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
•Non-GAAP measures
•Regulatory matters
•Critical accounting policies and estimates
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 fertilizer and Scotts® grass seed products; Miracle-Gro® soil, plant food and gardening products; Ortho® herbicide and pesticide products; and Tomcat® rodent control and animal repellent products. We also have a presence in similar branded consumer products inChina . 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. In addition, we have an 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 a leading manufacturer, marketer and
distributor of lighting, nutrients, growing media, growing environments and
hardware products for indoor and hydroponic gardening in
As a leading consumer branded lawn and garden company, our product development and marketing efforts are largely focused on providing innovative and differentiated products and continually increasing brand and product awareness to inspire consumers to create retail demand. We have implemented this model for a number of years by focusing on research and development and investing approximately 3-5% of ourU.S. Consumer segment annual net sales in advertising to support and promote our consumer lawn and garden products and brands. We continually explore new and innovative ways to communicate with consumers. We believe that we receive a significant benefit from these expenditures and anticipate a similar commitment to research and development, advertising and marketing investments in the future, with the continuing objective of driving category growth and profitably maintaining and/or increasing market share. Our consumer lawn and garden net sales in any one year are susceptible to weather conditions in the markets in which our products are sold. For instance, periods of abnormally wet or dry weather can adversely impact the sale of certain products, while increasing demand for other products. We believe that our diversified product line and our geographic diversification reduce this risk, although to a lesser extent in a year in which unfavorable weather is geographically widespread and extends across a significant portion of the lawn and garden season. We also believe that weather conditions in any one year, positive or negative, do not materially impact longer-term category growth trends. 26
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Due to the seasonal nature of the consumer lawn and garden business, for our
U.S. Consumer and Other segments, significant portions of our products ship to
our retail customers during our second and third fiscal quarters, as noted in
the 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 in North America during our second and third fiscal quarters, and the
timing of certain controlled agricultural lighting project sales during our
third and fourth fiscal quarters.
Percent of Net Sales from Continuing
Operations by Quarter
2022 2021 2020
First Quarter 14.4 % 15.2 % 8.9 %
Second Quarter 42.8 % 37.1 % 33.5 %
Third Quarter 30.2 % 32.7 % 36.1 %
Fourth Quarter 12.6 % 15.0 % 21.5 %
We follow a 13-week quarterly accounting cycle pursuant to which the first three
fiscal quarters end on a Saturday and the fiscal year always ends on September
30 . This fiscal calendar convention requires us to cycle forward the first three
fiscal quarter ends every six years. Fiscal 2021 was impacted by this process
and, as a result, our first quarter of fiscal 2021 had five additional days and
our fourth quarter of fiscal 2021 had six fewer days compared to the respective
quarters of fiscal 2020.
Management focuses on a variety of key indicators and operating metrics to
monitor the financial condition and performance of the continuing operations of
our business. These metrics include consumer purchases (point-of-sale data),
market share, category growth, net sales (including unit volume, pricing and
foreign exchange movements), gross margins, advertising to net sales ratios,
income from operations, income from continuing operations, net income, earnings
per share, earnings before interest, taxes, depreciation and amortization
("EBITDA") and leverage ratio. To the extent applicable, these metrics are
evaluated with and without impairment, restructuring and other charges that do
not occur in or reflect the ordinary course of our ongoing business operations.
Metrics that exclude impairment, restructuring and other nonrecurring items are
used by management to evaluate our performance, engage in financial and
operational planning and determine incentive compensation because we believe
that these measures provide additional perspective on the performance of our
underlying, ongoing business. We also focus on measures to optimize cash flow
and return on invested capital, including the management of working capital and
capital expenditures. Refer to the "NON-GAAP MEASURES" section of this MD&A for
further discussion of non-GAAP measures.
Recent Events
During fiscal 2022, our Hawthorne segment experienced adverse financial results due to decreased sales volume and higher transportation and warehousing costs. Sales volume decreased due to an oversupply of cannabis, which significantly decreased cannabis wholesale prices and indoor and outdoor cannabis cultivation. The oversupply has been driven by increased licensing activity across theU.S. , as well as significant capital investment in the cannabis production marketplace over the past several years and the market impacts of the COVID-19 pandemic. 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 Consolidated Statements of Operations. Refer to the "CRITICAL ACCOUNTING POLICIES AND ESTIMATES" section of this MD&A and "NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET" for more information. We expect that the oversupply of cannabis and cost increases will continue to adversely impact our Hawthorne segment. 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 materially and adversely impacted for a longer period and to a greater extent than we currently anticipate. During fiscal 2022, ourU.S. Consumer, Hawthorne and Other segments 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 . OnApril 8, 2022 , we entered into the Sixth A&R Credit Agreement, providing the Company and certain of its subsidiaries 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 27
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) 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 increases 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"). We are currently in compliance with our covenants and expect to remain in compliance, however, we could experience material changes to forecasted revenues, expenses or cash flows and may experience difficulty remaining in compliance with the financial covenants required by the amended Sixth A&R Credit Agreement. Refer to the "LIQUIDITY AND CAPITAL RESOURCES" section of this MD&A for more information regarding the Amendment and the financial covenants required by the Sixth A&R Credit Agreement. During fiscal 2022, due to a broader business downturn, we began implementing a series of Company-wide organizational changes and initiatives intended to create operational and management-level efficiencies. As part of the first phase of this restructuring program, we reduced the size of our supply chain network, reduced staffing levels and implemented other cost-reduction initiatives, which achieved approximately$100.0 of annual cost reductions. During fiscal 2022, we incurred costs of$65.2 associated with this restructuring initiative primarily related to employee termination benefits and impairment of property, plant and equipment. OnNovember 2, 2022 , we announced further details of a second phase of this initiative, targeting an additional$85.0 of annual cost reductions. Expected savings will be driven by: (i) reducing the operating footprint of our Hawthorne andU.S. Consumer segments by closing points of distribution, (ii) further right-sizing of overhead expenses in our Hawthorne segment enabled by integration into ScottsMiracle-Gro, (iii) enhancing profitability through improved product mix and fewer SKUs in our Hawthorne segment, (iv) executing on supply chain labor and materials efficiencies, (v) improving productivity of trade programs, and (vi) further reductions in SG&A spending. In addition, we have contingency plans which would further reduce or delay additional expenses and cash outlays, or reduce borrowings, should operations weaken beyond current forecasts or if cash inflows are not received when expected. During fiscal 2022, we discontinued and exited the market for certain Hawthorne lighting products and brands. These actions resulted in inventory write-down charges of$120.9 recorded in the "Cost of sales-impairment, restructuring and other" line in the Consolidated Statements of Operations and finite-lived intangible asset impairment charges of$35.3 recorded in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations. 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 fiscal 2022 and fiscal 2021,Scotts Miracle-Gro repurchased 1.1 million and 0.6 million Common Shares under this share repurchase authorization for$175.0 and$113.1 , respectively. There were no share repurchases under this share repurchase authorization during fiscal 2020. OnJuly 27, 2020 , the ScottsMiracle-Gro Board of Directors approved an increase inScotts 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 inScotts 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. 28
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THE 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:
Year Ended September 30,
2022 % of Net Sales 2021 % of Net Sales 2020 % of Net Sales
Net sales $ 3,924.1 100.0 %
2,891.1 73.7 3,431.3 69.7 2,768.6 67.0
Cost of sales-impairment, restructuring and
other 160.1 4.1 24.7 0.5 16.0 0.4
Gross margin 872.9 22.2 1,469.0 29.8 1,347.0 32.6
Operating expenses:
Selling, general and administrative 613.0 15.6 743.5 15.1 757.8 18.3
Impairment, restructuring and other 693.1 17.7 4.3 0.1 0.8 -
Other (income) expense, net 0.8 - (1.8) - 3.2 0.1
Income (loss) from operations (434.0) (11.1) 723.0 14.7 585.2 14.2
Equity in (income) loss of unconsolidated
affiliates 12.9 0.3 (14.4) (0.3) - -
Costs related to refinancing - - - - 15.1 0.4
Interest expense 118.1 3.0 78.9 1.6 79.6 1.9
Other non-operating income, net (6.9) (0.2) (18.6) (0.4) (20.1) (0.5)
Income (loss) from continuing operations
before income taxes (558.1) (14.2) 677.1 13.7 510.6 12.4
Income tax expense (benefit) from continuing
operations (120.6) (3.1) 159.8 3.2 123.7 3.0
Income (loss) from continuing operations (437.5) (11.1)
517.3 10.5 386.9 9.4
Income (loss) from discontinued operations,
net of tax - - (3.9) (0.1) 1.7 -
Net income (loss) $ (437.5) (11.1) % $ 513.4 10.4 % $ 388.6 9.4 %
The sum of the components may not equal due to rounding.
