THE SCOTTS MIRACLE-GRO COMPANY
The purpose of this Management's Discussion and Analysis ("MD&A") is to provide
an understanding of our financial condition and results of operations by
focusing on changes in certain key measures from year-to-year. This MD&A is
divided into the following sections:
•Executive summary
•Results of operations
•Segment results
•Liquidity and capital resources
•Regulatory matters
•Critical accounting policies and estimates
This MD&A should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" included in Scotts
Miracle-Gro's Annual Report on Form 10-K for the fiscal year ended September 30,
2021 (the "2021 Annual Report") and our condensed consolidated financial
statements included in this Quarterly Report on Form 10-Q.
EXECUTIVE SUMMARY
Through our U.S. Consumer and Other segments, we are the leading manufacturer
and marketer of branded consumer lawn and garden products in North America . Our
products are marketed under some of the most recognized brand names in the
industry. Our key consumer lawn and garden brands include Scotts® and Turf
Builder® lawn and grass seed products; Miracle-Gro® soil, plant food and
insecticide, LiquaFeed® plant food and Osmocote® gardening and landscape
products; and Ortho®, Home Defense® and Tomcat® branded insect control, weed
control and rodent control products. We are the exclusive agent of Monsanto for
the marketing and distribution of certain of Monsanto's consumer Roundup®
branded products within the United States and certain other specified countries.
We also have a presence in similar branded consumer products in China . In
addition, we own a 50% equity interest in Bonnie Plants, LLC , a joint venture
with AFC, focused on planting, growing, developing, distributing, marketing and
selling live plants.
Through our Hawthorne segment, we are the leading manufacturer, marketer and
distributor of lighting, nutrients, growing media, growing environments and
hardware products for indoor and hydroponic gardening in North America . Our key
brands include General Hydroponics®, Gavita®, Botanicare®, Agrolux®,
Can-Filters®, Sun System®, Gro Pro®, Mother Earth®, Hurricane®, Grower's Edge®
and Hydro-Logic®.
On December 30, 2021 , our Hawthorne segment completed the acquisition of
substantially all of the assets of Luxx Lighting, Inc. , a leading provider of
lighting products for indoor growing that significantly strengthens our
industry-leading lighting portfolio, for a purchase price of $213.5 .
During fiscal 2021, we announced the creation of a newly formed subsidiary, THC,
which will focus on strategic minority non-equity investments in areas of the
cannabis industry not currently pursued by our Hawthorne segment. This
initiative is designed to allow us, in the future, to participate directly in a
larger marketplace as the legal environment changes over time. On August 24,
2021 , we made our initial investment under this initiative in the form of a
$150.0 six-year convertible note issued to us by Toronto -based RIV Capital (CSE:
RIV) (OTC: CNPOF), a cannabis investment and acquisition firm listed on the
Canadian Securities Exchange. During the fourth quarter of fiscal 2021, we made
additional minority non-equity investments of $43.1 in other entities focused on
branded cannabis and high quality genetics. These investments include conversion
features that would provide us with minority ownership interests in these
entities if we exercise the conversion features. Refer to "NOTE 2. ACQUISITIONS
AND INVESTMENTS" for more information regarding these investments.
Our operations are divided into three reportable segments: U.S. Consumer,
Hawthorne and Other. U.S. Consumer consists of our consumer lawn and garden
business in the United States . Hawthorne consists of our indoor and hydroponic
gardening business. Other primarily consists of our consumer lawn and garden
business outside the United States . This division of reportable segments is
consistent with how the segments report to and are managed by our chief
operating decision maker. In addition, Corporate consists of general and
administrative expenses and certain other income and expense items not allocated
to the business segments. See "SEGMENT RESULTS" below for additional information
regarding our evaluation of segment performance.
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Due to the seasonal nature of the consumer lawn and garden business, for our
U.S. Consumer and Other segments, significant portions of our products ship to
our retail customers during our second and third fiscal quarters, as noted in
the table below. Our annual net sales are further concentrated in the second and
third fiscal quarters by retailers who rely on our ability to deliver products
closer to when consumers buy our products, thereby reducing retailers'
pre-season inventories. For our Hawthorne segment, sales are also impacted by
seasonal patterns for certain product categories due to the timing of outdoor
growing in North America during our second and third fiscal quarters, and the
timing of certain controlled agricultural lighting project sales during our
third and fourth fiscal quarters.
Percent of Net Sales from Continuing
Operations by Quarter
2021 2020 2019
First Quarter 15.2 % 8.9 % 9.4 %
Second Quarter 37.1 % 33.5 % 37.7 %
Third Quarter 32.7 % 36.1 % 37.1 %
Fourth Quarter 15.0 % 21.5 % 15.8 %
On February 6, 2020 , Scotts Miracle-Gro announced that its Board of Directors
authorized the repurchase of up to $750.0 of Common Shares from April 30, 2020
through March 25, 2023 . During the three months ended January 1, 2022 and
January 2, 2021 , Scotts Miracle-Gro repurchased approximately 0.8 million and
0.2 million Common Shares under this share repurchase authorization for $125.0
and $38.0 , respectively.
