THE SCOTTS MIRACLE-GRO COMPANY The purpose of this discussion is to provide an understanding of the financial condition and results of operations ofThe Scotts Miracle-Gro Company ("Scotts Miracle-Gro") and its subsidiaries (collectively, together withScotts Miracle-Gro , the "Company," "we" or "us") by focusing on changes in certain key measures from year-to-year. This Management's Discussion and Analysis ("MD&A") is divided into the following sections: •Executive summary •Results of operations •Segment results •Liquidity and capital resources •Regulatory matters •Critical accounting policies and estimates This MD&A should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" included inScotts Miracle-Gro's Annual Report on Form 10-K for the fiscal year endedSeptember 30, 2019 (the "2019 Annual Report"). EXECUTIVE SUMMARY We are a leading manufacturer and marketer of branded consumer lawn and garden products inNorth America . 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. Through ourHawthorne segment, we are a leading manufacturer, marketer and distributor of nutrients, growing media, advanced indoor garden, lighting and ventilation systems and accessories for indoor, urban and hydroponic gardening. Beginning in fiscal 2015, ourHawthorne segment made a series of key acquisitions, including General Hydroponics, Gavita, Botanicare, Vermicrop, Agrolux, Can-Filters andAeroGrow . OnJune 4, 2018 , ourHawthorne segment acquired substantially all of the assets of Sunlight Supply. Prior to the acquisition, Sunlight Supply was the largest distributor of hydroponic products inthe United States , and engaged in the business of developing, manufacturing, marketing and distributing horticultural, organics, lighting and hydroponics products, including lighting fixtures, nutrients, seeds and growing media, systems, trays, fans, filters, humidifiers and dehumidifiers, timers, instruments, water pumps, irrigation supplies and hand tools. In connection with our acquisition of Sunlight Supply, we announced the launch of an initiative called Project Catalyst. Project Catalyst is a company-wide restructuring effort to reduce operating costs throughout ourU.S. Consumer,Hawthorne and Other segments and drive synergies from acquisitions within ourHawthorne segment. 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 located in the geographicUnited States .Hawthorne consists of our indoor, urban and hydroponic gardening business. Other consists of our consumer lawn and garden business in geographies other than theU.S. and our product sales to commercial nurseries, greenhouses and other professional customers. In addition, Corporate consists of general and administrative expenses and certain other income and expense items not allocated to the business segments. This division of reportable segments is consistent with how the segments report to and are managed by our chief operating decision maker. See "SEGMENT RESULTS" below for additional information regarding our evaluation of segment performance. 26
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Due to the seasonal nature of the lawn and garden business, significant portions of our products ship to our retail customers during our second and third fiscal quarters, as noted in the chart below. Our annual net sales are further concentrated in the second and third fiscal quarters by retailerswho rely on our ability to deliver products closer to when consumers buy our products, thereby reducing retailers' pre-season inventories. 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 onSeptember 30 . This fiscal calendar convention requires us to cycle forward the first three fiscal quarter ends every six years. Percent of Net Sales from Continuing Operations by Quarter 2019 2018 2017 First Quarter 9.4 % 8.3 % 7.8 % Second Quarter 37.7 % 38.1 % 41.1 % Third Quarter 37.1 % 37.3 % 36.8 % Fourth Quarter 15.8 % 16.3 % 14.3 % OnAugust 11, 2014 ,Scotts Miracle-Gro announced that its Board of Directors authorized the repurchase of up to$500.0 million of Common Shares over a five-year period (effectiveNovember 1, 2014 throughSeptember 30, 2019 ). OnAugust 3, 2016 ,Scotts Miracle-Gro announced that its Board of Directors authorized a$500.0 million increase to the share repurchase authorization ending onSeptember 30, 2019 . OnAugust 2, 2019 , the Scotts Miracle-Gro Board of Directors authorized an extension of the share repurchase authorization throughMarch 28, 2020 . The amended authorization allowed for repurchases of Common Shares of up to an aggregate amount of$1.0 billion throughMarch 28, 2020 . During fiscal 2020 throughMarch 28, 2020 ,Scotts Miracle-Gro repurchased 0.4 million Common Shares under the share repurchase authorization for$48.2 million . There were no share repurchases under the share repurchase authorization during the three and nine months endedJune 29, 2019 . From the effective date of the share repurchase authorization in the fourth quarter of fiscal 2014 throughMarch 28, 2020 ,Scotts Miracle-Gro repurchased approximately 8.7 million Common Shares for$762.8 million . OnJanuary 31, 2020 , the Scotts Miracle-Gro Board of Directors authorized a new share repurchase program allowing for repurchases of up to$750.0 million of Common Shares fromApril 30, 2020 throughMarch 25, 2023 . OnMarch 26, 2020 , we announced a temporary suspension of share repurchase activity, effective as ofMarch 30, 2020 , in order to enhance the Company's financial flexibility in response to the COVID-19 pandemic. Accordingly, there were no share repurchases under this share repurchase authorization during the three months endedJune 27, 2020 . OnJuly 30, 2019 , the Scotts Miracle-Gro Board of Directors approved an increase in our quarterly cash dividend from$0.55 to$0.58 per Common Share, which was first paid in the fourth quarter of fiscal 2019. OnJuly 27, 2020 , the Scotts Miracle-Gro Board of Directors approved a special cash dividend of$5.00 per Common Share, which will be paid onSeptember 10, 2020 to all shareholders of record at the close of business onAugust 27, 2020 . In addition, onJuly 27, 2020 , the Scotts Miracle-Gro Board of Directors also approved an increase in our quarterly cash dividend from$0.58 to$0.62 per Common Share. COVID-19 Response and Impacts TheWorld Health Organization recognized a novel strain of coronavirus ("COVID-19") as a public health emergency of international concern onJanuary 30, 2020 and as a global pandemic onMarch 11, 2020 . Public health responses have included national pandemic preparedness and response plans, travel restrictions, quarantines, curfews, event postponements and cancellations and closures of facilities including local schools and businesses. Although many jurisdictions have begun down the path of re-opening their economies, the global pandemic and actions taken to contain COVID-19 have adversely affected the global economy and financial markets. In response to the COVID-19 pandemic, we have implemented additional measures intended to both protect the health and safety of our employees and maintain our ability to provide products to our customers, including (i) requiring a significant part of our workforce to work from home, (ii) monitoring our employees for COVID-19 symptoms, (iii) making additional personal protective equipment available to our operations team, (iv) requiring all manufacturing and warehousing associates to take their temperatures before beginning a shift, (v) modifying work methods and schedules of our manufacturing and field associates to create distance or add barriers between associates, consumers and others, (vi) expanding cleaning efforts at our operation centers, (vii) modifying attendance policies so that associates may elect to stay home if they have symptoms, (viii) prioritizing production for goods that are more essential to our customers and (ix) implementing an interim premium pay allowance for associates in our field sales force as well as those still working in manufacturing or distribution centers. In addition, to help address the critical shortage of personal protective equipment in the fight against COVID-19, we shifted production in ourTemecula, California manufacturing plant to produce face shields to help protect healthcare workers and first responders in critical need areas across the country. As a result of these additional measures and initiatives, we expect to incur 27