Net sales for fiscal 2022 were$3,924.1 , a decrease of 20.3% from net sales of$4,925.0 for fiscal 2021. Net sales for fiscal 2021 increased 19.2% from net sales of$4,131.6 for fiscal 2020. These changes in net sales were attributable to the following: Year Ended September 30, 2022 2021 Volume (27.0) % 16.9 % Foreign exchange rates (0.4) 0.8 Pricing 6.2 1.5 Acquisitions 0.9 - Change in net sales (20.3) % 19.2 %
The decrease in net sales for fiscal 2022 as compared to fiscal 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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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
The increase in net sales for fiscal 2021 as compared to fiscal 2020 was primarily driven by:
•increased sales volume driven by soils, fertilizer, grass seed, mulch,
controls, plant food and direct to consumer products in our
•increased pricing in our
•increased net sales associated with the Roundup® marketing agreement; and
•the favorable impact of foreign exchange rates as a result of the weakening of
the
Cost of Sales
The following table shows the major components of cost of sales:
Year Ended September 30,
2022 2021 2020
Materials $ 1,616.7 $ 1,962.5 $ 1,599.3
Distribution and warehousing 660.1 684.0 492.6
Manufacturing labor and overhead 546.4 714.0 615.1 Costs associated with Roundup® marketing agreement 67.9 70.8
61.6
Cost of sales 2,891.1 3,431.3 2,768.6
Cost of sales-impairment, restructuring and other 160.1 24.7 16.0
$ 3,051.2 $ 3,456.0 $ 2,784.6
Factors contributing to the change in cost of sales are outlined in the
following table:
Year Ended September 30,
2022 2021
Volume, product mix and other $ (641.4) $ 545.9
Foreign exchange rates (16.9) 24.6
Costs associated with Roundup® marketing agreement (2.9) 9.2
Material cost changes 121.0 83.0
(540.2) 662.7
Impairment, restructuring and other 135.4 8.7
Change in cost of sales $ (404.8) $ 671.4
The decrease in cost of sales for fiscal 2022 as compared to fiscal 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.
The increase in cost of sales for fiscal 2021 as compared to fiscal 2020 was primarily driven by:
•higher sales volume in our
•higher material costs in our
•higher transportation and warehousing costs included within "volume, product
mix and other" in our
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
•the unfavorable impact of foreign exchange rates as a result of the weakening
of the
•an increase in costs associated with the Roundup® marketing agreement; and
•an increase in impairment, restructuring and other charges.
Gross Margin
As a percentage of net sales, our gross margin rate was 22.2%, 29.8% and 32.6%
for fiscal 2022, fiscal 2021 and fiscal 2020, respectively. Factors contributing
to the change in gross margin rate are outlined in the following table:
Year Ended September 30,
2022 2021
Volume, product mix and other (6.6) % (1.8) % Material costs (3.4)
(1.7)
Roundup® commissions and reimbursements (0.2) -
Acquisitions (0.1) -
Pricing 6.3 0.8
(4.0) (2.7)
Impairment, restructuring and other (3.6) (0.1)
Change in gross margin rate (7.6) %
(2.8) %
The decrease in gross margin rate for fiscal 2022 as compared to fiscal 2021 was primarily driven by:
•higher material costs in our
•higher transportation and warehousing costs included within "volume, product
mix and other" associated with our
•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
The decrease in gross margin rate for fiscal 2021 as compared to fiscal 2020 was primarily driven by:
•higher transportation and warehousing costs included within "volume, product
mix and other" in our
•higher material costs in our
•unfavorable mix driven by higher sales growth in our Hawthorne segment relative
to our
•partially offset by favorable leverage of fixed costs driven by higher sales
volume in our
•increased pricing in our
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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"):
Year Ended September 30,
2022 2021 2020
Advertising $ 120.3 $ 165.7 $ 147.4 Advertising as a percentage of net sales 3.1 % 3.4 %
3.6 %
Research and development 45.3 45.4 39.7
Share-based compensation 34.3 40.6 57.9
Amortization of intangibles 31.0 29.1 31.5
Other selling, general and administrative 382.1 462.7 481.3
$ 613.0 $ 743.5 $ 757.8
SG&A decreased $130.5 , or 17.6%, during fiscal 2022 compared to fiscal 2021.
Advertising expense decreased $45.4 , or 27.4%, in fiscal 2022 driven by
decreased media spending in our U.S. Consumer and Hawthorne segments. Other SG&A
decreased $80.6 , or 17.4%, in fiscal 2022 driven by a decrease in short-term
variable cash incentive compensation expense, reductions in staffing levels and
other cost-reduction initiatives.
SG&A decreased $14.3 , or 1.9%, during fiscal 2021 compared to fiscal 2020.
Share-based compensation expense decreased $17.3 , or 29.9%, in fiscal 2021 due
to a more significant increase in the expected payout percentage on long-term
performance-based awards during fiscal 2020 as compared to fiscal 2021.
Advertising expense increased $18.3 , or 12.4%, in fiscal 2021 driven by
increased media spending in our U.S. Consumer, Hawthorne, and Other segments.
Other SG&A decreased $18.6 , or 3.9%, in fiscal 2021 driven by lower short-term
variable cash incentive compensation expense of $48.8 and lower corporate
spending, partially offset by increases in various categories supporting the
continued growth of the business including information technology, strategy and
people costs.
