Scotts Miracle-Gro Company — FY2022 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended September 30, 2022; it is an annual report, not a standalone fourth-quarter filing. Scotts sells consumer lawn and garden products through U.S. Consumer and Other, and indoor/hydroponic gardening products through Hawthorne. The business is seasonal, with about 75% of North American consumer lawn and garden sales typically in the second and third fiscal quarters.
Financial performance and liquidity
| Metric | FY2022 | FY2021 |
|---|---|---|
| Net sales | $3,924.1 million | $4,925.0 million |
| Gross margin | $872.9 million; 22.2% of sales | $1,469.0 million; 29.8% |
| Operating income (loss) | $(434.0) million | $723.0 million |
| Net income (loss) | $(437.5) million | $513.4 million |
| Diluted EPS | $(7.88) | $8.96 |
| Operating cash flow | $(129.0) million | $271.5 million |
| Free cash flow (non-GAAP) | $(242.5) million | $164.6 million |
| Interest expense | $118.1 million | $78.9 million |
- Sales fell 20.3%, primarily from lower volume: reported volume declined 27.0%, partly offset by 6.2% pricing, acquisitions, and other factors.
- U.S. Consumer sales decreased 8.4% to $2,928.8 million; segment profit fell 21.8% to $568.6 million. Hawthorne sales decreased 49.7% to $716.2 million and shifted from $163.8 million segment profit to a $21.1 million segment loss. Other sales decreased 7.9% to $279.1 million.
- FY2022 GAAP results included $853.2 million of impairment, restructuring and other charges. The company reported non-GAAP adjusted diluted EPS of $4.10, versus $9.23 in FY2021, and adjusted operating income of $418.2 million, versus $752.1 million.
- Cash and equivalents were $86.8 million at year-end, down from $244.1 million. Inventories rose to $1,343.5 million from $1,126.6 million. Total debt was $2,992.1 million, up from $2,315.3 million; shareholders’ equity declined to $147.7 million from $1,013.3 million.
- Available borrowings under the credit agreement were $1,185.5 million. The reported leverage ratio was 6.01, against a then-applicable maximum of 6.25; interest coverage was 4.83 against a minimum of 3.00. The company said it was in covenant compliance at year-end.
Material changes and unusual items
- Hawthorne’s downturn, attributed largely to cannabis oversupply, lower cultivation activity, and higher transportation and warehousing costs, drove major impairments. Charges included $522.4 million of goodwill impairment and $145.3 million of finite-lived intangible impairment; goodwill for Hawthorne was reduced to zero.
- The exit from certain Hawthorne lighting products and brands generated $120.9 million of inventory write-downs and $35.3 million of intangible impairment. Total impairment, restructuring and other charges also included restructuring costs and other items.
- Net sales were pressured by lower Hawthorne and U.S. Consumer volumes and reduced Roundup marketing-agreement sales. Higher material and freight costs and lower fixed-cost absorption contributed to gross-margin contraction; pricing increases partially offset the pressure.
- The company acquired Luxx Lighting, True Liberty Bags and Cyco during FY2022. It also invested a further $25.0 million in a RIV Capital convertible note.
- Management reported approximately $100 million of annual cost reductions from the first restructuring phase and, after year-end, announced a second phase targeting another $85 million of annual savings.
Outlook, commentary and risks
- Management expected cannabis oversupply and cost increases to continue weighing on Hawthorne. It also anticipated an inflationary environment, including ongoing pressure from raw materials and transportation. The filing text does not provide a clear quantified FY2023 revenue or earnings guidance figure.
- The June 2022 credit amendment raised permitted leverage limits temporarily, increased certain borrowing costs when leverage exceeds specified levels, and restricted discretionary distributions. The maximum leverage covenant tightens over time, reaching 4.50 from the third quarter of FY2024. Management expected covenant compliance but warned forecasts and cash flows could change; it described contingency measures that could include further cost cuts, cash management, lender discussions or equity financing.
- Liquidity and execution risks include negative operating and free cash flow, elevated inventory, substantial debt, seasonal working-capital needs and reliance on continued access to credit. The filing states that available cash and liquidity would not be sufficient to repay the specified credit-facility and senior-note debt in a default scenario.
- Home Depot and Lowe’s accounted for 43% of FY2022 sales and 46% of year-end accounts receivable. Other risks include weather, raw-material and freight costs, interest rates, foreign exchange, regulatory changes, and dependence on the Monsanto Roundup marketing agreement.
- Environmental matters included a $2.4 million accrual. The company disclosed asbestos-related lawsuits for which it recorded no accrual, stating loss was not considered probable; it cautioned that litigation outcomes and defense costs remain uncertain.
- S&P lowered the issuer rating to BB- in September 2022; Moody’s changed its outlook to negative in June 2022. Deloitte issued unqualified opinions on the financial statements and internal controls, and identified Hawthorne goodwill and intangible impairment valuation as a critical audit matter.
Most important facts for investors to verify
- Whether Hawthorne demand, margins and asset values stabilize after the sharp sales decline and impairment charges.
- Progress on the announced cost reductions, including timing, cash costs and realized savings.
- Quarterly leverage and interest-coverage covenant headroom as permitted leverage limits step down.
- Inventory levels, seasonal operating cash flow, borrowing availability and debt refinancing needs.
- Customer orders and receivable exposure to Home Depot and Lowe’s, and the continuing economics of the Roundup agreement.
- Potential effects of litigation, environmental regulation and the fair-value assumptions underlying remaining goodwill and intangible assets.