and the implementation of a
comprehensive CRM, were initiated beginning in the third quarter of 2015 and are
expected to continue through 2023.
Marketing initiatives, including a relaunch of the Partners Program and implementation of a digital marketing strategy, were initiated beginning in the third quarter of 2015 and are expected to continue through 2023.
Digital initiatives, including the relaunch of our website and the implementation of a B2B e-Commerce platform, which provides the convenience of an online sales channel, enhanced account management functionality, and industry specific productivity tools for our customers, are expected to continue through 2023. Operational excellence initiatives, including the implementation of best practices in branch operations which encompasses safety, merchandising, stocking and assortment, customer engagement, delivery, labor management, as well as branch systems automation and enhancement including the rollout of barcoding, are expected to continue through 2023.
Working Capital
Our business is characterized by a relatively high level of reported working capital, the effects of which can be compounded by changes in prices. In addition to affecting our Net sales, fluctuations in prices of supplies tend to result in changes in our reported inventories, trade receivables, and trade payables, even when our sales volumes and our rate of turnover of these working capital items remain relatively constant. Our working capital needs are exposed to these price fluctuations, as well as to fluctuations in our cost for transportation and distribution. We might not always be able to reflect these increases in our pricing. The strategic initiatives described above are designed to reduce our exposure to these fluctuations and maintain and improve our efficiency. Results of Operations
In the following discussion of our results of operations, we make comparisons among the 2020 Fiscal Year and the 2019 Fiscal Year.
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Consolidated Statements of Operations
December 31, 2018 to December 29,
December 30, 2019 to January 3, 2021 2019
(in millions)
Net sales $ 2,704.5 100.0 % $ 2,357.5 100.0 %
Cost of goods sold 1,803.2 66.7 % 1,584.3 67.2 %
Gross profit 901.3 33.3 % 773.2 32.8 %
Selling, general and administrative
expenses 728.2 26.9 % 654.3 27.8 %
Other income 6.7 0.2 % 6.0 0.3 %
Operating income 179.8 6.6 % 124.9 5.3 %
Interest and other non-operating expenses,
net 31.0 1.1 % 33.4 1.4 %
Income tax expense 27.5 1.0 % 13.8 0.6 %
Net income $ 121.3 4.5 % $ 77.7 3.3 %
Comparison of the 2020 Fiscal Year to the 2019 Fiscal Year
Net sales
Net sales for the 2020 Fiscal Year increased 15% to$2,704.5 million as compared to$2,357.5 million for the 2019 Fiscal Year. Organic Daily Sales for the 2020 Fiscal Year increased 8% due to increased demand as consumers are spending more time at home and investing in their outdoor living spaces. Organic Daily Sales for landscaping products (irrigation, nursery, hardscapes, outdoor lighting, and landscape accessories) grew 9% reflecting strength in both the repair and upgrade and residential construction end markets. Organic Daily Sales for agronomic products (fertilizer, control products, ice melt, equipment, and other products) increased 3%. Acquisitions contributed 6%, or$135.9 million , to Net sales growth. Cost of goods sold Cost of goods sold for the 2020 Fiscal Year increased 14% to$1,803.2 million from$1,584.3 million for the 2019 Fiscal Year. The increase in Cost of goods sold was primarily driven by the increased Net sales growth, including growth from acquisitions.
Gross profit and gross margin
Gross profit for the 2020 Fiscal Year increased 17% to$901.3 million as compared to$773.2 million for the 2019 Fiscal Year. Gross profit growth was primarily driven by the Net sales increase. Gross margin increased 50 basis points to 33.3% in the 2020 Fiscal Year as compared to 32.8% in the 2019 Fiscal Year. The improvement in gross margin primarily reflected lower freight costs and the contributions from acquisitions which carry higher gross margins.
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") for the 2020 Fiscal Year
increased 11% to $728.2 million from $654.3 million for the 2019 Fiscal Year.
