Scotts Miracle-Gro Co. — Q2 FY2016 Form 10-Q
Reporting period: Quarter and six months ended April 2, 2016; comparisons are with periods ended March 28, 2015. The company manufactures and markets lawn and garden products, primarily in North America and Europe, and also participates in indoor and hydroponic gardening.
Financial performance
| Metric | Q2 FY2016 | Q2 FY2015 | Six months FY2016 | Six months FY2015 |
|---|---|---|---|---|
| Net sales | $1,245.2m | $1,071.8m | $1,439.7m | $1,241.3m |
| Gross profit | $521.6m | $424.8m | $538.3m | $431.4m |
| Gross margin | 41.9% | 39.6% | 37.4% | 34.8% |
| Income from continuing operations | $225.8m | $138.6m | $146.6m | $64.0m |
| Net income attributable to controlling interest | $210.1m | $124.6m | $129.0m | $50.0m |
| Diluted continuing-operations EPS | $3.64 | $2.24 | $2.35 | $1.03 |
| Interest expense | $19.1m | $15.0m | $35.4m | $24.7m |
- Six-month operating cash flow was negative $627.8m, versus negative $648.7m; capital expenditures were $24.4m. Investing cash flow was negative $98.2m and financing cash flow provided $713.5m. Period-end cash was $57.3m.
- Debt totaled $1,967.7m at April 2, 2016, including $202.9m current and $1,764.8m long-term, compared with $1,157.6m at September 30, 2015. The company reported $496.8m available under its credit agreement and $233.3m available under its receivables program. Leverage ratio was 2.45 against a maximum of 4.50; interest coverage was 9.72 against a minimum of 3.00.
- Quarterly dividends declared were $0.47 per share. The company repurchased $42.8m of shares during the six months.
Material changes and drivers
- Sales rose 16.2% in the quarter and 16.0% for the six months. Management attributed growth to volume, acquisitions, and the amended Roundup marketing agreement, partly offset by currency and lower pricing. U.S. Consumer sales rose 16.4% for both periods; Europe Consumer sales fell 2.6% for the quarter and 6.6% year to date; Other sales rose 49.6% and 45.7%, respectively.
- The fiscal calendar shift placed six additional days in Q2 FY2016 compared with the prior-year quarter, all during peak selling season. Management estimated this added about $103m to quarterly sales and $120m to six-month sales, and $0.40 to continuing-operations EPS. This limits direct year-over-year comparability.
- Gross margin improved, helped by volume leverage, lower material and distribution costs, and Roundup-related revenue; lower pricing and product mix partly offset these gains.
- Reported earnings include significant unusual items. Q2 continuing operations recorded a net $47.0m recovery in impairment, restructuring and other charges, principally reflecting a $50.0m insurance recovery related to Bonus S consumer claims. Six-month results also include an $8.8m refinancing charge. The company reported discontinued-operation losses of $16.0m in Q2 and $17.5m for six months.
Outlook, transactions and risks
- On April 13, 2016, after quarter-end, the company contributed Scotts LawnService to a TruGreen joint venture for an approximately 30% interest. It received a $196.2m cash distribution, partly offset by an $18.0m investment in the joint venture’s second-lien loan. Management’s preliminary estimate of the after-tax gain was around $100m, expected to be recorded in Q3 FY2016, subject to adjustments. The former business is presented as discontinued operations.
- In Q2 the company made a $72.0m loan to AFC, guaranteed by Bonnie Plants, at a fixed 6.95% rate and entered into service agreements and options concerning the Bonnie business. A Canadian growing-media acquisition for an estimated $35.0m, including contingent consideration, closed May 2, after quarter-end.
- No numeric full-year earnings or sales guidance is provided in the filing. Management said it expected to remain within debt covenants through FY2016 based on current assumptions, while warning that lower earnings, higher debt or other factors could jeopardize compliance. It expects continued investment in research, development, advertising and marketing.
- Key exposures include seasonal demand and working-capital swings, foreign exchange, interest rates and commodity prices. The company also faces Bonus S product claims (costs incurred to date of $73.7m; $54.9m of insurance reimbursements received), environmental matters, asbestos-related claims and litigation over recalled bird food products. The company stated that some litigation losses could not be reasonably estimated and no reserves were recorded for certain cases.
Investor verification priorities
- Separate underlying operating performance from the six-day calendar benefit and the $50.0m insurance recovery; review the company’s non-GAAP adjustments and reconciliation.
- Verify final accounting for the Scotts LawnService joint venture, the estimated gain, cash proceeds and ongoing equity-method results.
- Assess the higher debt balance, seasonal cash usage, facility availability, covenant headroom and terms of receivables-backed borrowing.
- Monitor remaining Bonus S claims and insurance recoveries, as well as material legal and environmental contingencies.
- Track the Bonnie loan and options, the post-quarter Canadian acquisition, and whether acquisition and investment spending produces expected returns.