SCOTTS MIRACLE-GRO CO (SMG) FY 2023 MD&A

ITEM 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this Management’s Discussion and Analysis (“MD&A”) is to provide an understanding of our financial condition and results of operations by focusing on changes in certain key measures from year-to-year. This MD&A includes the following sections:

•Executive summary

•Results of operations

•Segment results

•Liquidity and capital resources

•Non-GAAP measures

•Regulatory matters

•Critical accounting policies and estimates

Executive Summary

Our operations are divided into three reportable segments: U.S. Consumer, Hawthorne and Other. U.S. Consumer consists of our consumer lawn and garden business in the United States. Hawthorne consists of our indoor and hydroponic gardening business. Other primarily consists of our consumer lawn and garden business in Canada. This division of reportable segments is consistent with how the segments report to and are managed by our chief operating decision maker. In addition, Corporate consists of general and administrative expenses and certain other income and expense items not allocated to the business segments. See “SEGMENT RESULTS” below for additional information regarding our evaluation of segment performance.

Through our U.S. Consumer and Other segments, we are the leading manufacturer and marketer of branded consumer lawn and garden products in North America. Our products are marketed under some of the most recognized brand names in the industry. Our key consumer lawn and garden brands include Scotts® and Turf Builder® lawn fertilizer and Scotts® grass seed products; Miracle-Gro® soil, plant food and gardening products; Ortho® herbicide and pesticide products; and Tomcat® rodent control and animal repellent products. We are the exclusive agent of Monsanto for the marketing and distribution of certain of Monsanto’s consumer Roundup® branded products within the United States and certain other specified countries. In addition, we have an equity interest in Bonnie Plants, LLC, a joint venture with AFC, focused on planting, growing, developing, distributing, marketing and selling live plants.

Through our Hawthorne segment, we are a leading manufacturer, marketer and distributor of lighting, nutrients, growing media, growing environments and hardware products for indoor and hydroponic gardening in North America. Our key brands include General Hydroponics®, Gavita®, Botanicare®, Agrolux®, Gro Pro®, Mother Earth®, Grower’s Edge®, HydroLogic Purification System® and Cyco® .

As a leading consumer branded lawn and garden company, our product development and marketing efforts are largely focused on providing innovative and differentiated products and continually increasing brand and product awareness to inspire consumers to create retail demand. We have implemented this model for a number of years by focusing on research and development and investing approximately 3-5% of our U.S. Consumer segment annual net sales in advertising to support and promote our consumer lawn and garden products and brands. We continually explore new and innovative ways to communicate with consumers. We believe that we receive a significant benefit from these expenditures and anticipate a similar commitment to research and development, advertising and marketing investments in the future, with the continuing objective of driving category growth and profitably maintaining and/or increasing market share.

Our consumer lawn and garden net sales in any one year are susceptible to weather conditions in the markets in which our products are sold. For instance, periods of abnormally wet or dry weather can adversely impact the sale of certain products, while increasing demand for other products. We believe that our diversified product line and our geographic diversification reduce this risk, although to a lesser extent in a year in which unfavorable weather is geographically widespread and extends across a significant portion of the lawn and garden season. We also believe that weather conditions in any one year, positive or negative, do not materially impact longer-term category growth trends.

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THE SCOTTS MIRACLE-GRO COMPANY

(Dollars in millions, except per share data)

Due to the seasonal nature of the consumer lawn and garden business, for our U.S. Consumer and Other segments, significant portions of our products ship to our retail customers during our second and third fiscal quarters, as noted in the following table. Our annual net sales are further concentrated in the second and third fiscal quarters by retailers who rely on our ability to deliver products closer to when consumers buy our products. Our Hawthorne segment is also impacted by seasonal sales patterns for certain product categories due to the timing of outdoor growing in North America during our second and third fiscal quarters, and the timing of certain controlled agricultural lighting project sales during our third and fourth fiscal quarters.

Management focuses on a variety of key indicators and operating metrics to monitor the financial condition and performance of the continuing operations of our business. These metrics include consumer purchases (point-of-sale data), market share, category growth, net sales (including unit volume, pricing and foreign exchange movements), gross margins, advertising to net sales ratios, income from operations, income from continuing operations, net income, earnings per share, earnings before interest, taxes, depreciation and amortization (“EBITDA”), leverage ratio, fixed charge coverage ratio and interest coverage ratio. To the extent applicable, these metrics are evaluated with and without impairment, restructuring and other charges that do not occur in or reflect the ordinary course of our ongoing business operations. Metrics that exclude impairment, restructuring and other nonrecurring items are used by management to evaluate our performance, engage in financial and operational planning and determine incentive compensation because we believe that these measures provide additional perspective on the performance of our underlying, ongoing business. We also focus on measures to optimize cash flow and return on invested capital, including the management of working capital and capital expenditures. Refer to the “NON-GAAP MEASURES” section of this MD&A for further discussion of non-GAAP measures.

Recent Events

During fiscal 2022, we began implementing a series of Company-wide organizational changes and initiatives intended to create operational and management-level efficiencies. As part of this restructuring initiative, we are reducing the size of our supply chain network, reducing staffing levels and implementing other cost-reduction initiatives. In addition, to reduce our on hand inventory to align with the optimized network capacity, we have accelerated the reduction of certain Hawthorne inventory, primarily lighting, growing environments and hardware products. We expect these efforts to deliver run-rate annualized savings of at least $300.0, nearly all of which is expected to be realized by the end of fiscal 2024. The restructuring initiative is expected to improve our gross margin rate and decrease SG&A. During fiscal 2023, we incurred costs of $184.8 in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations and $44.1 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations associated with this restructuring initiative primarily related to inventory write-down charges, employee termination benefits, facility closure costs and impairment of right-of-use assets and property, plant and equipment. Costs incurred from the inception of this restructuring initiative through September 30, 2023 were $294.1.

During fiscal 2023, our Hawthorne segment continued to experience adverse financial results due to decreased sales volume and inflationary cost pressures. The decrease in sales volume is attributable to an oversupply of cannabis, which significantly decreased cannabis wholesale prices and indoor and outdoor cannabis cultivation. The oversupply has been driven by increased licensing activity across the U.S., significant capital investment in the cannabis production marketplace over the past several years, inconsistent enforcement of regulations and the market impacts of the COVID-19 pandemic. As a result, we revised our internal forecasts to reflect the longer persistence and more significant impact of the oversupply of cannabis, and recorded non-cash, pre-tax impairment charges of $117.7 related to our Hawthorne segment intangible assets in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. We expect that the oversupply of cannabis will continue to adversely impact our Hawthorne segment. If the oversupply of cannabis persists longer, or is more significant than we expect, our results of operations could be materially and adversely impacted for a longer period and to a greater extent than we currently anticipate.

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THE SCOTTS MIRACLE-GRO COMPANY

(Dollars in millions, except per share data)

During fiscal 2023, we recorded a non-cash, pre-tax other-than-temporary impairment charge of $101.3 related to our convertible debt investments and a non-cash, pre-tax goodwill impairment charge of $10.3 associated with our Other segment in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. In addition, we recorded a non-cash, pre-tax impairment charge of $94.7 associated with our investment in Bonnie Plants, LLC in the “Equity in (income) loss of unconsolidated affiliates” line in the Consolidated Statements of Operations during fiscal 2023.

