SiteOne Landscape Supply, Inc. — Q3 2019 Form 10-Q
Business context and period: SiteOne is a wholesale distributor of landscape supplies and related services, operating more than 550 branches. This unaudited report covers the 13 weeks and 39 weeks ended September 29, 2019; comparisons are with the periods ended September 30, 2018. Sales are seasonal, typically strongest in the second and third quarters.
Financial performance
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Net sales | $652.8 million | $578.5 million | $1,822.5 million | $1,637.7 million |
| Gross profit / margin | $215.2 million / 33.0% | $191.0 million / 33.0% | $603.2 million / 33.1% | $529.4 million / 32.3% |
| Operating income | $52.5 million | $41.5 million | $120.5 million | $106.7 million |
| Net income | $34.6 million | $29.9 million | $75.2 million | $76.0 million |
| Diluted EPS | $0.81 | $0.70 | $1.76 | $1.78 |
| Operating cash flow | — | $64.4 million | $41.7 million |
- Quarterly sales rose 13%; management reported Organic Daily Sales growth of 7% in Q3 and 4% for the first nine months. Acquisitions contributed $39.0 million to Q3 sales growth and $126.2 million to nine-month growth.
- Q3 SG&A was $165.0 million, or 25.3% of sales, versus 26.2% a year earlier. Nine-month SG&A was $487.5 million, or 26.7% of sales, versus 26.2%.
- Nine-month gross margin improved 80 basis points, which management attributed primarily to higher-margin acquisitions, opportunistic inventory purchases, and improved pricing. Q3 gross margin was unchanged.
- Interest and other non-operating expense was $25.9 million for the nine months, up from $23.8 million, mainly reflecting higher average debt. The effective tax rate increased to 20.5% from 8.3%, primarily because of lower excess stock-based compensation tax benefits; this largely explains the slight decline in nine-month net income despite higher sales and operating income.
Financial position and liquidity
- At September 29, 2019, cash was $30.3 million; working capital was $516.2 million. Current assets were $875.2 million and current liabilities were $359.0 million.
- Gross long-term debt was $585.7 million, with a $575.5 million carrying amount after debt issuance costs and discounts. Finance lease liabilities were $20.8 million. Operating lease liabilities were $227.5 million, recognized following adoption of the new lease standard.
- The ABL facility had $142.8 million outstanding and $226.9 million of availability under its $375 million commitment, subject to borrowing-base limits. The term loan interest rate was 4.90%; the ABL rate was 3.62% at quarter-end. The company reported compliance with debt covenants.
- Nine-month investing cash outflow was $64.0 million, including $47.3 million for acquisitions and $16.4 million of capital expenditures. Financing cash inflow was $12.5 million. Operating cash flow improved year over year, which management attributed primarily to improved working-capital management.
- Management expected cash on hand, operating cash flow, and ABL availability to fund operations, expected capital expenditures, and liquidity needs for the following 12 months, including debt service.
Changes, outlook, and risks
- The company completed several acquisitions in 2019, with aggregate purchase price of approximately $46.4 million, broadening its hardscapes, landscape-supply, and agronomics presence. A further acquisition completed September 30, after quarter-end, was described as immaterial.
- ASC 842 lease accounting was adopted in Q1 2019 without restating prior periods. It materially increased reported assets and liabilities but had an immaterial impact on the income and cash flow statements.
- No specific numerical earnings or sales guidance was provided. Management cited solid end-market demand, cost-inflation-related price increases, and more favorable Q3 weather versus the prior-year quarter and first half. Weather and seasonality can materially affect results.
- Key disclosed risks include construction-market cyclicality, economic conditions, weather and water availability, competition, supplier or product shortages, price and inventory fluctuations, acquisition integration, labor and operating costs, credit-sale exposure, cybersecurity, regulation, and substantial indebtedness and interest-rate exposure.
- Interest-rate swaps hedge portions of variable-rate term debt; changes in swap fair value reduced nine-month other comprehensive income. Counterparty failure could eliminate hedge benefits while leaving the company exposed to variable interest payments.
- The company reported a $3.7 million estimated environmental remediation liability, capped exposure of $2.4 million, and a $1.3 million indemnification asset. It reported no material litigation and no material changes to previously disclosed risk factors.
Investor verification priorities
- Verify how much reported sales growth reflects organic demand, pricing, weather, and acquired businesses, and whether organic growth is sustained.
- Assess the durability of margin improvement and the effects of acquisition mix, integration costs, and rising SG&A.
- Reconcile higher nine-month operating income with lower net income, focusing on the tax-rate change and stock-compensation tax benefits.
- Monitor seasonal working-capital needs, cash conversion, ABL availability, debt service, and the effect of recognized lease obligations on leverage and liquidity.
- Review acquisition execution, interest-rate hedge coverage and counterparty exposure, and the environmental remediation estimate.