SiteOne Landscape Supply, Inc. — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019 (13 and 26 weeks, respectively); comparisons are with periods ended July 1, 2018. SiteOne is a wholesale distributor of landscape supplies, operating more than 540 branches. Its sales and earnings are typically strongest in the second and third quarters.
Financial performance
| Metric | Q2 2019 | Q2 2018 | First half 2019 | First half 2018 |
|---|---|---|---|---|
| Net sales | $752.4 million | $687.8 million | $1,169.7 million | $1,059.2 million |
| Gross profit | $258.0 million | $229.9 million | $388.0 million | $338.4 million |
| Gross margin | 34.3% | 33.4% | 33.2% | 31.9% |
| Operating income | $92.7 million | $85.8 million | $68.0 million | $65.2 million |
| Net income | $64.7 million | $63.1 million | $40.6 million | $46.1 million |
| Diluted EPS | $1.52 | $1.48 | $0.95 | $1.08 |
- Revenue and margins: Sales increased 9% in Q2 and 10% in the first half. Organic daily sales grew 1% and 2%, respectively; acquisitions contributed $57.7 million to Q2 sales and $87.2 million to first-half sales. Management attributed organic growth to higher prices offsetting weather-related lower volumes. Gross margin improved, which management attributed primarily to acquisitions with higher margins, opportunistic inventory purchases and improved pricing.
- Costs and earnings: SG&A rose 15% in Q2 and 16% in the first half, driven mainly by acquisitions, as well as health-care and stock-compensation costs and wage inflation. SG&A reached 22.2% of sales in Q2 and 27.6% for the first half. First-half net income declined despite higher sales and operating income, reflecting higher interest expense and a higher effective tax rate.
- Cash flow: First-half operating cash use was $11.4 million, improved from $28.4 million used a year earlier. Investing used $48.4 million, including $35.5 million for acquisitions and $12.7 million for capital expenditures. Financing provided $67.6 million. Cash increased to $25.2 million from $17.3 million at year-end.
- Debt and liquidity: At June 30, gross long-term debt was $639.7 million ($629.0 million net of debt costs and discounts); finance lease liabilities were $17.9 million. The ABL balance was $196.8 million, with $172.9 million of availability under the $375 million facility. Working capital was $535.7 million. The company reported compliance with debt covenants and expected cash, operating cash flow and ABL availability to fund operations and obligations for the next 12 months.
- Lease accounting: Adoption of ASC 842 in 2019 added operating lease right-of-use assets of $213.4 million and operating lease liabilities of $216.4 million at June 30. Prior periods were not restated; management reported no material impact on the income statement or cash flows.
Outlook, commentary and risks
The filing provides no numerical earnings or sales guidance. Management cited seasonality, unfavorable weather, cost inflation and modest organic sales growth. Business results are exposed to weather and water availability, construction and economic cycles, supplier and product-price risks, competition, labor and acquisition integration, and working-capital needs. Variable-rate borrowing creates interest-rate exposure; interest-rate swaps hedge portions of term-loan exposure.
SiteOne completed five acquisitions during the first half of 2019 for approximately $34.9 million, with $4.7 million of deferred contingent consideration. A subsequent acquisition completed July 3, 2019 was described as immaterial. The company estimated environmental remediation costs of $3.7 million, capped its exposure at $2.4 million, and recorded a $1.3 million indemnification asset. It reported no material litigation and no material change in risk factors from its 2018 Form 10-K.
Investor verification points
- Assess whether organic growth and weather-related volume trends support continued sales growth apart from acquisitions and pricing.
- Review whether gross-margin improvement can persist as acquisition mix, inventory purchasing and pricing conditions change.
- Track SG&A growth, wage and benefit costs, and the effect of acquisition integration on operating leverage.
- Monitor seasonal working-capital cash use, ABL borrowings and availability, debt service, and the company’s ability to meet covenants.
- Consider the impact of the higher first-half effective tax rate and interest expense on full-year earnings.