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 reporting 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 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 inNorth America . Our key brands include General Hydroponics®, Gavita®, Botanicare®, Agrolux®, Can-Filters®, Gro Pro®, Mother Earth®, Hurricane®, Grower's Edge®, Hydro-Logic® and Luxx Lighting®. 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 following table. 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 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 % 30
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ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Recent Events Our Hawthorne segment profit has been negatively impacted by an oversupply of cannabis, which has slowed down indoor and outdoor cultivation, and higher transportation and warehousing costs during the three and nine months endedJuly 2, 2022 . Due to the risks and uncertainties related to these impacts, we performed interim impairment testing for Hawthorne long-lived assets and goodwill during the third quarter of fiscal 2022, which resulted in non-cash, pre-tax goodwill and intangible asset impairment charges of$632.4 recorded in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations. The tax impact of the impairment charges was a benefit of$138.0 for the three and nine months endedJuly 2, 2022 and was recorded in the "Income tax expense (benefit) from continuing operations" line in the Condensed Consolidated Statements of Operations. Refer to the "CRITICAL ACCOUNTING POLICIES AND ESTIMATES" section of this MD&A and "NOTE 4.GOODWILL AND INTANGIBLE ASSETS" for more information. We expect that the oversupply of cannabis and cost increases will continue to adversely impact our Hawthorne segment. In response, we are taking actions intended to mitigate the impact, including reducing the size of our supply chain network, reducing staffing levels and implementing other cost-reduction initiatives. 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. OnApril 8, 2022 , we entered into 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 Agreement contains, among other obligations, an affirmative covenant regarding our leverage ratio determined as of the end of each of our fiscal quarters. The maximum permitted leverage ratio originally established in the Sixth A&R Credit Agreement was 4.50. During the third quarter of fiscal 2022, we experienced an unexpected shortfall in earnings that affected our ability to remain in compliance with the leverage ratio covenant of the Sixth A&R Credit Agreement. OnJune 8, 2022 , we entered into Amendment No. 1 (the "Amendment") to the Sixth A&R Credit Agreement which increased the maximum permitted leverage ratio for the quarterly leverage covenant effective for the third quarter of fiscal 2022 until the earlier of (i)April 1, 2024 and (ii) subject to certain conditions specified in the Amendment, the termination by us of such increase (such period, the "Leverage Adjustment Period"). Refer to the "LIQUIDITY AND CAPITAL RESOURCES" section of this MD&A for more information regarding the Amendment. OnDecember 30, 2021 , our Hawthorne segment completed the acquisition of substantially all of the assets ofLuxx Lighting, Inc. , a leading provider of lighting products for indoor growing, for a purchase price of$213.2 . OnApril 28, 2022 , our Hawthorne 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$37.4 . During fiscal 2021, we announced the creation of a newly formed subsidiary, THC, to 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. 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 by RIV Capital, 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 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 3. ACQUISITIONS AND INVESTMENTS" for more information regarding these investments. 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 nine months endedJuly 2, 2022 ,Scotts Miracle-Gro repurchased 0.0 million and 1.1 million Common Shares under this share repurchase authorization for$0.0 and$175.0 , respectively. During the three and nine months endedJuly 3, 2021 ,Scotts Miracle-Gro repurchased 0.1 million and 0.4 million Common Shares under this share repurchase authorization for$25.0 and$75.6 , respectively. OnJuly 27, 2020 , the Scotts Miracle-Gro Board of Directors approved an increase inScott Miracle-Gro's 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 inScott Miracle-Gro's quarterly cash dividend from$0.62 to$0.66 per Common Share, which was first paid in the fourth quarter of fiscal 2021. 31 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) 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 .
COVID-19
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 during those two years. 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.