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incremental costs, mostly related to premium pay provided to our associates, through the end of the fiscal year. While we believe that these efforts should enable us to maintain our operations during the COVID-19 pandemic, we can provide no assurance that we will be able to do so as a result of the unpredictability of the ultimate impact of the COVID-19 pandemic, including its length, severity and the responses of local, state, federal and foreign governmental authorities to the pandemic. In those jurisdictions that remain closed or limited, our manufacturing and distribution operations are viewed as essential services and continue to operate. Likewise, our major retail partners have been designated as essential services and remain open at this time. In certain places, however, they have operated under reduced hours and customer capacity limitations. There have been no significant disruptions in incoming supplies or raw materials. We believe we have sufficient liquidity to satisfy our cash needs, however, we continue to evaluate and take action, as necessary, to preserve adequate liquidity and ensure that our business can continue to operate during these uncertain times. AtJune 27, 2020 , we had$1,372.0 million of borrowing availability under our fifth amended and restated credit agreement (the "Fifth A&R Credit Agreement"). For our fiscal quarter endedJune 27, 2020 , we experienced increased demand for many of our products, especially our soils, fertilizer, grass seed, controls and plant food products, in response to COVID-19, and expect strong demand for such products will continue throughout the remainder of this fiscal year. This increased demand has driven an increase in sales and profits throughJune 27, 2020 that were not previously projected for the fiscal year. In light of these events and in recognition of the dedication and efforts of our associates during this challenging time, we will provide one-time payments and retirement contributions to our hourly and certain salaried associateswho do not participate in our variable cash incentive compensation plans along with providing increased variable payments to our salaried associateswho participate in such plans. In addition, we will be increasing our contributions supporting community initiatives and charities. The extent to which the COVID-19 pandemic will ultimately impact our business, results of operations, financial condition and cash flows depends on future developments that are highly uncertain, rapidly evolving and difficult to predict at this time. Depending on the length and severity of the COVID-19 pandemic, we may experience an increase or decrease in future customer orders driven by volatility in retail foot traffic, consumer shopping and consumption behavior. We are not able to predict the impact that the COVID-19 pandemic may have on the seasonality of our business. RESULTS OF OPERATIONS The following table sets forth the components of earnings as a percentage of net sales for the three months endedJune 27, 2020 andJune 29, 2019 (dollars in millions): JUNE 27, % OF JUNE 29, % OF 2020 NET SALES 2019 NET SALES Net sales$ 1,492.7 100.0 %$ 1,170.3 100.0 % Cost of sales 954.3 63.9 747.0 63.8 Cost of sales-impairment, restructuring and other 11.7 0.8 (0.1) - Gross profit 526.7 35.3 423.4 36.2 Operating expenses: Selling, general and administrative 237.7 15.9 166.4 14.2 Impairment, restructuring and other 4.2 0.3 0.6 0.1 Other (income) expense, net 0.3 - (1.8) (0.2) Income from operations 284.5 19.1 258.2 22.1 Interest expense 20.3 1.4 25.9 2.2 Other non-operating income, net (1.9) (0.1) (5.1) (0.4) Income from continuing operations before income taxes 266.1 17.8 237.4 20.3 Income tax expense from continuing operations 61.8 4.1 59.4 5.1 Income from continuing operations 204.3 13.7 178.0 15.2 Income (loss) from discontinued operations, net of tax (1.0) (0.1) 23.6 2.0 Net income$ 203.3 13.6 %$ 201.6 17.2 %
The sum of the components may not equal due to rounding.
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The following table sets forth the components of earnings as a percentage of net sales for the nine months endedJune 27, 2020 andJune 29, 2019 (dollars in millions): JUNE 27, % OF JUNE 29, % OF 2020 NET SALES 2019 NET SALES Net sales$ 3,241.3 100.0 %$ 2,658.3 100.0 % Cost of sales 2,094.9 64.6 1,724.8 64.9 Cost of sales-impairment, restructuring and other 15.3 0.5 3.4 0.1 Gross profit 1,131.1 34.9 930.1 35.0 Operating expenses: Selling, general and administrative 553.1 17.1 462.4 17.4 Impairment, restructuring and other 2.0 0.1 4.3 0.2 Other (income) expense, net 0.4 - (0.1) - Income from operations 575.6 17.8 463.5 17.4 Equity in income of unconsolidated affiliates - - (3.3) (0.1) Costs related to refinancing 15.1 0.5 - - Interest expense 63.0 1.9 80.0 3.0 Other non-operating income, net (7.3) (0.2) (268.2) (10.1) Income from continuing operations before income taxes 504.8 15.6 655.0 24.6 Income tax expense from continuing operations 122.0 3.8 162.7 6.1 Income from continuing operations 382.8 11.8 492.3 18.5 Income from discontinued operations, net of tax 1.6 - 26.1 1.0 Net income$ 384.4 11.9 %$ 518.4 19.5 %
The sum of the components may not equal due to rounding.
Net Sales Net sales for the three months endedJune 27, 2020 were$1,492.7 million , an increase of 27.5% from the three months endedJune 29, 2019 . Net sales for the nine months endedJune 27, 2020 were$3,241.3 million , an increase of 21.9% from the nine months endedJune 29, 2019 . These changes in net sales were attributable to the following: THREE MONTHS ENDED NINE MONTHS ENDED JUNE 27, 2020 JUNE 27, 2020 Volume 26.1 % 20.5 % Pricing 1.9 1.7 Foreign exchange rates (0.5) (0.3) Change in net sales 27.5 % 21.9 % The increase in net sales for the three months endedJune 27, 2020 as compared to the three months endedJune 29, 2019 was primarily driven by: •increased sales volume due to increased consumer demand including the impacts of the COVID-19 pandemic and driven by soils, fertilizer, grass seed, controls and plant food products in ourU.S. Consumer segment, hydroponic gardening products in ourHawthorne segment and increased sales in our Other segment, partially offset by decreased sales of mulch products in ourU.S. Consumer segment and a decrease due to the loss in sales from the Roundup® brand extension products that were sold to Monsanto during fiscal 2019; and •increased pricing in ourU.S. Consumer,Hawthorne and Other segments; •partially offset by a decrease in expense reimbursements associated with the Roundup® marketing agreement; and •the unfavorable impact of foreign exchange rates as a result of the strengthening of theU.S. dollar relative to the euro and the Canadian dollar. The increase in net sales for the nine months endedJune 27, 2020 as compared to the nine months endedJune 29, 2019 was primarily driven by: •increased sales volume due to increased consumer demand including impacts of the COVID-19 pandemic and driven by soils, fertilizer, grass seed, controls and plant food products in ourU.S. Consumer segment, hydroponic 29