On June 8, 2022, we entered into Amendment No. 1 (“Amendment No. 1”) to the Sixth A&R Credit Agreement which increased the maximum permitted leverage ratio for the quarterly leverage covenant effective for the third quarter of fiscal 2022 until April 1, 2024. During the third quarter of fiscal 2023, we experienced an unexpected shortfall in earnings that affected our ability to remain in compliance with the leverage ratio covenant of Amendment No. 1. On July 31, 2023, we entered into Amendment No. 2 to the Sixth A&R Credit Agreement which, in addition to other changes, temporarily increased the maximum permitted leverage ratio for the quarterly leverage covenant, and increased the interest rate applicable to borrowings under the revolving credit facility and the term loan facility by 25 bps for each existing pricing tier and added a pricing tier that is applicable for periods when the leverage ratio is in excess of 6.00. Refer to the “LIQUIDITY AND CAPITAL RESOURCES” section of this MD&A for more information regarding Amendment No. 2.

During fiscal 2023, we continued to experience the impacts of cost inflation, resulting in persistently high manufacturing and logistics costs, as well as volatile commodity costs. Higher costs over the past several years required us to implement significant price increases across our business in fiscal 2022 and 2023. Inflationary headwinds, volatile commodity costs and higher interest rates are expected to continue. The impact that these trends will continue to have on our operational and financial performance will depend on future developments, including inflationary and macroeconomic conditions and their impact on consumer behavior, which are difficult to predict.

Results of Operations

The following table sets forth the components of earnings as a percentage of net sales:

The sum of the components may not equal due to rounding.

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THE SCOTTS MIRACLE-GRO COMPANY

(Dollars in millions, except per share data)

Net Sales

Net sales for fiscal 2023 were $3,551.3, a decrease of 9.5% from net sales of $3,924.1 for fiscal 2022. Net sales for fiscal 2022 decreased 20.3% from net sales of $4,925.0 for fiscal 2021. Factors contributing to the change in net sales are outlined in the following table:

The decrease in net sales for fiscal 2023 as compared to fiscal 2022 was primarily driven by:

•decreased sales volume across all segments driven by growing environments, growing media, hardware, nutrients and lighting products in our Hawthorne segment; and lawn care, plant food and controls products in our U.S. Consumer segment; and

•the unfavorable impact of foreign exchange rates as a result of the strengthening of the U.S. dollar relative to the Canadian dollar;

•partially offset by increased pricing in our U.S. Consumer, Hawthorne and Other segments.

The decrease in net sales for fiscal 2022 as compared to fiscal 2021 was primarily driven by:

•decreased sales volume driven by lighting, nutrients, growing media, hardware and growing environments products in our Hawthorne segment; and lawn care, soils, controls, plant food and mulch products in our U.S. Consumer segment;

•decreased net sales associated with the Roundup® marketing agreement; and

•the unfavorable impact of foreign exchange rates as a result of the strengthening of the U.S. dollar relative to the euro and the Canadian dollar;

•partially offset by increased pricing in our U.S. Consumer, Hawthorne and Other segments; and

•the addition of net sales from acquisitions in our Hawthorne segment.

Cost of Sales

The following table shows the major components of cost of sales:

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(Dollars in millions, except per share data)

Factors contributing to the change in cost of sales are outlined in the following table:

The decrease in cost of sales for fiscal 2023 as compared to fiscal 2022 was primarily driven by:

•lower sales volume in our U.S. Consumer, Hawthorne and Other segments;

•lower warehousing costs included within “volume, mix and other” in our U.S. Consumer and Hawthorne segments; and

•the favorable impact of foreign exchange rates as a result of the strengthening of the U.S. dollar relative to the Canadian dollar;

•partially offset by higher material costs in our U.S. Consumer, Hawthorne and Other segments;

•higher manufacturing costs, primarily labor, included within “volume, mix and other” in our U.S. Consumer, Hawthorne and Other segments;

•inventory write-down charges included within “volume, mix and other” associated with our U.S. Consumer segment;

•an increase in costs associated with the Roundup® marketing agreement; and

•an increase in impairment, restructuring and other charges.

The decrease in cost of sales for fiscal 2022 as compared to fiscal 2021 was primarily driven by:

•lower sales volume in our U.S. Consumer, Hawthorne and Other segments;

•the favorable impact of foreign exchange rates as a result of the strengthening of the U.S. dollar relative to the euro and the Canadian dollar; and

•a decrease in costs associated with the Roundup® marketing agreement;

•partially offset by higher material costs in our U.S. Consumer and Other segments;

•higher transportation and warehousing costs included within “volume, mix and other” in our U.S. Consumer, Hawthorne and Other segments; and

•an increase in impairment, restructuring and other charges.

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THE SCOTTS MIRACLE-GRO COMPANY

(Dollars in millions, except per share data)

Gross Margin

As a percentage of net sales, our gross margin rate was 18.5%, 22.2% and 29.8% for fiscal 2023, fiscal 2022 and fiscal 2021, respectively. Factors contributing to the change in gross margin rate are outlined in the following table:

The decrease in gross margin rate for fiscal 2023 as compared to fiscal 2022 was primarily driven by:

•higher material costs in our U.S. Consumer, Hawthorne and Other segments;

•higher manufacturing costs, primarily labor, included within “volume, mix and other” in our U.S. Consumer, Hawthorne and Other segments;

•unfavorable leverage of fixed costs, included within “volume, mix and other,” driven by lower sales and production volume in our U.S. Consumer, Hawthorne and Other segments;

•inventory write-down charges included within “volume, mix and other” associated with our U.S. Consumer segment; and

•an increase in impairment, restructuring and other charges;

•partially offset by increased pricing in our U.S. Consumer, Hawthorne and Other segments; and

•lower warehousing costs included within “volume, mix and other” in our U.S. Consumer and Hawthorne segments.

The decrease in gross margin rate for fiscal 2022 as compared to fiscal 2021 was primarily driven by:

•higher material costs in our U.S. Consumer, Hawthorne and Other segments;

•higher transportation and warehousing costs included within “volume, mix and other” associated with our U.S. Consumer, Hawthorne and Other segments;

•unfavorable leverage of fixed costs driven by lower sales volume in our U.S. Consumer, Hawthorne and Other segments; and

•an increase in impairment, restructuring and other charges;

•partially offset by increased pricing in our U.S. Consumer, Hawthorne and Other segments.