Impairment, Restructuring and Other
Activity described herein is classified within the "Cost of sales-impairment,
restructuring and other," "Impairment, restructuring and other" and "Income
(loss) from discontinued operations, net of tax" lines in the Consolidated
Statements of Operations. The following table details impairment, restructuring
and other charges (recoveries) for each of the periods presented:
Year Ended September 30,
2022 2021 2020
Cost of sales-impairment, restructuring and other: COVID-19 related costs
$ - $ 25.0 $ 15.5
Restructuring and other charges (recoveries), net 143.6 (0.3) (0.1)
Property, plant and equipment impairments 16.6 - 0.6
Operating expenses-impairment, restructuring and other: COVID-19 related costs
- 4.2 3.9
Restructuring and other charges (recoveries), net 40.9 0.1 (3.1)
Gains on sale of property, plant and equipment (16.2) - -
Goodwill and intangible asset impairments 668.3 - -
Impairment, restructuring and other charges from
continuing operations 853.2 29.0 16.8
Restructuring and other charges (recoveries), net, from discontinued operations
- - (3.1)
Total impairment, restructuring and other charges
During fiscal 2022, we recognized non-cash, pre-tax goodwill and intangible asset impairment charges of$632.4 as a result of interim impairment testing of our Hawthorne segment in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations, comprised of$522.4 of goodwill impairment charges and$110.0 of finite-lived intangible asset impairment charges. During fiscal 2022, we incurred inventory write-down charges of$120.9 in the "Cost of sales-impairment, restructuring and other" line in the Consolidated Statements of Operations and finite-lived intangible asset impairment charges of$35.3 in 32
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) the "Impairment, restructuring and other" line in the Consolidated Statements of Operations associated with our decision to discontinue and exit the market for certain Hawthorne lighting products and brands. During fiscal 2022, we began implementing a 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 fiscal 2022, we incurred costs of$65.2 associated with this restructuring initiative primarily related to employee termination benefits and impairment of property, plant and equipment. We incurred costs of$9.7 in ourU.S. Consumer segment and$27.1 in our Hawthorne segment in the "Cost of sales-impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2022. We incurred costs of$11.9 in ourU.S. Consumer segment,$8.1 in our Hawthorne segment,$0.7 in our Other segment and$7.7 at Corporate in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2022. We continue to evaluate additional network and organizational changes, which, if executed, may result in additional restructuring charges in future periods.
During fiscal 2022, we recognized gains of
Costs incurred during fiscal 2022 related to COVID-19 were immaterial. During fiscal 2021, we incurred costs of$29.2 associated with the COVID-19 pandemic primarily related to premium pay. We incurred costs of$21.2 in ourU.S. Consumer segment,$3.2 in our Hawthorne segment and$0.6 in our Other segment in the "Cost of sales-impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2021. We incurred costs of$4.0 in ourU.S. Consumer segment and$0.2 in our Other segment in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2021. During fiscal 2020, we incurred costs of$19.4 associated with the COVID-19 pandemic primarily related to premium pay. We incurred costs of$12.4 in ourU.S. Consumer segment,$2.6 in our Hawthorne segment and$0.5 in our Other segment in the "Cost of sales-impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2020. We incurred costs of$3.8 in ourU.S. Consumer segment and$0.1 in our Other segment in the "Impairment, restructuring and other" line in the Consolidated Statements of Operations during fiscal 2020.
Other (Income) Expense, net
Other (income) expense is comprised of activities such as royalty income from the licensing of certain of our brand names and foreign exchange transaction gains and losses. Other (income) expense was$0.8 ,$(1.8) and$3.2 in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. The change for fiscal 2022 and fiscal 2021 was primarily due to foreign exchange transaction gains and losses.
Income (Loss) from Operations
Income (loss) from operations was$(434.0) in fiscal 2022 compared to$723.0 in fiscal 2021. The decrease was driven by lower net sales, a decrease in gross margin rate, higher impairment, restructuring and other charges and lower other income, partially offset by lower SG&A. Income from operations was$723.0 in fiscal 2021, an increase of 23.5% compared to$585.2 in fiscal 2020. The increase was driven by higher net sales, lower SG&A and higher other income, partially offset by a decrease in gross margin rate and higher impairment, restructuring and other charges.
Equity in (Income) 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 Consolidated Statements of Operations. We recorded equity in (income) loss of unconsolidated affiliates associated withBonnie Plants, LLC of$12.9 ,$(14.4) and zero in fiscal 2022, fiscal 2021 and fiscal 2020, respectively. Refer to "NOTE 9. INVESTMENT IN UNCONSOLIDATED AFFILIATES" of the Notes to the Consolidated Financial Statements included in this Form 10-K for more information regardingBonnie Plants, LLC .
Costs Related to Refinancing
Costs related to refinancing were$15.1 in fiscal 2020, and we did not incur costs related to refinancing in fiscal 2022 or fiscal 2021. The costs incurred in fiscal 2020 were associated with the redemption of our 6.000% Senior Notes due 2023 (the "6.000% Senior Notes"), and are comprised of$12.0 of redemption premium and$3.1 of unamortized bond issuance costs that were written off. Refer to "NOTE 12. DEBT" of the Notes to the Consolidated Financial Statements included in this Form 10-K for more information regarding the redemption of the 6.000% Senior Notes. 33
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
Interest Expense
Interest expense was$118.1 in fiscal 2022, an increase of 49.7% compared to$78.9 in fiscal 2021. The increase was driven by higher average borrowings of$1,119.6 due to higher inventory production, capital expenditures, acquisition activity and repurchases of our Common Shares. Interest expense was$78.9 in fiscal 2021, a decrease of 0.9% compared to$79.6 in fiscal 2020. The decrease was driven by a decrease in our weighted average interest rate of 61 basis points, partially offset by an increase in average borrowings of$289.0 . The decrease in our weighted average interest rate was driven by lower borrowing rates on the Fifth A&R Credit Agreement. The increase in average borrowings was primarily driven by higher inventory production, capital expenditures and acquisition activity.
Other Non-Operating Income, Net
Other non-operating income was$6.9 ,$18.6 and$20.1 in fiscal 2022, fiscal 2021 and fiscal 2020, respectively, which included interest income of$6.7 ,$4.1 and$7.6 for fiscal 2022, fiscal 2021 and fiscal 2020, 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 Consolidated Balance Sheets, had a carrying value of$66.4 onDecember 31, 2020 . We recognized a gain of$12.5 during the first quarter of fiscal 2021 to write-up the value of the loan to its closing date fair value of$78.9 .
