SiteOne Landscape Supply, Inc. — Q2 2017 Form 10-Q
Business context and reporting period
The filing covers the quarter and six months ended July 2, 2017; comparative periods ended July 3, 2016. SiteOne is a wholesale distributor of landscape supplies, with more than 475 branches. Sales are seasonal and typically highest in the spring and summer.
Financial performance
| Metric | Q2 2017 | Q2 2016 | First half 2017 | First half 2016 |
|---|---|---|---|---|
| Net sales | $608.6 million | $513.4 million | $943.6 million | $841.9 million |
| Gross profit / margin | $202.4 million / 33.3% | $168.5 million / 32.8% | $303.3 million / 32.1% | $265.5 million / 31.5% |
| Operating income / margin | $77.1 million / 12.7% | $51.5 million / 10.0% | $65.2 million / 6.9% | $45.1 million / 5.4% |
| Net income | $44.2 million | $26.9 million | $33.7 million | $21.3 million |
| Diluted EPS | $1.07 | $(3.18) | $0.82 | $(4.78) |
Q2 sales rose 19%; first-half sales rose 12%. Organic Daily Sales increased 8% in Q2 and 5% for the first half. Acquisitions contributed $53.7 million to Q2 sales growth and $70.2 million to first-half growth. First-half adjusted EBITDA was $93.5 million, versus $79.4 million in the comparable period, based on the company’s non-GAAP measure.
Gross-margin expansion was attributed mainly to category-management initiatives. SG&A increased 7% in Q2 and 8% in the first half, but declined as a share of sales. The company noted that the Q2 2016 comparison included $11.2 million of IPO- and refinancing-related expenses. Prior-period common-share losses and EPS were also affected by the $112.4 million special dividend attributable to preferred stockholders.
Cash flow, debt and liquidity
First-half operating cash flow was negative $31.7 million, compared with positive $12.2 million a year earlier. Management attributed the change principally to higher inventory associated with growth, acquisitions, broader product offerings and stocking during the transition to a new replenishment system. Investing cash outflow was $65.1 million, including $59.6 million of acquisitions and $5.7 million of capital expenditures. Financing provided $100.6 million, including increased ABL borrowings.
At July 2, 2017, cash was $20.2 million, total debt was $479.0 million, and capital-lease obligations were $11.9 million. ABL borrowings were $193.1 million, with $127.5 million of availability under the $325 million facility. Working capital was $408.7 million. Debt included a $299.5 million Tranche C term loan issued in May to refinance the prior tranche; the term loan matures in April 2022 and the ABL facility in October 2020. The company reported covenant compliance. It entered into forward-starting swaps covering $174 million of term-loan principal, effective March 2019 through June 2021.
Outlook, risks and unusual items
No quantified earnings or sales guidance is provided. Management expects cash from operations and available ABL capacity to be sufficient for operations, expected capital expenditures and liquidity needs over the next 12 months, including debt service. Results remain exposed to seasonality and weather, construction-market cycles, competition, product-price and supplier risks, working-capital needs, acquisition integration, labor costs and variable interest rates. The company also identifies substantial indebtedness and inventory management as risks.
Five acquisitions were completed in the first half of 2017 for aggregate cash consideration of approximately $59.9 million. A further small acquisition was completed August 7, after quarter-end; management said it was not expected to have a significant financial impact. The company estimated $4.0 million of environmental remediation costs, partly offset by a $1.6 million indemnification asset. It reported no material litigation and no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Whether organic growth and gross-margin gains persist apart from acquisition contributions and seasonality.
- Inventory levels, replenishment-system effects and operating cash flow conversion.
- Debt, interest costs, ABL availability and covenant headroom as working-capital needs change.
- Acquisition integration, purchase economics and realized operating benefits.
- Exposure to weather, construction cycles, supplier availability and variable rates; the filing provides no quantified forward guidance.