Business context and reporting period
The Scotts Miracle-Gro Company (NYSE: SMG) filed this unaudited Form 10-Q for the three months ended January 1, 2022, its fiscal 2022 first quarter. It sells lawn and garden products and indoor and hydroponic gardening products through U.S. Consumer, Hawthorne and Other segments. Results are highly seasonal: more than 75% of annual North American consumer lawn and garden sales typically occur in the second and third fiscal quarters, so first-quarter results are not necessarily indicative of full-year performance.
Financial performance and liquidity
Amounts are in millions of dollars, except per-share data.
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $566.0 | $748.6 |
| Gross profit / margin | $118.7 / 21.0% | $190.8 / 25.5% |
| Operating income (loss) | $(35.4) | $34.0 |
| Net income (loss) | $(50.0) | $25.2 |
| Diluted EPS | $(0.90) | $0.43 |
| Cash used in operating activities | $(765.1) | $(420.7) |
| Cash used in investing activities | $(245.2) | $(148.2) |
| Cash provided by financing activities | $782.6 | $573.5 |
Sales fell 24.4%; reported volume declined 28.6%, partly offset by 3.9% pricing and 0.3% acquisitions. Gross margin contracted 4.5 percentage points. Higher transport, warehousing, labor and material costs, lower volume and unfavorable fixed-cost absorption weighed on margins; pricing partly offset these pressures. SG&A declined 1.7% to $154.1.
Segment sales and profit (loss): U.S. Consumer $342.4 and $10.7 (prior year $408.2 and $45.3); Hawthorne $190.6 and $(5.3) (prior year $309.4 and $40.4); Other $33.0 and $1.3 (prior-year sales $31.0 and break-even profit). Hawthorne’s sales decline was driven mainly by lower volume in lighting, nutrients, growing media, hardware and growing environments. U.S. Consumer volume also weakened, particularly in fertilizer, soils and controls.
Operating cash use increased by $344.4 year over year, primarily reflecting inventory build, lower earnings, higher interest payments and vendor payments shifted into the quarter. Inventories were $1,657.2, up from $1,068.3 a year earlier and $1,126.6 at September 30, 2021. Cash and equivalents were $16.4, versus $244.1 at fiscal year-end.
Total debt was $3,263.0, including $160.7 current and $3,082.2 long-term, compared with $2,177.2 a year earlier and $2,315.3 at fiscal year-end. Interest expense increased 47.8% to $23.8, largely due to higher average borrowings. The company reported $623.5 of availability under its credit agreement; its leverage ratio was 3.32 against a maximum of 4.50, and its interest coverage ratio was 8.73 against a minimum of 3.00. It reported compliance with financial covenants at quarter-end.
Material changes, outlook and risks
- On December 30, 2021, Hawthorne acquired substantially all Luxx Lighting assets for $213.5, partly paid with 0.1 million common shares valued at $21.0. It also acquired True Liberty Bags assets for $10.0. Acquisitions contributed to increased goodwill and intangible assets.
- The quarter included $7.3 of equity-method losses from the 50%-owned Bonnie Plants joint venture. Management said a first-quarter loss was anticipated because the business is seasonal.
- Q1 FY2021 included $9.3 of COVID-related costs and $12.5 of gain from remeasuring the AFC loan in connection with the Bonnie Plants transaction; the current quarter included neither comparable item. Current-quarter restructuring and other charges were $1.8.
- The filing provides no specific full-year numerical revenue or earnings guidance. Management said operating cash flows and borrowing capacity are expected to meet debt service, capital expenditure and working-capital needs for the foreseeable future, and it expects covenant compliance through fiscal 2022 based on current assumptions. It cautioned that earnings shortfalls, increased debt or other factors could threaten covenant compliance or liquidity.
- Risks include continued supply-chain disruption and inflationary costs, uncertainty from COVID-19, seasonal demand, high inventory and indebtedness, and potential covenant pressure. Management reported $3.0 accrued for environmental matters; asbestos-related claims remain contested, with no accrual recorded because a loss was not considered probable. The company said it did not expect identified legal or environmental matters to have a material effect, but noted outcomes remain uncertain.
- The company repurchased approximately 0.8 million shares for $125.0 and paid $37.1 in dividends during the quarter. The quarterly dividend was $0.66 per share. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether inventory accumulation converts to seasonal sales and operating cash flow, and whether elevated inventory creates obsolescence or markdown exposure.
- Whether Hawthorne demand and segment profitability recover after the sharp sales decline, and how Luxx and other acquisitions perform.
- How gross margins respond to pricing, input-cost inflation, freight, labor and product mix.
- Debt, interest costs, borrowing availability and covenant headroom as seasonal working-capital needs rise.
- Any subsequent changes to management’s outlook, supply-chain conditions, COVID-19 impacts, legal contingencies or environmental exposures.