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gardening products in ourHawthorne segment and increased sales in our Other segment, partially offset by decreased sales of mulch products in ourU.S. Consumer segment and a decrease of$29.3 million due to the loss in sales from the Roundup® brand extension products that were sold to Monsanto during fiscal 2019; •increased pricing in ourU.S. Consumer,Hawthorne and Other segments; and •increased net sales associated with the Roundup® marketing agreement; •partially offset by the unfavorable impact of foreign exchange rates as a result of the strengthening of theU.S. dollar relative to the euro and the Canadian dollar. Cost of Sales The following table shows the major components of cost of sales for the periods indicated: THREE MONTHS ENDED NINE MONTHS ENDED JUNE 27, JUNE 29, JUNE 27, JUNE 29, 2020 2019 2020 2019 (In millions) Materials$ 552.8 $ 414.8 $ 1,206.4 $ 966.6 Manufacturing labor and overhead 213.7 178.5 464.0 392.5 Distribution and warehousing 171.4 139.4 377.8 324.4 Costs associated with Roundup® marketing agreement 16.4 14.3 46.7 41.3 954.3 747.0 2,094.9 1,724.8 Impairment, restructuring and other 11.7 (0.1) 15.3 3.4$ 966.0 $ 746.9 $ 2,110.2 $ 1,728.2 Factors contributing to the change in cost of sales are outlined in the following table: THREE MONTHS ENDED NINE MONTHS ENDED JUNE 27, 2020 JUNE 27, 2020 (In millions) Volume, product mix and other $ 214.8 $ 377.4 Costs associated with Roundup® marketing agreement 2.1 5.4 Foreign exchange rates (4.9) (6.6) Material costs (4.7) (6.1) 207.3 370.1 Impairment, restructuring and other 11.8 11.9 Change in cost of sales $ 219.1 $ 382.0 The increase in cost of sales for the three months endedJune 27, 2020 as compared to the three months endedJune 29, 2019 was primarily driven by: •higher sales volume in ourU.S. Consumer,Hawthorne and Other segments; •an increase in costs associated with the Roundup® marketing agreement; and •an increase in impairment, restructuring and other charges of$11.8 million as a result of costs associated with the COVID-19 pandemic; •partially offset by the favorable impact of foreign exchange rates as a result of the strengthening of theU.S. dollar relative to the euro and the Canadian dollar; and •lower material costs in ourU.S. Consumer,Hawthorne and Other segments. The increase in cost of sales for the nine months endedJune 27, 2020 as compared to the nine months endedJune 29, 2019 was primarily driven by: •higher sales volume in ourU.S. Consumer,Hawthorne and Other segments; •higher warehousing costs and inventory adjustments to net realizable value included within "volume, product mix and other" associated with ourU.S. Consumer segment; 30
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•an increase in costs associated with the Roundup® marketing agreement; and •an increase in impairment, restructuring and other charges of$11.9 million as a result of costs associated with the COVID-19 pandemic; •partially offset by the favorable impact of foreign exchange rates as a result of the strengthening of theU.S. dollar relative to the euro and the Canadian dollar; •lower material costs in ourU.S. Consumer,Hawthorne and Other segments; and •lower transportation costs included within "volume, product mix and other" in ourU.S. Consumer segment. Gross Profit As a percentage of net sales, our gross profit rate was 35.3% and 36.2% for the three months endedJune 27, 2020 andJune 29, 2019 , respectively. As a percentage of net sales, our gross profit rate was 34.9% and 35.0% for the nine months endedJune 27, 2020 andJune 29, 2019 , respectively. Factors contributing to the change in gross profit rate are outlined in the following table: THREE MONTHS ENDED NINE MONTHS ENDED JUNE 27, 2020 JUNE 27, 2020 Pricing 0.9 % 0.8 % Material costs 0.3 0.2 Roundup® commissions and reimbursements (1.0)
-
Volume, product mix and other (0.3)
(0.7)
(0.1) % 0.3 %
Impairment, restructuring and other (0.8) (0.4)
Change in gross profit rate (0.9) %
(0.1) %
The decrease in gross profit rate for the three months endedJune 27, 2020 as compared to the three months endedJune 29, 2019 was primarily driven by: •an increase in impairment, restructuring and other charges of$11.8 million as a result of costs associated with the COVID-19 pandemic; •a decrease in expense reimbursements associated with the Roundup® marketing agreement; and •unfavorable mix driven by higher sales growth in ourHawthorne segment relative to ourU.S. Consumer segment and increased sales of lower tier and commodity soils products within ourU.S. Consumer segment; •partially offset by increased pricing in ourU.S. Consumer,Hawthorne and Other segments; •lower material costs in ourU.S. Consumer,Hawthorne and Other segments; and •favorable leverage of fixed costs driven by higher sales volume in ourU.S. Consumer,Hawthorne and Other segments. The decrease in gross profit rate for the nine months endedJune 27, 2020 as compared to the nine months endedJune 29, 2019 was primarily driven by: •an increase in impairment, restructuring and other charges of$11.9 million as a result of costs associated with the COVID-19 pandemic; •unfavorable mix driven by higher sales growth in ourHawthorne segment relative to ourU.S. Consumer segment and increased sales of lower tier and commodity soils products within ourU.S. Consumer segment; and •higher warehousing costs and inventory adjustments to net realizable value included within "volume, product mix and other" associated with ourU.S. Consumer segment; •partially offset by increased pricing in ourU.S. Consumer,Hawthorne and Other segments; •lower material costs in ourU.S. Consumer,Hawthorne and Other segments; •lower transportation costs included within "volume, product mix and other" in ourU.S. Consumer segment; and •favorable leverage of fixed costs driven by higher sales volume in ourU.S. Consumer,Hawthorne and Other segments. 31
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Selling, General and Administrative Expenses The following table sets forth the components of selling, general and administrative expenses ("SG&A") for the periods indicated:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2020 2019 2020 2019
(In millions)
Advertising $ 55.6 $ 41.8 $ 122.4 $ 106.3
Share-based compensation 22.8 11.4 41.8 28.4
Research and development 9.1 10.2 28.0 28.8
Amortization of intangibles 7.7 8.2 23.1 24.7
Other selling, general and administrative 142.5 94.8 337.8 274.2
$ 237.7 $ 166.4 $ 553.1 $ 462.4
SG&A increased $71.3 million , or 42.8%, during the three months ended June 27,
2020 compared to the three months ended June 29, 2019 . Advertising expense
increased $13.8 million , or 33.0%, during the three months ended June 27, 2020
driven by increased media spending in our U.S. Consumer segment. Share-based
compensation expense increased $11.4 million , or 100.0%, during the three months
ended June 27, 2020 due to an increase in the expected payout percentage on
long-term performance-based awards. Other SG&A increased $47.7 million , or
50.3%, during the three months ended June 27, 2020 driven by higher short-term
variable cash incentive compensation expense and higher selling expense.
SG&A increased $90.7 million , or 19.6%, during the nine months ended June 27,
2020 compared to the nine months ended June 29, 2019 . Advertising expense
increased $16.1 million , or 15.1%, during the nine months ended June 27, 2020
driven by increased media spending in our U.S. Consumer segment. Share-based
compensation expense increased $13.4 million , or 47.2%, during the nine months
ended June 27, 2020 due to an increase in the expected payout percentage on
long-term performance-based awards. Other SG&A increased $63.6 million , or
23.2%, during the nine months ended June 27, 2020 driven by higher short-term
variable cash incentive compensation expense and higher selling expense.
