SiteOne Landscape Supply, Inc. — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017 (52 weeks). The filing is an annual report, not a standalone Q4 report; quarterly figures below are unaudited. SiteOne is a wholesale distributor of landscape supplies, operating in the U.S. and Canada.
Business context and reporting period
SiteOne reported one operating and reportable segment. As of February 20, 2018, it operated 511 branches in 45 U.S. states and six Canadian provinces, offering more than 120,000 products. Its customer base is primarily professional landscape contractors. Sales are seasonal, typically strongest in Q2 and Q3.
Key financial metrics
| Metric | FY 2017 | FY 2016 |
|---|---|---|
| Net sales | $1,861.7 million | $1,648.2 million |
| Gross profit / margin | $595.5 million / 32.0% | $515.7 million / 31.3% |
| Operating income / margin | $97.8 million / 5.3% | $74.0 million / 4.5% |
| Net income | $54.6 million | $30.6 million |
| Diluted earnings per share | $1.29 | ($3.01) |
| Adjusted EBITDA (non-GAAP) | $157.2 million | $134.3 million |
| Cash from operating activities | $16.3 million | $72.9 million |
| Cash from investing activities | ($98.6 million) | ($74.9 million) |
| Cash from financing activities | $82.5 million | ($1.8 million) |
FY 2017 net sales rose 13%; management attributed approximately 5% growth to Organic Daily Sales and 8% to acquisitions. Gross margin expanded 70 basis points, primarily from category-management improvements. Net income increased 78%, reflecting sales growth, margin expansion and a lower effective tax rate. The effective tax rate was 24.8%, versus 41.0% in FY 2016.
Q4 FY 2017: Sales were $415.7 million, gross profit $131.9 million and operating loss $1.2 million; net income was $4.0 million. Q4 included an $11.4 million income tax benefit, so reported net income exceeded operating income.
Liquidity and debt: At year-end, cash and cash equivalents were $16.7 million, working capital was $396.1 million, gross principal debt was $476.1 million, and debt net of discounts and issuance costs was $463.6 million. Capital leases were $11.7 million. The filing reports $162.0 million of ABL availability, subject to borrowing-base terms, with $127.0 million drawn. Operating cash flow fell to $16.3 million, which management attributed to increased working capital and the transition to its supply-chain strategy. Capital expenditures were $14.5 million; acquisitions used $82.9 million in cash.
Material changes versus the prior comparable period
- Sales increased $213.5 million, with acquisitions contributing $135.0 million; Organic Daily Sales growth was 5%.
- Gross margin improved from 31.3% to 32.0%, while operating expenses increased 12% in dollars but declined slightly as a share of sales.
- Operating cash flow declined $56.6 million, principally amid increases in receivables and inventory.
- Gross debt increased from $388.9 million to $476.1 million. A December 2017 term-loan amendment increased Tranche D term loans to $350.0 million; proceeds repaid the prior tranche and approximately $50.7 million of ABL borrowings.
- FY 2016 common-shareholder earnings were affected by preferred-stock dividends and the $112.4 million portion of a one-time special dividend attributable to preferred holders; FY 2017 had no comparable preferred-stock deductions.
Outlook, management commentary, risks and unusual items
- Management expected cash from operations and available ABL capacity to fund operations, expected capital expenditures and liquidity needs for the following 12 months. The filing provides no specific revenue or earnings guidance.
- Management plans to continue organic growth, acquisitions and operational initiatives in pricing, category management, supply chain, sales productivity, marketing and e-commerce. Acquisitions remain an important growth strategy; eight acquisitions were completed in 2017.
- The business is exposed to construction-market cycles, weather and seasonality, water restrictions, competitive pressure, supplier availability and pricing, inventory risk, labor and fuel costs, customer credit risk, and environmental and product-liability matters.
- Debt is substantial and largely variable-rate. The company reported that a 1 percentage-point interest-rate increase would raise annual interest expense by approximately $4.8 million on variable-rate debt. Debt covenants restrict certain borrowing, distributions and other activities.
- The 2017 Tax Act reduced the U.S. corporate tax rate to 21%. SiteOne recognized provisional tax effects, including a $4.5 million deferred-tax benefit and a $1.3 million transition-tax expense, but said its accounting for the Act was not complete at year-end.
- Environmental remediation related to former LESCO manufacturing assets remained a contingency; the recorded estimate was $3.8 million, with an indemnification asset of $1.4 million. Management reported no material litigation and no material expected effect from unresolved ordinary-course claims.
- The auditor issued unqualified opinions on the financial statements and internal controls. Management and the auditor excluded three recent acquisitions from the 2017 internal-control assessment; together they represented less than 2% of assets and 1% of sales.
Most important facts for investors to verify
- Whether organic growth, gross-margin gains and acquisition integration continue to offset acquisition-related costs and competitive pressures.
- How working-capital investment affects operating cash flow and whether liquidity remains adequate through seasonal low periods.
- Debt balances, ABL borrowing-base availability, covenant headroom, refinancing needs and sensitivity to floating interest rates.
- The final tax effects of the 2017 Tax Act, including transition-tax calculations and future GILTI exposure.
- Progress and returns from acquisitions and strategic investments, including supply-chain and e-commerce initiatives.
- Potential effects of weather, water restrictions, supplier concentration, environmental obligations and customer credit losses.