Note 1. Nature of Business and Significant Accounting Policies
Nature of Business
SiteOne Landscape Supply, Inc. (hereinafter collectively with all its consolidated subsidiaries referred to as the “Company”) is a wholesale distributor of irrigation supplies, fertilizer and control products (e.g., herbicides), hardscapes (including pavers, natural stone, and blocks), landscape accessories, nursery goods, outdoor lighting, and ice melt products to green industry professionals. The Company also provides value-added consultative services to complement its product offering and to help customers operate and grow their businesses. Substantially all of the Company’s sales are to customers located in the United States of America (“U.S.”), with less than two percent of sales and less than four percent of total assets in Canada for all periods presented. As of April 3, 2022, the Company had over 600 branches. Based on the nature of the Company’s products and customers’ business cycles, sales are significantly higher in the second and third quarters of each fiscal year.
COVID-19 Pandemic
As a result of the ongoing novel coronavirus (or “COVID-19”) pandemic, the Company could experience impacts including, but not limited to, charges from potential adjustments of the carrying amounts of receivables and inventory, goodwill and other asset impairment charges, or deferred tax valuation allowances. There has been no material adverse impact to the Company’s consolidated financial statements for the three months ended April 3, 2022; however, the extent to which the COVID-19 pandemic impacts the Company's business, results of operations, and financial condition will depend on future developments, which remain highly uncertain and cannot be predicted, including, but not limited to the duration, spread, and severity, of the COVID-19 pandemic, including the emergence of variant strains of the virus, the effects of the COVID-19 pandemic on the Company's customers, suppliers, vendors, and associates and the remedial actions and stimulus measures adopted by local, state, and federal governments, and to what extent normal economic and operating conditions can resume. Even after the COVID-19 pandemic has subsided, the Company may experience an impact to its business as a result of any economic downturn, recession, or depression that has occurred or may occur in the future.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted which includes measures to assist companies in response to the COVID-19 pandemic. In accordance with the CARES Act, the Company deferred the payment of qualifying employer payroll taxes of $12.2 million during the fiscal year ended January 3, 2021, which are required to be paid over two years, with 50% to be paid by December 31, 2021 and the remainder by December 31, 2022. During the fiscal year ended January 2, 2022, the Company paid $6.1 million of the previously deferred employer payroll taxes. As of April 3, 2022, the Company had $6.1 million of qualifying employer payroll taxes included in Accrued compensation in its Consolidated Balance Sheets.
Basis of Financial Statement Presentation
The accompanying unaudited consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) as applicable to interim financial reporting. In management’s opinion, the unaudited financial information for the interim periods presented includes all adjustments, consisting of normal recurring accruals necessary for a fair statement of the financial position, results of operations, and cash flows. Certain information and disclosures normally included in the Company’s annual financial statements prepared in accordance with U.S. GAAP have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). These interim unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K filed with the SEC for the fiscal year ended January 2, 2022. The interim period unaudited financial results for the three-month periods presented are not necessarily indicative of results to be expected for any other interim period or for the entire year.
Use of Estimates
The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and accompanying notes. Actual results could differ from these estimates.
Fiscal Year
The Company’s fiscal year is a 52- or 53-week period ending on the Sunday nearest to December 31. The fiscal year ending January 1, 2023 and January 2, 2022 both include 52 weeks. Additionally, the Company’s fiscal quarters end on the Sunday nearest to March 31, June 30, and September 30, respectively. The three months ended April 3, 2022 and April 4, 2021 both include 13 weeks.
Principles of Consolidation
The Company’s consolidated financial statements include the assets and liabilities used in operating the Company’s business, including entities in which the Company owns or controls more than 50% of the voting shares. All of the Company’s subsidiaries are wholly owned. All intercompany balances and transactions have been eliminated in consolidation.
Significant Accounting Policies
Except as updated by the Recently Issued and Adopted Accounting Pronouncements section below, a description of the Company’s significant accounting policies is included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 2, 2022.
Recently Issued and Adopted Accounting Pronouncements
In December 2019, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, “Simplifying the Accounting for Income Taxes” (“ASU 2019-12”). The amendments in ASU 2019-12 simplified the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification (“ASC”) Topic 740, Income Taxes. The amendments also improved consistent application of and simplified U.S. GAAP for other areas of ASC Topic 740 by clarifying and amending existing guidance. ASU 2019-12 required adoption on either a prospective or retrospective basis, dependent upon each amendment within this update. The Company adopted ASU 2019-12 when it became effective in the first quarter of fiscal year 2021. The adoption of ASU 2019-12 did not have a material impact on its consolidated financial statements and related disclosures.
Accounting Pronouncements Issued But Not Yet Adopted
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting” (“ASU 2020-04”). The amendments provide optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. In January 2021, the FASB issued ASU 2021-01, “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”) to amend the scope of the guidance in ASU 2020-04 on the facilitation of the effects of reference rate reform on financial reporting. Specifically, the amendments in ASU 2021-01 clarify that “certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting can apply to derivatives that are affected by the discounting transition”. The amendments apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The expedients are applicable to contract modifications made and hedging relationships entered into on or before December 31, 2022. The guidance may be elected over time as reference rate reform activities occur. The Company has elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. The Company continues to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
In October 2021, the FASB issued ASU 2021-08, “Business Combinations (Topic 805): Accounting for Contract Assets and Contact Liabilities from Contracts with Customers” (“ASU 2021-08”). The guidance requires an acquirer in a business combination to recognize and measure contract assets and liabilities in accordance with ASC 2014-09, Revenue from Contracts with Customers (Topic 606) rather than at fair value. The new standard will be effective on a prospective basis for fiscal years beginning after December 15, 2022 and interim periods therein, with early adoption permitted. The Company is currently evaluating the amended guidance and the impact on its consolidated financial statements and related disclosures.
Note 2. Revenue from Contracts with Customers
The following table presents Net sales disaggregated by product category (in millions):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | | April 3, 2022 | | April 4, 2021 | | | | |
Landscaping products(a) | | $ | 587.7 | | | $ | 452.4 | | | | | |
Agronomic and other products(b) | | 217.6 | | | 197.8 | | | | | |
| | $ | 805.3 | | | $ | 650.2 | | | | | |
______________(a) Landscaping products include irrigation supplies, hardscapes, landscape accessories, nursery goods, and outdoor lighting.