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THE SCOTTS MIRACLE-GRO COMPANY

(Dollars in millions, except per share data)

Selling, General and Administrative Expenses

The following table sets forth the components of selling, general and administrative expenses (“SG&A”):

SG&A decreased $61.7, or 10.1%, during fiscal 2023 compared to fiscal 2022. Advertising expense increased $3.4, or 2.8%, in fiscal 2023 driven by increased media spending in our U.S. Consumer segment. Share-based compensation expense, which excludes certain advertising expenses paid for in Common Shares, increased $15.4, or 44.9%, driven by short-term variable incentive compensation that was provided to employees as share-based awards for fiscal 2023 in lieu of a cash-based program, partially offset by the recognition of a cumulative adjustment for certain performance-based award units to reflect management’s assessment of a lower probability of achievement of performance goals. Amortization expense decreased $8.4, or 27.1%, driven by the impairment of certain Hawthorne segment intangible assets during fiscal 2022 and fiscal 2023. Other SG&A and research and development costs decreased by a combined $72.1, or 16.9%, driven by the reductions in staffing levels and other cost-reduction initiatives.

SG&A decreased $130.5, or 17.6%, during fiscal 2022 compared to fiscal 2021. Advertising expense decreased $45.4, or 27.4%, in fiscal 2022 driven by decreased media spending in our U.S. Consumer and Hawthorne segments. Other SG&A decreased $80.6, or 17.4%, in fiscal 2022 driven by a decrease in short-term variable cash incentive compensation expense, reductions in staffing levels and other cost-reduction initiatives.

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 Consolidated Statements of Operations. The following table details impairment, restructuring and other charges (recoveries) for each of the periods presented:

During fiscal 2023, we recorded non-cash, pre-tax goodwill and intangible asset impairment charges of $127.9 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations, comprised of $117.7 of finite-lived intangible asset impairment charges associated with our Hawthorne segment and $10.3 of goodwill impairment charges associated with our Other segment.

During fiscal 2023, we recorded a non-cash, pre-tax other-than-temporary impairment charge related to our convertible debt investments of $101.3 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations.

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(Dollars in millions, except per share data)

During fiscal 2022, we began implementing a series of Company-wide organizational changes and initiatives intended to create operational and management-level efficiencies. As part of this restructuring initiative, we are reducing the size of our supply chain network, reducing staffing levels and implementing other cost-reduction initiatives. In addition, to reduce our on hand inventory to align with the optimized network capacity, we have accelerated the reduction of certain Hawthorne inventory, primarily lighting, growing environments and hardware products. During fiscal 2023, we incurred costs of $229.0 associated with this restructuring initiative primarily related to inventory write-down charges, employee termination benefits, facility closure costs and impairment of right-of-use assets and property, plant and equipment. We incurred costs of $16.3 in our U.S. Consumer segment and $168.5 in our Hawthorne segment in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations during fiscal 2023. We incurred costs of $7.7 in our U.S. Consumer segment, $20.7 in our Hawthorne segment, $0.8 in our Other segment and $14.9 at Corporate in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations during fiscal 2023. During fiscal 2022, we incurred costs of $65.2 associated with this restructuring initiative primarily related to employee termination benefits and impairment of property, plant and equipment. We incurred costs of $9.7 in our U.S. Consumer segment and $27.1 in our Hawthorne segment in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations during fiscal 2022. We incurred costs of $11.9 in our U.S. Consumer segment, $8.1 in our Hawthorne segment, $0.7 in our Other segment and $7.7 at Corporate in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations during fiscal 2022. Costs incurred to date since the inception of this restructuring initiative are $45.5 for our U.S. Consumer segment, $224.4 for our Hawthorne segment, $1.5 for our Other segment and $22.7 at Corporate. We continue to evaluate additional network and organizational changes, which, if executed, may result in additional restructuring charges in future periods.

During fiscal 2022, we recorded non-cash, pre-tax goodwill and intangible asset impairment charges of $632.4 as a result of interim impairment testing of our Hawthorne segment in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations, comprised of $522.4 of goodwill impairment charges and $110.0 of finite-lived intangible asset impairment charges.

During fiscal 2022, we incurred inventory write-down charges of $120.9 in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations and finite-lived intangible asset impairment charges of $35.3 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations associated with our decision to discontinue and exit the market for certain Hawthorne lighting products and brands.

During fiscal 2022, we recorded gains of $16.2 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations associated with the sale of property, plant and equipment.

During fiscal 2021, we incurred costs of $29.2 associated with the COVID-19 pandemic primarily related to premium pay. We incurred costs of $21.2 in our U.S. Consumer segment, $3.2 in our Hawthorne segment and $0.6 in our Other segment in the “Cost of sales—impairment, restructuring and other” line in the Consolidated Statements of Operations during fiscal 2021. We incurred costs of $4.0 in our U.S. Consumer segment and $0.2 in our Other segment in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations during fiscal 2021.

Income (Loss) from Operations

Loss from operations was $(174.4) in fiscal 2023 compared to $(434.0) in fiscal 2022. The decrease was driven by lower impairment, restructuring and other charges and lower SG&A, partially offset by lower net sales and a decrease in gross margin rate.

Income (loss) from operations was $(434.0) in fiscal 2022 compared to $723.0 in fiscal 2021. The decrease was driven by lower net sales, a decrease in gross margin rate, higher impairment, restructuring and other charges and lower other income, partially offset by lower SG&A.

Equity in (Income) Loss of Unconsolidated Affiliates

Equity in (income) loss of unconsolidated affiliates associated with Bonnie Plants, LLC was $101.1, $12.9 and $(14.4) in fiscal 2023, fiscal 2022 and fiscal 2021, respectively. During fiscal 2023, we recorded a non-cash, pre-tax impairment charge of $94.7 associated with our investment in Bonnie Plants, LLC. Refer to “NOTE 9. INVESTMENT IN UNCONSOLIDATED AFFILIATES” of the Notes to the Consolidated Financial Statements included in this Form 10-K for more information regarding Bonnie Plants, LLC.

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(Dollars in millions, except per share data)

Interest Expense

Interest expense was $178.1 in fiscal 2023, an increase of 50.8% compared to $118.1 in fiscal 2022. The increase was driven by an increase in our weighted average interest rate, net of the impact of interest rate swaps, of 180 basis points, primarily due to higher borrowing rates on the Sixth A&R Credit Agreement. While we had net debt repayments of $353.6 during fiscal 2023, our seasonal borrowing and repayment pattern resulted in an average debt balance for fiscal 2023 that was consistent with fiscal 2022.

Interest expense was $118.1 in fiscal 2022, an increase of 49.7% compared to $78.9 in fiscal 2021. The increase was driven by higher average borrowings of $1,119.6 due to higher inventory production, capital expenditures, acquisition activity and repurchases of our Common Shares.

Other Non-Operating Income, Net

Other non-operating income was $0.3, $6.9 and $18.6 in fiscal 2023, fiscal 2022 and fiscal 2021, respectively. On December 31, 2020, we acquired a 50% equity interest in Bonnie Plants, LLC in exchange for cash payments of $102.3, forgiveness of our outstanding loan receivable with AFC and surrender of our options to increase our economic interest in the Bonnie Plants business. We recorded a gain of $12.5 during the first quarter of fiscal 2021 to write-up the value of our loan receivable with AFC to its closing date fair value.

