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, 2020 (the "2020 Annual Report"). EXECUTIVE SUMMARY We are the 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 our Hawthorne segment, we are the leading manufacturer, marketer and distributor of lighting, nutrients, growing media, growing environments and hardware products for indoor and hydroponic gardening. Beginning in fiscal 2015, our Hawthorne segment made a series of key acquisitions and investments, including General Hydroponics, Gavita, Botanicare, Vermicrop, Agrolux and Can-Filters. OnJune 4, 2018 , our Hawthorne segment acquired substantially all of the assets of Sunlight Supply. At the time of the acquisition, Sunlight Supply was a leading developer, manufacturer, marketer and distributor of horticultural, organics, lighting and hydroponic gardening products. Prior to the transaction, Sunlight Supply served as a non-exclusive distributor of our products. 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 our Hawthorne 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 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. 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. Fiscal 2021 is 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 will have six fewer days compared to the respective quarters of fiscal 2020. In addition, our second quarter of fiscal 2021 ended six days later than our second quarter of fiscal 2020 and those six days fall within our peak selling season. This resulted in an increase in net sales of approximately$122.5 and$176.9 , and an increase in net income attributable to controlling interest from continuing operations per diluted share of$0.55 and$0.70 for the three and six months endedApril 3, 2021 , respectively, compared to the three and six months endedMarch 28, 2020 . 27 --------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
Percent of Net Sales from Continuing
Operations by Quarter
2020 2019 2018
First Quarter 8.9 % 9.4 % 8.3 %
Second Quarter 33.5 % 37.7 % 38.1 %
Third Quarter 36.1 % 37.1 % 37.3 %
Fourth Quarter 21.5 % 15.8 % 16.3 %
On August 11, 2014 , Scotts Miracle-Gro announced that its Board of Directors
authorized the repurchase of up to $500.0 of Common Shares over a five-year
period (effective November 1, 2014 through September 30, 2019 ). On August 3,
2016 , Scotts Miracle-Gro announced that its Board of Directors authorized a
$500.0 increase to the share repurchase authorization ending on September 30,
2019 . On August 2, 2019 , the Scotts Miracle-Gro Board of Directors authorized an
extension of the share repurchase authorization through March 28, 2020 . The
amended authorization allowed for repurchases of Common Shares of up to an
aggregate amount of $1,000.0 through March 28, 2020 . During the three and six
months ended March 28, 2020 , Scotts Miracle-Gro repurchased 0.4 million Common
Shares under this share repurchase authorization for $48.2 . From the effective
date of this share repurchase authorization in the fourth quarter of fiscal 2014
through March 28, 2020 , Scotts Miracle-Gro repurchased approximately 8.7 million
Common Shares for $762.8 .
On February 6, 2020 , Scotts Miracle-Gro announced that its Board of Directors
authorized the repurchase of up to $750.0 of Common Shares from April 30, 2020
through March 25, 2023 . There were no share repurchases under this share
repurchase authorization during fiscal 2020. During the three and six months
ended April 3, 2021 , Scotts Miracle-Gro repurchased approximately 0.1 million
and 0.3 million Common Shares under this share repurchase authorization for
$12.5 and $50.5 , respectively.
On July 27, 2020 , the Scotts Miracle-Gro Board of Directors approved a special
cash dividend of $5.00 per Common Share, which was paid on September 10, 2020 to
all shareholders of record at the close of business on August 27, 2020 . In
addition, on July 27, 2020 , the Scotts Miracle-Gro Board of Directors approved
an increase in our quarterly cash dividend from $0.58 to $0.62 per Common Share,
which was first paid in the fourth quarter of fiscal 2020.
COVID-19 Response and Impacts
The World Health Organization recognized COVID-19 as a public health emergency
of international concern on January 30, 2020 and as a global pandemic on March
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. 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 certain
associates in our field sales force or working in manufacturing or distribution
centers. As a result of these additional measures and initiatives, we have
incurred incremental costs, mostly related to premium pay provided to our
associates, and we expect to continue to incur incremental costs through the end
of fiscal 2021. 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.
For our fiscal quarter ended April 3, 2021 , we continued to experience increased
demand for many of our products in response to the COVID-19 pandemic. The
impacts of the pandemic remain uncertain and vary by geography, as infection
rates of COVID-19 continue to increase in many regions, and authorities have
taken different approaches to address the pandemic and resume economic activity.
In those jurisdictions that were subject to business closures or limitations,
our manufacturing and distribution operations were viewed as essential services
and continued to operate. Likewise, our major retail partners were designated as
essential services and remained open. 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
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(Dollars in millions, except per share data)
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, if any, that the COVID-19 pandemic may
have on the seasonality of our business.
For additional information on the impacts and our response to the COVID-19
pandemic, refer to "Management's Discussion and Analysis of Financial Condition
and Results of Operations" in Part II, Item 7 of our Annual Report on Form 10-K
for the fiscal year ended September 30, 2020 .
