Scotts Miracle-Gro Company — Q2 FY2020 Form 10-Q
Business context and period. The filing covers the quarter and six months ended March 28, 2020. Scotts manufactures and markets lawn and garden products, including indoor and hydroponic gardening products through Hawthorne. Sales are highly seasonal: the second and third fiscal quarters together represented about 75% of annual sales in recent years.
Financial performance
| Metric | Three months ended Mar. 28, 2020 | Prior-year quarter | Six months ended Mar. 28, 2020 | Prior-year period |
|---|---|---|---|---|
| Net sales | $1,382.8 million | $1,189.9 million | $1,748.6 million | $1,488.0 million |
| Gross profit / margin | $550.2 million / 39.8% | $472.1 million / 39.7% | $604.4 million / 34.6% | $506.7 million / 34.1% |
| Operating income / margin | $353.7 million / 25.6% | $290.2 million / 24.4% | $291.1 million / 16.6% | $205.4 million / 13.8% |
| Net income | $252.4 million | $396.4 million | $181.1 million | $316.8 million |
| Diluted EPS | $4.47 | $7.09 | $3.19 | $5.67 |
- Quarterly sales rose 16.2%; six-month sales rose 17.5%, driven mainly by volume growth in U.S. Consumer and Hawthorne, pricing, and increased Roundup marketing-agreement revenue. Hawthorne sales grew 59.6% in the quarter; U.S. Consumer sales grew 11.0%. Other segment sales declined 4.2%.
- Operating income increased 21.9% for the quarter and 41.7% for the six-month period. The prior-year net income comparison is distorted by a $259.8 million gain from selling the company’s TruGreen joint-venture interest in 2019. Excluding that unusual prior-period gain, the headline decline in 2020 net income is not a like-for-like measure of operating performance.
- Quarterly diluted continuing-operations EPS was $4.43 versus $7.10; six-month diluted continuing-operations EPS was $3.15 versus $5.62. Six-month 2020 results included $15.1 million in refinancing costs related to redeeming the 6.000% notes.
- Cash used in operating activities was $607.1 million for the six months, compared with $546.1 million a year earlier, principally reflecting seasonal working-capital needs, inventory production timing, and higher incentive compensation and SG&A. Investing activities provided $82.1 million, including $115.5 million from the Roundup brand-extension asset sale. Financing activities provided $537.3 million.
- At March 28, 2020, cash was $30.8 million and total debt was $2,336.5 million, versus $2,405.3 million at March 30, 2019. Current debt was $212.2 million and long-term debt was $2,113.8 million. The company reported $785.7 million of availability under its main credit agreement.
Changes, outlook and risks
- In October 2019, Scotts issued $450 million of 4.500% senior notes due 2029 and redeemed $400 million of 6.000% notes due 2023. Refinancing costs were $15.1 million; management reported lower interest expense year over year.
- Management maintained its projected FY2020 earnings range, citing strong first-half demand and flexibility to reduce discretionary spending. The filing text does not provide a clear numeric value for that earnings range.
- COVID-19 had not materially disrupted manufacturing, distribution, retail partners, or incoming supplies as of the filing. The company estimated up to $35 million of incremental pandemic-related costs, mainly premium pay; $3.8 million had been incurred through March 28. It suspended share repurchases effective March 30 and delayed some capital expenditures to preserve flexibility.
- Management cautioned that pandemic duration, supply-chain and labor availability, retail operations, consumer demand, customer payment capacity, and access to credit could affect results and liquidity. It stated it expected to remain within debt covenant limits based on current assumptions; leverage was 3.13 against a 4.75 maximum for the period, and interest coverage was 7.29 against a 3.00 minimum.
- Other items to monitor include the receivables facility, which expires August 21, 2020; environmental and ordinary-course legal matters; and the previously disclosed bird-food litigation, for which the company recorded $1.5 million of insurance recoveries in the period. No material change in pending legal proceedings was reported.
Most important facts for investors to verify
- The numeric FY2020 earnings guidance and any subsequent revisions, particularly as COVID-19 impacts and seasonal demand developed.
- Whether strong Q2 sales and Hawthorne growth translated into sustainable margins, cash generation, and receivables collection.
- Debt, borrowing availability, covenant headroom, and renewal or replacement of the receivables facility.
- The total and timing of pandemic-related costs versus management’s estimate of up to $35 million.
- The effect of the Roundup marketing agreement and any legal, environmental, or other contingent liabilities.