On July 27, 2020 , the Scotts Miracle-Gro Board of Directors approved an increase
in our quarterly cash dividend from $0.58 to $0.62 per Common Share, which was
first paid in the fourth quarter of fiscal 2020. On July 30, 2021 , the Scotts
Miracle-Gro Board of Directors approved an increase in our quarterly cash
dividend from $0.62 to $0.66 per Common Share, which was first paid in the
fourth quarter of fiscal 2021.
COVID-19 Response and Impacts
The COVID-19 pandemic has had, and continues to have, an impact on financial
markets, economic conditions, and portions of our business and industry. We have
actively addressed the pandemic's ongoing impact on our employees, operations,
customers, consumers, and communities, by, among other things, implementing
contingency plans, making operational adjustments where necessary, and providing
assistance to organizations that support front-line workers. The first priority
of our pandemic response has been and remains the health, safety and well-being
of our employees. Many of our employees continue to work from home. In those
instances where our employees cannot perform their work at home, we have
implemented additional health and safety measures and social distancing
protocols, consistent with government recommendations and/or requirements, to
help to ensure their safety. In addition, we implemented an interim premium pay
allowance for certain associates in our field sales force and our manufacturing
or distribution centers, which paid out nearly $50.0 in aggregate during fiscal
2020 and 2021.
The extent to which the COVID-19 pandemic will impact our business, results of
operations, financial condition and cash flows in the future will depend on
future developments, including the duration, spread and intensity of the
pandemic, our continued ability to manufacture and distribute our products, as
well as any future government actions affecting consumers and the economy
generally, all of which are uncertain and difficult to predict considering the
rapidly evolving landscape. We are not able to predict the impact, if any, that
the COVID-19 pandemic may have on the seasonality of our business.
Although we currently expect to be able to continue operating our business as
described above and we intend to continue to work with government authorities
and to follow the necessary protocols to maintain the health and safety of our
employees, the COVID-19 pandemic could result in additional disruptions to our
business, including our global supply chain and retailer network, and/or require
us to incur additional operational costs. For additional information on the
impacts of, and our response to, the COVID-19 pandemic, refer to "Management's
Discussion and Analysis of Financial Condition and Results of Operations" in
Part II, Item 7 of the 2021 Annual Report.
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(Dollars in millions, except per share data)
RESULTS OF OPERATIONS
The following table sets forth the components of earnings as a percentage of net
sales for the three months ended January 1, 2022 and January 2, 2021 :
January 1, % Of January 2, % Of
2022 Net Sales 2021 Net Sales
Net sales $ 566.0 100.0 % $ 748.6 100.0 %
Cost of sales 447.3 79.0 548.8 73.3
Cost of sales-impairment, restructuring and other - - 9.0 1.2
Gross profit 118.7 21.0 190.8 25.5
Operating expenses:
Selling, general and administrative 154.1 27.2 156.7 20.9
Impairment, restructuring and other 1.8 0.3 0.7 0.1
Other income, net (1.8) (0.3) (0.6) (0.1)
Income (loss) from operations (35.4) (6.3) 34.0 4.5
Equity in loss of unconsolidated affiliates 7.3 1.3 - -
Interest expense 23.8 4.2 16.1 2.2
Other non-operating income, net (1.8) (0.3) (15.2) (2.0)
Income (loss) from continuing operations before
income taxes (64.7) (11.4) 33.1 4.4
Income tax expense (benefit) from continuing
operations (14.7) (2.6) 7.9 1.1
Income (loss) from continuing operations (50.0) (8.8) 25.2 3.4
Income (loss) from discontinued operations, net of
tax - - - -
Net income (loss) $ (50.0) (8.8) % $ 25.2 3.4 %
The sum of the components may not equal due to rounding.
Net Sales Net sales for the three months endedJanuary 1, 2022 were$566.0 , a decrease of 24.4% from net sales of$748.6 for the three months endedJanuary 2, 2021 . These changes in net sales were attributable to the following: Three Months EndedJanuary 1, 2022 Volume (28.6) % Pricing 3.9 Acquisitions 0.3 Change in net sales (24.4) % The decrease in net sales for the three months endedJanuary 1, 2022 as compared to the three months endedJanuary 2, 2021 was primarily driven by: •decreased sales volume driven by lighting, nutrients, growing media, hardware and growing environments products in our Hawthorne segment; and fertilizer, soils and controls products in ourU.S. Consumer segment; •partially offset by increased pricing in ourU.S. Consumer, Hawthorne and Other segments; and •the addition of net sales from acquisitions. 28 --------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Cost of Sales
The following table shows the major components of cost of sales for the periods
indicated:
Three Months Ended
January 1, January 2,
2022 2021
Materials $ 235.9 $ 312.1
Distribution and warehousing 115.1 108.1
Manufacturing labor and overhead 76.7 114.6
Costs associated with Roundup® marketing agreement 19.6 14.0
Cost of sales 447.3 548.8
Cost of sales-impairment, restructuring and other - 9.0
$ 447.3 $ 557.8
Factors contributing to the change in cost of sales are outlined in the
following table:
Three Months Ended
January 1, 2022
Volume, product mix and other $ (112.8)
Material cost changes 5.7
Costs associated with Roundup® marketing agreement 5.6
(101.5)
Impairment, restructuring and other (9.0) Change in cost of sales $ (110.5) The decrease in cost of sales for the three months endedJanuary 1, 2022 as compared to the three months endedJanuary 2, 2021 was primarily driven by: •lower sales volume in ourU.S. Consumer and Hawthorne segments; and •a decrease in impairment, restructuring and other charges as a result of lower costs associated with the COVID-19 pandemic; •partially offset by higher material costs in ourU.S. Consumer segment; •higher transportation, warehousing and labor costs included within "volume, product mix and other" in ourU.S. Consumer and Hawthorne segments; and •an increase in costs associated with the Roundup® marketing agreement. 29 --------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Gross Profit
As a percentage of net sales, our gross profit rate was 21.0% and 25.5% for the
three months ended January 1, 2022 and January 2, 2021 , respectively. Factors
contributing to the change in gross profit rate are outlined in the following
table:
Three Months Ended
January 1, 2022
Volume, product mix and other (8.2) %
Material costs (1.0)
Roundup® commissions and reimbursements (0.5)
Acquisitions (0.1)
Pricing 4.1
(5.7) %
Impairment, restructuring and other 1.2
Change in gross profit rate (4.5) %
The decrease in gross profit rate for the three months ended January 1, 2022 as
compared to the three months ended January 2, 2021 was primarily driven by:
•unfavorable leverage of fixed costs driven by lower sales volume in our U.S.
