SCOTTS MIRACLE-GRO CO [SMG] Filings

10-Q 1 smg-20220402.htm 10-Q smg-20220402

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

_________________________________________

FORM 10-Q

_________________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended April 2, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-11593

____________________________________

The Scotts Miracle-Gro Company

(Exact name of registrant as specified in its charter)

____________________________________________


Ohio									31-1414921
(State or other jurisdiction of incorporation or organization)									(I.R.S. Employer Identification No.)

14111 Scottslawn Road, Marysville, Ohio 43041

(Address of principal executive offices) (Zip Code)

(937) 644-0011

(Registrant’s telephone number, including area code)

_____________________________________________

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Shares, $0.01 stated value

SMG

NYSE

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).


Yes			☐			No			☒

As of May 6, 2022, there were 55,392,409 Common Shares outstanding.

Table of Contents


THE SCOTTS MIRACLE-GRO COMPANY INDEX
		PAGE NO.
PART I. FINANCIAL INFORMATION:

Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Operations — Three and six months ended April 2 , 2022 and April 3 , 2021	3
	Condensed Consolidated Statements of Comprehensive Income (Loss) — Three and six months ended April 2 , 2022 and April 3 , 2021	4
	Condensed Consolidated Statements of Cash Flows — Six months ended April 2 , 2022 and April 3 , 2021	5
	Condensed Consolidated Balance Sheets — April 2 , 2022, April 3 , 2021 and September 30, 2021	6
	Notes to Condensed Consolidated Financial Statements	7
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	41
Item 4.	Controls and Procedures	41

PART II. OTHER INFORMATION:

Item 1.	Legal Proceedings	42
Item 1A.	Risk Factors	42
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	43
Item 3.	Defaults Upon Senior Securities	43
Item 4.	Mine Safety Disclosures	43
Item 5.	Other Information	43
Item 6.	Exhibits	43
Index to Exhibits		44
Signatures		45

Table of Contents

PART I—FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

THE SCOTTS MIRACLE-GRO COMPANY

Condensed Consolidated Statements of Operations

(In millions, except per share data)

(Unaudited)


	Three Months Ended				Six Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Net sales	$	1,678.4	$	1,828.8	$	2,244.3	$	2,577.4
Cost of sales	1,084.7		1,158.9		1,532.0		1,707.7
Cost of sales—impairment, restructuring and other	5.3		12.4		5.3		21.4

Gross profit	588.4		657.5		707.0		848.3
Operating expenses:
Selling, general and administrative	204.7		231.5		358.7		388.2
Impairment, restructuring and other	0.1		2.5		1.8		3.2

Other income, net	(4.3)		(0.6)		(6.0)		(1.2)
Income from operations	387.9		424.1		352.5		458.1
Equity in loss of unconsolidated affiliates	6.5		1.5		13.8		1.5

Interest expense	28.3		19.3		52.1		35.4
Other non-operating income, net	(1.9)		(0.9)		(3.7)		(16.1)
Income from continuing operations before income taxes	355.0		404.2		290.3		437.3
Income tax expense from continuing operations	78.5		93.1		63.9		101.1
Income from continuing operations	276.5		311.1		226.4		336.2
Loss from discontinued operations, net of tax	—		(0.9)		—		(0.9)
Net income	$	276.5	$	310.2	$	226.4	$	335.3
Net income attributable to noncontrolling interest	—		(0.2)		—		(0.9)
Net income attributable to controlling interest	$	276.5	$	310.0	$	226.4	$	334.4

Basic income (loss) per common share:
Income from continuing operations	$	4.98	$	5.58	$	4.08	$	6.02
Loss from discontinued operations	—		(0.01)		—		(0.02)
Basic net income per common share	$	4.98	$	5.57	$	4.08	$	6.00
Weighted-average common shares outstanding during the period	55.5		55.7		55.5		55.7

Diluted income (loss) per common share:
Income from continuing operations	$	4.94	$	5.44	$	4.02	$	5.88
Loss from discontinued operations	—		(0.01)		—		(0.01)
Diluted net income per common share	$	4.94	$	5.43	$	4.02	$	5.87
Weighted-average common shares outstanding during the period plus dilutive potential common shares	56.0		57.1		56.3		57.0

See Notes to Condensed Consolidated Financial Statements.

