Scotts Miracle-Gro Company — Q3 FY2023 Form 10-Q
Reporting period: Fiscal quarter and nine months ended July 1, 2023. The company manufactures and sells lawn and garden products and indoor-growing products through U.S. Consumer, Hawthorne, and Other segments. Sales are seasonal, with most annual consumer sales in the second and third fiscal quarters. Dollar amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q3 FY2023 | Q3 FY2022 | Nine months FY2023 | Nine months FY2022 |
|---|---|---|---|---|
| Net sales | $1,118.7 | $1,186.1 | $3,176.8 | $3,430.4 |
| Gross margin | $205.9 (18.4%) | $236.6 (19.9%) | $714.3 (22.5%) | $943.7 (27.5%) |
| Operating income (loss) | $77.3 | $(562.5) | $241.7 | $(210.1) |
| Net income (loss) | $43.7 | $(443.9) | $88.3 | $(217.5) |
| Diluted EPS | $0.77 | $(8.01) | $1.57 | $(3.91) |
| Interest expense | $47.1 | $31.0 | $138.1 | $83.1 |
- Quarterly sales declined 5.7%; nine-month sales declined 7.4%. Lower volume and mix were the main factors, partly offset by pricing. Nine-month volume and mix reduced sales 13.1%, while pricing added 6.0%.
- Quarterly results compare against prior-year charges that included $632.4 of Hawthorne goodwill and intangible-asset impairments. FY2023 recorded no such impairment, but recorded $193.8 of impairment, restructuring and other charges for the nine months, versus $731.3 a year earlier. FY2023 charges included inventory write-downs, facility costs, employee termination benefits and asset impairments.
- Segment sales and profit (loss), Q3 / nine months: U.S. Consumer sales were $916.4 / $2,642.7, with segment profit of $124.8 / $553.5; Hawthorne sales were $93.4 / $317.6, with segment loss of $8.7 / $41.7; Other sales were $108.9 / $216.5, with segment profit of $5.8 / $21.8.
- Hawthorne sales fell 39.5% in Q3 and 42.0% for nine months, reflecting lower volume and some pricing pressure. U.S. Consumer sales edged up in Q3 but its segment profit fell 31.1%, primarily due to lower gross margin rate and higher SG&A.
Cash flow, debt and liquidity
- Nine-month operating cash flow was $(4.3), versus $(679.6) in the prior-year period. Management cited lower inventory production and other factors, but cash flow benefited from vendor payment terms that deferred payments due near quarter-end into Q4. Accounts receivable also increased with sales timing.
- Nine-month investing cash outflow was $44.6, including $73.8 of capital expenditures and $37.0 received from repayment of seller financing. Financing cash outflow was $11.0. Cash ended at $27.4.
- Total debt was $3,098.8 at July 1, 2023, including $450.7 current debt and $2,628.8 long-term debt. Total debt was $3,500.1 at July 2, 2022. Current assets were $2,251.0 and current liabilities were $1,329.1.
- Credit-facility borrowings had a 7.3% weighted average rate for the nine months, excluding swaps; average debt interest rate including swaps was 5.3%. Interest expense rose as rates and average borrowings increased.
- The company reported $1,349.9 of borrowing availability under its credit agreement at July 1 and a leverage ratio of 6.15; it said it was then in compliance with applicable covenants. On July 31, 2023, it amended the credit agreement: reduced revolving commitments by $250, raised permitted leverage limits temporarily, replaced the interest-coverage covenant with a fixed-charge coverage covenant, increased borrowing pricing, added intellectual property as collateral, and restricted certain investments and discretionary payments.
- The company warned that a covenant default could accelerate debt and trigger cross-defaults on senior notes. It stated it did not have sufficient cash or available liquidity to repay $2,682.6 of credit-agreement and senior-note debt in such an event. It expects covenant compliance based on its projections, but noted that contingency plans—including further cost reductions, lender discussions or financing that could include equity—are not assured.
Outlook, commentary and risks
- Management expects at least $300 of annualized run-rate savings from restructuring, with most remaining actions substantially complete by fiscal year-end. It expects at least $10 of additional restructuring charges in Q4 FY2023 and says the program should improve gross margin and reduce SG&A.
- Management expects cannabis-industry oversupply to continue to pressure Hawthorne. It also cited persistent manufacturing and logistics inflation, volatile commodity costs, higher interest rates and uncertain consumer behavior. No specific full-year sales or earnings guidance is provided in the supplied filing text.
- Environmental liabilities accrued were $2.5. The company is defending asbestos-related claims, for which it recorded no accrual because loss was not considered probable. Management considers current accruals adequate but cannot assure litigation and other contingencies will not affect results.
- Convertible debt investments had a fair value of $86.5 against an amortized cost basis of $225.0, with gross unrealized losses of $138.5. Management attributed the decline mainly to lower conversion-option value, said it intended and was able to hold the investments, and believed it would recover cost.
Important facts for investors to verify
- Progress against the $300 annualized savings target, timing and cash cost of facility closures, and whether further restructuring charges are needed.
- Compliance with the amended leverage and fixed-charge coverage covenants, actual borrowing availability after the July 31 amendment, and the status and terms of the receivables facility, which was scheduled to expire August 18, 2023.
- Whether operating cash flow improves without relying on deferred vendor payments, and the company’s seasonal working-capital and debt needs.
- Hawthorne demand, inventory reductions and pricing; U.S. Consumer volume, margins, input costs and promotional spending.
- The sustainability of dividends and the value and recoverability of convertible debt investments.