Scotts Miracle-Gro(SMG) - 2023 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section presents the company's unaudited financial statements, MD&A, market risk, and internal controls Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, highlighting significant decreases in net income and total equity Condensed Consolidated Statements of Operations Highlights | Metric | Three Months Ended April 1, 2023 | Three Months Ended April 2, 2022 | Six Months Ended April 1, 2023 | Six Months Ended April 2, 2022 | | :--- | :--- | :--- | :--- | :--- | | Net sales | $1,531.5 M | $1,678.4 M | $2,058.1 M | $2,244.3 M | | Gross margin | $412.7 M | $588.4 M | $508.4 M | $707.0 M | | Income from operations | $206.2 M | $387.9 M | $164.4 M | $352.5 M | | Net income | $109.4 M | $276.5 M | $44.7 M | $226.4 M | | Diluted net income per common share | $1.94 | $4.94 | $0.80 | $4.02 | Condensed Consolidated Balance Sheets Highlights | Metric | April 1, 2023 | April 2, 2022 | September 30, 2022 | | :--- | :--- | :--- | :--- | | Total current assets | $2,842.4 M | $3,254.4 M | $1,981.9 M | | Total assets | $4,988.1 M | $6,207.5 M | $4,296.8 M | | Total current liabilities | $1,372.5 M | $1,470.3 M | $963.9 M | | Total liabilities | $4,850.6 M | $5,232.5 M | $4,149.1 M | | Total equity | $137.5 M | $975.0 M | $147.7 M | Condensed Consolidated Statements of Cash Flows Highlights (Six Months Ended) | Metric | April 1, 2023 | April 2, 2022 | | :--- | :--- | :--- | | Net cash used in operating activities | $(566.9) M | $(1,142.6) M | | Net cash used in investing activities | $(20.6) M | $(255.8) M | | Net cash provided by financing activities | $525.3 M | $1,171.3 M | | Cash and cash equivalents at end of period | $25.0 M | $17.1 M | Note 4: Impairment, Restructuring and Other Significant restructuring charges of $140.5 million and $159.2 million were incurred for Hawthorne supply chain optimization Impairment, Restructuring and Other Charges (in millions) | Charge Type | Three Months Ended April 1, 2023 | Six Months Ended April 1, 2023 | | :--- | :--- | :--- | | Cost of sales—impairment, restructuring and other | $118.7 | $129.0 | | Operating expenses—impairment, restructuring and other | $21.8 | $30.2 | | Total | $140.5 | $159.2 | - The company accelerated the optimization of its Hawthorne supply chain, announcing the closure of four additional distribution centers and selling its non-core Hurricane branded fans business for $5.0 million[34] - Total costs incurred from the inception of this restructuring initiative through April 1, 2023, were $180.3 million for the Hawthorne segment and $23.1 million for the U.S. Consumer segment[34] Note 7: Debt Total debt was $3.59 billion as of April 1, 2023, with a leverage ratio of 6.01, compliant with amended covenants Debt Components (in millions) | Component | April 1, 2023 | April 2, 2022 | | :--- | :--- | :--- | | Revolving loans | $642.5 | $1,135.0 | | Term loans | $950.0 | $650.0 | | Senior Notes (aggregate) | $1,600.0 | $1,600.0 | | Receivables facility | $380.0 | $400.0 | | Total debt | $3,593.5 | $3,829.1 | - The company's leverage ratio was 6.01 at April 1, 2023, compliant with the amended maximum permitted ratio of 6.50 for Q2 and Q3 of fiscal 2023[45] - The company has contingency plans, including further restructuring and potential financing transactions, to address potential future noncompliance with debt covenants[47] Note 15: Segment Information Hawthorne segment sales dramatically declined by 43% to $224.2 million, resulting in a significant loss, while U.S. Consumer sales remained flat Net Sales by Segment (Six Months Ended, in millions) | Segment | April 1, 2023 | April 2, 2022 | % Change | | :--- | :--- | :--- | :--- | | U.S. Consumer | $1,726.3 | $1,722.2 | +0.2% | | Hawthorne | $224.2 | $393.2 | -43.0% | | Other | $107.6 | $128.9 | -16.5% | | Consolidated | $2,058.1 | $2,244.3 | -8.3% | Segment Profit (Loss) (Six Months Ended, in millions) | Segment | April 1, 2023 | April 2, 2022 | | :--- | :--- | :--- | | U.S. Consumer | $428.7 | $439.6 | | Hawthorne | $(33.0) | $(2.0) | | Other | $16.0 | $11.8 | | Total Segment Profit | $411.7 | $449.4 | Management's Discussion and Analysis (MD&A) Q2 net sales declined 8.8% due to the Hawthorne segment's 54.2% collapse, prompting a restructuring plan targeting over $200 million in annualized savings Executive Summary Performance was impacted by the Hawthorne segment downturn and cost inflation, leading to a restructuring targeting at least $200 million in annualized savings - Hawthorne segment sales volume decreased significantly due to continued challenges in the hydroponic industry from an oversupply of cannabis, which has depressed prices and cultivation[100] - The company is implementing a restructuring initiative and now expects to deliver run-rate annualized