Contents

THE SCOTTS MIRACLE-GRO COMPANY

Condensed Consolidated Statements of Comprehensive Income (Loss)

(In millions)

(Unaudited)


	Three Months Ended				Six Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021
Net income	$	276.5	$	310.2	$	226.4	$	335.3
Other comprehensive income (loss):
Net foreign currency translation adjustment	(1.3)		(4.3)		(5.6)		8.1
Net unrealized gains on derivative instruments, net of tax	16.2		7.4		25.8		9.9
Reclassification of net unrealized (gains) losses on derivative instruments to net income, net of tax	(4.3)		2.0		(4.5)		3.9

Net unrealized gains on securities, net of tax	0.1		—		0.3		—
Pension and other post-retirement benefit adjustments, net of tax	1.6		0.4		2.1		(0.8)
Total other comprehensive income	12.3		5.5		18.1		21.1
Comprehensive income	288.8		315.7		244.5		356.4
Comprehensive income attributable to noncontrolling interest	—		(0.2)		—		(0.9)
Comprehensive income attributable to controlling interest	$	288.8	$	315.5	$	244.5	$	355.5

See Notes to Condensed Consolidated Financial Statements.

Contents

THE SCOTTS MIRACLE-GRO COMPANY

Condensed Consolidated Statements of Cash Flows

(In millions)

(Unaudited)


	Six Months Ended
	April 2, 2022		April 3, 2021
OPERATING ACTIVITIES
Net income	$	226.4	$	335.3
Adjustments to reconcile net income to net cash used in operating activities:


Share-based compensation expense	23.2		25.8
Depreciation	32.4		31.3
Amortization	19.3		15.2





Equity in loss of unconsolidated affiliates	13.8		—
Other, net	0.2		(7.5)
Changes in assets and liabilities, net of acquired businesses:
Accounts receivable	(945.6)		(908.1)
Inventories	(436.4)		(393.8)
Prepaid and other assets	(37.6)		(50.9)
Accounts payable	(73.7)		176.0
Other current liabilities	37.4		90.0

Other non-current items	(2.3)		(13.3)
Other, net	0.3		0.1
Net cash used in operating activities	(1,142.6)		(699.9)

INVESTING ACTIVITIES
Proceeds from sale of long-lived assets	8.5		—

Investments in property, plant and equipment	(66.0)		(53.7)





Investments in unconsolidated affiliates	—		(100.7)
Payment for acquisitions, net of cash acquired	(202.8)		(10.5)
Other investing, net	4.5		(8.9)
Net cash used in investing activities	(255.8)		(173.8)

FINANCING ACTIVITIES
Borrowings under revolving and bank lines of credit and term loans	1,609.7		1,113.7
Repayments under revolving and bank lines of credit and term loans	(96.2)		(594.5)
Proceeds from issuance of 4.000% Senior Notes	—		500.0




Financing and issuance fees	—		(7.0)
Dividends paid	(93.2)		(70.9)

Purchase of Common Shares	(256.4)		(62.2)


Cash received from exercise of stock options	1.8		7.5
Acquisition of noncontrolling interests	—		(15.5)
Other financing, net	5.6		—
Net cash provided by financing activities	1,171.3		871.1
Effect of exchange rate changes on cash	0.1		0.4
Net decrease in cash and cash equivalents	(227.0)		(2.2)


Cash and cash equivalents at beginning of period	244.1		16.6
Cash and cash equivalents at end of period	$	17.1	$	14.4

See Notes to Condensed Consolidated Financial Statements.

Contents

THE SCOTTS MIRACLE-GRO COMPANY

Condensed Consolidated Balance Sheets

(In millions, except per share data)

(Unaudited)


	April 2, 2022		April 3, 2021		September 30, 2021
ASSETS
Current assets:
Cash and cash equivalents	$	17.1	$	14.4	$	244.1
Accounts receivable, less allowances of $16.5, $12.4 and $16.8, respectively	990.1		1,230.3		483.4
Accounts receivable pledged	444.5		177.8		—
Inventories	1,594.1		1,019.2		1,126.6

Prepaid and other current assets	208.6		132.0		169.9
Total current assets	3,254.4		2,573.7		2,024.0
Investment in unconsolidated affiliates	193.2		201.4		207.0
Property, plant and equipment, net of accumulated depreciation of $764.9, $713.3 and $737.4, respectively	621.0		565.3		622.2
Goodwill	688.1		546.1		605.2
Intangible assets, net	799.9		674.9		709.6
Other assets	650.9		372.7		632.0
Total assets	$	6,207.5	$	4,934.1	$	4,800.0

LIABILITIES AND EQUITY
Current liabilities:
Current portion of debt	$	459.7	$	212.8	$	57.8
Accounts payable	507.5		549.9		609.4


Other current liabilities	503.1		584.8		473.2
Total current liabilities	1,470.3		1,347.5		1,140.4
Long-term debt	3,350.0		2,322.5		2,236.7

