Business context and reporting period
The Scotts Miracle-Gro Company filed this unaudited Form 10-Q for the quarter ended March 29, 2014, its fiscal second quarter, and the six months then ended. The company makes and markets lawn and garden products, operates Scotts LawnService, and distributes consumer Roundup products under an exclusive marketing agreement with Monsanto. Results are highly seasonal, with shipments concentrated in the second and third fiscal quarters. The wild bird food business is presented as discontinued operations for all periods shown.
Key financial metrics
| Metric | Three months ended March 29, 2014 | Six months ended March 29, 2014 |
|---|---|---|
| Net sales | $1,081.0 million; up 7.3% | $1,270.6 million; up 5.6% |
| Gross profit / margin | $433.8 million / 40.1% (37.4% prior year) | $467.7 million / 36.8% (33.9% prior year) |
| Income from operations / margin | $217.1 million / 20.1% | $127.4 million / 10.0% |
| Income from continuing operations | $125.7 million; diluted EPS $2.00 | $59.9 million; diluted EPS $0.95 |
| Net income | $125.7 million | $60.0 million |
| Cash from operations | Not separately presented for the quarter | $(614.6) million, versus $(545.3) million |
For the six-month period, investing activities used $108.9 million, including $53.0 million of capital expenditures and the $60.0 million Tomcat acquisition. Financing activities provided $744.9 million. Cash at March 29, 2014 was $152.7 million; $116.2 million was held by controlled foreign corporations and management said it had no current plan to repatriate those earnings.
Total debt was $1,423.9 million, including $278.6 million current and $1,145.3 million long-term. Cash and revolving-credit availability were $152.7 million and $735.4 million, respectively; the company also reported $126.5 million available under its receivables purchase agreement. The credit-facility leverage ratio was 1.83 against a 4.00 maximum, and interest coverage was 7.18 against a 3.50 minimum. The company reported compliance with debt covenants.
Material changes versus the prior comparable period
- Quarterly sales rose 7.3%, primarily from higher Global Consumer volume and pricing, acquisitions, foreign exchange, and increased Monsanto marketing-agreement revenue. Six-month sales rose 5.6%. Management attributed part of the volume increase to shipment timing to retailers.
- Quarterly and six-month gross margins improved by 2.7 and 2.9 percentage points, respectively, reflecting pricing, lower material costs, volume leverage and mix, and higher Roundup commission income.
- Quarterly continuing-operations income increased to $125.7 million from $99.1 million; six-month income rose to $59.9 million from $30.8 million. Lower interest expense and stronger Global Consumer results contributed, partly offset by higher SG&A.
- Scotts LawnService sales declined 12.2% for the quarter and 3.2% for six months, which management linked to unfavorable weather and delayed sales. Its quarterly operating loss widened to $20.3 million from $17.0 million.
- Operating cash outflow worsened by $69.3 million year over year, mainly because working-capital cash use rose $100.5 million, particularly from higher receivables. Capital expenditures increased, including a $30.0 million down payment on a corporate aircraft.
- Total debt was $1,423.9 million, versus $1,371.0 million at March 30, 2013 and $570.5 million at September 30, 2013; the seasonal balance-sheet comparison with year-end reflects substantially higher receivables and inventory funding.
Outlook, management commentary, risks and unusual items
- No specific numeric full-year sales or earnings guidance is provided in the supplied filing text. Management expected operating cash flows and credit-facility borrowings to meet foreseeable debt service, working-capital, capital-expenditure, dividend and share-repurchase needs, and expected covenant compliance through fiscal 2014 based on current assumptions.
- On January 15, 2014, the company redeemed $200 million of 7.25% Senior Notes, funded partly with credit-facility borrowings. The redemption and write-off of related financing costs resulted in $10.7 million of refinancing costs. Management reported lower interest expense following the refinancing and reduced borrowing rates.
- The company completed the $60.0 million all-cash acquisition of Tomcat consumer rodent-control products and sold its U.S. and Canadian wild bird food business for $4.1 million cash, with an estimated $1.0 million future earn-out. Tomcat contributed $6.6 million of quarterly and $12.2 million of six-month sales.
- Unusual charges included $3.9 million of U.S. marketing-group severance costs and $2.0 million of ongoing turfgrass biotechnology monitoring and remediation costs in the quarter; international restructuring charges were also recorded.
- Risks include seasonality and weather, working-capital demands, covenant compliance, and potential changes in borrowing availability. Termination of the Monsanto Roundup marketing agreement could eliminate a significant earnings and overhead-absorption source. The filing also discusses environmental matters, asbestos-related claims, and consolidated putative class actions related to recalled wild bird food; the company had not recorded reserves for the latter claims because losses could not be reasonably estimated.
- Environmental remediation accruals were $6.1 million. Management considered reserves adequate but noted that final outcomes of contingencies could affect future results. The company also disclosed ongoing tax examinations and unresolved notices, without anticipating a material impact from their resolution.
Important facts for investors to verify
- How much of sales and margin growth reflects sustainable demand and pricing versus seasonal shipment timing and product mix.
- Whether working-capital cash use and seasonal borrowing levels unwind as expected in subsequent quarters.
- Execution and returns from the Tomcat acquisition, and the final amount and timing of the wild bird food earn-out.
- Progress on Scotts LawnService recovery, restructuring, and turfgrass biotechnology remediation costs.
- Continued covenant headroom, credit-facility and receivables-program availability, and the treatment of foreign-held cash.
- Developments in the Roundup agreement, environmental exposures, asbestos claims, and wild bird food litigation.