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 inScotts Miracle-Gro's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2021 (the "2021 Annual Report") and our condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
EXECUTIVE SUMMARY
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 inthe United States .Hawthorne consists of our indoor and hydroponic gardening business. Other primarily consists of our consumer lawn and garden business outsidethe 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. Through ourU.S. Consumer and Other segments, we are the leading manufacturer and marketer of branded consumer lawn and garden products inNorth 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 withinthe United States and certain other specified countries. We also have a presence in similar branded consumer products inChina . In addition, we own a 50% equity interest inBonnie Plants, LLC , a joint venture with AFC, focused on planting, growing, developing, distributing, marketing and selling live plants. Through ourHawthorne segment, we are the leading manufacturer, marketer and distributor of lighting, nutrients, growing media, growing environments and hardware products for indoor and hydroponic gardening inNorth America . Our key brands include General Hydroponics®, Gavita®, Botanicare®, Agrolux®, Can-Filters®, Sun System®, Gro Pro®, Mother Earth®, Hurricane®, Grower's Edge®, Hydro-Logic® and Luxx Lighting®. OnDecember 30, 2021 , ourHawthorne segment completed the acquisition of substantially all of the assets ofLuxx Lighting, Inc. , a leading provider of lighting products for indoor growing that significantly strengthens our industry-leading lighting portfolio, for a purchase price of$213.2 . OnApril 28, 2022 , ourHawthorne segment completed the acquisition of substantially all of the assets of Cyco, anAustralia -based provider of premium nutrients, additives and growing media products for indoor growing, for a purchase price of$34.4 plus contingent consideration with a maximum payout of$10.0 . 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 ourHawthorne 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. OnAugust 24, 2021 , we made our initial investment under this initiative in the form of a$150.0 six-year convertible note issued to us byToronto -based RIV Capital (CSE: RIV) (OTC: CNPOF), a cannabis investment and acquisition firm listed on the Canadian Securities Exchange. OnApril 22, 2022 , pursuant to our follow-on investment rights, we made an additional investment in RIV Capital in the form of a$25.0 convertible note. 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 27 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
the conversion features. Refer to "NOTE 3. ACQUISITIONS AND INVESTMENTS" for more information regarding these investments.
Due to the seasonal nature of the consumer lawn and garden business, for ourU.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 ourHawthorne segment, sales are also impacted by seasonal patterns for certain product categories due to the timing of outdoor growing inNorth 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 % OnFebruary 6, 2020 ,Scotts Miracle-Gro announced that its Board of Directors authorized the repurchase of up to$750.0 of Common Shares fromApril 30, 2020 throughMarch 25, 2023 . During the three and six months endedApril 2, 2022 ,Scotts Miracle-Gro repurchased approximately 0.4 million and 1.1 million Common Shares under this share repurchase authorization for$50.0 and$175.0 , respectively. During the three and six months endedApril 3, 2021 ,Scotts Miracle-Gro repurchased approximately 0.1 million and 0.3 million Common Shares under this share repurchase authorization for$12.5 and$50.5 , respectively. OnJuly 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. OnJuly 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.
Recent Events
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. In addition to implementing measures to help ensure the health and safety of our employees, we implemented an interim premium pay allowance during fiscal 2020 and 2021 for certain associates in our field sales force and our manufacturing and distribution centers, which paid out nearly$50.0 in aggregate. 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. We have experienced higher transportation and materials costs, including fertilizer inputs such as urea, due in part to the negative impact of the war inUkraine on the global economy. We expect a continuing inflationary environment that is heightened by this conflict, and we are continuing to address these impacts to our operations. We have no operations inRussia orUkraine . 28 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (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
April 2, % Of April 3, % Of
2022 Net Sales 2021 Net Sales
Net sales $ 1,678.4 100.0 % $ 1,828.8 100.0 %
Cost of sales 1,084.7 64.6 1,158.9 63.4
Cost of sales-impairment, restructuring and other 5.3 0.3 12.4 0.7
Gross profit 588.4 35.1 657.5 36.0
Operating expenses:
Selling, general and administrative 204.7 12.2 231.5 12.7
Impairment, restructuring and other 0.1 - 2.5 0.1
Other income, net (4.3) (0.3) (0.6) -
Income from operations 387.9 23.1 424.1 23.2
Equity in loss of unconsolidated affiliates 6.5 0.4 1.5 0.1
Interest expense 28.3 1.7 19.3 1.1
Other non-operating income, net (1.9) (0.1) (0.9) -
Income from continuing operations before income
taxes 355.0 21.2 404.2 22.1
Income tax expense from continuing operations 78.5 4.7 93.1 5.1
Income from continuing operations 276.5 16.5 311.1 17.0
Loss from discontinued operations, net of tax - - (0.9) -
Net income $ 276.5 16.5 % $ 310.2 17.0 %
The sum of the components may not equal due to rounding.