Other liabilities	412.2		323.2		409.6
Total liabilities	5,232.5		3,993.2		3,786.7
Commitments and contingencies (Note 12)
Equity:
Common shares and capital in excess of $0.01 stated value per share; shares outstanding of 55.4, 55.7 and 55.6, respectively	361.8		473.0		477.0
Retained earnings	1,758.8		1,500.2		1,605.1
Treasury shares, at cost; 12.8, 12.4 and 12.6 shares, respectively	(1,097.2)		(954.3)		(1,002.4)
Accumulated other comprehensive loss	(48.4)		(78.0)		(66.4)


Total equity	975.0		940.9		1,013.3
Total liabilities and equity	$	6,207.5	$	4,934.1	$	4,800.0

See Notes to Condensed Consolidated Financial Statements.


Contents			THE SCOTTS MIRACLE-GRO COMPANY
			NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
			(Dollars in millions, except per share data)

NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

The Scotts Miracle-Gro Company (“Scotts Miracle-Gro” or “Parent”) and its subsidiaries (collectively, together with Scotts Miracle-Gro, the “Company”) are engaged in the manufacturing, marketing and sale of products for lawn and garden care and indoor and hydroponic gardening. The Company’s products are sold in North America, Europe and Asia.

The Company’s North America consumer lawn and garden business is highly seasonal, with more than 75% of its annual net sales occurring in the second and third fiscal quarters.

Organization and Basis of Presentation

The Company’s unaudited condensed consolidated financial statements for the three and six months ended April 2, 2022 and April 3, 2021 are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The condensed consolidated financial statements include the accounts of Scotts Miracle-Gro and its subsidiaries. All intercompany transactions and accounts have been eliminated in consolidation. The Company’s consolidation criteria are based on majority ownership (as evidenced by a majority voting interest in the entity) and an objective evaluation and determination of effective management control. On February 26, 2021, the Company acquired the remaining outstanding shares of AeroGrow International, Inc. (“AeroGrow”). Prior to this date, the equity owned by other shareholders was shown as noncontrolling interest in the Condensed Consolidated Balance Sheets, and the other shareholders’ portion of net earnings and other comprehensive income was shown as net (income) loss or comprehensive (income) loss attributable to noncontrolling interest in the Condensed Consolidated Statements of Operations and Condensed Consolidated Statements of Comprehensive Income (Loss), respectively. The results of businesses acquired or disposed of are included in the condensed consolidated financial statements from the date of each acquisition or up to the date of disposal, respectively. In the opinion of management, interim results reflect all normal and recurring adjustments and are not necessarily indicative of results for a full year.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted or condensed pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, this Quarterly Report on Form 10-Q should be read in conjunction with Scotts Miracle-Gro’s Annual Report on Form 10-K for the fiscal year ended September 30, 2021 (the “2021 Annual Report”), which includes a complete set of footnote disclosures, including the Company’s significant accounting policies.

The Company’s Condensed Consolidated Balance Sheet at September 30, 2021 has been derived from the Company’s audited Consolidated Balance Sheet at that date, but does not include all of the information and footnotes required by GAAP for complete financial statements.

Long-Lived Assets

The Company had non-cash investing activities of $13.0 and $7.9 during the six months ended April 2, 2022 and April 3, 2021, respectively, representing unpaid liabilities to acquire property, plant and equipment.

Statements of Cash Flows

Supplemental cash flow information was as follows:


	Six Months Ended
	April 2, 2022		April 3, 2021

Interest paid	$	58.9	$	32.1

Income tax (refunds) payments	(7.0)		25.1

Recently Adopted Accounting Pronouncements

In December 2019, the Financial Accounting Standards Board issued Accounting Standards Update No. 2019-12, “Income taxes (Topic 740): Simplifying the Accounting for Income Taxes,” which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Accounting Standards Codification 740 and also clarifies and amends existing guidance to improve consistent application. The Company adopted this guidance on October 1, 2021. The adoption of this guidance did not have a material impact on the Company’s consolidated financial position, results of operations or cash flows.