The increase in SG&A was primarily driven by additional costs associated with
our growth including acquisitions. SG&A as a percentage of Net sales decreased
to 26.9% for the 2020 Fiscal Year compared to 27.8% for the 2019 Fiscal Year.
The decrease in SG&A as a percentage of Net sales was primarily due to operating
leverage resulting from strong Organic Sales growth and solid cost management.
Depreciation and amortization increased $7.7 million to $67.2 million primarily
as a result of our acquisitions.
Interest expense and other non-operating expense
Interest expense and other non-operating expense decreased 7% to$31.0 million in the 2020 Fiscal Year from$33.4 million in the 2019 Fiscal Year. The decrease primarily reflected lower interest rates and lower average outstanding debt levels in the 2020 Fiscal Year as compared to the 2019 Fiscal Year. 44
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Income tax expense
Income tax expense was$27.5 million during the 2020 Fiscal Year as compared to$13.8 million during the 2019 Fiscal Year. The effective tax rate was 18.5% for the 2020 Fiscal Year as compared to 15.1% for the 2019 Fiscal Year. The increase in the effective tax rate was due primarily to a decrease in excess tax benefits relative to Income before taxes for the 2020 Fiscal Year as compared to the 2019 Fiscal Year. Excess tax benefits of$10.9 million were recognized for the 2020 Fiscal Year as compared to$9.6 million for the 2019 Fiscal Year.
Net income
Net income for the 2020 Fiscal Year increased 56% to
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.
(In millions except per share information and percentages, unaudited)
2020 Fiscal Year 2019 Fiscal Year
Year Qtr 4 Qtr 3 Qtr 2 Qtr 1 Year Qtr 4 Qtr 3 Qtr 2 Qtr 1
Net sales $ 2,704.5 $ 675.1 $ 751.9
1,803.2 452.8 501.8 531.6 317.0 1,584.3 365.0 437.6 494.4 287.3
Gross profit 901.3 222.3 250.1 286.1 142.8 773.2 170.0 215.2 258.0 130.0
Selling, general and
administrative expenses 728.2 202.8 183.3 175.0 167.1 654.3 166.8 165.0 166.7 155.8
Other income 6.7 2.7 1.8 1.2 1.0 6.0 1.2 2.3 1.4 1.1
Operating income (loss) 179.8 22.2 68.6
112.3 (23.3) 124.9 4.4 52.5 92.7 (24.7) Interest and other non-operating expenses 31.0 9.1 6.6 7.6 7.7 33.4 7.5 8.2 8.7 9.0 Income tax (benefit) expense 27.5 1.6 13.8 25.6 (13.5) 13.8 (5.6) 9.7 19.3 (9.6)
Net income (loss)
34.6$ 64.7 $ (24.1) Net income (loss) per common share: Basic$ 2.83 $ 0.26 $ 1.11 $ 1.89 $ (0.42) $ 1.89 $ 0.06 $ 0.84 $ 1.57 $ (0.59) Diluted$ 2.75 $ 0.25 $ 1.08 $ 1.83 $ (0.42) $ 1.82 $ 0.06 $ 0.81 $ 1.52 $ (0.59) Adjusted EBITDA(1)$ 260.2 $ 43.9 $ 87.8 $ 132.1 $ (3.6) $ 201.1 $ 22.2 $ 70.5 $ 114.3 $ (5.9) Net sales as a percentage of annual Net sales 100.0 % 25.0 % 27.8 % 30.2 % 17.0 % 100.0 % 22.7 % 27.7 % 31.9 % 17.7 % Gross profit as a percentage of annual Gross profit 100.0 % 24.7 % 27.8 % 31.7 % 15.8 % 100.0 % 22.0 % 27.8 % 33.4 % 16.8 % Adjusted EBITDA as a percentage of annual Adjusted EBITDA 100.0 % 16.9 % 33.7 % 50.8 % (1.4) % 100.0 % 11.0 % 35.1 % 56.8 % (2.9) % 45
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(1) 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), 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 and
termination of finance leases, 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
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alone. Because not all companies use identical calculations, our presentation of
Adjusted EBITDA may not be comparable to other similarly titled measures of
other companies limiting their usefulness as a comparative measure.