RESULTS OF OPERATIONS
The following table sets forth the components of earnings as a percentage of net
sales for the three months ended
July 2, % Of July 3, % Of
2022 Net Sales 2021 Net Sales
Net sales $ 1,186.1 100.0 % $ 1,609.7 100.0 %
Cost of sales 883.7 74.5 1,114.3 69.2
Cost of sales-impairment, restructuring and other 65.8 5.5 0.8 -
Gross profit 236.6 19.9 494.6 30.7
Operating expenses:
Selling, general and administrative 135.8 11.4 194.1 12.1
Impairment, restructuring and other 658.4 55.5 0.5 -
Other (income) expense, net 4.9 0.4 (2.1) (0.1)
Income (loss) from operations (562.5) (47.4) 302.1 18.8
Equity in income of unconsolidated affiliates (15.1) (1.3) (21.5) (1.3)
Interest expense 31.0 2.6 21.9 1.4
Other non-operating income, net (1.7) (0.1) (1.2) (0.1)
Income (loss) from continuing operations before
income taxes (576.7) (48.6) 302.9 18.8
Income tax expense (benefit) from continuing
operations (132.8) (11.2) 73.1 4.5
Income (loss) from continuing operations (443.9) (37.4) 229.8 14.3
Loss from discontinued operations, net of tax - - (3.9) (0.2)
Net income (loss) $ (443.9) (37.4) % $ 225.9 14.0 %
The sum of the components may not equal due to rounding.
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
The following table sets forth the components of earnings as a percentage of net
sales for the nine months ended
July 2, % Of July 3, % Of
2022 Net Sales 2021 Net Sales
Net sales $ 3,430.4 100.0 % $ 4,187.2 100.0 %
Cost of sales 2,415.6 70.4 2,822.2 67.4
Cost of sales-impairment, restructuring and other 71.1 2.1 22.2 0.5
Gross profit 943.7 27.5 1,342.8 32.1
Operating expenses:
Selling, general and administrative 494.6 14.4 582.3 13.9
Impairment, restructuring and other 660.2 19.2 3.7 0.1
Other (income) expense, net (1.0) - (3.4) (0.1)
Income (loss) from operations (210.1) (6.1) 760.2 18.2
Equity in income of unconsolidated affiliates (1.3) - (20.0) (0.5)
Interest expense 83.1 2.4 57.3 1.4
Other non-operating income, net (5.4) (0.2) (17.3) (0.4)
Income (loss) from continuing operations before
income taxes (286.5) (8.4) 740.2 17.7
Income tax expense (benefit) from continuing
operations (69.0) (2.0) 174.2 4.2
Income (loss) from continuing operations (217.5) (6.3) 566.0 13.5
Loss from discontinued operations, net of tax - - (4.7) (0.1)
Net income (loss) $ (217.5) (6.3) % $ 561.3 13.4 %
The sum of the components may not equal due to rounding.
Net sales for the three months endedJuly 2, 2022 were$1,186.1 , a decrease of 26.3% from net sales of$1,609.7 for the three months endedJuly 3, 2021 . Net sales for the nine months endedJuly 2, 2022 were$3,430.4 , a decrease of 18.1% from net sales of$4,187.2 for the nine months endedJuly 3, 2021 . These changes in net sales were attributable to the following: Three Months Ended Nine Months Ended July 2, 2022 July 2, 2022 Volume (33.6) % (25.1) % Foreign exchange rates (0.4) (0.2) Pricing 6.6 6.3 Acquisitions 1.1 0.9 Change in net sales (26.3) % (18.1) % The decrease in net sales for the three and nine months endedJuly 2, 2022 as compared to the three and nine months endedJuly 3, 2021 was primarily driven by:
•decreased sales volume driven by lighting, nutrients, growing media, hardware
and growing environments products in our Hawthorne segment; and lawn care,
soils, controls, plant food and mulch products in our
•decreased net sales associated with the Roundup® marketing agreement; and
•the unfavorable impact of foreign exchange rates as a result of the
strengthening of the
•partially offset by increased pricing in our
•the addition of net sales from acquisitions in our Hawthorne segment.
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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 Nine Months Ended
July 2, July 3, July 2, July 3,
2022 2021 2022 2021
Materials $ 495.2 $ 622.1 $ 1,356.2 $ 1,617.1
Distribution and warehousing 199.1 228.0 549.4 552.3
Manufacturing labor and overhead 174.6 246.5 453.6 594.4
Costs associated with Roundup® marketing
agreement 14.8 17.7 56.4 58.4
Cost of sales 883.7 1,114.3 2,415.6 2,822.2
Cost of sales-impairment, restructuring and
other 65.8 0.8 71.1 22.2
$ 949.5 $ 1,115.1 $ 2,486.7 $ 2,844.4
Factors contributing to the change in cost of sales are outlined in the
following table:
Three Months Ended Nine Months Ended
July 2, 2022 July 2, 2022
Volume, product mix and other $ (274.6) $ (497.4)
Foreign exchange rates (6.0) (6.3)
Costs associated with Roundup® marketing agreement (2.9) (2.0)
Material cost changes 52.9 99.1
(230.6) (406.6)
Impairment, restructuring and other 65.0 48.9
Change in cost of sales $ (165.6) $ (357.7)
The decrease in cost of sales for the three and nine months ended July 2, 2022
as compared to the three and nine months ended July 3, 2021 was primarily driven
by:
•lower sales volume in our
•the favorable impact of foreign exchange rates as a result of the strengthening
of the
•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
•an increase in impairment, restructuring and other charges.