Contents			THE SCOTTS MIRACLE-GRO COMPANY
			NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
			(Dollars in millions, except per share data)

NOTE 2. DISCONTINUED OPERATIONS

International Business

Prior to August 31, 2017, the Company operated consumer lawn and garden businesses located in Australia, Austria, Belgium, Luxembourg, Czech Republic, France, Germany, Poland and the United Kingdom (the “International Business”). On August 31, 2017, the Company completed the sale of the International Business. As a result, effective in its fourth quarter of fiscal 2017, the Company classified its results of operations for all periods presented to reflect the International Business as a discontinued operation. The transaction included contingent consideration with a maximum payout of $23.8 and an initial fair value of $18.2, the payment of which depended on the achievement of certain performance criteria by the International Business following the closing of the transaction through fiscal 2020. During the third quarter of fiscal 2021, the Company agreed to accept a contingent consideration payout of $6.0 and recorded a pre-tax charge of $12.2 in the “Income (loss) from discontinued operations, net of tax” line in the Condensed Consolidated Statements of Operations during the third quarter of fiscal 2021 to write down the contingent consideration receivable to the agreed upon payout amount. During the three months ended April 2, 2022, the Company received the contingent consideration payment and this amount was classified as a financing activity in the “Other financing, net” line in the Condensed Consolidated Statements of Cash Flows.

NOTE 3. ACQUISITIONS AND INVESTMENTS

Cyco

On April 28, 2022, the Company’s Hawthorne segment completed the acquisition of substantially all of the assets of S.J. Enterprises PTY LTD, d.b.a. Cyco, an Australia-based provider of premium nutrients, additives and growing media products for indoor growing, for a purchase price of $34.4 plus contingent consideration with a maximum payout of $10.0 based on the achievement of certain performance metrics through December 31, 2024. Prior to the transaction, the Company served as the exclusive distributor of Cyco’s products in the United States.

Luxx Lighting

On December 30, 2021, the Company’s Hawthorne segment completed the acquisition of substantially all of the assets of Luxx Lighting, Inc., a leading provider of lighting products for indoor growing. The purchase price was $213.2, a portion of which was paid by the issuance of 0.1 million of the common shares of Scotts Miracle-Gro (“Common Shares”), a non-cash investing and financing activity, with a fair value of $21.0 based on the share price at the time of payment. During the three months ended April 2, 2022, the Company identified quality issues with certain products sold prior to the closing of the acquisition and recorded an accrual for product return refund liabilities and warranty claims of $8.0, and an offsetting increase to goodwill. At April 2, 2022, the preliminary valuation of the acquired assets included (i) $36.4 of inventory and accounts receivable, (ii) $6.3 of current assets, (iii) $20.3 of current liabilities, (iv) $106.9 of finite-lived identifiable intangible assets and (v) $83.9 of tax-deductible goodwill. Identifiable intangible assets included tradenames, customer relationships and non-compete agreements with useful lives ranging between 5 and 25 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate. Certain estimated values for the acquisition, including goodwill, intangible assets and accruals for refund liabilities and warranty claims, are not yet finalized and are subject to revision as additional information becomes available and more detailed analysis is completed.

True Liberty Bags

On December 23, 2021, the Company’s Hawthorne segment completed the acquisition of substantially all of the assets of True Liberty Bags, a leading provider of liners and storage solutions to dry and cure plant products, for $10.1. The valuation of the acquired assets included (i) $1.1 of inventory, (ii) $5.8 of finite-lived identifiable intangible assets and (iii) $3.2 of tax-deductible goodwill. Identifiable intangible assets included tradenames and customer relationships with useful lives ranging between 15 and 20 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate.

Hydro-Logic

On August 27, 2021, the Company’s Hawthorne segment completed the acquisition of substantially all of the assets of Hydro-Logic Purification Systems, Inc., a leading provider of products, accessories and systems for water filtration and purification, for $65.3. The valuation of the acquired assets included (i) $4.9 of inventory and accounts receivable, (ii) $1.6 of


Contents			THE SCOTTS MIRACLE-GRO COMPANY
			NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
			(Dollars in millions, except per share data)

noncurrent assets, (iii) $2.4 of other liabilities, (iv) $23.1 of finite-lived identifiable intangible assets and (v) $38.1 of tax-deductible goodwill. Identifiable intangible assets included tradenames, customer relationships and non-compete agreements with useful lives ranging between 5 and 25 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate.

The Hawthorne Collective

On August 24, 2021, the Company’s newly formed subsidiary, The Hawthorne Collective, Inc. (“THC”), made its initial investment under the Company’s strategic minority non-equity investment initiative in the form of a $150.0 six-year convertible note issued to the Company by Toronto-based RIV Capital Inc. (“RIV Capital”) (CSE: RIV) (OTC: CNPOF), a cannabis investment and acquisition firm listed on the Canadian Securities Exchange. The note accrues interest at 2 percent annually for the first two years and provides additional follow-on investment rights. Accrued interest will be payable to THC at maturity or will be included in the conversion value of the note at the time of conversion. The conversion feature, which is based upon the RIV Capital closing stock price on August 9, 2021, would provide the Company with approximately 42 percent ownership of RIV Capital if it exercises the conversion feature. In connection with the Company’s investment, RIV Capital increased the size of its board of directors from four to seven members and added three nominees of the Company to the board of directors.