During the fourth quarter of fiscal 2020, we recognized an increase in the fair
value of our options to increase our economic interest in the Bonnie Plants
business of
Income Tax Expense (Benefit) from Continuing Operations
A reconciliation of the federal corporate income tax rate and the effective tax
rate on income from continuing operations before income taxes is summarized
below:
Year Ended September 30,
2022 2021 2020
Statutory income tax rate 21.0 % 21.0 % 21.0 %
Effect of foreign operations (2.5) (0.1) (0.7)
State taxes, net of federal benefit 2.6 3.9 3.5
Effect of other permanent differences 2.8 (1.1) -
Research and Experimentation and other federal tax credits 0.2 (0.2) (0.3)
Effect of tax contingencies (1.8) - 0.1
Other (0.7) 0.1 0.6
Effective income tax rate 21.6 % 23.6 % 24.2 %
During fiscal 2022, we recognized non-cash, pre-tax goodwill and intangible
asset impairment charges of $668.3 in the "Impairment, restructuring and other"
line in the Consolidated Statements of Operations. The tax impact of the
impairment charges was a benefit of $148.3 , which is net of the impact of
non-deductible goodwill of $18.8 , for fiscal 2022 and was recorded in the
"Income tax expense (benefit) from continuing operations" line in the
Consolidated Statements of Operations. The tax impact of non-deductible goodwill
was considered a discrete item because we have no remaining non-deductible
goodwill. This discrete item, which is included in the "Effect of foreign
operations" line in the table above, decreased the fiscal 2022 effective tax
rate by approximately 340 bps because we incurred a net loss during the period.
Additionally, excess tax benefits related to share-based compensation, which are
included in the "Effect of other permanent differences" line in the table above,
increased the fiscal 2022 effective tax rate by approximately 260 bps.
Income (Loss) from Continuing Operations
Income (loss) from continuing operations was$(437.5) , or$(7.88) per diluted share, in fiscal 2022 compared to$517.3 , or$9.03 per diluted share, in fiscal 2021. The decrease was driven by lower net sales, a decrease in gross margin 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 fiscal 2022 were 55.5 million, which excluded potential Common Shares of 0.6 million because the effect of their inclusion would be anti-dilutive as we
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) incurred a net loss for fiscal 2022. Diluted average common shares used in the diluted income per common share calculation were 57.2 million for fiscal 2021, which included dilutive potential Common Shares of 1.5 million. Income from continuing operations was$517.3 , or$9.03 per diluted share, in fiscal 2021 compared to$386.9 , or$6.78 per diluted share, in fiscal 2020. The increase was driven by higher net sales, lower SG&A, higher other income, higher equity in income of unconsolidated affiliates and lower costs related to refinancing, partially offset by a decrease in gross margin rate and higher impairment, restructuring and other charges. Diluted average common shares used in the diluted income per common share calculation were 57.2 million for fiscal 2021 compared to 56.9 million for fiscal 2020. The increase was primarily the result of the exercise and issuance of share-based compensation awards, partially offset by common share repurchase activity. Dilutive equivalent shares for fiscal 2021 and fiscal 2020 were 1.5 million and 1.2 million, respectively.
Income (Loss) from Discontinued Operations, net of tax
Income (loss) from discontinued operations, net of tax, was zero,$(3.9) and$1.7 for fiscal 2022, fiscal 2021 and fiscal 2020, respectively. OnAugust 31, 2017 , we completed the sale of the International Business. As a result, effective in our fourth quarter of fiscal 2017, we classified our results of operations for all periods presented to reflect the International Business as a discontinued operation. The transaction included contingent consideration with a maximum payout of$23.8 and an initial fair value of$18.2 , the payment of which depended on the achievement of certain performance criteria by the International Business following the closing of the transaction through fiscal 2020. During fiscal 2021, we agreed to accept a contingent consideration payout of$6.0 and recorded a pre-tax charge of$12.2 during fiscal 2021 to write-down the contingent consideration receivable to the agreed upon payout amount. During fiscal 2022, we received the contingent consideration payment and this amount was classified as a financing activity in the "Other financing, net" line in the Consolidated Statements of Cash Flows.
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:
Year Ended September 30,
2022 2021 2020
U.S. Consumer $ 2,928.8 $ 3,197.7 $ 2,883.5
Hawthorne 716.2 1,424.2 1,023.1
Other 279.1 303.1 225.0
Consolidated $ 3,924.1 $ 4,925.0 $ 4,131.6
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THE 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:
Year Ended September 30,
2022 2021 2020
U.S. Consumer $ 568.6 $ 726.7 $ 694.3
Hawthorne (21.1) 163.8 111.9
Other 20.2 42.1 11.7
Total Segment Profit (Non-GAAP) 567.7 932.6 817.9
Corporate (112.4) (149.7) (183.4)
Intangible asset amortization (37.1) (30.9) (32.5)
Impairment, restructuring and other (852.2) (29.0) (16.8)
Equity in income (loss) of unconsolidated
affiliates (12.9) 14.4 -
Costs related to refinancing - - (15.1)
Interest expense (118.1) (78.9) (79.6)
Other non-operating income, net 6.9 18.6 20.1
Income (loss) from continuing operations before
income taxes (GAAP) $ (558.1) $ 677.1 $ 510.6
U.S. Consumer
U.S. Consumer segment net sales were $2,928.8 in fiscal 2022, a decrease of 8.4%
from fiscal 2021 net sales of $3,197.7 . The decrease was driven by lower sales
volume of 15.6%, partially offset by increased pricing of 7.2%. The decrease in
sales volume for fiscal 2022 was driven by lawn care, soils, controls, plant
food and mulch products.
U.S. Consumer Segment Profit was $568.6 in fiscal 2022, a decrease of 21.8% from
fiscal 2021 Segment Profit of $726.7 . The decrease for fiscal 2022 was primarily
due to lower net sales and a lower gross margin rate, partially offset by lower
SG&A.
U.S. Consumer segment net sales were $3,197.7 in fiscal 2021, an increase of
10.9% from fiscal 2020 net sales of $2,883.5 . The increase was driven by the
favorable impacts of volume and pricing of 10.2% and 0.7%, respectively. The
increase in sales volume for fiscal 2021 was driven by soils, fertilizer, grass
seed, mulch, controls, plant food and direct to consumer products as well as
increased net sales associated with the Roundup® marketing agreement.
U.S. Consumer Segment Profit was $726.7 in fiscal 2021, an increase of 4.7% from
fiscal 2020 Segment Profit of $694.3 . The increase for fiscal 2021 was primarily
due to higher net sales, partially offset by a lower gross margin rate and
higher SG&A.
Hawthorne
Hawthorne segment net sales were$716.2 in fiscal 2022, a decrease of 49.7% from fiscal 2021 net sales of$1,424.2 . The decrease was driven by lower sales volume of 56.0% and unfavorable foreign exchange rates of 0.8%, partially offset by increased pricing of 3.8% and acquisitions of 3.3%. The decrease in sales volume for fiscal 2022 was driven by lighting, nutrients, growing media, hardware and growing environments products. Hawthorne Segment Loss was$21.1 in fiscal 2022, a decrease from fiscal 2021 Segment Profit of$163.8 . The decrease for fiscal 2022 was driven by lower net sales and a lower gross margin rate, partially offset by lower SG&A. Hawthorne segment net sales were$1,424.2 in fiscal 2021, an increase of 39.2% from fiscal 2020 net sales of$1,023.1 . The increase was driven by the favorable impacts of volume, pricing and foreign exchange rates of 35.1%, 3.4% and 0.7%, respectively. The increase in sales volume for fiscal 2021 was driven by lighting, nutrients, growing media, hardware and growing environments products. Hawthorne Segment Profit was$163.8 in fiscal 2021, an increase of 46.4% from fiscal 2020 Segment Profit of$111.9 . The increase for fiscal 2021 was driven by higher net sales, partially offset by a lower gross margin rate and higher SG&A.