RESULTS OF OPERATIONS
The following table sets forth the components of earnings as a percentage of net
sales for the three months ended April 3, 2021 and March 28, 2020 :
April 3, % Of March 28, % Of
2021 Net Sales 2020 Net Sales
Net sales $ 1,828.8 100.0 % $ 1,382.8 100.0 %
Cost of sales 1,158.9 63.4 829.2 60.0
Cost of sales-impairment, restructuring and
other 12.4 0.7 3.4 0.2
Gross profit 657.5 36.0 550.2 39.8
Operating expenses:
Selling, general and administrative 231.5 12.7 195.6 14.1
Impairment, restructuring and other 2.5 0.1 0.3 -
Other (income) expense, net (0.6) - 0.6 -
Income from operations 424.1 23.2 353.7 25.6
Equity in loss of unconsolidated affiliates 1.5 0.1 - -
Interest expense 19.3 1.1 22.7 1.6
Other non-operating income, net (0.9) - (2.8) (0.2)
Income from continuing operations before
income taxes 404.2 22.1 333.8 24.1
Income tax expense from continuing operations 93.1 5.1 84.0 6.1
Income from continuing operations 311.1 17.0 249.8 18.1
Income (loss) from discontinued operations,
net of tax (0.9) - 2.6 0.2
Net income $ 310.2 17.0 % $ 252.4 18.3 %
The sum of the components may not equal due to rounding.
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
The following table sets forth the components of earnings as a percentage of net
sales for the six months ended
April 3, % Of March 28, % Of
2021 Net Sales 2020 Net Sales
Net sales $ 2,577.4 100.0 % $ 1,748.6 100.0 %
Cost of sales 1,707.7 66.3 1,140.6 65.2
Cost of sales-impairment, restructuring and other 21.4 0.8 3.6 0.2
Gross profit 848.3 32.9 604.4 34.6
Operating expenses:
Selling, general and administrative 388.2 15.1 315.4 18.0
Impairment, restructuring and other 3.2 0.1 (2.2) (0.1)
Other (income) expense, net (1.2) - 0.1 -
Income from operations 458.1 17.8 291.1 16.6
Equity in loss of unconsolidated affiliates 1.5 0.1 - -
Costs related to refinancing - - 15.1 0.9
Interest expense 35.4 1.4 42.7 2.4
Other non-operating income, net (16.1) (0.6) (5.4) (0.3)
Income from continuing operations before income taxes 437.3 17.0 238.7 13.7
Income tax expense from continuing operations 101.1 3.9 60.2 3.4
Income from continuing operations 336.2 13.0 178.5 10.2
Income (loss) from discontinued operations, net of tax (0.9) - 2.6 0.1
Net income $ 335.3 13.0 % $ 181.1 10.4 %
The sum of the components may not equal due to rounding.
Net Sales
Net sales for the three months ended April 3, 2021 were $1,828.8 , an increase of
32.3% from net sales of $1,382.8 for the three months ended March 28, 2020 . Net
sales for the six months ended April 3, 2021 were $2,577.4 , an increase of 47.4%
from net sales of $1,748.6 for the six months ended March 28, 2020 . These
changes in net sales were attributable to the following:
Three Months Ended Six Months Ended
April 3, 2021 April 3, 2021
Volume 31.2 % 45.3 %
Pricing 0.5 1.5
Foreign exchange rates 0.6 0.6
Change in net sales 32.3 % 47.4 %
The increase in net sales for the three months ended April 3, 2021 as compared
to the three months ended March 28, 2020 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,
plant food and direct to consumer products in our U.S. Consumer segment;
lighting, nutrients, growing media, hardware and growing environments products
in our Hawthorne segment; increased sales in our Other segment; and the impact
of the fiscal calendar shift which caused our second quarter of fiscal 2021 to
end six days later than our second quarter of fiscal 2020 with those six days
falling within our peak selling season, resulting in an increase in net sales of
approximately $122.5 ;
•increased pricing in our Hawthorne and Other segments;
•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 U.S. dollar relative to the euro and the Canadian dollar.
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(Dollars in millions, except per share data)
The increase in net sales for the six months ended April 3, 2021 as compared to
the six months ended March 28, 2020 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,
plant food and direct to consumer products in our U.S. Consumer segment;
lighting, nutrients, growing media, hardware and growing environments products
in our Hawthorne segment; increased sales in our Other segment; and the impact
of the fiscal calendar shift which caused our first quarter of fiscal 2021 to
have five additional days and our second quarter of fiscal 2021 to end six days
later than our second quarter of fiscal 2020 with those six days falling within
our peak selling season, resulting in an increase in net sales of approximately
$176.9 ;
•increased pricing in our Hawthorne and Other segments;
•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 U.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 Six Months Ended
April 3, March 28, April 3, March 28,
2021 2020 2021 2020
Materials $ 680.9 $ 486.1 $ 995.3 $ 653.8
Manufacturing labor and overhead 235.3 183.3 347.5 250.1
Distribution and warehousing 216.1 142.8 324.3 206.4
Costs associated with Roundup® marketing
agreement 26.6 17.0 40.6 30.3
Cost of sales 1,158.9 829.2 1,707.7 1,140.6
Cost of sales-impairment, restructuring and
other 12.4 3.4 21.4 3.6
$ 1,171.3 $ 832.6 $ 1,729.1 $ 1,144.2
Factors contributing to the change in cost of sales are outlined in the
following table:
Three Months Ended Six Months Ended
April 3, 2021 April 3, 2021
Volume, product mix and other $ 299.8 $ 524.8
Material cost changes 14.0 24.0
Costs associated with Roundup® marketing agreement 9.7 10.3
Foreign exchange rates 6.2 8.0
329.7 567.1
Impairment, restructuring and other 9.0 17.8
Change in cost of sales $ 338.7 $ 584.9
The increase in cost of sales for the three months ended April 3, 2021 as
compared to the three months ended March 28, 2020 was primarily driven by:
•higher sales volume in our U.S. Consumer, Hawthorne and Other segments;
•higher material prices in our U.S. Consumer, Hawthorne and Other segments;
•higher transportation prices and warehousing costs included within "volume,
product mix and other" in our U.S. Consumer and Hawthorne segments;
•the unfavorable impact of foreign exchange rates as a result of the weakening
of the U.S. dollar relative to the euro and the Canadian dollar;
•an increase in costs associated with the Roundup® marketing agreement; and
•an increase in impairment, restructuring and other charges as a result of costs
associated with the COVID-19 pandemic.