Consumer and Hawthorne segments;
•decreased net sales associated with the Roundup® marketing agreement;
•higher transportation, warehousing and labor costs included within "volume,
product mix and other" in our U.S. Consumer and Hawthorne segments; and
•higher material costs in our U.S. Consumer segment;
•partially offset by increased pricing in our U.S. Consumer, Hawthorne and Other
segments; and
•a decrease in impairment, restructuring and other charges.
Selling, General and Administrative Expenses
The following table sets forth the components of selling, general and
administrative expenses ("SG&A") for the periods indicated:
Three Months Ended
January 1, January 2,
2022 2021
Advertising $ 18.3 $ 26.7
Research and development 12.5 10.3
Amortization of intangibles 7.4 7.3
Share-based compensation 7.3 8.2
Other selling, general and administrative 108.6 104.2
$ 154.1 $ 156.7
SG&A decreased $2.6 , or 1.7%, during the three months ended January 1, 2022
compared to the three months ended January 2, 2021 . Advertising expense
decreased $8.4 , or 31.5%, during the three months ended January 1, 2022 driven
by the timing of media spending in our U.S. Consumer segment. Other SG&A
increased $4.4 , or 4.2%, during the three months ended January 1, 2022 driven by
increases in various categories supporting the continued growth of the business
as well as higher people costs, partially offset by a decrease in short-term
variable cash incentive compensation expense.
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(Dollars in millions, except per share data)
Impairment, Restructuring and Other
Activity described herein is classified within the "Cost of sales-impairment,
restructuring and other" and "Impairment, restructuring and other" lines in the
Condensed Consolidated Statements of Operations. The following table details
impairment, restructuring and other charges for each of the periods presented:
Three Months Ended
January 1, January 2,
2022 2021Cost of sales-impairment, restructuring and other: COVID-19 related costs
$ - $ 8.7
Restructuring and other charges, net - 0.3
Operating expenses:
COVID-19 related costs - 0.6
Restructuring and other charges, net 1.8 0.1
Impairment, restructuring and other charges from continuing
operations $ 1.8 $ 9.7
COVID-19
In response to the COVID-19 pandemic, we implemented measures intended to
protect the health and safety of our employees and maintain our ability to
provide products to our customers as described in additional detail above under
"COVID-19 Response and Impacts." Costs incurred during the three months ended
January 1, 2022 were immaterial. During the three months ended January 2, 2021 ,
we incurred costs of $9.3 associated with the COVID-19 pandemic primarily
related to premium pay. We incurred costs of $8.3 in our U.S. Consumer segment
and $0.4 in our Hawthorne segment in the "Cost of sales-impairment,
restructuring and other" line in the Condensed Consolidated Statements of
Operations during the three months ended January 2, 2021 . We incurred costs of
$0.6 in our U.S. Consumer segment in the "Impairment, restructuring and other"
line in the Condensed Consolidated Statements of Operations during the three
months ended January 2, 2021 .
Other Income, net
Other income is comprised of activities such as royalty income from the
licensing of certain of our brand names, foreign exchange transaction gains and
losses and gains and losses from the disposition of non-inventory assets. Other
income was $1.8 and $0.6 for the three months ended January 1, 2022 and
January 2, 2021 , respectively.
Income (Loss) from Operations
Loss from operations was $35.4 for the three months ended January 1, 2022 , a
decrease of 204.1% compared to income from operations of $34.0 for the three
months ended January 2, 2021 . For the three months ended January 1, 2022 , the
decrease was driven by lower net sales and a decrease in gross profit rate,
partially offset by lower impairment, restructuring and other charges, lower
SG&A and higher other income.
Equity in Loss of Unconsolidated Affiliates
We acquired a 50% equity interest in Bonnie Plants, LLC on December 31, 2020 .