Other
Other segment net sales were$279.1 in fiscal 2022, a decrease of 7.9% from fiscal 2021 net sales of$303.1 . The decrease was driven by lower sales volume of 13.7% and unfavorable foreign exchange rates of 1.9%, partially offset by increased pricing of 7.7%. 36
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Other Segment Profit was$20.2 in fiscal 2022, a decrease of 52.0% from fiscal 2021 Segment Profit of$42.1 . The decrease was driven by lower net sales and a lower gross margin rate, partially offset by lower SG&A. Other segment net sales were$303.1 in fiscal 2021, an increase of 34.7% from fiscal 2020 net sales of$225.0 . The increase was driven by the favorable impacts of volume, foreign exchange rates and pricing of 20.6%, 11.2% and 2.9%, respectively. Other Segment Profit was$42.1 in fiscal 2021, an increase of 259.8% from fiscal 2020 Segment Profit of$11.7 . The increase was driven by higher net sales and a higher gross margin rate, partially offset by higher SG&A.
Corporate
Corporate expenses were$112.4 in fiscal 2022, a decrease of 24.9% from fiscal 2021 expenses of$149.7 . The decrease was driven by lower short-term variable cash incentive compensation expense, reductions in staffing levels and other cost-reduction initiatives. Corporate expenses were$149.7 in fiscal 2021, a decrease of 18.4% from fiscal 2020 expenses of$183.4 . The decrease was driven by lower short-term variable cash incentive compensation expense, lower corporate spending and lower share-based compensation expense.
Liquidity and Capital Resources
The following table summarizes cash activities for the years ended
2022 2021 2020
Net cash (used in) provided by operating activities
$ 558.0 Net cash (used in) provided by investing activities (283.2) (538.6) 46.9 Net cash provided by (used in) financing activities 255.3 494.0 (607.1) Operating Activities Cash used in operating activities totaled$129.0 for fiscal 2022, a decrease of$400.5 as compared to cash provided by operating activities of$271.5 for fiscal 2021. This decrease was driven by higher inventory, lower accounts payable, 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, lower sales and higher input costs. Lower accounts payable was driven by the timing of production. Fiscal 2022 was also favorably impacted by extended payment terms with vendors across theU.S. Consumer and Hawthorne segments, as well as Monsanto, for payments originally due in the final weeks of fiscal 2022 that were paid in the first quarter of fiscal 2023. Cash provided by operating activities totaled$271.5 for fiscal 2021, a decrease of$286.5 as compared to$558.0 for fiscal 2020. This decrease was driven by higher inventory production, higher short-term variable cash incentive compensation payouts and higher tax payments during fiscal 2021, partially offset by higher net income and lower interest payments. Higher inventory production was driven by the growth in net sales and an effort to build inventory levels to meet expected future demand. Fiscal 2021 was also favorably impacted by extended payment terms with 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. The seasonal nature of ourNorth America consumer lawn and garden business generally requires cash to fund significant increases in inventories during the first half of the fiscal year. Receivables and payables also build substantially in our second quarter of the fiscal year in line with the timing of sales to support our retailers' spring selling season.
Investing Activities
Cash used in investing activities totaled$283.2 for fiscal 2022, a decrease of$255.4 as compared to$538.6 for fiscal 2021. Cash used for investments in property, plant and equipment during fiscal 2022 was$113.5 . We also completed the acquisitions ofLuxx Lighting, Inc. , True Liberty Bags and Cyco during fiscal 2022 in exchange for aggregate 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 fiscal 2022, we made payments of$25.0 in connection with a minority non-equity convertible debt investment in RIV Capital, received proceeds from the sale of long-lived assets of$63.3 and received$29.3 associated with currency forward contracts. Cash used in investing activities totaled$538.6 for fiscal 2021, a decrease of$585.5 as compared to cash provided by investing activities of$46.9 for fiscal 2020. Cash used for investments in property, plant and equipment during fiscal 2021 was 37
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)$106.9 . During fiscal 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. We also made aggregate cash payments of$127.8 in connection with our acquisitions ofHydro-Logic Purification Systems, Inc. ,Rhizoflora, Inc. and other contract and license rights, and made payments of$193.1 in connection with minority non-equity convertible debt investments in RIV Capital and other entities focused on branded cannabis and high quality genetics. In addition, we paid cash of$8.7 associated with currency forward contracts during fiscal 2021. For the three fiscal years endedSeptember 30, 2022 , we allocated our capital spending as follows: 72% for expansion and maintenance of existing productive assets; 6% for new productive assets; 16% to expand our information technology and transformation and integration capabilities; and 6% for corporate assets.
Financing Activities
Cash provided by financing activities totaled$255.3 for fiscal 2022 as compared to$494.0 for fiscal 2021. During fiscal 2022, we had net borrowings under our Fifth A&R Credit Facilities and Sixth A&R Credit Facilities of$680.1 and paid financing and issuance fees of$9.6 in connection with the execution of the Sixth A&R Credit Facilities. We also repurchased Common Shares for$257.9 and paid dividends of$166.2 during fiscal 2022. Cash provided by financing activities totaled$494.0 in fiscal 2021 as compared to cash used in financing activities of$607.1 in fiscal 2020. During fiscal 2021, we had net borrowings under our Fifth A&R Credit Facilities of$118.3 . We also issued$500.0 aggregate principal amount of 4.000% Senior Notes and$400.0 aggregate principal amount of 4.375% Senior Notes, and paid financing and issuance fees of$13.1 in connection with these Senior Notes issuances. In addition, during fiscal 2021, we repurchased Common Shares for$129.3 , paid dividends of$143.0 , received cash from the exercise of stock options of$15.2 and made payments of$17.5 associated with the acquisition of the remaining outstanding shares ofAeroGrow .
