SiteOne Landscape Supply, Inc. — Q3 2022 Form 10-Q
Reporting period: Fiscal quarter and nine months ended October 2, 2022; each period comprised 13 and 39 weeks, respectively. SiteOne is a wholesale distributor of landscape supplies, with more than 630 branches in the U.S. and Canada. The business is seasonal, with sales typically strongest in the second and third quarters. All amounts below are in millions of dollars, except per-share data and percentages.
Key financial results
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,102.6 | $936.4 | $3,124.5 | $2,670.5 |
| Gross profit / margin | $388.6 / 35.2% | $340.5 / 36.4% | $1,118.9 / 35.8% | $930.2 / 34.8% |
| SG&A | $289.2 | $235.3 | $792.4 | $653.4 |
| Operating income | $101.8 | $103.4 | $333.1 | $278.4 |
| Net income | $73.3 | $80.0 | $246.3 | $210.9 |
| Diluted EPS | $1.60 | $1.74 | $5.38 | $4.61 |
| Adjusted EBITDA (non-GAAP) | $135.6 | $128.2 | Not clearly provided in the filing text | Not clearly provided in the filing text |
Financial position, cash flow, and debt
- At October 2, cash was $62.7; working capital was $869.2, up from $615.9 at fiscal year-end, primarily reflecting seasonality. Inventory was $853.5, versus $636.6 at January 2, 2022.
- Nine-month operating cash flow was $112.5, down from $159.4 year over year, mainly because of higher inventory. Investing cash outflow was $211.0, including $182.2 of acquisitions and $20.5 of capital expenditures. Financing cash inflow was $108.5. Cash ended at $62.7.
- Gross debt was $393.7 ($387.8 net of issuance costs and discounts), up $133.5 from January 2. Finance lease obligations were $51.5, excluding interest. The company attributed higher borrowing primarily to seasonal working capital and acquisitions.
- The $600.0 ABL facility had $136.5 outstanding and $452.0 of availability, including the effect of $11.5 in letters of credit. ABL rates were 4.20%–4.43%; term-loan rate was 5.12%. The term loans mature in 2028; the amended ABL facility matures in 2027. The company reported compliance with debt covenants.
Changes versus the prior comparable periods
- Q3 sales grew 18%; nine-month sales grew 17%. Organic Daily Sales increased 12% in both periods. Management estimated price inflation contributed about 17% of Q3 and 19% of nine-month Organic Daily Sales growth; acquisitions contributed $56.6 of Q3 sales growth and $144.9 for the nine months.
- Q3 gross margin fell 120 basis points, while nine-month gross margin improved 100 basis points. Management cited moderating price realization for the quarterly decline; nine-month improvement reflected price realization, acquisitions, and supply-chain initiatives.
- Q3 net income declined $6.7, as lower gross margin and higher SG&A outweighed sales growth. Nine-month net income increased $35.4, primarily on sales growth and improved gross margin. Higher SG&A, cost inflation, and acquisitions raised SG&A as a share of sales in both periods.
- Nine-month cash from operations decreased, while acquisition spending and related investing outflows increased. Debt rose to fund working capital and acquisitions.
Outlook, commentary, risks, and unusual items
- Management said demand remained solid but noted supply-chain disruptions, product shortages, freight and labor constraints, inflation, rising fuel costs, and economic uncertainty. It expected inflation to remain elevated for most of fiscal 2022 and said supply-chain disruptions could continue. No quantified earnings or sales guidance is provided in the filing text.
- Management reported successful pass-through of product cost increases to date, supported by supplier/customer coordination, strategic inventory purchases, and freight and logistics initiatives. It also cited dampened volumes from higher prices and moderating economic conditions, plus unfavorable weather in northern markets.
- Acquisitions completed in the first nine months had an aggregate purchase price of $186.0, with $15.6 of deferred contingent consideration. Goodwill increased to $386.8, including $77.0 acquired during the period.
- On October 20, 2022, the board authorized repurchases of up to $400.0 of common stock, with no expiration date. The filing does not state that repurchases had commenced. A further acquisition was completed on October 13, after quarter-end.
- Interest-rate exposure is partly hedged with swaps; variable-rate borrowings remain exposed to rate increases. Other disclosed risks include seasonality and weather, construction-market cyclicality, inflation and ability to pass through costs, supply and labor availability, inventory management, acquisitions, and debt and financing conditions.
- The company recorded a $3.9 environmental remediation liability, partly offset by a $1.5 indemnification asset; its stated exposure is capped at $2.4. It reported no material litigation and no material adverse COVID-19 impact for the periods presented. The Inflation Reduction Act was not expected to have a material financial-statement impact, though the company had not completed its analysis.
Important facts for investors to verify
- Whether sales growth and margins can be sustained as price inflation moderates and customer volumes face pressure.
- How inventory levels, working-capital needs, and operating cash generation evolve after strategic purchasing and seasonal borrowing.
- Debt balances, borrowing costs, ABL availability, covenant compliance, and sensitivity to further interest-rate increases.
- Acquisition integration, purchase-price allocation, contingent consideration, and the returns on acquisition spending.
- Whether the $400.0 repurchase authorization is used, and how any repurchases are funded alongside acquisitions and other liquidity needs.