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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 19.9% and 30.7% for the
three months ended July 2, 2022 and July 3, 2021 , respectively. As a percentage
of net sales, our gross profit rate was 27.5% and 32.1% for the nine months
ended July 2, 2022 and July 3, 2021 , respectively. Factors contributing to the
change in gross profit rate are outlined in the following table:
Three Months Ended Nine Months Ended
July 2, 2022 July 2, 2022
Volume, product mix and other (6.9) % (5.4) %
Material costs (4.9) (3.1)
Roundup® commissions and reimbursements (0.9) (0.2)
Acquisitions (0.2) (0.2)
Pricing 7.6 5.9
(5.3) % (3.0) %
Impairment, restructuring and other (5.5) (1.6)
Change in gross profit rate (10.8) %
(4.6) %
The decrease in gross profit rate for the three and nine months endedJuly 2, 2022 as compared to the three and nine months endedJuly 3, 2021 was primarily driven by:
•higher material costs in our
•higher transportation and warehousing costs of 250 bps and 300 bps for the three and nine months endedJuly 2, 2022 , respectively, included within "volume, product mix and other" associated with ourU.S. Consumer, Hawthorne and Other segments;
•unfavorable leverage of fixed costs driven by lower sales volume in our
•decreased net sales associated with the Roundup® marketing agreement;
•an unfavorable net impact from acquisitions in our Hawthorne segment; and
•an increase in impairment, restructuring and other charges;
•partially offset by increased pricing in our
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 Nine Months Ended
July 2, July 3, July 2, July 3,
2022 2021 2022 2021
Advertising $ 30.0 $ 44.6 $ 97.4 $ 140.1
Research and development 10.4 11.4 35.3 32.0
Amortization of intangibles 7.7 7.3 24.0 21.8
Share-based compensation 5.5 8.1 28.6 34.0
Other selling, general and administrative 82.2 122.7 309.3 354.4
$ 135.8 $ 194.1 $ 494.6 $ 582.3
SG&A decreased $58.3 , or 30.0%, during the three months ended July 2, 2022
compared to the three months ended July 3, 2021 . Advertising expense decreased
$14.6 , or 32.7%, during the three months ended July 2, 2022 driven by decreased
media spending in our U.S. Consumer segment. Other SG&A decreased $40.5 , or
33.0%, during the three months ended July 2, 2022 driven by a decrease in
short-term variable cash incentive compensation expense, reductions in staffing
levels and other cost-reduction initiatives.
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
SG&A decreased $87.7 , or 15.1%, during the nine months ended July 2, 2022
compared to the nine months ended July 3, 2021 . Advertising expense decreased
$42.7 , or 30.5%, during the nine months ended July 2, 2022 driven by decreased
media spending in our U.S. Consumer segment. Other SG&A decreased $45.1 , or
12.7%, during the nine months ended July 2, 2022 driven by a decrease in
short-term variable cash incentive compensation expense, reductions in staffing
levels and other cost-reduction initiatives.
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 Nine Months Ended
July 2, July 3, July 2, July 3,
2022 2021 2022 2021
Cost of sales-impairment, restructuring and
other:
COVID-19 related costs $ - $ 1.5 $ - $ 22.5
Restructuring and other charges (recoveries), net 58.8 (0.7) 61.3 (0.3)
Property, plant and equipment impairments 7.0 - 9.8 -
Operating expenses:
COVID-19 related costs - 0.4 - 3.6
Restructuring and other charges, net 25.3 0.1 27.1 0.1
Goodwill and intangible asset impairments 633.1 - 633.1 -
Impairment, restructuring and other charges from
continuing operations $ 724.2 $ 1.3 $ 731.3 $ 25.9
During the three and nine months ended July 2, 2022 , we recognized non-cash,
pre-tax goodwill and intangible asset impairment charges of $632.4 related to
our Hawthorne segment in the "Impairment, restructuring and other" line in the
Condensed Consolidated Statements of Operations, comprised of $522.4 of goodwill
impairment charges and $110.0 of finite-lived intangible asset impairment
charges.
