Scotts Miracle-Gro Company — FY2018 Form 10-K
Business context and reporting period. This annual report covers the fiscal year ended September 30, 2018, not a standalone fourth-quarter filing. Scotts sells branded lawn and garden products and operates Hawthorne, its indoor and hydroponic gardening business. More than 75% of annual sales typically occur in the second and third fiscal quarters combined.
Financial performance
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $2,663.4 million | $2,642.1 million |
| Gross profit / margin | $864.6 million / 32.5% | $972.6 million / 36.8% |
| Operating income | $198.9 million | $433.4 million |
| Continuing-operations income | $127.6 million; diluted EPS $2.23 | $198.3 million; diluted EPS $3.29 |
| Net income | $63.7 million | $218.8 million |
| Operating cash flow / capital expenditures | $342.5 million / $68.2 million | $363.2 million / $69.6 million |
| Free cash flow (non-GAAP) | $274.3 million | $293.6 million |
| Total debt at fiscal year-end | $2,025.7 million | $1,409.7 million |
| Cash at fiscal year-end | $33.9 million | $120.5 million |
Working capital was $273.0 million and the current ratio was 1.4, versus $337.2 million and 1.6, respectively, in FY2017. Adjusted diluted EPS, a non-GAAP measure, was $3.71 versus $3.94. The company reported a 4.23 leverage ratio and 5.55 interest coverage ratio at year-end.
Material changes and drivers
- Sales increased 0.8%; acquisition contributions, including Sunlight Supply, supported growth, while lower volume and pricing weighed on results. U.S. Consumer sales fell 2.4%; Hawthorne sales rose 20.1%, substantially reflecting acquisitions, but the segment recorded a $6.1 million loss versus $35.5 million profit.
- Gross margin fell 4.3 percentage points. Management cited acquisition mix and costs, higher transportation expense, weaker volume leverage, product mix, customer rebates and lower Roundup-related sales.
- Operating income declined 54.1%, reflecting lower gross profit and $152.8 million of continuing-operations impairment, restructuring and other charges. These included a $94.6 million non-cash Hawthorne goodwill impairment, primarily attributed to a prolonged U.S. retail hydroponics downturn.
- On June 4, 2018, Hawthorne acquired Sunlight Supply for an estimated $459.1 million. Acquisitions and seller-note payments used $501.8 million of cash overall. The company also acquired Can-Filters and bought out the remaining 25% of Gavita.
- Total debt rose by approximately $616 million year over year, alongside acquisition spending and share repurchases. Interest expense increased to $86.4 million from $76.1 million.
Outlook, risks and unusual items
- No specific FY2019 revenue or earnings guidance is provided in the supplied filing text. Management expected FY2019 capital expenditures to be consistent with recent spending and stated it expected to remain within debt covenants under current operating assumptions.
- The July 2018 credit agreement provides $2.3 billion of facilities, with $985.5 million available at September 30, 2018. Maximum leverage limits tighten over time; the reported 4.23 ratio was below the then-applicable 5.25 ceiling. Dividend and repurchase capacity is restricted by leverage and annual limits.
- The quarterly dividend increased 4% to $0.55 per share in FY2018’s fourth quarter. The company repurchased 3.5 million shares for $323.1 million during the year; $285.4 million remained under the authorization at year-end.
- Discontinued operations included an $85.0 million pre-tax charge for a proposed settlement of the Morning Song bird-food class action, subject to court approval. A further $11.7 million charge was recorded for the EZ Seed class action’s preliminary settlement; final payments depended on court approval and the claims process.
- The Tax Cuts and Jobs Act produced a $44.6 million net tax benefit from deferred-tax remeasurement, partly offset by transition tax and other items; the continuing-operations effective tax rate was negative 10.3%. FY2018 results also included $63.9 million of net losses from discontinued operations.
- Key risks include high retail-customer concentration (Home Depot, Lowe’s and Walmart together represented 61% of FY2018 sales), seasonality and weather, commodity costs, substantial debt, regulatory and product-liability exposure, and sensitivity to the Monsanto Roundup marketing relationship. Hydroponics demand is exposed to uncertainty around emerging markets and changing cannabis-related laws.
Investor facts to verify
- Review the reconciliation and sustainability of non-GAAP adjusted earnings and cash-flow measures, given the large gap from GAAP results and significant unusual charges.
- Assess Hawthorne’s post-acquisition performance, the hydroponics market outlook, and whether Project Catalyst delivers expected savings and synergies.
- Confirm final outcomes and cash costs for the Morning Song and EZ Seed legal matters, including any amounts beyond accrued provisions.
- Monitor debt reduction, covenant headroom, interest costs, and the funding trade-off between acquisitions, dividends and share repurchases.
- Track customer demand, retailer concentration, pricing/rebates, and Roundup commission economics under the revised marketing agreement.