Business context and reporting period
SiteOne Landscape Supply, Inc. filed this unaudited Form 10-Q for the quarter ended September 27, 2020. It distributes landscape and irrigation supplies, agronomic products, nursery goods, hardscapes and related products to green-industry professionals through more than 550 branches. The quarter and nine-month comparison periods each comprised 13 and 39 weeks, respectively.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net sales | $751.9 million | $652.8 million | $2,029.4 million | $1,822.5 million |
| Gross profit / margin | $250.1 million / 33.3% | $215.2 million / 33.0% | $679.0 million / 33.5% | $603.2 million / 33.1% |
| Operating income / margin | $68.6 million / 9.1% | $52.5 million / 8.0% | $157.6 million / 7.8% | $120.5 million / 6.6% |
| Net income | $48.2 million | $34.6 million | $109.8 million | $75.2 million |
| Diluted EPS | $1.08 | $0.81 | $2.52 | $1.76 |
- Q3 sales grew 15%; nine-month sales grew 11%. Organic Daily Sales rose 11% in Q3 and 6% for the nine months. Acquisitions contributed $31.6 million and $94.9 million, respectively, to sales growth.
- Q3 Adjusted EBITDA was $87.8 million versus $70.5 million. This is a non-GAAP measure and should not be treated as a substitute for GAAP earnings or cash flow.
- Operating cash flow for the nine months was $180.7 million, versus $64.4 million. Investing cash outflow was $86.9 million, including $73.5 million for acquisitions; financing cash inflow was $161.9 million.
- Cash was $274.6 million at quarter-end. Gross debt was $438.4 million (net carrying amount $430.2 million); finance lease liabilities were $38.9 million. No ABL borrowings were outstanding, with $366.3 million of availability. Working capital was $709.6 million.
Material changes and notable items
- Margins improved year over year: gross margin increased 30 basis points in Q3 and 40 basis points for the nine months. Management attributed this mainly to lower freight costs and acquired businesses with higher gross margins. SG&A as a share of sales fell 90 basis points in Q3 and 80 basis points year to date, reflecting operating leverage and cost management.
- Management attributed higher net income primarily to sales growth, margin improvement and SG&A leverage. Lower interest rates and lower average debt reduced interest expense.
- On August 6, the company completed a public offering of 2.15 million shares, receiving approximately $261.7 million net. The proceeds were intended for general corporate purposes. The offering increased cash and equity and diluted shareholders.
- Acquisitions during the first nine months had an aggregate purchase price of approximately $74.6 million, with $7.0 million of deferred contingent consideration.
- After quarter-end, on September 30, the company repaid approximately $138.4 million of term-loan principal from cash, leaving $300.0 million outstanding. It also acquired BURNCO Landscape Centres and Hedberg Supply in October.
Outlook, risks and contingencies
The filing provides no quantitative earnings or sales guidance. Management said it expected cash from operations and ABL availability to support operations, expected capital expenditures and liquidity needs over the following 12 months; it reported approximately $641 million of total available liquidity at quarter-end and no debt maturities under its credit facilities until 2024. Management also said it could not reliably estimate the future impact of COVID-19.
- COVID-19 had reduced sales by 3% in April year over year, but management reported subsequent recovery and increased demand as customers invested in outdoor living. Potential continuing impacts include supply, staffing, delivery, customer-demand and collections disruptions, as well as broader recession risk. No material adverse impact on reported results was identified for the quarter or nine months.
- The company experienced a ransomware attack in July 2020. It warned of possible data disclosure, operating disruption, response costs, claims, regulatory action and reputational harm; insurance may not cover all losses.
- Other key exposures include seasonal and weather-driven demand, construction-market cycles, supplier and product availability, inventory and working-capital needs, acquisition integration, interest rates and substantial indebtedness.
- Environmental remediation costs were estimated at $3.6 million, with the company’s exposure capped at $2.4 million and a $1.2 million indemnification asset recorded. Outstanding letters of credit were $8.7 million. The company reported covenant compliance and no material litigation.
Important facts for investors to verify
- Whether strong organic demand and margin improvement persist beyond the seasonal peak, and how much reported growth reflects acquisitions.
- Cash and debt after the September 30 term-loan repayment, including the impact of subsequent acquisitions and ongoing capital allocation.
- Any financial, operational or data-protection consequences from the July ransomware attack, including insurance recovery or claims.
- COVID-19 effects on customers, suppliers, collections and demand, and any resulting changes to liquidity or forecasts.
- The sustainability and comparability of Adjusted EBITDA and other non-GAAP measures against GAAP results and cash flow.