Business context and reporting period
The Scotts Miracle-Gro Company’s Form 10-K covers the fiscal year ended September 30, 2020; the filing also reports fourth-quarter results. The company sells branded lawn and garden products through U.S. Consumer and Other, and indoor and hydroponic gardening products through Hawthorne. Its North American consumer business is highly seasonal, with more than 75% of annual sales typically in the second and third fiscal quarters.
Key financial metrics
Amounts below are in millions of dollars except per-share data.
| Metric | FY2020 | FY2019 |
|---|---|---|
| Net sales | $4,131.6 | $3,156.0 |
| Gross profit / margin | $1,347.0 / 32.6% | $1,019.6 / 32.3% |
| Operating income / margin | $585.2 / 14.2% | $409.6 / 13.0% |
| Continuing-operations income | $386.9 | $436.7 |
| Net income | $388.6 | $460.2 |
| Diluted continuing-operations EPS | $6.78 | $7.77 |
| Adjusted diluted continuing-operations EPS (non-GAAP) | $7.24 | $4.47 |
| Operating cash flow / free cash flow (non-GAAP) | $558.0 / $495.3 | $226.8 / $184.4 |
| Total debt at year-end | $1,531.2 | $1,659.3 |
| Cash / working capital / current ratio | $16.6 / $266.2 / 1.3 | $18.8 / $421.2 / 1.7 |
FY2020 fourth-quarter sales were $890.3, continuing-operations income was $4.2, and diluted continuing-operations EPS was $0.07. The quarter is seasonally weaker than the spring selling period.
Material changes versus the prior year
- Sales increased 30.9%, primarily from higher volume; reported volume contributed 29.2 percentage points. COVID-related consumer demand supported U.S. Consumer sales, while Hawthorne also grew strongly.
- U.S. Consumer sales rose 23.8% to $2,823.1 and segment profit increased 30.0% to $686.1. Hawthorne sales rose 61.4% to $1,083.5 and segment profit more than doubled to $120.1. Other sales increased 10.5% to $225.0.
- Gross margin improved 0.3 percentage points. Higher pricing, lower material costs and fixed-cost leverage were partly offset by product mix, higher warehousing costs and inventory adjustments.
- Operating income rose 42.9%, but continuing-operations income declined 11.4% and diluted EPS declined from $7.77 to $6.78. FY2019 included a $259.8 pre-tax gain from selling the company’s TruGreen joint-venture interest; FY2020 also included $15.1 of refinancing costs.
- Operating cash flow increased $331.2. Lower interest and tax payments and the absence of FY2019 litigation-related payments contributed, alongside higher sales. Free cash flow was $495.3.
- Debt declined by $128.1 year over year. The company issued $450.0 of 4.5% notes due 2029 and redeemed $400.0 of 6.0% notes due 2023, incurring a $12.0 redemption premium and writing off $3.1 of issuance costs.
- FY2020 included a $5.00-per-share special dividend and an increase in the quarterly dividend from $0.58 to $0.62. Total dividends paid were $411.2; the reported annual dividend per share was $7.36.
Outlook, risks and unusual items
- Management said COVID-19 increased demand and sales and profits beyond prior expectations, but future effects remained uncertain, including possible changes in customer orders and consumer behavior. Operations continued without significant raw-material or supply disruption reported to date; the company incurred $19.4 of COVID-related costs, primarily premium pay.
- No specific FY2021 earnings or sales guidance is provided in the supplied filing text. Management expected FY2021 capital expenditures to exceed FY2020’s $62.7 because of demand, and expected to remain within debt covenant limits under current assumptions.
- At September 30, 2020, the company reported $1,415.7 of available credit-facility borrowings, a 2.48 leverage ratio and 10.12 interest-coverage ratio; it stated that it was in compliance with covenants. Liquidity remains subject to seasonal working-capital needs and uncertain future conditions.
- Customer concentration is material: Home Depot and Lowe’s together generated 44% of FY2020 sales and represented 58% of year-end accounts receivable. The filing says there are no long-term sales agreements with major retail customers.
- The Roundup marketing agreement contributed $134.0 of FY2020 net sales, including commissions and reimbursements. Termination or a significant decline in Monsanto’s consumer Roundup business could reduce earnings and overhead absorption; specified termination conditions and fees apply.
- Hawthorne’s outlook is exposed to uncertain hydroponic-market growth and changing cannabis-related laws and perceptions. The auditor identified Hawthorne goodwill valuation as a critical audit matter; the reporting unit’s estimated fair value exceeded carrying value, with a 79% cushion.
- Other risks include weather, commodity and input costs, tariffs, regulation of pesticides and peat harvesting, supply disruptions, cyber incidents, pension funding, and litigation. Environmental accruals were $4.2. Asbestos/vermiculite claims were not accrued because management assessed loss as not probable; the filing cautions that outcomes and defense costs remain uncertain.
- FY2020’s $20.1 of other non-operating income included a $12.0 increase in the fair value of the Bonnie Option. The company also signed a non-binding letter of intent after year-end to acquire a 50% interest in the Bonnie Business; this was not yet a completed transaction.
Important facts for investors to verify
- How much of the exceptional sales and profit growth persists after pandemic-related demand, and how customer orders and inventory levels evolve.
- Whether Hawthorne’s growth and margins are sustainable given market and regulatory uncertainty, and whether goodwill valuation assumptions remain supportable.
- Roundup agreement economics, termination provisions and the durability of its contribution to earnings.
- Seasonal liquidity, debt maturities, covenant headroom and the company’s capacity to fund dividends, repurchases and higher capital spending.
- The terms, financing and completion status of the proposed Bonnie investment, along with remaining legal, environmental and tax contingencies.
GAAP and non-GAAP results are not interchangeable: adjusted EPS and free cash flow exclude specified items and should be assessed alongside the reported GAAP figures.