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 Condensed
Consolidated Statements of Operations. The following table details impairment,
restructuring and other charges (recoveries) for each of the periods presented:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2020 2019 2020 2019
(In millions) Cost of sales-impairment, restructuring and other: COVID-19 related costs
$ 12.2 $ -$ 15.3 $ - Restructuring and other charges (recoveries) (0.5) (0.1) - 2.9 Property, plant and equipment impairments - - - 0.5 Operating expenses: COVID-19 related costs 4.3 - 5.0 - Restructuring and other charges, net (0.1) 0.6 (3.0) 4.3 Impairment, restructuring and other charges from continuing operations 15.9 0.5 17.3 7.7
Restructuring and other charges (recoveries), net, from discontinued operations
- (30.9) (3.1) (35.8)
Total impairment, restructuring and other charges
(recoveries) $ 15.9 $ (30.4) $ 14.2 $ (28.1)
COVID-19
In response to the COVID-19 pandemic, we have implemented additional measures
intended to both protect the health and safety of our employees and maintain our
ability to provide products to our customers as described in additional detail
above under "COVID-19 Response and Impacts." During the three and nine months
ended June 27, 2020 , we incurred costs of
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$16.5 million and$20.3 million , respectively, associated with the COVID-19 pandemic primarily related to premium pay. We incurred costs of$9.6 million and$12.2 million in ourU.S. Consumer segment,$2.0 million and$2.5 million in ourHawthorne segment and$0.6 million in our Other segment in the "Cost of sales-impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations during the three and nine months endedJune 27, 2020 , respectively. We incurred costs of$4.2 million and$4.9 million in ourU.S. Consumer segment and$0.1 million in our Other segment in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations during the three and nine months endedJune 27, 2020 , respectively. Project Catalyst In connection with the acquisition of Sunlight Supply during the third quarter of fiscal 2018, we announced the launch of an initiative called Project Catalyst, which is a company-wide restructuring effort to reduce operating costs throughout ourU.S. Consumer,Hawthorne and Other segments and drive synergies from acquisitions within ourHawthorne segment. Costs incurred during the three and nine months endedJune 27, 2020 related to Project Catalyst were not material. Costs incurred to date since the inception of Project Catalyst are$25.3 million for ourHawthorne segment,$13.5 million for ourU.S. Consumer segment,$1.3 million for our Other segment and$2.8 million for Corporate. Additionally, during the three and nine months endedJune 27, 2020 , we received zero and$2.6 million , respectively, from the final settlement of escrow funds related to a previous acquisition within theHawthorne segment that was recognized in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations. During the three and nine months endedJune 29, 2019 , we incurred charges of$0.4 million and$8.0 million , respectively, related to Project Catalyst. We incurred charges of zero and$0.4 million in ourU.S. Consumer segment,$(0.1) million and$2.4 million in ourHawthorne segment and zero and$0.6 million in our Other segment in the "Cost of sales-impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations during the three and nine months endedJune 29, 2019 , respectively, related to employee termination benefits, facility closure costs and impairment of property, plant and equipment. We incurred charges of zero and$0.5 million in ourU.S. Consumer segment,$0.5 million and$2.6 million in ourHawthorne segment, zero and$0.6 million in our Other segment and zero and$0.9 million at Corporate in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations during the three and nine months endedJune 29, 2019 , respectively, related to employee termination benefits and facility closure costs. Other We recognized insurance recoveries related to the previously disclosed legal matter In re Morning Song Bird Food Litigation of zero and$1.5 million during the three and nine months endedJune 27, 2020 , respectively, and recognized insurance recoveries of$8.4 million and$13.4 million during the three and nine months endedJune 29, 2019 , respectively, in the "Income (loss) from discontinued operations, net of tax" line in the Condensed Consolidated Statements of Operations. In addition, during the three and nine months endedJune 29, 2019 , we recognized a favorable adjustment of$22.5 million in the "Income (loss) from discontinued operations, net of tax" line in the Condensed Consolidated Statements of Operations as a result of the final resolution of the previously disclosed settlement agreement. Refer to "NOTE 2. DISCONTINUED OPERATIONS" of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for more information. During the three and nine months endedJune 29, 2019 , we recognized favorable adjustments of zero and$0.4 million , respectively, related to the previously disclosed legal matter In re Scotts EZ Seed Litigation in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations. Other (Income) Expense, net Other (income) expense is comprised of activities outside our normal business operations, such as royalty income from the licensing of certain of our brand names, foreign exchange transaction gains and losses and gains and losses from the disposition of non-inventory assets. Other (income) expense was$0.3 million and$(1.8) million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively. The change for the three months endedJune 27, 2020 was primarily due to foreign exchange transaction losses. Other (income) expense was$0.4 million and$(0.1) million for the nine months endedJune 27, 2020 andJune 29, 2019 , respectively. Income from Operations Income from operations was$284.5 million for the three months endedJune 27, 2020 , an increase of 10.2% compared to$258.2 million for the three months endedJune 29, 2019 . Income from operations was$575.6 million for the nine months endedJune 27, 2020 , an increase of 24.2% compared to$463.5 million for the nine months endedJune 29, 2019 . For the three and nine months endedJune 27, 2020 , the increase was driven by higher net sales, partially offset by higher SG&A, higher impairment, restructuring and other charges and decreased other income. 33
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Equity in Income of Unconsolidated Affiliates Equity in income of unconsolidated affiliates was zero for the three months endedJune 27, 2020 andJune 29, 2019 and was zero and$3.3 million for the nine months endedJune 27, 2020 andJune 29, 2019 , respectively. The decrease for the nine months endedJune 27, 2020 was attributable to the sale of our equity interest in an unconsolidated affiliate whose products support the professionalU.S. industrial, turf and ornamental market (the "IT&O Joint Venture") onApril 1, 2019 . Costs Related to Refinancing Costs related to refinancing were zero and$15.1 million for the three and nine months endedJune 27, 2020 . The costs incurred for the nine months endedJune 27, 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 million of redemption premium and$3.1 million of unamortized bond issuance costs that were written off. Refer to "NOTE 7. DEBT" of the Notes to the Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for more information regarding the redemption of the 6.000% Senior Notes. Interest Expense Interest expense was$20.3 million for the three months endedJune 27, 2020 , a decrease of 21.6% compared to$25.9 million for the three months endedJune 29, 2019 . The decrease was driven by a decrease in average borrowings of$175.8 million and a decrease in our weighted average interest rate of 70 basis points. The decrease in average borrowings was primarily driven by the application of the proceeds from the sale of our approximately 30% equity interest inOutdoor Home Services Holdings LLC , a lawn service joint venture between the Company andTruGreen Holding Corporation (the "TruGreen Joint Venture"), the payoff of second lien term loan financing by the TruGreen Joint Venture, the sale of our equity interest in the IT&O Joint Venture and the sale of the Roundup® brand extension assets to reduce our indebtedness. The decrease in our weighted average interest rate was driven by lower borrowing rates on the Fifth A&R Credit Agreement, the issuance of the 4.500% Senior Notes due 2029 (the "4.500% Senior Notes") and the redemption of the 6.000% Senior