During the three and nine months ended July 2, 2022 , we incurred inventory
write-down charges of $45.9 in the "Cost of sales-impairment, restructuring and
other" line in the Condensed Consolidated Statements of Operations associated
with our decision to discontinue and exit the market for certain lighting
products and brands.
During the three and nine months ended July 2, 2022 , we began implementing an
expanded series of organizational changes and initiatives intended to create
operational and management-level efficiencies. As part of this restructuring
program, we are reducing the size of our supply chain network, reducing staffing
levels and implementing other cost-reduction initiatives. During the three and
nine months ended July 2, 2022 , we incurred costs of $40.7 and $46.1 ,
respectively, associated with this restructuring initiative primarily related to
employee termination benefits and impairment of property, plant and equipment.
We incurred costs of $9.5 in our U.S. Consumer segment and $10.4 and $15.6 in
our Hawthorne segment in the "Cost of sales-impairment, restructuring and other"
line in the Condensed Consolidated Statements of Operations during the three and
nine months ended July 2, 2022 , respectively. We incurred costs of $7.4 in our
U.S. Consumer segment, $7.1 in our Hawthorne segment and $6.3 at Corporate in
the "Impairment, restructuring and other" line in the Condensed Consolidated
Statements of Operations during the three and nine months ended July 2, 2022 ,
respectively. We continue to evaluate additional network and organizational
changes, which, if executed, may result in additional restructuring charges in
future periods.
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 nine
months ended July 2, 2022 related to COVID-19 were immaterial. During the three
and nine months ended July 3, 2021 , we incurred costs of $1.9 and $26.1 ,
respectively, associated with the COVID-19 pandemic primarily related to premium
pay. We incurred costs of $0.8 and $19.8 in our U.S. Consumer segment, $0.5 and
$2.4 in our Hawthorne segment and $0.2 and $0.3 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 nine months ended
July 3, 2021 , respectively. We incurred costs of $0.3 and $3.5 in our U.S.
Consumer segment and $0.1 in our Other segment in the "Impairment, restructuring
and other" line in the Condensed Consolidated Statements of Operations during
the three and nine months ended July 3, 2021 , respectively.
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Other (Income) Expense, net
Other (income) expense 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) expense was$4.9 and$(2.1) for the three months endedJuly 2, 2022 andJuly 3, 2021 , respectively; and was$(1.0) and$(3.4) for the nine months endedJuly 2, 2022 andJuly 3, 2021 , respectively. The change for the three and nine months endedJuly 2, 2022 was primarily due to foreign exchange transaction gains and losses.
Income (Loss) from Operations
Income (loss) from operations was$(562.5) for the three months endedJuly 2, 2022 , a decrease of 286.2% compared to$302.1 for the three months endedJuly 3, 2021 ; and was$(210.1) for the nine months endedJuly 2, 2022 , a decrease of 127.6% compared to$760.2 for the nine months endedJuly 3, 2021 . For the three and nine months endedJuly 2, 2022 , the decrease was driven by lower net sales, a decrease in gross profit rate, higher impairment, restructuring and other charges and lower other income, partially offset by lower SG&A.
Equity in Income 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 income of unconsolidated affiliates associated withBonnie Plants, LLC of$15.1 and$1.3 during the three and nine months endedJuly 2, 2022 , respectively, as compared to$21.5 and$20.0 during the three and nine months endedJuly 3, 2021 , respectively.
