SiteOne Landscape Supply, Inc. — Q3 2016 Form 10-Q
Business context and reporting period. SiteOne is a wholesale distributor of landscape supplies, operating more than 450 stores. This unaudited report covers the 13 weeks ended October 2, 2016 and the first 39 weeks of fiscal 2016; comparisons are with the corresponding 2015 periods. Sales are seasonal, typically strongest in spring and summer.
Financial performance
Amounts are in millions of dollars except per-share data and percentages.
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $444.5 | $404.5 | $1,286.5 | $1,111.8 |
| Gross profit | $138.4 | $118.4 | $404.0 | $324.5 |
| Gross margin | 31.1% | 29.3% | 31.4% | 29.2% |
| Operating income | $31.9 | $21.5 | $77.0 | $64.7 |
| Net income | $14.9 | $11.4 | $36.2 | $34.8 |
| Net income (loss) attributable to common shares | $14.9 | $0.1 | $(85.8) | $1.9 |
| Diluted EPS | $0.36 | $0.01 | $(3.15) | $0.13 |
Third-quarter sales grew 10%; nine-month sales grew 16%. Organic sales increased 2% and 5%, respectively, while acquisitions contributed $33.9 million (8%) to third-quarter growth and $126.6 million (11%) to nine-month growth. Gross-margin expansion reflected pricing and category-management improvements and lower material costs, including manufacturer incentives. Nine-month SG&A rose 26%, including higher personnel and acquisition costs and approximately $11 million of dividend recapitalization/IPO-related expenses. Higher debt and interest rates contributed to increased interest expense: $6.3 million for Q3 and $15.4 million for the nine months, versus $2.7 million and $7.7 million, respectively.
Q3 Adjusted EBITDA, a non-GAAP measure, was $43.7 million versus $33.7 million. Management cautions that Adjusted EBITDA is not a substitute for GAAP results or operating cash flow.
Cash flow, balance sheet and financing
- Nine-month operating cash flow was $9.2 million, down from $44.6 million, principally due to working-capital needs, especially receivables, and a favorable bonus-payment timing effect in 2015. Investing cash outflow was $62.5 million, including $56.6 million of acquisition spending; financing cash inflow was $59.0 million.
- At October 2, 2016, cash was $25.9 million; working capital was $383.0 million. Total debt was $434.5 million and capital-lease obligations were $10.6 million. ABL borrowings were $174.8 million, with $130.2 million of reported availability; term-loan debt was $273.6 million.
- The company refinanced its term loan in April with a $275 million facility maturing in 2022. The term loan’s reported interest rate was 6.25%; ABL rates ranged from 2.28% to 4.25%. Debt rose substantially from $177.7 million at January 3, 2016.
- Management said cash on hand, operating cash flow and ABL availability were expected to provide sufficient funds for operations, capital expenditures and debt service over the following 12 months. Borrowings are subject to borrowing-base availability, financial covenants and other restrictions.
Material changes, outlook and risks
- On May 2, the company paid a $176 million special dividend, funded principally by the new term loan; $112.4 million went to preferred holders. The dividend is reflected as a reduction in income attributable to common shares, explaining the nine-month common-share loss despite positive consolidated net income.
- The preferred stock converted into common stock on May 16, adding 25.3 million shares. In May, existing holders sold 11.5 million shares in the IPO at $21 per share; SiteOne received no IPO proceeds. The company also paid $7.5 million to terminate related-party consulting agreements.
- 2016 acquisitions included Hydro-Scape, Blue Max, Bissett and Glen Allen. A further, described as immaterial, acquisition followed in November. Hot, dry weather in Texas and the East Coast hurt nursery sales; management also cites weather and seasonality as factors that can affect demand.
- No numerical earnings or sales guidance is provided. Management identifies risks including construction-market cyclicality, adverse weather and water availability, competition, supplier or product disruptions, acquisition integration, operating costs, substantial indebtedness and interest-rate increases. It reported no material litigation and no material changes to previously disclosed risk factors. An estimated $4.6 million environmental remediation liability was recorded, with an indemnification asset of $2.2 million.
Important facts for investors to verify
- Whether organic growth and gross-margin improvement persist after separating acquisition contributions and seasonal effects.
- Whether working-capital investment, particularly receivables, converts to cash and operating cash flow recovers.
- Debt-service capacity, interest-rate exposure, ABL availability and compliance with credit-facility covenants.
- The effects of the special dividend, preferred conversion, IPO-related costs and enlarged share count on per-share results.
- Acquisition integration and performance, plus potential changes in weather, construction demand and nursery-product sales.