Business Context and Reporting Period
Company: The Scotts Miracle-Gro Company
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 27, 2009 (Third Quarter of Fiscal 2009)
Business Overview: A leading manufacturer and marketer of consumer branded lawn and garden care products and professional horticulture products. Operations are divided into Global Consumer, Global Professional, Scotts LawnService, and Corporate & Other segments. The Company is the exclusive agent for Monsanto's consumer Roundup business.
Key Financial Metrics
| Metric (in millions) | 3 Months Ended June 27, 2009 |
9 Months Ended June 27, 2009 |
3 Months Ended June 28, 2008 |
9 Months Ended June 28, 2008 |
|---|---|---|---|---|
| Net Sales | $1,280.0 | $2,558.1 | $1,170.9 | $2,437.6 |
| Gross Profit | $486.8 | $929.3 | $423.8 | $817.9 |
| Gross Margin % | 38.0% | 36.3% | 36.2% | 33.6% |
| Income from Operations | $245.7 | $309.8 | $93.4 | $137.8 |
| Net Income | $147.8 | $168.2 | $22.6 | $23.8 |
| Diluted EPS | $2.23 | $2.56 | $0.35 | $0.36 |
| Cash from Operations (9mo) | $3.5 (2009) vs. $(39.5) (2008) | |||
| Total Debt (Current + Long-term) | $1,120.6 (as of June 27, 2009) | |||
| Cash and Equivalents | $149.2 (as of June 27, 2009) |
Material Changes vs. Prior Period
- Revenue Growth: Net sales increased 9.3% in the quarter and 4.9% year-to-date compared to the prior year. Organic sales growth (excluding FX and recalls) was 12.2% for the quarter and 8.0% year-to-date.
- Profitability Surge: Net income increased significantly ($147.8M vs. $22.6M for the quarter). This improvement is largely attributable to the absence of a $123.3 million non-cash goodwill impairment charge recorded in the same period of fiscal 2008.
- Margin Expansion: Gross profit margin improved to 38.0% in the quarter (from 36.2% prior year) due to price increases exceeding commodity cost increases and productivity improvements.
- Segment Performance:
- Global Consumer: Sales up 15.2% (quarter) driven by North America growth.
- Global Professional: Sales down 23.6% (quarter) due to housing market downturn affecting professional buyers.
- Scotts LawnService: Sales down 9.6% (quarter) due to macroeconomic pressures reducing customer count.
Guidance, Outlook, and Risks
- Smith & Hawken Closure: On July 8, 2009, the Company announced plans to cease operations of the Smith & Hawken business by year-end. Expected charges are approximately $25 million (severance, lease terminations, inventory write-downs), though the cash impact is expected to be neutral.
- Product Registration and Recall Matters: Ongoing investigations by the U.S. EPA and DOJ regarding FIFRA compliance. The Company recorded $6.4 million in charges for the quarter and expects to incur an additional $8 million to $12 million in charges related to these matters, exclusive of potential fines or penalties.
- Outlook: Management anticipates full-year fiscal 2009 organic net sales to increase by 7% to 8%. SG&A expenses are expected to grow 10% to 11% for the full year.
- Liquidity: The Company has $1.01 billion available under its revolving credit facility. Management expects to remain in compliance with leverage covenants (4.25x as of June 27, 2009), though global credit market conditions remain a risk factor.
Investor Verification Checklist
- Impairment Comparison: Verify the impact of the $123.3 million impairment charge in Q3 2008 to understand the true year-over-year operational improvement.
- Recall Liabilities: Monitor the status of the EPA/DOJ investigations and the potential for fines or penalties beyond the estimated $8M-$12M in additional charges.
- Smith & Hawken Exit: Track the execution of the closure plan and the actual cash impact versus the "neutral" estimate.
- Debt Covenants: Confirm continued compliance with the leverage ratio covenant, which tightens to 3.75x on September 30, 2009.
- Seasonality: Note that 70-75% of annual sales occur in Q2 and Q3; Q1 and Q4 results are not indicative of full-year performance.