Business context and reporting period
The Scotts Miracle-Gro Company filed this unaudited Form 10-Q for the quarter ended July 2, 2022. It sells lawn and garden products and indoor/hydroponic gardening products through its U.S. Consumer, Hawthorne and Other segments. The business is seasonal: more than 75% of annual North American consumer lawn and garden sales generally occur in the second and third fiscal quarters.
Financial performance and liquidity
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net sales | $1,186.1 million | $1,609.7 million | $3,430.4 million | $4,187.2 million |
| Gross profit margin | 19.9% | 30.7% | 27.5% | 32.1% |
| Net income (loss) | $(443.9) million | $225.9 million | $(217.5) million | $561.3 million |
| Diluted EPS | $(8.01) | $3.94 | $(3.91) | $9.81 |
| Operating cash flow | Not presented separately for the quarter | $(679.6) million | $(207.1) million |
Quarterly operating loss was $562.5 million; nine-month operating loss was $210.1 million. Results included $724.2 million of quarterly impairment, restructuring and other charges, including a $632.4 million non-cash Hawthorne goodwill and intangible asset impairment. Hawthorne goodwill was fully impaired, leaving no carrying value. The impairment’s stated tax benefit was $138.0 million.
Cash and cash equivalents were $27.8 million at July 2, 2022, versus $58.3 million a year earlier. Total debt was $3.50 billion, compared with $2.20 billion a year earlier; current debt was $322.0 million and long-term debt was $3.16 billion. The company reported $868.5 million of availability under its revolving credit agreement. Current assets were $2.59 billion and current liabilities were $1.07 billion. Shareholders’ equity fell to $418.1 million from $1.12 billion at July 3, 2021.
Material changes versus the prior comparable period
- Sales fell 26.3% in the quarter and 18.1% for the nine months. Management attributed the declines principally to lower volume, partly offset by pricing and acquisitions.
- Hawthorne sales declined 63.4% in the quarter and 50.0% year to date; segment profit was $4.1 million and $2.0 million, respectively, versus $51.9 million and $133.7 million in the prior-year periods. Management cited cannabis oversupply, weaker cultivation activity, and higher freight and warehousing costs.
- U.S. Consumer sales declined 13.5% for the quarter and 7.1% year to date. Segment profit declined 31.5% and 16.8%, respectively.
- Quarterly gross margin decreased 10.8 percentage points. Higher material and transportation costs, lower volume and fixed-cost absorption, and charges weighed on margins; price increases provided a partial offset.
- Interest expense increased to $31.0 million for the quarter and $83.1 million year to date, reflecting higher average borrowings. Operating cash use worsened, driven by higher inventory, lower earnings and higher interest payments.
Outlook, management commentary, risks and unusual items
Management expects cannabis oversupply and cost increases to continue adversely affecting Hawthorne. It is reducing supply-chain capacity and staffing and pursuing other cost reductions; further restructuring charges may follow. The filing provides no clear numerical full-year earnings or sales guidance. Management said it expected to remain within financial covenant limits during fiscal 2022 based on current operating assumptions, while warning that earnings shortfalls or increased debt could threaten compliance.
A June 2022 credit amendment temporarily raised the maximum leverage covenant: 6.25 for Q3 2022 through Q1 2023, 6.50 for Q2–Q3 2023, then stepping down to 4.50 from Q3 2024. The reported leverage ratio was 5.10; the interest coverage ratio was 5.89 against a 3.00 minimum. The amendment raises certain borrowing costs when leverage exceeds 4.75, restricts discretionary distributions and imposes conditions on certain acquisitions and additional debt.
Other notable items include $45.9 million of inventory write-downs associated with exiting certain lighting products and brands; acquisitions of Luxx Lighting, True Liberty Bags and Cyco; and a $250 million receivables-facility borrowing. Management cited inflation, higher transportation and input costs, foreign exchange effects, seasonal working-capital needs and continuing uncertainty from COVID-19. It reported no operations in Russia or Ukraine. The company disclosed ordinary-course legal and environmental matters, including asbestos-related claims for which no accrual was recorded because loss was not considered probable; management said known environmental accruals were adequate.
Important facts for investors to verify
- Whether Hawthorne demand, sales volumes and segment profitability stabilize, and whether further goodwill or intangible impairments arise.
- Inventory levels, seasonal cash conversion, operating cash flow and the company’s ability to reduce borrowings.
- Compliance with the stepped-down leverage covenant, the cost and renewal terms of the receivables facility, and available borrowing capacity.
- Actual savings, execution costs and additional charges from restructuring and the lighting-product exit.
- Whether price increases can offset input, freight and warehousing inflation without further volume or margin deterioration.