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
The increase in cost of sales for the six months ended April 3, 2021 as compared
to the six months ended March 28, 2020 was primarily driven by:
•higher sales volume in our U.S. Consumer, Hawthorne and Other segments;
•higher material prices in our U.S. Consumer, Hawthorne and Other segments;
•higher transportation prices and warehousing costs included within "volume,
product mix and other" in our U.S. Consumer and Hawthorne segments;
•the unfavorable impact of foreign exchange rates as a result of the weakening
of the U.S. dollar relative to the euro and the Canadian dollar;
•an increase in costs associated with the Roundup® marketing agreement; and
•an increase in impairment, restructuring and other charges as a result of costs
associated with the COVID-19 pandemic.
Gross Profit
As a percentage of net sales, our gross profit rate was 36.0% and 39.8% for the
three months ended April 3, 2021 and March 28, 2020 , respectively. As a
percentage of net sales, our gross profit rate was 32.9% and 34.6% for the six
months ended April 3, 2021 and March 28, 2020 , respectively. Factors
contributing to the change in gross profit rate are outlined in the following
table:
Three Months Ended Six Months Ended
April 3, 2021 April 3, 2021
Material costs (0.8) % (0.9) %
Volume, product mix and other (2.6) (0.9)
Roundup® commissions and reimbursements (0.2) 0.1
Pricing 0.2 0.6
(3.4) % (1.1) %
Impairment, restructuring and other (0.4) (0.6)
Change in gross profit rate (3.8) %
(1.7) %
The decrease in gross profit rate for the three months endedApril 3, 2021 as compared to the three months endedMarch 28, 2020 was primarily driven by: •higher transportation prices and warehousing costs included within "volume, product mix and other" in ourU.S. Consumer and Hawthorne segments; •higher material prices in ourU.S. Consumer, Hawthorne and Other segments; •unfavorable mix driven by higher sales growth in our Hawthorne segment relative to ourU.S. Consumer segment; •an increase in costs associated with the Roundup® marketing agreement; and •an increase in impairment, restructuring and other charges as a result of costs associated with the COVID-19 pandemic; •partially offset by favorable leverage of fixed costs driven by higher sales volume in ourU.S. Consumer, Hawthorne and Other segments; and •increased pricing in our Hawthorne and Other segments. The decrease in gross profit rate for the six months endedApril 3, 2021 as compared to the six months endedMarch 28, 2020 was primarily driven by: •higher transportation prices and warehousing costs included within "volume, product mix and other" in ourU.S. Consumer and Hawthorne segments; •higher material prices in ourU.S. Consumer, Hawthorne and Other segments; •unfavorable mix driven by higher sales growth in our Hawthorne segment relative to ourU.S. Consumer segment; and 32 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) •an increase in impairment, restructuring and other charges as a result of costs associated with the COVID-19 pandemic; •partially offset by favorable leverage of fixed costs driven by higher sales volume in ourU.S. Consumer, Hawthorne and Other segments; •increased pricing in our Hawthorne and Other segments; and •increased net sales associated with the Roundup® marketing agreement. Selling, General and Administrative Expenses The following table sets forth the components of selling, general and administrative expenses ("SG&A") for the periods indicated: Three Months Ended Six Months Ended April 3, March 28, April 3, March 28, 2021 2020 2021 2020 Advertising$ 68.8 $ 56.0 $ 95.5 $ 66.8 Research and development 10.3 9.7 20.6 18.9 Share-based compensation 17.7 12.0 25.8 19.0 Amortization of intangibles 7.3 7.9 14.5 15.4 Other selling, general and administrative 127.4 110.0 231.8 195.3$ 231.5 $ 195.6 $ 388.2 $ 315.4 SG&A increased$35.9 , or 18.4%, during the three months endedApril 3, 2021 compared to the three months endedMarch 28, 2020 . Advertising expense increased$12.8 , or 22.9%, during the three months endedApril 3, 2021 driven by increased media spending in ourU.S. Consumer and Hawthorne segments and the timing of our media spending. Share-based compensation expense increased$5.7 , or 47.5%, during the three months endedApril 3, 2021 due to an increase in the expected payout percentage on long-term performance-based awards and a higher annual grant value. Other SG&A increased$17.4 , or 15.8%, during the three months endedApril 3, 2021 driven by increases in short-term variable cash incentive compensation expense and investments in information technology. SG&A increased$72.8 , or 23.1%, during the six months endedApril 3, 2021 compared to the six months endedMarch 28, 2020 . Advertising expense increased$28.7 , or 43.0%, during the six months endedApril 3, 2021 driven by increased media spending in ourU.S. Consumer and Hawthorne segments and the timing of our media spending. Share-based compensation expense increased$6.8 , or 35.8%, during the six months endedApril 3, 2021 due to an increase in the expected payout percentage on long-term performance-based awards and a higher annual grant value. Other SG&A increased$36.5 , or 18.7%, during the six months endedApril 3, 2021 driven by higher short-term variable cash incentive compensation expense and investments in information technology. 