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$86.8 and$244.1 atSeptember 30, 2022 and 2021, respectively, included$4.2 and$15.9 , respectively, held by controlled foreign corporations. As ofSeptember 30, 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 the Company and certain of its subsidiaries 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 replaced the Fifth A&R Credit Agreement and will terminate onApril 8, 2027 . The Sixth A&R Credit Facilities are available for the 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. 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. 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 38
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) 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 an Amendment to the Sixth A&R Credit Agreement. The Amendment increases the maximum permitted leverage ratio for the quarterly leverage covenant during 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 . The Amendment also requires pro forma compliance with certain leverage levels specified in the Amendment with respect to our ability to consummate certain acquisitions and incur debt. AtSeptember 30, 2022 , we had letters of credit outstanding in the aggregate principal amount of$14.1 , and$1,185.5 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 2.8%, 1.9% and 3.3% for fiscal 2022, fiscal 2021 and fiscal 2020, respectively. 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 6.01 atSeptember 30, 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 4.83 for the twelve months endedSeptember 30, 2022 . As ofSeptember 30, 2022 , we were in compliance with all applicable covenants in the agreements governing our debt. Based on our projections of financial performance for the twelve-month period subsequent to the date of the filing of the financial statements on Form 10-K, we expect to remain in compliance with the financial covenants under the Sixth A&R Credit Agreement. However, our assessment of our ability to meet our future obligations is inherently subjective, judgment-based, and susceptible to change based on future events. A covenant violation may result in an event of default. Such a default would allow the lender under the Sixth A&R Credit Agreement to accelerate the maturity of the debt and would also implicate cross-default provisions under our Senior Notes, making them due and payable at that time. As ofSeptember 30, 2022 , our indebtedness under the Sixth A&R Credit Agreement and Senior Notes was$2,875.5 . We do not have sufficient cash on hand or available liquidity that can be utilized to repay these outstanding amounts in the event of default. As part of our contingency planning to address potential future circumstances that could result in noncompliance, we have contemplated alternative plans including additional restructuring activities to reduce operating expenses and certain cash management strategies that are within our control. Additionally, we have contemplated alternative plans that are subject to market conditions and not in our control, including, among others, discussions with our lender to amend the terms of our financial covenant under the debt instrument and generating cash by completing other financing transactions, which may include issuing equity. There is no assurance that we will be successful in implementing these alternative plans. 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. 39
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) OnOctober 23, 2019 ,Scotts Miracle-Gro redeemed all of our outstanding 6.000% Senior Notes for a redemption price of$412.5 , comprised of$0.5 of accrued and unpaid interest,$12.0 of redemption premium, and$400.0 for outstanding principal amount. The$12.0 redemption premium was recognized in the "Costs related to refinancing" line on the Consolidated Statements of Operations during the first quarter of fiscal 2020. Additionally, we had$3.1 in unamortized bond issuance costs associated with the 6.000% Senior Notes, which were written-off during the first quarter of fiscal 2020 and were recognized in the "Costs related to refinancing" line in the Consolidated Statements of Operations. 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 Master Repurchase Agreement (including the annexes thereto, the "Repurchase Agreement") and a Master Framework Agreement, as amended (the "Framework Agreement" and, together with the Repurchase Agreement, the "Receivables Facility"). Under the Receivables Facility, we may sell a portfolio of available and eligible outstanding customer accounts receivable to the purchasers and simultaneously agree to repurchase the receivables on a weekly basis. The eligible accounts receivable consist of accounts receivable generated by sales to three specified customers. The eligible amount of customer accounts receivables which may be sold under the Receivables Facility is$400.0 and the commitment amount during the seasonal commitment period beginning onFebruary 24, 2023 and ending onJune 16, 2023 is$160.0 . The Receivables Facility expires onAugust 18, 2023 .
We account for the sale of receivables under the Receivables Facility as
short-term debt and continue to carry the receivables on our 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 ofSeptember 30, 2022 and 2021 had a maximum totalU.S. dollar equivalent notional amount of$800.0 and$600.0 , respectively. The notional amount, effective date, expiration date and rate of each of the swap agreements outstanding atSeptember 30, 2022 are shown in the table below: Effective Expiration Fixed Notional 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. Actual results of operations will depend on numerous factors, many of
which are beyond our control as further discussed in "ITEM 1A. RISK FACTORS -
Risks Related
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
to Our M&A, Lending and Financing Activities - Our indebtedness could limit our flexibility and adversely affect our financial condition" of this Form 10-K.
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") of 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. 41
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THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
The following tables present summarized financial information on a combined
basis for Scotts Miracle-Gro and the Guarantors. Transactions between Scotts
Miracle-Gro and the Guarantors have been eliminated and the summarized financial
information does not reflect investments of the Scotts Miracle-Gro and the
Guarantors in the Non-Guarantor subsidiaries.
September 30, 2022
Current assets $ 1,749.6
Non-current assets (a) 2,165.4
Current liabilities 851.4
Non-current liabilities 3,117.8
(a)Includes amounts due from Non-Guarantor subsidiaries of
Year Ended
September 30, 2022
Net sales $ 3,559.0
Gross margin 828.7
Loss from continuing operations (a) (335.9)
Net loss (335.9)
Net loss attributable to controlling interest (335.9)
(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.
Contractual Obligations
The following table summarizes our future cash outflows for contractual
obligations as of
Payments Due by Period
More Than
Contractual Cash Obligations Total Less Than 1 Year 1-3 Years 3-5 Years 5 Years
Debt obligations $ 2,963.2 $
137.7
813.7 137.6 263.2 225.4 187.5
Finance lease obligations 34.2 7.5 10.8 4.1 11.8
Operating lease obligations 326.0 85.2 139.2 61.1 40.5
Purchase obligations 1,468.2 547.2 559.7 276.5 84.8
Other, primarily retirement plan obligations 62.3 5.8 16.8 14.2 25.5
Total contractual cash obligations $ 5,667.6 $
921.0
We had long-term debt obligations and interest payments due primarily under the 5.250% Senior Notes, 4.500% Senior Notes, 4.000% Senior Notes and 4.375% Senior Notes and our credit facilities. Amounts in the table represent scheduled future maturities of debt principal for the periods indicated.
The interest payments for our credit facilities are based on outstanding
borrowings as of
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Purchase obligations primarily represent commitments for materials used in our manufacturing processes, including urea and packaging, as well as commitments for warehouse services, grass seed, marketing services and information technology services which comprise the unconditional purchase obligations disclosed in "NOTE 19. COMMITMENTS" of the Notes to Consolidated Financial Statements included in this Form 10-K. Other obligations include actuarially determined retiree benefit payments and pension funding to comply with local funding requirements. Pension funding requirements beyond fiscal 2022 are based on preliminary estimates using actuarial assumptions determined as ofSeptember 30, 2022 . These amounts represent expected payments through 2032. Based on the accounting rules for defined benefit pension plans and retirement health care plans, the liabilities reflected in our Consolidated Balance Sheets differ from these expected future payments (see Notes to Consolidated Financial Statements included in this Form 10-K). The above table excludes liabilities for unrecognized tax benefits and insurance accruals as we are unable to estimate the timing of payments for these items. Non-GAAP Measures Use of Non-GAAP Measures To supplement the financial measures prepared in accordance withU.S. generally accepted accounting principles ("GAAP"), we use certain non-GAAP financial measures. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the following tables. These non-GAAP financial measures should not be considered in isolation from, as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than us, limiting the usefulness of those measures for comparative purposes. In addition to GAAP financial measures, we use these non-GAAP financial measures to evaluate our performance, engage in financial and operational planning, determine incentive compensation and monitor compliance with the financial covenants contained in our borrowing agreements because we believe that these non-GAAP financial measures provide additional perspective on and, in some circumstances are more closely correlated to, the performance of our underlying, ongoing business. We believe that these non-GAAP financial measures are useful to investors in their assessment of our operating performance and valuation. In addition, these non-GAAP financial measures address questions routinely received from analysts and investors and, in order to ensure that all investors have access to the same data, we have determined that it is appropriate to make this data available to all investors. Non-GAAP financial measures exclude the impact of certain items (as further described below) and provide supplemental information regarding operating performance. By disclosing these non-GAAP financial measures, we intend to provide investors with a supplemental comparison of operating results and trends for the periods presented. We believe these non-GAAP financial measures are also useful to investors as such measures allow investors to evaluate performance using the same metrics that we use to evaluate past performance and prospects for future performance. We view free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends and discretionary investment.
