Scotts Miracle-Gro(SMG) - 2024 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION This section provides the unaudited condensed consolidated financial statements and management's discussion and analysis for the specified periods Item 1. Financial Statements (Unaudited) This section presents the unaudited condensed consolidated financial statements, including operations, comprehensive income, cash flows, and balance sheets, with detailed notes Condensed Consolidated Statements of Operations Net sales were nearly flat at $1.53 billion in Q2 2024, with net income rising to $157.5 million, while six-month sales decreased to $1.94 billion, but net income increased to $77.0 million Condensed Consolidated Statements of Operations (in millions, except per share data) | | Three Months Ended | | Six Months Ended | | | :--- | :--- | :--- | :--- | :--- | | | March 30, 2024 | April 1, 2023 | March 30, 2024 | April 1, 2023 | | Net sales | $1,525.4 | $1,531.5 | $1,935.8 | $2,058.1 | | Gross margin | $463.7 | $412.7 | $525.9 | $508.4 | | Income from operations | $272.1 | $206.2 | $224.8 | $164.4 | | Net income | $157.5 | $109.4 | $77.0 | $44.7 | | Diluted net income per common share | $2.74 | $1.94 | $1.34 | $0.80 | Condensed Consolidated Statements of Comprehensive Income (Loss) Comprehensive income significantly improved to $160.5 million in Q2 2024 and $71.1 million for the six-month period, reversing a prior-year loss Comprehensive Income (Loss) (in millions) | | Three Months Ended | | Six Months Ended | | | :--- | :--- | :--- | :--- | :--- | | | March 30, 2024 | April 1, 2023 | March 30, 2024 | April 1, 2023 | | Net income | $157.5 | $109.4 | $77.0 | $44.7 | | Total other comprehensive income (loss) | $3.0 | $(17.8) | $(5.9) | $(42.4) | | Comprehensive income | $160.5 | $91.6 | $71.1 | $2.3 | Condensed Consolidated Statements of Cash Flows Net cash used in operating activities dramatically improved to $39.0 million for the six months ended March 30, 2024, from $566.9 million in the prior year Six-Month Cash Flow Summary (in millions) | Activity | Six Months Ended March 30, 2024 | Six Months Ended April 1, 2023 | | :--- | :--- | :--- | | Net cash used in operating activities | $(39.0) | $(566.9) | | Net cash used in investing activities | $(71.1) | $(20.6) | | Net cash provided by financing activities | $142.8 | $525.3 | | Net increase (decrease) in cash | $33.2 | $(61.8) | | Cash and cash equivalents at end of period | $65.1 | $25.0 | Condensed Consolidated Balance Sheets Total assets decreased to $3.92 billion as of March 30, 2024, with total liabilities also declining, resulting in an equity deficit of $250.9 million Balance Sheet Summary (in millions) | | March 30, 2024 | April 1, 2023 | September 30, 2023 | | :--- | :--- | :--- | :--- | | Total current assets | $1,935.1 | $2,842.4 | $1,397.8 | | Total assets | $3,924.2 | $4,988.1 | $3,413.7 | | Total current liabilities | $1,060.3 | $1,372.5 | $773.7 | | Total liabilities | $4,175.1 | $4,850.6 | $3,681.0 | | Total equity (deficit) | $(250.9) | $137.5 | $(267.3) | Notes to Condensed Consolidated Financial Statements Notes detail significant accounting policies, including a new accounts receivable agreement, restructuring charges, investment impairments, and debt covenant compliance - The company's business is highly seasonal, with approximately 75% of annual net sales in the North America consumer lawn and garden business occurring in the second and third fiscal quarters[24] - On October 27, 2023, the Company entered into a Master Receivables Purchase Agreement, allowing it to sell up to $600.0 million of eligible accounts receivable, with proceeds from sales under this agreement reaching $758.2 million in Q2 2024[28] - In Q2 2024, the company recorded $77.0 million in impairment, restructuring, and other charges, primarily related to Hawthorne inventory write-downs and facility closures[37][38] - The company recorded an equity loss of $29.5 million for the six months ended March 30, 2024, from its investment in Bonnie Plants, LLC, which included a $10.4 million pre-tax impairment charge[36] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial results, highlighting sales declines driven by Hawthorne, improved gross margins, ongoing restructuring for $300 million savings, and debt covenant compliance Executive Summary The company's ongoing restructuring aims for $300 million in savings, while the Hawthorne segment faces challenges from cannabis oversupply amid macroeconomic uncertainties - The company is implementing company-wide organizational changes and initiatives expected to deliver run-rate annualized savings of at least $300.0 million, with nearly all savings expected to be realized by the end of fiscal 2024[107] - The Hawthorne segment continues to experience adverse financial results due to an oversupply of cannabis, which has significantly decreased wholesale prices and cultivation activities[108] - Hawthorne announced a strategic partnership with BFG Supply to distribute its proprietary brands and is discontinuing the distribution of other companies' products to focus on its own