The following table presents a reconciliation of Adjusted EBITDA to Net income (loss):
(In millions, unaudited)
2020 Fiscal Year 2019 Fiscal Year
Year Qtr 4 Qtr 3 Qtr 2 Qtr 1 Year Qtr 4 Qtr 3 Qtr 2 Qtr 1
Reported Net income (loss) $ 121.3 $ 11.5
Income tax (benefit) expense 27.5 1.6 13.8 25.6 (13.5) 13.8 (5.6) 9.7 19.3 (9.6)
Interest expense, net 31.0 9.1 6.6 7.6 7.7 33.4 7.5 8.2 8.7 9.0
Depreciation & amortization 67.2 18.2 16.3 16.4 16.3 59.5 14.8 14.6 14.7 15.4
EBITDA 247.0 40.4 84.9 128.7 (7.0) 184.4 19.2 67.1 107.4 (9.3)
Stock-based compensation(a) 10.6 2.7 2.6 2.8 2.5 11.7 2.0 2.5 5.4 1.8
(Gain) loss on sale of
assets(b) (0.4) (0.2) (0.4) 0.1 0.1 0.3 0.1 0.1 - 0.1
Acquisitions and other
adjustments(c) 3.0 1.0 0.7 0.5 0.8 4.7 0.9 0.8 1.5 1.5
Adjusted EBITDA(d) $ 260.2 $ 43.9 $ 87.8 $ 132.1 $ (3.6) $ 201.1 $ 22.2 $ 70.5 $ 114.3 $ (5.9) _____________________________________
(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 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. (d) 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)
2020 Fiscal Year 2019 Fiscal Year
Year Qtr 4 Qtr 3 Qtr 2 Qtr 1 Year Qtr 4 Qtr 3 Qtr 2 Qtr 1
Reported Net sales $ 2,704.5 $ 675.1
Organic sales(a) 2,504.0 612.7 698.3 758.2 434.8 2,292.9 513.6 630.8 735.5 413.0
Acquisition contribution(b) 200.5 62.4 53.6 59.5 25.0 64.6 21.4 22.0 16.9 4.3
Selling Days 256 65 63 64 64 252 61 63 64 64
Organic Daily Sales $ 9.8 $ 9.4 $ 11.1 $ 11.8 $ 6.8 $ 9.1 $ 8.4 $ 10.0 $ 11.5 $ 6.5 _____________________________________
(a) Organic sales equals reported Net sales less Net sales from branches
acquired in 2019 and 2020.
(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 2020 Fiscal
Year. Includes Net sales from branches acquired in 2019 and 2020.