Notes. Interest expense was$63.0 million for the nine months endedJune 27, 2020 , a decrease of 21.3% compared to$80.0 million for the nine months endedJune 29, 2019 . The decrease was driven by a decrease in average borrowings of$263.6 million and a decrease in our weighted average interest rate of 50 basis points. The decrease in average borrowings was primarily driven by the application of the proceeds from the sale of our approximately 30% equity interest in the TruGreen Joint Venture, the payoff of second lien term loan financing by the TruGreen Joint Venture, the sale of our equity interest in the IT&O Joint Venture and the sale of the Roundup® brand extension assets to reduce our indebtedness. The decrease in our weighted average interest rate was driven by lower borrowing rates on the Fifth A&R Credit Agreement, the issuance of the 4.500% Senior Notes and the redemption of the 6.000% Senior Notes. Other Non-Operating Income, net Other non-operating income, which includes the non-service-cost components of net post-employment benefit cost and interest income, was$1.9 million and$5.1 million for the three months endedJune 27, 2020 andJune 29, 2019 , respectively, and was$7.3 million and$268.2 million for the nine months endedJune 27, 2020 andJune 29, 2019 , respectively. OnMarch 19, 2019 , we entered into an agreement under which we sold, toTruGreen Companies L.L.C. , a subsidiary ofTruGreen Holding Corporation , all of our approximately 30% equity interest in the TruGreen Joint Venture. Prior to this transaction, our net investment and advances with respect to the TruGreen Joint Venture had been reduced to a liability which resulted in an amount recorded in the "Distributions in excess of investment in unconsolidated affiliate" line in the Condensed Consolidated Balance Sheets. In connection with this transaction, we received cash proceeds of$234.2 million related to the sale of our equity interest in the TruGreen Joint Venture and$18.4 million related to the payoff of second lien term loan financing by the TruGreen Joint Venture. During the nine months endedJune 29, 2019 , we also received a distribution from the TruGreen Joint Venture intended to cover certain required tax payments of$3.5 million , which was classified as an investing activity in the Condensed Consolidated Statements of Cash Flows. During the three and nine months endedJune 29, 2019 , we recognized a pre-tax gain of zero and$259.8 million , respectively, related to this sale in the "Other non-operating income, net" line in the Condensed Consolidated Statements of Operations. The cash proceeds were applied to reduce our indebtedness. During the third quarter of fiscal 2019, we made cash tax payments of$75.2 million associated with this disposition. OnApril 1, 2019 , we sold all of our noncontrolling equity interest in the IT&O Joint Venture for cash proceeds of$36.6 million . During the three and nine months endedJune 29, 2019 , we recognized a pre-tax gain of$2.9 million related to this sale in the "Other non-operating income, net" line in the Condensed Consolidated Statements of Operations. During the nine months endedJune 29, 2019 , we received a distribution of net earnings from the IT&O Joint Venture of$4.9 million , which was classified as an operating activity in the Condensed Consolidated Statements of Cash Flows. 34
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During the second quarter of fiscal 2019, we recognized a charge of$2.5 million in the "Other non-operating income, net" line in the Condensed Consolidated Statements of Operations related to the write-off of accumulated foreign currency translation loss adjustments of a foreign subsidiary that was substantially liquidated. Income Tax Expense from Continuing Operations The effective tax rates related to continuing operations for the nine months endedJune 27, 2020 andJune 29, 2019 were 24.2% and 24.8%, respectively. The effective tax rate used for interim purposes is based on our best estimate of factors impacting the effective tax rate for the full fiscal year. Factors affecting the estimated effective tax rate include assumptions as to income by jurisdiction (domestic and foreign), the availability and utilization of tax credits and the existence of elements of income and expense that may not be taxable or deductible. The estimated effective tax rate is subject to revision in later interim periods and at fiscal year end as facts and circumstances change during the course of the fiscal year. There can be no assurance that the effective tax rate estimated for interim financial reporting purposes will approximate the effective tax rate determined at fiscal year end. Income from Continuing Operations Income from continuing operations was$204.3 million , or$3.57 per diluted share, for the three months endedJune 27, 2020 compared to$178.0 million , or$3.15 per diluted share, for the three months endedJune 29, 2019 . The increase was driven by higher net sales and lower interest expense, partially offset by higher SG&A, increased impairment, restructuring and other charges, lower other non-operating income and decreased other income. Diluted average common shares used in the diluted income per common share calculation were 57.1 million for the three months endedJune 27, 2020 compared to 56.6 million for the three months endedJune 29, 2019 . The increase was primarily the result of the exercise and issuance of share-based compensation awards, partially offset by Common Share repurchase activity. Income from continuing operations was$382.8 million , or$6.74 per diluted share, for the nine months endedJune 27, 2020 compared to$492.3 million , or$8.78 per diluted share, for the nine months endedJune 29, 2019 . The decrease was driven by lower other non-operating income, higher SG&A, increased impairment, restructuring and other charges, higher costs related to refinancing, lower equity in income of unconsolidated affiliates and decreased other income, partially offset by higher net sales and lower interest expense. Diluted average common shares used in the diluted income per common share calculation were 56.7 million for the nine months endedJune 27, 2020 compared to 56.1 million for the nine months endedJune 29, 2019 . The increase was primarily the result of the exercise and issuance of share-based compensation awards, partially offset by Common Share repurchase activity. Income (Loss) from Discontinued Operations, net of tax Income (loss) from discontinued operations, net of tax, was$(1.0) million and$1.6 million for the three and nine months endedJune 27, 2020 , respectively, as compared to$23.6 million and$26.1 million for the three and nine months endedJune 29, 2019 , respectively. We recognized insurance recoveries related to the previously disclosed legal matter In re Morning Song Bird Food Litigation of zero and$1.5 million during the three and nine months endedJune 27, 2020 , respectively, and recognized insurance recoveries of$8.4 million and$13.4 million during the three and nine months endedJune 29, 2019 , respectively. In addition, during the three and nine months endedJune 29, 2019 , we recognized a favorable adjustment of$22.5 million as a result of the final resolution of the previously disclosed settlement agreement related to this matter. Refer to "NOTE 2. DISCONTINUED OPERATIONS" of the Notes to Condensed Consolidated Financial Statements (Unaudited) included in this Quarterly Report on Form 10-Q for more information. SEGMENT RESULTS We divide our operations into three reportable segments:U.S. Consumer,Hawthorne and Other.U.S. Consumer consists of our consumer lawn and garden business located in the geographicUnited States .Hawthorne consists of our indoor, urban and hydroponic gardening business. Other consists of our consumer lawn and garden business in geographies other than theU.S. and our product sales to commercial nurseries, greenhouses and other professional customers. In addition, Corporate consists of general and administrative expenses and certain other income and expense items not allocated to the business segments. This identification of reportable segments is consistent with how the segments report to and are managed by our chief operating decision maker. 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 35
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(Loss)"), which is a non-GAAP financial measure. Senior management uses Segment
Profit (Loss) to evaluate segment performance because they believe this measure
is indicative of performance trends and the overall earnings potential of each
segment.