The following table sets forth the components of earnings as a percentage of net
sales for the six months ended
April 2, % Of April 3, % Of
2022 Net Sales 2021 Net Sales
Net sales $ 2,244.3 100.0 % $ 2,577.4 100.0 %
Cost of sales 1,532.0 68.3 1,707.7 66.3
Cost of sales-impairment, restructuring and other 5.3 0.2 21.4 0.8
Gross profit 707.0 31.5 848.3 32.9
Operating expenses:
Selling, general and administrative 358.7 16.0 388.2 15.1
Impairment, restructuring and other 1.8 0.1 3.2 0.1
Other income, net (6.0) (0.3) (1.2) -
Income from operations 352.5 15.7 458.1 17.8
Equity in loss of unconsolidated affiliates 13.8 0.6 1.5 0.1
Interest expense 52.1 2.3 35.4 1.4
Other non-operating income, net (3.7) (0.2) (16.1) (0.6)
Income from continuing operations before income
taxes 290.3 12.9 437.3 17.0
Income tax expense from continuing operations 63.9 2.8 101.1 3.9
Income from continuing operations 226.4 10.1 336.2 13.0
Loss from discontinued operations, net of tax - - (0.9) -
Net income $ 226.4 10.1 % $ 335.3 13.0 %
The sum of the components may not equal due to rounding.
29
--------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Net Sales
Net sales for the three months ended April 2, 2022 were $1,678.4 , a decrease of
8.2% from net sales of $1,828.8 for the three months ended April 3, 2021 . Net
sales for the six months ended April 2, 2022 were $2,244.3 , a decrease of 12.9%
from net sales of $2,577.4 for the six months ended April 3, 2021 . These changes
in net sales were attributable to the following:
Three Months Ended Six Months Ended
April 2, 2022 April 2, 2022
Volume (16.0) % (19.7) %
Pricing 7.0 6.1
Acquisitions 0.8 0.7
Change in net sales (8.2) % (12.9) %
The decrease in net sales for the three and six months ended April 2, 2022 as
compared to the three and six months ended April 3, 2021 was primarily driven
by:
•decreased sales volume driven by lighting, nutrients, growing media, hardware
and growing environments products in our
•partially offset by increased pricing in our
•the addition of net sales from acquisitions.
Cost of Sales
The following table shows the major components of cost of sales for the periods
indicated:
Three Months Ended Six Months Ended
April 2, April 3, April 2, April 3,
2022 2021 2022 2021
Materials $ 627.4 $ 680.9 $ 864.6 $ 995.3
Distribution and warehousing 235.3 216.1 350.3 324.3
Manufacturing labor and overhead 200.0 235.3 275.5 347.5
Costs associated with Roundup® marketing
agreement 22.0 26.6 41.6 40.6
Cost of sales 1,084.7 1,158.9 1,532.0 1,707.7
Cost of sales-impairment, restructuring and
other 5.3 12.4 5.3 21.4
$ 1,090.0 $ 1,171.3 $ 1,537.3 $ 1,729.1
Factors contributing to the change in cost of sales are outlined in the
following table:
Three Months Ended Six Months Ended
April 2, 2022 April 2, 2022
Volume, product mix and other $ (122.3) $ (224.0)
Material cost changes 53.1 47.6
Costs associated with Roundup® marketing agreement (4.7) 1.0
Foreign exchange rates (0.3) (0.3)
(74.2) (175.7)
Impairment, restructuring and other (7.1) (16.1)
Change in cost of sales $ (81.3) $ (191.8)
The decrease in cost of sales for the three months ended
•lower sales volume in our
•a decrease in impairment, restructuring and other charges; and
30
--------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
•a decrease in costs associated with the Roundup® marketing agreement;
•partially offset by higher material costs in our
•higher transportation and warehousing costs included within "volume, product
mix and other" in our
The decrease in cost of sales for the six months ended
•lower sales volume in our
•a decrease in impairment, restructuring and other charges;
•partially offset by higher material costs in our
•higher transportation and warehousing costs included within "volume, product
mix and other" in our
Gross Profit
As a percentage of net sales, our gross profit rate was 35.1% and 36.0% for the three months endedApril 2, 2022 andApril 3, 2021 , respectively. As a percentage of net sales, our gross profit rate was 31.5% and 32.9% for the six months endedApril 2, 2022 andApril 3, 2021 , respectively. Factors contributing to the change in gross profit rate are outlined in the following table: Three Months Ended Six
