Scotts Miracle-Gro(SMG) - 2024 Q3 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements for the third quarter and first nine months of fiscal 2024, Management's Discussion and Analysis (MD&A) of the company's financial condition and results of operations, disclosures on market risk, and an evaluation of controls and procedures Financial Statements (Unaudited) This section contains the unaudited condensed consolidated financial statements for the three and nine months ended June 29, 2024, and July 1, 2023, including Statements of Operations, Comprehensive Income, Cash Flows, and Balance Sheets, along with detailed Notes Condensed Consolidated Statements of Operations (in millions, except per share data) | | Three Months Ended | | Nine Months Ended | | | :--- | :--- | :--- | :--- | :--- | | | June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | | Net sales | $1,202.2 | $1,118.7 | $3,138.0 | $3,176.8 | | Gross margin | $354.1 | $205.9 | $880.0 | $714.3 | | Income from operations | $200.1 | $77.3 | $424.9 | $241.7 | | Net income | $132.1 | $43.7 | $209.1 | $88.3 | | Diluted net income per common share | $2.28 | $0.77 | $3.64 | $1.57 | Condensed Consolidated Statements of Cash Flows (in millions) | | Nine Months Ended | | | :--- | :--- | :--- | | | June 29, 2024 | July 1, 2023 | | Net cash provided by (used in) operating activities | $549.0 | $(4.3) | | Net cash used in investing activities | $(80.0) | $(44.6) | | Net cash used in financing activities | $(221.1) | $(11.0) | | Net increase (decrease) in cash | $248.0 | $(59.4) | | Cash and cash equivalents at end of period | $279.9 | $27.4 | Condensed Consolidated Balance Sheets (in millions) | | June 29, 2024 | July 1, 2023 | Sept 30, 2023 | | :--- | :--- | :--- | :--- | | Total current assets | $1,538.4 | $2,251.0 | $1,397.8 | | Total assets | $3,489.3 | $4,454.4 | $3,413.7 | | Total current liabilities | $854.4 | $1,329.1 | $773.7 | | Total liabilities | $3,635.5 | $4,319.6 | $3,681.0 | | Total equity (deficit) | $(146.2) | $134.8 | $(267.3) | Notes to Condensed Consolidated Financial Statements The notes provide detailed explanations of the company's accounting policies and financial results, covering a new accounts receivable sales agreement, restructuring activities, debt covenants, segment performance, and legal contingencies - The company's business is highly seasonal, with about 75% of annual net sales in the North America consumer lawn and garden business occurring in the second and third fiscal quarters[14] - On October 27, 2023, the company entered into a Master Receivables Purchase Agreement to sell up to $600.0 million in customer receivables, with proceeds from these sales totaling $1,680.0 million during the nine months ended June 29, 2024[17] - The company purchased an additional 5% equity interest in the Bonnie Plants, LLC joint venture for $21.4 million on November 7, 2023, restoring its total equity interest to 50%, and recorded an impairment charge of $10.4 million on this investment during the first nine months of fiscal 2024[26][27] Impairment, Restructuring and Other Charges (in millions) | | Nine Months Ended June 29, 2024 | Nine Months Ended July 1, 2023 | | :--- | :--- | :--- | | Cost of sales charges | $66.6 | $161.8 | | Operating expenses charges | $(5.9) | $32.0 | | Total charges (recoveries), net | $60.8 | $193.8 | Total Net Sales from Roundup® Marketing Agreement (in millions) | | Three Months Ended | | Nine Months Ended | | | :--- | :--- | :--- | :--- | :--- | | | June 29, 2024 | July 1, 2023 | June 29, 2024 | July 1, 2023 | | Total Net Sales | $54.4 | $31.3 | $142.9 | $123.3 | - As of June 29, 2024, the company was in compliance with its debt covenants, with a leverage ratio of 5.46 (vs. a maximum of 6.50) and a fixed charge coverage ratio of 1.15 (vs. a minimum of 0.75)[47] - The company is facing new shareholder class action and derivative lawsuits filed in June and July 2024, alleging misstatements about inventories, sales, and business prospects between 2021 and 2023[80][81] - The company's investment in RIV Capital may be subject to a non-cash, pre-tax impairment charge of approximately $70.0 million upon the closing of RIV Capital's transaction with Cansortium Inc[95] Segment Net Sales (in millions) | Segment | Nine Months Ended June 29, 2024 | Nine Months Ended July 1, 2023 | | :--- | :--- | :--- | | U.S. Consumer | $2,704.0 | $2,642.7 | | Hawthorne | $214.2 | $317.6 | | Other | $219.8 | $216.5 | | Consolidated | $3,138.0 | $3,176.8 | Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses the company's financial performance for the third quarter and first nine months of fiscal 2024, highlighting strong U.S. Consumer segment performance, continued challenges and restructuring in the Hawthorne segment, improved gross margins, and reduced debt levels Executive Summary The executive summary outlines the company's three reportable segments (U.S. Consumer, Hawthorne, Other) and highlights recent events, including an ongoing restructuring initiative aimed at delivering over $300 million in savings, and persistent adverse conditions in the Hawthorne segment due to cannabis oversupply - The company is implementing a restructuring initiative expected to deliver run-rate annualized savings of at least $300.0 million, with nearly all savings realized by the end of fiscal 2024, and costs incurred from inception through June 29, 2024, were $363.8 million[116] - The Hawthorne segment continues to face adverse results due to an oversupply of cannabis, which has significantly decreased wholesale prices and cultivation, leading Hawthorne to discontinue the distribution of other companies' products to focus on its proprietary brands[116] Results of Operations For the first nine months of fiscal 2024, net sales decreased 1.2% to $3.14 billion, while gross margin rate improved significantly to 28.0% from 22.5% year-over-year, driven by lower costs and reduced restructuring charges, with net income increasing substantially to $209.1 million from $88.3 million in the prior year, aided by lower interest expense and a higher gross margin Drivers of Net Sales Change (Nine Months Ended June 29, 2024) | Factor | Change | | :--- | :--- | | Pricing | (1.1)% | | Volume and mix | (0.1)% | | Foreign exchange rates | 0.0% | | Total Change in net sales | (1.2)% | Drivers of Gross Margin Rate Change (Nine Months Ended June 29, 2024) | Factor | Change | | :--- | :--- | | Volume, mix and other | 2.6% | | Material costs | 0.7% | | Roundup commissions/reimbursements | 0.1% | | Pricing | (0.8)% | | Impairment, restructuring and other | 2.9% | | Total Change in gross margin rate | 5.5% | - SG&A expenses for the nine months ended June 29, 2024, decreased by 0.4% to $441.4 million, primarily due to lower amortization and reductions in staffing and other cost-saving initiatives, which offset higher advertising and share-based compensation expenses[133] - Interest expense for the nine months decreased 9.1% to $125.6 million, driven by lower average borrowings of $591.6 million, despite a 50 basis point increase in the weighted average interest rate[140] Segment Results For the first nine months of fiscal 2024, the U.S. Consumer segment saw a 2.3% increase in net sales and a 4.9% rise in segment profit, while the Hawthorne segment's net sales fell by 32.6%, but its segment loss narrowed significantly to $9.2 million from $41.7 million, and the Other segment's sales grew 1.5%, but its profit declined by 40.4% - U.S. Consumer segment sales rose 2.3% to $2.70 billion for the first nine months, driven by a 3.3% increase in volume, primarily from mulch, controls, and the Roundup® marketing agreement[146] - Hawthorne segment sales declined 32.6% to $214.2 million for the first nine months, driven by a 30.9% drop in volume across all product categories and the discontinuation of sales of other companies' products[148] - Despite the sharp sales decline, Hawthorne's Segment Loss for the first nine months improved to $9.2 million from a loss of $41.7 million in the prior year, due to higher gross margin and lower SG&A[149] Liquidity and Capital Resources The company's liquidity has significantly improved, with cash from operations reaching $549.0 million for the first nine months of 2024, compared to a $4.3 million use of cash in the prior year, driven by lower accounts receivable (aided by a new sales agreement), better margins, and favorable accounts payable timing, and the company has actively reduced debt, including a $200.0 million term loan repayment made after the quarter-end, and expects to remain compliant with all debt covenants - Cash provided by operating activities increased to $549.0 million for the nine months ended June 29, 2024, a significant improvement from a $4.3 million use of cash in the same period last year, primarily due to lower accounts receivable, higher gross margin, and favorable accounts payable timing[154] - The company had net debt repayments of $127.9 million