The following table sets forth net sales by segment:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2020 2019 2020 2019
(In millions)
U.S. Consumer $ 1,075.8 $ 889.1 $ 2,325.9 $ 2,019.5
Hawthorne 302.9 176.3 731.7 461.1
Other 114.0 104.9 183.7 177.7
Consolidated $ 1,492.7 $ 1,170.3 $ 3,241.3 $ 2,658.3
The following table sets forth Segment Profit (Loss) as well as a reconciliation
to income from continuing operations before income taxes, the most directly
comparable GAAP measure:
THREE MONTHS ENDED NINE MONTHS ENDED
JUNE 27, JUNE 29, JUNE 27, JUNE 29,
2020 2019 2020 2019
(In millions)
U.S. Consumer $ 310.5 $ 271.5 $ 641.9 $ 548.5
Hawthorne 41.1 16.8 80.5 31.6
Other 14.4 13.2 14.8 13.0
Total Segment Profit (Non-GAAP) 366.0 301.5 737.2 593.1
Corporate (57.8) (34.4) (120.7) (96.7)
Intangible asset amortization (7.8) (8.4) (23.6) (25.2)
Impairment, restructuring and other (15.9) (0.5) (17.3) (7.7)
Equity in income of unconsolidated affiliates - - - 3.3
Costs related to refinancing - - (15.1) -
Interest expense (20.3) (25.9) (63.0) (80.0)
Other non-operating income, net 1.9 5.1 7.3 268.2
Income from continuing operations before income taxes
(GAAP) $ 266.1 $ 237.4 $ 504.8 $ 655.0
U.S. Consumer
U.S. Consumer segment net sales were $1,075.8 million in the third quarter of
fiscal 2020, an increase of 21.0% from third quarter of fiscal 2019 net sales of
$889.1 million , and were $2,325.9 million for the first nine months of fiscal
2020, an increase of 15.2% from the first nine months of fiscal 2019 net sales
of $2,019.5 million . For the third quarter of fiscal 2020, the increase was
driven by the favorable impacts of volume and pricing of 19.4% and 1.6%,
respectively. For the nine months ended June 27, 2020 , the increase was driven
by the favorable impacts of volume and pricing of 13.8% and 1.4%, respectively.
The increase in sales volume for the three and nine months ended June 27, 2020
was driven by soils, fertilizer, grass seed, controls and plant food products,
partially offset by decreased sales of mulch products and the loss in sales from
the Roundup® brand extension products that were sold to Monsanto during fiscal
2019. Additionally, during the third quarter of fiscal 2019, Monsanto agreed to
reimburse us for $20.0 million of additional expenses incurred by the Company
for certain activities connected to the Roundup® marketing agreement and this
payment was recognized in the "Net sales" line in the Condensed Consolidated
Statements of Operations during the third quarter of fiscal 2019.
U.S. Consumer Segment Profit was $310.5 million in the third quarter of fiscal
2020, an increase of 14.4% from the third quarter of fiscal 2019 Segment Profit
of $271.5 million ; and was $641.9 million for the first nine months of fiscal
2020, an increase of 17.0% from the first nine months of fiscal 2019 Segment
Profit of $548.5 million . For the three and nine months ended June 27, 2020 , the
increase was due to higher net sales and a higher gross profit rate, partially
offset by higher SG&A.
Hawthorne
Hawthorne segment net sales were $302.9 million in the third quarter of fiscal
2020, an increase of 71.8% from third quarter of fiscal 2019 net sales of $176.3
million ; and were $731.7 million for the first nine months of fiscal 2020, an
increase of 58.7% from the first nine months of fiscal 2019 net sales of $461.1
million . For the third quarter of fiscal 2020, the increase
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was driven by the favorable impacts of volume and pricing of 67.9% and 4.6%, respectively, partially offset by the unfavorable impact of foreign exchange rates of 0.7%. For the nine months endedJune 27, 2020 , the increase was driven by the favorable impacts of volume and pricing of 55.5% and 3.7%, respectively, partially offset by the unfavorable impact of foreign exchange rates of 0.5%. Hawthorne Segment Profit was$41.1 million in the third quarter of fiscal 2020, an increase of 144.6% from the third quarter of fiscal 2019 Segment Profit of$16.8 million ; and was$80.5 million for the first nine months of fiscal 2020, an increase of 154.7% from the first nine months of fiscal 2019 Segment Profit of$31.6 million . For the three and nine months endedJune 27, 2020 , the increase was driven by higher net sales and a higher gross profit rate, partially offset by higher SG&A. Other Other segment net sales were$114.0 million in the third quarter of fiscal 2020, an increase of 8.7% from third quarter of fiscal 2019 net sales of$104.9 million ; and were$183.7 million in the first nine months of fiscal 2020, an increase of 3.4% from the first nine months of fiscal 2019 net sales of$177.7 million . For the third quarter of fiscal 2020, the increase was driven by the favorable impacts of volume and pricing of 12.9% and 0.4%, respectively, partially offset by the unfavorable impact of foreign exchange rates of 4.6%. For the nine months endedJune 27, 2020 , the increase was driven by the favorable impacts of volume and pricing of 6.6% and 0.3%, respectively, partially offset by the unfavorable impact of foreign exchange rates of 3.4%. Other Segment Profit was$14.4 million in the third quarter of fiscal 2020, an increase of 9.1% from the third quarter of fiscal 2019 Segment Profit of$13.2 million ; and was$14.8 million for the first nine months of fiscal 2020, an increase of 13.8% from the first nine months of fiscal 2019 Segment Profit of$13.0 million . For the three months endedJune 27, 2020 , the increase was driven by higher net sales and lower SG&A, partially offset by a lower gross profit rate. For the nine months endedJune 27, 2020 , the increase was driven by higher net sales, a higher gross profit rate and lower SG&A. Corporate Corporate expenses were$57.8 million in the third quarter of fiscal 2020, an increase of 68.0% from third quarter of fiscal 2019 expenses of$34.4 million ; and were$120.7 million for the first nine months of fiscal 2020, an increase of 24.8% from the first nine months of fiscal 2019 expenses of$96.7 million . For the three and nine months endedJune 27, 2020 , the increase was driven by higher short-term variable cash incentive compensation expense and an increase in the expected payout percentage on long-term performance-based awards. LIQUIDITY AND CAPITAL RESOURCES The following table summarizes cash activities: NINE MONTHS ENDEDJUNE 27 ,JUNE 29, 2020 2019 (In millions)
Net cash provided by (used in) operating activities
Net cash provided by investing activities 74.4 263.5
Net cash used in financing activities (87.4) (182.9)
Operating Activities Cash provided by operating activities totaled$42.5 million for the nine months endedJune 27, 2020 , an increase of$120.2 million as compared to cash used in operating activities of$77.7 million for the nine months endedJune 29, 2019 . This increase was driven by higher net sales and lower interest payments during the nine months endedJune 27, 2020 , timing of customer rebate payments, payments made in connection with litigation settlements of$55.2 million partially offset by insurance reimbursements of$13.4 million received during the nine months endedJune 29, 2019 , and lower tax payments due to timing as well as payments of$75.2 million made in connection with the sale of our equity interest in the TruGreen Joint Venture during the nine months endedJune 29, 2019 , partially offset by higher short-term variable cash incentive compensation payouts and higher SG&A during the nine months endedJune 27, 2020 . Investing Activities Cash provided by investing activities totaled$74.4 million for the nine months endedJune 27, 2020 as compared to$263.5 million for the nine months endedJune 29, 2019 . Cash used for investments in property, plant and equipment during the first nine months of fiscal 2020 and 2019 was$41.7 million and$28.8 million , respectively. During the nine months endedJune 27, 2020 , we received proceeds of$115.5 million from the sale of the Roundup® brand extension assets. During the nine 37 -------------------------------------------------------------------------------- Table of Contents months endedJune 27, 2020 , we made a$2.5 million loan investment and received cash of$2.9 million associated with currency forward contracts. During the nine months endedJune 29, 2019 , we sold our interest in the TruGreen Joint Venture for cash proceeds of$234.2 million related to the sale of our equity interest and$18.4 million related to the payoff of second lien term loan financing, and we sold our equity interest in the IT&O Joint Venture for cash proceeds of$36.6 million . During the nine months endedJune 29, 2019 , we paid a post-closing net working capital adjustment