Months Ended
April 2, 2022 April 2, 2022
Volume, product mix and other (3.4) % (4.7) %
Material costs (3.4) (2.3)
Acquisitions (0.1) (0.1)
Roundup® commissions and reimbursements 0.3 -
Pricing 5.4 5.1
(1.2) % (2.0) %
Impairment, restructuring and other 0.3 0.6
Change in gross profit rate (0.9) %
(1.4) %
The decrease in gross profit rate for the three months ended
•higher material costs in our
•higher transportation and warehousing costs of 300 bps included within "volume,
product mix and other" in our
•unfavorable leverage of fixed costs driven by lower sales volume in our
•partially offset by increased pricing in our
•a decrease in impairment, restructuring and other charges; and
•a decrease in costs associated with the Roundup® marketing agreement.
The decrease in gross profit rate for the six months ended
•higher transportation and warehousing costs of 340 bps included within "volume,
product mix and other" in our
•higher material costs in our
•unfavorable leverage of fixed costs driven by lower sales volume in our
•partially offset by increased pricing in our
•a decrease in impairment, restructuring and other charges.
31
--------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
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 Six Months Ended
April 2, April 3, April 2, April 3,
2022 2021 2022 2021
Advertising $ 49.1 $ 68.8 $ 67.3 $ 95.5
Research and development 12.4 10.3 24.9 20.6
Amortization of intangibles 8.9 7.3 16.3 14.5
Share-based compensation 15.9 17.7 23.2 25.8
Other selling, general and administrative 118.4 127.4 227.0 231.8
$ 204.7 $ 231.5 $ 358.7 $ 388.2
SG&A decreased $26.8 , or 11.6%, during the three months ended April 2, 2022
compared to the three months ended April 3, 2021 . Advertising expense decreased
$19.7 , or 28.6%, during the three months ended April 2, 2022 driven by decreased
media spending in our U.S. Consumer segment. Other SG&A decreased $9.0 , or 7.1%,
during the three months ended April 2, 2022 driven by a decrease in short-term
variable cash incentive compensation expense.
SG&A decreased $29.5 , or 7.6%, during the six months ended April 2, 2022
compared to the six months ended April 3, 2021 . Advertising expense decreased
$28.2 , or 29.5%, during the six months ended April 2, 2022 driven by decreased
media spending in our U.S. Consumer segment. Other SG&A decreased $4.8 , or 2.1%,
during the six months ended April 2, 2022 driven by a decrease in short-term
variable cash incentive compensation expense, partially offset by higher people
costs.
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 Six Months Ended
April 2, April 3, April 2, April 3,
2022 2021 2022 2021
Cost of sales-impairment, restructuring and
other:
COVID-19 related costs $ - $ 12.3 $ - $ 21.0
Restructuring and other charges, net 2.5 0.1 2.5 0.4
Property, plant and equipment impairments 2.8 - 2.8 -
Operating expenses:
COVID-19 related costs - 2.6 - 3.2
Restructuring and other charges (recoveries), net 0.1 (0.1) 1.8 -
Impairment, restructuring and other charges from
continuing operations $ 5.4 $ 14.9 $ 7.1 $ 24.6
During the second quarter of fiscal 2022, we announced plans to consolidate U.S.
lighting manufacturing for our Hawthorne segment into a single location and to
close another recently acquired assembly facility and move those operations to
our Santa Rosa, California facility. During the three and six months ended
April 2, 2022 , our Hawthorne segment incurred costs of $5.3 in in the "Cost of
sales-impairment, restructuring and other" line in the Condensed Consolidated
Statements of Operations and $0.1 in the "Impairment, restructuring and other"
line in the Condensed Consolidated Statements of Operations in connection with
this restructuring initiative related to employee termination benefits and
impairment of property, plant and equipment.
