Scotts Miracle-Gro Co. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the three months ended December 28, 2013. The company manufactures and markets consumer lawn and garden products, operates Scotts LawnService, and serves as Monsanto’s exclusive agent for consumer Roundup products in specified markets. Results are highly seasonal: the first quarter accounted for about 7% of fiscal 2013 sales.
Financial performance
| Metric | Q1 FY2014 | Q1 FY2013 |
|---|---|---|
| Net sales | $196.4 million | $205.8 million |
| Gross profit / margin | $34.9 million / 17.8% | $31.1 million / 15.1% |
| Operating loss | $89.5 million | $91.9 million |
| Loss from continuing operations | $65.6 million | $68.3 million |
| Net loss | $65.6 million | $67.7 million |
| Diluted loss per share | $1.06 | $1.10 |
| Cash used in operating activities | $180.2 million | $168.6 million |
Quarter-end cash was $124.6 million. Total debt was $882.0 million, including $229.7 million current and $652.3 million long-term. The current portion included $200 million of 7.25% senior notes subsequently redeemed in January 2014. Cash and cash equivalents plus current assets were $1,015.7 million, against current liabilities of $648.9 million. The company reported $1,229.3 million of availability under its revolving credit facility at quarter-end.
Changes versus the prior-year quarter
- Sales declined 4.6%, reflecting an 8.1% volume decrease, partly offset by 0.6% favorable pricing and 3.3% contribution from acquisitions. Management attributed lower Global Consumer volume mainly to retailers timing shipments closer to the peak lawn and garden season.
- Gross margin improved 2.7 percentage points, to 17.8%, primarily due to pricing, acquisitions, and improved Scotts LawnService margins.
- Scotts LawnService sales rose 3.1% to $46.2 million; segment income improved to $2.6 million from a $0.9 million loss. Global Consumer sales fell 5.2% to $145.3 million.
- Operating cash outflow increased $11.6 million, primarily because of higher working-capital use, including inventory production. Quarter-end inventory was $605.7 million, up from $324.9 million at September 30, 2013.
- Investing cash outflow increased to $103.4 million, including the $60 million Tomcat consumer rodent-control acquisition and $43.4 million of capital expenditures. The prior-year quarter included a $4.7 million vendor reimbursement and a $4.3 million technology impairment; the current quarter recorded $0.3 million of restructuring expense.
Outlook, risks and notable items
- The filing provides no specific revenue, earnings, or full-year numerical guidance. Management expected to remain within leverage and interest-coverage covenants during fiscal 2014 based on current assumptions, and believed operating cash flow and credit availability would meet foreseeable needs, while cautioning that results and future borrowing availability are uncertain.
- On December 20, 2013, the company entered a new five-year, $1.7 billion secured revolving credit facility, with an option to seek up to $450 million more subject to conditions. At quarter-end, leverage was 2.04 against a maximum of 4.00; interest coverage was 7.06 against a minimum of 3.50.
- On January 15, 2014, the company redeemed $200 million of 7.25% notes for $214.5 million, including accrued interest and a $7.25 million call premium. The premium and $3.5 million of unamortized issuance costs were expected to be recognized or written off in fiscal Q2.
- The Tomcat acquisition’s purchase-price allocation was preliminary: $38.1 million of identifiable intangible assets, $19.9 million of goodwill, and $2.0 million of inventory were recorded.
- Capital spending included a $30 million down payment on a new corporate aircraft. The company expected to take title in late fiscal 2014 and then enter a lease arrangement.
- Key exposures include seasonality, working-capital and inventory needs, commodity, foreign-exchange and interest-rate fluctuations, and credit-covenant compliance. The company relies on the Monsanto Roundup marketing agreement; termination could eliminate a significant source of earnings and overhead absorption.
- Contingencies include asbestos-related claims and a consolidated bird-food consumer class action; no reserves were recorded for these matters. Environmental liabilities of $4.1 million were accrued. Management said tax audits and other proceedings were not expected to materially affect results, but acknowledged uncertainty in final outcomes.
- The quarterly dividend declared was $0.438 per share. The company repurchased 0.2 million shares for $8.5 million during the quarter; $290.3 million remained under its authorized repurchase program.
Investor verification priorities
- Track spring and summer shipments, retailer inventory timing, and whether Global Consumer volume recovers.
- Monitor inventory conversion, seasonal operating cash flow, and the effect of working-capital needs on borrowing.
- Confirm post-redemption debt balances, refinancing costs, and ongoing compliance with credit covenants.
- Assess whether Scotts LawnService margin gains and Tomcat acquisition contributions continue.
- Review Roundup agreement developments, aircraft financing and leasing, and the outcomes of material legal and environmental matters.