SiteOne Landscape Supply, Inc. — Q2 2020 Form 10-Q
Reporting period: Quarter and six months ended June 28, 2020, compared with the periods ended June 30, 2019. SiteOne is a wholesale distributor of landscape supplies, operating more than 550 branches. Results are unaudited.
Financial performance
| Metric | Q2 2020 | Q2 2019 | First half 2020 | First half 2019 |
|---|---|---|---|---|
| Net sales | $817.7 million | $752.4 million | $1,277.5 million | $1,169.7 million |
| Gross profit / margin | $286.1 million / 35.0% | $258.0 million / 34.3% | $428.9 million / 33.6% | $388.0 million / 33.2% |
| Operating income | $112.3 million | $92.7 million | $89.0 million | $68.0 million |
| Net income | $79.1 million | $64.7 million | $61.6 million | $40.6 million |
| Diluted EPS | $1.83 | $1.52 | $1.43 | $0.95 |
| Operating cash flow | Not separately provided | Not separately provided | $119.1 million | $(11.4) million |
- Q2 sales increased 9%; organic daily sales grew 3%. For the first half, sales rose 9% and organic daily sales grew 4%. Acquisitions contributed $42.6 million to Q2 sales growth and $63.3 million to first-half growth.
- Q2 gross margin expanded 70 basis points; first-half margin expanded 40 basis points. Management attributed improvement primarily to lower freight costs and higher-margin acquisitions.
- SG&A rose 5% in Q2 and 6% for the first half, but declined as a share of sales by 80 basis points in both periods, to 21.4% and 26.8%, respectively. Management cited sales leverage and cost controls.
- Interest and other non-operating expenses declined to $7.6 million in Q2 and $15.3 million for the first half, versus $8.7 million and $17.7 million, respectively, mainly reflecting lower interest rates.
- First-half investing cash outflow was $55.5 million, including $45.3 million for acquisitions; capital expenditures were $9.5 million. Financing cash inflow was $81.4 million. Cash increased by $144.8 million to $163.8 million.
Balance sheet, debt, and liquidity
- At June 28, 2020, cash was $163.8 million, total current assets $993.4 million, and current liabilities $409.6 million. Working capital was $583.8 million, up $128.8 million from year-end.
- Total gross debt was $618.5 million ($609.8 million net of issuance costs and discounts), versus $534.6 million gross at December 29, 2019. This comprised $179.0 million under the ABL facility and $439.5 million under the term loan.
- ABL availability was $187.3 million. Cash plus available ABL capacity provided approximately $351 million of liquidity. The ABL balance increased during the first half; the company said it borrowed about $100 million in April to strengthen flexibility and subsequently repaid that borrowing during Q2.
- Debt maturities under the credit facilities begin in 2024. The company reported compliance with credit covenants at quarter-end. Interest rates were 1.68% on the ABL balance and 3.75% on the term loan.
Outlook, risks, and unusual items
- No specific financial guidance or quantified full-year outlook is provided. Management said it could not reliably estimate COVID-19’s future effects, but expected cash from operations and ABL availability to fund operations, expected capital spending, debt service, and liquidity needs for the next 12 months.
- COVID-19 caused sales to decline 3% in April year over year amid shelter-in-place restrictions. Management reported no material adverse effect on first-half financial statements, while warning that prolonged disruption could affect demand, suppliers, staffing, deliveries, customer collections, and liquidity. Cost actions included reduced hiring, furloughs, lower discretionary spending, reduced capital investment, and postponed acquisitions.
- The business is seasonal, with sales and income typically higher in Q2 and Q3. Weather, construction activity, supply availability, product costs, and the ability to pass cost increases through to customers are important sensitivities.
- A ransomware attack was detected July 14, 2020, after quarter-end. The company reported recovering critical operational data and no significant operating disruption; it did not expect a material financial impact based on information then available. The investigation remained ongoing, and the filing cautions about possible data exposure, claims, costs, or reputational effects despite cyber insurance.
- Environmental remediation liabilities were estimated at $3.6 million, with company exposure capped at $2.4 million and a $1.2 million indemnification asset recorded. No material litigation was reported.
Important facts for investors to verify
- Whether organic sales momentum and margin gains persist after the seasonal peak, and how much growth reflects acquisitions.
- Subsequent cash generation, working-capital needs, ABL borrowings and availability, and progress in reducing gross debt.
- COVID-19 effects on customers, suppliers, collections, and demand, including any changes to postponed acquisitions or capital spending.
- Final findings and costs from the July ransomware incident, including any data exposure, insurance recovery, or related claims.
- Debt covenant headroom and exposure to variable interest rates; the filing notes that interest-rate swap liabilities totaled $12.0 million at quarter-end.