Scotts Miracle-Gro Co. — Form 10-Q Summary
Reporting period: Quarter ended March 28, 2015; comparisons are with the quarter and six months ended March 29, 2014. The lawn and garden business is seasonal, with most sales typically occurring in the second and third fiscal quarters. Amounts below are in millions except per-share data.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,102.3, up 2.0% | $1,318.5, up 3.8% |
| Gross profit / margin | $433.3 / 39.3%; prior 40.1% | $462.6 / 35.1%; prior 36.8% |
| Income from operations | $209.3; prior $217.1 | $103.3; prior $127.4 |
| Net income attributable to controlling interest | $124.6; prior $125.7 | $50.0; prior $60.0 |
| Diluted earnings per share | $2.01; prior $2.00 | $0.81; prior $0.95 |
| Cash used in operating activities | $648.7 for six months; prior $614.6 |
Sales growth reflected acquisitions and higher Global Consumer volume, partly offset by unfavorable currency movements. Lower gross margins reflected fuel-hedge mark-to-market losses, product mix, acquisition impacts and higher material costs. Six-month earnings also included higher restructuring charges; the prior-year comparison included $10.7 of refinancing costs.
Liquidity, debt and capital
At March 28, cash was $54.8, versus $152.7 a year earlier. Total debt was $1,529.2, compared with $1,423.9; this included $998.9 of revolving loans and $301.3 under the receivables purchase agreement. The company reported $676.9 of credit-facility availability and $98.7 available under the receivables agreement. It was in compliance with debt covenants: leverage ratio 2.62 versus a 4.00 maximum, and interest coverage 9.18 versus a 3.50 minimum.
Operating cash use increased primarily because of working-capital needs, including inventory production. Investing cash use was $73.3, including $50.5 for acquisitions. Financing provided $693.6, chiefly from borrowings. The company declared dividends of $0.45 per share for the quarter and repurchased $14.8 of shares during the six months.
Changes, outlook and notable items
- Global Consumer sales rose 1.7% for the quarter and 3.7% for six months; Scotts LawnService sales rose 5.2% and 2.5%, respectively. LawnService segment income declined, reflecting higher planned selling costs.
- Management expects fuel-hedge mark-to-market costs recognized in the first half to be offset by fuel-purchase savings in the third and fourth quarters. It said the inventory build was intended to improve spring service levels and reduce distribution costs.
- No specific numerical full-year earnings or sales guidance is provided in the supplied filing text. Management expects operating cash and credit availability to fund debt service, working capital, capital expenditures and shareholder returns, while warning that results and borrowing availability are not assured.
- After quarter-end, the company acquired a growing-media business for an estimated $6.6 and acquired General Hydroponics and Vermicrop for $120 and $15, respectively. These transactions expand its indoor and urban gardening presence.
- Restructuring charges were $14.7 for six months, as the company continued efforts to reduce management layers; completion was expected by fiscal year-end. Environmental remediation accruals were $5.7. The company reported asbestos-related claims and consolidated bird-food class actions, for which it had recorded no reserves because probable losses could not be reasonably estimated.
- The Monsanto Roundup marketing agreement is a significant source of earnings and overhead absorption; termination under specified circumstances could adversely affect results. The EU term runs through September 30, 2015, with renewal subject to agreement.
Key facts for investors to verify
- Whether second-half sales, seasonal working-capital recovery and hedge-related savings materialize as management expects.
- Acquisition integration, purchase-price accounting and the contingent consideration associated with Vermicrop.
- Debt, covenant headroom and continued access to the credit and receivables facilities as seasonal borrowing needs change.
- Potential outcomes and costs of the bird-food litigation, asbestos claims, environmental matters and tax audits.
- Continuation or renewal of the Roundup agreement and its effect on earnings if changed or terminated.