Income Tax Expense (Benefit) from Continuing Operations

A reconciliation of the federal corporate income tax rate and the effective tax rate on income from continuing operations before income taxes is summarized below:

During fiscal 2023, we recorded a non-cash, pre-tax other-than-temporary impairment charge related to our convertible debt investments of $101.3 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. Deferred tax assets related to unrealized losses on convertible debt investments were $33.4 and $25.3 at September 30, 2023 and 2022, respectively. A full valuation allowance has been established against these losses at September 30, 2023 as we do not expect to utilize them prior to their expiration. This discrete item, which is included in the “Change in valuation allowances” line in the table above, decreased the fiscal 2023 effective tax rate because we incurred a net loss during this period.

During fiscal 2022, we recorded non-cash, pre-tax goodwill and intangible asset impairment charges of $668.3 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. The tax impact of the impairment charges was a benefit of $148.3, which is net of the impact of non-deductible goodwill of $18.8, for fiscal 2022 and was recorded in the “Income tax expense (benefit) from continuing operations” line in the Consolidated Statements of Operations. The tax impact of non-deductible goodwill was considered a discrete item because we have no remaining non-deductible goodwill. This discrete item, which is included in the “Effect of foreign operations” line in the table above, decreased the fiscal 2022 effective tax rate by approximately 340 bps because we incurred a net loss during the period. Additionally, excess tax benefits related to share-based compensation, which are included in the “Effect of other permanent differences” line in the table above, increased the fiscal 2022 effective tax rate by approximately 260 bps.

Income (Loss) from Continuing Operations

Loss from continuing operations was $(380.1), or $(6.79) per diluted share, in fiscal 2023 compared to $(437.5), or $(7.88) per diluted share, in fiscal 2022. The decrease was driven by lower impairment, restructuring and other charges, and lower SG&A, partially offset by lower net sales, a decrease in gross margin rate, higher equity in loss of unconsolidated affiliates, higher interest expense, lower other non-operating income and lower income tax benefit.

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(Dollars in millions, except per share data)

Income (loss) from continuing operations was $(437.5), or $(7.88) per diluted share, in fiscal 2022 compared to $517.3, or $9.03 per diluted share, in fiscal 2021. The decrease was driven by lower net sales, a decrease in gross margin rate, higher impairment, restructuring and other charges, lower other income, lower equity in income of unconsolidated affiliates, higher interest expense and lower other non-operating income, partially offset by lower SG&A.

Diluted average common shares used in the diluted loss per common share calculation for fiscal 2023 and fiscal 2022 were 56.0 million and 55.5 million, respectively, which excluded potential common shares of 0.4 million and 0.6 million, respectively, because the effect of their inclusion would be anti-dilutive as we incurred a net loss for fiscal 2023 and fiscal 2022. Diluted average common shares used in the diluted income per common share calculation for fiscal 2021 were 57.2 million, which included dilutive potential common shares of 1.5 million.

Segment Results

The performance of each reportable segment is evaluated based on several factors, including income (loss) from continuing operations before income taxes, amortization, impairment, restructuring and other charges (“Segment Profit (Loss)”), which is a non-GAAP financial measure. Senior management uses Segment Profit (Loss) to evaluate segment performance because they believe this measure is indicative of performance trends and the overall earnings potential of each segment.

The following table sets forth net sales by segment:

The following table sets forth Segment Profit (Loss) as well as a reconciliation to income (loss) from continuing operations before income taxes, the most directly comparable measure prepared in accordance with U.S. generally accepted accounting principles (“GAAP”):

U.S. Consumer

U.S. Consumer segment net sales were $2,843.7 in fiscal 2023, a decrease of 2.9% from fiscal 2022 net sales of $2,928.8. The decrease was driven by lower sales volume of 8.3%, partially offset by increased pricing of 5.4%. The decrease in sales volume for fiscal 2023 was driven by lawn care, plant food and controls products.

U.S. Consumer Segment Profit was $454.1 in fiscal 2023, a decrease of 20.1% from fiscal 2022 Segment Profit of $568.6. The decrease for fiscal 2023 was primarily due to lower net sales and a lower gross margin rate, partially offset by lower SG&A.

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(Dollars in millions, except per share data)

U.S. Consumer segment net sales were $2,928.8 in fiscal 2022, a decrease of 8.4% from fiscal 2021 net sales of $3,197.7. The decrease was driven by lower sales volume of 15.6%, partially offset by increased pricing of 7.2%. The decrease in sales volume for fiscal 2022 was driven by lawn care, soils, controls, plant food and mulch products.

U.S. Consumer Segment Profit was $568.6 in fiscal 2022, a decrease of 21.8% from fiscal 2021 Segment Profit of $726.7. The decrease for fiscal 2022 was primarily due to lower net sales and a lower gross margin rate, partially offset by lower SG&A.

Hawthorne

Hawthorne segment net sales were $467.3 in fiscal 2023, a decrease of 34.8% from fiscal 2022 net sales of $716.2. The decrease was driven by lower sales volume of 38.1%, partially offset by increased pricing of 2.5% and acquisitions of 0.8%. The decrease in sales volume for fiscal 2023 was driven by growing environments, growing media, hardware, nutrients and lighting products.

Hawthorne Segment Loss was $48.1 in fiscal 2023 compared to fiscal 2022 Segment Loss of $21.1. The increase for fiscal 2023 was driven by lower net sales and a lower gross margin rate, partially offset by lower SG&A.

Hawthorne segment net sales were $716.2 in fiscal 2022, a decrease of 49.7% from fiscal 2021 net sales of $1,424.2. The decrease was driven by lower sales volume of 56.0% and unfavorable foreign exchange rates of 0.8%, partially offset by increased pricing of 3.8% and acquisitions of 3.3%. The decrease in sales volume for fiscal 2022 was driven by lighting, nutrients, growing media, hardware and growing environments products.

Hawthorne Segment Loss was $21.1 in fiscal 2022 compared to fiscal 2021 Segment Profit of $163.8. The decrease for fiscal 2022 was driven by lower net sales and a lower gross margin rate, partially offset by lower SG&A.

Other

Other segment net sales were $240.3 in fiscal 2023, a decrease of 13.9% from fiscal 2022 net sales of $279.1. The decrease was driven by lower sales volume of 16.0% and unfavorable foreign exchange rates of 4.8%, partially offset by increased pricing of 6.9%.

Other Segment Profit was $12.4 in fiscal 2023, a decrease of 38.6% from fiscal 2022 Segment Profit of $20.2. The decrease was driven by lower net sales and a lower gross margin rate.

Other segment net sales were $279.1 in fiscal 2022, a decrease of 7.9% from fiscal 2021 net sales of $303.1. The decrease was driven by lower sales volume of 13.7% and unfavorable foreign exchange rates of 1.9%, partially offset by increased pricing of 7.7%.

Other Segment Profit was $20.2 in fiscal 2022, a decrease of 52.0% from fiscal 2021 Segment Profit of $42.1. The decrease was driven by lower net sales and a lower gross margin rate, partially offset by lower SG&A.

Corporate

Corporate expenses were $101.6 in fiscal 2023, a decrease of 9.6% from fiscal 2022 expenses of $112.4. The decrease was driven by lower share-based compensation expense due to the recognition of a cumulative adjustment for certain performance-based award units to reflect management’s assessment of a lower probability of achievement of performance goals, and reductions in staffing levels and other cost-reduction initiatives.

