SiteOne Landscape Supply, Inc. — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; comparative period ended April 1, 2018. Amounts are in millions unless otherwise noted. SiteOne is a wholesale distributor of landscape supplies, with more than 540 branches. Results are highly seasonal, with sales and income typically higher in the second and third quarters.
Financial performance
| Metric | Q1 2019 | Q1 2018 | Change / context |
|---|---|---|---|
| Net sales | $417.3 | $371.4 | Up 12%; organic daily sales grew 5%. Acquisitions contributed $29.5, or 8%, to sales growth. |
| Gross profit / margin | $130.0 / 31.2% | $108.5 / 29.2% | Gross profit up 20%; margin improved 200 basis points. |
| SG&A | $155.8 | $131.7 | Up 18%; 37.3% of sales versus 35.5%, reflecting acquisition costs, growth investments, and the seasonally low sales quarter. |
| Operating loss | $(24.7) | $(20.6) | Loss widened. |
| Net loss / diluted loss per share | $(24.1) / $(0.59) | $(17.0) / $(0.43) | Loss widened, primarily due to higher operating and interest expense. |
| Adjusted EBITDA | $(5.9) | $(5.1) | Non-GAAP measure; the filing cautions it is not a substitute for GAAP results or cash flow. |
| Cash from operating activities | $(48.5) | $(40.8) | Greater cash use, primarily reflecting timing of spring inventory purchases and accounts payable. |
Balance sheet, debt and liquidity
- Cash was $21.1 at March 31, 2019, versus $17.3 at December 30, 2018. Working capital was $482.9, essentially unchanged from $483.0.
- Gross long-term debt was $643.1, up from $569.3 at year-end; reported debt, net of issuance costs and discounts, was $632.0. Finance lease liabilities were $16.1.
- Operating lease liabilities were $203.8 following adoption of ASC 842; the filing says adoption materially affected the balance sheet but did not materially affect the income statement or cash flows.
- The ABL facility had $199.1 outstanding and $170.6 of availability, with a $375.0 commitment. SiteOne amended the facility in February, extending its termination date to February 1, 2024 and increasing commitments.
- The term loan balance was $444.0, with a 5.24% rate at quarter-end and maturity extended to October 2024. The ABL rate was 4.00% at quarter-end.
- Management expects cash on hand, operating cash flow and ABL availability to fund operations, expected capital expenditures and liquidity needs for the next 12 months. The company reported compliance with debt covenants.
Cash flow and investment
- Investing cash outflow was $19.2, compared with $55.3 in Q1 2018, mainly because acquisition spending was lower. Acquisitions, net of cash acquired, were $12.8; capital expenditures were $6.4, versus $2.0 a year earlier.
- Financing cash inflow was $71.4, including $140.5 of ABL borrowings and $64.5 of ABL repayments. Cash increased $3.8 during the quarter.
- Interest paid was $8.9, up from $5.8 in the prior-year quarter.
Material changes and management commentary
- Sales growth reflected 5% organic daily sales growth, price increases in response to cost inflation, and acquisitions. Agronomic products grew 7% organically; landscaping products grew 3%.
- Gross margin improvement was attributed to improved pricing, opportunistic inventory purchases and acquisitions. Higher SG&A and interest costs more than offset gross profit growth, contributing to a larger quarterly loss.
- Q1 2019 acquisitions were All Pro Horticulture and Cutting Edge Curbing Sand & Rock, for aggregate purchase consideration of approximately $12.7. Subsequent to quarter-end, SiteOne acquired Landscape Depot and Fisher’s Landscape Depot; these acquisitions were described as immaterial and not expected to significantly affect the financial statements.
- There is no specific earnings or sales guidance in the provided filing text. Management emphasized seasonality and stated that first-quarter results are not necessarily indicative of full-year performance.
- Key risks include weather and seasonality, economic and construction cycles, competition, supplier availability and price changes, inventory and working-capital needs, acquisition integration, labor costs, interest rates and substantial indebtedness. Interest-rate swaps hedge portions of variable-rate term debt; counterparty failure could remove the hedge benefit.
Contingencies, controls and unusual items
- Environmental remediation liability was estimated at $3.7, with exposure capped at $2.4 and an associated $1.3 indemnification asset.
- Outstanding letters of credit were $5.3; none had been drawn. The company reported no material litigation or arbitration and did not expect ordinary-course proceedings to have a material effect, while noting outcomes cannot be assured.
- ASC 842 lease accounting adoption added operating lease assets and liabilities to the balance sheet. The company also recorded a $0.4 write-off of unamortized ABL debt costs related to the February amendment.
- Management concluded disclosure controls and procedures were effective at quarter-end. It reported no material changes to risk factors from the 2018 Form 10-K.
Important facts for investors to verify
- Whether seasonal demand and organic daily sales growth persist into the normally stronger second and third quarters.
- Whether gross-margin gains from pricing and purchasing practices are sustained as product costs and competitive conditions change.
- How acquisition integration, related expenses and the contribution from acquired branches affect future sales, margins and cash generation.
- Debt and interest-rate exposure, ABL availability and covenant headroom, particularly as seasonal inventory needs increase.
- The impact of operating lease commitments and working-capital requirements on cash flow; Q1 operating cash flow was negative $48.5.