(b) Agronomic and other products include fertilizer, control products, ice melt, equipment, and other products.
Remaining Performance Obligations
Remaining performance obligations related to ASC Topic 606 represent the aggregate transaction price allocated to performance obligations with an original contract term greater than one year that are fully or partially unsatisfied at the end of the period. Remaining performance obligations include the outstanding points balance related to the customer loyalty rewards program. The program allows enrolled customers to earn loyalty rewards on purchases to be used on future purchases, to pay for annual customer trips hosted by the Company, or to obtain gift cards to other third-party retailers.
As of April 3, 2022, the aggregate amount of the transaction price allocated to remaining performance obligations was $8.6 million. The Company expects to recognize revenue on the remaining performance obligations over the next 12 months.
Contract Balances
The timing of revenue recognition, billings, and cash collections results in billed accounts receivable, deferred revenue, and billings in excess of revenue recognized in the Company’s Consolidated Balance Sheets.
Contract liabilities
As of April 3, 2022 and January 2, 2022, contract liabilities were $8.6 million and $8.8 million, respectively, and were included within Accrued liabilities in the accompanying Consolidated Balance Sheets. The decrease in the contract liability balance during the three months ended April 3, 2022 is primarily a result of $2.0 million of revenue recognized and the expiration of points related to the customer loyalty rewards program during the period, partially offset by cash payments received in advance of satisfying performance obligations.
Note 3. Acquisitions
From time to time, the Company enters into strategic acquisitions in an effort to better service existing customers and to attract new customers. The Company completed the following acquisitions for an aggregate purchase price of $32.9 million and $37.1 million and deferred contingent consideration of $0.9 million and zero for the three months ended April 3, 2022 and April 4, 2021, respectively.
•In March 2022, the Company acquired all of the outstanding stock of J K Enterprise, Inc., Culpeper Recycling Hauling LLC, Culpeper Recycling Transport LLC, Gateway Home & Garden Center, LLC, JK Enterprise Landscape Supply, Limited Liability Company, Madera Farm Transport, LLC, Saunders LS, LLC, and Tilden Farm Nursery, LLC, and also acquired the assets of Metro Landscape Supply, Limited and Culpeper Recycling, LLC (collectively, “JK Enterprise”). With six locations in Northern Virginia and one location in Maryland, JK Enterprise is a wholesale distributor of bulk and bagged mulches and soil, hardscapes, and nursery products to landscape professionals.
•In December 2021, the Company acquired the assets and assumed the liabilities of Bothe Trucking, Inc., doing business as Seffner Rock and Gravel (“Seffner”). With one location in Tampa, Florida, Seffner is a wholesale distributor of natural stone, bulk aggregates, mulch, soil, and other landscape supplies to landscape professionals.
•In November 2021, the Company acquired the assets and assumed the liabilities of Semco Distributing, Inc. (“Semco”). With four locations in Ohio and Missouri, Semco is a wholesale distributor of natural stone and landscape supplies to landscape professionals.
•In August 2021, the Company acquired the assets and assumed the liabilities of Green Brothers Earth Works and Southern Landscape Supply (“Green Brothers”). With four locations in the greater Atlanta, Georgia market, Green Brothers is a distributor of landscape supplies and hardscapes to landscape professionals.
•In May 2021, the Company acquired all of the outstanding stock of Rodvold Enterprises, Inc., doing business as Rock & Block Hardscape Supply (“Rock & Block”). With two locations in the San Diego, Southern Orange County and Inland Empire markets in California, Rock & Block is a distributor of hardscapes, masonry, and landscape supplies to landscape professionals.
•In April 2021, the Company acquired the assets and assumed the liabilities of Melrose Supply & Sales Corp (“Melrose”). With six locations throughout Florida, Melrose is a distributor of irrigation, lighting, and drainage products to landscape professionals.
•In April 2021, the Company acquired all of the outstanding stock of Timberwall Landscape & Masonry Products, Inc. (“Timberwall”). With one location in Victoria, Minnesota, Timberwall is a distributor of hardscapes and landscape supplies to landscape professionals.
•In April 2021, the Company acquired the assets and assumed the liabilities of Arizona Stone & Architectural Products and Solstice Stone (“Arizona Stone and Solstice”). With seven locations throughout Arizona and two locations in the Las Vegas, Nevada market, Arizona Stone and Solstice is a distributor of hardscapes, natural stone, and landscape supplies to landscape professionals.
•In February 2021, the Company acquired the assets and assumed the liabilities of Lucky Landscape Supply, LLC (“Lucky Landscape Supply”). With one location in the greater Houston, Texas market, Lucky Landscape Supply is a distributor of nursery products to landscape professionals.
These transactions were accounted for by the acquisition method, and accordingly, the results of operations were included in the Company’s consolidated financial statements from their respective acquisition dates.
Note 4. Fair Value Measurement and Interest Rate Swaps
Fair value is defined as an exit price, representing an amount that would be received to sell an asset or the amount paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The inputs used to measure fair value are prioritized into the following three-tiered value hierarchy:
•Level 1: Unadjusted quoted prices in active markets for identical assets or liabilities.
•Level 2: Unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities in markets that are not active or inputs, other than quoted prices in active markets, which are observable either directly or indirectly.
•Level 3: Unobservable inputs for which there is little or no market data.
The hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The classification of fair value measurement within the hierarchy is based upon the lowest level of input that is significant to the measurement.
The Company’s financial instruments consist of cash and cash equivalents, accounts receivables, forward-starting interest rate swap contracts, interest rate swap contracts, and long-term debt. The variable interest rate on the long-term debt is reflective of current market borrowing rates. As such, the Company has determined that the carrying value of these financial instruments approximates fair value.
Interest Rate Swaps
The Company is subject to interest rate risk with regard to existing and future issuances of debt. The Company utilizes interest rate swap contracts to reduce its exposure to fluctuations in variable interest rates for future interest payments on existing debt. The Company is party to a forward-starting interest rate swap contract and interest rate swap contracts to convert the variable interest rate to a fixed interest rate on the borrowings under the term loans.
