Scotts Miracle-Gro Company (NYSE: SMG) — Q1 FY2023 10-Q
Reporting period: Three months ended December 31, 2022, compared with the three months ended January 1, 2022. Unaudited results. The consumer lawn and garden business is highly seasonal; approximately 75% of annual net sales typically occur in fiscal Q2 and Q3, so Q1 results are not necessarily indicative of the full year. Unless noted otherwise, dollar amounts are in millions.
Financial performance
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $526.6 | $566.0 |
| Gross margin | $95.7; 18.2% of sales | $118.7; 21.0% of sales |
| Loss from operations | $(41.8) | $(35.4) |
| Net loss | $(64.7) | $(50.0) |
| Diluted loss per share | $(1.17) | $(0.90) |
| Net cash used in operating activities | $(431.6) | $(765.1) |
| Net cash used in investing activities | $(36.0) | $(245.2) |
| Net cash provided by financing activities | $406.2 | $782.6 |
Sales fell 7.0%. Pricing contributed 9.6 percentage points and acquisitions 1.0 point, partly offsetting a 16.4-point impact from volume and mix and a 1.2-point foreign-exchange headwind. Gross margin contracted 2.8 percentage points, reflecting unfavorable volume/mix, higher material costs and $18.8 of impairment, restructuring and other charges, partly offset by pricing. SG&A declined $25.6 to $128.5, primarily from lower staffing and other cost-reduction actions; share-based compensation increased.
Segments: U.S. Consumer sales rose 7.8% to $369.0 and segment profit increased to $31.3 from $10.7, helped by pricing and lower SG&A. Hawthorne sales fell 31.0% to $131.5 and its segment loss widened to $16.2 from $5.3, mainly due to lower volumes. Other sales declined 20.9% to $26.1; segment profit was $1.4 versus $1.3.
Liquidity, debt and other key metrics
- Cash was $25.6 at quarter-end, down from $86.8 at September 30, 2022. Total debt was $3,427.3, up from $2,992.1 at fiscal year-end; current and long-term debt were $216.8 and $3,189.6, respectively.
- Credit-facility borrowing availability was $813.5. The weighted-average rate on average credit-facility borrowings was 6.6%, compared with 1.8% a year earlier; total-debt weighted-average interest rates were 5.2% and 3.6%, respectively. Quarterly interest expense rose 79.4% to $42.7.
- Current assets were $2,299.3 and current liabilities $931.7. Inventory was $1,525.9, up from $1,343.5 at September 30, 2022. Operating cash use improved year over year but remained substantial; management cited lower inventory production, vendor-payment timing and higher tax refunds, among other factors. Extended vendor payment terms favorably affected the quarter’s operating cash flow.
- Net interest expense and equity-method losses were $42.7 and $11.4, respectively. The company declared dividends of $0.66 per share; $36.6 of dividends were paid in the quarter.
Material changes, outlook and risks
Management said its company-wide restructuring is intended to improve operational and management efficiency, including supply-chain network reductions, staffing reductions and other cost actions. It expects $185.0 of annualized savings in fiscal 2023, with visibility to additional savings through fiscal 2024. Restructuring costs incurred since the initiative began totaled $79.8 through December 31, 2022; management said further changes could result in additional charges. The filing does not provide a clear sales or earnings forecast for the year.
Debt covenant headroom is a key risk. The leverage ratio was 5.90 at December 31, 2022, versus a permitted maximum of 6.25 for the quarter; the maximum rises to 6.50 for FY2023 Q2 and Q3, then steps down under the amended agreement. Interest coverage was 4.36 versus a 3.00 minimum. The company reported covenant compliance and expects to remain compliant over the next 12 months, but noted that a default could accelerate debt and trigger cross-defaults. It said it lacks sufficient cash and available liquidity to repay the relevant debt in a default. Contingency options include more cost reductions, cash-management measures, lender discussions and financing that could include equity; success is not assured. The credit agreement also restricts discretionary distributions and imposes conditions on certain acquisitions and additional debt.
Other notable items include a $26.8 unrealized loss in other comprehensive income on convertible debt investments during the quarter; their reported fair value was $91.2 against an amortized cost basis of $223.0. Management attributed the decline to conversion-option values, not credit risk, and said it intended and was able to hold the securities. Environmental remediation accruals were $2.5. The company also disclosed asbestos-related claims for which it recorded no accrual because loss was not considered probable; it cautioned that future developments or defense costs could affect results. Management reported disclosure controls were effective and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether the expected $185.0 of FY2023 annualized savings is achieved, and whether additional restructuring charges or savings emerge.
- Quarterly leverage-covenant compliance as limits tighten, borrowing availability, interest expense and any lender or financing actions.
- Inventory levels, vendor-payment timing and seasonal operating cash conversion, including how much Q1 cash flow benefited from extended payment terms.
- Hawthorne demand and segment losses, as well as the carrying value and eventual recovery or impairment of convertible debt investments.