Subsequent to April 2, 2022 , we began evaluating actions to reduce the size of
our Hawthorne segment supply chain network and implement productivity and other
restructuring activities in our U.S. Consumer segment and Corporate functions,
which, if executed, may result in additional charges during our third and fourth
quarters of fiscal 2022.
32
--------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
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. Costs incurred during the three and six
months ended April 2, 2022 were immaterial. During the three and six months
ended April 3, 2021 , we incurred costs of $14.9 and $24.2 , respectively,
associated with the COVID-19 pandemic primarily related to premium pay. We
incurred costs of $10.7 and $19.0 in our U.S. Consumer segment, $1.5 and $1.9 in
our Hawthorne segment and $0.1 in our Other segment in the "Cost of
sales-impairment, restructuring and other" line in the Condensed Consolidated
Statements of Operations during the three and six months ended April 3, 2021 ,
respectively. We incurred costs of $2.6 and $3.2 in our U.S. Consumer segment in
the "Impairment, restructuring and other" line in the Condensed Consolidated
Statements of Operations during the three and six months ended April 3, 2021 ,
respectively.
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 $4.3 and $0.6 for the three months ended April 2, 2022 and April 3,
2021 , respectively; and was $6.0 and $1.2 for the six months ended April 2, 2022
and April 3, 2021 , respectively. The change for the three and six months ended
April 2, 2022 was primarily due to gains on the sale of long-lived assets during
the second quarter of fiscal 2022.
Income from Operations
Income from operations was$387.9 for the three months endedApril 2, 2022 , a decrease of 8.5% compared to$424.1 for the three months endedApril 3, 2021 ; and was$352.5 for the six months endedApril 2, 2022 , a decrease of 23.1% compared to$458.1 for the six months endedApril 3, 2021 . For the three and six months endedApril 2, 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 inBonnie Plants, LLC onDecember 31, 2020 . Our interest is accounted for using the equity method of accounting, with our proportionate share ofBonnie Plants, LLC earnings subsequent toDecember 31, 2020 reflected in the Condensed Consolidated Statements of Operations. We recorded equity in loss of unconsolidated affiliates associated withBonnie Plants, LLC of$6.5 and$13.8 during the three and six months endedApril 2, 2022 , respectively, as compared to$1.5 during the three and six months endedApril 3, 2021 . Interest Expense Interest expense was$28.3 for the three months endedApril 2, 2022 , an increase of 46.6% compared to$19.3 for the three months endedApril 3, 2021 . The increase was driven by higher average borrowings of$1,158.2 due to higher inventory production, capital expenditures, acquisition activity and repurchases of our Common Shares. Interest expense was$52.1 for the six months endedApril 2, 2022 , an increase of 47.2% compared to$35.4 for the six months endedApril 3, 2021 . The increase was driven by higher average borrowings of$1,041.5 due to higher inventory production, capital expenditures, acquisition activity and repurchases of our Common Shares.
Other Non-Operating Income, Net
Other non-operating income was$1.9 and$0.9 for the three months endedApril 2, 2022 andApril 3, 2021 , respectively, and was$3.7 and$16.1 for the six months endedApril 2, 2022 andApril 3, 2021 , respectively. OnDecember 31, 2020 , we acquired a 50% equity interest inBonnie 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 onDecember 31, 2020 and we recognized a gain of$12.5 during the three months endedJanuary 2, 2021 to write-up the value of the loan to its closing date fair value of$78.9 .
Income Tax Expense from Continuing Operations
The effective tax rates related to continuing operations for the six months endedApril 2, 2022 andApril 3, 2021 were 22.0% and 23.1%, 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 33 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
that the effective tax rate estimated for interim financial reporting purposes will approximate the effective tax rate determined at fiscal year-end.