The Company recognizes any differences between the variable interest rate payments and the fixed interest rate settlements with the swap counterparties as an adjustment to interest expense over the life of the swaps. The Company has designated these swaps as cash flow hedges and records the estimated fair value of the swaps to Accumulated other comprehensive income (loss) (“AOCI”) on its Consolidated Balance Sheets. If it becomes probable the forecasted transactions will not occur, the hedge relationship will be de-designated and amounts accumulated in AOCI will be reclassified to Interest and other non-operating expenses, net in the current period.
On March 23, 2021, the Company restructured the interest rate swap positions of its Forward-starting interest rate swaps 4, 5, and 6 to extend the terms to maturity using a strategy commonly referred to as a “blend and extend” in order to continue to manage its exposure to interest rate risk on borrowings under the term loans. Refer to “Note 9. Long-Term Debt” for additional information regarding the Company’s term loans. As a result of these transactions, all existing agreements for Forward-starting interest rate swaps 4, 5, and 6 were amended and restructured as new agreements designated by the Company as Interest rate swaps 7, 8, and 9 with the same counterparties. Each of these amended Interest rate swap agreements mature on March 23, 2025 and blended the liability positions of the Forward-starting interest rate swaps into the Interest rate swaps and extended the term of the hedged positions. The Interest rate swaps are indexed to three-month LIBOR and net settled on a quarterly basis with the counterparties for the difference between the fixed rates and the variable rates based upon three-month LIBOR (subject to a floor of 0.50%) as applied to the notional amounts of each Interest rate swap. Due to the size of the initial net investment amounts resulting from the termination values of the Forward-starting interest rate swaps that were rolled into the Interest rate swap arrangements, Interest rate swaps 7, 8, and 9 were determined to be hybrid debt instruments containing embedded at-market interest rate swap derivatives. As a result, the Company bifurcated the derivative instruments from the debt host instruments for accounting purposes. Refer to “Note 9. Long-Term Debt” for additional information regarding the Company’s hybrid debt instruments. The Company also de-designated the hedging relationships for Forward-starting interest rate swaps 1 and 2 on March 23, 2021. The swaps were not terminated upon de-designation; however, hedge accounting was discontinued since these swaps were no longer designated as hedging instruments. The related accumulated losses for these swaps remained in AOCI upon de-designation and were recognized in earnings at the time the hedged interest payments impacted earnings.
The following table provides additional details regarding the swap contracts designated as hedging instruments as of April 3, 2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives designated as hedging instruments | | Inception Date | | Effective Date | | Maturity Date | | Notional Amount
(in millions) | | Fixed Interest Rate | | Type of Hedge |
| Forward-starting interest rate swap 3 | | December 17, 2018 | | July 14, 2020 | | January 14, 2024 | | $ | 34.0 | | | 2.93450 | % | | Cash flow |
| Interest rate swap 7 | | March 23, 2021 | | March 23, 2021 | | March 23, 2025 | | $ | 50.0 | | | 0.99500 | % | | Cash flow |
| Interest rate swap 8 | | March 23, 2021 | | March 23, 2021 | | March 23, 2025 | | $ | 90.0 | | | 0.98600 | % | | Cash flow |
| Interest rate swap 9 | | March 23, 2021 | | March 23, 2021 | | March 23, 2025 | | $ | 70.0 | | | 0.99784 | % | | Cash flow |
The following table provides additional details regarding the swap contracts not designated as hedging instruments, which were terminated upon maturity on June 11, 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Derivatives not designated as hedging instruments | | Inception Date | | Effective Date | | Maturity Date | | Notional Amount
(in millions) | | Fixed Interest Rate |
| Forward-starting interest rate swap 1 | | June 30, 2017 | | March 11, 2019 | | June 11, 2021 | | $ | 58.0 | | | 2.13450 | % |
| Forward-starting interest rate swap 2 | | June 30, 2017 | | March 11, 2019 | | June 11, 2021 | | $ | 116.0 | | | 2.15100 | % |
The Company recognizes the unrealized gains or unrealized losses for interest rate swap contracts as either assets or liabilities at fair value on its Consolidated Balance Sheets. The interest rate swap contracts are subject to master netting arrangements. The Company has elected not to offset the fair value of assets with the fair value of liabilities related to these contracts. The following tables summarize the fair value of the derivative instruments and the respective lines in which they were recorded in the Consolidated Balance Sheets as of April 3, 2022 and January 2, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Assets |
| | April 3, 2022 | | January 2, 2022 |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Derivatives designated as hedging instruments | | | | | | | | |
| Interest rate contracts | | Prepaid expenses and other current assets | | $ | 2.0 | | | Prepaid expenses and other current assets | | $ | — | |
| | Other assets | | 8.5 | | | Other assets | | 2.5 | |
| Total derivative assets | | | | $ | 10.5 | | | | | $ | 2.5 | |
| | | | | | | | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Derivative Liabilities |
| | April 3, 2022 | | January 2, 2022 |
| | Balance Sheet Location | | Fair Value | | Balance Sheet Location | | Fair Value |
| Derivatives designated as hedging instruments | | | | | | | | |
| Interest rate contracts | | Accrued liabilities | | $ | 0.3 | | | Accrued liabilities | | $ | 1.2 | |
| | Other long-term liabilities | | — | | | Other long-term liabilities | | 0.6 | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Total derivative liabilities | | | | $ | 0.3 | | | | | $ | 1.8 | |
For determining the fair value of the interest rate swap contracts, the Company uses significant observable market data or assumptions (Level 2 inputs) that market participants would use in pricing similar assets or liabilities, including assumptions about counterparty risk. The fair value estimates reflect an income approach based on the terms of the interest rate swap contracts and inputs corroborated by observable market data including interest rate curves.
For the three months ended April 3, 2022 and April 4, 2021, there was no ineffectiveness recognized in earnings. The after-tax amount of unrealized loss on derivative instruments included in Accumulated other comprehensive loss related to the interest rate swap contracts expected to be reclassified to earnings during the next twelve months was $0.5 million as of April 3, 2022. The ultimate amount recognized will vary based on fluctuations of interest rates through the maturity dates.
