Business context and reporting period
The Scotts Miracle-Gro Company filed this unaudited Form 10-Q for its fiscal third quarter and first nine months ended June 27, 2020, compared with periods ended June 29, 2019. The company sells consumer lawn and garden products, markets certain Roundup products under an agency agreement, and operates its Hawthorne indoor and hydroponic gardening business. Sales are seasonal, with most annual sales typically occurring in the second and third fiscal quarters.
Financial performance
Amounts are in millions except per-share data. Quarter and nine-month comparisons are year over year.
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $1,492.7; up 27.5% | $3,241.3; up 21.9% |
| Gross profit / margin | $526.7 / 35.3% (36.2% prior year) | $1,131.1 / 34.9% (35.0% prior year) |
| Operating income | $284.5; up 10.2% | $575.6; up 24.2% |
| Continuing-operations income | $204.3; diluted EPS $3.57 | $382.8; diluted EPS $6.74 |
| Net income | $203.3; diluted EPS $3.55 | $384.4; diluted EPS $6.76 |
Quarterly net income was nearly flat versus $201.6 million a year earlier, while continuing-operations income increased from $178.0 million. Nine-month net income fell from $518.4 million and diluted EPS from $9.24; comparison was affected by the prior-year $259.8 million gain on sale of the TruGreen joint-venture interest and prior-year discontinued-operation recoveries. Nine-month refinancing costs were $15.1 million. Nine-month effective tax rates were 24.2% versus 24.8%.
For the quarter, U.S. Consumer sales rose 21.0% to $1,075.8 million and Hawthorne sales rose 71.8% to $302.9 million; Other sales rose 8.7% to $114.0 million. Nine-month sales rose 15.2% in U.S. Consumer and 58.7% in Hawthorne, while Other increased 3.4%. Hawthorne’s strong growth reflected higher indoor-gardening demand. Segment profit, a company-defined non-GAAP measure, was $366.0 million for the quarter versus $301.5 million and $737.2 million for nine months versus $593.1 million.
Cash flow, debt and liquidity
For the nine months, operating cash flow was $42.5 million, compared with cash used of $77.7 million in the prior-year period. The company reported investing cash inflow of $74.4 million and financing cash outflow of $87.4 million; cash ended at $48.3 million. Working-capital movements included an $840.0 million increase in accounts receivable, partially offset by increases in accounts payable and other current liabilities. Investing inflows included $115.5 million from the sale of Roundup brand-extension assets. Capital expenditures were $41.7 million.
Total debt was $1,732.5 million at June 27, 2020, versus $1,934.8 million a year earlier; current debt was $206.4 million. The company had $1,372.0 million of availability under its credit agreement. Its leverage ratio was 2.80 against a maximum of 4.75 for the applicable quarters, and its interest coverage ratio was 8.50 against a minimum of 3.00; it reported compliance with covenants. The 4.500% Senior Notes issued in October 2019 were used to redeem the 6.000% notes, with $15.1 million of refinancing costs recognized in fiscal 2020.
Changes, outlook, risks and unusual items
- Management attributed higher sales to increased consumer demand during the COVID-19 pandemic, especially for soils, fertilizer, grass seed, controls and plant food, as well as hydroponic products. It said demand had increased sales and profits beyond prior expectations and expected strong demand for these products through the rest of fiscal 2020. No quantified full-year earnings or sales guidance is provided.
- The company incurred $20.3 million of COVID-19-related costs in the first nine months, primarily premium pay, and expected incremental costs to continue through fiscal year-end. It cautioned that future effects remained uncertain and could include changes in customer orders, retail activity and consumer behavior. It reported no significant supply or raw-material disruptions at the filing date.
- Quarterly gross margin declined 0.9 percentage points, chiefly from COVID-related charges, lower Roundup reimbursements and product mix; nine-month margin declined 0.1 point. Higher SG&A also partly offset sales growth.
- The receivables facility, with $160.0 million outstanding at quarter-end, was due to expire August 21, 2020; management expected renewal before expiration. The company said it believed operating cash flow and borrowings would meet foreseeable needs, while noting uncertainty from COVID-19 and covenant risks if earnings weaken or debt rises.
- After quarter-end, the board approved a $5.00-per-share special dividend and raised the quarterly dividend from $0.58 to $0.62 per share. The company had temporarily suspended share repurchases effective March 30, 2020 to preserve financial flexibility.
- Environmental remediation accruals were $3.7 million. The company disclosed asbestos-related claims, for which it had recorded no accrual because a loss was not considered probable; it cautioned that future developments or defense costs could affect results. It reported no material changes in previously disclosed legal proceedings.
Important facts for investors to verify
- Whether elevated pandemic-related demand persisted beyond the seasonally important second and third quarters, and whether consumer demand or retail conditions later reversed.
- Cash conversion and working-capital trends, particularly receivables, given the large seasonal use of cash in accounts receivable.
- Renewal and terms of the receivables facility, debt maturities, covenant headroom and the capacity to fund dividends and other capital returns.
- Underlying performance excluding prior-year asset-sale gains and discontinued-operation recoveries, as well as COVID-19 costs and other unusual items.
- Potential developments in litigation and environmental matters, and the company’s estimates of related exposure.