Corporate expenses were $112.4 in fiscal 2022, a decrease of 24.9% from fiscal 2021 expenses of $149.7. The decrease was driven by lower short-term variable cash incentive compensation expense, reductions in staffing levels and other cost-reduction initiatives.

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(Dollars in millions, except per share data)

Liquidity and Capital Resources

The following table summarizes cash activities for the years ended September 30:

Operating Activities

Cash provided by operating activities totaled $531.0 for fiscal 2023, an increase of $660.0 compared to cash used in operating activities of $129.0 for fiscal 2022. This increase was driven by a reduction in inventory, lower short-term variable cash incentive compensation payouts, higher income tax refunds and lower SG&A, partially offset by lower gross margin, higher interest payments, higher payments associated with restructuring activities and accounts payable timing. Accounts payable timing is driven by the unfavorable impact of extended payment terms with vendors for payments originally due in the final weeks of fiscal 2022 that were paid in the first quarter of fiscal 2023.

Cash used in operating activities totaled $129.0 for fiscal 2022, a decrease of $400.5 compared to cash provided by operating activities of $271.5 for fiscal 2021. This decrease was driven by higher inventory, lower accounts payable, lower net income and higher interest payments, partially offset by lower tax payments and lower short-term variable cash incentive compensation payouts. Higher inventory was driven by higher production, lower sales and higher input costs. Lower accounts payable was driven by the timing of production. Fiscal 2022 was also favorably impacted by extended payment terms with vendors for payments originally due in the final weeks of fiscal 2022 that were paid in the first quarter of fiscal 2023.

The seasonal nature of our North America consumer lawn and garden business generally requires cash to fund significant increases in inventories during the first half of the fiscal year. Receivables and payables also build substantially in our second quarter of the fiscal year in line with the timing of sales to support our retailers’ spring selling season.

Investing Activities

Cash used in investing activities totaled $65.7 for fiscal 2023, a decrease of $217.5 compared to $283.2 for fiscal 2022. Cash used for investments in property, plant and equipment during fiscal 2023 was $92.8, a decrease from fiscal 2022 due to higher spending in the prior period on capital projects to expand network capacity. We also received proceeds of $37.0 during fiscal 2023 related to the payoff of seller financing that we provided in connection with a fiscal 2017 divestiture. In addition, we had other investing cash outflows of $12.4 primarily comprised of cash outflows associated with currency forward contracts.

Cash used in investing activities totaled $283.2 for fiscal 2022, a decrease of $255.4 compared to $538.6 for fiscal 2021. Cash used for investments in property, plant and equipment during fiscal 2022 was $113.5. We also completed the acquisitions of Luxx Lighting, Inc., True Liberty Bags and Cyco during fiscal 2022 in exchange for aggregate cash payments of $237.3, as well as the issuance of 0.1 million 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. In addition, during fiscal 2022, we made payments of $25.0 in connection with a minority non-equity convertible debt investment in RIV Capital, received proceeds from the sale of long-lived assets of $63.3 and received $29.3 associated with currency forward contracts.

For the three fiscal years ended September 30, 2023, we allocated our capital spending as follows: 64% for maintenance of existing productive assets; 20% for cost savings projects, focused primarily on supply chain and information technology, and 16% for innovation and expansion. We expect fiscal 2024 capital expenditures to be generally consistent with our recent capital spending amounts and allocations.

Financing Activities

Cash used in financing activities totaled $520.1 for fiscal 2023 compared to cash provided by financing activities of $255.3 for fiscal 2022. During fiscal 2023, we had net debt repayments of $353.6, paid dividends of $149.1, paid financing and issuance fees of $6.4 and repurchased Common Shares for $9.3 (which includes cash paid to tax authorities to satisfy statutory income tax withholding obligations related to share-based compensation). Higher debt repayment and lower Common Share repurchases are driven by our focus on using available cash flow to reduce our debt.

Cash provided by financing activities totaled $255.3 in fiscal 2022 compared to $494.0 in fiscal 2021. During fiscal 2022, we had net borrowings of $680.1 and paid financing and issuance fees of $9.6. We also repurchased Common Shares for $257.9 and paid dividends of $166.2 during fiscal 2022.

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(Dollars in millions, except per share data)

Accounts Receivable Sales

On October 27, 2023, we entered into an agreement under which we may sell up to $600.0 of a portfolio of available and eligible outstanding customer accounts receivable generated by sales to four specified customers. The agreement is uncommitted and has an initial term that expires October 25, 2024, unless earlier terminated by the purchaser.

Supplier Finance Program

We have an agreement to provide a supplier finance program which facilitates participating suppliers’ ability to finance our payment obligations with a designated third-party financial institution. Participating suppliers may, at their sole discretion, elect to finance our payment obligations prior to their scheduled due dates at a discounted price to the participating financial institution. Our obligations to our suppliers, including amounts due and scheduled payment dates, are not impacted by suppliers’ decisions to finance amounts under this arrangement. The payment terms that we negotiate with our suppliers are consistent, regardless of whether a supplier participates in the program. Our current payment terms with a majority of our suppliers generally range from 30 to 60 days, which we deem to be commercially reasonable. Our outstanding payment obligations under our supplier finance program were $18.3 and $8.6 at September 30, 2023 and 2022, respectively, and are recorded within accounts payable in the Consolidated Balance Sheets. The associated payments were $185.3 for fiscal 2023 and are classified as operating activities in the Consolidated Statements of Cash Flows.

Share Repurchases

On February 6, 2020, Scotts Miracle-Gro announced that its Board of Directors authorized the repurchase of up to $750.0 of Common Shares from April 30, 2020 through March 25, 2023. There were no share repurchases under this share repurchase authorization during fiscal 2023 through its expiration on March 25, 2023. During fiscal 2022 and fiscal 2021, Scotts Miracle-Gro repurchased 1.1 million and 0.6 million Common Shares under this share repurchase authorization for $175.0 and $113.1, respectively. Treasury share purchases also include cash paid to tax authorities to satisfy statutory income tax withholding obligations related to share-based compensation of $9.3, $82.9 and $16.3 for fiscal 2023, fiscal 2022 and fiscal 2021, respectively.

Cash and Cash Equivalents

Our cash and cash equivalents were held in cash depository accounts with major financial institutions around the world or invested in high quality, short-term liquid investments having original maturities of three months or less. The cash and cash equivalents balances of $31.9 and $86.8 at September 30, 2023 and 2022, respectively, included $26.6 and $4.2, respectively, held by controlled foreign corporations. As of September 30, 2023, we maintain our assertion of indefinite reinvestment of the earnings of all material foreign subsidiaries.

Borrowing Agreements

Credit Facilities

Our primary sources of liquidity are cash generated by operations and borrowings under our credit facilities, which are guaranteed by substantially all of Scotts Miracle-Gro’s domestic subsidiaries. On July 5, 2018, we entered into a fifth amended and restated credit agreement, which provided us 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.