The table below details pre-tax amounts in AOCI and gain (loss) reclassified into income for derivatives designated as cash flow hedges for the three months ended April 3, 2022 and April 4, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | April 3, 2022 | | April 4, 2021 |
| Derivatives in Cash Flow Hedging Relationships | | Gain (Loss) Recorded in OCI | | Classification of Gain (Loss) Reclassified from AOCI into Income | | Gain (Loss) Reclassified from AOCI into Income | | Gain (Loss) Recorded in OCI | | Classification of Gain (Loss) Reclassified from AOCI into Income | | Gain (Loss) Reclassified from AOCI into Income |
| Interest rate contracts | | $ | 9.1 | | | Interest and other non-operating expenses, net | | $ | (0.4) | | | $ | 1.2 | | | Interest and other non-operating expenses, net | | $ | (0.9) | |
The table below details gain (loss) recorded in income and reclassified from AOCI into income for derivatives not designated as hedging instruments for the three months ended April 3, 2022 and April 4, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended |
| | | | Gain (Loss) Reclassified from AOCI into Income | | Gain (Loss) Recognized in Income |
| Derivatives not designated as hedging instruments | | Location of Gain (Loss) | | April 3, 2022 | | April 4, 2021 | | April 3, 2022 | | April 4, 2021 |
| Interest rate contracts | | Interest and other non-operating expenses, net | | $ | (0.7) | | | $ | (0.6) | | | $ | — | | | $ | 0.4 | |
Failure of the swap counterparties to make payments would result in the loss of any potential benefit to the Company under the swap agreements. In this case, the Company would still be obligated to pay the variable interest payments underlying the debt agreements. Additionally, failure of the swap counterparties would not eliminate the Company’s obligation to continue to make payments under the existing swap agreements if it continues to be in a net pay position.
Note 5. Property and Equipment, Net
Property and equipment consisted of the following (in millions):
| | | | | | | | | | | | | | |
| | April 3, 2022 | | January 2, 2022 |
| Land | | $ | 12.2 | | | $ | 12.2 | |
| Buildings and leasehold improvements: | | | | |
| Buildings | | 7.8 | | | 7.8 | |
| Leasehold improvements | | 39.8 | | | 39.5 | |
| Branch equipment | | 85.9 | | | 81.0 | |
| Office furniture and fixtures and vehicles: | | | | |
| Office furniture and fixtures | | 25.5 | | | 25.5 | |
| Vehicles | | 34.0 | | | 33.6 | |
| Finance lease right-of-use assets | | 79.4 | | | 77.5 | |
| Tooling | | 0.1 | | | 0.1 | |
| Construction in progress | | 9.4 | | | 7.3 | |
| Total property and equipment, gross | | 294.1 | | | 284.5 | |
| Less: accumulated depreciation and amortization | | 142.1 | | | 133.0 | |
| Total property and equipment, net | | $ | 152.0 | | | $ | 151.5 | |
Amortization of finance right-of-use (“ROU”) assets and depreciation expense was $10.0 million and $8.5 million for the three months ended April 3, 2022 and April 4, 2021, respectively.
Capitalized software has an estimated useful life of three years. The amounts of total capitalized software costs, including purchased and internally developed software, included in Other assets at April 3, 2022 and January 2, 2022 were $13.1 million and $12.8 million, less accumulated amortization of $11.5 million and $11.1 million, respectively. Amortization of these software costs was $0.4 million and $0.4 million for the three months ended April 3, 2022 and April 4, 2021, respectively.
Note 6. Goodwill and Intangible Assets, Net
Goodwill
The changes in the carrying amount of goodwill were as follows (in millions):
| | | | | | | | |
| | January 2, 2022 |
| | to April 3, 2022 |
| Beginning balance | | $ | 311.1 | |
Goodwill acquired during the period(a) | | 16.0 | |
| Goodwill adjusted during the period | | (1.2) | |
| Ending balance | | $ | 325.9 | |
______________
(a) Additions to goodwill during the three months ended April 3, 2022 related to the acquisition completed in 2022 as described in Note 3.
Intangible Assets
Intangible assets include customer relationships as well as trademarks and other intangibles acquired through acquisitions. Intangible assets with finite useful lives are amortized on an accelerated method or a straight-line method over their estimated useful lives. An accelerated amortization method reflecting the pattern in which the asset will be consumed is utilized if that pattern can be reliably determined. If that pattern cannot be reliably determined, a straight-line amortization method is used. The Company considers the period of expected cash flows and underlying data used to measure the fair value of the intangible assets when selecting a useful life.
During the three months ended April 3, 2022, the Company recorded $16.4 million of intangible assets, including $13.9 million in Customer relationship intangibles and $2.5 million in Trademarks and other intangibles. The change in Customer relationship intangibles and Trademarks and other intangibles included additions of $12.8 million and $1.1 million, respectively, as a result of the acquisition completed in 2022 as described in Note 3. Updates of purchase price allocations related to prior year acquisitions during the allowable measurement period and currency translation adjustments of Customer relationship intangibles and Trademarks and other intangibles were $1.1 million and $1.4 million, respectively. During the three months ended April 4, 2021, the Company recorded $21.7 million of intangible assets, including $19.3 million in Customer relationship intangibles and $2.4 million in Trademarks and other intangibles. The change in Customer relationship intangibles and Trademarks and other intangibles included additions of $19.1 million and $2.4 million, respectively, as a result of the acquisitions completed in 2021 as described in Note 3. Adjustments to purchase price allocations related to prior year acquisitions during the allowable measurement period of Customer relationship intangibles and Trademarks and other intangibles were $0.2 million and zero, respectively.
The Customer relationship intangible assets will be amortized over a weighted-average period of approximately 20 years. The trademarks and other intangible assets recorded will be amortized over a weighted-average period of approximately five years.
The following table summarizes the components of intangible assets (in millions, except weighted average remaining useful life):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | April 3, 2022 | | January 2, 2022 |
| | Weighted Average Remaining Useful Life | | Amount | | Accumulated Amortization | | Net | | Amount | | Accumulated Amortization | | Net |
| Customer relationships | | 17.0 years | | $ | 408.7 | | | $ | 207.2 | | | $ | 201.5 | | | $ | 394.8 | | | $ | 197.3 | | | $ | 197.5 | |
| Trademarks and other | | 3.7 years | | 36.6 | | | 19.1 | | | 17.5 | | | 34.1 | | | 17.7 | | | 16.4 | |
| Total intangibles | | | | $ | 445.3 | | | $ | 226.3 | | | $ | 219.0 | | | $ | 428.9 | | | $ | 215.0 | | | $ | 213.9 | |
Amortization expense for intangible assets was $11.3 million and $10.5 million for the three months ended April 3, 2022 and April 4, 2021, respectively.
