SiteOne Landscape Supply, Inc. — Q3 2017 Form 10-Q
Business and period: SiteOne distributes landscape, irrigation, nursery, hardscape and related products to green-industry professionals through more than 475 branches. The quarter ended October 1, 2017 (13 weeks); the year-to-date period covers 39 weeks. Sales are seasonal, generally strongest in spring and summer.
Financial performance
| Metric | Three months ended Oct. 1, 2017 | Three months ended Oct. 2, 2016 | Nine months ended Oct. 1, 2017 | Nine months ended Oct. 2, 2016 |
|---|---|---|---|---|
| Net sales | $502.4 million | $444.5 million | $1,446.0 million | $1,286.5 million |
| Gross profit / margin | $160.3 million / 31.9% | $138.4 million / 31.1% | $463.6 million / 32.1% | $404.0 million / 31.4% |
| Operating income / margin | $33.8 million / 6.7% | $31.9 million / 7.2% | $99.0 million / 6.8% | $77.0 million / 6.0% |
| Net income | $16.9 million | $14.9 million | $50.6 million | $36.2 million |
| Diluted EPS | $0.41 | $0.36 | $1.23 | $(3.15) |
| Adjusted EBITDA (non-GAAP) | $48.4 million | $43.7 million | Not clearly provided as a comparable nine-month figure | Not clearly provided as a comparable nine-month figure |
Growth and margins: Sales rose 13% in Q3 and 12% year to date. Organic Daily Sales increased 5% in both periods; acquisitions contributed $34.1 million (8%) to Q3 growth and $104.3 million (8%) to nine-month growth. Gross margin improved by 80 basis points in Q3 and 70 basis points year to date, which management primarily attributed to category-management initiatives. Q3 SG&A rose 19%, faster than sales, and SG&A as a share of sales increased to 25.5% from 24.2%; management cited acquisitions, labor and investment in growth capabilities. Year-to-date SG&A percentage declined to 25.5% from 25.7%, partly because the prior-year period included IPO and refinancing costs.
Cash flow, liquidity and debt
- For the first nine months, operating cash flow was negative $14.6 million, versus positive $9.2 million in the prior-year period. Management attributed the deterioration primarily to higher working capital, including inventory growth.
- Investing cash outflow was $76.9 million, including $66.9 million for acquisitions and $10.3 million of property and equipment purchases. Financing provided $99.1 million, including increased ABL borrowings.
- Cash was $24.1 million at October 1, 2017. Working capital was $428.7 million, compared with $304.5 million at January 1, 2017; the increase reflected seasonality, acquisitions and higher inventory stocking.
- Total debt carrying value was $479.5 million, including $193.7 million outstanding under the ABL and $298.0 million under the term loan; capital lease obligations were $12.8 million. ABL availability was $126.9 million, down from $164.5 million at January 1, 2017.
- The term loan matures in April 2022; the ABL matures in October 2020. Rates are primarily variable. Two interest-rate swaps cover $174.0 million of term-loan notional, with effectiveness beginning in March 2019. The company reported compliance with debt covenants.
Changes, outlook and risks
- Seven acquisitions were completed during the first nine months of 2017, expanding product offerings and geographic reach; aggregate cash consideration was approximately $66.8 million. A further, immaterial acquisition was completed after quarter-end.
- Management said cash from operations and available ABL capacity were expected to be sufficient for operating needs, planned capital expenditures and debt service over the following 12 months. The filing provides no numerical earnings or sales guidance.
- Management cited strength in residential and commercial construction and repair-and-remodel markets. It also described initiatives in procurement, category management, inventory planning, logistics and branch productivity.
- Key risks include seasonality and weather, construction-market cyclicality, product and supplier availability and pricing, inventory and working-capital needs, labor costs, acquisition integration, competition, and substantial debt and variable interest rates. The company noted that industry demand may be affected by economic conditions and weather events.
- An estimated $4.0 million environmental remediation liability was recorded, offset by a $1.6 million indemnification asset; the company’s exposure was capped at $2.4 million under the stated arrangement. Outstanding letters of credit were $4.5 million, with none drawn. No material litigation was reported, and management said risk factors had not materially changed.
- The company was evaluating the upcoming revenue-recognition standard; its preliminary assessment identified possible changes to the timing of incentive-program revenue and gross-versus-net presentation for certain arrangements. Adoption was planned for the first quarter of 2018.
Important facts for investors to verify
- How much of reported sales and profit growth came from acquired businesses versus organic growth, and whether acquisition integration supports margins.
- Whether working-capital investment, especially inventory, converts into operating cash flow after the seasonal peak.
- Available ABL capacity and borrowing-base availability as inventory and receivables change, alongside debt levels and variable-rate exposure.
- Whether higher Q3 SG&A and labor costs continue to pressure operating margins despite improved gross margins.
- The eventual financial and presentation effects of the new revenue-recognition standard and the environmental remediation estimate.