SiteOne Landscape Supply, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended April 2, 2023 (13 weeks), compared with the three months ended April 3, 2022. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
SiteOne is a wholesale distributor of landscape supplies serving landscape professionals, with more than 640 branches across the U.S. and Canada. Sales are seasonal, typically higher in the second and third quarters. The company reported one operating and reportable segment.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Net sales | $837.4 | $805.3 | +4% |
| Gross profit / gross margin | $287.1 / 34.3% | $269.2 / 33.4% | +7% / +90 bps |
| SG&A | $291.4 | $230.5 | +26% |
| Operating income (loss) | $(0.3) | $41.2 | Down $41.5 |
| Net income (loss) | $(4.5) | $32.3 | Down $36.8 |
| Diluted EPS | $(0.10) | $0.70 | — |
| Adjusted EBITDA | $39.8 | $67.8 | Down $28.0 |
| Operating cash flow | $(152.6) | $(118.3) | More cash used |
Gross margin improvement reflected lower freight costs and acquired businesses with higher margins, partly offset by the absence of the prior-year quarter’s large price-realization benefit. SG&A as a percentage of sales rose to 34.8% from 28.6%, reflecting acquisitions, cost inflation, higher operating expenses, and a later spring selling season. Interest and other non-operating expense increased to $6.9 million from $4.3 million, primarily due to higher borrowings and interest rates.
Organic Daily Sales declined 2%. Management estimated price inflation contributed approximately 6% to Organic Daily Sales growth; landscaping products’ Organic Daily Sales rose 1%, while agronomic products declined 9%. Acquisitions contributed to reported sales growth. The MD&A cites acquisition sales contribution of $56.5 million, while the sales reconciliation shows $59.8 million; investors should verify the difference and the applicable definitions.
Liquidity, debt and cash flow
- At April 2, 2023, cash was $40.3 million, gross debt was $568.2 million, and total debt net of issuance costs and discounts was $562.9 million. Finance lease obligations, excluding interest, were $63.5 million.
- ABL borrowings were $313.0 million, with reported facility availability of $272.7 million; the ABL commitment was up to $600 million, subject to borrowing-base availability. Letters of credit totaled $14.3 million.
- Working capital was $959.5 million, up $200.0 million from January 1, 2023, primarily due to seasonality. Inventory increased to $943.1 million from $767.7 million.
- Operating cash use was $152.6 million, mainly reflecting seasonal working-capital investment and the quarterly net loss. Investing cash use was $39.6 million, including $33.2 million for acquisitions and $7.1 million of capital expenditures. Financing provided $203.4 million, primarily from seasonal ABL borrowing.
- Debt increased by $212.1 million from January 1, 2023, principally to fund seasonal working capital and acquisitions. ABL rates ranged from 6.07% to 8.00%; the term-loan rate was 7.16% at quarter-end.
- Management stated cash, operating cash generation, and ABL capacity were expected to be sufficient for operating needs, capital expenditures, acquisitions, share repurchases, and debt service over the next 12 months. No shares were repurchased in the quarter; $375.0 million remained under the authorization.
Outlook, commentary and risks
- Management expects higher interest rates, elevated inflation, and tighter financial markets to continue pressuring volumes. Price inflation is expected to moderate, with low-single-digit inflation anticipated for fiscal 2023 and most of it expected in the first half. No earnings or sales guidance range was provided in the filing text.
- Unfavorable weather affected Western and Northern markets; California Organic Daily Sales were down 21%. A late spring and limited snow and ice events also weakened agronomic product demand.
- Management cited a favorable long-term industry outlook based on population and housing trends and continuing interest in outdoor living, while noting consumer investment may be at lower levels. The Goodyear, Arizona distribution center began operating toward quarter-end as the company transitions its western distribution operations from California.
- Debt and liquidity risks include floating-rate exposure, covenant requirements, and reduced ABL availability as seasonal borrowings rise. The company amended its term loans and swaps to transition from LIBOR to SOFR; it also uses swaps to hedge portions of term-loan interest-rate exposure.
- The company reported compliance with debt covenants at quarter-end. It reported no material litigation or arbitration and no material change in market-risk disclosures. Environmental remediation costs were estimated at $3.9 million, with company exposure capped at $2.4 million and a $1.5 million indemnification asset recorded.
- Other disclosed risks include construction-market cyclicality, weather, inflation and product-price changes, supply-chain and labor constraints, inventory management, acquisition integration, competition, cybersecurity and IT disruption, and indebtedness. Management said disclosure controls were effective and reported no significant changes in internal control over financial reporting.
Most important facts for investors to verify
- How much of reported sales growth came from acquisitions and inflation versus underlying volumes, including the filing’s differing acquisition-contribution figures.
- Whether gross-margin gains can offset ongoing SG&A inflation and weak seasonal volumes, particularly as the spring selling season progresses.
- Working-capital needs, inventory levels, ABL availability, and interest expense as borrowings and floating rates change.
- The assumptions behind management’s low-single-digit fiscal 2023 price-inflation expectation and the absence of quantified earnings guidance.
- Acquisition integration and distribution-center transition costs, together with progress on expected operational and margin benefits.