What’s Happening At Hines?
On Aug. 14, Hines Horticulture Inc., the self-described leading operator of commercial nurseries in North America, filed its second-quarter earnings statement with the Securities And Exchange Commission (SEC). As soon as the news got out that Hines had posted a year-to-date gross profit drop of more than 21 percent year-over-year and was planning to sell four Northeast color facilities and all Miami, Fla., assets, the industry started speculating about what it could mean for the future of the company: Would Hines go bankrupt? Was it getting out of the color business? How could the company's fortunes have changed so drastically?
Instead of answers, all we can offer are clues. With the help of some industry veterans and financial experts, GPN's Big Grower has taken a closer look at the Form 10-Q that Hines filed with the SEC. While it can't tell us how many units Hines Color will ship in 2007, it can help us better understand the company's current financial situation and some of the reasons it got that way.
The numbers in Figure 1, right, tell most of the story: In the six months that ended June 30, 2006, gross profit was down (more than 21 percent year-over-year) and costs were up (more than 7 percent), creating a net loss of more than $5 million (140 percent less than last year's $12 million gain).
The new agreement Hines negotiated with its loan provider lowers Hines' revolving credit limit from $120 million to $100 million and raises the interest rate charged on this money by 25 basis points. The new rate will be prime plus between 1 and 3 percent depending on the monetary source and Hines' debt-to-asset ratio. The new agreement also requires Hines to sell some of its production facilities. On Aug. 8, Hines' board of directors approved the sales of color facilities in Danville and Pipersville, Pa., and Utica and Newark, N.Y., and on Aug. 18, approved sale of all assets in Miami, Fla., including the old Lovell Farms facility.
According to comments in Hines' earnings statement, "The company determined that the carrying value of the long-lived assets for three of the Northeast facilities exceeded the estimated undiscounted future cash flows associated with the use of the assets." With land in the area selling for as much as $150,000 per acre, the same can probably be said about the Miami facilities.
All facility sales are to be completed prior to Dec. 31, 2006, which will allow the proceeds to show in the 2006 financials and, according to the loan agreement, will be used to pay down Hines' $175 million long-term debt.
Hines' earnings report cites a number of factors contributing to the decline in earnings: pricing pressure, customer consolidation, intense competition, the company's substantial leverage and ability to service its debt, and about 10 other factors. The most discussed factors are weather, increased costs and pay by scan.
In addition to the expected seasonality of the horticulture market, Hines has dealt with flooding this spring in the Northeast and California and hurricanes the past two years in Florida and the Southeast. In fact, Hines estimates lost sales of as much as $10 million in the Southeast because of hurricanes the past two years. And these lost sales are complicated by what Hines calls increased cost of goods sold (mostly from petroleum products), higher distribution expenses (often arising from third-party carriers) and other inflationary costs (such as labor).
Perhaps the most interesting of the acknowledged factors is pay by scan. The earnings statement includes an extensive description of pay by scan and Hines' history with the system, including an assertion that the company "Édid not encounter any material variances with the quality and variability of our earnings and cash flows during 2005. However, we believe that pay by scan has had an impact on our 2006 first-six-months earnings as we are experiencing a reduction in revenue when comparing year-over-year shipments. The result of this was an increase in our consigned inventory held at our customer's store locations at June 30, 2006, as well as increased shrink as a result of the lower sell-through of product."
Indeed, Hines' year-over-year, mid-year numbers do show an increase in inventories (from approximately $12 million to approximately $22 million) and a decrease in accounts receivable (from approximately $47 million to approximately $36 million). Both of these numbers make much more sense under a pay by scan system where the grower continues to own the inventory until it is sold and receives quicker payment when that happens, increasing inventory and decreasing accounts receivable just as it has with Hines.
What Comes Next?
Some industry experts believe Hines' poor second-quarter results, its financial troubles and the sale of more than half of its color facilities seem to indicate ç the company is getting out of the color business. When GPN's Big Grower spoke with Hines' CFO Claudia Pieropan in early August, she indicated there are no such plans in the works.
"We have good market share out of our facilities and continue to serve those markets," said Pieropan, who also confirmed Hines still has facilities in Houston, Texas; Chino Valley, Az.; and Fresno, Calif.
At press time, what was certain about the future of Hines is that it is getting out of the Florida market, with Home Depot accounts there reportedly going to Costa Nursery Farms and Pure Beauty Farms, both located in Miami, Fla. According to David Wadsworth, Costa's production manager, Costa will be assuming ownership of poinsettias and mums already in production at the Hines Lovell facility and will begin servicing Hines' Home Depot stores within a few weeks using this product. Wadsworth said the longer-range plan at Costa will include leasing additional land, possibly some of the Lovell facility, to accommodate the new business.
It also seems fairly certain that Hines will continue to be a major player in the shrub business, expanding its Winters South, Winters, Calif., facility and maintaining all currently owned nursery production facilities.
Without rampant speculation, this might be all we can know about Hines' situation at this time or until the company releases more information. It does seem unlikely that the industry's largest company would completely turn to real estate, but stranger things have happened.
At press time, representatives from Hines, Pure Beauty and Home Depot could not be reached for comment.