On April 8, 2022, we entered into 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 replaced the fifth amended and restated credit agreement and will terminate on April 8, 2027. The Sixth A&R Credit Facilities are available for the 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.

Under the terms of the Sixth A&R Credit Agreement, loans bear interest, at our 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 bear interest at the applicable Swingline Rate set forth in the Sixth A&R Credit Agreement. 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.

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On June 8, 2022, we entered into Amendment No. 1 to the Sixth A&R Credit Agreement. Amendment No. 1 increased the maximum permitted leverage ratio for the quarterly leverage covenant until April 1, 2024. Amendment No. 1 also increased the interest rate applicable to borrowings under the revolving credit facility by 35 bps and the term loan facility by 50 bps, and increased the annual facility fee rate on the revolving credit facility by 15 bps, in each case, when the Company’s quarterly-tested leverage ratio exceeded 4.75.

On July 31, 2023, we entered into Amendment No. 2 to the Sixth A&R Credit Agreement. Amendment No. 2 (i) reduces the revolving loan commitments by $250.0; (ii) increases the maximum permitted leverage ratio for the quarterly leverage covenant until the earlier of (a) October 1, 2025 and (b) subject to certain conditions specified in Amendment No. 2, the termination by the Company of such adjustment (such period, the “Leverage Adjustment Period”); (iii) replaces the interest coverage covenant with a fixed charge coverage covenant; (iv) increases the interest rate applicable to borrowings under the revolving credit facility and the term loan facility by 25 bps for each existing pricing tier and adds a pricing tier applicable to periods when the leverage ratio exceeds 6.00; (v) limits the amount of certain incremental investments, loans and advances to $25.0 during the Leverage Adjustment Period; and (vi) adds our intellectual property (subject to certain exceptions) as collateral to secure our obligations under the Sixth A&R Credit Agreement. Additionally, Amendment No. 2 limits our ability to declare or pay any discretionary dividends, distributions or other restricted payments during the Leverage Adjustment Period to only the payment of (i) regularly scheduled cash dividends to holders of our Common Shares in an aggregate amount not to exceed $225.0 per fiscal year and (ii) other dividends, distributions or other restricted payments in an aggregate amount not to exceed $25.0. Amendment No. 2 also subjects our ability to make certain investments to pro forma compliance with certain leverage levels specified in Amendment No. 2. Pursuant to Amendment No. 2, the Sixth A&R Credit Agreement is secured by (i) a perfected first priority security interest in all of the accounts receivable, inventory, equipment and intellectual property (subject to certain exceptions) 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.

At September 30, 2023, we had letters of credit outstanding in the aggregate principal amount of $5.0, and had $1,156.7 of borrowing availability under the Sixth A&R Credit Agreement. The weighted average interest rates on average borrowings under the credit facilities, excluding the impact of interest rate swaps, were 7.6%, 2.8% and 1.9% for fiscal 2023, fiscal 2022 and fiscal 2021, respectively.

The Sixth A&R Credit Agreement contains, among other obligations, an affirmative covenant regarding our leverage ratio determined as of the end of each of our fiscal quarters calculated as average total indebtedness, divided by our earnings before interest, taxes, depreciation and amortization, as adjusted pursuant to the terms of Amendment No. 2 (“Adjusted EBITDA”). Pursuant to Amendment No. 2, the maximum permitted leverage ratio is (i) 7.75 for the fourth quarter of fiscal 2023, (ii) 8.25 for the first quarter of fiscal 2024, (iii) 7.75 for the second quarter of fiscal 2024, (iv) 6.50 for the third quarter of fiscal 2024, (v) 6.00 for the fourth quarter of fiscal 2024, (vi) 5.50 for the first quarter of fiscal 2025, (vii) 5.25 for the second quarter of fiscal 2025, (viii) 5.00 for the third quarter of fiscal 2025, (ix) 4.75 for the fourth quarter of fiscal 2025 and (x) 4.50 for the first quarter of fiscal 2026 and thereafter. Our leverage ratio was 6.57 at September 30, 2023. Pursuant to Amendment No. 2, the Sixth A&R Credit Agreement also contains an affirmative covenant regarding our fixed charge coverage ratio determined as of the end of each of our fiscal quarters, calculated as Adjusted EBITDA minus capital expenditures and expense for taxes paid in cash, divided by the sum of interest expense plus restricted payments, as described in Amendment No. 2. The minimum required fixed charge coverage ratio is (i) 0.75 for the fourth quarter of fiscal 2023 through the third quarter of fiscal 2024 and (ii) 1.00 for the fourth quarter of fiscal 2024 and thereafter. Our fixed charge coverage ratio was 1.56 for the twelve months ended September 30, 2023.

As of September 30, 2023, we were in compliance with all applicable covenants in the agreements governing our debt. Based on our projections of financial performance for the twelve-month period subsequent to the date of the filing of this Form 10-K, we expect to remain in compliance with the financial covenants under the Sixth A&R Credit Agreement. However, our assessment of our ability to meet our future obligations is inherently subjective, judgment-based, and susceptible to change based on future events. A covenant violation may result in an event of default. Such a default would allow the lenders under the Sixth A&R Credit Agreement to accelerate the maturity of the indebtedness thereunder and would also implicate cross-default provisions under the Senior Notes and cause the Senior Notes to become due and payable at that time. As of September 30, 2023, our indebtedness under the Sixth A&R Credit Agreement and Senior Notes was $2,613.3. We do not have sufficient cash on hand or available liquidity that can be utilized to repay these outstanding amounts in the event of default.

As part of our contingency planning to address potential future circumstances that could result in noncompliance, we have contemplated alternative plans including additional restructuring activities to reduce operating expenses and certain cash management strategies that are within our control. Additionally, we have contemplated alternative plans that are subject to market conditions and not in our control, including, among others, discussions with our lenders to amend the terms of our financial covenants under the Sixth A&R Credit Agreement and generating cash by completing other financing transactions, which may include issuing equity. There is no assurance that we will be successful in implementing these alternative plans.

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(Dollars in millions, except per share data)

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 represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 5.250% Senior Notes have interest payment dates of June 15 and December 15 of each year.

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 represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 4.500% Senior Notes have interest payment dates of April 15 and October 15 of each year.

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 represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 4.000% Senior Notes have interest payment dates of April 1 and October 1 of each year.

On August 13, 2021, Scotts Miracle-Gro issued $400.0 aggregate principal amount of 4.375% Senior Notes due 2032. The 4.375% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt. The 4.375% Senior Notes have interest payment dates of February 1 and August 1 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, the 4.500% Senior Notes, the 4.000% Senior Notes and the 4.375% Senior Notes.

The Senior Notes contain an affirmative covenant regarding our interest coverage ratio determined as of the end of each of our fiscal quarters, calculated as Adjusted EBITDA divided by interest expense excluding costs related to refinancings. The minimum required interest coverage ratio is 2.00. Our interest coverage ratio was 2.81 for the twelve months ended September 30, 2023.

