Business context and reporting period
SiteOne Landscape Supply, Inc. is a wholesale distributor of landscape products, with more than 450 stores and substantially all sales in the United States. This unaudited 10-Q covers the 13 weeks and 26 weeks ended July 3, 2016, compared with the corresponding periods ended June 28, 2015. Results are seasonal, typically strongest in the second and third quarters.
During the period, SiteOne acquired Hydro-Scape and Blue Max. The company completed its IPO in May, but selling stockholders—not the company—received the proceeds. Preferred stock converted into common stock in May. Per-share and share data reflect an 11.6181-for-1 stock split.
Financial performance and liquidity
| Metric | Q2 2016 | Six months 2016 | Prior comparable period |
|---|---|---|---|
| Net sales | $513.4 million | $841.9 million | $481.5 million; $707.3 million |
| Gross profit / margin | $168.5 million / 32.8% | $265.5 million / 31.5% | $147.5 million / 30.6%; $206.1 million / 29.1% |
| Operating income | $51.5 million | $45.1 million | $56.9 million; $43.2 million |
| Net income | $26.9 million | $21.3 million | $33.2 million; $23.4 million |
| Net income (loss) attributable to common shares | $(88.6) million | $(100.7) million | $8.4 million; $1.9 million |
| Operating cash flow | $12.2 million | $12.6 million |
Sales increased 7% in Q2 and 19% for the six months year over year. Acquisitions contributed $41.8 million to Q2 growth and $92.7 million to first-half growth; organic sales declined 2% in Q2 but rose 7% for the half. Gross margin expanded 220 basis points in Q2 and 240 basis points for the half, which management attributed mainly to pricing and category-management improvements. Q2 operating income fell despite higher sales, as selling, general and administrative expenses rose 29% to $118.0 million. The six-month operating income increased to $45.1 million from $43.2 million.
Q2 net income declined by $6.3 million year over year; management cited recapitalization and IPO-related costs and higher interest expense. The $176.0 million special dividend, including $112.4 million paid to preferred holders, drove the reported common-share loss; it did not represent an operating loss. Basic and diluted loss per common share was $3.18 in Q2 and $4.78 for the six months.
At July 3, 2016, cash was $19.0 million, total debt was $406.3 million, and capital lease obligations were $10.0 million. Working capital was $341.9 million. ABL borrowings were $146.5 million; the filing reports ABL availability of $175.6 million. The new $275.0 million term loan matures in April 2022 and carried a 6.25% rate at quarter-end. The ABL facility matures in October 2020. First-half investing cash outflow was $45.9 million, including $41.7 million for acquisitions and $4.4 million in capital expenditures; financing cash flow was $32.4 million.
Material changes, outlook, and risks
- Management said unusually wet April and May weather and sales pulled forward by an unusually warm first quarter weighed on Q2 organic sales. Construction-related categories grew 2% organically in Q2; fertilizer, control, and other lawn-care products declined 11%.
- The April refinancing funded debt repayment, fees, and the special dividend, increasing debt and interest expense. IPO and recapitalization-related operating costs were approximately $11.2 million, including a $7.5 million fee to terminate consulting agreements; management cited $7.4 million of related after-tax costs in explaining the Q2 net-income decline.
- Management expects cash from operations and ABL capacity to fund operations, expected capital expenditures, and liquidity needs for the next 12 months, including debt service. No specific earnings or revenue guidance is provided.
- Key disclosed risks include seasonality and weather, construction-market cyclicality, acquisitions and integration, product and supplier risks, labor and operating-cost pressures, and substantial indebtedness and interest-rate exposure. The filing reports no material litigation and no material changes to the risk factors in the IPO prospectus. A $4.6 million environmental remediation liability was recorded, with a $2.2 million indemnification asset; the company’s exposure was capped at $2.4 million under the disclosed arrangement.
Important facts for investors to verify
- Reconcile reported ABL availability of $175.6 million with the $146.5 million outstanding balance and the $325.0 million facility commitment.
- Assess whether Q2’s organic sales weakness was temporary, given the weather effects and first-quarter sales pull-forward.
- Separate ongoing operating performance from the special dividend, IPO, refinancing, and other one-time costs when evaluating common-share results.
- Review debt-service capacity, covenant headroom, and exposure to floating interest rates as debt and interest expense rise.
- Track acquisition integration, working-capital needs, and seasonal cash flow; first-half operating cash flow was $12.2 million despite reported net income of $21.3 million.