Scotts Miracle-Gro Company — Q1 FY2013 Form 10-Q
Reporting period: Three months ended December 29, 2012; comparisons are with the three months ended December 31, 2011. The company manufactures and markets lawn and garden products, distributes consumer Roundup products under a Monsanto marketing agreement, and operates Scotts LawnService. Results are seasonal: sales are concentrated in the second and third fiscal quarters, and management expected a first-quarter loss.
Financial results
| Metric (USD millions, except per-share data) | Q1 FY2013 | Q1 FY2012 |
|---|---|---|
| Net sales | 205.8 | 199.6 |
| Gross profit / gross margin | 31.1 / 15.1% | 25.6 / 12.8% |
| Operating loss | (91.9) | (99.0) |
| Loss from continuing operations | (68.3) | (73.1) |
| Net loss | (67.7) | (73.9) |
| Diluted loss per share | (1.10) | (1.21) |
| Cash used in operating activities | (168.6) | (201.1) |
| Capital expenditures | (25.0) | (16.4) |
- Sales increased 3.1%; management attributed the increase primarily to higher volume, including LawnService growth and stronger U.S. fertilizer and control-product sales. Pricing was flat overall.
- Gross margin improved 2.3 percentage points, principally from LawnService volume and margin, improved Global Consumer mix, and lower first-quarter Roundup and ICL-related activity.
- SG&A rose 1.6% to $124.5 million, with higher employee-related costs, including severance, partly offset by productivity initiatives. Interest expense declined to $13.2 million from $15.3 million, reflecting lower average borrowings and a lower weighted-average interest rate.
- Operating cash use improved by $32.5 million year over year, largely from lower working-capital use and a smaller net loss. Cash ended the quarter at $115.6 million, versus $127.8 million a year earlier.
- At December 29, 2012, total debt was $986.2 million, including $981.9 million long-term debt and $4.3 million current debt; total debt was $1,034.2 million a year earlier. The company reported $1.1 billion of credit-facility availability and $24.2 million of outstanding letters of credit.
Changes, outlook, and notable items
- Global Consumer sales rose 2.7% to $153.2 million; U.S. growth was partly offset by declines in Europe and wild bird food. LawnService sales grew 19.1% to $44.8 million, supported by increased customer count and weather-related timing; its operating loss narrowed to $0.9 million from $4.6 million.
- The professional seed business was wound down in fiscal 2012 and is presented as discontinued operations. Its prior-year quarter had $11.6 million of sales; the current quarter recorded $0.6 million of income from discontinued operations.
- Management described fiscal 2013 initiatives focused on price optimization, product cost reductions, and SG&A productivity. It gave no quantified full-year financial guidance in this filing. Management expected operating cash flows and credit-facility borrowings to meet fiscal 2013 debt-service and working-capital needs, and expected covenant compliance under current assumptions.
- The company recorded a $4.7 million vendor reimbursement related to product development, including MAT 28, and a $4.3 million impairment of insect-repellent technology after commercialization issues. These items were included in impairment, restructuring and other.
- Debt covenants were met at quarter-end: leverage ratio 2.80 versus a maximum of 3.50; interest coverage 5.25 versus a minimum of 3.50. Management cautioned that adverse earnings, debt, or other developments could affect future compliance and potentially require lender amendments or waivers.
- Risks and contingencies include environmental remediation (a $5.1 million accrual), consolidated putative class actions related to a 2008 wild bird food recall, and asbestos-related claims for which loss could not be reasonably estimated and no reserve was recorded. Management said these matters were not expected to have a material effect, but noted outcomes remain uncertain.
- After quarter-end, the CFO announced his resignation effective February 8, 2013, with an interim principal financial officer named. Disclosure controls were assessed as effective; no material change in internal control over financial reporting was reported.
Important facts for investors to verify
- Whether LawnService’s first-quarter growth reflects sustainable customer and margin gains or mainly weather-related timing.
- Progress on inventory management, cash conversion, and seasonal working-capital funding; inventory was $646.7 million at quarter-end versus $414.9 million at September 30, 2012.
- Debt levels, covenant headroom, and the availability and terms of revolving credit and the uncommitted receivables-purchase arrangement.
- Whether planned profitability initiatives offset employee-related cost increases and the impact of product and regional sales trends.
- Developments in the insect-repellent technology impairment, bird-food litigation, asbestos claims, and environmental matters.
- The effect of the CFO transition and any subsequent management updates or full-year guidance.