Exclusions from Non-GAAP Financial Measures
Non-GAAP financial measures reflect adjustments based on the following items:
•Impairments, which are excluded because they do not occur in or reflect the
ordinary course of our ongoing business operations and their exclusion results
in a metric that provides supplemental information about the sustainability of
operating performance.
•Restructuring and employee severance costs, which include charges for discrete
projects or transactions that fundamentally change our operations and are
excluded because they are not part of the ongoing operations of our underlying
business, which includes normal levels of reinvestment in the business.
•Costs related to refinancing, which are excluded because they do not typically
occur in the normal course of business and may obscure analysis of trends and
financial performance. Additionally, the amount and frequency of these types of
charges is not consistent and is significantly impacted by the timing and size
of debt financing transactions.
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) •Discontinued operations and other unusual items, which include costs or gains related to discrete projects or transactions and are excluded because they are not comparable from one period to the next and are not part of the ongoing operations of our underlying business. The tax effect for each of the items listed above is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s) in which the item is recorded.
Definitions of Non-GAAP Financial Measures
The reconciliations below include the following financial measures that are not calculated in accordance with GAAP:
•Adjusted income (loss) from operations: Income (loss) from operations excluding impairment, restructuring and other charges / recoveries.
•Adjusted income (loss) from continuing operations: Income (loss) from continuing operations excluding impairment, restructuring and other charges / recoveries, costs related to refinancing and certain other non-operating income / expense items, each net of tax. •Adjusted net income (loss) attributable to controlling interest from continuing operations: Net income (loss) attributable to controlling interest excluding impairment, restructuring and other charges / recoveries, costs related to refinancing, certain other non-operating income / expense items and discontinued operations, each net of tax. •Adjusted diluted income (loss) per common share from continuing operations: Diluted net income (loss) per common share from continuing operations excluding impairment, restructuring and other charges / recoveries, costs related to refinancing and certain other non-operating income / expense items, each net of tax. •Adjusted EBITDA: Net income (loss) before interest, taxes, depreciation and amortization as well as certain other items such as the impact of the cumulative effect of changes in accounting, costs associated with debt refinancing and other non-recurring or non-cash items affecting net income (loss). The presentation of adjusted EBITDA is intended to be consistent with the calculation of that measure as required by our borrowing arrangements, and used to calculate a leverage ratio (maximum of 6.25 atSeptember 30, 2022 ) and an interest coverage ratio (minimum of 3.00 for the twelve months endedSeptember 30, 2022 ).
•Free cash flow: Net cash provided by (used in) operating activities reduced by investments in property, plant and equipment.
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the following table:
Year Ended September 30,
2022 2021 2020
Income (loss) from operations (GAAP) $ (434.0) $ 723.0 $ 585.2
Impairment, restructuring and other charges 852.2 29.0 16.8
Adjusted income from operations (Non-GAAP)
752.1
Income (loss) from continuing operations (GAAP)
517.3$ 386.9 Impairment, restructuring and other charges 852.2 29.0 16.8 Costs related to refinancing - - 15.1 Other non-operating (income) expense, net - (12.6) 0.8 Adjustment to income tax expense (benefit) from continuing operations (184.7) (5.1) (6.7) Adjusted income from continuing operations (Non-GAAP)$ 230.0 $ 528.6 $ 412.9 Net income (loss) attributable to controlling interest (GAAP)$ (437.5) $
512.5
- 3.9 (1.7)
Impairment, restructuring and other charges 852.2 29.0 16.8
Costs related to refinancing - - 15.1
Other non-operating (income) expense, net - (12.6) 0.8
Adjustment to income tax expense (benefit) from
continuing operations (184.7) (5.1) (6.7)
Adjusted net income attributable to controlling
interest from continuing operations (Non-GAAP) $ 230.0 $ 527.7 $ 411.7
Diluted income (loss) per common share from
continuing operations (GAAP) $ (7.88) $ 9.03 $ 6.78
Impairment, restructuring and other charges 15.19 0.51 0.30
Costs related to refinancing - - 0.27
Other non-operating (income) expense, net - (0.22) 0.01
Adjustment to income tax expense (benefit) from
continuing operations (3.29) (0.09) (0.12)
Adjusted diluted income per common share from
continuing operations (Non-GAAP) $ 4.10 $
9.23
Net cash (used in) provided by operating activities (GAAP)
$ (129.0) $ 271.5 $ 558.0 Investments in property, plant and equipment (113.5) (106.9) (62.7) Free cash flow (Non-GAAP)$ (242.5) $
164.6
The sum of the components may not equal the total due to rounding.
Due to the GAAP net loss for fiscal 2022, diluted average common shares used in the GAAP diluted loss per common share calculation were 55.5 million, which excluded potential Common Shares of 0.6 million because the effect of their inclusion would be anti-dilutive. Diluted average common shares used in the fiscal 2022 non-GAAP adjusted diluted income per common share calculation, and the calculation of the fiscal 2022 earnings per share impact from the GAAP to non-GAAP reconciling items, were 56.1 million, which included dilutive potential Common Shares of 0.6 million. We view our credit facility as material to our ability to fund operations, particularly in light of our seasonality. Refer to "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" of this Form 10-K for a more complete discussion of the risks associated with our debt and our credit facility and the restrictive covenants therein. Our ability to generate cash flows sufficient to cover our debt service costs is essential to our ability to maintain our borrowing capacity. We believe that Adjusted EBITDA provides additional information for determining our ability to meet debt service requirements. The presentation of Adjusted EBITDA herein is intended to be consistent with the calculation of that measure as required by our borrowing arrangements, and used to calculate a leverage ratio (maximum of 6.25 atSeptember 30, 2022 ) and an interest coverage ratio (minimum of 3.00 for the twelve months endedSeptember 30, 2022 ). The leverage ratio is calculated as average total indebtedness divided by Adjusted EBITDA. 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. Refer to "ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF 45
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
OPERATIONS - Liquidity and Capital Resources - Borrowing Agreements" of this Form 10-K for more information regarding our credit facility.
Beginning in fiscal 2022, equity in income / loss of unconsolidated affiliates is excluded from the calculation of non-GAAP Adjusted EBITDA. This exclusion is consistent with the calculation of that measure as required by the Company's borrowing arrangements. This change has been reflected in the calculation of Adjusted EBITDA for fiscal 2022. The prior period amounts have not been reclassified to conform to the revised calculation. Our calculation of Adjusted EBITDA does not represent and should not be considered as an alternative to net income or cash flows from operating activities as determined by GAAP. We make no representation or assertion that Adjusted EBITDA is indicative of our cash flows from operating activities or results of operations. We have provided a reconciliation of Adjusted EBITDA to net income solely for the purpose of complying withSEC regulations and not as an indication that Adjusted EBITDA is a substitute measure for net income.
