Business context and reporting period
SiteOne Landscape Supply, Inc. is a wholesale distributor of landscape supplies to professional contractors, with more than 450 stores and a growing Canadian presence. Its products include irrigation, nursery goods, hardscapes, lawn-care supplies and outdoor lighting. This unaudited Form 10-Q covers the 13 weeks ended April 3, 2016; comparisons are with the 13 weeks ended March 29, 2015. Results are seasonal, with the first and fourth quarters typically weaker and often loss-making.
Financial performance and liquidity
| Metric (US$ millions, except per-share data) | Q1 2016 | Q1 2015 |
|---|---|---|
| Net sales | 328.5 | 225.8 |
| Gross profit / gross margin | 97.0 / 29.5% | 58.6 / 26.0% |
| SG&A | 104.6 | 73.1 |
| Operating loss | (6.4) | (13.7) |
| Net loss | (5.6) | (9.8) |
| Net loss attributable to common shares / basic and diluted loss per share | (12.1) / $(0.85) | (17.5) / $(1.23) |
| Operating cash flow | 10.0 | (15.2) |
| Investing cash flow | (33.0) | (56.7) |
| Financing cash flow | 23.3 | 74.9 |
| Adjusted EBITDA | 4.5 | (5.7) |
Sales increased 45%: management attributed approximately 23 percentage points of growth to organic sales and 22 points to acquisitions, which contributed $50.8 million. Favorable warm weather advanced contractor projects and seasonal applications; management said some sales were pulled forward from Q2. Gross margin expanded 350 basis points, attributed principally to pricing and category-management improvements (about 240 basis points) and better supply-chain efficiency, including lower inbound freight. SG&A rose 43% but declined as a percentage of sales, to 31.8% from 32.4%.
At April 3, 2016, cash was $20.5 million, total debt was $209.5 million (including $10.2 million of debt discount), and capital-lease obligations were $10.1 million. ABL borrowings were $159.4 million; disclosed ABL availability was $158.3 million. Working capital excluding cash was $289.0 million. Accounts receivable and inventory increased seasonally, while accounts payable also rose. Operating cash flow benefited in part from vendor-payment timing. Capital expenditures were $1.9 million; acquisitions used $31.2 million net of acquired cash.
Material changes, outlook and risks
- Acquisitions: SiteOne acquired Hydro-Scape, with 17 Southern California locations, in January 2016; it contributed to reported growth. A small five-location Blue Max acquisition closed in April after quarter-end.
- Subsequent financing and distributions: On April 29, the company refinanced its prior term loan with a $275.0 million term facility maturing in 2022. Proceeds repaid $60.3 million of prior term debt, $29.9 million of ABL borrowings, transaction costs and funded a $176.0 million special cash dividend to existing common and preferred holders. Management disclosed pro forma cash of $9.0 million, debt of $402.4 million and capital leases of $10.1 million after the subsequent transactions and other prospectus adjustments. The filing’s pro forma contractual-obligations table reports $416.0 million of long-term debt; the presentation basis differs, so reconcile with the underlying disclosures.
- IPO and capital structure: The May 17 IPO consisted of 11.5 million shares sold by existing stockholders at $21 per share; the company received no IPO proceeds. Preferred stock converted into 25.3 million common shares before closing. An 11.6181-for-1 common-stock split was effected April 29, with share and per-share data retroactively adjusted.
- Management outlook: No specific earnings or revenue guidance is provided. Management expected cash from operations and ABL capacity to fund operations, expected capital expenditures and obligations for the following 12 months, while cautioning that interim results are not indicative of a full year. This outlook should be considered alongside the later dividend and refinancing, which materially increased debt.
- Key risks and unusual items: Weather and seasonality, construction-market cyclicality, acquisition integration, supplier and inventory risks, competition, labor costs and substantial indebtedness are identified risks. ABL and term-loan covenants can restrict borrowing and distributions; covenant breaches could trigger acceleration or enforcement. Environmental remediation liabilities were estimated at $4.6 million, offset by a $2.2 million indemnification asset; Deere agreed to cover the first $2.5 million and the company’s exposure was capped at $2.4 million. The company also agreed after quarter-end to pay CD&R and Deere about $7.5 million to terminate consulting agreements in connection with the IPO. No material litigation was reported.
Important facts for investors to verify
- How much of Q1’s unusually strong growth reflects durable organic demand versus acquisitions and weather-related sales pulled forward from Q2.
- Reconcile the reported April 3 debt and ABL availability with post-quarter refinancing, dividend, pro forma debt figures and contractual obligations; assess covenant headroom and interest burden.
- Assess cash conversion and seasonal working-capital needs, particularly receivables, inventory and vendor-payment timing.
- Review the company’s Adjusted EBITDA reconciliation and exclusions; it is a non-GAAP measure and is not a substitute for earnings or operating cash flow.
- Monitor integration of Hydro-Scape and subsequent acquisitions, along with environmental remediation exposure and the costs associated with the IPO and consulting-agreement terminations.