SiteOne Landscape Supply, Inc. — Q1 2018 Form 10-Q
Reporting period: Three months ended April 1, 2018; comparative period ended April 2, 2017. Amounts are in U.S. dollars. SiteOne is a wholesale distributor of landscape supplies, operating more than 500 branches, primarily in the U.S. Sales and earnings are seasonal, typically strongest in the second and third quarters.
Financial results and liquidity
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Net sales | $371.4 million | $335.0 million |
| Gross profit / margin | $108.5 million / 29.2% | $100.9 million / 30.1% |
| Operating loss | $20.6 million | $11.9 million |
| Net loss | $17.0 million | $10.5 million |
| Basic and diluted loss per share | $0.43 | $0.26 |
| Adjusted EBITDA (non-GAAP) | $(5.1) million | $1.2 million |
| Cash used in operating activities | $40.8 million | $54.7 million |
| Cash used in investing activities | $55.3 million | $59.0 million |
| Cash provided by financing activities | $111.2 million | $113.3 million |
- Sales increased 11%; Organic Daily Sales, a company-defined non-GAAP measure, increased 3%. Landscaping products grew 4% organically and agronomic and other products grew 1%.
- Gross margin fell 90 basis points. SG&A increased 16% to $131.7 million, or 35.5% of sales versus 33.9%. Management attributed expense growth to staffing and operating costs supporting expansion, alongside seasonally lower sales volumes.
- Cash and cash equivalents were $31.7 million at quarter-end. Working capital was $460.4 million, up from $396.1 million at December 31, 2017, primarily due to seasonality and acquisition-related inventory and receivables.
- Gross debt was $587.9 million, compared with $476.1 million at December 31, 2017; balance-sheet debt, net of issuance costs and discounts, was $576.2 million. Capital lease obligations were $14.0 million. ABL borrowings were $239.7 million and reported availability was $80.9 million.
- Operating cash use improved year over year, primarily from increased receivables collections, partly offset by inventory purchases. Financing cash flow included $168.5 million of ABL borrowings and $55.8 million of repayments.
Material changes and notable items
- Acquisitions contributed to sales growth; management stated they added $27.9 million, or 8%, to Q1 sales growth. Cash consideration for Q1 2018 acquisitions was approximately $51.6 million. Acquisitions included Village Nurseries, Atlantic Irrigation and Pete Rose.
- Higher cost of goods sold and SG&A outpaced sales growth, and net loss widened by $6.5 million. Management cited seasonality and continued investment in the business.
- Weather—including more snow, rain and colder temperatures in most regions—negatively affected Organic Daily Sales. Stronger ice-melt sales partly offset weaker control-product and fertilizer sales.
- The company adopted ASC 606 in Q1 using the modified retrospective method. It reported an immaterial overall adoption impact, but the quarter’s comparison table shows reported net loss was $1.3 million greater than it would have been without adoption; reported sales were $0.6 million higher and cost of goods sold $2.4 million higher.
- On April 12, 2018, SiteOne acquired Northwest Marble & Terrazzo Co.; the filing says the acquisition was not material and was not expected to have a significant financial-statement impact.
Outlook, risks and contingencies
- No specific full-year earnings or sales guidance is provided. Management expects cash from operations and available ABL capacity to be sufficient for operations, expected capital expenditures and liquidity needs over the following 12 months, including debt service.
- Key risks include seasonal and weather-sensitive demand, construction-market cyclicality, supplier availability and pricing, inventory and working-capital requirements, acquisition integration, labor and operating-cost pressures, and substantial debt and variable interest rates.
- ABL and term-loan covenants were reported in compliance at April 1, 2018. ABL availability had declined from $162.0 million at year-end; its facility matures October 20, 2020, and the term loan matures April 29, 2022. The filing notes that covenant breaches could trigger default and accelerated repayment.
- Two forward-starting interest-rate swaps cover $174.0 million in notional principal, become effective in March 2019 and mature in June 2021. Counterparty failure could remove the hedge benefit while leaving underlying variable-rate debt exposure.
- Environmental remediation liabilities were estimated at $3.8 million, with a $1.4 million indemnification asset recorded. Outstanding letters of credit were $4.5 million. SiteOne reported no material litigation and no material changes to previously disclosed risk factors.
- The company expects adoption of the new lease standard in 2019 to significantly increase lease-related assets and liabilities; the income-statement effect was still being evaluated. Tax effects of the 2017 Tax Act remained provisional in certain respects.
Important facts for investors to verify
- Whether organic sales momentum and gross margin recover as the business enters its historically stronger spring and summer quarters.
- How much sales growth and future profitability depend on acquisitions versus organic performance, and whether acquired operations integrate as expected.
- ABL borrowing availability, seasonal working-capital needs, covenant headroom and the effect of higher variable interest rates on debt service.
- The final impact of ASC 606, the provisional tax accounting and forthcoming lease-standard adoption on reported results and balance-sheet obligations.