Receivables Facility

We also maintained a Master Repurchase Agreement (including the annexes thereto, the “Repurchase Agreement”) and a Master Framework Agreement, as amended (the “Framework Agreement” and, together with the Repurchase Agreement, the “Receivables Facility”) under which we could sell a portfolio of available and eligible outstanding customer accounts receivable to the purchasers subject to agreeing to repurchase the receivables on a weekly basis. The eligible accounts receivable consisted of accounts receivable generated by sales to three specified customers. The eligible amount of customer accounts receivables which could be sold under the Receivables Facility was $400.0 and the commitment amount during the seasonal commitment period that began on February 24, 2023 and ended on June 16, 2023 was $160.0. The Receivables Facility expired on August 18, 2023.

The sale of receivables under the Receivables Facility was accounted for as short-term debt and we continued to carry the receivables on our Consolidated Balance Sheets, primarily as a result of our requirement to repurchase receivables sold. As of September 30, 2022, there were $75.0 in borrowings on receivables pledged as collateral under the Receivables Facility, and the carrying value of the receivables pledged as collateral was $79.8.

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(Dollars in millions, except per share data)

Interest Rate Swap Agreements

We enter into interest rate swap agreements with major financial institutions that effectively convert a portion of our variable rate debt to a fixed rate. Interest payments made between the effective date and expiration date are hedged by the swap agreements. Swap agreements that were hedging interest payments as of September 30, 2023 and 2022 had a maximum total U.S. dollar equivalent notional amount of $600.0 and $800.0, respectively. On October 26, 2023, we executed an interest rate swap agreement with a notional amount that adjusts in accordance with a specified seasonal schedule, and a maximum notional amount of $100.0. This swap agreement has a fixed rate of 4.74%, an effective date of November 20, 2023 and an expiration date of March 22, 2027. The notional amount, effective date, expiration date and rate of each of the swap agreements outstanding at September 30, 2023 are shown in the table below:

(a)The effective date refers to the date on which interest payments are first hedged by the applicable swap agreement.

(b)Notional amount adjusts in accordance with a specified seasonal schedule. This represents the maximum notional amount at any point in time.

Availability and Use of Cash

We believe that our cash flows from operations and borrowings under our agreements described herein will be sufficient to meet debt service, capital expenditures and working capital needs for the foreseeable future. However, we cannot ensure that our business will generate sufficient cash flow from operations or that future borrowings will be available under our borrowing agreements in amounts sufficient to pay indebtedness or fund other liquidity needs. Actual results of operations will depend on numerous factors, many of which are beyond our control as further discussed in “ITEM 1A. RISK FACTORS — Risks Related to Our M&A, Lending and Financing Activities — Our indebtedness could limit our flexibility and adversely affect our financial condition” of this Form 10-K.

Financial Disclosures About Guarantors and Issuers of Guaranteed Securities

The 5.250% Senior Notes, 4.500% Senior Notes, 4.000% Senior Notes and 4.375% Senior Notes were issued by Scotts Miracle-Gro on December 15, 2016, October 22, 2019, March 17, 2021 and August 13, 2021, respectively. The Senior Notes are guaranteed by certain consolidated domestic subsidiaries of Scotts Miracle-Gro (collectively, the “Guarantors”) and, therefore, we report summarized financial information in accordance with SEC Regulation S-X, Rule 13-01, “Guarantors and Issuers of Guaranteed Securities Registered or Being Registered.”

The guarantees are “full and unconditional,” as those terms are used in Regulation S-X, Rule 3-10(b)(3), except that a Guarantor’s guarantee will be released in certain circumstances set forth in the indentures governing the Senior Notes, such as: (i) upon any sale or other disposition of all or substantially all of the assets of the Guarantor (including by way of merger or consolidation) to any person other than Scotts Miracle-Gro or any “restricted subsidiary” under the applicable indenture; (ii) if the Guarantor merges with and into Scotts Miracle-Gro, with Scotts Miracle-Gro surviving such merger; (iii) if the Guarantor is designated an “unrestricted subsidiary” in accordance with the applicable indenture or otherwise ceases to be a “restricted subsidiary” (including by way of liquidation or dissolution) in a transaction permitted by such indenture; (iv) upon legal or covenant defeasance; (v) at the election of Scotts Miracle-Gro following the Guarantor’s release as a guarantor under the Sixth A&R Credit Agreement, except a release by or as a result of the repayment of the Sixth A&R Credit Agreement; or (vi) if the Guarantor ceases to be a “restricted subsidiary” and the Guarantor is not otherwise required to provide a guarantee of the Senior Notes pursuant to the applicable indenture.

Our foreign subsidiaries and certain of our domestic subsidiaries are not guarantors (collectively, the “Non-Guarantors”) of the Senior Notes. Payments on the Senior Notes are only required to be made by Scotts Miracle-Gro and the Guarantors. As a result, no payments are required to be made from the assets of the Non-Guarantors, unless those assets are transferred by dividend or otherwise to Scotts Miracle-Gro or a Guarantor. In the event of a bankruptcy, insolvency, liquidation or reorganization of any of the Non-Guarantors, holders of their indebtedness, including their trade creditors and other obligations, will be entitled to payment of their claims from the assets of the Non-Guarantors before any assets are made available for distribution to Scotts Miracle-Gro or the Guarantors. As a result, the Senior Notes are effectively subordinated to all the liabilities of the Non-Guarantors.

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(Dollars in millions, except per share data)

The guarantees may be subject to review under federal bankruptcy laws or relevant state fraudulent conveyance or fraudulent transfer laws. In certain circumstances, the court could void the guarantee, subordinate the amounts owing under the guarantee, or take other actions detrimental to the holders of the Senior Notes.

As a general matter, value is given for a transfer or an obligation if, in exchange for the transfer or obligation, property is transferred or a valid antecedent debt is satisfied. A court would likely find that a Guarantor did not receive reasonably equivalent value or fair consideration for its guarantee to the extent such Guarantor did not obtain a reasonably equivalent benefit from the issuance of the Senior Notes.

The measure of insolvency varies depending upon the law of the jurisdiction that is being applied. Regardless of the measure being applied, a court could determine that a Guarantor was insolvent on the date the guarantee was issued, so that payments to the holders of the Senior Notes would constitute a preference, fraudulent transfer or conveyances on other grounds. If a guarantee is voided as a fraudulent conveyance or is found to be unenforceable for any other reason, the holders of the Senior Notes will not have a claim against the Guarantor.

Each guarantee contains a provision intended to limit the Guarantor’s liability to the maximum amount that it could incur without causing the incurrence of obligations under its guarantee to be a fraudulent conveyance. However, there can be no assurance as to what standard a court will apply in making a determination of the maximum liability of each Guarantor. Moreover, this provision may not be effective to protect the guarantees from being voided under fraudulent conveyance laws. There is a possibility that the entire guarantee may be set aside, in which case the entire liability may be extinguished.

The following tables present summarized financial information on a combined basis for Scotts Miracle-Gro and the Guarantors. Transactions between Scotts Miracle-Gro and the Guarantors have been eliminated and the summarized financial information does not reflect investments of the Scotts Miracle-Gro and the Guarantors in the Non-Guarantor subsidiaries.

(a)Includes amounts due from Non-Guarantor subsidiaries of $26.2.

