Scotts Miracle-Gro Co. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended June 29, 2013. The company manufactures and markets lawn and garden products, distributes consumer Roundup products under an agreement with Monsanto, and operates Scotts LawnService. Results are seasonal, with sales concentrated in the second and third fiscal quarters.
Financial performance
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net sales | $1,148.1 million | $1,054.9 million | $2,373.5 million | $2,424.9 million |
| Gross profit | $441.8 million | $369.0 million | $851.6 million | $856.3 million |
| Gross margin | 38.5% | 35.0% | 35.9% | 35.3% |
| Operating income | $250.2 million | $170.2 million | $331.4 million | $288.3 million |
| Income from continuing operations | $148.2 million | $96.4 million | $179.8 million | $149.8 million |
| Net income | $148.2 million | $93.3 million | $180.5 million | $146.6 million |
| Diluted EPS | $2.37 | $1.50 | $2.89 | $2.37 |
Q3 operating margin was 21.8%, versus 16.1%; nine-month operating margin was 14.0%, versus 11.9%. Interest expense was $16.8 million for Q3 and $47.9 million year to date. The effective tax rate on continuing operations was 36.5% for Q3 and 36.6% year to date.
Cash flow: Nine-month operating cash flow was $143.1 million, compared with $115.1 million a year earlier. Investing used $46.9 million, including $42.7 million of capital expenditures. Financing used $117.8 million, including $60.7 million of dividends. Cash declined $26.5 million from fiscal-year beginning to $105.4 million.
Debt and liquidity: Debt totaled $713.6 million at June 29, including $165.5 million current; cash was $105.4 million. The company reported $1,533.8 million of availability under its senior secured credit facility and $159.9 million borrowed under its receivables purchase agreement. It was compliant with debt covenants: leverage ratio 2.46 against a 3.50 maximum; interest coverage 5.79 against a 3.50 minimum.
Changes versus comparable periods
- Q3 sales rose 8.8%, driven mainly by higher Global Consumer volume and pricing. Management attributed the volume increase largely to spring-season sales shifting from Q2 into Q3 after a delayed season start.
- Nine-month sales fell 2.1%, primarily because of lower Global Consumer volume, reduced Roundup-related sales and lower ICL supply-agreement sales; pricing and Scotts LawnService growth partly offset the decline.
- Q3 and nine-month earnings improved. Management cited higher sales, better pricing, lower growing-media material costs and reduced SG&A; the nine-month comparison also benefited from lower product-registration and recall charges.
- SG&A fell 4.1% in Q3 and 6.5% year to date, including lower advertising and productivity-related costs. The nine-month gross margin improved 0.6 percentage points.
Outlook, commentary and risks
- Management described fiscal 2013 initiatives focused on pricing, product cost reductions and SG&A productivity, while continuing investment in research, development and marketing. It expected operating cash flow and borrowing capacity to meet foreseeable debt service, working capital, capital expenditure and shareholder-return needs, and expected covenant compliance under current assumptions; these are not guarantees.
- On August 6, 2013, the board announced a quarterly dividend increase from $0.325 to $0.4375 per share. The company had $298.8 million remaining under its share-repurchase authorization, but made no purchases under that program during the nine-month period.
- Restructuring and other items included $8.5 million of Q3 international severance costs. Year-to-date items included a $4.3 million impairment charge for insect-repellent technology and $4.7 million of vendor reimbursement related to MAT 28 development costs. The company also recorded a $2.3 million gain on U.K. peat-bog land sales.
- The Roundup marketing agreement is an important earnings and overhead contributor; termination or a decline in covered-region sales could materially reduce its benefit. Q3 net sales associated with the agreement were $52.2 million, down from $60.8 million.
- Contingencies include consolidated putative class actions related to the 2008 wild-bird-food recall and asbestos-related injury claims. The company had not accrued for these matters, citing uncertainty about potential loss. Environmental remediation accruals were $3.7 million; management did not expect known environmental matters to be material, while noting outcomes remain uncertain.
- Seasonality and weather, commodity and foreign-exchange movements, working-capital needs, and potential covenant pressure are relevant risks. The company held $100.7 million of its $105.4 million cash balance at controlled foreign corporations and said it had no current plan to repatriate those funds.
Important facts for investors to verify
- Whether the Q3 sales rebound reflects underlying demand or mainly the timing shift caused by the delayed spring season; monitor subsequent-quarter sales and inventory.
- Whether improved margins and lower SG&A are sustainable, and how pricing, product-cost initiatives and marketing investment affect future results.
- Cash conversion and receivables: nine-month cash flow included a $356.5 million increase in accounts receivable, and $199.9 million of receivables were pledged.
- Debt maturity and covenant headroom, including the receivables-financing arrangement, foreign-held cash and the dividend increase’s effect on liquidity.
- Developments in the Roundup agreement, recall class actions, asbestos claims and environmental matters; the filing does not provide a clear estimable loss for certain legal claims.