A reconciliation of net income to Adjusted EBITDA is as follows:
Year Ended September 30,
2022 2021 2020
Net income (loss) (GAAP) $ (437.5) $ 513.4 $ 388.6
Income tax expense (benefit) from continuing
operations (120.6) 159.8 123.7
Income tax expense (benefit) from discontinued
operations - (8.4) 0.1
Loss on contingent consideration from discontinued operations
- 12.2 -
Costs related to refinancing - - 15.1
Interest expense 118.1 78.9 79.6
Depreciation 68.1 62.9 62.2
Amortization 37.1 30.9 32.5
Impairment, restructuring and other charges from
continuing operations 852.2 29.0 16.8
Impairment, restructuring and other charges
(recoveries) from discontinued operations - - (3.1)
Equity in loss of unconsolidated affiliates 12.9 - -
Other non-operating (income) expense, net - (12.6) 0.8
Interest income (6.7) (4.1) (7.6)
Share-based compensation expense 34.3 40.6 57.9
Adjusted EBITDA (Non-GAAP) $ 557.9 $ 902.6 $ 766.6
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, 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 "ITEM 1. BUSINESS -
Regulatory Considerations" and "ITEM 3. LEGAL PROCEEDINGS" of this Form 10-K.
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.
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
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 of
Revenue Recognition and Promotional Allowances
Our revenue is primarily generated from sales of branded and private label lawn and garden care and indoor and hydroponic gardening finished products. Product sales are recognized at a point in time when control of products transfers to customers and we have no further obligation to provide services related to such products. Sales are typically recognized when products are delivered to or picked up by the customer. We are generally the principal in a transaction and, therefore, primarily record revenue on a gross basis. Revenue for product sales is recorded net of sales returns and allowances. Revenues are measured based on the amount of consideration that we expect to receive as derived from a list price, reduced by estimates for variable consideration. Variable consideration includes the cost of current and continuing promotional programs and expected sales returns. Our promotional programs primarily include rebates based on sales volumes, in-store promotional allowances, cooperative advertising programs, direct consumer rebate programs and special purchasing incentives. The cost of promotional programs is estimated considering all reasonably available information, including current expectations and historical experience. Promotional costs (including allowances and rebates) incurred during the year are expensed to interim periods in relation to revenues and are recorded as a reduction of net sales. Provisions for estimated returns and allowances are recorded at the time revenue is recognized based on historical rates and are periodically adjusted for known changes in return levels. Shipping and handling costs are accounted for as contract fulfillment costs and included in the "Cost of sales" line in the Consolidated Statements of Operations. We exclude from revenue any amounts collected from customers for sales or other taxes.
Income Taxes
Our annual effective tax rate is established based on our pre-tax income (loss), statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. Valuation allowances are used to reduce deferred tax assets to the balances that are more likely than not to be realized. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowances. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and Consolidated Statements of Operations reflect the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments involved in determining the proper valuation allowances, differences between actual future events and prior estimates and judgments could result in adjustments to these valuation allowances. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end.
We have significant investments in intangible assets and goodwill. We perform
our annual goodwill and indefinite-lived intangible asset testing as of the
first day of our fiscal fourth quarter or more frequently if circumstances
indicate potential impairment. In our evaluation of impairment for goodwill and
indefinite-lived intangible assets, we perform either an initial qualitative or
quantitative evaluation for each of our reporting units and indefinite-lived
intangible assets. Factors considered in the qualitative test include operating
results as well as new events and circumstances impacting the operations or cash
flows of the reporting unit or indefinite-lived intangible assets. For the
quantitative test, the review for impairment of goodwill and indefinite-lived
intangible assets is based on a combination of income-based approaches,
including the relief-from-royalty method for indefinite-lived trade names, and
market-based approaches. If it is determined that an impairment has occurred, an
impairment loss is recognized for the amount by which the carrying value of the
reporting unit or intangible asset exceeds its estimated fair value.
Under the income-based approach, we determine fair value using a discounted cash
flow approach that requires significant judgment with respect to revenue and
profitability growth rates, based upon annual budgets and longer-range strategic
plans, and the selection of an appropriate discount rate. These budgets and
plans are used for internal purposes and are also the basis for communication
with outside parties about future business trends. Under the market-based
approach, we determine fair value by comparing our reporting units to similar
businesses or guideline companies whose securities are actively traded in public
markets. We also use the guideline transaction method to determine fair value
based on pricing multiples derived from the sale of companies that are similar
to our reporting units.
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THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Fair value estimates employed in our annual impairment review of indefinite-lived intangible assets and goodwill were determined using models involving several assumptions. Changes in our assumptions could materially impact our fair value estimates. Assumptions critical to our fair value estimates were: (i) discount rates used in determining the fair value of the reporting units and intangible assets; (ii) royalty rates used in our intangible asset valuations; (iii) projected future revenues and profitability used in the reporting unit and intangible asset models; and (iv) projected long-term growth rates used in the derivation of terminal year values. These and other assumptions are impacted by economic conditions and expectations of management and may change in the future based on period specific facts and circumstances. While we believe the assumptions we used to estimate future cash flows are reasonable, there can be no assurance that the expected future cash flows will be realized. As a result, impairment charges that possibly would have been recognized in earlier periods may not be recognized until later periods if actual results deviate unfavorably from earlier estimates. The use of different assumptions would increase or decrease discounted cash flows or earnings projections and, therefore, could change impairment determinations. During fiscal 2022, our Hawthorne reporting unit experienced adverse financial results due to decreased sales volume and higher transportation and warehousing costs. Sales volume decreased due to an oversupply of cannabis, which significantly decreased cannabis wholesale prices and indoor and outdoor cannabis cultivation. As a result, we revised 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 during the third quarter of fiscal 2022. 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 recognized during the third quarter of fiscal 2022 in the "Impairment, restructuring and other" line in the 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, therefore, 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 5. GOODWILL AND INTANGIBLE ASSETS, NET" for more information. AtSeptember 30, 2022 , goodwill totaled$254.0 , with$243.9 , zero and$10.1 for ourU.S. Consumer, Hawthorne and Other segments, respectively. We performed annual impairment testing as of the first day of our fiscal fourth quarter and, with the exception of the Hawthorne reporting unit in fiscal 2022, concluded that there were no impairments of goodwill as the estimated fair value of each reporting unit exceeded its carrying value. Based on the results of the annual quantitative evaluation for fiscal 2022, the fair values of ourU.S. Consumer and Other segment reporting units exceeded their respective carrying values by 181% and 71%, respectively. A 100 basis point change in the discount rate would not have resulted in an impairment for any of our reporting units. AtSeptember 30, 2022 , indefinite-lived intangible assets consisted of trade names of$168.2 and the Roundup® marketing agreement amendment of$155.7 . Based on the results of the annual evaluation for fiscal 2022, the fair values of our indefinite-lived intangible assets exceeded their respective carrying values in a range of 11% to over 1,100%. A 100 basis point change in the discount rate would not have resulted in an impairment of any of our indefinite-lived intangible assets.
Other Significant Accounting Policies
Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed above, are also critical to understanding the consolidated financial statements. The Notes to Consolidated Financial Statements included in this Form 10-K contain additional information related to our accounting policies, including recent accounting pronouncements, and should be read in conjunction with this discussion.
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