Income from Continuing Operations
Income from continuing operations was$276.5 , or$4.94 per diluted share, for the three months endedApril 2, 2022 compared to$311.1 , or$5.44 per diluted share, for the three months endedApril 3, 2021 . The decrease was driven by lower net sales, a decrease in gross profit rate, higher interest expense and higher equity in loss of unconsolidated affiliates, partially offset by lower impairment, restructuring and other charges, lower SG&A and higher other income. Diluted average common shares used in the diluted income per common share calculation for the three months endedApril 2, 2022 were 56.0 million, which included dilutive potential Common Shares of 0.5 million. Diluted average common shares used in the diluted income per common share calculation for the three months endedApril 3, 2021 were 57.1 million, which included dilutive potential Common Shares of 1.4 million. The decrease was primarily the result of Common Share repurchase activity partially offset by the exercise and issuance of share-based compensation awards. Income from continuing operations was$226.4 , or$4.02 per diluted share, for the six months endedApril 2, 2022 compared to$336.2 , or$5.88 per diluted share, for the six months endedApril 3, 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 income per common share calculation for the six months endedApril 2, 2022 were 56.3 million, which included dilutive potential Common Shares of 0.8 million. Diluted average common shares used in the diluted income per common share calculation for the six months endedApril 3, 2021 were 57.0 million, which included dilutive potential Common Shares of 1.3 million. The decrease was primarily the result of Common Share repurchase activity partially offset by the exercise and issuance of share-based compensation awards.
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 Six Months Ended
April 2, April 3, April 2, April 3,
2022 2021 2022 2021
U.S. Consumer $ 1,379.8 $ 1,374.0 $ 1,722.2 $ 1,782.2
Hawthorne 202.6 363.8 393.2 673.2
Other 96.0 91.0 128.9 122.0
Consolidated $ 1,678.4 $ 1,828.8 $ 2,244.3 $ 2,577.4
34-------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (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 Six Months Ended
April 2, April 3, April 2, April 3,
2022 2021 2022 2021
U.S. Consumer $ 428.9 $ 435.9 $ 439.6 $ 481.2
Hawthorne 3.3 41.4 (2.0) 81.8
Other 10.5 17.6 11.8 17.6
Total Segment Profit (Non-GAAP) 442.7 494.9 449.4 580.6
Corporate (39.1) (48.1) (70.5) (82.7)
Intangible asset amortization (10.4) (7.8) (19.3) (15.2)
Impairment, restructuring and other (5.3) (14.9) (7.1) (24.6)
Equity in loss of unconsolidated affiliates (6.5) (1.5) (13.8) (1.5)
Interest expense (28.3) (19.3) (52.1) (35.4)
Other non-operating income, net 1.9 0.9 3.7 16.1
Income from continuing operations before income
taxes (GAAP) $ 355.0 $ 404.2 $ 290.3 $ 437.3
U.S. Consumer
U.S. Consumer segment net sales were $1,379.8 in the second quarter of fiscal
2022, an increase of 0.4% from second quarter of fiscal 2021 net sales of
$1,374.0 ; and were $1,722.2 for the first six months of fiscal 2022, a decrease
of 3.4% from the first six months of fiscal 2021 net sales of $1,782.2 . For the
second quarter of fiscal 2022, the increase was driven by the favorable impact
of increased pricing of 8.4%, partially offset by the unfavorable impact of
volume of 8.0%. For the six months ended April 2, 2022 , the decrease was driven
by the unfavorable impact of volume of 10.7%, partially offset by the favorable
impact of increased pricing of 7.3%. The decrease in sales volume for the three
and six months ended April 2, 2022 was driven by seed, fertilizer, soils and
controls products.
U.S. Consumer Segment Profit was $428.9 in the second quarter of fiscal 2022, a
decrease of 1.6% from the second quarter of fiscal 2021 Segment Profit of
$435.9 ; and Segment Profit was $439.6 for the first six months of fiscal 2022, a
decrease of 8.6% from the first six months of fiscal 2021 Segment Profit of
$481.2 . For the three months ended April 2, 2022 , the decrease was primarily due
to a lower gross profit rate, partially offset by lower SG&A. For the six months
ended April 2, 2022 , the decrease was primarily due to lower net sales and a
lower gross profit rate, partially offset by lower SG&A.
