SiteOne Landscape Supply, Inc. — FY2016 Form 10-K
Reporting period: Fiscal year ended January 1, 2017 (52 weeks). The prior fiscal year ended January 3, 2016 and included 53 weeks. This annual filing includes fourth-quarter results; it is not a standalone quarterly filing.
Business context
SiteOne distributes landscape supplies to professional customers through a North American branch network. It reported 469 locations in 45 U.S. states and five Canadian provinces as of March 10, 2017, and operates as one reportable segment. Its products include irrigation, agronomic supplies, nursery goods, hardscapes and outdoor lighting. FY2016 sales were approximately 99% U.S.-based. The business is seasonal, typically strongest in the second and third quarters.
Financial performance
| Metric | FY2016 | FY2015 |
|---|---|---|
| Net sales | $1,648.2 million | $1,451.6 million |
| Gross profit / margin | $515.7 million / 31.3% | $429.1 million / 29.6% |
| Operating income / margin | $74.0 million / 4.5% | $59.8 million / 4.1% |
| Net income | $30.6 million | $28.9 million |
| Adjusted EBITDA (non-GAAP) | $134.3 million | $106.5 million |
| Operating cash flow | $72.9 million | $71.0 million |
| Capital expenditures | $8.8 million | $10.5 million |
- Sales increased 14%; acquisitions contributed 11 percentage points and organic sales growth 3 points. Adjusting for the shorter fiscal year, management said total growth would have been about 15%, with organic growth of 4%.
- Gross margin expanded 170 basis points, primarily from pricing and category-management initiatives; acquisitions contributed about 20 basis points.
- SG&A rose 20% to $446.5 million, including approximately $12 million of transition costs tied to stock offerings, debt refinancing and amendments, and termination of consulting agreements. SG&A was 27.1% of sales versus 25.7%.
- Interest and other non-operating expense increased to $22.1 million from $11.4 million, reflecting higher debt and rates, and write-offs of unamortized financing costs.
- FY2016 net income was positive, but net loss attributable to common shares was $91.4 million, or $3.01 per share. This included the $112.4 million portion of the special dividend allocated to preferred stockholders before preferred shares converted to common stock; it does not represent an operating loss.
- Fourth-quarter sales were $361.8 million versus $339.8 million; net loss was $5.6 million versus $5.9 million; Adjusted EBITDA was $11.2 million versus $11.9 million.
Cash, debt and liquidity
- At January 1, 2017, cash was $16.3 million, working capital $304.5 million, and total debt net of discounts and issuance costs $375.5 million. Debt principal was $388.9 million, with $11.0 million of capital leases.
- Operating cash flow was $72.9 million; investing cash outflow was $74.9 million, including $66.4 million for acquisitions; financing cash outflow was $1.8 million. The year included $176.0 million of special cash dividends and $13.0 million of other dividends, funded in significant part with borrowings.
- The ABL facility had $91.0 million outstanding and reported availability of $164.5 million at year-end. The term loan balance was $297.9 million before debt discounts and issuance costs. The term loan matures in 2022; the ABL matures in 2020.
- Term-loan borrowing bore 5.50% at year-end; the Tranche B terms provide for LIBOR plus 4.50% or base rate plus 3.50%. Debt is substantially variable-rate. Management estimated that a 1 percentage point rate increase would raise annual interest expense by approximately $3.9 million on variable-rate debt.
- Management stated that cash from operations and available ABL capacity were expected to fund operations, planned capital expenditures and liquidity needs for the following 12 months. Credit facilities contain restrictions and financial tests; the company reported covenant compliance at year-end.
Changes, outlook and risks
- Six acquisitions were completed during FY2016; acquisition spending was approximately $67.9 million. Management intends to continue acquisitions alongside organic growth.
- Management described pricing, category management, sales-force, marketing and supply-chain initiatives as ongoing and in early implementation stages. It expects selected initiatives to continue through 2017 or 2018, depending on the initiative.
- The filing provides no specific company revenue, earnings or margin guidance. Management cited housing and commercial construction recovery as demand drivers, but results remain exposed to construction cycles, weather, seasonality, water restrictions, product and fuel costs, supplier availability, inventory risk, labor costs, customer credit and acquisition integration.
- Environmental remediation liability for former LESCO manufacturing assets was estimated at $4.0 million, with a $1.6 million indemnification asset; Deere had agreed to cover the first $2.5 million and cap SiteOne’s exposure at approximately $2.4 million. The company reported no material litigation and did not expect unresolved claims to materially affect results.
- Auditors issued an unqualified opinion on the financial statements. The company did not include management’s assessment or an auditor attestation on internal control over financial reporting because of the newly public company transition period. Management concluded disclosure controls were effective at a reasonable assurance level.
Most important facts for investors to verify
- How much future growth and margin expansion is organic versus acquisition-driven, and whether the shorter fiscal year affects comparability.
- Debt principal, variable-rate exposure, covenant headroom, ABL availability and the cash required for interest, leases and contractual commitments.
- The recurring operating impact of FY2016 transition and financing costs, and the distinction between GAAP net income and the preferred-dividend-related common-share loss.
- Execution of operational initiatives and integration of recent and subsequent acquisitions, including their returns and working-capital requirements.
- Seasonal and weather-related sales variability, environmental remediation estimates, and the effects of regulation or water restrictions on product demand.