Total future amortization estimated as of April 3, 2022 is as follows (in millions):
| | | | | |
| Fiscal year ending: | |
| 2022 (remainder) | $ | 33.3 | |
| 2023 | 37.2 | |
| 2024 | 30.1 | |
| 2025 | 24.4 | |
| 2026 | 19.5 | |
| Thereafter | 74.5 | |
| Total future amortization | $ | 219.0 | |
| |
Note 7. Leases
The Company determines if an arrangement is a lease at inception of a contract. The Company leases equipment and real estate including office space, branch locations, and distribution centers under operating leases. Finance lease obligations consist primarily of the Company’s vehicle fleet. Most leases include one or more options to renew, with renewal terms that can extend the lease term from one year to five years or more. The exercise of lease renewal options is at the Company’s sole discretion. Certain leases include options to purchase the leased property. ROU assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. ROU assets and liabilities are recognized at the commencement date based on the net present value of fixed lease payments over the lease term. As most of the Company's operating leases do not provide an implicit interest rate, the Company uses an incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. Finance lease agreements generally include an interest rate that is used to determine the present value of future lease payments. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or lease liabilities and are expensed as incurred and recorded as variable lease expense. Leases with an initial term of 12 months or less are not recorded in the Consolidated Balance Sheets.
The components of lease expense were as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Three Months Ended | | |
| Lease Cost | | Classification | | April 3, 2022 | | April 4, 2021 | | | | |
| Finance lease cost: | | | | | | | | | | |
| Amortization of right-of-use assets | | Selling, general and administrative expenses | | $ | 3.0 | | | $ | 2.6 | | | | | |
| Interest on lease liabilities | | Interest and other non-operating expenses, net | | 0.4 | | | 0.4 | | | | | |
| Operating lease cost | | Cost of goods sold | | 1.5 | | | 0.7 | | | | | |
| Operating lease cost | | Selling, general and administrative expenses | | 18.4 | | | 16.7 | | | | | |
| Short-term lease cost | | Selling, general and administrative expenses | | 0.5 | | | 0.5 | | | | | |
| Variable lease cost | | Selling, general and administrative expenses | | 0.2 | | | 0.2 | | | | | |
| Sublease income | | Selling, general and administrative expenses | | (0.3) | | | (0.3) | | | | | |
| Total lease cost | | | | $ | 23.7 | | | $ | 20.8 | | | | | |
Supplemental cash flow information related to leases was as follows (in millions):
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| Other Information | | April 3, 2022 | | April 4, 2021 | | | | |
| Cash paid for amounts included in the measurements of lease liabilities: | | | | | | | | |
| Operating cash flows from finance leases | | $ | 0.4 | | | $ | 0.4 | | | | | |
| Operating cash flows from operating leases | | $ | 19.3 | | | $ | 16.9 | | | | | |
| Financing cash flows from finance leases | | $ | 2.9 | | | $ | 2.4 | | | | | |
| Right-of-use assets obtained in exchange for new lease liabilities: | | | | | | | | |
| Finance leases | | $ | 1.9 | | | $ | 2.0 | | | | | |
| Operating leases | | $ | 26.0 | | | $ | 12.5 | | | | | |
The aggregate future lease payments for operating and finance leases as of April 3, 2022 were as follows (in millions):
| | | | | | | | | | | | | | |
| Maturity of Lease Liabilities | | Operating Leases | | Finance Leases |
| Fiscal year: | | | | |
| 2022 (remainder) | | $ | 52.5 | | | $ | 9.5 | |
| 2023 | | 69.5 | | | 12.2 | |
| 2024 | | 58.3 | | | 11.0 | |
| 2025 | | 46.9 | | | 8.0 | |
| 2026 | | 35.3 | | | 5.2 | |
| 2027 | | 25.2 | | | 1.8 | |
| Thereafter | | 86.4 | | | 0.2 | |
| Total lease payments | | 374.1 | | | 47.9 | |
| Less: interest | | 58.8 | | | 3.4 | |
| Present value of lease liabilities | | $ | 315.3 | | | $ | 44.5 | |
Average lease terms and discount rates were as follows:
| | | | | | | | |
| Lease Term and Discount Rate | | April 3, 2022 |
| Weighted-average remaining lease term: | | |
| Finance leases | | 4.2 years |
| Operating leases | | 6.8 years |
| Weighted-average discount rate: | | |
| Finance leases | | 3.7 | % |
| Operating leases | | 4.7 | % |
Note 8. Employee Benefit and Stock Incentive Plans
The Company sponsors a defined contribution benefit plan for substantially all of its employees. Company contributions to the plan are based on a percentage of employee wages. The Company’s contributions to the plan were $4.4 million for the three months ended April 3, 2022, and $3.3 million for the three months ended April 4, 2021.
The Company’s Omnibus Equity Incentive Plan (the “2016 Plan”), which became effective on April 28, 2016, provided for the grant of awards in the form of stock options that may be either incentive stock options or non-qualified stock options; stock purchase rights; restricted stock; restricted stock units (“RSUs”); performance shares; performance stock units (“PSUs”); stock appreciation rights (“SARs”); dividend equivalents; deferred stock units (“DSUs”); or other stock-based awards. The Company also has outstanding stock-based awards under its stock incentive plan (“Stock Incentive Plan”), which commenced in May 2014 and terminated upon adoption of the 2016 Plan. However, awards previously granted under the Stock Incentive Plan were unaffected by the termination of the Stock Incentive Plan.