Interest Expense
Interest expense was$31.0 for the three months endedJuly 2, 2022 , an increase of 41.6% compared to$21.9 for the three months endedJuly 3, 2021 . The increase was driven by higher average borrowings of$1,307.4 due to higher inventory production, capital expenditures, acquisition activity and repurchases of our Common Shares. Interest expense was$83.1 for the nine months endedJuly 2, 2022 , an increase of 45.0% compared to$57.3 for the nine months endedJuly 3, 2021 . The increase was driven by higher average borrowings of$1,131.4 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$1.7 and$1.2 for the three months endedJuly 2, 2022 andJuly 3, 2021 , respectively, and was$5.4 and$17.3 for the nine months endedJuly 2, 2022 andJuly 3, 2021 , respectively. OnDecember 31, 2020 , we acquired a 50% equity interest inBonnie Plants, LLC in exchange for cash payments of$102.3 , 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 (Benefit) from Continuing Operations
The effective tax rates related to continuing operations for the nine months endedJuly 2, 2022 andJuly 3, 2021 were 24.1% and 23.5%, 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. During the three and nine months endedJuly 2, 2022 , we recognized non-cash, pre-tax goodwill and intangible asset impairment charges of$632.4 related to our Hawthorne segment in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations. The tax impact of the impairment charges was a benefit of$138.0 , which is net of the impact of non-deductible goodwill of$18.5 , for the three and nine months endedJuly 2, 2022 and was recorded in the "Income tax expense (benefit) from continuing operations" line in the Condensed Consolidated Statements of Operations. The tax impact of non-deductible goodwill was considered a discrete item because we have no remaining non-deductible goodwill. 37 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) This discrete item decreased the effective tax rate by approximately 640 bps for the nine months endedJuly 2, 2022 because we incurred a net loss during this period.
Income (Loss) from Continuing Operations
Income (loss) from continuing operations was$(443.9) , or$(8.01) per diluted share, for the three months endedJuly 2, 2022 compared to$229.8 , or$4.00 per diluted share, for the three months endedJuly 3, 2021 . The decrease was driven by lower net sales, a decrease in gross profit rate, higher impairment, restructuring and other charges, lower other income, lower equity in income of unconsolidated affiliates and higher interest expense, partially offset by lower SG&A. Diluted average common shares used in the diluted loss per common share calculation for the three months endedJuly 2, 2022 were 55.4 million, which excluded potential Common Shares of 0.4 million because the effect of their inclusion would be anti-dilutive as we incurred a net loss for the three months endedJuly 2, 2022 . Diluted average common shares used in the diluted income per common share calculation for the three months endedJuly 3, 2021 were 57.4 million, which included dilutive potential Common Shares of 1.6 million. Income (loss) from continuing operations was$(217.5) , or$(3.91) per diluted share, for the nine months endedJuly 2, 2022 compared to$566.0 , or$9.90 per diluted share, for the nine months endedJuly 3, 2021 . The decrease was driven by lower net sales, a decrease in gross profit rate, higher impairment, restructuring and other charges, lower other income, lower equity in income of unconsolidated affiliates, higher interest expense and lower other non-operating income, partially offset by lower SG&A. Diluted average common shares used in the diluted loss per common share calculation for the nine months endedJuly 2, 2022 were 55.6 million, which excluded potential Common Shares of 0.6 million because the effect of their inclusion would be anti-dilutive as we incurred a net loss for the nine months endedJuly 2, 2022 . Diluted average common shares used in the diluted income per common share calculation for the nine months endedJuly 3, 2021 were 57.1 million, which included dilutive potential Common Shares of 1.4 million.
SEGMENT RESULTS
The following table sets forth net sales by segment:
Three Months Ended Nine Months Ended
July 2, July 3, July 2, July 3,
2022 2021 2022 2021
U.S. Consumer $ 904.5 $ 1,046.2 $ 2,626.7 $ 2,828.4
Hawthorne 154.5 421.9 547.7 1,095.1
Other 127.1 141.6 256.0 263.7
Consolidated $ 1,186.1 $ 1,609.7 $ 3,430.4 $ 4,187.2
38
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
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 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 Nine Months Ended
July 2, July 3, July 2, July 3,
2022 2021 2022 2021
U.S. Consumer $ 181.1 $ 264.4 $ 620.7 $ 745.6
Hawthorne 4.1 51.9 2.0 133.7
Other 10.9 26.8 22.7 44.4
Total Segment Profit (Non-GAAP) 196.1 343.1 645.4 923.7
Corporate (25.2) (31.9) (95.7) (114.6)
Intangible asset amortization (9.2) (7.8) (28.5) (23.0)
Impairment, restructuring and other (724.2) (1.3) (731.3) (25.9)
Equity in income of unconsolidated affiliates 15.1 21.5 1.3 20.0
Interest expense (31.0) (21.9) (83.1) (57.3)
Other non-operating income, net 1.7 1.2 5.4 17.3
Income (loss) from continuing operations before
income taxes (GAAP) $ (576.7) $ 302.9 $ (286.5) $ 740.2
U.S. Consumer
U.S. Consumer segment net sales were $904.5 in the third quarter of fiscal 2022,
a decrease of 13.5% from third quarter of fiscal 2021 net sales of $1,046.2 ; and
were $2,626.7 for the first nine months of fiscal 2022, a decrease of 7.1% from
the first nine months of fiscal 2021 net sales of $2,828.4 . For the third
quarter of fiscal 2022, the decrease was driven by lower sales volume of 20.0%,
partially offset by increased pricing of 6.5%. For the nine months ended July 2,
2022 , the decrease was driven by lower sales volume of 14.1%, partially offset
by increased pricing of 7.0%. The decrease in sales volume for the three and
nine months ended July 2, 2022 was driven by lawn care, soils, controls, plant
food and mulch products.