Our interest is accounted for using the equity method of accounting, with our
proportionate share of Bonnie Plants, LLC earnings subsequent to December 31,
2020 reflected in the Condensed Consolidated Statements of Operations. During
the three months ended January 1, 2022 , we recorded equity in loss of
unconsolidated affiliates of $7.3 associated with Bonnie Plants, LLC . We
anticipated a net loss for Bonnie Plants, LLC in the first quarter of fiscal
2022 due to the seasonal nature of its business, in which sales are heavily
weighted to the spring and summer selling periods during our second and third
fiscal quarters.
Interest Expense
Interest expense was $23.8 for the three months ended January 1, 2022 , an
increase of 47.8% compared to $16.1 for the three months ended January 2, 2021 .
The increase was driven by an increase in average borrowings of $927.7 ,
partially offset by a decrease in our weighted average interest rate of 16 basis
points. The increase in average borrowings was primarily driven by higher
inventory production, capital expenditures and acquisition activity. The
decrease in our weighted average interest rate was primarily driven by lower
borrowing rates on the Fifth A&R Credit Agreement, partially offset by the
issuance of the 4.000% and 4.375% Senior Notes.
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(Dollars in millions, except per share data)
Other Non-Operating Income, Net
Other non-operating income was $1.8 and $15.2 for the three months ended
January 1, 2022 and January 2, 2021 , respectively. On December 31, 2020 , we
acquired a 50% equity interest in Bonnie Plants, LLC in exchange for a cash
payment of $100.7 , forgiveness of our outstanding loan receivable with AFC and
surrender of our options to increase our economic interest in the Bonnie Plants
business. Our loan receivable with AFC, which was previously recognized in the
"Other assets" line in the Condensed Consolidated Balance Sheets, had a carrying
value of $66.4 on December 31, 2020 and we recognized a gain of $12.5 during the
three months ended January 2, 2021 to write-up the value of the loan to its
closing date fair value of $78.9 .
Income Tax Expense (Benefit) from Continuing Operations
The effective tax rates related to continuing operations for the three months
ended January 1, 2022 and January 2, 2021 were 22.7% and 23.9%, respectively.
The effective tax rate used for interim purposes is based on our best estimate
of factors impacting the effective tax rate for the full fiscal year. Factors
affecting the estimated effective tax rate include assumptions as to income by
jurisdiction (domestic and foreign), the availability and utilization of tax
credits and the existence of elements of income and expense that may not be
taxable or deductible. The estimated effective tax rate is subject to revision
in later interim periods and at fiscal year-end as facts and circumstances
change during the course of the fiscal year. There can be no assurance that the
effective tax rate estimated for interim financial reporting purposes will
approximate the effective tax rate determined at fiscal year-end.
Income (Loss) from Continuing Operations
Loss from continuing operations was $50.0 , or $0.90 per diluted share, for the
three months ended January 1, 2022 compared to income from continuing operations
of $25.2 , or $0.43 per diluted share, for the three months ended January 2,
2021 . The decrease was driven by lower net sales, a decrease in gross profit
rate, higher interest expense, higher equity in loss of unconsolidated
affiliates and lower other non-operating income, partially offset by lower
impairment, restructuring and other charges, lower SG&A and higher other income.
Diluted average common shares used in the diluted loss per common share
calculation for the three months ended January 1, 2022 were 55.4 million, which
excluded 1.3 million dilutive potential Common Shares because the effect of
their inclusion would be anti-dilutive as the Company incurred a net loss for
the three months ended January 1, 2022 . Diluted average common shares used in
the diluted income per common share calculation for the three months ended
January 2, 2021 were 57.1 million, which included 1.4 million dilutive potential
Common Shares.
SEGMENT RESULTS
The performance of each reportable segment is evaluated based on several
factors, including income (loss) from continuing operations before income taxes,
amortization, impairment, restructuring and other charges ("Segment Profit
(Loss)"), which is a non-GAAP financial measure. Senior management uses Segment
Profit (Loss) to evaluate segment performance because they believe this measure
is indicative of performance trends and the overall earnings potential of each
segment.