Hawthorne segment net sales were$202.6 in the second quarter of fiscal 2022, a decrease of 44.3% from second quarter of fiscal 2021 net sales of$363.8 ; and were$393.2 for the first six months of fiscal 2022, a decrease of 41.6% from the first six months of fiscal 2021 net sales of$673.2 . For the second quarter of fiscal 2022, the decrease was driven by the unfavorable impacts of volume and foreign exchange rates of 50.9% and 0.1%, respectively, partially offset by the favorable impacts of increased pricing and acquisitions of 2.7% and 4.0%, respectively. For the six months endedApril 2, 2022 , the decrease was driven by the unfavorable impacts of volume and foreign exchange rates of 47.0% and 0.2%, respectively, partially offset by the favorable impacts of increased pricing and acquisitions of 3.1% and 2.5%, respectively. The decrease in sales volume for the three and six months endedApril 2, 2022 was driven by lighting, nutrients, growing media, hardware and growing environments products. Hawthorne Segment Profit was$3.3 in the second quarter of fiscal 2022, a decrease of 92.0% from the second quarter of fiscal 2021 Segment Profit of$41.4 ; and Segment Loss was$2.0 for the first six months of fiscal 2022, a decrease of 102.4% from the first six months of fiscal 2021 Segment Profit of$81.8 . For the three and six months endedApril 2, 2022 , the decrease was driven by lower net sales, a lower gross profit rate and higher SG&A. 35 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) OurHawthorne segment has been negatively impacted during the six months endedApril 2, 2022 by both an oversupply of cannabis, which has slowed down indoor and outdoor cultivation, and higher transportation and warehousing costs. Although we expect that the oversupply of cannabis and cost increases will continue to adversely impact ourHawthorne segment during the remainder of fiscal 2022, we are taking actions intended to mitigate the impact, including reducing costs. If the oversupply of cannabis and cost increases persist longer, or are more significant than we expect or we are unable to mitigate their impact, our results of operations could be adversely impacted for a longer period and to a greater extent than we currently anticipate. AtApril 2, 2022 , the goodwill for ourHawthorne segment totaled$433.0 . As ofApril 2, 2022 , we concluded that no goodwill impairment exists for ourHawthorne segment. This assessment considered the impact of temporary lower sales volumes and increased costs being experienced by ourHawthorne segment during the first six months of fiscal 2022 as well as changes to other assumptions used in the fiscal 2021 annual impairment assessment, including the discount rate. While we consider our assumptions to be reasonable and appropriate and informed by temporary downturns inHawthorne results experienced during 2018 and 2019, they are complex and subjective. Adverse changes in key assumptions in the future may result in a decline in the fair value of ourHawthorne segment below its carrying value and an impairment of its goodwill. These adverse changes may include, among other things: a failure to meet expected revenue and profitability growth rates; an increase in the discount rate; a decrease in the long-term growth rate; or a significant change in economic conditions.
Other
Other segment net sales were$96.0 in the second quarter of fiscal 2022, an increase of 5.5% from the second quarter of fiscal 2021 net sales of$91.0 ; and were$128.9 for the first six months of fiscal 2022, an increase of 5.7% from the first six months of fiscal 2021 net sales of$122.0 . For the second quarter of fiscal 2022, the increase was driven by the favorable impacts of pricing, volume and foreign exchange rates of 4.7%, 0.6% and 0.2%, respectively. For the six months endedApril 2, 2022 , the increase was driven by the favorable impacts of pricing and foreign exchange rates of 5.2% and 0.9%, respectively, partially offset by the unfavorable impact of volume of 0.4%. Other Segment Profit was$10.5 in the second quarter of fiscal 2022, a decrease of 40.3% from the second quarter of fiscal 2021 Segment Profit of$17.6 ; and Segment Profit was$11.8 for the first six months of fiscal 2022, a decrease of 33.0% from the first six months of fiscal 2021 Segment Profit of$17.6 . For the three and six months endedApril 2, 2022 , the decrease was driven by a lower gross profit rate, partially offset by higher net sales.
