SiteOne Landscape Supply, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended October 1, 2023; comparative periods ended October 2, 2022. Amounts are in U.S. dollars. SiteOne is a wholesale distributor of landscape supplies, operating more than 690 branches across the U.S. and Canada. Its business is seasonal, with sales typically strongest in the second and third quarters.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Net sales | $1,145.1m | $1,102.6m | $3,336.2m | $3,124.5m |
| Gross profit / margin | $388.1m / 33.9% | $388.6m / 35.2% | $1,164.6m / 34.9% | $1,118.9m / 35.8% |
| Operating income | $81.2m | $101.8m | $252.2m | $333.1m |
| Net income | $57.3m | $73.3m | $176.8m | $246.3m |
| Diluted EPS | $1.25 | $1.60 | $3.87 | $5.38 |
- Q3 sales increased 4%; nine-month sales increased 7%, primarily from acquisitions. Acquisitions added $64.7m to Q3 sales and $207.3m to nine-month sales.
- Organic Daily Sales declined 2% in Q3 and grew 1% for the first nine months. Management estimated Q3 price deflation reduced Organic Daily Sales by about 4%; nine-month price contribution was about 1%.
- Q3 gross margin fell 130 basis points and nine-month margin fell 90 basis points. SG&A rose 8% in Q3 and 17% year to date; SG&A was 27.2% and 27.7% of sales, respectively.
- Net income declined 22% in Q3 and 28% year to date, mainly from lower gross margin and higher SG&A. Higher borrowing and interest rates also increased non-operating expense.
Cash flow, balance sheet and debt
- For the first nine months, operating cash flow was $189.9m, versus $112.5m; investing cash flow was $(209.2)m, including $181.7m of acquisition spending and $24.1m of capital expenditures; financing cash flow was $65.1m. Cash ended at $74.9m, up from $29.1m at fiscal year-end.
- At October 1, cash was $74.9m, working capital was $918.8m, and total assets were $2,989.5m. Accounts receivable was $540.4m and inventory was $852.2m.
- Gross debt was $445.3m, compared with $356.1m at January 1; total debt net of issuance costs was $438.9m. Finance lease obligations were $82.0m. The $600m asset-based revolving facility had $513.2m of availability, after borrowings and letters of credit.
- Reported rates at October 1 were 7.43% on term loans and 6.68% on ABL borrowings. The term loans mature in 2028 and the ABL facility in 2027. The company reported compliance with debt covenants.
- Operating cash flow improved mainly through inventory reduction and working-capital management. The company added $120m of term loans in July, using proceeds partly to repay ABL borrowings. It completed multiple acquisitions; aggregate purchase price for acquisitions in the nine months was $187.5m, plus $11.3m of deferred contingent consideration.
Outlook, risks and other notable items
- No quantified earnings or sales guidance is provided in the filing. Management expects elevated interest rates, tighter financial markets, weaker consumer spending, moderating inflation and deflation in selected commodities to pressure sales growth through the remainder of 2023 and into 2024. It expects the negative pricing trend to continue before moderating early next year.
- Management describes the industry’s longer-term outlook as favorable, citing population trends, housing demand and outdoor-living interest. It plans to pursue organic growth and acquisitions, margin expansion, supply-chain efficiencies and operational initiatives.
- Key uncertainties include construction-market cyclicality, demand and pricing, weather and seasonality, supplier and labor constraints, inventory management, acquisition integration, inflation and interest rates, and geopolitical conditions. Management says it cannot estimate the full effects of current market and geopolitical uncertainty.
- The company reported no material litigation or arbitration expected to affect results, and no significant change in internal controls. It recorded a $3.9m environmental remediation liability, with its exposure capped at $2.4m and a $1.5m indemnification asset. No shares were repurchased under the authorization during the period.
Investor verification points
- Assess how much reported sales growth reflects acquisitions versus organic volume and pricing, particularly as commodity deflation continues.
- Track whether gross-margin pressure and elevated SG&A persist, and whether planned efficiencies support margin recovery.
- Monitor cash conversion, inventory levels, acquisition spending and the increase in debt and interest costs.
- Review acquisition integration and purchase accounting, debt availability and covenant headroom, and management’s progress against its unquantified outlook.
- Consider seasonal effects and the filing’s stated sensitivity to weather, housing and construction activity, interest rates and customer spending.