SiteOne Landscape Supply, Inc. — Q2 2022 Form 10-Q
Reporting period: Unaudited quarter and six months ended July 3, 2022, compared with the periods ended July 4, 2021. Amounts are in millions unless stated otherwise. SiteOne is a wholesale distributor of landscape supplies, operating as one reportable segment with more than 620 branches.
Financial performance
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Net sales | $1,216.6 | $1,083.9 | $2,021.9 | $1,734.1 |
| Gross profit | $461.1 | $388.2 | $730.3 | $589.7 |
| Gross margin | 37.9% | 35.8% | 36.1% | 34.0% |
| Operating income | $190.1 | $164.6 | $231.3 | $175.0 |
| Net income | $140.7 | $123.5 | $173.0 | $130.9 |
| Diluted EPS | $3.07 | $2.70 | $3.78 | $2.86 |
| Adjusted EBITDA (non-GAAP) | $222.0 | $190.6 | Not clearly stated in the supplied filing text | Not clearly stated in the supplied filing text |
Q2 sales rose 12% and first-half sales rose 17%. Organic Daily Sales grew 8% in Q2 and 12% for the six months. Management estimated price inflation contributed approximately 19% and 20%, respectively, to that organic growth; higher prices, moderating economic conditions, and unfavorable weather in northern markets weighed on volumes. Acquisitions contributed $44.9 in Q2 and $88.3 for the six months to sales growth.
Gross margin expanded 210 basis points in both comparison periods, reflecting price realization, acquisitions, and supply-chain initiatives. SG&A rose 21% in Q2 and 20% in the first half, faster than sales, due to growth-related operating costs, inflation, and acquisitions. SG&A was 22.4% of sales in Q2 versus 20.8%, and 24.9% for the first half versus 24.1%.
Cash flow, debt, and liquidity
- First-half operating cash flow was negative $23.6, versus positive $92.2 a year earlier. Management attributed the change mainly to a larger seasonal inventory build, inflation, supply uncertainty, and purchases ahead of supplier price increases.
- First-half investing cash outflow was $144.7, including $122.0 of acquisitions net of cash acquired; capital expenditures were $16.6. Financing provided $164.9, primarily from increased borrowings.
- At July 3, cash was $50.1; gross debt was $444.2 (carrying value $439.8); and finance lease obligations were $46.6. Gross debt increased $184.0 from January 2, primarily to fund seasonal working capital and acquisitions.
- The existing asset-based credit facility had $186.0 drawn and $178.1 of availability at July 3. Working capital was $885.1, up from $615.9 at January 2, primarily due to seasonality. Management said cash, operating cash flow, and available credit were expected to cover requirements for the next 12 months.
- On July 22, after quarter-end, the company amended and restated its revolving credit facility, increasing commitments to $600.0 and extending maturity to July 22, 2027. The new facility provides for SOFR-based or alternate-base-rate borrowing.
Outlook, risks, and notable items
- No specific full-year financial guidance is provided in the supplied filing text. Management expected product-cost inflation to remain elevated for most of fiscal 2022 and anticipated ongoing supply-chain disruption, while expressing confidence in its pricing and operating initiatives.
- Key exposures include seasonality, weather, construction and consumer-demand cycles, inflation and interest rates, labor and freight constraints, supply shortages, inventory and working-capital needs, and the ability to pass cost increases through to customers. The company also cited uncertainty related to COVID-19 and the Russia-Ukraine conflict, neither of which had materially adversely affected reported results to date.
- Interest-rate swaps hedge portions of variable-rate debt. The company reported compliance with its debt covenants at July 3. ABL availability and borrowing costs remain sensitive to eligible receivables and inventory, rates, and facility terms.
- Several acquisitions were completed during 2022; River Valley was acquired July 22, after the quarter. The filing reports no current material litigation or arbitration. It records a $3.9 environmental remediation liability, with company exposure capped at $2.4 and a $1.5 indemnification asset.
Investor verification priorities
- Separate underlying volume and organic growth from the sizable contribution of pricing and acquisitions, and assess whether price increases remain sustainable.
- Monitor inventory, receivables, operating cash flow, and seasonal borrowing needs, particularly given negative first-half operating cash flow.
- Verify the impact of the July 22 credit-facility amendment on actual borrowing costs, availability, covenants, and liquidity.
- Track whether gross-margin gains persist as inflation, freight, labor, and supply constraints evolve, while SG&A grows faster than sales.
- Review acquisition integration, purchase-price allocations, and the contribution of acquired branches to future growth and cash generation.