Scotts Miracle-Gro Co. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended March 30, 2013, compared with the periods ended March 31, 2012. The company makes branded lawn and garden products, distributes consumer Roundup products under an agreement with Monsanto, and operates a U.S. lawn-care service business. Results are seasonal, with most sales typically occurring in the second and third fiscal quarters.
Financial performance
| Metric | Quarter | Six months |
|---|---|---|
| Net sales | $1,019.6 million, down 12.9% | $1,225.4 million, down 10.6% |
| Gross profit / margin | $378.7 million / 37.1%, versus 39.4% | $409.8 million / 33.4%, versus 35.6% |
| Income from operations | $173.1 million, versus $217.1 million | $81.2 million, versus $118.1 million |
| Net income | $100.0 million, versus $127.2 million | $32.3 million, versus $53.3 million |
| Diluted continuing-operations EPS | $1.60, versus $2.04 | $0.51, versus $0.86 |
Lower sales volume was the main driver of weaker results; management attributed it largely to a delayed start to the spring lawn and garden season in the U.S. and internationally. The gross margin decline reflected lower volume and fixed-cost absorption, higher packaging and fertilizer input costs, and product mix, partly offset by pricing. SG&A decreased 12.6% in the quarter and 7.8% for the half year, including lower advertising and other spending.
Cash flow and liquidity: Operating activities used $545.3 million in the first six months, compared with $620.4 million a year earlier, primarily reflecting lower working-capital use. Investing activities used $37.7 million, including $34.6 million of capital expenditures. Financing activities provided $555.9 million. Cash ended at $99.1 million; $94.1 million was held by foreign subsidiaries and considered indefinitely reinvested.
Debt: Total debt was $1,371.0 million at March 30, 2013, including $202.1 million under the receivables purchase arrangement; cash netted against this was $99.1 million. The company reported $918.8 million of availability under its senior secured credit facility. It was in covenant compliance, with leverage of 3.24 against a 3.50 maximum and interest coverage of 4.45 against a 3.50 minimum. Debt was $1,469.0 million at March 31, 2012; the September 2012 balance was lower, reflecting seasonal borrowing needs.
Changes, outlook, and risks
- Global Consumer sales fell 13.0% in the quarter and 11.1% for the half year. Segment income fell 20.0% and 26.4%, respectively. Scotts LawnService sales declined 8.4% in the quarter but rose 5.7% for the half year; its operating loss widened in the quarter, primarily due to higher SG&A.
- Management said fiscal 2013 sales concentration in the second and third quarters was expected to be in line with fiscal 2010 and earlier years. It expected operating cash flows and credit-facility borrowings to be sufficient for fiscal 2013 debt service and working capital, while cautioning that outcomes depend on factors beyond its control. No specific full-year revenue or earnings guidance is provided in the filing text.
- Unusual items included a $4.7 million vendor reimbursement related to product development and commercialization costs, including MAT 28, and a $4.3 million impairment charge for an insect-repellent technology. The filing also reports $0.2 million of second-quarter international severance costs.
- Key exposures include weather and seasonal demand, input-cost inflation, foreign exchange, interest rates, and the company’s dependence on the Monsanto Roundup marketing agreement. Termination of that agreement could remove a significant source of earnings and overhead absorption.
- Contingencies include consolidated putative class actions related to the 2008 wild-bird-food recall, asbestos-related claims, and environmental matters. The company recorded no accrual for the bird-food or asbestos litigation because loss estimates were not determinable; it reported $3.7 million accrued for environmental actions. Management said the ultimate resolution of contingencies could affect results.
- The company declared dividends of $0.325 per share for the quarter. It made no repurchases under its publicly announced share-repurchase program during the six-month period. Management expected covenant compliance through fiscal 2013 under current operating assumptions, but warned that adverse earnings, higher debt, or other factors could affect compliance.
Most important facts for investors to verify
- Whether delayed spring demand shifted sales into later quarters or represented lost demand, and whether margins recover as volume normalizes.
- Current and forecast covenant headroom, seasonal borrowing requirements, and the availability and renewal terms of the uncommitted receivables purchase arrangement.
- Progress and financial impact of pricing, cost-out, and SG&A productivity initiatives, including the effect of higher material costs.
- Ongoing earnings contribution and termination provisions of the Monsanto Roundup agreement.
- Developments, potential costs, and insurance or indemnity coverage for the bird-food, asbestos, and environmental matters.