Scotts Miracle-Gro Co. — Q3 FY2016 Form 10-Q
Reporting period: Quarter and nine months ended July 2, 2016; comparisons are with periods ended June 27, 2015. Amounts are in U.S. dollars. The business is seasonal, with most sales in the second and third fiscal quarters. The company says a six-day calendar shift moved peak-season days out of Q3 2016, reducing quarterly sales by about $90 million and increasing nine-month sales by about $32 million.
Key financial results
| Metric | Q3 FY2016 | Q3 FY2015 | Nine months FY2016 | Nine months FY2015 |
|---|---|---|---|---|
| Net sales | $994.1M | $1,111.3M | $2,433.8M | $2,352.6M |
| Gross profit | $357.4M | $385.8M | $895.7M | $817.2M |
| Gross margin | 36.0% | 34.7% | 36.8% | 34.7% |
| Operating income | $216.9M | $191.4M | $488.4M | $316.1M |
| Continuing-operations income | $127.0M | $115.1M | $273.5M | $180.1M |
| Net income | $212.7M | $133.0M | $341.7M | $183.3M |
| Diluted EPS, continuing operations | $2.06 | $1.85 | $4.40 | $2.90 |
| Diluted EPS, total | $3.44 | $2.14 | $5.50 | $2.95 |
- Q3 sales fell 10.5%; nine-month sales grew 3.5%. Q3 continuing-operations income rose despite the sales decline, helped by higher gross margin and lower restructuring charges.
- Q3 discontinued-operations income was $85.7M, including the SLS Business contribution gain. Nine-month discontinued-operations income was $68.2M. Total net income growth therefore substantially reflects this transaction, not just ongoing operations.
- Cash used in operating activities was $28.9M for nine months, versus $24.2M provided in the prior-year period. Capital expenditures were $35.7M. Cash and equivalents were $77.2M at July 2.
- Total debt was $1.513B, including $382.5M current and $1.130B long-term; interest expense was $52.3M for nine months. The company reported $1.1B available under its credit agreement and $26.7M available under its receivables program.
- Current assets were $1.481B and current liabilities $991.2M. The balance included $435.1M of receivables pledged as collateral.
Material changes and business developments
- On April 13, 2016, Scotts contributed its Scotts LawnService business to a TruGreen joint venture for an approximately 30% interest. The interest was initially valued at $294.0M; the transaction generated a $142.6M pretax gain, subject to post-closing adjustments. The company received a $196.2M distribution and provided $18.0M of second-lien financing to the venture.
- Other segment sales rose 24.9% for nine months, mainly from hydroponics growth and acquisitions. U.S. Consumer sales rose 2.6% over nine months but fell 13.1% in Q3; Europe Consumer sales declined 9.2% over nine months.
- Acquisitions included a 75% interest in Gavita for $136.2M and a Canadian growing-media business for an estimated $34.4M, both with contingent consideration. A definitive agreement to acquire Botanicare was signed after quarter-end; closing was expected during calendar 2016.
- Debt refinancing included issuance of $400M of 6.000% senior notes due 2023 and redemption of $200M of 6.625% notes. Nine-month refinancing costs were $8.8M.
Outlook, risks and unusual items
- No specific numerical earnings or sales guidance is provided in this filing. Management expected to remain within debt covenants through FY2016 under its current operating assumptions, while warning that lower earnings or higher debt could affect compliance.
- Management cites seasonality, foreign-exchange movements, consumer demand and product mix as factors affecting results. The company’s leverage ratio was 2.96 against a maximum of 4.50; interest coverage was 8.22 against a minimum of 3.00.
- The reformulated Bonus S fertilizer claims remained an unusual exposure: cumulative costs were $74.3M and insurance reimbursements received totaled $60.8M through Q3. Further claims and coverage outcomes remain uncertain.
- Other contingencies include asbestos-related claims and a consolidated wild-bird-food class action. Losses could not be reasonably estimated and no reserves were recorded for those cases. Environmental liabilities accrued were $4.1M.
- The company increased its share-repurchase authorization to $1.0B and raised its quarterly dividend from $0.47 to $0.50 per share after quarter-end. It repurchased $81.2M of shares in the nine-month period.
- Disclosure controls were assessed as effective; the filing reports no material change in internal control over financial reporting during the quarter.
Investor verification checklist
- Separate recurring continuing-operations earnings from the SLS contribution gain and other unusual items.
- Assess the effect of the six-day fiscal-calendar shift when comparing Q3 and year-to-date sales and earnings.
- Track operating cash flow, seasonal working-capital needs, pledged receivables and debt levels alongside reported profit.
- Verify final SLS transaction adjustments and the performance and valuation of the joint-venture investment.
- Monitor Bonus S claims and insurance recoveries, other litigation, acquisition commitments and covenant headroom.
- Confirm the closing and subsequent financial impact of the Botanicare acquisition, and the capacity to fund buybacks and dividends.