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Liquidity and Capital Resources Our ongoing liquidity needs are expected to be funded by cash on hand, net cash provided by operating activities and, as required, borrowings under the ABL Facility. We expect that cash provided from operations and available capacity under the ABL Facility will provide sufficient funds to operate our business, make expected capital expenditures, and meet our liquidity requirements for the following 12 months, including payment of interest and principal on our debt. There were no revolving credit loans outstanding and our borrowing base capacity under the ABL Facility was$362.3 million as ofJanuary 3, 2021 . As ofDecember 29, 2019 , there were$92.8 million of revolving credit loans outstanding and$263.4 million of borrowing base capacity under the ABL Facility. As ofJanuary 3, 2021 , we had total cash and cash equivalents of$55.2 million , total gross long-term debt of$269.0 million and finance leases of$41.6 million . Working capital was$483.0 million as ofJanuary 3, 2021 , an increase of$28.0 million as compared to$455.0 million as ofDecember 29, 2019 . The change in working capital reflected our decision to increase cash on hand to enhance our financial flexibility in response to the ongoing COVID-19 pandemic and market uncertainty. Capital expenditures of$18.6 million for the 2020 Fiscal Year were 0.7% of Net sales for the year. Capital expenditures have averaged$17.7 million annually from the 2018 Fiscal Year to the 2020 Fiscal Year representing an average of 0.7% of Net sales over this time period. Information about our cash flows, by category, is presented in our statements of cash flows and is summarized below: For the yearDecember 30, 2019 toDecember 31, 2018 toJanuary 3, 2021 December 29, 2019 (in millions)
Net cash provided by (used in):
Operating activities $ 229.4 $ 130.8 Investing activities $ (184.2) $ (91.9) Financing activities $ (9.1) $ (37.3)
Cash flow provided by operating activities
Net cash provided by operating activities for the 2020 Fiscal Year was$229.4 million compared to$130.8 million for the 2019 Fiscal Year. The increase in operating cash flow reflected higher net income and improved working capital turnover. In addition, we deferred the payment of$12.2 million of qualifying employer payroll taxes in accordance with the CARES Act for the 2020 Fiscal Year.
Cash flow used in investing activities
Net cash used in investing activities for the 2020 Fiscal Year was$184.2 million compared to$91.9 million for the 2019 Fiscal Year. The increase was attributable to higher investments in acquisitions during the 2020 Fiscal Year. Capital expenditures of$18.6 million were$0.9 million lower in the 2020 Fiscal Year compared to$19.5 million in the 2019 Fiscal Year due to less investment in material handling equipment used in our branches.
Cash flow used in financing activities
Net cash used in financing activities was$9.1 million for the 2020 Fiscal Year compared to$37.3 million in the 2019 Fiscal Year. The decrease primarily reflected the proceeds from our Common Stock offering partially offset by the repayments of our Long-term debt during the 2020 Fiscal Year. 48 -------------------------------------------------------------------------------- Table of Contents External Financing Term Loan FacilityLandscape Holding and Landscape (collectively, the "Term Loan Borrower") are parties to the Amended and Restated Term Loan Credit Agreement datedApril 29, 2016 , which was amended onNovember 23, 2016 ,May 24, 2017 ,December 12, 2017 , andAugust 14, 2018 , providing for a senior secured term loan facility (the "Term Loan Facility"), with UBS AG,Stamford Branch as administrative agent and collateral agent, and the other financial institutions and lenders from time to time party thereto. In connection with the amendment onAugust 14, 2018 , the final maturity date of the Term Loan Facility was extended toOctober 29, 2024 . In addition, however, the Amended and Restated Term Loan Credit Agreement provides the right for individual lenders to extend the maturity date of their loans upon the request ofLandscape Holding without the consent of any other lender. Subject to certain conditions, without the consent of the then existing lenders (but subject to the receipt of commitments), the Term Loan Facility 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)$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 3.50 to 1.00. The Term Loan Facility is 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 Term Loan Facility. If an event of default occurs, the lenders could elect to declare all amounts outstanding under the Term Loan Facility to be immediately due and payable and enforce their interest in collateral pledged under the agreement. Term Loan Facility Amendments OnAugust 14, 2018 , we amended the Term Loan Facility (the "Fourth Amendment") to, among other things, (i) add an additional credit facility under the Term Loan Facility consisting of additional term loans (the "Tranche E Term Loans") in an aggregate principal amount of$347.4 million and (ii) increase the aggregate principal amount of Tranche E Term Loans under the Term Loan Facility to$447.4 million . Proceeds of the Tranche E Term Loans were used to, among other things, (i) repay in full the Tranche D Term Loans and (ii) repay approximately$96.8 million of borrowings outstanding under the ABL Facility. The Tranche E Term Loans bear interest, atLandscape Holding's option, at either (i) an adjusted LIBOR rate (as defined in the Term Loan Facility) plus an applicable margin equal to 2.75% or (ii) an alternative base rate plus an applicable margin equal to 1.75%. The other terms of the Tranche E Term Loans are generally the same as the terms applicable to the previously existing term loans under the Term Loan Facility, provided that certain terms of the Term Loan Facility were