SiteOne Landscape Supply, Inc. — Q1 2020 Form 10-Q
Reporting period: Three months ended March 29, 2020 (13 weeks); comparison is the three months ended March 31, 2019. SiteOne is a wholesale distributor of landscape supplies, with more than 550 branches. Results are seasonal, with sales historically higher in the second and third quarters.
Financial performance
| Metric | Q1 2020 | Q1 2019 | Change / context |
|---|---|---|---|
| Net sales | $459.8 million | $417.3 million | Up 10%; organic daily sales increased 5% |
| Gross profit / margin | $142.8 million / 31.1% | $130.0 million / 31.2% | Profit up 10%; margin down 10 basis points |
| SG&A | $167.1 million | $155.8 million | Up 7%; 36.3% of sales versus 37.3% |
| Operating loss | $(23.3) million | $(24.7) million | Loss narrowed |
| Net loss / diluted loss per share | $(17.5) million / $(0.42) | $(24.1) million / $(0.59) | Loss narrowed |
| Adjusted EBITDA | $(3.6) million | $(5.9) million | Non-GAAP measure |
| Operating cash flow | $(65.6) million | $(48.5) million | Greater seasonal working-capital use |
Landscaping-product organic daily sales grew 9%, attributed to favorable weather and strong end-market demand; agronomic-product organic daily sales declined 1%, primarily due to a warmer winter reducing ice-melt sales. Acquisitions contributed to sales growth. Management attributed the narrower net loss to sales growth and a larger income tax benefit, including $5.5 million of excess tax benefits from stock-based compensation, compared with $0.8 million in Q1 2019.
Cash, debt and liquidity
- At March 29, cash was $22.0 million; working capital was $520.8 million, up from $455.0 million at December 29, 2019, mainly reflecting seasonal inventory and receivables and acquisitions.
- Gross long-term debt was $653.8 million ($644.6 million net of issuance costs and discounts), including $213.1 million outstanding on the ABL facility and $440.7 million on the term loan. ABL availability was $155.0 million; management reported total available liquidity of approximately $177 million.
- Debt maturities under the credit facilities begin in 2024. Both credit facilities were reported in covenant compliance. The ABL facility has a $375 million commitment, subject to borrowing-base availability.
- Operating cash use reflected the spring-season working-capital build, including a $112.5 million inventory increase, partly offset by higher accounts payable. Investing cash use was $50.7 million, including $45.2 million for acquisitions; capital expenditures were $4.6 million. Financing provided $119.6 million, mainly from net ABL borrowings.
- On April 1, SiteOne drew approximately $100 million on the ABL facility as a precaution, bringing ABL borrowings to approximately $319 million. As of April 27, it reported approximately $122 million in cash and $47 million of ABL availability. The filing says the additional funds were not planned for use beyond seasonal working capital.
Material developments, outlook and risks
- COVID-19: Management said pandemic-related economic disruption negatively affected sales beginning late in Q1. Organic daily sales were down approximately 11% in April versus the comparable 2019 period through the filing date. The company expected near-term weakness to continue under restrictions, with potential improvement as restrictions ease; it could not reliably estimate the overall financial impact.
- Branches continued operating at the filing date. SiteOne was reducing costs through lower hiring, employee furloughs and limits on discretionary spending, and had paused or reduced capital projects and postponed pending acquisitions.
- No material adverse impact on Q1 results was reported, but management warned that prolonged disruption could affect demand, staffing, supplier availability, deliveries, customer collections, liquidity and asset valuations. Potential charges could include receivable or inventory adjustments, impairment and deferred-tax valuation allowances.
- No formal earnings guidance is provided in the supplied filing text. Management stated it expected operating cash and ABL capacity to fund operations and liquidity requirements for the following 12 months, while emphasizing substantial uncertainty.
- Q1 acquisitions included Big Rock, Garden Dept., Empire Supplies and Wittkopf Landscape Supply. Aggregate purchase price was approximately $44.8 million, with $6.2 million of deferred contingent consideration. Acquisition spending was higher than in the prior-year quarter.
- Other risks include seasonality and weather, construction-market cyclicality, supplier and product-price risks, labor costs, acquisition integration, substantial indebtedness and variable interest rates. Interest-rate swaps had a $12.4 million liability fair value at March 29; $3.4 million after tax of unrealized swap losses was expected to be reclassified to earnings over the following 12 months, subject to interest-rate movements.
- Environmental remediation liabilities were estimated at $3.6 million, with company exposure capped at $2.4 million and a $1.2 million indemnification asset recorded. No material litigation was reported.
Important facts for investors to verify
- Track April and subsequent organic sales trends, customer activity and the realized effects of COVID-19 restrictions and reopening.
- Monitor seasonal inventory, receivables, payables and operating cash flow, alongside ABL borrowing-base availability and liquidity after the April draw.
- Reconcile acquisition-related sales disclosures: MD&A cites a $20.7 million acquisition contribution to sales growth, while the sales reconciliation lists $25.0 million of acquired-branch sales for Q1 2020. The filing does not clearly explain this difference.
- Confirm covenant headroom, debt balances and interest exposure, including the effect of swap settlements and any further ABL borrowing.
- Assess margin trends, acquisition integration and any COVID-related credit-loss, inventory, goodwill or other impairment charges.