33 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Impairment, Restructuring and Other Activity described herein is classified within the "Cost of sales-impairment, restructuring and other," "Impairment, restructuring and other" and "Income (loss) from discontinued operations, net of tax" lines in the Condensed Consolidated Statements of Operations. The following table details impairment, restructuring and other charges (recoveries) for each of the periods presented: Three Months Ended Six Months Ended April 3, March 28, April 3, March 28, 2021 2020 2021 2020 Cost of sales-impairment, restructuring and other: COVID-19 related costs$ 12.3 $ 3.1 $ 21.0 $ 3.1 Restructuring and other charges 0.1 0.3 0.4 0.5 Operating expenses: COVID-19 related costs 2.6 0.7 3.2 0.7 Restructuring and other charges (recoveries), net (0.1) (0.4) - (2.9) Impairment, restructuring and other charges from continuing operations 14.9 3.7 24.6 1.4 Restructuring and other charges (recoveries), net, from discontinued operations - (3.1) - (3.1) Total impairment, restructuring and other charges (recoveries)$ 14.9 $ 0.6 $ 24.6 $ (1.7) 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 six months endedApril 3, 2021 , we incurred costs of$14.9 and$24.2 , respectively, associated with the COVID-19 pandemic primarily related to premium pay. We incurred costs of$10.7 and$19.0 in ourU.S. Consumer segment,$1.5 and$1.9 in our Hawthorne segment and$0.1 in our Other segment in the "Cost of sales-impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations during the three and six months endedApril 3, 2021 , respectively. We incurred costs of$2.6 and$3.2 in ourU.S. Consumer segment in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations during the three and six months endedApril 3, 2021 , respectively. Since the inception of the COVID-19 pandemic, total costs classified within the "Cost of sales-impairment, restructuring and other" and the "Impairment, restructuring and other" lines in the Condensed Consolidated Statements of Operations are$38.4 for ourU.S. Consumer segment,$4.5 for our Hawthorne segment and$0.7 for our Other segment. During the three and six months endedMarch 28, 2020 , we incurred costs of$3.8 associated with the COVID-19 pandemic primarily related to premium pay and incremental cleaning costs. We incurred costs of$2.6 in ourU.S. Consumer segment and$0.5 in our Hawthorne segment in the "Cost of sales-impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations during the three and six months endedMarch 28, 2020 . We incurred costs of$0.7 in ourU.S. Consumer segment in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations during the three and six months endedMarch 28, 2020 . 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 our Hawthorne segment. Costs incurred during the three and six months endedApril 3, 2021 andMarch 28, 2020 related to Project Catalyst were not material. Costs incurred to date since the inception of Project Catalyst are$25.1 for the Hawthorne segment,$14.0 for ourU.S. Consumer segment,$1.3 for our Other segment and$2.8 for Corporate. Additionally, during the three and six months endedMarch 28, 2020 , we received zero and$2.6 , respectively, from the final settlement of escrow funds related to a previous acquisition within the Hawthorne segment that was recognized in the "Impairment, restructuring and other" line in the Condensed Consolidated Statements of Operations. 34 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Other (Income) Expense, net Other (income) expense is comprised of activities outside our normal business operations, such as royalty income from the licensing of certain of our brand names, foreign exchange transaction gains and losses and gains and losses from the disposition of non-inventory assets. Other (income) expense was$(0.6) and$0.6 for the three months endedApril 3, 2021 andMarch 28, 2020 , respectively; and was$(1.2) and$0.1 for the six months endedApril 3, 2021 andMarch 28, 2020 , respectively. The change for the three and six months endedApril 3, 2021 was primarily due to foreign exchange transaction gains and losses. Income from Operations Income from operations was$424.1 for the three months endedApril 3, 2021 , an increase of 19.9% compared to$353.7 for the three months endedMarch 28, 2020 ; and was$458.1 for the six months endedApril 3, 2021 , an increase of 57.4% compared to$291.1 for the six months endedMarch 28, 2020 . For the three and six months endedApril 3, 2021 , the increase was driven by higher net sales, partially offset by a decrease in gross profit rate, higher SG&A and higher impairment, restructuring and other charges. Equity in Loss of Unconsolidated Affiliates We acquired a 50% equity interest inBonnie Plants, LLC onDecember 31, 2020 . Our interest is accounted for using the equity method of accounting, with our proportionate share ofBonnie Plants, LLC earnings subsequent toDecember 31, 2020 reflected in the Condensed Consolidated Statements of Operations. Equity in loss ofBonnie Plants, LLC was$1.5 for the three and six months endedApril 3, 2021 . Costs Related to Refinancing Costs related to refinancing were zero and$15.1 for the three and six months endedMarch 28, 2020 , respectively. These costs 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 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$19.3 for the three months endedApril 3, 2021 , a decrease of 15.0% compared to$22.7 for the three months endedMarch 28, 2020 . The decrease was driven by a decrease in our weighted average interest rate of 95 basis points, partially offset by an increase in average borrowings of$226.9 . The decrease in our weighted average interest rate was primarily driven by lower borrowing rates on the Fifth A&R Credit Agreement and the issuance of the 4.000% Senior Notes due 2031 (the "4.000% Senior Notes"). The increase in average borrowings was primarily driven by higher inventory production and acquisition activity. Interest expense was$35.4 for the six months endedApril 3, 2021 , a decrease of 17.1% compared to$42.7 for the six months endedMarch 28, 2020 . The decrease was driven by a decrease our weighted average interest rate of 85 basis points, partially offset by an increase in average borrowings of$67.9 . 