On April 22, 2022, pursuant to its follow-on investment rights, the Company made an additional investment in RIV Capital in the form of a $25.0 convertible note. The note accrues interest at 2 percent annually for the first two years and matures on August 24, 2027. Accrued interest will be payable to THC at maturity or will be included in the conversion value of the note at the time of conversion. The conversion feature is based upon the RIV Capital closing stock price on March 29, 2022. Additionally, RIV Capital is expected to increase the size of its board of directors during fiscal 2022 from seven to nine members, which is expected to include four nominees of the Company.

The Company will not have control of or an active day-to-day role in RIV Capital or any of the companies in which RIV Capital invests. RIV Capital has agreed to use the funds it receives from the Company for general corporate and other lawful purposes, which could include acquisitions, and has agreed that the funds will not be used in connection with or for any cannabis or cannabis-related operations in the U.S. unless and until such operations comply with all applicable U.S. federal laws.

During the fourth quarter of fiscal 2021, THC made additional minority non-equity investments of $43.1 in other entities focused on branded cannabis and high quality genetics. These additional investments also include conversion features that would provide the Company with minority ownership interests if it exercises the conversion features, as well as restrictions that the funds will not be used in connection with or for any cannabis or cannabis-related operations in the U.S. unless and until such operations comply with all applicable U.S. federal laws.

Rhizoflora

On August 13, 2021, the Company’s Hawthorne segment completed the acquisition of substantially all of the assets of Rhizoflora, Inc., the manufacturer of terpene enhancing nutrient products Terpinator® and Purpinator®, for $33.7. The valuation of the acquired assets included (i) $0.6 of inventory, (ii) $10.9 of finite-lived identifiable intangible assets and (iii) $22.2 of tax-deductible goodwill. Identifiable intangible assets included tradenames, customer relationships and non-compete agreements with useful lives ranging between 5 and 25 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate.

AeroGrow

On November 11, 2020, the Company entered into an agreement and plan of merger to acquire the remaining outstanding shares of AeroGrow for cash consideration of $3.00 per share, or approximately $20.1. The merger closed on February 26, 2021. SMG Growing Media, Inc., a wholly-owned subsidiary of Scotts Miracle-Gro, was the holder of 80.5% of the outstanding shares of AeroGrow prior to the closing and now holds 100% of the outstanding shares of AeroGrow. The closing date carrying value of the noncontrolling interest was $6.7 and the $13.4 difference between the purchase price and carrying value was recognized in the “Common shares and capital in excess of $0.01 stated value per share” line within “Total equity” in the Condensed Consolidated Balance Sheets.


Contents			THE SCOTTS MIRACLE-GRO COMPANY
			NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) — (Continued)
			(Dollars in millions, except per share data)

NOTE 4. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

On December 31, 2020, pursuant to the terms of the Contribution and Unit Purchase Agreement between the Company and Alabama Farmers Cooperative, Inc. (“AFC”), the Company acquired a 50% equity interest in the Bonnie Plants business of planting, growing, developing, distributing, marketing and selling live plants through a newly formed joint venture with AFC (“Bonnie Plants, LLC”) in exchange for a cash payment of $100.7, as well as non-cash investing activities that included forgiveness of the Company’s outstanding loan receivable with AFC and surrender of the Company’s options to increase its economic interest in the Bonnie Plants business. The Company’s 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 on December 31, 2020 and the Company recognized a gain of $12.5 during the three months ended January 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. The Company’s options to increase its economic interest in the Bonnie Plants business were previously recognized in the “Other assets” line in the Condensed Consolidated Balance Sheets and had an estimated fair value of $23.3 on December 31, 2020. The Company’s interest in Bonnie Plants, LLC had an initial fair value of $202.9 and is recorded in the “Investment in unconsolidated affiliates” line in the Condensed Consolidated Balance Sheets. The Company’s interest is accounted for using the equity method of accounting, with the Company’s proportionate share of Bonnie Plants, LLC earnings subsequent to December 31, 2020 reflected in the Condensed Consolidated Statements of Operations. During the three and six months ended April 2, 2022, the Company recorded equity in loss of unconsolidated affiliates associated with Bonnie Plants, LLC of $6.5 and $13.8, respectively, as compared to $1.5 during both the three and six months ended April 3, 2021. The estimated fair value of the loan receivable with AFC was determined using an income-based approach, which includes market participant expectations of cash flows over the remaining useful life discounted to present value using an appropriate discount rate. The fair value estimate utilized significant unobservable inputs and thus represents a Level 3 nonrecurring fair value measurement.

