Scotts Miracle-Gro Co. — Fiscal 2019 First-Quarter 10-Q
Reporting period: Three months ended December 29, 2018, compared with the three months ended December 30, 2017. The company manufactures and markets lawn and garden products and operates its Hawthorne indoor and hydroponic gardening business. Results are highly seasonal: the company says more than 75% of annual sales have typically occurred in fiscal Q2 and Q3. The first-quarter loss is therefore not necessarily indicative of full-year results.
Key financial results
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Net sales | $298.1 million | $221.5 million |
| Gross profit / gross margin | $34.5 million / 11.6% | $34.0 million / 15.3% |
| Loss from operations | $84.9 million | $71.9 million |
| Loss from continuing operations | $82.6 million; $1.49 per diluted share | $20.0 million; $0.35 per diluted share |
| Net loss attributable to controlling interest | $79.6 million | $21.2 million |
| Cash used in operating activities | $233.4 million | $210.5 million |
| Cash and cash equivalents at period-end | $22.6 million | $54.5 million |
| Total debt at period-end | $2,290.2 million | $1,791.3 million |
- Sales rose 34.6%, principally reflecting $71.6 million of Sunlight Supply sales in Hawthorne and higher U.S. Consumer volume. Acquisition contribution was reported as 32.3% of the sales change. Foreign exchange and pricing were unfavorable.
- Gross margin declined 3.7 percentage points. Management cited higher transportation costs, including $5.0 million of unfavorable fuel and resin hedge mark-to-market effects; increased Hawthorne promotions; and restructuring and impairment charges. Higher U.S. Consumer volume provided some offset.
- SG&A increased 7.5% to $116.3 million. Interest expense rose 41.6% to $25.2 million, reflecting higher average borrowings following acquisitions and higher market rates.
- Discontinued operations contributed $2.9 million of income versus a $1.2 million loss a year earlier, including $5.0 million of insurance recoveries tied to the Morning Song bird food litigation.
- Operating cash use increased by $22.9 million year over year. The company cited customer rebate payment timing, inventory-related working capital, higher interest and SG&A payments, tax payment timing, and a $33.3 million income tax receivable.
Segments and balance sheet
- U.S. Consumer: Sales of $136.9 million, up 8.7%; segment loss widened to $43.1 million from $37.9 million, primarily on lower gross margin and higher SG&A.
- Hawthorne: Sales of $140.8 million, up 83.6%, mainly due to Sunlight Supply. Excluding acquisitions, sales volume declined, with weakness in North American hydroponics and AeroGrow partly offset by European professional greenhouse growth. Segment profit was $4.4 million versus $1.7 million.
- Other: Sales rose 7.9% to $20.4 million; segment loss was $4.0 million, unchanged.
- At December 29, 2018, current assets were $1,078.7 million and current liabilities were $594.6 million. Inventories were $745.4 million, up from $696.1 million a year earlier and $481.4 million at September 30, 2018.
- Total debt was $2,290.2 million, including $95.1 million current debt and $2,186.2 million long-term debt. Revolver availability under the credit agreement was $683.9 million, after $22.2 million of letters of credit; the receivables facility had only $0.2 million available.
- The reported leverage ratio was 4.48 against a maximum of 5.25 through fiscal Q2 2019; interest coverage was 5.17 against a 3.00 minimum. Management said it expected to remain compliant through fiscal 2019 under current operating assumptions, while warning that weaker earnings or increased debt could jeopardize compliance.
Outlook, commentary, and material risks
- The filing provides no specific fiscal 2019 earnings or sales guidance. Management anticipated a first-quarter loss because of seasonality and stated that interim results are not necessarily indicative of full-year performance.
- Project Catalyst, a restructuring program intended to reduce costs and capture Hawthorne acquisition synergies, generated $5.5 million of charges in the quarter. Cumulative costs incurred were $34.9 million across the segments and Corporate.
- The Morning Song class action settlement had been submitted for court approval; preliminary approval was granted January 31, 2019, with a final fairness hearing scheduled for June 3, 2019. The company accrued $85.0 million at quarter-end and recognized $5.0 million in related insurance recoveries.
- The EZ Seed litigation settlement was approved in December 2018, with final claims payments underway. The company accrued $12.2 million at quarter-end and recorded a $0.5 million quarterly charge; additional losses were possible, though management did not expect a material excess loss.
- Environmental matters included $4.2 million accrued for remediation and other actions. The company also described asbestos-related claims, for which it recorded no accrual because a loss was not considered probable. Management cautioned that litigation, environmental matters, or defense costs could affect results.
- Other risks include seasonal demand and working-capital needs, acquisition integration and Hawthorne performance, interest-rate and commodity-price exposure, and potential credit-covenant pressure. Management reported no material change in risk factors from the 2018 annual report.
Most important facts for investors to verify
- Whether Hawthorne can stabilize underlying sales and realize the expected benefits of Sunlight Supply and Project Catalyst.
- Whether gross-margin pressure, especially transportation, promotional, and hedge-related costs, persists into the peak selling quarters.
- Inventory levels, operating cash flow, and the timing of the seasonal working-capital reversal.
- Debt reduction, borrowing costs, and covenant headroom as fiscal-year earnings develop.
- The final outcome and payment amounts for the Morning Song and EZ Seed settlements, including insurance recoveries.