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 and acquisition activity. Other Non-Operating Income, net Other non-operating income was$0.9 and$2.8 for the three months endedApril 3, 2021 andMarch 28, 2020 , respectively, and was$16.1 and$5.4 for the six months endedApril 3, 2021 andMarch 28, 2020 , respectively. OnDecember 31, 2020 , we acquired a 50% equity interest inBonnie Plants, LLC in exchange for a cash payment of$100.7 , forgiveness of our outstanding loan receivable with AFC and surrender of our options to increase our economic interest in the Bonnie Plants business. Our loan receivable with AFC, which was previously recognized in the "Other assets" line in the Condensed Consolidated Balance Sheets, had a carrying value of$66.4 onDecember 31, 2020 and we recognized a gain of$12.5 during the three months endedJanuary 2, 2021 to write-up the value of the loan to its closing date fair value of$78.9 in the "Other non-operating income, net" line in the Condensed Consolidated Statements of Operations. Income Tax Expense from Continuing Operations The effective tax rates related to continuing operations for the six months endedApril 3, 2021 andMarch 28, 2020 were 23.1% and 25.2%, respectively. The effective tax rate used for interim purposes is based on our best estimate of factors 35 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) 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$311.1 , or$5.44 per diluted share, for the three months endedApril 3, 2021 compared to$249.8 , or$4.43 per diluted share, for the three months endedMarch 28, 2020 . The increase was driven by higher net sales and lower interest expense, partially offset by a decrease in gross profit rate, higher SG&A, higher impairment, restructuring and other charges, higher equity in loss of unconsolidated affiliates, lower other non-operating income and higher income tax expense. Diluted average common shares used in the diluted income per common share calculation for the three months endedApril 3, 2021 were 57.1 million, which included dilutive potential Common Shares of 1.4 million. Diluted average common shares used in the diluted income per common share calculation for the three months endedMarch 28, 2020 were 56.4 million, which included dilutive potential Common Shares of 0.7 million. 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$336.2 , or$5.88 per diluted share, for the six months endedApril 3, 2021 compared to$178.5 , or$3.15 per diluted share, for the six months endedMarch 28, 2020 . The increase was driven by higher net sales, lower costs related to refinancing, lower interest expense and higher other non-operating income, partially offset by a decrease in gross profit rate, higher SG&A, higher impairment, restructuring and other charges, higher equity in loss of unconsolidated affiliates and higher income tax expense. Diluted average common shares used in the diluted income per common share calculation for the six months endedApril 3, 2021 were 57.0 million, which included dilutive potential Common Shares of 1.3 million. Diluted average common shares used in the diluted income per common share calculation for the six months endedMarch 28, 2020 were 56.6 million, which included dilutive potential Common Shares of 0.9 million. The increase was primarily the result of the exercise and issuance of share-based compensation awards, partially offset by Common Share repurchase activity. SEGMENT RESULTS During the three months endedJanuary 2, 2021 , we changed our internal organization structure such thatAeroGrow is now managed by and reported within ourU.S. Consumer segment. Within ourU.S. Consumer segment,AeroGrow is integrated into our overall direct to consumer focus and strategy.AeroGrow was previously managed by and reported within our Hawthorne segment. The prior period amounts have been reclassified to conform to the new organization structure. The performance of each reportable segment is evaluated based on several factors, including income (loss) from continuing operations before income taxes, amortization, impairment, restructuring and other charges ("Segment Profit (Loss)"), which is a non-GAAP financial measure. Senior management uses Segment Profit (Loss) to evaluate segment performance because they believe this measure is indicative of performance trends and the overall earnings potential of each segment. The following table sets forth net sales by segment: Three Months Ended Six Months Ended April 3, March 28, April 3, March 28, 2021 2020 2021 2020 U.S. Consumer$ 1,374.0 $ 1,113.2 $ 1,782.2 $ 1,278.6 Hawthorne 363.8 219.5 673.2 400.3 Other 91.0 50.1 122.0 69.7 Consolidated$ 1,828.8 $ 1,382.8 $ 2,577.4 $ 1,748.6 36
-------------------------------------------------------------------------------- ContentsTHE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data)