obligation of$6.6 million related to the fiscal 2018 acquisition of Sunlight Supply and we received cash of$3.6 million associated with currency forward contracts. Financing Activities Cash used in financing activities totaled$87.4 million for the nine months endedJune 27, 2020 as compared to$182.9 million for the nine months endedJune 29, 2019 . This change was the result of the issuance of$450.0 million aggregate principal amount of 4.500% Senior Notes and an increase in net borrowings under our Fifth A&R Credit Facilities (as defined below) of$15.7 million during the nine months endedJune 27, 2020 as compared to net repayments on our Fifth A&R Credit Facilities of$90.2 million during the nine months endedJune 29, 2019 , and an increase in cash received from the exercise of stock options of$13.8 million , partially offset by the redemption of all$400.0 million aggregate principal amount of 6.000% Senior Notes, payment of financing and issuance fees of$18.7 million and an increase in repurchases of our Common Shares of$50.1 million during the nine months endedJune 27, 2020 . OnJuly 27, 2020 , the Scotts Miracle-Gro Board of Directors approved a special cash dividend of$5.00 per Common Share, which will be paid onSeptember 10, 2020 to all shareholders of record at the close of business onAugust 27, 2020 . In addition, onJuly 27, 2020 , the Scotts Miracle-Gro Board of Directors also approved an increase in our quarterly cash dividend from$0.58 to$0.62 per Common Share. 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$48.3 million ,$36.4 million and$18.8 million as ofJune 27, 2020 ,June 29, 2019 andSeptember 30, 2019 , respectively, included$33.0 million ,$24.0 million and$7.2 million , respectively, held by controlled foreign corporations. As ofJune 27, 2020 , we maintain our assertion of indefinite reinvestment of the earnings of all material foreign subsidiaries with the exception of the cumulative earnings of Scotts Luxembourg Sarl, which are generally taxed on a current basis under "Subpart F" of the Code which prevents deferral of recognition ofU.S. taxable income through the use of foreign entities. 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. We maintain the Fifth A&R Credit Agreement that provides senior secured loan facilities in the aggregate principal amount of$2.3 billion , comprised of a revolving credit facility of$1.5 billion and a term loan in the original principal amount of$800.0 million (the "Fifth A&R Credit Facilities"). AtJune 27, 2020 , we had letters of credit outstanding in the aggregate principal amount of$21.8 million , and$1,372.0 million of borrowing availability under the Fifth A&R Credit Agreement. The weighted average interest rates on average borrowings under the Fifth A&R Credit Agreement were 3.4% and 4.6% for the nine months endedJune 27, 2020 andJune 29, 2019 , respectively. The Fifth A&R Credit Agreement contains, among other obligations, an affirmative covenant regarding our leverage ratio on the last day of each quarter calculated as average total indebtedness, divided by our earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted pursuant to the terms of the Fifth A&R Credit Agreement ("Adjusted EBITDA"). The maximum leverage ratio is 4.75 for the second quarter of fiscal 2020 through the fourth quarter of fiscal 2020 and 4.50 for the first quarter of fiscal 2021 and thereafter. Our leverage ratio was 2.80 atJune 27, 2020 . The Fifth A&R Credit Agreement also contains an affirmative covenant regarding our interest coverage ratio determined as of the end of each of our fiscal quarters. The interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in the Fifth A&R Credit Agreement, and excludes costs related to refinancings. The minimum interest coverage ratio was 3.00 for the twelve months endedJune 27, 2020 . Our interest coverage ratio was 8.50 for the twelve months endedJune 27, 2020 . As ofJune 27, 2020 , we were in compliance with these financial covenants. The Fifth A&R Credit Agreement allows us to make unlimited restricted payments (as defined in the Fifth A&R Credit Agreement), including dividend payments and Common Share repurchases, as long as the leverage ratio resulting from the 38 -------------------------------------------------------------------------------- Table of Contents making of such restricted payments is 4.00 or less. Otherwise we may make further restricted payments in an aggregate amount for each fiscal year not to exceed$225.0 million for fiscal 2020 and thereafter. We continue to monitor our compliance with the leverage ratio, interest coverage ratio and other covenants contained in the Fifth A&R Credit Agreement and, based upon our current operating assumptions, we expect to remain in compliance with the permissible leverage ratio and interest coverage ratio throughout fiscal 2020. However, an unanticipated shortfall in earnings, an increase in net indebtedness or other factors could materially affect our ability to remain in compliance with the financial or other covenants of the Fifth A&R Credit Agreement, potentially causing us to have to seek an amendment or waiver from our lending group which could result in repricing of the Fifth A&R Credit Agreement. While we believe we have good relationships with our lending group, we can provide no assurance that such a request would result in a modified or replacement credit agreement on reasonable terms, if at all. Senior Notes OnDecember 15, 2016 , we issued$250.0 million aggregate principal amount of 5.250% Senior Notes due 2026 (the "5.250% Senior Notes"). The 5.250% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 5.250% Senior Notes have interest payment dates ofJune 15 andDecember 15 of each year. Substantially all of our directly and indirectly owned domestic subsidiaries serve as guarantors of the 5.250% Senior Notes. OnOctober 22, 2019 , we issued$450.0 million aggregate principal amount of 4.500% Senior Notes. The net proceeds of the offering were used to redeem all of our outstanding 6.000% Senior Notes and for general corporate purposes. The 4.500% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 4.500% Senior Notes have interest payment dates ofApril 15 andOctober 15 of each year. All of our domestic subsidiaries that serve as guarantors of the 5.250% Senior Notes also serve as guarantors of the 4.500% Senior Notes. OnOctober 23, 2019 , we redeemed all of our outstanding 6.000% Senior Notes for a redemption price of$412.5 million , comprised of$0.5 million of accrued and unpaid interest,$12.0 million of redemption premium, and$400.0 million for outstanding principal amount. The$12.0 million redemption premium was recognized in the "Costs related to refinancing" line on the Condensed Consolidated Statements of Operations during the first quarter of fiscal 2020. Additionally, we had$3.1 million 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 Condensed Consolidated Statements of Operations. Receivables Facility We also maintain a Master Repurchase Agreement (including the annexes thereto, the "Repurchase Agreement") and a Master Framework Agreement (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 million and the commitment amount during the seasonal commitment period beginning onFebruary 28, 2020 and ending onJune 19, 2020 was$160.0 million . The Receivables Facility expires onAugust 21, 2020 but is expected to be renewed prior to its expiration. We account for the sale of receivables under the Receivables Facility as short-term debt and continue to carry the receivables on our Condensed Consolidated Balance Sheet, primarily as a result of our requirement to repurchase receivables sold. As ofJune 27, 2020 andJune 29, 2019 , there were$160.0 million and$316.0 million , respectively, in borrowings on receivables pledged as collateral under the Receivables Facility, and the carrying value of the receivables pledged as collateral was$177.8 million and$351.1 million , respectively. Interest Rate Swap Agreements We enter into interest rate swap agreements with major financial institutions that effectively convert a portion of our variable rate debt to a fixed rate. The swap agreements had a maximum totalU.S. dollar equivalent notional amount of$600.0 million ,$850.0 million and$850.0 million atJune 27, 2020 ,June 29, 2019 andSeptember 30, 2019 , respectively. Interest payments made between the effective date and expiration date are hedged by the swap agreements, except as noted below. 