The following table sets forth net sales by segment:
Three Months Ended
January 1, January 2,
2022 2021
U.S. Consumer $ 342.4 $ 408.2
Hawthorne 190.6 309.4
Other 33.0 31.0
Consolidated $ 566.0 $ 748.6
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(Dollars in millions, except per share data)
The following table sets forth Segment Profit (Loss) as well as a reconciliation
to income from continuing operations before income taxes, the most directly
comparable GAAP measure:
Three Months Ended
January 1, January 2,
2022 2021
U.S. Consumer $ 10.7 $ 45.3
Hawthorne (5.3) 40.4
Other 1.3 -
Total Segment Profit (Loss) (Non-GAAP) 6.7 85.7
Corporate (31.4) (34.6)
Intangible asset amortization (8.9) (7.4)
Impairment, restructuring and other (1.8) (9.7)
Equity in loss of unconsolidated affiliates (7.3) -
Interest expense (23.8) (16.1)
Other non-operating income, net 1.8 15.2
Income (loss) from continuing operations before income taxes (GAAP)
$ (64.7) $ 33.1 U.S. ConsumerU.S. Consumer segment net sales were$342.4 in the first quarter of fiscal 2022, a decrease of 16.1% from first quarter of fiscal 2021 net sales of$408.2 . The decrease was driven by the unfavorable impact of volume of 20.1%, partially offset by the favorable impact of increased pricing of 4.0%. The decrease in sales volume was driven by fertilizer, soils and controls products.U.S. Consumer Segment Profit was$10.7 in the first quarter of fiscal 2022, a decrease of 76.4% from the first quarter of fiscal 2021 Segment Profit of$45.3 . The decrease was due to lower net sales and a lower gross profit rate, partially offset by lower SG&A. Hawthorne Hawthorne segment net sales were$190.6 in the first quarter of fiscal 2022, a decrease of 38.4% from first quarter of fiscal 2021 net sales of$309.4 . The decrease was driven by the unfavorable impacts of volume and foreign exchange rates of 42.5% and 0.2%, respectively, partially offset by the favorable impacts of increased pricing and acquisitions of 3.5% and 0.8%, respectively. The decrease in sales volume was driven by lighting, nutrients, growing media, hardware and growing environments products. Hawthorne Segment Loss was$5.3 in the first quarter of fiscal 2022, a decrease of 113.1% from the first quarter of fiscal 2021 Segment Profit of$40.4 . The decrease was driven by lower net sales, a lower gross profit rate and higher SG&A. Other Other segment net sales were$33.0 in the first quarter of fiscal 2022, an increase of 6.5% from the first quarter of fiscal 2021 net sales of$31.0 . The increase was driven by the favorable impacts of pricing and foreign exchange rates of 6.7% and 2.8%, respectively, partially offset by the unfavorable impact of volume of 3.4%. Other Segment Profit was$1.3 in the first quarter of fiscal 2022, an increase of 100.0% from the first quarter of fiscal 2021 Segment Profit of$0.0 . The increase was driven by higher net sales and a higher gross profit rate, partially offset by higher SG&A. Corporate Corporate expenses were$31.4 in the first quarter of fiscal 2022, a decrease of 9.2% from first quarter of fiscal 2021 expenses of$34.6 . The decrease was driven by lower short-term variable cash incentive compensation expense. 33 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) LIQUIDITY AND CAPITAL RESOURCES The following table summarizes cash activities: Three Months Ended January 1, January 2, 2022 2021
Net cash used in operating activities
(245.2) (148.2)
Net cash provided by financing activities 782.6 573.5
Operating Activities
Cash used in operating activities totaled $765.1 for the three months ended
January 1, 2022 , an increase of $344.4 as compared to $420.7 for the three
months ended January 2, 2021 . This increase was driven by higher inventory
production, lower net income and higher interest payments, partially offset by
lower short-term variable cash incentive compensation payouts. Higher inventory
production was driven by our effort to build inventory levels to meet expected
future demand and higher input costs. The three months ended January 1, 2022 was
also impacted by extended payment terms with several of our major vendors across
the U.S. Consumer and Hawthorne segments, as well as Monsanto, for payments
originally due in the final weeks of fiscal 2021 that were paid in the first
quarter of fiscal 2022.
Investing Activities
Cash used in investing activities totaled $245.2 for the three months ended
January 1, 2022 , an increase of $97.0 as compared to $148.2 for the three months
ended January 2, 2021 . Cash used for investments in property, plant and
equipment during the first three months of fiscal 2022 and 2021 was $46.1 and
$34.6 , respectively. We also completed the acquisitions of Luxx Lighting, Inc.
and True Liberty Bags during the three months ended January 1, 2022 in exchange
for cash payments of $202.5 , as well as the issuance of 0.1 million Common
Shares, a non-cash investing and financing activity, with a fair value
of $21.0 based on the share price at the time of payment. In addition, we
received cash of $3.4 associated with currency forward contracts during the
three months ended January 1, 2022 . During the three months ended January 2,
2021 , we acquired a 50% equity interest in Bonnie Plants, LLC in exchange for a
cash payment of $100.7 , as well as non-cash investing activities that included
forgiveness of our outstanding loan receivable with AFC and surrender of our
options to increase our economic interest in the Bonnie Plants business. In
addition, during the three months ended January 2, 2021 , we acquired contract
rights within our U.S. Consumer segment for a cash payment of $10.0 and we paid
cash of $2.9 associated with currency forward contracts.
Financing Activities
Cash provided by financing activities totaled $782.6 for the three months ended
January 1, 2022 as compared $573.5 for the three months ended January 2, 2021 .
This change was driven by an increase in net borrowings under our Fifth A&R
Credit Facilities (as defined below) of $302.9 during the three months ended
January 1, 2022 , partially offset by an increase in repurchases of our Common
Shares of $91.1 and an increase in dividends paid of $2.5 during the three
months ended January 1, 2022 .
Cash and Cash Equivalents
Our cash and cash equivalents were held in cash depository accounts with major
financial institutions around the world or invested in high-quality, short-term
liquid investments having original maturities of three months or less. The cash
and cash equivalents balances of $16.4 , $21.5 and $244.1 as of January 1, 2022 ,
January 2, 2021 and September 30, 2021 , respectively, included $8.7 , $4.2 and
$15.9 , respectively, held by controlled foreign corporations. As of January 1,
2022 , we maintain our assertion of indefinite reinvestment of the earnings of
all material foreign subsidiaries.