At the 2020 Annual Meeting of Stockholders of the Company on May 13, 2020 (the “Effective Date”), the Company’s stockholders approved the Company’s 2020 Omnibus Equity Incentive Plan (the “2020 Plan”), which replaced the 2016 Plan. The 2020 Plan reserves 2,155,280 shares of the Company’s common stock for issuance under the 2020 Plan, consisting of 1,600,000 new shares plus 555,280 shares that were previously authorized for issuance under the 2016 Plan and that, as of the Effective Date, were not subject to outstanding awards. No further grants of awards will be made under the 2016 Plan; however, outstanding awards granted under the 2016 Plan will remain outstanding and will continue to be administered in accordance with the terms of the 2016 Plan and the applicable award agreements. Any shares covered by an award, or any portion thereof, granted under the 2020 Plan, 2016 Plan, or Stock Incentive Plan that terminates, is forfeited, is repurchased, expires, or lapses for any reason will again be available for the grant of awards. Additionally, any shares tendered or withheld to satisfy the grant or exercise price or tax withholding obligations pursuant to any award under the 2020 Plan, 2016 Plan, or Stock Incentive Plan will again be available for issuance. The aggregate number of shares that may be issued under the 2020 Plan is 2,155,280 shares of which 1,897,382 remain available as of April 3, 2022.
The stock options and RSUs granted to employees vest over a four-year period at 25% per year. The DSUs granted to non-employee directors vest immediately but settlement is deferred until termination of the director’s service on the board or until a change of control of the Company. Stock options and RSUs expire ten years after the date of grant. PSUs granted to employees vest upon the achievement of the performance conditions, over a three-year period, measured by the growth of the Company’s pre-tax income plus amortization relative to a select peer group, subject to adjustment based upon the application of a return on invested capital modifier.
The fair value of each stock option is estimated on the date of grant using the Black-Scholes options pricing model. The DSUs, RSUs, and PSUs have grant date fair values equal to the fair market value of the underlying stock on the date of grant. Share-based compensation expense is recognized in the financial statements based upon fair value on the date of grant. The compensation cost for stock options and RSUs is recognized on a straight-line basis over the requisite vesting period. The Company recognizes compensation expense for PSUs when it is probable that the performance conditions will be achieved. The Company reassesses the probability of vesting at each reporting period and adjusts its compensation cost accordingly.
A summary of stock-based compensation activities during the three months ended April 3, 2022 was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Stock Options | | RSUs | | DSUs | | PSUs |
| Outstanding as of January 2, 2022 | 1,193.3 | | | 186.6 | | | 45.5 | | | 60.5 | |
| Granted | 65.8 | | | 72.5 | | | 0.1 | | | 20.6 | |
| Exercised/Vested/Settled | (95.5) | | | (60.4) | | | — | | | — | |
| Expired or forfeited | (2.6) | | | (2.5) | | | — | | | (0.2) | |
| Outstanding as of April 3, 2022 | 1,161.0 | | | 196.2 | | | 45.6 | | | 80.9 | |
The weighted average grant date fair value of awards granted during the three months ended April 3, 2022 was as follows:
| | | | | |
| Weighted Average
Grant Date Fair Value |
| Stock options | $ | 57.47 | |
| RSUs | $ | 179.71 | |
| DSUs | $ | 161.69 | |
| PSUs | $ | 179.40 | |
A summary of stock-based compensation expenses recognized during the periods was as follows (in millions):
| | | | | | | | | | | | | | | |
| Three Months Ended | | |
| April 3, 2022 | | April 4, 2021 | | | | |
| Stock options | $ | 0.9 | | | $ | 1.1 | | | | | |
| RSUs | 2.1 | | | 1.5 | | | | | |
| DSUs | 0.1 | | | 0.1 | | | | | |
| PSUs | 0.6 | | | 0.4 | | | | | |
| Total stock-based compensation | $ | 3.7 | | | $ | 3.1 | | | | | |
A summary of unrecognized stock-based compensation expense as of April 3, 2022 was as follows:
| | | | | | | | | | | |
| Unrecognized Compensation
(in millions) | | Weighted Average
Remaining Period |
| Stock options | $ | 8.3 | | | 2.9 years |
| RSUs | $ | 27.0 | | | 3.2 years |
| DSUs | $ | 0.1 | | | 0.8 years |
| PSUs | $ | 5.7 | | | 2.3 years |
Note 9. Long-Term Debt
Long-term debt was as follows (in millions):
| | | | | | | | | | | | | | |
| | April 3, 2022 | | January 2, 2022 |
| ABL facility | | $ | 162.7 | | | $ | — | |
| Term loans | | 254.8 | | | 255.4 | |
| Hybrid debt instruments | | 4.4 | | | 4.8 | |
| Total gross long-term debt | | 421.9 | | | 260.2 | |
| Less: unamortized debt issuance costs and discounts on debt | | (4.7) | | | (5.0) | |
| Total debt | | $ | 417.2 | | | $ | 255.2 | |
| Less: current portion | | (4.0) | | | (4.0) | |
| Total long-term debt | | $ | 413.2 | | | $ | 251.2 | |
ABL Facility
SiteOne Landscape Supply Holding, LLC (“Landscape Holding”) and SiteOne Landscape Supply, LLC (“Landscape” and together with Landscape Holding, the “Borrowers”), each an indirect wholly-owned subsidiary of the Company, are parties to the credit agreement dated December 23, 2013 (as amended by the First Amendment to the Credit Agreement, dated June 13, 2014, the Second Amendment to the Credit Agreement, dated January 26, 2015, the Third Amendment to the Credit Agreement, dated February 13, 2015, the Fourth Amendment to the Credit Agreement, dated October 20, 2015, the Omnibus Amendment to the Credit Agreement, dated May 24, 2017, and the Sixth Amendment to the Credit Agreement, dated February 1, 2019, the “ABL Credit Agreement”) providing for an asset-based credit facility (the “ABL Facility”) of up to $375.0 million, subject to borrowing base availability. The ABL Facility is guaranteed by SiteOne Landscape Supply Bidco, Inc. (“Bidco”), an indirect wholly-owned subsidiary of the Company, and each direct and indirect wholly-owned U.S. restricted subsidiary of Landscape. The availability under the ABL Facility was $198.4 million and $364.1 million as of April 3, 2022 and January 2, 2022, respectively. Availability is determined using borrowing base calculations of eligible inventory and receivable balances less the current outstanding ABL Facility and letters of credit balances.