39 -------------------------------------------------------------------------------- Table of Contents The notional amount, effective date, expiration date and rate of each of these swap agreements outstanding atJune 27, 2020 are shown in the table below: Notional Amount Effective Expiration Fixed (in millions) Date (a) Date Rate $ 100 6/20/2018 10/20/2020 2.15 % 200 (b) 11/7/2018 6/7/2021 2.87 % 100 11/7/2018 7/7/2021 2.96 % 200 11/7/2018 10/7/2021 2.98 % 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 were 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. We believe that our cash flows from operations and borrowings under our agreements described herein will be sufficient to meet debt service, capital expenditures and working capital needs for the foreseeable future. However, we cannot ensure that our business will generate sufficient cash flow from operations or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other liquidity needs. Additionally, the extent to which the COVID-19 pandemic will ultimately impact our business, results of operations, financial condition and cash flows depends on future developments that are highly uncertain, rapidly evolving and difficult to predict at this time. Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in the 2019 Annual Report, under "ITEM 1A. RISK FACTORS - Our indebtedness could limit our flexibility and adversely affect our financial condition" and in our Quarterly Report on Form 10-Q for the quarter endedMarch 28, 2020 , under Part II, "ITEM 1A. RISK FACTORS - The effects of the ongoing coronavirus (COVID-19) pandemic and any possible recurrence of other similar types of pandemics, or any other widespread public health emergencies, could have a material adverse effect on our business, results of operations, financial condition and/or cash flows." Financial Disclosures About Guarantors and Issuers ofGuaranteed Securities The 5.250% Senior Notes and 4.500% Senior Notes were issued byScotts Miracle-Gro onDecember 15, 2016 andOctober 22, 2019 , respectively. The 5.250% Senior Notes and 4.500% Senior Notes are guaranteed by certain consolidated domestic subsidiaries ofScotts Miracle-Gro (collectively, the "Guarantors") and, therefore, we report summarized financial information in accordance with SEC Regulation S-X, Rule 13-01, "Guarantors and Issuers ofGuaranteed Securities Registered or Being Registered." The guarantees are "full and unconditional," as those terms are used in Regulation S-X, Rule 3-10(b)(3), except that a Guarantor's guarantee will be released in certain circumstances set forth in the indentures governing the 5.250% Senior Notes and 4.500% Senior Notes, such as (1) 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; (2) if the Guarantor merges with and intoScotts Miracle-Gro , withScotts Miracle-Gro surviving such merger; (3) 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; (4) upon legal or covenant defeasance; (5) at the election ofScotts Miracle-Gro following the Guarantor's release as a guarantor under the Fifth A&R Credit Agreement, except a release by or as a result of the repayment of the Fifth A&R Credit Agreement; or (6) if the Guarantor ceases to be a "restricted subsidiary" and the Guarantor is not otherwise required to provide a guarantee of the 5.250% Senior Notes and the 4.500% Senior Notes pursuant to the applicable indenture. Our foreign subsidiaries and certain of our domestic subsidiaries are not guarantors (collectively, the "Non-Guarantors") on the 5.250% Senior Notes and 4.500% Senior Notes. Payments on the 5.250% Senior Notes and 4.500% 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 40
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the Non-Guarantors before any assets are made available for distribution toScotts Miracle-Gro or the Guarantors. As a result, the 5.250% Senior Notes and 4.500% 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 5.250% Senior Notes and 4.500% 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 5.250% Senior Notes or the 4.500% 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 5.250% Senior Notes and 4.500% 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 5.250% Senior Notes and 4.500% Senior Notes will not have a claim against the Guarantor. Each guarantee contains a provision intended to limit the Guarantor's liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent conveyance. However, there can be no assurance as to what standard a court will apply in making a determination of the maximum liability of each Guarantor. Moreover, this provision may not be effective to protect the guarantees from being voided under fraudulent conveyance laws. There is a possibility that the entire guarantee may be set aside, in which case the entire liability may be extinguished. The following tables present summarized financial information on a combined basis forScotts Miracle-Gro and the Guarantors. Transactions betweenScotts Miracle-Gro and the Guarantors have been eliminated and the summarized financial information does not reflect investments ofthe Scotts Miracle-Gro and the Guarantors in Non-Guarantor subsidiaries. JUNE 27, SEPTEMBER 30, 2020 2019 (In millions) Current assets$ 1,523.2 $ 895.6 Noncurrent assets (a) 1,777.1 1,682.1 Current liabilities 1,013.2 569.3 Noncurrent liabilities 1,656.6 1,560.2
(a)Includes amounts due from Non-Guarantor subsidiaries of
NINE MONTHS YEAR
ENDED ENDED
JUNE 27, SEPTEMBER 30,
2020 2019
(In millions)
Net sales $ 2,931.0 $ 2,806.3
Gross profit 1,060.8 948.1
Income (loss) from continuing operations (a) 359.2 417.7
Net income (loss) 359.3 441.4
Net income (loss) attributable to controlling interest 359.3 441.4
(a)Includes intercompany expense from Non-Guarantor subsidiaries of $3.5 million
and $9.2 million , respectively.
Judicial and Administrative Proceedings
We are party to various pending judicial and administrative proceedings arising
in the ordinary course of business, including, among others, proceedings based
on accidents or product liability claims and alleged violations of environmental
laws. We have reviewed these pending judicial and administrative proceedings,
including the probable outcomes, reasonably anticipated costs and expenses, and
the availability and limits of our insurance coverage, and have established what
we believe to be appropriate accruals. We believe that our assessment of
contingencies is reasonable and that the related accruals, in the
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aggregate, are adequate; however, there can be no assurance that future quarterly or annual operating results will not be materially affected by these proceedings, whether as a result of adverse outcomes or as a result of significant defense costs. Contractual Obligations Other than the issuance of our 4.500% Senior Notes and the redemption of all outstanding 6.000% Senior Notes during the first quarter of fiscal 2020, there have been no material changes outside of the ordinary course of business in our outstanding contractual obligations since the end of fiscal 2019 and throughJune 27, 2020 . REGULATORY MATTERS We are subject to local, state, federal and foreign environmental protection laws and regulations with respect to our business operations and believe we are operating in substantial compliance with, or taking actions aimed at ensuring compliance with, such laws and regulations. We are involved in several legal actions with various governmental agencies related to environmental matters. While it is difficult to quantify the potential financial impact of actions involving these environmental matters, particularly remediation costs at waste disposal sites and future capital expenditures for environmental control equipment, in the opinion of management, the ultimate liability arising from such environmental matters, taking into account established accruals, should not have a material effect on our financial condition, results of operations or cash flows. However, there can be no assurance that the resolution of these matters will not materially affect our future quarterly or annual results of operations, financial condition or cash flows. Additional information on environmental matters affecting us is provided in the 2019 Annual Report, under "ITEM 1. BUSINESS - Regulatory Considerations" and "ITEM 3. LEGAL PROCEEDINGS." CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preceding discussion and analysis of our consolidated results of operations and financial condition should be read in conjunction with our condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q. The 2019 Annual Report includes additional information about us, our operations, our financial condition, our critical accounting policies and accounting estimates, and should be read in conjunction with this Quarterly Report on Form 10-Q.
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