Borrowing Agreements
Credit Facilities
Our primary sources of liquidity are cash generated by operations and borrowings
under our credit facilities, which are guaranteed by substantially all of Scotts
Miracle-Gro's domestic subsidiaries. We maintain the Fifth A&R Credit Agreement
that provides senior secured loan facilities in the aggregate principal amount
of $2,300.0 , comprised of a revolving credit facility of $1,500.0 and a term
loan in the original principal amount of $800.0 (the "Fifth A&R Credit
Facilities"). The Fifth A&R Credit Agreement is available for issuance of
letters of credit up to $75.0 and will terminate on July 5, 2023 .
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(Dollars in millions, except per share data)
At January 1, 2022 , we had letters of credit outstanding in the aggregate
principal amount of $19.9 and had $623.5 of borrowing availability under the
Fifth A&R Credit Agreement. The weighted average interest rates on average
borrowings under the Fifth A&R Credit Agreement were 1.8% and 2.1% for the three
months ended January 1, 2022 and January 2, 2021 , respectively.
The Fifth A&R Credit Agreement contains, among other obligations, an affirmative
covenant regarding our leverage ratio on the last day of each quarter calculated
as average total indebtedness, divided by our earnings before interest, taxes,
depreciation and amortization ("EBITDA"), as adjusted pursuant to the terms of
the Fifth A&R Credit Agreement ("Adjusted EBITDA"). The maximum leverage ratio
is 4.50. Our leverage ratio was 3.32 at January 1, 2022 . The Fifth A&R Credit
Agreement also contains an affirmative covenant regarding our interest coverage
ratio determined as of the end of each of our fiscal quarters. The interest
coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as
described in the Fifth A&R Credit Agreement, and excludes costs related to
refinancings. The minimum interest coverage ratio was 3.00 for the twelve months
ended January 1, 2022 . Our interest coverage ratio was 8.73 for the twelve
months ended January 1, 2022 . As of January 1, 2022 , we were in compliance with
these financial covenants.
The Fifth A&R Credit Agreement allows us to make unlimited restricted payments
(as defined in the Fifth A&R Credit Agreement), including dividend payments on,
and repurchases of, our Common Shares, as long as the leverage ratio resulting
from the making of such restricted payments is 4.00 or less. Otherwise, we may
make further restricted payments in an aggregate amount for each fiscal year not
to exceed $225.0 . We continue to monitor our compliance with the leverage ratio,
interest coverage ratio and other covenants contained in the Fifth A&R Credit
Agreement and, based upon our current operating assumptions, we expect to remain
in compliance with the permissible leverage ratio and interest coverage ratio
throughout fiscal 2022. However, an unanticipated shortfall in earnings, an
increase in net indebtedness or other factors could materially affect our
ability to remain in compliance with the financial or other covenants of the
Fifth A&R Credit Agreement, potentially causing us to have to seek an amendment
or waiver from our lending group which could result in repricing of the Fifth
A&R Credit Agreement. While we believe we have good relationships with our
lending group, we can provide no assurance that such a request would result in a
modified or replacement credit agreement on reasonable terms, if at all.
Senior Notes
On December 15, 2016 , we issued $250.0 aggregate principal amount of 5.250%
Senior Notes. The 5.250% Senior Notes represent general unsecured senior
obligations and rank equal in right of payment with our existing and future
unsecured senior debt. The 5.250% Senior Notes have interest payment dates of
June 15 and December 15 of each year. Substantially all of our directly and
indirectly owned domestic subsidiaries serve as guarantors of the 5.250% Senior
Notes.
On October 22, 2019 , we issued $450.0 aggregate principal amount
of 4.500% Senior Notes. The 4.500% Senior Notes represent general unsecured
senior obligations and rank equal in right of payment with our existing and
future unsecured senior debt. The 4.500% Senior Notes have interest payment
dates of April 15 and October 15 of each year. All of our domestic subsidiaries
that serve as guarantors of the 5.250% Senior Notes also serve as guarantors of
the 4.500% Senior Notes.
On March 17, 2021 , we issued $500.0 aggregate principal amount of 4.000% Senior
Notes. The 4.000% Senior Notes represent general unsecured senior obligations
and rank equal in right of payment with our existing and future unsecured senior
debt. The 4.000% Senior Notes have interest payment dates of April 1 and October
1 of each year. All of our domestic subsidiaries that serve as guarantors of the
5.250% Senior Notes also serve as guarantors of the 4.000% Senior Notes.
On August 13, 2021 , we issued $400.0 aggregate principal amount of 4.375% Senior
Notes. The 4.375% Senior Notes represent general unsecured senior obligations
and rank equal in right of payment with our existing and future unsecured senior
debt. The 4.375% Senior Notes have interest payment dates of February 1 and
August 1 of each year. All of our domestic subsidiaries that serve as guarantors
of the 5.250% Senior Notes also serve as guarantors of the 4.375% Senior Notes.
Receivables Facility
We also maintain a Receivables Facility, under which we may sell a portfolio of
available and eligible outstanding customer accounts receivable to the
purchasers and simultaneously agree to repurchase the receivables on a weekly
basis. The eligible accounts receivable consist of accounts receivable generated
by sales to three specified customers. The eligible amount of customer accounts
receivables which may be sold under the Receivables Facility is $400.0 and the
commitment amount during the seasonal commitment period beginning on
February 25, 2022 and ending on June 17, 2022 is $160.0 . The Receivables
Facility expires on August 19, 2022 .
