Scotts Miracle-Gro Co. — Q1 FY2015 Form 10-Q
Reporting period: Three months ended December 27, 2014, compared with the three months ended December 28, 2013. Scotts manufactures and sells lawn and garden products, and provides lawn care services. Its first quarter is seasonally weak; sales are concentrated in the spring and summer quarters.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 |
|---|---|---|
| Net sales | $216.2 million | $189.6 million |
| Gross profit / margin | $29.3 million / 13.6% | $33.9 million / 17.8% |
| Operating loss | $106.0 million | $89.7 million |
| Loss from continuing operations | $74.0 million | $65.7 million |
| Net loss attributable to controlling interest | $74.6 million | $65.6 million |
| Diluted loss per share | $1.23 | $1.06 |
| Operating cash flow | $(267.0) million | $(180.2) million |
| Cash and equivalents at period end | $130.1 million | $124.6 million |
| Total debt at period end | $1,169.9 million | $882.0 million |
Sales increased 14.0%, primarily from acquisitions and higher Global Consumer volume, partly offset by unfavorable foreign exchange. Gross margin fell 4.2 percentage points, mainly due to Global Consumer mix and volume, including $6.8 million of negative fuel-hedge mark-to-market adjustments. Interest expense declined to $9.7 million from $13.9 million, reflecting lower borrowing rates and the prior-year redemption of 7.25% notes.
Cash used in operations rose $86.8 million, mainly because working-capital use increased $83.7 million amid inventory production. Inventory was $682.8 million, up from $605.7 million a year earlier. Investing activities used $25.6 million; financing provided $337.0 million, including net borrowings. The quarterly dividend declared was $0.45 per share.
Material changes and business developments
- Global Consumer sales rose 18.2% to $163.6 million; its operating loss increased to $74.2 million from $67.4 million.
- Scotts LawnService sales edged up 0.9% to $46.7 million, while segment income declined to $1.5 million from $2.6 million.
- Acquisitions included Action Pest Control for an estimated $21.7 million and a growing-media business for an estimated $7.1 million. Acquired businesses contributed to reported growth.
- Restructuring charges were $9.6 million, versus $0.3 million; they included $3.6 million of accelerated equity compensation expense. The company expected to complete the fiscal 2014 restructuring initiative in Q2 FY2015.
Liquidity, outlook and risks
At December 27, 2014, revolving credit-facility availability was $753.1 million, including letter-of-credit availability; letters of credit outstanding were $24.0 million. The $1.7 billion facility had a maximum leverage ratio of 4.00; the company reported 2.41, and an interest coverage ratio of 10.09 against a 3.50 minimum. The company said it was in covenant compliance and expected to remain compliant in FY2015, while cautioning that unexpected charges or debt increases could affect compliance. Management believed operating cash flow and credit-facility borrowings would cover foreseeable needs, but did not guarantee future cash generation or borrowing availability.
Management expected the inventory build to improve service levels and reduce spring 2015 distribution costs, and expected to offset the fuel-hedge mark-to-market impact with savings on future fuel purchases during the fiscal year. The filing provides no specific full-year earnings or revenue guidance. Risks include seasonality, working-capital needs, foreign exchange, commodity and interest-rate exposure, debt covenants, and potential loss of income and overhead absorption if the Monsanto Roundup marketing agreement ends. Litigation includes asbestos-related claims and a consolidated wild-bird-food class action; loss estimates were not reasonably determinable and no reserves were recorded for these matters. Environmental remediation liabilities accrued were $5.8 million.
Investor verification points
- Track whether inventory converts to spring sales and cash, and whether operating cash use moderates.
- Assess whether gross-margin pressure and fuel-hedge costs reverse as management expected.
- Review debt growth, covenant headroom, and capacity to fund dividends and share repurchases; the company repurchased approximately 0.2 million shares for $14.8 million during the quarter.
- Monitor acquisition contributions, restructuring completion, and integration costs.
- Follow developments in the Roundup agreement and material litigation, for which potential outcomes remain uncertain.