Corporate
Corporate expenses were$39.1 in the second quarter of fiscal 2022, a decrease of 18.7% from second quarter of fiscal 2021 expenses of$48.1 ; and were$70.5 for the first six months of fiscal 2022, a decrease of 14.8% from the first six months of fiscal 2021 expenses of$82.7 . For the three and six months endedApril 2, 2022 , the decrease was driven by lower short-term variable cash incentive compensation expense and higher other income.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes cash activities:
Six Months Ended
April 2 , April 3,
2022 2021
Net cash used in operating activities
(255.8) (173.8)
Net cash provided by financing activities 1,171.3 871.1
Operating Activities
Cash used in operating activities totaled$1,142.6 for the six months endedApril 2, 2022 , an increase of$442.7 as compared to$699.9 for the six months endedApril 3, 2021 . This increase was driven by higher inventory, lower net income and higher interest payments, partially offset by lower tax payments and lower short-term variable cash incentive compensation payouts. Higher inventory was driven by higher production to meet expected future demand and higher input costs. The six months endedApril 2, 2022 was also impacted by extended payment terms with several of our major vendors across theU.S. Consumer andHawthorne 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. 36 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
Investing Activities
Cash used in investing activities totaled$255.8 for the six months endedApril 2, 2022 , an increase of$82.0 as compared to$173.8 for the six months endedApril 3, 2021 . Cash used for investments in property, plant and equipment during the first six months of fiscal 2022 and 2021 was$66.0 and$53.7 , respectively. We also completed the acquisitions ofLuxx Lighting, Inc. and True Liberty Bags during the six months endedApril 2, 2022 in exchange for cash payments of$202.8 , 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 proceeds from the sale of long-lived assets of$8.5 and received$4.5 associated with currency forward contracts during the six months endedApril 2, 2022 . During the six months endedApril 3, 2021 , we acquired a 50% equity interest inBonnie 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 six months endedApril 3, 2021 , we acquired contract rights within ourU.S. Consumer segment for a cash payment of$10.0 and we paid cash of$8.9 associated with currency forward contracts.
Financing Activities
Cash provided by financing activities totaled$1,171.3 for the six months endedApril 2, 2022 as compared$871.1 for the six months endedApril 3, 2021 . This change was driven by an increase in net borrowings under our Fifth A&R Credit Facilities of$994.3 during the six months endedApril 2, 2022 , partially offset by the issuance of$500.0 aggregate principal amount of 4.00% Senior Notes during the six months endedApril 3, 2021 , an increase in repurchases of our Common Shares of$194.2 and an increase in dividends paid of$22.3 during the six months endedApril 2, 2022 . In addition, during the six months endedApril 3, 2021 , we made payments of$15.5 associated with the acquisition of the remaining outstanding shares ofAeroGrow and paid financing and issuance fees of$7.0 . 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$17.1 ,$14.4 and$244.1 as ofApril 2, 2022 ,April 3, 2021 andSeptember 30, 2021 , respectively, included$4.0 ,$6.2 and$15.9 , respectively, held by controlled foreign corporations. As ofApril 2, 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 ofScotts Miracle-Gro's domestic subsidiaries. OnJuly 5, 2018 , we entered into a fifth amended and restated credit agreement (the "Fifth A&R Credit Agreement"), which provided us with five-year 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"). Under the Fifth A&R Credit Facilities, we had the ability to obtain letters of credit up to$75.0 . AtApril 2, 2022 , we had letters of credit outstanding in the aggregate principal amount of$19.9 and had$345.2 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 1.9% for the six months endedApril 2, 2022 andApril 3, 2021 , respectively. OnApril 8, 2022 , we entered into a sixth amended and restated credit agreement (the "Sixth A&R Credit Agreement"), providing us with five-year senior secured loan facilities in the aggregate principal amount of$2,500.0 , comprised of a revolving credit facility of$1,500.0 and a term loan in the original principal amount of$1,000.0 (the "Sixth A&R Credit Facilities"). The Sixth A&R Credit Agreement also provides us with the right to seek additional committed credit under the agreement in an aggregate amount of up to$500.0 plus an unlimited additional amount, subject to certain specified financial and other conditions. The Sixth A&R Credit Agreement replaces the Fifth A&R Credit Agreement and will terminate onApril 8, 2027 . The Sixth A&R Credit Facilities will be available for issuance of letters of credit up to$100.0 . The terms of the Sixth A&R Credit Agreement include customary representations and warranties, affirmative and negative covenants, financial covenants, and events of default. The Fifth A&R Credit Agreement would have terminated onJuly 5, 2023 , if it had not been amended and restated pursuant to the Sixth A&R Credit Agreement. Under the terms of the Sixth A&R Credit Agreement, loans bear interest, at our election, at a rate per annum equal to either (i) the Alternate Base Rate plus the Applicable Spread (each, as defined in the Sixth A&R Credit Agreement) or (ii) the 37 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Adjusted Term SOFR Rate for the Interest Period in effect