We account for the sale of receivables under the Receivables Facility as
short-term debt and continue to carry the receivables on our Condensed
Consolidated Balance Sheets, primarily as a result of our requirement to
repurchase receivables sold. As of January 1, 2022 and January 2, 2021 , there
were $94.0 and $136.0 , respectively, in borrowings on receivables
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
pledged as collateral under the Receivables Facility, and the carrying value of
the receivables pledged as collateral was $104.4 and $151.1 , respectively.
Interest Rate Swap Agreements
We enter into interest rate swap agreements with major financial institutions
that effectively convert a portion of our variable rate debt to a fixed rate.
Interest payments made between the effective date and expiration date are hedged
by the swap agreements. Swap agreements that were hedging interest payments as
of January 1, 2022 , January 2, 2021 and September 30, 2021 had a maximum total
U.S. dollar equivalent notional amount of $600.0 . The notional amount, effective
date, expiration date and rate of each of the swap agreements outstanding at
January 1, 2022 are shown in the table below:
Notional Effective Expiration Fixed
Amount Date (a) Date Rate
100 12/21/2020 6/20/2023 1.36 %
300 (b) 1/7/2021 6/7/2023 1.34 %
200 10/7/2021 6/7/2023 1.37 %
200 (b) 1/20/2022 6/20/2024 0.58 %
200 6/7/2023 6/8/2026 0.85 %
(a)The effective date refers to the date on which interest payments are first
hedged by the applicable swap agreement.
(b)Notional amount adjusts in accordance with a specified seasonal schedule.
This represents the maximum notional amount at any point in time.
Availability and Use of Cash
We believe that our cash flows from operations and borrowings under our
agreements described herein will be sufficient to meet debt service, capital
expenditures and working capital needs for the foreseeable future. However, we
cannot ensure that our business will generate sufficient cash flow from
operations or that future borrowings will be available under our borrowing
agreements in amounts sufficient to pay indebtedness or fund other liquidity
needs. Additionally, the extent to which the COVID-19 pandemic will ultimately
impact our business, results of operations, financial condition and cash flows
depends on future developments that are uncertain and difficult to predict.
Actual results of operations will depend on numerous factors, many of which are
beyond our control as further discussed in the 2021 Annual Report, under "ITEM
1A. RISK FACTORS - Risks Related to Our M&A, Lending and Financing Activities -
Our indebtedness could limit our flexibility and adversely affect our financial
condition" and "ITEM 1A. RISK FACTORS - Risks Related to Our Business - The
effects of the ongoing coronavirus (COVID-19) pandemic and any possible
recurrence of other similar types of pandemics, or any other widespread public
health emergencies, could have a material adverse effect on our business,
results of operations, financial condition and/or cash flows."
Financial Disclosures About Guarantors and Issuers of Guaranteed Securities
The 5.250% Senior Notes, 4.500% Senior Notes, 4.000% Senior Notes and 4.375%
Senior Notes (collectively, the "Senior Notes") were issued by Scotts
Miracle-Gro on December 15, 2016 , October 22, 2019 , March 17, 2021 and
August 13, 2021 , respectively. The Senior Notes are guaranteed by certain
consolidated domestic subsidiaries of Scotts Miracle-Gro (collectively, the
"Guarantors") and, therefore, we report summarized financial information in
accordance with SEC Regulation S-X, Rule 13-01, "Guarantors and Issuers of
Guaranteed Securities Registered or Being Registered."
The guarantees are "full and unconditional," as those terms are used in
Regulation S-X, Rule 3-10(b)(3), except that a Guarantor's guarantee will be
released in certain circumstances set forth in the indentures governing the
Senior Notes, such as: (i) upon any sale or other disposition of all or
substantially all of the assets of the Guarantor (including by way of merger or
consolidation) to any person other than Scotts Miracle-Gro or any "restricted
subsidiary" under the applicable indenture; (ii) if the Guarantor merges with
and into Scotts Miracle-Gro , with Scotts Miracle-Gro surviving such merger;
(iii) if the Guarantor is designated an "unrestricted subsidiary" in accordance
with the applicable indenture or otherwise ceases to be a "restricted
subsidiary" (including by way of liquidation or dissolution) in a transaction
permitted by such indenture; (iv) upon legal or covenant defeasance; (v) at the
election of Scotts Miracle-Gro following the Guarantor's release as a guarantor
under the Fifth A&R Credit Agreement, except a release by or as a result of the
repayment of the Fifth A&R Credit Agreement; or (vi) if the Guarantor ceases to
be a "restricted subsidiary" and the Guarantor is not otherwise required to
provide a guarantee of the Senior Notes pursuant to the applicable indenture.
Our foreign subsidiaries and certain of our domestic subsidiaries are not
guarantors (collectively, the "Non-Guarantors") on the Senior Notes. Payments on
the Senior Notes are only required to be made by Scotts Miracle-Gro and the
Guarantors. As
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
a result, no payments are required to be made from the assets of the
Non-Guarantors, unless those assets are transferred by dividend or otherwise to
Scotts Miracle-Gro or a Guarantor. In the event of a bankruptcy, insolvency,
liquidation or reorganization of any of the Non-Guarantors, holders of their
indebtedness, including their trade creditors and other obligations, will be
entitled to payment of their claims from the assets of the Non-Guarantors before
any assets are made available for distribution to Scotts Miracle-Gro or the
Guarantors. As a result, the Senior Notes are effectively subordinated to all
the liabilities of the Non-Guarantors.
