Scotts Miracle-Gro Co. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended July 3, 2021, compared with periods ended June 27, 2020. The company sells lawn and garden products and indoor/hydroponic gardening products. Its consumer business is highly seasonal, with more than 75% of annual sales in the second and third fiscal quarters. All dollar amounts below are in millions unless noted.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net sales | $1,609.7 | $1,492.7 | $4,187.2 | $3,241.3 |
| Gross profit | $494.6 | $526.7 | $1,342.8 | $1,131.1 |
| Gross margin | 30.7% | 35.3% | 32.1% | 34.9% |
| Operating income | $302.1 | $284.5 | $760.2 | $575.6 |
| Continuing-operations income | $229.8 | $204.3 | $566.0 | $382.8 |
| Net income | $225.9 | $203.3 | $561.3 | $384.4 |
| Diluted EPS, continuing operations | $4.00 | $3.57 | $9.90 | $6.74 |
| Diluted net EPS | $3.94 | $3.55 | $9.81 | $6.76 |
Cash flow and liquidity: Operating cash flow for the first nine months was negative $207.1, versus positive $42.5 in the prior-year period, primarily reflecting higher inventory production and incentive compensation, partly offset by higher sales and lower interest payments. Investing cash flow was negative $211.9; financing cash flow was positive $459.6. Cash was $58.3 at July 3. Total debt was $2,201.2, including $53.7 current debt; borrowing availability under the main credit agreement was $1,201.4. The company reported a leverage ratio of 2.19 against a maximum covenant of 4.50 and an interest coverage ratio of 13.53 against a 3.00 minimum.
Margins and costs: Gross margin fell as transportation, warehousing and material costs increased, and sales mix shifted toward Hawthorne. Pricing and lower promotional activity partly offset these pressures. Q3 operating income increased despite the lower gross margin, supported by higher sales, lower SG&A and fewer impairment and restructuring charges.
Material changes and business drivers
- Q3 sales increased 7.8%; nine-month sales increased 29.2%. Growth reflected volume, pricing and favorable foreign exchange, with elevated consumer demand during the pandemic contributing to year-to-date volume.
- Q3 U.S. Consumer sales declined 4.3% and segment profit declined 15.7%, while Hawthorne sales rose 47.7% and profit rose 37.3%. Other-segment sales increased 24.2% and profit increased 86.1%.
- Management said the fiscal-calendar shift reduced Q3 sales by approximately $115 and diluted continuing-operations EPS by $0.47; for the nine-month comparison, it added approximately $50 of sales and $0.18 of diluted EPS.
- Debt increased from $1,531.2 at September 30, 2020, while the company issued $500 of 4.000% notes in March and used proceeds to reduce revolving-credit borrowings. Nine-month interest expense fell to $57.3 from $63.0.
Outlook, commentary, risks and unusual items
- The filing provides no specific full-year sales or earnings guidance. Management said operating cash flow and available borrowing were expected to fund debt service, capital expenditures and working capital for the foreseeable future, and expected covenant compliance through fiscal 2021 under current assumptions.
- COVID-19 continued to support demand for some products, but management cited uncertainty around future demand, supply chains, retail networks and possible additional operating costs. Pandemic-related costs were $26.1 for the first nine months of fiscal 2021.
- Input, transportation and warehousing cost inflation pressured margins. Seasonal working-capital needs are significant; inventories were $962.8 and accounts receivable were $1,058.0 at July 3.
- The company recorded a $12.2 pre-tax charge in discontinued operations after agreeing to accept $6.0 of contingent consideration related to the 2017 sale of its former international business.
- The 50% Bonnie Plants joint venture generated $21.5 of equity-method income in Q3 and $20.0 for the first nine months. The company also recorded a $12.5 gain earlier in the fiscal year from revaluing a loan to AFC in connection with the investment.
- After quarter-end, the company agreed to acquire Hydro-Logic assets for $65, subject to closing conditions, and agreed to invest $150 in a six-year convertible note issued by RIV Capital. It also agreed to issue $400 of 4.375% senior notes, expected to close August 13, 2021, to reduce credit-facility borrowings and fund general corporate purposes.
- The board raised the quarterly dividend from $0.62 to $0.66 per share, beginning in Q4 fiscal 2021. Environmental remediation accruals were $3.6. The company disclosed asbestos-related lawsuits but recorded no accrual, stating loss was not probable; it cautioned that outcomes and defense costs remain uncertain.
Important facts for investors to verify
- Whether strong demand and Hawthorne growth persist, and whether U.S. Consumer performance recovers after the fiscal-calendar comparison effect.
- How input, freight and warehousing costs affect gross margins and whether pricing can offset further inflation.
- Working-capital requirements, operating cash generation after peak season, debt levels and continued compliance with credit covenants.
- Closing, funding and financial effects of the Hydro-Logic acquisition, RIV Capital investment and planned senior-note issuance.
- Potential impacts of COVID-19, legal and environmental matters, and the contingent-consideration recovery associated with the discontinued international business.