U.S. Consumer Segment Profit was $181.1 in the third quarter of fiscal 2022, a
decrease of 31.5% from the third quarter of fiscal 2021 Segment Profit of
$264.4 ; and Segment Profit was $620.7 for the first nine months of fiscal 2022,
a decrease of 16.8% from the first nine months of fiscal 2021 Segment Profit of
$745.6 . For the three and nine months ended July 2, 2022 , the decrease was
primarily due to lower net sales and a lower gross profit rate, partially offset
by lower SG&A.
Hawthorne
Hawthorne segment net sales were $154.5 in the third quarter of fiscal 2022, a
decrease of 63.4% from third quarter of fiscal 2021 net sales of $421.9 ; and
were $547.7 for the first nine months of fiscal 2022, a decrease of 50.0% from
the first nine months of fiscal 2021 net sales of $1,095.1 . For the third
quarter of fiscal 2022, the decrease was driven by lower sales volume and
unfavorable foreign exchange rates of 73.2% and 0.3%, respectively, partially
offset by increased pricing and acquisitions of 5.7% and 4.4%, respectively. For
the nine months ended July 2, 2022 , the decrease was driven by lower sales
volume and unfavorable foreign exchange rates of 57.2% and 0.2%, respectively,
partially offset by increased pricing and acquisitions of 4.1% and 3.3%,
respectively. The decrease in sales volume for the three and nine months ended
July 2, 2022 was driven by lighting, nutrients, growing media, hardware and
growing environments products.
Hawthorne Segment Profit was $4.1 in the third quarter of fiscal 2022, a
decrease of 92.1% from the third quarter of fiscal 2021 Segment Profit of $51.9 ;
and Segment Profit was $2.0 for the first nine months of fiscal 2022, a decrease
of 98.5% from the first nine months of fiscal 2021 Segment Profit of $133.7 . For
the three and nine months ended July 2, 2022 , the decrease was driven by lower
net sales and a lower gross profit rate, partially offset by lower SG&A.
Other
Other segment net sales were$127.1 in the third quarter of fiscal 2022, a decrease of 10.2% from the third quarter of fiscal 2021 net sales of$141.6 ; and were$256.0 for the first nine months of fiscal 2022, a decrease of 2.9% from the first nine months of fiscal 2021 net sales of$263.7 . For the third quarter of fiscal 2022, the decrease was driven by lower sales volume 39 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) and unfavorable foreign exchange rates of 16.1% and 4.0%, respectively, partially offset by increased pricing of 9.9%. For the nine months endedJuly 2, 2022 , the decrease was driven by lower sales volume and unfavorable foreign exchange rates of 8.9% and 1.8%, respectively, partially offset by increased pricing of 7.8%. Other Segment Profit was$10.9 in the third quarter of fiscal 2022, a decrease of 59.3% from the third quarter of fiscal 2021 Segment Profit of$26.8 ; and Segment Profit was$22.7 for the first nine months of fiscal 2022, a decrease of 48.9% from the first nine months of fiscal 2021 Segment Profit of$44.4 . For the three and nine months endedJuly 2, 2022 , the decrease was driven by lower net sales and a lower gross profit rate, partially offset by lower SG&A.
