Scotts Miracle-Gro Company — Q2 FY2022 Form 10-Q
Reporting period: Three and six months ended April 2, 2022; comparisons are with the periods ended April 3, 2021. Dollar amounts are in millions except per-share data. The business makes and markets lawn and garden products and indoor-growing products. Its North American consumer business is highly seasonal, with most annual sales in the second and third fiscal quarters.
Key financial results
| Metric | Q2 FY2022 | Q2 FY2021 | Six months FY2022 | Six months FY2021 |
|---|---|---|---|---|
| Net sales | $1,678.4 | $1,828.8 | $2,244.3 | $2,577.4 |
| Gross profit | $588.4 | $657.5 | $707.0 | $848.3 |
| Gross margin | 35.1% | 36.0% | 31.5% | 32.9% |
| Operating income | $387.9 | $424.1 | $352.5 | $458.1 |
| Net income | $276.5 | $310.2 | $226.4 | $335.3 |
| Diluted EPS | $4.94 | $5.43 | $4.02 | $5.87 |
- Revenue declined 8.2% in Q2 and 12.9% in the first half. Management attributed the declines mainly to lower sales volumes, partly offset by higher pricing and acquisitions.
- First-half operating cash flow was negative $1,142.6, versus negative $699.9 a year earlier. Investing cash outflow was $255.8, including $202.8 in cash acquisition payments; financing cash inflow was $1,171.3. Cash ended at $17.1, down from $244.1 at September 30, 2021.
- At April 2, total debt was $3,829.1, including $459.7 current debt and $3,350.0 long-term debt. Debt was $2,551.3 a year earlier. First-half interest expense rose 47.2% to $52.1. The company reported $345.2 of borrowing availability under its then-current credit agreement.
- Current assets were $3,254.4 and current liabilities $1,470.3. Inventory was $1,594.1, up from $1,019.2 a year earlier; management cited higher production for expected demand and higher input costs. The company also reported $444.5 of receivables pledged as collateral for $400.0 of receivables-facility borrowings.
Material changes and segment performance
- U.S. Consumer: Q2 sales rose 0.4% to $1,379.8, but first-half sales fell 3.4% to $1,722.2. Segment profit decreased 1.6% in Q2 and 8.6% for the first half, reflecting lower gross margin and, for the half, lower sales.
- Hawthorne: Q2 sales fell 44.3% to $202.6 and first-half sales fell 41.6% to $393.2. Segment profit was $3.3 in Q2 versus $41.4; first-half segment loss was $2.0 versus profit of $81.8. Management cited lower volume, an oversupply of cannabis slowing cultivation, and higher transportation and warehousing costs.
- Other: Q2 sales increased 5.5% to $96.0 and first-half sales increased 5.7% to $128.9; segment profit declined in both periods.
- Higher transportation, warehousing and material costs, along with lower volume and unfavorable fixed-cost absorption, reduced gross margin. Pricing partly offset these pressures. First-half SG&A fell 7.6%, primarily due to lower advertising and incentive compensation costs.
Outlook, commentary and risks
- The filing provides no specific full-year revenue or earnings guidance. Management expected Hawthorne’s oversupply and cost pressures to continue adversely affecting that segment during the rest of FY2022; longer-lasting or more severe effects could further hurt results.
- Management cited inflation in transportation and materials, including fertilizer inputs, heightened by the war in Ukraine; the company reported no operations in Russia or Ukraine. COVID-related costs in the reported 2022 periods were immaterial, but potential future operational and supply-chain disruption remains uncertain.
- Hawthorne goodwill was $433.0; the company reported no impairment at April 2, but warned that weaker growth, higher discount rates or deteriorating economic conditions could lead to impairment.
- During Q2, the company announced Hawthorne lighting-manufacturing consolidation and facility closures, recording $5.4 of impairment, restructuring and other charges for the quarter. It was also evaluating further Hawthorne, U.S. Consumer and corporate cost actions that could generate charges in later FY2022 quarters.
- After quarter-end, the company entered a new five-year credit agreement on April 8, 2022, with $2,500.0 of facilities and maturity in April 2027. At April 2, leverage was 3.81 against a maximum of 4.50; interest coverage was 7.81 against a minimum of 3.00. Management expected covenant compliance for FY2022 based on its assumptions, while noting that earnings shortfalls or higher debt could threaten compliance.
- Subsequent events included a $25.0 RIV Capital convertible-note investment on April 22 and the Cyco acquisition on April 28 for $34.4 plus contingent consideration of up to $10.0. Luxx Lighting and True Liberty Bags were acquired during the first half; Luxx purchase accounting remained preliminary, and an $8.0 accrual was recorded for product-return and warranty issues identified after acquisition.
- Environmental matters included $2.9 accrued for known exposures. The company reported asbestos-related claims but recorded no accrual, stating loss was not considered probable; it cautioned that future developments or defense costs could affect results. Management considered other pending claims and legal proceedings adequately accrued, while acknowledging uncertainty.
Investor verification priorities
- Track whether pricing and cost controls can offset inflation, freight and warehousing costs without further margin deterioration.
- Assess Hawthorne demand, inventory and profitability trends, restructuring progress, and the assumptions supporting its goodwill valuation.
- Monitor seasonal working-capital conversion, especially elevated inventory and receivables, operating cash flow, and the use and renewal of the receivables facility.
- Review debt growth, interest expense, covenant headroom, and the effect of acquisitions, dividends and share repurchases on liquidity.
- Follow final Luxx purchase accounting and warranty exposure, subsequent acquisitions and investments, and any material developments in legal or environmental contingencies.