portfolio[109] Results of Operations Net sales decreased in Q2 and the six-month period, primarily due to Hawthorne, while gross margin rates improved, leading to increased net income Net Sales Change Drivers | | Three Months Ended March 30, 2024 | Six Months Ended March 30, 2024 | | :--- | :--- | :--- | | Volume and mix | 1.5% | (3.8)% | | Pricing | (1.9)% | (2.1)% | | Change in net sales | (0.4)% | (5.9)% | Gross Margin Rate Change Drivers | | Three Months Ended March 30, 2024 | Six Months Ended March 30, 2024 | | :--- | :--- | :--- | | Pricing | (1.2)% | (1.5)% | | Volume, mix and other | 0.4% | 1.6% | | Impairment, restructuring and other | 2.9% | 2.8% | | Change in gross margin rate | 3.5% | 2.5% | - SG&A expenses decreased by 4.1% in Q2 and 6.8% in the first six months of fiscal 2024, primarily due to lower share-based compensation and cost-reduction initiatives, despite an increase in advertising spending[118][119] - Interest expense decreased 8.7% in Q2 and 4.6% in the first six months, driven by lower average borrowings, which offset a 70 basis point increase in the weighted average interest rate[127] Segment Results Q2 2024 saw U.S. Consumer sales growth but profit decline, Hawthorne sales plummet but loss narrow, and decreases in Other segment sales and corporate expenses Segment Net Sales (in millions) | Segment | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | U.S. Consumer | $1,379.8 | $1,357.4 | 1.7% | | Hawthorne | $66.4 | $92.7 | (28.4)% | | Other | $79.2 | $81.4 | (2.7)% | Segment Profit (Loss) (in millions) | Segment | Q2 2024 | Q2 2023 | % Change | | :--- | :--- | :--- | :--- | | U.S. Consumer | $385.7 | $397.4 | (2.9)% | | Hawthorne | $(3.4) | $(16.8) | 79.8% | | Other | $6.4 | $14.6 | (56.2)% | Liquidity and Capital Resources Liquidity improved with reduced operating cash outflow, and the company remains in compliance with all debt covenants as of March 30, 2024 - Net cash used in operating activities improved to $(39.0) million for the first six months of fiscal 2024, compared to $(566.9) million in the prior year, mainly due to lower accounts receivable and favorable accounts payable timing[143][144] - As of March 30, 2024, the company was in compliance with all debt covenants, with a leverage ratio of 6.95 (covenant maximum of 7.75) and a fixed charge coverage ratio of 0.95 (covenant minimum of 0.75)[156][157] - The company has contingency plans, including further restructuring and potential financing transactions, to address potential future noncompliance with debt covenants, though it expects to remain in compliance[158] Item 3. Quantitative and Qualitative Disclosures About Market Risk Market risks have not materially changed from those disclosed in the 2023 Annual Report on Form 10-K - Market risks have not materially changed from those disclosed in the 2023 Annual Report[182] Item 4. Controls and Procedures Disclosure controls and procedures were effective as of March 30, 2024, with no material changes to internal control over financial reporting during the quarter - Based on an evaluation as of the end of the quarter, the principal executive officer and principal financial officer concluded that the company's disclosure controls and procedures were effective[184] - 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[185] PART II. OTHER INFORMATION This section provides updates on legal proceedings, risk factors, equity security sales, and other material information Item 1. Legal Proceedings No material developments occurred in legal proceedings previously disclosed in the 2023 Annual Report - There have been no material developments to the pending legal proceedings as set forth in the 2023 Annual Report[187] Item 1A. Risk Factors The company's risk factors have not materially changed from those described in the 2023 Annual Report on Form 10-K - The Company's risk factors, as of March 30, 2024, have not materially changed from those described in Part I, Item 1A of the 2023 Annual Report[189] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 6,849 common shares were purchased for an executive retirement plan, while the share repurchase program expired, and dividends are limited to $225.0 million annually - A total of 6,849 Common Shares were purchased during the second quarter of fiscal 2024 in open market transactions by the trustee of the rabbi trust for The Scotts Company LLC Executive Retirement Plan[195][199] - The company's share repurchase program expired on March 25, 2023, and as of March 30, 2024, the company does not have an active repurchase program[199] - The company's credit agreement limits regularly scheduled cash dividends to an aggregate amount not to exceed $225.0 million per fiscal year[194] Item 5. Other Information A Rule 10b5-1 trading plan was adopted for the potential sale of up to 250,000 Common Shares by a director, effective June 14, 2024 - On March 15, 2024, the Hagedorn Partnership, L.P., on behalf of director Katherine Littlefield, adopted a Rule 10b5-1 plan for the sale of up to 250,000 Common Shares, effective from June 14, 2024, to December 5, 2025, if certain price targets are met[198]