The guarantees may be subject to review under federal bankruptcy laws or
relevant state fraudulent conveyance or fraudulent transfer laws. In certain
circumstances, the court could void the guarantee, subordinate the amounts owing
under the guarantee, or take other actions detrimental to the holders of the
Senior Notes.
As a general matter, value is given for a transfer or an obligation if, in
exchange for the transfer or obligation, property is transferred or a valid
antecedent debt is satisfied. A court would likely find that a Guarantor did not
receive reasonably equivalent value or fair consideration for its guarantee to
the extent such Guarantor did not obtain a reasonably equivalent benefit from
the issuance of the Senior Notes.
The measure of insolvency varies depending upon the law of the jurisdiction that
is being applied. Regardless of the measure being applied, a court could
determine that a Guarantor was insolvent on the date the guarantee was issued,
so that payments to the holders of the Senior Notes would constitute a
preference, fraudulent transfer or conveyances on other grounds. If a guarantee
is voided as a fraudulent conveyance or is found to be unenforceable for any
other reason, the holders of the Senior Notes will not have a claim against the
Guarantor.
Each guarantee contains a provision intended to limit the Guarantor's liability
to the maximum amount that it could incur without causing the incurrence of
obligations under its guarantee to be a fraudulent conveyance. However, there
can be no assurance as to what standard a court will apply in making a
determination of the maximum liability of each Guarantor. Moreover, this
provision may not be effective to protect the guarantees from being voided under
fraudulent conveyance laws. There is a possibility that the entire guarantee may
be set aside, in which case the entire liability may be extinguished.
The following tables present summarized financial information on a combined
basis for Scotts Miracle-Gro and the Guarantors. Transactions between Scotts
Miracle-Gro and the Guarantors have been eliminated and the summarized financial
information does not reflect investments of the Scotts Miracle-Gro and the
Guarantors in the Non-Guarantor subsidiaries.
January 1, September 30,
2022 2021
Current assets $ 2,098.8 $ 1,834.8
Noncurrent assets (a) 2,652.1 2,484.5
Current liabilities 830.5 1,038.1
Noncurrent liabilities 3,427.7 2,611.8
(a)Includes amounts due from Non-Guarantor subsidiaries of $28.5 and $39.8 ,
respectively.
Three Months
Ended Year Ended
January 1, September 30,
2022 2021
Net sales $ 510.8 $ 4,507.6
Gross profit 111.1 1,380.6
Income (loss) from continuing operations (a) (48.5) 510.9
Net income (loss) (48.5) 510.8
Net income (loss) attributable to controlling interest (48.5) 509.9
(a)Includes intercompany income from Non-Guarantor subsidiaries of $0.9 and
$26.3 , respectively.
Judicial and Administrative Proceedings
We are party to various pending judicial and administrative proceedings arising
in the ordinary course of business, including, among others, proceedings based
on accidents or product liability claims and alleged violations of environmental
laws. We have reviewed these pending judicial and administrative proceedings,
including the probable outcomes, reasonably anticipated costs and expenses, and
the availability and limits of our insurance coverage, and have established what
we believe to be appropriate accruals. We believe that our assessment of
contingencies is reasonable and that the related accruals, in the
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ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) aggregate, are adequate; however, there can be no assurance that future quarterly or annual operating results will not be materially affected by these proceedings, whether as a result of adverse outcomes or as a result of significant defense costs. Contractual Obligations Other than as disclosed in this Quarterly Report on Form 10-Q, there have been no material changes outside of the ordinary course of business in our outstanding contractual obligations since the end of fiscal 2021 and throughJanuary 1, 2022 . REGULATORY MATTERS We are subject to local, state, federal and foreign environmental protection laws and regulations with respect to our business operations and believe we are operating in substantial compliance with, or taking actions aimed at ensuring compliance with, such laws and regulations. We are involved in several legal actions with various governmental agencies related to environmental matters. While it is difficult to quantify the potential financial impact of actions involving these environmental matters, particularly remediation costs at waste disposal sites and future capital expenditures for environmental control equipment, in the opinion of management, the ultimate liability arising from such environmental matters, taking into account established accruals, is not expected to have a material effect on our financial condition, results of operations or cash flows. However, there can be no assurance that the resolution of these matters will not materially affect our future quarterly or annual results of operations, financial condition or cash flows. Additional information on environmental matters affecting us is provided in the 2021 Annual Report, under "ITEM 1. BUSINESS - Regulatory Considerations" and "ITEM 3. LEGAL PROCEEDINGS." CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of financial statements requires management to use judgment and make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. By their nature, these judgments are subject to uncertainty. We base our estimates on historical experience and on various other sources that we believe to be reasonable under the circumstances. Certain accounting policies are particularly significant, including those related to revenue recognition, income taxes and goodwill and intangible assets. Our critical accounting policies are reviewed periodically with the Audit Committee of the Board of Directors ofScotts Miracle-Gro . Our critical accounting policies and estimates have not changed materially from those disclosed in the 2021 Annual Report.
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