modified by the Fourth Amendment. The interest rate on the outstanding balance was 3.75% as ofJanuary 3, 2021 . OnSeptember 30, 2020 andDecember 31, 2020 , we paid down approximately$138.4 million and$31.0 million , respectively, of the Term Loan Facility 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 written off to expense for the year endedJanuary 3, 2021 . The Term Loan Facility contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants limit the ability ofLandscape 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 ofLandscape 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 ofLandscape Holding's assets; •conduct, transact, or otherwise engage in businesses or operations atLandscape Holding other than certain specified exceptions relating to its role as a holding company of Landscape and its subsidiaries; •enter into certain transactions with affiliates; and •designate subsidiaries as unrestricted subsidiaries. 49 -------------------------------------------------------------------------------- Table of Contents ABL FacilityLandscape Holding and Landscape (collectively, the "ABL Borrower") 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 , and the Sixth Amendment to the Credit Agreement, datedFebruary 1, 2019 , providing for an ABL Facility in the amount of up to$375.0 million with the maturity date ofFebruary 1, 2024 . The ABL Facility is secured by a first lien on the inventory and receivables of the 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. 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 forU.S. denominated borrowings plus an applicable margin ranging from 0.25% to 0.75%. There were no outstanding balances on the ABL Facility as ofJanuary 3, 2021 . The interest rate on outstanding balances was 3.21% as ofDecember 29, 2019 . Additionally, the Borrowers paid a commitment fee of 0.25% and 0.25% on the unfunded amount as ofJanuary 3, 2021 andDecember 29, 2019 , respectively. The ABL Facility contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following: limitations on indebtedness, dividends, distributions and other restricted payments, investments, acquisitions, prepayments or redemptions of indebtedness under the Term Loan Facility, amendments of the Term Loan Facility, transactions with affiliates, asset sales, mergers, consolidations, and sales of all or substantially all assets, liens, negative pledge clauses, changes in fiscal periods, changes in line of business, and hedging transactions. 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 Term Loan Facility, 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 Term Loan Facility 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 Term Loan Facility and the ABL Facility and other indebtedness to incur additional indebtedness that may restrict or prohibit the making of distributions, the payment of dividends, or the making of loans to us. Interest Rate Swaps We are subject to interest rate risk with regard to existing and future issuances of debt. We utilize interest rate swap contracts to reduce our exposure to fluctuations in variable interest rates for future interest payments on existing debt. We entered into various forward-starting interest rate swap contracts to convert the variable interest rate to a fixed interest rate on portions of the borrowings 50
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Table of Contents under the Term Loan Facility. For additional information refer to "Note 8. Long-Term Debt" in the notes to the consolidated financial statements.
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 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.
Contractual Obligations
The following table presents our contractual obligations and commitments as of
January 3, 2021 :
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
(in millions)
Long-term debt, including current
maturities(1) $ 269.0 $ 2.8
55.0 19.2 27.3 8.5 -
Finance leases(3) 44.9 10.6 19.0 13.0 2.3
Operating leases(4) 322.5 61.7 104.4 64.6 91.8
Purchase obligations(5) 153.9 78.4 35.7 5.9 33.9
Total obligations and commitments
_____________________________________
(1) For additional information refer to "Note 8. Long-Term Debt" in the notes to the consolidated financial statements. In addition, the table excludes the debt issuance costs and debt discounts of$5.5 million . (2) The interest on long-term debt includes payments for agent administration fees. Interest payments on debt are calculated for future periods using interest rates in effect as ofJanuary 3, 2021 . Certain of these projected interest payments may differ in the future based on changes in floating interest rates or other factors and events, including our entry into amendments of the Term Loan Facility. The projected interest payments only pertain to obligations and agreements outstanding as ofJanuary 3, 2021 . Refer to "Note 8. Long-Term Debt" in the notes to the consolidated financial statements for further information regarding our debt instruments. (3) Finance leases consist primarily of leases for delivery vehicles. For additional information refer to "Note 6. Leases" in the notes to the consolidated financial statements. (4) Operating leases consist primarily of leases for equipment and real estate including office space, branch locations, and distribution centers. For additional information refer to "Note 6. Leases" in the notes to the consolidated financial statements. (5) Purchase obligations include various commitments with vendors to purchase goods and services, primarily inventory. These purchase obligations are generally cancelable, but we have no intent to cancel and incur a penalty for not meeting the minimum required purchases. In addition, this table excludes purchase obligations of acquisitions made sinceJanuary 3, 2021 . For additional information refer to "Note 10. Commitments and Contingencies" in the notes to the consolidated financial statements.