Corporate
Corporate expenses were$25.2 in the third quarter of fiscal 2022, a decrease of 21.0% from the third quarter of fiscal 2021 expenses of$31.9 ; and were$95.7 for the first nine months of fiscal 2022, a decrease of 16.5% from the first nine months of fiscal 2021 expenses of$114.6 . For the three and nine months endedJuly 2, 2022 , the decrease was driven by lower short-term variable cash incentive compensation expense, reductions in staffing levels and other cost-reduction initiatives.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes cash activities:
Nine Months Ended
July 2 , July 3,
2022 2021
Net cash used in operating activities
Operating Activities
Cash used in operating activities totaled$679.6 for the nine months endedJuly 2, 2022 , an increase of$472.5 as compared to$207.1 for the nine months endedJuly 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 and higher input costs. The nine months endedJuly 2, 2022 was also impacted by extended payment terms with several of our major vendors across theU.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$334.5 for the nine months endedJuly 2, 2022 , an increase of$122.6 as compared to$211.9 for the nine months endedJuly 3, 2021 . Cash used for investments in property, plant and equipment during the first nine months of fiscal 2022 and 2021 was$99.0 and$77.9 , respectively. We also completed the acquisitions ofLuxx Lighting, Inc. , True Liberty Bags and Cyco during the nine months endedJuly 2, 2022 in exchange for cash payments of$237.3 , 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, during the nine months endedJuly 2, 2022 , we made payments of$25.0 in connection with a minority non-equity convertible debt investment, received proceeds from the sale of long-lived assets of$9.4 and received$17.4 associated with currency forward contracts. During the nine months endedJuly 3, 2021 , we acquired a 50% equity interest inBonnie Plants, LLC in exchange for cash payments of$102.3 , 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 nine months endedJuly 3, 2021 , we acquired contract and license rights within ourU.S. Consumer segment for$20.0 and we paid cash of$10.0 associated with currency forward contracts. Financing Activities Cash provided by financing activities totaled$797.9 for the nine months endedJuly 2, 2022 as compared$459.6 for the nine months endedJuly 3, 2021 . This change was driven by an increase in net borrowings under our Fifth A&R Credit Facilities of$1,019.7 during the nine months endedJuly 2, 2022 , partially offset by the issuance of$500.0 aggregate principal amount of 4.00% Senior Notes during the nine months endedJuly 3, 2021 , an increase in repurchases of our Common Shares of$166.7 , an increase in dividends paid of$23.5 and a decrease in cash received from exercise of stock options of$11.7 . In addition, we paid financing and issuance fees of$9.7 and$7.2 for the nine months endedJuly 2, 2022 andJuly 3, 2021 , 40 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
respectively. We also made payments of
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$27.8 ,$58.3 and$244.1 as ofJuly 2, 2022 ,July 3, 2021 andSeptember 30, 2021 , respectively, included$4.0 ,$52.1 and$15.9 , respectively, held by controlled foreign corporations. As ofJuly 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 . 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 are 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. AtJuly 2, 2022 , we had letters of credit outstanding in the aggregate principal amount of$14.1 and had$868.5 of borrowing availability under the Sixth A&R Credit Agreement. The weighted average interest rates on average borrowings under the Fifth A&R Credit Agreement and Sixth A&R Credit Agreement were 2.1% and 1.8% for the nine months endedJuly 2, 2022 andJuly 3, 2021 , respectively. 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 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 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. OnJune 8, 2022 , we entered into Amendment No. 1 (the "Amendment") to the Sixth A&R Credit Agreement. The Amendment increased the maximum permitted leverage ratio for the quarterly leverage covenant effective for the third quarter of fiscal 2022 until the earlier of (i)April 1, 2024 and (ii) subject to certain conditions specified in the Amendment, the termination by us of such increase (such period, the "Leverage Adjustment Period"). The Amendment also increases the interest rate applicable to borrowings under the revolving credit facility by 35 bps and the term loan facility by 50 bps, and increases the annual facility fee rate on the revolving credit facility by 15 bps, in each case, when our quarterly-tested leverage ratio exceeds 4.75. Additionally, the Amendment limits our ability to declare or pay any discretionary dividends, distributions or other restricted payments during the Leverage Adjustment Period to only the payment of (i) regularly scheduled cash dividends to holders of our Common Shares in an aggregate amount not to exceed$225.0 per fiscal year and (ii) other dividends, distributions or other restricted payments in an aggregate amount not to exceed$25.0 ; and requires pro forma compliance with certain leverage levels specified in the Amendment with respect to our ability to consummate certain acquisitions and incur debt. 41 -------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) 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 our fiscal quarters calculated as average total indebtedness, divided by our earnings before interest, taxes, depreciation and amortization, as adjusted pursuant to the terms of the Sixth A&R Credit Agreement ("Adjusted EBITDA"). Pursuant to the Amendment, the maximum permitted leverage ratio is (i) 6.25 for the third quarter of fiscal 2022 through the first quarter of fiscal 2023, (ii) 6.50 for the second and third quarters of fiscal 2023, (iii) 6.25 for the fourth quarter of fiscal 2023 and the first quarter of fiscal 2024, (iv) 5.50 for the second quarter of fiscal 2024, and (v) 4.50 for the third quarter of fiscal 2024 and thereafter. Our leverage ratio was 5.10 atJuly 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. 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 5.89 for the twelve months endedJuly 2, 2022 . As ofJuly 2, 2022 , we were in compliance with these financial covenants. 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, among other things, repricing of the Sixth A&R Credit Agreement and/or immediate repayment of outstanding borrowings. 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 ,Scotts Miracle-Gro 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. OnOctober 22, 2019 ,Scotts Miracle-Gro 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. OnMarch 17, 2021 ,Scotts Miracle-Gro 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. OnAugust 13, 2021 ,Scotts Miracle-Gro 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. Substantially all ofScotts Miracle-Gro's directly and indirectly owned domestic subsidiaries serve as guarantors of the 5.250% Senior Notes, the 4.500% Senior Notes, the 4.000% Senior Notes and 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 that began onFebruary 25, 2022 and ended onJune 17, 2022 was$160.0 . The Receivables Facility expires onAugust 19, 2022 but is expected to be renewed prior to its expiration.
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
42
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
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 ofJuly 2, 2022 ,July 3, 2021 andSeptember 30, 2021 had a maximum totalU.S. dollar equivalent notional amount of$800.0 ,$700.0 and$600.0 , respectively. The notional amount, effective date, expiration date and rate of each of the swap agreements outstanding atJuly 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 covenant defeasance; (v) at the election ofScotts Miracle-Gro following the Guarantor's release as a guarantor under the Sixth A&R Credit Agreement, except a release by or as a result of the repayment of the Sixth 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, 43 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) 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. July 2, September 30, 2022 2021 Current assets$ 2,305.2 $ 1,834.8 Noncurrent assets (a) 2,251.4 2,484.5 Current liabilities 959.5 1,038.1 Noncurrent liabilities 3,393.0 2,611.8 (a)Includes amounts due from Non-Guarantor subsidiaries of$54.3 and$39.8 , respectively. Nine Months Ended Year Ended July 2, September 30, 2022 2021 Net sales$ 3,139.2 $ 4,507.6 Gross profit 898.6 1,380.6 Income (loss) from continuing operations (a) (124.5) 510.9 Net income (loss) (124.5) 510.8 Net income (loss) attributable to controlling interest (124.5) 509.9
(a)Includes intercompany income from Non-Guarantor subsidiaries of
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.
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
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, with the exception of the item discussed below. During the third quarter of fiscal 2022, our Hawthorne reporting unit continued to experience adverse financial results driven by an oversupply of cannabis, which has slowed down indoor and outdoor cultivation, and higher transportation and warehousing costs. As a result, we made further revisions to our internal forecasts relating to our Hawthorne reporting unit. We concluded that the changes in circumstances in this reporting unit and the decline in the Company's market capitalization triggered the need for an interim impairment review of its goodwill. We elected to bypass the qualitative assessment and perform quantitative interim goodwill impairment testing for our Hawthorne reporting unit. We updated our assumptions from prior periods to include the longer duration and increased significance of lower sales volumes and cost increases. This quantitative test resulted in a non-cash, pre-tax goodwill impairment charge of$522.4 related to our Hawthorne reporting unit, which was recorded in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations. The carrying value of goodwill of our Hawthorne reporting unit, after recognizing the impairment, is zero. The estimated fair value of our Hawthorne reporting unit was based upon an equal weighting of the income-based and market-based approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. The fair value estimate utilizes significant unobservable inputs and thus represents a Level 3 fair value measurement. While we consider our assumptions to be reasonable and appropriate, they are complex and subjective. Refer to "NOTE 4. GOODWILL AND INTANGIBLE ASSETS" for more information.
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