Scotts Miracle-Gro Co. — Q2 FY2021 Form 10-Q
Reporting period: Three and six months ended April 3, 2021; comparisons are with periods ended March 28, 2020. Dollars are in millions except per-share data. The business is seasonal, with most annual sales in the second and third fiscal quarters.
Financial performance
| Metric | Three months | Six months |
|---|---|---|
| Net sales | $1,828.8; +32.3% | $2,577.4; +47.4% |
| Gross profit / margin | $657.5 / 36.0% (39.8% prior year) | $848.3 / 32.9% (34.6% prior year) |
| Operating income | $424.1 | $458.1 |
| Net income attributable to controlling interest | $310.0 | $334.4 |
| Diluted EPS from continuing operations | $5.44 (prior year $4.43) | $5.88 (prior year $3.15) |
- Sales growth was primarily volume-led, with higher demand across consumer lawn and garden and Hawthorne products. Higher material, transportation and warehousing costs, unfavorable mix, and COVID-related charges reduced gross margin; higher volume and some pricing partially offset these pressures.
- Segment sales for the quarter: U.S. Consumer $1,374.0 (+23.4%), Hawthorne $363.8 (+65.7%), and Other $91.0 (+81.6%). Segment profit was $435.9, $41.4, and $17.6, respectively.
- Six-month operating cash flow was negative $699.9, compared with negative $607.1. Investing cash flow was negative $173.8; financing cash flow was positive $871.1. Cash ended at $14.4.
- Total debt was $2,551.3, including $212.8 current and $2,322.5 long-term debt. Revolver availability was $1,020.0. The reported covenant leverage ratio was 2.11 against a maximum of 4.50; interest coverage was 13.58 against a 3.00 minimum. The company reported compliance with its financial covenants.
Material changes and notable items
- The fiscal-calendar shift added selling-season days to the comparison: management estimated approximately $122.5 of additional second-quarter sales and $0.55 of diluted continuing-operations EPS; for the six-month comparison, the estimates were $176.9 and $0.70. This makes reported growth less directly comparable.
- Scotts issued $500.0 of 4.000% Senior Notes due 2031 in March 2021 and used net proceeds to reduce credit-facility borrowings. Six-month interest expense fell to $35.4 from $42.7, reflecting lower rates, partly offset by higher average borrowings.
- The company acquired a 50% interest in Bonnie Plants for $100.7 cash plus non-cash consideration; the investment was initially valued at $202.9. A $12.5 gain from revaluing an AFC loan contributed to six-month other non-operating income of $16.1. Bonnie Plants generated a $1.5 equity-method loss in the period.
- Scotts acquired the remaining AeroGrow shares in February 2021 for approximately $20.1. AeroGrow was moved from Hawthorne to U.S. Consumer reporting, and prior-period segment figures were reclassified.
- COVID-19-related costs were $14.9 for the quarter and $24.2 for the six months, primarily premium pay. Management expected incremental pandemic costs to continue through fiscal 2021.
Outlook, risks and contingencies
- The filing text provides no clear numerical full-year revenue or EPS guidance. Management stated that operating cash flow and borrowing capacity should cover debt service, capital expenditures, and working capital for the foreseeable future, and expected to remain within covenant limits based on current assumptions.
- Management reported increased demand during the quarter but emphasized uncertainty around the pandemic, consumer behavior, order patterns, and seasonality. Higher input, freight, and warehousing costs also pressured margins.
- The $160.0 receivables facility was scheduled to expire August 20, 2021; management expected renewal before expiry. Cash flow is seasonal and substantially affected by working-capital investment, including inventory and receivables.
- Roundup marketing-agreement sales were $64.6 for the quarter and $81.8 for the six months. Scotts declined its convenience termination option in January 2021; the agreement’s termination provisions and related fees remain relevant.
- Management had not determined whether the former International Business met fiscal 2020 performance criteria for contingent consideration. If criteria were not met, the company could record an approximately $18.0 charge to discontinued operations.
- Environmental liabilities accrued were $3.6. The company also disclosed asbestos-related claims; no accrual was recorded because loss was not considered probable. Management said ordinary-course legal matters and known environmental exposures were not expected to be material, while noting outcomes remain uncertain.
Important facts for investors to verify
- How much reported sales and EPS growth reflects the calendar shift and pandemic-related demand, and whether demand persists.
- Whether cost inflation, freight and warehousing pressures continue to offset volume growth and pricing.
- Working-capital needs, seasonal cash use, debt levels, covenant headroom, and renewal of the receivables facility.
- Bonnie Plants’ subsequent performance and the unresolved International Business contingent-consideration assessment.
- Developments under the Roundup agreement, environmental matters, and asbestos-related claims.