SiteOne Landscape Supply, Inc. — Q3 2018 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2018; comparisons are with periods ended October 1, 2017. SiteOne is a wholesale distributor of landscape supplies, with more than 540 branches. Results are seasonal, typically strongest in the second and third quarters. Figures below are in millions of dollars except per-share data, percentages and where noted.
Financial performance
| Metric | Q3 2018 | Q3 2017 | Nine months 2018 | Nine months 2017 |
|---|---|---|---|---|
| Net sales | $578.5 | $502.4 | $1,637.7 | $1,446.0 |
| Gross profit / margin | $191.0 / 33.0% | $160.3 / 31.9% | $529.4 / 32.3% | $463.6 / 32.1% |
| Operating income / margin | $41.5 / 7.2% | $33.8 / 6.7% | $106.7 / 6.5% | $99.0 / 6.8% |
| Net income / margin | $29.9 / 5.2% | $16.9 / 3.4% | $76.0 / 4.6% | $50.6 / 3.5% |
| Diluted EPS | $0.70 | $0.41 | $1.78 | $1.23 |
- Q3 sales rose 15%; organic daily sales increased 5%. Nine-month sales rose 13%, with organic daily sales up 4%. Acquisitions contributed $53.9 million of Q3 sales growth and $130.2 million of nine-month growth.
- Gross margin improved 110 basis points in Q3, reflecting pricing and acquisition mix, partly offset by higher material and freight costs. Nine-month margin increased 20 basis points, attributed mainly to category-management initiatives and acquisitions.
- SG&A rose 19% in Q3 and 16% year to date; expenses were 26.2% of sales in both periods, versus 25.5% a year earlier. Management cited acquisition-related costs and investment in e-commerce and supply chain initiatives.
- Interest and other non-operating expense increased to $9.2 million in Q3 and $23.8 million year to date, primarily due to higher average debt and rising rates.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $41.7 million, versus cash used of $14.6 million in 2017. Investing cash outflow was $139.8 million, including $126.3 million for acquisitions and $11.5 million for property and equipment. Financing provided $104.9 million. Cash increased $6.7 million to $23.4 million.
- At September 30, 2018, working capital was $513.7 million; current assets were $813.1 million and current liabilities $299.4 million. Management attributed the working-capital increase partly to seasonality and acquisition-related inventory and receivables.
- Gross long-term debt was $586.1 million, including $139.9 million under the ABL facility and $446.2 million under the term loan; reported debt net of issuance costs and discounts was $574.2 million. Capital lease obligations were $15.2 million.
- ABL availability was $180.7 million. The term loan was amended in August, refinancing the prior tranche and extending maturity to October 29, 2024; its rate was 4.89% at quarter-end. ABL outstanding rates ranged from 4.25% to 6.25%. The company reported compliance with debt covenants.
- Management expects cash from operations and ABL capacity to fund operations, anticipated capital spending and debt service for the next 12 months. Two forward-starting swaps are scheduled to fix rates on portions of term-loan borrowings from March 2019 through June 2021.
Material developments, outlook and risks
- SiteOne completed multiple acquisitions during the first nine months of 2018 for an aggregate purchase price of approximately $127.2 million, expanding product offerings and geographic reach. An additional four-location acquisition closed October 19 and was described as not material.
- The lower effective tax rate materially boosted reported earnings: nine-month tax expense was $6.9 million versus $29.4 million, with effective rates of 8.3% and 36.8%. The decrease reflected the U.S. corporate tax-rate reduction and $15.3 million of excess tax benefits, versus $2.5 million in the prior-year period. Tax Act accounting remained provisional in certain respects.
- No full-year earnings or sales guidance is provided in the supplied filing text. Management emphasizes seasonality and exposure to weather, construction-market cycles, product-price and freight inflation, supplier availability, competition, acquisition integration, labor and interest-rate changes.
- The company expects adoption of the new lease standard in 2019 to significantly increase lease-related balance-sheet assets and liabilities; income-statement effects were still under evaluation. No material litigation was reported. Environmental remediation liability was estimated at $3.8 million, partly offset by a $1.4 million indemnification asset.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- How much of sales and earnings growth reflects acquired businesses versus organic demand, and whether acquisition integration and costs affect margins.
- Whether gross-margin gains can persist amid freight and material-cost inflation, and whether SG&A investment begins to leverage against sales.
- The durability of the unusually low effective tax rate and the contribution of excess stock-compensation tax benefits to reported earnings.
- Debt-service capacity, borrowing-base availability, floating-rate exposure and covenant headroom as debt and interest costs rise.
- Seasonal working-capital needs, acquisition funding requirements, and the eventual balance-sheet and earnings effects of lease-standard adoption.