NOTE 5. IMPAIRMENT, RESTRUCTURING AND OTHER

Activity described herein is classified within the “Cost of sales—impairment, restructuring and other” and “Impairment, restructuring and other” lines in the Condensed Consolidated Statements of Operations. The following table details impairment, restructuring and other charges (recoveries) for each of the periods presented:


	Three Months Ended				Six Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021

Cost of sales—impairment, restructuring and other:
COVID-19 related costs	$	—	$	12.3	$	—	$	21.0
Restructuring and other charges, net	2.5		0.1		2.5		0.4
Property, plant and equipment impairments	2.8		—		2.8		—
Operating expenses:
COVID-19 related costs	—		2.6		—		3.2
Restructuring and other charges (recoveries), net	0.1		(0.1)		1.8		—

Impairment, restructuring and other charges from continuing operations	$	5.4	$	14.9	$	7.1	$	24.6

The following table summarizes the activity related to liabilities associated with restructuring and other during the six months ended April 2, 2022:


Amounts accrued for restructuring and other at September 30, 2021	$	1.9
Restructuring and other charges from continuing operations	2.6

Payments and other	(2.7)
Amounts accrued for restructuring and other at April 2, 2022	$	1.8

Included in restructuring accruals, as of April 2, 2022, is $0.4 that is classified as long-term. Payments against the long-term accruals will be incurred as the employees covered by the restructuring plan retire or through the passage of time. The remaining amounts accrued will continue to be paid out over the course of the next twelve months.

During the second quarter of fiscal 2022, the Company announced plans to consolidate U.S. lighting manufacturing for its Hawthorne segment into a single location and to close another recently acquired assembly facility and move those operations to its Santa Rosa, California facility. During the three and six months ended April 2, 2022, the Company’s Hawthorne segment


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incurred costs of $5.3 in the “Cost of sales—impairment, restructuring and other” line in the Condensed Consolidated Statements of Operations and $0.1 in the “Impairment, restructuring and other” line in the Condensed Consolidated Statements of Operations in connection with this restructuring initiative related to employee termination benefits and impairment of property, plant and equipment.

The COVID-19 pandemic has had, and continues to have, an impact on financial markets, economic conditions, and portions of the Company’s business and industry. The Company has actively addressed the pandemic’s ongoing impact on its employees, operations, customers, consumers, and communities, by, among other things, implementing contingency plans, making operational adjustments where necessary, and providing assistance to organizations that support front-line workers. The first priority of the Company’s pandemic response has been and remains the health, safety and well-being of its employees. In addition to implementing measures to help ensure the health and safety of its employees, the Company implemented an interim premium pay allowance for certain associates in its field sales force and its manufacturing and distribution centers. Costs incurred during the three and six months ended April 2, 2022 related to COVID-19 were immaterial. During the three and six months ended April 3, 2021, the Company incurred costs of $14.9 and $24.2, respectively, associated with the COVID-19 pandemic primarily related to premium pay. The Company incurred costs of $10.7 and $19.0 in its U.S. Consumer segment, $1.5 and $1.9 in its Hawthorne segment and $0.1 in its Other segment in the “Cost of sales—impairment, restructuring and other” line in the Condensed Consolidated Statements of Operations during the three and six months ended April 3, 2021, respectively. The Company incurred costs of $2.6 and $3.2 in its U.S. Consumer segment in the “Impairment, restructuring and other” line in the Condensed Consolidated Statements of Operations during the three and six months ended April 3, 2021, respectively.

NOTE 6. INVENTORIES

Inventories consisted of the following for each of the periods presented:


	April 2, 2022		April 3, 2021		September 30, 2021

Finished goods	$	1,153.2	$	709.1	$	793.7
Raw materials	332.5		238.4		242.8
Work-in-process	108.4		71.7		90.1
Total inventories	$	1,594.1	$	1,019.2	$	1,126.6

Adjustments to reflect inventories at net realizable values were $16.4 at April 2, 2022, $21.4 at April 3, 2021 and $22.5 at September 30, 2021.

