Scotts Miracle-Gro Company — Q1 FY2020 Form 10-Q
Reporting period: Three months ended December 28, 2019; comparisons are with the three months ended December 29, 2018, unless noted. The company manufactures and sells lawn and garden products, including indoor and hydroponic gardening products through Hawthorne. Results are highly seasonal: about 75% of sales in recent fiscal years occurred in the second and third quarters.
Financial performance
| Metric | Q1 FY2020 | Q1 FY2019 |
|---|---|---|
| Net sales | $365.8 million | $298.1 million |
| Gross profit / margin | $54.2 million / 14.8% | $34.5 million / 11.6% |
| Operating loss | $62.6 million | $84.9 million |
| Continuing-operations loss | $71.3 million | $82.6 million |
| Net loss per diluted share | $1.28 | $1.44 |
| Operating cash flow | $(318.2) million | $(233.4) million |
| Capital expenditures | $21.9 million | $12.7 million |
Sales increased 22.7%, reflecting 19.4% volume growth and 3.3% pricing. Gross margin rose 3.2 percentage points, driven mainly by pricing, higher-volume fixed-cost leverage, favorable transportation effects and lower restructuring charges; higher warehousing costs and inventory adjustments partly offset the improvement. Interest expense fell to $20.0 million from $25.2 million. The current-quarter net loss included $15.1 million of refinancing costs. Prior-year net loss included $2.9 million of income from discontinued operations.
Segments and material changes
- Hawthorne: Sales rose 41.2% to $198.8 million; segment profit increased to $13.9 million from $4.4 million, primarily on higher volume and pricing.
- U.S. Consumer: Sales rose 7.7% to $147.4 million; segment loss narrowed to $41.5 million from $43.1 million. Soils, fertilizer and plant food gains were partly offset by lower grass seed sales.
- Other: Sales declined 3.9% to $19.6 million; segment loss narrowed to $3.5 million. The filing cites the Mexico business closure and lower professional-customer sales.
- Operating cash use increased by $84.8 million year over year, mainly from inventory production timing and higher incentive-compensation payouts and SG&A, partly offset by sales growth. Inventory was $866.1 million, up from $745.4 million a year earlier and $540.3 million at September 30, 2019.
Debt, liquidity and capital
At December 28, 2019, total debt was $2,074.5 million, cash was $27.4 million, and current and long-term debt were $93.8 million and $1,969.9 million, respectively. Debt was $2,290.2 million at December 29, 2018 and $1,659.3 million at September 30, 2019. The company had $940.4 million available under its main credit agreement; its receivables facility had $39.0 million outstanding and $0.6 million available. The leverage ratio was 3.53 against a 5.00 maximum for the quarter, and interest coverage was 6.17 against a 3.00 minimum; the company reported covenant compliance.
In October 2019, the company issued $450 million of 4.500% senior notes due 2029 and redeemed $400 million of 6.000% notes due 2023. The redemption generated a $12.0 million premium and $3.1 million write-off of issuance costs. Financing cash flow was $352.3 million, including the note issuance and net borrowing. The quarterly dividend was $0.58 per share; dividends paid were $32.4 million. Management said operating cash flow and borrowing capacity were expected to meet foreseeable needs, while cautioning that cash generation and future borrowing availability are not assured.
Outlook, unusual items and risks
- The filing gives no specific quantified full-year sales or earnings guidance. Management expects a first-quarter net loss because sales are concentrated in spring and summer, and expected to remain within credit-covenant limits during FY2020 under current operating assumptions.
- Roundup marketing agreement terms were amended effective August 1, 2019. The company recorded $8.9 million of related net sales in the quarter, including reimbursements and a $4.5 million contribution expense. It also recorded $115.5 million of consideration for specified asset sales in current assets; the company reported receipt on January 13, 2020.
- Project Catalyst restructuring is ongoing; cumulative charges since inception were $43.5 million across segments and Corporate. In the quarter, the company recorded $0.4 million of Catalyst charges and a $2.6 million escrow settlement recovery related to a prior Hawthorne acquisition.
- ASC 842 lease adoption on October 1, 2019 added $129.6 million of operating lease right-of-use assets and related current and long-term liabilities; management said adoption did not materially affect earnings or cash flows.
- Environmental remediation accruals were $3.9 million. The company described asbestos-related claims and other proceedings; it recorded no asbestos accrual because loss was not considered probable, but cautioned that future developments or defense costs could affect results. It reported no material change in risk factors from its prior annual report.
Investor verification points
- Track whether Hawthorne’s sales and segment-profit growth continue and whether U.S. Consumer performance improves through the peak selling quarters.
- Monitor inventory growth, seasonal working-capital needs and operating cash conversion.
- Review debt levels, credit availability, covenant headroom and the effect of refinancing on interest costs.
- Confirm receipt and accounting for the Roundup-related asset-sale consideration, and assess ongoing agreement economics and termination provisions.
- Follow Project Catalyst savings versus remaining costs, and developments in environmental, product-liability and other legal matters.