savings of at least $200.0 million, up from the original $185.0 million goal[100] - The company continued to experience cost inflation in manufacturing and logistics, as well as volatile commodity costs, which necessitated material price increases in fiscal 2022 and 2023[101] Results of Operations Q2 fiscal 2023 net sales decreased 8.8% to $1.53 billion, with gross margin falling to 26.9% due to $140.5 million in charges Drivers of Net Sales Change (Q2 FY2023 vs Q2 FY2022) | Factor | Percentage Change | | :--- | :--- | | Volume and mix | (16.4)% | | Pricing | 8.0% | | Foreign exchange rates | (0.4)% | | Total Change in Net Sales | (8.8)% | - The gross margin rate decreased by 8.2 percentage points, from 35.1% to 26.9%, primarily due to a 7.5 percentage point negative impact from impairment and restructuring charges[107] - Interest expense increased 70.7% in the quarter to $48.3 million, driven by higher average borrowings and a 210 basis point increase in the weighted average interest rate[117] Segment Results Hawthorne segment Q2 net sales plummeted 54.2% to $92.7 million, resulting in a $16.8 million loss, while U.S. Consumer sales slightly declined - U.S. Consumer Q2 net sales decreased 1.6% to $1,357.4 million, as a 10.4% volume decline was mostly offset by an 8.7% price increase[129] - Hawthorne Q2 net sales plummeted 54.2% to $92.7 million, driven by a 59.9% volume decline. The segment reported a loss of $16.8 million[131][132] - Other segment Q2 net sales decreased 15.2%, but Segment Profit increased 39.0% to $14.6 million due to cost management[133][134] Liquidity and Capital Resources Cash used in operations improved to $566.9 million for the first six months of FY2023, with debt covenants maintained at a leverage ratio of 6.01 - Net cash used in operating activities for the six months ended April 1, 2023, was $566.9 million, a significant improvement from the $1,142.6 million used in the same period last year[136][137] - The company's leverage ratio was 6.01 at April 1, 2023, compliant with the amended covenant maximum of 6.50 for Q2 2023. The company expects to remain in compliance for the next twelve months[147][148] - The company's share repurchase authorization expired on March 25, 2023, with no repurchases made under it during fiscal 2023[140] Quantitative and Qualitative Disclosures about Market Risk Market risks have not materially changed from those disclosed in the 2022 Annual Report - Market risks have not materially changed from those disclosed in the 2022 Annual Report[173] Controls and Procedures Management concluded disclosure controls and procedures were effective as of April 1, 2023, with no material changes to internal control over financial reporting - The principal executive officer and principal financial officer have concluded that the Registrant's disclosure controls and procedures were effective as of April 1, 2023[175] - There were no changes in the Registrant's internal control over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, the Registrant's internal control over financial reporting[176] PART II. OTHER INFORMATION This section covers legal proceedings, risk factors, equity sales, debt defaults, mine safety disclosures, other information, and exhibits Legal Proceedings No material developments in legal proceedings were reported, and ongoing lawsuits are not expected to have a material adverse effect - There have been no material developments to the pending legal proceedings previously disclosed in the 2022 Annual Report[177] Risk Factors The company's risk factors have not materially changed from those described in its 2022 Annual Report on Form 10-K - The Company's risk factors, as of April 1, 2023, have not materially changed from those described in Part I, Item 1A of the 2022 Annual Report[179] Unregistered Sales of Equity Securities and Use of Proceeds The $750 million share repurchase program expired on March 25, 2023, with no repurchases, and dividends are limited to $225.0 million annually by the credit agreement - The share repurchase program announced on February 6, 2020, for up to $750.0 million expired on March 25, 2023. The company does not have an active repurchase program[189] - The amended credit agreement limits regularly scheduled cash dividends to an aggregate amount not to exceed $225.0 million per fiscal year[184] Defaults Upon Senior Securities The company reports no defaults upon senior securities - None[186] Mine Safety Disclosures This item is not applicable - Not Applicable[187] Other Information This item is not applicable - Not Applicable[188] Exhibits This section provides an index of the exhibits filed with the report, including certifications and XBRL data files - Lists exhibits filed with the Form 10-Q, including certifications by the CEO and CFO, and XBRL data[191]