On February 1, 2019, the Company entered into the Sixth Amendment to Credit Agreement, to among other things, (i) extend the termination date to February 1, 2024, (ii) increase the aggregate principal amount of the commitments under the ABL Credit Agreement to $375.0 million pursuant to an increase via use of the existing “incremental” commitment increase provisions of the ABL Credit Agreement, and (iii) amend certain terms of the ABL Credit Agreement and Guarantee and Collateral Agreement.
The interest rate on the ABL Facility is LIBOR plus an applicable margin ranging from 1.25% to 1.75% or an alternate base rate for U.S. denominated borrowings plus an applicable margin ranging from 0.25% to 0.75%. The interest rate on outstanding balances under the ABL Facility was 3.75% as of April 3, 2022. There were no outstanding balances under the ABL Facility as of January 2, 2022. Additionally, the Borrowers paid a commitment fee of 0.25% on the unfunded amount as of April 3, 2022 and January 2, 2022.
The ABL Facility is subject to mandatory prepayments if the outstanding loans and letters of credit exceed either the aggregate revolving commitments or the current borrowing base, in an amount equal to such excess. Additionally, the ABL Facility is subject to various covenants, including incurrence covenants that require the Company to meet minimum financial ratios, and additional borrowings and other corporate transactions may be limited by failure to meet these financial ratios. Failure to meet any of these covenants could result in an event of default under these agreements. If an event of default occurs, the lenders could elect to declare all amounts outstanding under these agreements to be immediately due and payable, enforce their interest in collateral pledged under the agreement, or restrict the Borrowers’ ability to obtain additional borrowings under these agreements. The ABL Facility is secured by a first lien security interest over inventory and receivables and a second lien security interest over all other assets pledged as collateral.
The ABL Facility contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants consist of the following: financial condition, fundamental changes, dividends and distributions, acquisitions, dispositions of collateral, payments and modifications of restricted indebtedness, negative pledge clauses, changes in line of business, currency, commodity and other hedging transactions, transactions with affiliates, investments, indebtedness, and liens. The negative covenants are subject to the customary exceptions and also permit the payment of dividends and distributions, investments, permitted acquisitions and payments or redemptions of junior indebtedness upon satisfaction of a payment condition. As of April 3, 2022, the Company was in compliance with all of the ABL Facility covenants.
Term Loans
The Borrowers entered into a syndicated senior term loan facility dated April 29, 2016, which was amended on November 23, 2016, May 24, 2017, December 12, 2017, and August 14, 2018. On March 23, 2021, the Borrowers entered into the Fifth Amendment to the Amended and Restated Credit Agreement (the “Fifth Amendment”), in order to, among other things, incur $325.0 million of term loans (the “New Term Loans”) which were used in part to prepay all of the existing Tranche E Term Loans. The New Term Loans are guaranteed by Bidco and each direct and indirect wholly-owned U.S. restricted subsidiary of Landscape. The New Term Loans are secured by a second lien security interest over inventory and receivables and a first lien security interest over all other assets pledged as collateral. The New Term Loans will mature on March 23, 2028.
Amendments of the Term Loans
The Company through its subsidiaries entered into the Fifth Amendment, dated as of March 23, 2021, by and among the Borrowers, JPMorgan Chase Bank, N.A. (the “New Agent”), as administrative agent and collateral agent, the several banks and other financial institutions party thereto and certain other parties party thereto from time to time. The Fifth Amendment amends and restates the Amended and Restated Credit Agreement, dated as of April 29, 2016, among the Borrowers, the lenders from time to time party thereto and UBS AG, Stamford Branch (the “Existing Agent”) as administrative agent and collateral agent (as amended prior to March 23, 2021, the “Existing Credit Agreement” and, as so amended and restated pursuant to the Fifth Amendment, the “Second Amended and Restated Credit Agreement”) in order to, among other things, (i) incur $325.0 million of term loans, (ii) replace the Existing Agent as administrative and collateral agent with the New Agent, and (iii) make such other changes in the Second Amended and Restated Credit Agreement as agreed among the Borrowers and the lenders. Proceeds of the New Term Loans were used, among other things, (i) to repay in full the Tranche E Term Loans outstanding under the Existing Credit Agreement immediately prior to effectiveness of the Fifth Amendment, (ii) to pay fees and expenses related to the Fifth Amendment and the Second Amended and Restated Credit Agreement, and (iii) for working capital and other general corporate purposes.
The New Term Loans bear interest, at Landscape Holding’s option, at either (i) an adjusted LIBOR rate plus an applicable margin equal to 2.00% (with a LIBOR floor of 0.50%) or (ii) an alternative base rate plus an applicable margin equal to 1.00%. Voluntary prepayments of the New Term Loans are permitted at any time, in minimum principal amounts, without premium or penalty, subject to a 1.00% premium payable in connection with certain repricing transactions within the first twelve months after the date of the initial funding of the New Term Loans. The interest rate on the outstanding balance of the New Terms Loans was 2.50% at April 3, 2022.
The Second Amended and Restated Credit Agreement contains customary representations and warranties and customary affirmative and negative covenants. The negative covenants are limited to the following: limitations on indebtedness, restricted payments, restrictive agreements, sales of assets and subsidiary stock, transactions with affiliates, liens, fundamental changes, amendments, and lines of business. The negative covenants are subject to exceptions customary for transactions of the type.
The New Term Loans are payable in consecutive quarterly installments equal to 0.25% of the aggregate initial principal amount of the New Term Loans until the maturity date. In addition, the New Term Loans are subject to annual mandatory prepayments in an amount equal to 50% of excess cash flow, as defined in the Second Amended and Restated Credit Agreement for the applicable fiscal year if 50% of excess cash flow exceeds $15.0 million and the secured leverage ratio is greater than 3.00 to 1.00. There are also mandatory prepayments with the proceeds of certain asset sales and from the issuance of debt not permitted to be incurred under the Second Amended and Restated Credit Agreement. As of April 3, 2022, the Company was in compliance with all of the Second Amended and Restated Credit Agreement covenants.
During the three months ended April 3, 2022, the Company incurred total interest expense of $4.3 million. Of these totals, $3.6 million related to interest on the ABL Facility and the term loans. The debt issuance costs and discounts are amortized as interest expense over the life of the debt. Amortization expense related to debt issuance costs and discounts was $0.3 million for the three months ended April 3, 2022. The remaining $0.4 million of interest expense is primarily related to interest attributable to finance leases for the three months ended April 3, 2022.