The following table sets forth Segment Profit (Loss) as well as a reconciliation to income from continuing operations before income taxes, the most directly comparable GAAP measure:
Three Months Ended Six Months Ended
April 3, March 28, April 3, March 28,
2021 2020 2021 2020
U.S. Consumer $ 435.9 $ 374.6 $ 481.2 $ 334.6
Hawthorne 41.4 23.8 81.8 36.3
Other 17.6 4.0 17.6 0.4
Total Segment Profit (Non-GAAP) 494.9 402.4 580.6 371.3
Corporate (48.1) (36.9) (82.7) (63.0)
Intangible asset amortization (7.8) (8.1) (15.2) (15.8)
Impairment, restructuring and other (14.9) (3.7) (24.6) (1.4)
Equity in loss of unconsolidated affiliates (1.5) - (1.5) -
Costs related to refinancing - - - (15.1)
Interest expense (19.3) (22.7) (35.4) (42.7)
Other non-operating income, net 0.9 2.8 16.1 5.4
Income from continuing operations before income
taxes (GAAP) $ 404.2 $ 333.8 $ 437.3 $ 238.7
U.S. Consumer
U.S. Consumer segment net sales were $1,374.0 in the second quarter of fiscal
2021, an increase of 23.4% from second quarter of fiscal 2020 net sales of
$1,113.2 ; and were $1,782.2 for the first six months of fiscal 2021, an increase
of 39.4% from the first six months of fiscal 2020 net sales of $1,278.6 . For
the second quarter of fiscal 2021, the increase was driven by the favorable
impact of volume of 23.7%, which includes the impact of the calendar shift,
partially offset by the unfavorable impact of pricing of 0.3%. For the six
months ended April 3, 2021 , the increase was driven by the favorable impacts of
volume, which includes the impact of the calendar shift, and pricing of 38.9%
and 0.5%, respectively. The increase in sales volume for the three and six
months ended April 3, 2021 was driven by soils, fertilizer, grass seed,
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 $435.9 in the second quarter of fiscal 2021, an
increase of 16.4% from the second quarter of fiscal 2020 Segment Profit of
$374.6 ; and was $481.2 for the first six months of fiscal 2021, an increase of
43.8% from the first six months of fiscal 2020 Segment Profit of $334.6 . For the
three and six months ended April 3, 2021 , the increase was due to higher net
sales, partially offset by a lower gross profit rate and higher SG&A.
Hawthorne
Hawthorne segment net sales were $363.8 in the second quarter of fiscal 2021, an
increase of 65.7% from second quarter of fiscal 2020 net sales of $219.5 ; and
were $673.2 for the first six months of fiscal 2021, an increase of 68.2% from
the first six months of fiscal 2020 net sales of $400.3 . For the second quarter
of fiscal 2021, the increase was driven by the favorable impacts of volume,
pricing and foreign exchange rates of 61.3%, 3.6% and 0.9%, respectively. For
the six months ended April 3, 2021 , the increase was driven by the favorable
impacts of volume, pricing and foreign exchange rates of 62.8%, 4.5%, 0.9%,
respectively. The increase in sales volume for the three and six months ended
April 3, 2021 was driven by lighting, nutrients, growing media, hardware and
growing environments products.
Hawthorne Segment Profit was $41.4 in the second quarter of fiscal 2021, an
increase of 73.9% from the second quarter of fiscal 2020 Segment Profit of
$23.8 ; and was $81.8 for the first six months of fiscal 2021, an increase of
125.3% from the first six months of fiscal 2020 Segment Profit of $36.3 . For the
second quarter of fiscal 2021, the increase was driven by higher net sales,
partially offset by a lower gross profit rate and higher SG&A. For the six
months ended April 3, 2021 , the increase was driven by higher net sales,
partially offset by higher SG&A.
Other
Other segment net sales were $91.0 in the second quarter of fiscal 2021, an
increase of 81.6% from second quarter of fiscal 2020 net sales of $50.1 ; and
were $122.0 for the first six months of fiscal 2021, an increase of 75.0% from
the first six months of fiscal 2020 net sales of $69.7 . For the second quarter
of fiscal 2021, the increase was driven by the favorable impacts of volume,
pricing and foreign exchange rates of 64.3%, 4.3% and 13.2%, respectively. For
the six months ended April 3, 2021 ,
37
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Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
the increase was driven by the favorable impacts of volume, pricing and foreign
exchange rates of 63.0%, 2.2% and 9.9%, respectively.
Other Segment Profit was $17.6 in the second quarter of fiscal 2021, an increase
of 340.0% from the second quarter of fiscal 2020 Segment Profit of $4.0 ; and was
$17.6 for the first six months of fiscal 2021, an increase of 4,300.0% from the
first six months of fiscal 2020 Segment Profit of $0.4 . For the three and six
months ended April 3, 2021 , the increase was driven by higher net sales and a
higher gross profit rate, partially offset by higher SG&A.
Corporate
Corporate expenses were $48.1 in the second quarter of fiscal 2021, an increase
of 30.4% from second quarter of fiscal 2020 expenses of $36.9 ; and were $82.7
for the first six months of fiscal 2021, an increase of 31.3% from the first six
months of fiscal 2020 expenses of $63.0 . For the three and six months ended
April 3, 2021 , the increase was driven by higher short-term variable cash
incentive compensation expense as well as an increase in the expected payout
percentage on long-term performance-based awards and a higher annual grant value
of share-based awards.
