SiteOne Landscape Supply, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended April 2, 2017; comparable period ended April 3, 2016. SiteOne is a wholesale distributor of landscape supplies, with more than 475 branches. The business is seasonal, with sales and income typically higher in the second and third quarters.
Financial performance
| Metric | Q1 2017 | Q1 2016 |
|---|---|---|
| Net sales | $335.0 million | $328.5 million |
| Gross profit / gross margin | $100.9 million / 30.1% | $97.0 million / 29.5% |
| Operating loss | $11.9 million | $6.4 million |
| Net loss | $10.5 million | $5.6 million |
| Net loss per common share | $0.26 | $0.85 |
| Adjusted EBITDA | $1.2 million | $4.5 million |
| Operating cash flow | $(54.7) million | $10.0 million |
| Investing cash flow | $(59.0) million | $(33.0) million |
Net sales rose 2%, but organic sales fell 3% and organic daily sales fell 2%; acquisitions contributed $16.5 million, or 5%, to sales growth. Gross margin expanded 60 basis points, which management attributed primarily to category-management improvements. SG&A increased 9% to $113.7 million, and rose to 33.9% of sales from 31.8%, reflecting acquired operations during the seasonally slow quarter. Interest and other non-operating expense increased to $6.2 million from $2.6 million, mainly due to higher debt and borrowing costs. The larger net loss reflected higher interest and acquisition-related operating expenses.
Balance sheet, debt and liquidity
- At April 2, 2017, cash was $15.9 million, working capital was $369.2 million, and total assets were $935.0 million.
- Gross debt, including current maturities, was $502.9 million; the balance-sheet carrying amount after debt discounts and issuance costs was $490.2 million. Capital leases totaled $11.1 million.
- ABL borrowings were $205.8 million, with $114.8 million of availability. The term loan balance was $297.1 million before unamortized discounts and costs; its stated interest rate was 5.5%.
- Cash declined $0.4 million to $15.9 million. Seasonal inventory build, acquisitions and inventory-system transitions contributed to operating cash use; ABL borrowings funded working capital and acquisitions.
Material changes, outlook and risks
- Four acquisitions closed in Q1 2017 for approximately $56.6 million in aggregate cash consideration: Angelo’s, AB Supply, Stone Forest and Aspen Valley. These expanded the company’s hardscape and landscape-supply presence. Acquisitions added $37.2 million of goodwill and $14.8 million of intangible assets.
- Management cited a return to more normal spring weather after the early spring in 2016. Later spring conditions delayed agronomic applications; wet weather affected the West Coast. Organic daily sales for nursery, irrigation, outdoor lighting, hardscapes and landscape accessories increased 3%, while agronomic products declined 8%.
- No quantified earnings or sales guidance was provided in the filing. Management said cash on hand, operating cash flow and ABL availability were expected to provide sufficient funds for operations, expected capital expenditures and debt service over the next 12 months.
- Principal stated risks include seasonality and weather, construction-market cyclicality, competition, supplier and inventory risks, acquisition integration, labor costs, customer credit, environmental and product-liability matters, and substantial indebtedness and interest-rate exposure. The company reported compliance with debt covenants at quarter-end.
- The company estimated environmental remediation costs of $4.0 million, with an associated $1.6 million indemnification asset. It reported no material litigation and no material changes to previously disclosed risk factors.
- Adoption of stock-compensation guidance resulted in $0.7 million of excess tax benefits recognized in income tax benefit. A May 2017 secondary offering of 11.5 million shares was completed by existing stockholders; SiteOne received no proceeds.
Important facts for investors to verify
- Whether the seasonal inventory build and replenishment-system transitions unwind as spring and summer sales progress.
- Organic sales trends and acquired-business contributions, including whether gross-margin gains offset higher SG&A.
- Debt levels, ABL availability, floating-rate exposure and covenant headroom as seasonal borrowing needs change.
- Acquisition integration, purchase-price allocation and the expected contribution from the four Q1 acquisitions.
- Cash generation and working-capital conversion; the filing’s Adjusted EBITDA is a non-GAAP measure and is not a substitute for cash flow.