for such borrowing plus the Applicable Spread (all as defined in the Sixth A&R Credit Agreement). Swingline Loans shall bear interest at the applicable Swingline Rate set forth in the Sixth A&R Credit Agreement. Further, interest rates for other select non-U.S. dollar borrowings, including borrowings denominated in euro, Pounds Sterling and Canadian Dollars, are based on separate interest rate indices, as set forth in the Sixth A&R Credit Agreement. The Sixth A&R Credit Agreement is secured by (i) a perfected first priority security interest in all of the accounts receivable, inventory and equipment ofScotts Miracle-Gro and certain of its domestic subsidiaries and (ii) the pledge of all of the capital stock of certain ofScotts Miracle-Gro's domestic subsidiaries and a portion of the capital stock of certain of its foreign subsidiaries. The collateral does not include any of our intellectual property. The Sixth A&R Credit Agreement contains, among other obligations, an affirmative covenant regarding our leverage ratio determined as of the end of each of its fiscal quarters ending on and afterApril 2, 2022 calculated as average total indebtedness, divided by our earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted pursuant to the terms of the Sixth A&R Credit Agreement ("Adjusted EBITDA"). The maximum permitted leverage ratio is 4.50, which is unchanged from the Fifth A&R Credit Agreement. Our leverage ratio was 3.81 atApril 2, 2022 . The Sixth 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 ending on and afterApril 2, 2022 . The interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in the Sixth A&R Credit Agreement, and excludes costs related to refinancings. The minimum required interest coverage ratio is 3.00, which is unchanged from the Fifth A&R Credit Agreement. Our interest coverage ratio was 7.81 for the twelve months endedApril 2, 2022 . As ofApril 2, 2022 , we were in compliance with these financial covenants. The Sixth A&R Credit Agreement allows us to make unlimited restricted payments (as defined in the Sixth 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 Sixth 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 Sixth 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 Sixth 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
OnDecember 15, 2016 , we issued$250.0 aggregate principal amount of 5.250% Senior Notes due 2026. 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 ofJune 15 andDecember 15 of each year. Substantially all of our directly and indirectly owned domestic subsidiaries serve as guarantors of the 5.250% Senior Notes. OnOctober 22, 2019 , we issued$450.0 aggregate principal amount of 4.500% Senior Notes due 2029. 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 ofApril 15 andOctober 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. OnMarch 17, 2021 , we issued$500.0 aggregate principal amount of 4.000% Senior Notes due 2031. 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 ofApril 1 andOctober 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. OnAugust 13, 2021 , we issued$400.0 aggregate principal amount of 4.375% Senior Notes due 2032. 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 ofFebruary 1 andAugust 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 38 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
during the seasonal commitment period beginning on
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
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 ofApril 2, 2022 ,April 3, 2021 andSeptember 30, 2021 had a maximum totalU.S. dollar equivalent notional amount of$800.0 ,$900.0 and$600.0 , respectively. The notional amount, effective date, expiration date and rate of each of the swap agreements outstanding atApril 2, 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
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
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 thanScotts Miracle-Gro or any "restricted subsidiary" under the applicable indenture; (ii) if the Guarantor merges with and intoScotts Miracle-Gro , withScotts 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 39 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) covenant defeasance; (v) at the election ofScotts 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 byScotts Miracle-Gro and the Guarantors. As 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 toScotts 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 toScotts 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 forScotts Miracle-Gro and the Guarantors. Transactions betweenScotts Miracle-Gro and the Guarantors have been eliminated and the summarized financial information does not reflect investments ofthe Scotts Miracle-Gro and the Guarantors in the Non-Guarantor subsidiaries. April 2, September 30, 2022 2021 Current assets$ 2,953.8 $ 1,834.8 Noncurrent assets (a) 2,699.3 2,484.5 Current liabilities 1,354.0 1,038.1 Noncurrent liabilities 3,662.9 2,611.8 (a)Includes amounts due from Non-Guarantor subsidiaries of$69.5 and$39.8 , respectively. Six Months Ended Year Ended April 2, September 30, 2022 2021 Net sales $ 2,085.7$ 4,507.6 Gross profit 681.5 1,380.6 Income from continuing operations (a) 230.1
510.9
Net income 230.1
510.8
Net income attributable to controlling interest 230.1
509.9
(a)Includes intercompany income from Non-Guarantor subsidiaries of
40
--------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
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 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 throughApril 2, 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.
© Edgar Online, source