under its credit facilities and paid dividends of $113.7 million during the first nine months of fiscal 2024[156] - As of June 29, 2024, the company was in compliance with all debt covenants, and based on projections, management expects to remain in compliance for the next twelve months but has contingency plans, including further restructuring and potential financing transactions, if needed[167] - On August 6, 2024, after the quarter ended, the company used available cash to make a $200.0 million repayment on the principal of its term loan[165] Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes to the company's market risks since the disclosures made in its Annual Report on Form 10-K for the fiscal year ended September 30, 2023 - Market risks have not materially changed from those disclosed in the 2023 Annual Report[189] Controls and Procedures Management, including the principal executive and financial officers, evaluated the company's disclosure controls and procedures and concluded they were effective as of June 29, 2024, with no material changes to internal control over financial reporting occurring during the quarter - The company's principal executive officer and principal financial officer have concluded that the Registrant's disclosure controls and procedures were effective as of June 29, 2024[191] - There were no changes in the company's internal control over financial reporting during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[192] PART II. OTHER INFORMATION This part covers other required disclosures, including new legal proceedings, a confirmation that risk factors are unchanged, details on share repurchases, and a list of exhibits filed with the report Legal Proceedings The company reports two new legal matters: shareholder class action lawsuits filed in June and July 2024 alleging misstatements about inventories, sales, and business prospects, and shareholder derivative lawsuits filed in July 2024 with similar allegations, which the company believes are without merit - In June and July 2024, shareholder class action lawsuits were filed against the company and certain officers, alleging violations of the Securities Exchange Act based on misstatements about inventories, sales, and business prospects between 2021 and 2023[194] - In July 2024, shareholder derivative lawsuits were filed against certain current and former officers and directors, mirroring the allegations in the securities class actions and claiming breaches of fiduciary duties[195] Risk Factors The company states that its risk factors have not materially changed from those described in its Annual Report on Form 10-K for the fiscal year ended September 30, 2023 - The Company's risk factors, as of June 29, 2024, have not materially changed from those described in the 2023 Annual Report[196] Unregistered Sales of Equity Securities and Use of Proceeds During the third quarter of fiscal 2024, a total of 6,033 common shares were purchased in open market transactions by a trustee for an executive retirement plan, and the company's formal share repurchase program expired in March 2023, with no active program currently in place Common Share Purchases (Q3 2024) | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | March 31 - April 27, 2024 | 1,242 | $67.64 | | April 28 - May 25, 2024 | 0 | N/A | | May 26 - June 29, 2024 | 4,791 | $66.91 | | Total | 6,033 | $67.06 | - The company's $750.0 million share repurchase program expired on March 25, 2023, and as of June 29, 2024, the company does not have an active repurchase program[202] Defaults Upon Senior Securities The company reports no defaults upon its senior securities - None[203] Mine Safety Disclosures This item is not applicable to the company - Not applicable[204] Other Information No director or officer adopted or terminated any Rule 10b5-1 trading arrangement or non-Rule 10b5-1 trading arrangement during the third quarter of fiscal 2024 - During the third quarter of fiscal 2024, no director or officer adopted or terminated any Rule 10b5-1 or non-Rule 10b5-1 trading arrangement[205] Exhibits This section provides an index of the exhibits filed with the Form 10-Q, including an amendment to the credit agreement, a list of subsidiaries, officer certifications, and XBRL data files - Key exhibits filed include Amendment No. 3 to the Sixth Amended and Restated Credit Agreement, lists of subsidiaries and guarantors, and certifications by the Principal Executive and Financial Officers[209]