Critical Accounting Policies and Estimates
Critical accounting policies are those that are both important to the accurate
portrayal of a company's consolidated financial statements and require
subjective or complex judgments, often as a result of the need to make estimates
about the effect of matters that are inherently uncertain.
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In order to prepare financial statements in accordance with GAAP, we make estimates and assumptions that affect the amounts reported in our financial statements and accompanying notes. 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. We have identified the following critical accounting policies and estimates that require us to make the most subjective or complex judgments in order to fairly present our consolidated financial statements.
Revenue Recognition
We recognize revenue when control over a product or service is transferred to a customer. This transfer occurs primarily when goods are picked up by a customer at the branch or when goods are delivered to a customer location. Revenue is measured at the transaction price, which is based on the amount of consideration that we expect to receive in exchange for transferring the promised goods or services to the customer. The transaction price will include estimates of variable consideration, such as returns and provisions for doubtful accounts and sales incentives, to the extent it is probable that a significant reversal of revenue recognized will not occur. In all cases, when a sale is recorded by us, no significant uncertainty exists surrounding the purchaser's obligation to pay. 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. Provisions for returns are estimated and accrued at the time a sale is recognized. We also have entered into agency agreements with certain of our suppliers whereby we operate as a sales agent of those suppliers. The suppliers retain title to their merchandise until it is sold by us and determine the prices at which we can sell their merchandise. We recognize these agency sales on a net basis and record only the product margin as commission revenue within Net sales.
Inventory Valuation
Product inventories represent our largest asset and are recorded at the lower of cost or 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 130,000 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. We monitor our inventory levels by branch and record provisions for excess inventories based on slower moving inventory. We define potential excess inventory as the amount of inventory on hand in excess of the historical usage, excluding items purchased in the last three months. We then review our most recent history of sales and adjustments of such excess inventory and apply our judgment as to forecasted demand and other factors, including liquidation value, to determine the required adjustments to net realizable value. In addition, at the end of each year, we evaluate our inventory at each branch and write off and dispose of obsolete products. Our inventories are generally not susceptible to technological obsolescence.
During the year, we perform periodic cycle counts and write off excess or damaged inventory as needed. Prior to year-end, we conduct a physical inventory and record any necessary additional write-offs.
Acquisitions
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. 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.
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
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
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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.
Intangibles assets with finite useful lives are amortized on an accelerated
method or a straight-line of amortization over their estimated useful lives. An
accelerated amortization method reflecting the pattern in which the asset will
be consumed is utilized if that pattern can be reliably determined. If that
pattern cannot be reliably determined, a straight-line amortization method is
used. 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 relationships are amortized on an accelerated method.
Refer to Note 5 for more information regarding intangible assets
amortization. The value of residual goodwill is not amortized but is tested at
least annually for impairment as described in the following paragraphs.
Goodwill
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 impairment test is a single-step process. The process 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. Each of our reporting unit's fair value has
substantially exceeded its carrying value at each test date.
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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