Scotts Miracle-Gro Co. — Form 10-Q Summary
Reporting period: Second quarter and first six months of fiscal 2018, ended March 31, 2018. The company sells branded lawn and garden products and indoor/hydroponic gardening products. Results exclude the International Business, sold in August 2017, which is reported as discontinued operations. The business is highly seasonal, with most sales in fiscal Q2 and Q3.
Financial performance
| Metric | Three months ended Mar. 31, 2018 | Year-over-year | Six months ended Mar. 31, 2018 | Year-over-year |
|---|---|---|---|---|
| Net sales | $1,013.3 million | Down 6.6% | $1,234.9 million | Down 4.4% |
| Gross profit / margin | $409.2 million / 40.4% | Margin down 2.4 points | $443.2 million / 35.9% | Margin down 2.9 points |
| Operating income | $232.3 million | Down 18.6% | $160.4 million | Down 28.2% |
| Continuing-operations income | $152.7 million | Prior year: $154.1 million | $132.7 million | Prior year: $96.0 million |
| Diluted continuing-operations EPS | $2.66 | Prior year: $2.54 | $2.29 | Prior year: $1.57 |
| Net income | $149.0 million | Prior year: $165.2 million | $127.8 million | Prior year: $100.3 million |
- Consolidated operating performance weakened on lower sales and gross margin, despite lower SG&A. Main pressures included lower volume, higher transportation costs, customer rebates and mix, weaker Roundup-related net sales, and unfavorable fixed-cost absorption.
- U.S. Consumer sales fell 5.6% in Q2; segment profit declined 8.8% to $286.2 million. Hawthorne sales fell 29.3% to $41.8 million and segment profit shifted to a $4.8 million loss from $9.6 million profit. Other-segment sales rose 1.2%, but profit declined.
- Six-month net cash used in operating activities was $482.8 million, versus $489.0 million a year earlier. Investing used $220.1 million, including $144.2 million for acquisitions and $35.3 million for the International Business working-capital settlement. Financing provided $612.9 million, including substantial borrowing and $256.8 million of share repurchases.
- Cash was $33.0 million at March 31, 2018. Total debt was $2,281.5 million, up from $1,409.7 million at September 30, 2017; reported net debt was approximately $2,248.5 million. Current debt was $335.8 million and long-term debt $1,937.7 million.
- Credit-facility availability was $534.6 million; the receivables facility had $78.4 million available. The leverage ratio was 3.46 against a maximum of 4.50, and interest coverage was 6.70 against a minimum of 3.00. The weighted-average rate on total debt was 4.4% for the six-month period.
Material changes and unusual items
- Fiscal-six-month continuing-operations income benefited from the Tax Cuts and Jobs Act: a $45.9 million deferred-tax revaluation benefit was recorded. The six-month effective tax rate was negative 15.0%, versus 35.7% a year earlier. Accounting for certain tax-law provisions remained incomplete; management said estimates could change.
- Q2 included a $10.2 million charge for a probable loss in the EZ Seed litigation. The parties reached a preliminary settlement agreement in principle after quarter-end; court approval and the claims process remained outstanding.
- Q2 other non-operating expense included an $11.7 million write-off of accumulated foreign-currency translation losses associated with repatriating cash and liquidating a foreign subsidiary.
- Equity-method results improved substantially versus the prior year, when the company recorded losses associated with TruGreen. The company stopped applying equity-method accounting to TruGreen in fiscal Q1 2018 after its net investment and advances were reduced to a liability; it disclosed no contractual obligation to fund further losses.
- On April 12, 2018, Hawthorne agreed to acquire Sunlight Supply for $450 million—$425 million cash and $25 million in company shares—with up to $20 million additional contingent consideration. Management expected closing in early to mid-June 2018. Project Catalyst was expected to incur $15–$20 million of restructuring costs and generate synergies increasing earnings in fiscal 2019 and beyond.
Outlook, risks and contingencies
- Management expected to remain within debt-covenant limits through fiscal 2018 based on current assumptions, but warned that an earnings shortfall or increased debt could threaten compliance and require a lender amendment or waiver.
- Management highlighted weather sensitivity, seasonality, transportation and input costs, sales volume, customer rebates and mix as factors affecting results. The filing did not provide a numerical full-year earnings or sales forecast.
- Other legal matters include asbestos-related claims and the Morning Song bird-food class action; the company said losses were not probable for those matters at filing. Environmental accruals were $4.2 million. Management cautioned that litigation, remediation or defense costs could affect future results.
- Share repurchases totaled $256.8 million for the six months. Dividends declared were $1.06 per share, compared with $1.00 in the prior-year period. The filing notes that future dividends and repurchases depend on business conditions, capital needs and debt restrictions.
Most important facts for investors to verify
- Whether the Sunlight Supply acquisition closed on expected terms and how its financing affects debt, leverage and liquidity.
- Hawthorne sales, margins and integration progress, including whether the segment’s losses reverse as management expects.
- Whether lower U.S. Consumer volume and gross margins recover during the key selling season.
- The final EZ Seed settlement amount, court approval and any additional loss beyond the $10.2 million accrual.
- Final tax-law accounting and effective tax rate, including unresolved GILTI, FDII and compensation-deduction impacts.
- Seasonal working-capital needs, cash generation, covenant headroom and the pace of buybacks relative to debt reduction.