SiteOne Landscape Supply, Inc. — 2018 Form 10-K
Reporting period: Fiscal year ended December 30, 2018 (52 weeks); Q4 refers to the final fiscal quarter. The company is a wholesale landscape-supplies distributor operating more than 550 branches across 45 U.S. states and six Canadian provinces. Figures are in U.S. dollars.
Financial performance
| Metric | FY 2018 | FY 2017 | Q4 2018 | Q4 2017 |
|---|---|---|---|---|
| Net sales | $2,112.3 million | $1,861.7 million | $474.6 million | $415.7 million |
| Gross profit / margin | $678.1 million / 32.1% | $595.5 million / 32.0% | $148.7 million / 31.3% | $131.9 million / 31.7% |
| Operating income (loss) | $107.3 million | $97.8 million | $0.6 million | $(1.2) million |
| Net income (loss) | $73.9 million | $54.6 million | $(2.1) million | $4.0 million |
| Adjusted EBITDA | $176.0 million | $157.2 million | $18.1 million | $15.3 million |
| Cash from operating activities | $78.1 million | $16.3 million | Quarterly value not clearly provided | Quarterly value not clearly provided |
Annual sales increased 13%; organic daily sales grew 4%, while acquisitions contributed 9% (about $171.9 million) to sales growth. Landscaping-product organic daily sales rose 3% and agronomic-product sales rose 7%. Annual net income increased 35%. Q4 sales rose about 14% year over year, but the company recorded a net loss, compared with Q4 2017 net income.
Annual operating expenses rose 15% to $578.8 million, outpacing sales growth; as a share of sales they increased to 27.4% from 27.0%. Annual interest and other non-operating expense increased 27% to $32.1 million. The reported effective tax rate fell to 1.7% from 24.8%, primarily reflecting the U.S. tax-rate reduction, finalized Tax Act accounting and $16.3 million of excess tax benefits.
Cash, liquidity and debt
- Year-end cash and cash equivalents were $17.3 million; working capital was $483.0 million, up from $396.1 million.
- Operating cash flow was $78.1 million, versus $16.3 million in 2017. Investing used $164.1 million, mainly reflecting $147.7 million of acquisitions; capital expenditures were $14.9 million. Financing provided $86.8 million.
- Gross long-term debt principal was $569.3 million; balance-sheet debt net of discounts and issuance costs was $558.2 million. Capital lease obligations were $14.7 million.
- The ABL Facility had $123.1 million outstanding and reported availability of $197.5 million at year-end. The Term Loan Facility had $446.2 million outstanding, with a reported interest rate of 5.21%. Debt facilities bear variable rates; the company uses interest-rate swaps to hedge portions of term-loan exposure.
- Management said cash from operations and available ABL capacity were expected to be sufficient for operations, planned capital expenditures and obligations over the following 12 months. The ABL agreement was amended in February 2019 to extend its termination to February 2024 and increase commitments to $375 million.
Changes, outlook and risks
- Gross margin improved 10 basis points year over year, with acquisitions the primary driver; pricing and category-management gains were largely offset by higher costs, including freight. Operating margin declined to 5.1% from 5.3%.
- The company completed multiple acquisitions in 2018; acquisition investment was $147.7 million net of cash acquired. Management expects acquisitions to remain part of its growth strategy. No specific numerical earnings or sales guidance is provided.
- Management described continuing initiatives in pricing, category management, supply chain, sales, marketing and B2B e-commerce, with programs extending through 2019 or 2020. The company also cited opportunities to expand product offerings in existing markets.
- Results are seasonal: sales and earnings are typically strongest in Q2 and Q3, with losses historically possible in Q1 and Q4. Management said challenging weather in spring and fall affected construction-related sales; Hurricane Florence and associated rain hurt Q3 demand.
- Key risks include construction-market cyclicality, adverse weather and water restrictions, competition, supplier and product-price volatility, inventory and customer-credit risks, labor and operating-cost inflation, acquisition integration, environmental and product-liability exposure, cybersecurity, and substantial variable-rate debt. A 1 percentage-point interest-rate increase was estimated to raise annual interest expense by about $3.0 million.
- Environmental remediation related to former LESCO manufacturing assets remained accrued at an estimated $3.7 million, partly offset by a $1.3 million indemnification asset. The company reported no material litigation and stated it was in compliance with debt covenants at year-end.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls; specified recently acquired businesses were excluded from the controls assessment.
Important facts for investors to verify
- Reconcile Q4’s year-over-year sales growth with its net loss and examine quarter-specific expenses and tax effects.
- Assess whether organic growth, acquisition contributions and integration synergies support sustainable margins and cash generation.
- Review debt maturities, borrowing-base availability, variable-rate exposure, swap coverage and covenant headroom, including the February 2019 ABL amendment.
- Monitor working-capital needs, acquisition spending and the conversion of operating earnings into cash amid seasonal fluctuations.
- Track weather, construction-market conditions, supplier incentives, product costs and the potential for environmental or other contingencies to change.