LIQUIDITY AND CAPITAL RESOURCES
The following table summarizes cash activities:
Six Months Ended
April 3, March 28,
2021 2020
Net cash used in operating activities $ (699.9) $(607.1)
Net cash provided by (used in) investing activities (173.8)
82.1
Net cash provided by financing activities 871.1 537.3
Operating Activities Cash used in operating activities totaled$699.9 for the six months endedApril 3, 2021 , an increase of$92.8 as compared to cash used in operating activities of$607.1 for the six months endedMarch 28, 2020 . This increase was driven by higher inventory production, higher short-term variable cash incentive compensation payouts and higher SG&A during the six months endedApril 3, 2021 , partially offset by higher net sales and lower interest payments. Investing Activities Cash used in investing activities totaled$173.8 for the six months endedApril 3, 2021 as compared to cash provided by investing activities of$82.1 for the six months endedMarch 28, 2020 . Cash used for investments in property, plant and equipment during the first six months of fiscal 2021 and 2020 was$53.7 and$29.4 , respectively. During the six months endedApril 3, 2021 , we acquired a 50% equity interest inBonnie Plants, LLC in exchange for a cash payment of$100.7 , as well as non-cash investing activities that included forgiveness of our outstanding loan receivable with AFC and surrender of our options to increase our economic interest in the Bonnie Plants business. In addition, during the six months endedApril 3, 2021 , we acquired contract rights within ourU.S. Consumer segment for a cash payment of$10.0 and we paid cash of$8.9 associated with currency forward contracts. During the six months endedMarch 28, 2020 , we received proceeds of$115.5 from the sale of the Roundup® brand extension assets, made a$2.5 loan investment and paid cash of$1.7 associated with currency forward contracts. Financing Activities Cash provided by financing activities totaled$871.1 for the six months endedApril 3, 2021 as compared to$537.3 for the six months endedMarch 28, 2020 . This increase was driven by the issuance of$500.0 aggregate principal amount of 4.000% Senior Notes, partially offset by net borrowings under our Fifth A&R Credit Facilities (as defined below) of$519.2 during the six months endedApril 3, 2021 as compared to$620.2 during the six months endedMarch 28, 2020 , the issuance of$450.0 aggregate principal amount of 4.500% Senior Notes and the redemption of all$400.0 aggregate principal amount of 6.000% Senior Notes during the six months endedMarch 28, 2020 , an increase in repurchases of our Common Shares of$11.8 during the six months endedApril 3, 2021 and a payment of$15.5 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$14.4 ,$30.8 and$16.6 as ofApril 3, 2021 ,March 28, 2020 andSeptember 30, 2020 , respectively, 38 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) included$6.2 ,$19.9 and$9.4 , respectively, held by controlled foreign corporations. As ofApril 3, 2021 , 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. We maintain the Fifth A&R Credit Agreement that provides senior secured loan facilities in the aggregate principal amount of$2,300.0 , comprised of a revolving credit facility of$1,500.0 and a term loan in the original principal amount of$800.0 (the "Fifth A&R Credit Facilities"). The Fifth A&R Credit Agreement is available for issuance of letters of credit up to$75.0 and will terminate onJuly 5, 2023 . AtApril 3, 2021 , we had letters of credit outstanding in the aggregate principal amount of$19.8 and had$1,020.0 of borrowing availability under the Fifth A&R Credit Agreement. The weighted average interest rates on average borrowings under the Fifth A&R Credit Agreement were 1.9% and 3.7% for the six months endedApril 3, 2021 andMarch 28, 2020 , respectively. The Fifth A&R Credit Agreement contains, among other obligations, an affirmative covenant regarding our leverage ratio on the last day of each quarter calculated as average total indebtedness, divided by our earnings before interest, taxes, depreciation and amortization ("EBITDA"), as adjusted pursuant to the terms of the Fifth A&R Credit Agreement ("Adjusted EBITDA"). The maximum leverage ratio is 4.50. Our leverage ratio was 2.11 atApril 3, 2021 . 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 endedApril 3, 2021 . Our interest coverage ratio was 13.58 for the twelve months endedApril 3, 2021 . As ofApril 3, 2021 , 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 repurchases of Common Shares, as long as the leverage ratio resulting from the making of such restricted payments is 4.00 or less. Otherwise, we may make further restricted payments in an aggregate amount for each fiscal year not to exceed$225.0 . We continue to monitor our compliance with the leverage ratio, interest coverage ratio and other covenants contained in the Fifth A&R Credit Agreement and, based upon our current operating assumptions, we expect to remain in compliance with the permissible leverage ratio and interest coverage ratio throughout fiscal 2021. 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 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 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 , 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 Condensed 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 Condensed Consolidated Statements of Operations. 