During the three months ended April 4, 2021, the Company incurred total interest expense of $5.5 million. Of this total, $3.9 million related to interest on the ABL Facility and the term loans. The debt issuance costs and discounts are amortized as interest expense over the life of the debt. As a result of the Fifth Amendment, unamortized debt issuance costs and discounts in the amount of $0.8 million were written off to expense and new debt fees and issuance costs of $2.4 million were capitalized during the three months ended April 4, 2021, in accordance with ASC 470-50, “Debt Modifications and Extinguishments”. No gain or loss was recorded as it related to all participating lenders. Amortization expense related to debt issuance costs and discounts was $0.4 million for the three months ended April 4, 2021. The remaining $0.4 million of interest expense primarily related to interest attributable to finance leases for the three months ended April 4, 2021.
Hybrid Debt Instruments
As a result of the determination that the Interest rate swap arrangements executed on March 23, 2021 are hybrid debt instruments containing embedded at-market swap derivatives, the Company reclassified $5.9 million from Accrued liabilities and Other long-term liabilities to long-term debt with $1.5 million classified as Long-term debt, current portion and $4.4 million classified as Long-term debt, less current portion on its Consolidated Balance Sheets during the first quarter of 2021. As of April 3, 2022, approximately $1.5 million was classified as Long-term debt, current portion and approximately $2.9 million was classified as Long-term debt, less current portion on the Company’s Consolidated Balance Sheets. Refer to “Note 4. Fair Value Measurement and Interest Rate Swaps” for additional information regarding interest rate swaps and hybrid debt instruments.
Note 10. Income Taxes
The Company’s effective tax rate was approximately 12.5% for the three months ended April 3, 2022 and approximately (51.0)% for the three months ended April 4, 2021. The increase in the effective 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 Company’s Consolidated Statements of Operations. The Company recognized excess tax benefits of $5.0 million for the three months ended April 3, 2022, and $3.7 million for the three months ended April 4, 2021. The Company’s effective tax rate differs from its statutory rate based on a variety of factors, including overall profitability, the geographical mix of income taxes, and the related tax rates in the jurisdictions in which it operates.
The Company provides a valuation allowance against deferred tax assets when it is more likely than not that some portion or all of the deferred tax assets will not be realized. The assessment considers all available positive and negative evidence and is measured quarterly. The Company maintains a valuation allowance against certain state deferred tax assets where sufficient negative evidence exists to require a valuation allowance. During the three months ended April 3, 2022 and April 4, 2021, the Company recorded no material increases or decreases to the valuation allowance against deferred tax assets.
Note 11. Commitments and Contingencies
Environmental liability: As part of the sale by LESCO, Inc. of its manufacturing assets in 2005, the Company retained the environmental liability associated with those assets. Remediation activities can vary substantially in duration and cost and it is difficult to develop precise estimates of future site remediation costs. The Company recorded in Other long-term liabilities the undiscounted cost estimate of future remediation efforts of $3.9 million and $3.9 million as of April 3, 2022 and January 2, 2022, respectively. As part of the CD&R Acquisition, Deere & Company agreed to pay the first $2.5 million of the liability and the Company’s exposure is capped at $2.4 million. The Company has recorded an indemnification asset in Other Assets against the liability as a result of these actions of $1.5 million and $1.5 million as of April 3, 2022 and January 2, 2022, respectively.
Letters of credit: As of April 3, 2022 and January 2, 2022, outstanding letters of credit were $13.9 million and $10.9 million, respectively. There were no amounts drawn on the letters of credit for either period presented.
Note 12. Earnings (Loss) Per Share
The Company computes basic earnings (loss) per share (“EPS”) by dividing Net income (loss) attributable to common shares by the weighted average number of common shares outstanding for the period. The Company includes vested DSUs and PSUs that have not been settled in common shares in the basic weighted average number of common shares calculation. The Company’s computation of diluted EPS reflects the potential dilution that could occur if dilutive securities or other obligations to issue common stock were exercised or converted into common stock, which include in-the-money outstanding stock options and RSUs. PSUs are excluded from the calculation of dilutive potential common shares until the performance conditions have been achieved on the basis of the assumption that the end of the reporting period was the end of the contingency period, if such shares issuable are dilutive. Using the treasury stock method, the effect of dilutive securities includes the additional shares of common stock that would have been outstanding based on the assumption that these potentially dilutive securities had been issued. The calculation of the effect of dilutive securities excludes any derived excess tax benefits or deficiencies from assumed future proceeds. RSUs and stock options with exercise prices that are higher than the average market prices of the Company’s common stock for the periods presented are excluded from the diluted EPS calculation because the effect is anti-dilutive.
The following table sets forth the computation of the weighted average number of diluted common shares outstanding for the three months ended April 3, 2022 and April 4, 2021:
| | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | |
| | April 3, 2022 | | April 4, 2021 | | | | |
| Shares used in the computation of basic earnings per share | | 44,935,765 | | | 44,381,174 | | | | | |
| Effect of dilutive securities: | | | | | | | | |
| Stock options | | 811,922 | | | 1,180,762 | | | | | |
| RSUs and PSUs | | 96,833 | | | 84,596 | | | | | |
| DSUs | | 6,082 | | | 8,639 | | | | | |
| Shares used in the computation of diluted earnings per share | | 45,850,602 | | | 45,655,171 | | | | | |
The diluted earnings per common share calculation for the three months ended April 3, 2022 and April 4, 2021 excluded the effect of 151,642 and 81,766 potential shares of common stock, respectively, because the assumed exercises of a portion of the Company’s employee stock options and RSUs were anti-dilutive.
Note 13. Subsequent Events
On April 22, 2022, the Company acquired the assets and assumed the liabilities of RTSB Enterprises, Inc., doing business as Bellstone Masonry Supply (“Bellstone”). With one location in Fort Worth, Texas, Bellstone is a wholesale distributor of hardscapes and landscape supplies to landscape professionals.
On April 28, 2022, the Company acquired the assets and assumed the liabilities of Preferred Seed Company, Inc. (“Preferred Seed”). With one location in Buffalo, New York, Preferred Seed is a wholesale distributor of seed and agronomic products to landscape professionals.