NOTE 7. MARKETING AGREEMENT

The Scotts Company LLC (“Scotts LLC”) is the exclusive agent of Monsanto Company, a subsidiary of Bayer AG (“Monsanto”), for the marketing and distribution of certain of Monsanto’s consumer Roundup® branded products in the United States and certain other specified countries. Effective August 1, 2019, the Company entered into the Third Amended and Restated Exclusive Agency and Marketing Agreement (the “Third Restated Agreement”) which amended, among other things, the provisions of the Second Amended and Restated Exclusive Agency and Marketing Agreement (the “Restated Marketing Agreement”) relating to commissions, contributions, noncompetition, and termination. The annual commission payable under the Third Restated Agreement is equal to 50% of the actual earnings before interest and income taxes of Monsanto’s consumer Roundup® business for each program year in the markets covered by the Third Restated Agreement (“Program EBIT”). The Third Restated Agreement also requires the Company to make annual payments of $18.0 to Monsanto as a contribution against the overall expenses of its consumer Roundup® business, subject to reduction pursuant to the Third Restated Agreement for any program year in which the Program EBIT does not equal or exceed $36.0.

Unless Monsanto terminates the Third Restated Agreement due to an event of default by the Company, termination rights under the Third Restated Agreement include the following:

•The Company may terminate the Third Restated Agreement upon the insolvency or bankruptcy of Monsanto;

•Monsanto may terminate the Third Restated Agreement in the event that Monsanto decides to decommission the permits, licenses and registrations needed for, and the trademarks, trade names, packages, copyrights and designs used in, the sale of the Roundup® products in the lawn and garden market (a “Brand Decommissioning Termination”); and

•Each party may terminate the Third Restated Agreement if Program EBIT falls below $50.0 and, in such case, no termination fee would be payable to either party.


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The termination fee structure requires Monsanto to pay a termination fee to the Company in an amount equal to (i) $375.0 upon a Brand Decommissioning Termination, and (ii) the greater of $175.0 or four times an amount equal to the average of the Program EBIT for the three program years before the year of termination, minus $186.4, if Monsanto or its successor terminates the Third Restated Agreement as a result of a Roundup Sale or Change of Control of Monsanto (each, as defined in the Third Restated Agreement).

The elements of the net commission and reimbursements earned under the Third Restated Agreement and included in the “Net sales” line in the Condensed Consolidated Statements of Operations are as follows:


	Three Months Ended				Six Months Ended
	April 2, 2022		April 3, 2021		April 2, 2022		April 3, 2021

Gross commission	$	46.7	$	42.5	$	52.4	$	50.2
Contribution expenses	(4.5)		(4.5)		(9.0)		(9.0)

Net commission	42.2		38.0		43.4		41.2
Reimbursements associated with Roundup® marketing agreement	22.0		26.6		41.6		40.6
Total net sales associated with Roundup® marketing agreement	$	64.2	$	64.6	$	85.0	$	81.8

NOTE 8. DEBT

The components of debt are as follows:


	April 2, 2022		April 3, 2021		September 30, 2021

Credit Facilities:
Revolving loans	$	1,135.0	$	460.2	$	—
Term loans	650.0		690.0		670.0
Senior Notes due 2031 – 4.000%	500.0		500.0		500.0
Senior Notes due 2032 – 4.375%	400.0		—		400.0
Senior Notes due 2029 – 4.500%	450.0		450.0		450.0
Senior Notes due 2026 – 5.250%	250.0		250.0		250.0

Receivables facility	400.0		160.0		—
Finance lease obligations	30.5		33.5		33.4
Other	13.6		7.6		11.9
Total debt	3,829.1		2,551.3		2,315.3
Less current portions	459.7		212.8		57.8
Less unamortized debt issuance costs	19.4		16.0		20.8
Long-term debt	$	3,350.0	$	2,322.5	$	2,236.7

Credit Facilities

On July 5, 2018, the Company entered into a fifth amended and restated credit agreement (the “Fifth A&R Credit Agreement”), which provided the Company and certain of its subsidiaries with five-year senior secured loan facilities in the aggregate principal amount of $2,300.0, comprised of a revolving credit facility of $1,500.0 and a term loan in the original principal amount of $800.0 (the “Fifth A&R Credit Facilities”). Under the Fifth A&R Credit Facilities, the Company had the ability to obtain letters of credit up to $75.0.

At April 2, 2022, the Company had letters of credit outstanding in the aggregate principal amount of $19.9 and had $345.2 of borrowing availability under the Fifth A&R Credit Agreement. The weighted average interest rates on average borrowings under the Fifth A&R Credit Agreement were 1.8% and 1.9% for the six months ended April 2, 2022 and April 3, 2021, respectively.