39 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) OnMarch 17, 2021 , we issued$500.0 aggregate principal amount of 4.000% Senior Notes. The net proceeds of the offering were used to reduce borrowings under the Fifth A&R Credit Facilities. The 4.000% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with the our existing and future unsecured senior debt. The 4.000% Senior Notes have interest payment dates ofApril 1 andOctober 1 of each year, commencingOctober 1, 2021 . Substantially all of our directly and indirectly owned domestic subsidiaries serve as guarantors of the 4.000% 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 26, 2021 and ending onJune 18, 2021 is$160.0 . The Receivables Facility expires onAugust 20, 2021 but is expected to be renewed prior to its expiration. We account for the sale of receivables under the Receivables Facility as short-term debt and continue to carry the receivables on our Condensed Consolidated Balance Sheets, primarily as a result of our requirement to repurchase receivables sold. As ofApril 3, 2021 andMarch 28, 2020 , there were$160.0 in borrowings on receivables pledged as collateral under the Receivables Facility, and the carrying value of the receivables pledged as collateral was$177.8 . Interest Rate Swap Agreements We enter into interest rate swap agreements with major financial institutions that effectively convert a portion of our variable rate debt to a fixed rate. Interest payments made between the effective date and expiration date are hedged by the swap agreements. Swap agreements that were hedging interest payments as ofApril 3, 2021 ,March 28, 2020 andSeptember 30, 2020 had a maximum totalU.S. dollar equivalent notional amount of$900.0 ,$850.0 and$600.0 , respectively. The notional amount, effective date, expiration date and rate of each of the swap agreements outstanding atApril 3, 2021 are shown in the table below: Notional Effective Expiration Fixed Amount Date (a) Date Rate$ 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 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. 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 2020 Annual Report, under "ITEM 1A. RISK FACTORS - Our indebtedness could limit our flexibility and adversely affect our financial condition" and "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." 40 -------------------------------------------------------------------------------- Contents THE SCOTTS MIRACLE-GRO COMPANY (Dollars in millions, except per share data) Financial Disclosures About Guarantors and Issuers ofGuaranteed Securities The 5.250% Senior Notes, 4.500% Senior Notes and 4.000% Senior Notes were issued byScotts Miracle-Gro onDecember 15, 2016 ,October 22, 2019 andMarch 17, 2021 , respectively. The 5.250% Senior Notes, 4.500% Senior Notes and 4.000% 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 of Guaranteed Securities Registered or Being Registered." The guarantees are "full and unconditional," as those terms are used in Regulation S-X, Rule 3-10(b)(3), except that a Guarantor's guarantee will be released in certain circumstances set forth in the indentures governing the 5.250% Senior Notes, 4.500% Senior Notes and 4.000% 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 Fifth A&R Credit Agreement, except a release by or as a result of the repayment of the Fifth A&R Credit Agreement; or (vi) if the Guarantor ceases to be a "restricted subsidiary" and the Guarantor is not otherwise required to provide a guarantee of the 5.250% Senior Notes, 4.500% Senior Notes and 4.000% 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, 4.500% Senior Notes and 4.000% Senior Notes. Payments on the 5.250% Senior Notes, 4.500% Senior Notes and 4.000% 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 5.250% Senior Notes, 4.500% Senior Notes and 4.000% 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, 4.500% Senior Notes and 4.000% 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, 4.500% Senior Notes and 4.000% 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, 4.500% Senior Notes and 4.000% 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, 4.500% Senior Notes and 4.000% Senior Notes will not have a claim against the Guarantor. Each guarantee contains a provision intended to limit the Guarantor's liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent conveyance. However, there can be no assurance as to what standard a court will apply in making a determination of the maximum liability of each Guarantor. Moreover, this provision may not be effective to protect the guarantees from being voided under fraudulent conveyance laws. There is a possibility that the entire guarantee may be set aside, in which case the entire liability may be extinguished. The following tables present summarized financial information on a combined basis forScotts Miracle-Gro and the Guarantors. Transactions betweenScotts Miracle-Gro and the Guarantors have been eliminated and the summarized financial information does not reflect investments ofthe Scotts Miracle-Gro and the Guarantors in the Non-Guarantor subsidiaries. 41 --------------------------------------------------------------------------------
Contents THE SCOTTS MIRACLE-GRO COMPANY
(Dollars in millions, except per share data)
April 3, September 30,
2021 2020
Current assets $ 2,326.4 $ 1,087.1
Noncurrent assets (a) 2,075.0 1,871.5
Current liabilities 1,244.9 881.2
Noncurrent liabilities 2,559.0 1,697.0
(a)Includes amounts due from Non-Guarantor subsidiaries of $47.8 and $24.8 ,
respectively.
Six Months Ended Year Ended
April 3, September 30,
2021 2020
Net sales $ 2,397.6 $ 3,773.8
Gross profit 809.9 1,281.4
Income from continuing operations (a) 331.8 364.0
Net income 331.8
364.1
Net income attributable to controlling interest 330.9
362.9
(a)Includes intercompany (income) expense from Non-Guarantor subsidiaries of$(10.3) and$6.3 , respectively. Judicial and Administrative Proceedings We are party to various pending judicial and administrative proceedings arising in the ordinary course of business, including, among others, proceedings based on accidents or product liability claims and alleged violations of environmental laws. We have reviewed these pending judicial and administrative proceedings, including the probable outcomes, reasonably anticipated costs and expenses, and the availability and limits of our insurance coverage, and have established what we believe to be appropriate accruals. We believe that our assessment of contingencies is reasonable and that the related accruals, in the aggregate, are adequate; however, there can be no assurance that future quarterly or annual operating results will not be materially affected by these proceedings, whether as a result of adverse outcomes or as a result of significant defense costs. Contractual Obligations Other than as disclosed in this Quarterly Report on Form 10-Q, there have been no material changes outside of the ordinary course of business in our outstanding contractual obligations since the end of fiscal 2020 and throughApril 3, 2021 . 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 2020 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 2020 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. 42
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