On April 8, 2022, the Company entered into a sixth amended and restated credit agreement (the “Sixth A&R Credit Agreement”), providing the Company and certain of its subsidiaries with five-year senior secured loan facilities in the aggregate principal amount of $2,500.0, comprised of a revolving credit facility of $1,500.0 and a term loan in the original principal amount of $1,000.0 (the “Sixth A&R Credit Facilities”). The Sixth A&R Credit Agreement also provides the Company with the


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right to seek additional committed credit under the agreement in an aggregate amount of up to $500.0 plus an unlimited additional amount, subject to certain specified financial and other conditions. The Sixth A&R Credit Agreement replaces the Fifth A&R Credit Agreement and will terminate on April 8, 2027. The Sixth A&R Credit Facilities will be available for issuance of letters of credit up to $100.0. The terms of the Sixth A&R Credit Agreement include customary representations and warranties, affirmative and negative covenants, financial covenants, and events of default. The Fifth A&R Credit Agreement would have terminated on July 5, 2023, if it had not been amended and restated pursuant to the Sixth A&R Credit Agreement.

Under the terms of the Sixth A&R Credit Agreement, loans bear interest, at the Company’s election, at a rate per annum equal to either (i) the Alternate Base Rate plus the Applicable Spread (each, as defined in the Sixth A&R Credit Agreement) or (ii) the Adjusted Term SOFR Rate for the Interest Period in effect for such borrowing plus the Applicable Spread (all as defined in the Sixth A&R Credit Agreement). Swingline Loans shall bear interest at the applicable Swingline Rate set forth in the Sixth A&R Credit Agreement. Further, interest rates for other select non-U.S. dollar borrowings, including borrowings denominated in euro, Pounds Sterling and Canadian Dollars, are based on separate interest rate indices, as set forth in the Sixth A&R Credit Agreement. The Sixth A&R Credit Agreement is secured by (i) a perfected first priority security interest in all of the accounts receivable, inventory and equipment of Scotts Miracle-Gro and certain of its domestic subsidiaries and (ii) the pledge of all of the capital stock of certain of Scotts Miracle-Gro’s domestic subsidiaries and a portion of the capital stock of certain of its foreign subsidiaries. The collateral does not include any of the Company’s intellectual property.

The Sixth A&R Credit Agreement contains, among other obligations, an affirmative covenant regarding the Company’s leverage ratio determined as of the end of each of its fiscal quarters ending on and after April 2, 2022 calculated as average total indebtedness, divided by the Company’s earnings before interest, taxes, depreciation and amortization (“EBITDA”), as adjusted pursuant to the terms of the Sixth A&R Credit Agreement (“Adjusted EBITDA”). The maximum permitted leverage ratio is 4.50, which is unchanged from the Fifth A&R Credit Agreement. The Company’s leverage ratio was 3.81 at April 2, 2022. The Sixth A&R Credit Agreement also contains an affirmative covenant regarding the Company’s interest coverage ratio determined as of the end of each of its fiscal quarters ending on and after April 2, 2022. The interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in the Sixth A&R Credit Agreement, and excludes costs related to refinancings. The minimum required interest coverage ratio is 3.00, which is unchanged from the Fifth A&R Credit Agreement. The Company’s interest coverage ratio was 7.81 for the twelve months ended April 2, 2022.

The Sixth A&R Credit Agreement allows the Company to make unlimited restricted payments (as defined in the Sixth A&R Credit Agreement), including dividend payments on, 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, the Company may make further restricted payments in an aggregate amount for each fiscal year not to exceed $225.0.

Senior Notes

On December 15, 2016, Scotts Miracle-Gro 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 the Company’s existing and future unsecured senior debt. The 5.250% Senior Notes have interest payment dates of June 15 and December 15 of each year. Substantially all of Scotts Miracle-Gro’s directly and indirectly owned domestic subsidiaries serve as guarantors of the 5.250% Senior Notes.

On October 22, 2019, Scotts Miracle-Gro issued $450.0 aggregate principal amount of 4.500% Senior Notes due 2029 (the “4.500% Senior Notes”). The 4.500% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with the Company’s existing and future unsecured senior debt. The 4.500% Senior Notes have interest payment dates of April 15 and October 15 of each year. All of Scotts Miracle-Gro’s domestic subsidiaries that serve as guarantors of the 5.250% Senior Notes also serve as guarantors of the 4.500% Senior Notes.

On March 17, 2021, Scotts Miracle-Gro issued $500.0 aggregate principal amount of 4.000% Senior Notes due 2031 (the “4.000% Senior Notes”). The 4.000% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with the Company’s existing and future unsecured senior debt. The 4.000% Senior Notes have interest payment dates of April 1 and October 1 of each year. All of Scotts Miracle-Gro’s domestic subsidiaries that serve as guarantors of the 5.250% Senior Notes also serve as guarantors of the 4.000% Senior Notes.

On August 13, 2021, Scotts Miracle-Gro issued $400.0 aggregate principal amount of