(a)Includes intercompany expense from Non-Guarantor subsidiaries of $12.1.

Judicial and Administrative Proceedings

We are party to various pending judicial and administrative proceedings arising in the ordinary course of business, including, among others, proceedings based on accidents or product liability claims and alleged violations of environmental laws. We have reviewed these pending judicial and administrative proceedings, including the probable outcomes, reasonably anticipated costs and expenses, and the availability and limits of our insurance coverage, and have established what we believe to be appropriate accruals. We believe that our assessment of contingencies is reasonable and that the related accruals, in the aggregate, are adequate; however, there can be no assurance that future quarterly or annual operating results will not be materially affected by these proceedings, whether as a result of adverse outcomes or as a result of significant defense costs.

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(Dollars in millions, except per share data)

Contractual Obligations

The following table summarizes our future cash outflows for contractual obligations as of September 30, 2023:

We had long-term debt obligations and interest payments due primarily under the 5.250% Senior Notes, 4.500% Senior Notes, 4.000% Senior Notes and 4.375% Senior Notes and our credit facilities. Amounts in the table represent scheduled future maturities of debt principal for the periods indicated.

The interest payments for our credit facilities are based on outstanding borrowings as of September 30, 2023. Actual interest expense will likely be higher due to the seasonality of our business and associated higher average borrowings.

Purchase obligations primarily represent commitments for materials used in our manufacturing processes, including urea and packaging, as well as commitments for warehouse services, grass seed, marketing services and information technology services which comprise the unconditional purchase obligations disclosed in “NOTE 19. COMMITMENTS” of the Notes to Consolidated Financial Statements included in this Form 10-K.

Other obligations include actuarially determined retiree benefit payments and pension funding to comply with local funding requirements. Pension funding requirements are based on preliminary estimates using actuarial assumptions determined as of September 30, 2023. These amounts represent expected payments through 2033. Based on the accounting rules for defined benefit pension plans and retirement health care plans, the liabilities reflected in our Consolidated Balance Sheets differ from these expected future payments (see Notes to Consolidated Financial Statements included in this Form 10-K). The above table excludes liabilities for unrecognized tax benefits and insurance accruals as we are unable to estimate the timing of payments for these items.

Non-GAAP Measures

Use of Non-GAAP Measures

To supplement the financial measures prepared in accordance with GAAP, we use non-GAAP financial measures. The reconciliations of these non-GAAP financial measures to the most directly comparable financial measures calculated and presented in accordance with GAAP are shown in the following tables. These non-GAAP financial measures should not be considered in isolation from, or as a substitute for or superior to, financial measures reported in accordance with GAAP. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all the items associated with the operations of the business as determined in accordance with GAAP. Other companies may calculate similarly titled non-GAAP financial measures differently than us, limiting the usefulness of those measures for comparative purposes.

In addition to GAAP measures, we use these non-GAAP financial measures to evaluate our performance, engage in financial and operational planning, determine incentive compensation and monitor compliance with the financial covenants contained in our borrowing agreements because we believe that these non-GAAP financial measures provide additional perspective on and, in some circumstances are more closely correlated to, the performance of our underlying, ongoing business.

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(Dollars in millions, except per share data)

We believe that these non-GAAP financial measures are useful to investors in their assessment of our operating performance and valuation. In addition, these non-GAAP financial measures address questions routinely received from analysts and investors and, in order to ensure that all investors have access to the same data, we have determined that it is appropriate to make this data available to all investors. Non-GAAP financial measures exclude the impact of certain items (as further described below) and provide supplemental information regarding operating performance. By disclosing these non-GAAP financial measures, we intend to provide investors with a supplemental comparison of operating results and trends for the periods presented. We believe these non-GAAP financial measures are also useful to investors as such measures allow investors to evaluate performance using the same metrics that we use to evaluate past performance and prospects for future performance. We view free cash flow as an important measure because it is one factor used in determining the amount of cash available for dividends and discretionary investment.

Exclusions from Non-GAAP Financial Measures

Non-GAAP financial measures reflect adjustments based on the following items:

•Impairments, which are excluded because they do not occur in or reflect the ordinary course of our ongoing business operations and their exclusion results in a metric that provides supplemental information about the sustainability of operating performance.

•Restructuring and employee severance costs, which include charges for discrete projects or transactions that fundamentally change our operations and are excluded because they are not part of the ongoing operations of our underlying business, which includes normal levels of reinvestment in the business.

•Costs related to refinancing, which are excluded because they do not typically occur in the normal course of business and may obscure analysis of trends and financial performance. Additionally, the amount and frequency of these types of charges is not consistent and is significantly impacted by the timing and size of debt financing transactions.

•Discontinued operations and other unusual items, which include costs or gains related to discrete projects or transactions and are excluded because they are not comparable from one period to the next and are not part of the ongoing operations of our underlying business.

The tax effect for each of the items listed above is determined using the tax rate and other tax attributes applicable to the item and the jurisdiction(s) in which the item is recorded.

Definitions of Non-GAAP Financial Measures

The reconciliations below include the following financial measures that are not calculated in accordance with GAAP:

•Adjusted income (loss) from operations: Income (loss) from operations excluding impairment, restructuring and other charges / recoveries.

•Adjusted net income (loss) attributable to controlling interest from continuing operations: Net income (loss) attributable to controlling interest excluding impairment, restructuring and other charges / recoveries, costs related to refinancing, certain other non-operating income / expense items and discontinued operations, each net of tax.

•Adjusted diluted net income (loss) per common share from continuing operations: Diluted net income (loss) per common share from continuing operations excluding impairment, restructuring and other charges / recoveries, costs related to refinancing and certain other non-operating income / expense items, each net of tax.

•Adjusted EBITDA: Net income (loss) before interest, taxes, depreciation and amortization as well as certain other items such as the impact of the cumulative effect of changes in accounting, costs associated with debt refinancing and other non-recurring or non-cash items affecting net income (loss). A form of Adjusted EBITDA is used in agreements governing the Company’s outstanding indebtedness for debt covenant compliance purposes. Adjusted EBITDA as used in those agreements includes additional adjustments to the Adjusted EBITDA presented in the reconciliations below which may decrease or increase Adjusted EBITDA for purposes of the Company’s financial covenants.

•Free cash flow: Net cash provided by (used in) operating activities reduced by investments in property, plant and equipment.

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(Dollars in millions, except per share data)

Reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures are presented in the following table:

The sum of the components may not equal the total due to rounding.

Due to the GAAP net loss for fiscal 2023 and fiscal 2022, diluted average common shares used in the GAAP diluted loss per common share calculation for fiscal 2023 and fiscal 2022 were 56.0 million and 55.5 million, respectively, which excluded potential common shares of 0.4 million and 0.6 million, respectively, because the effect of their inclusion would be anti-dilutive. Diluted average common shares used in the fiscal 2023 non-GAAP adjusted diluted income per common share calculation, and the calculation of the fiscal 2023 earnings per share impact from the GAAP to non-GAAP reconciling items, were 56.4 million, which included dilutive potential common shares of 0.4 million. Diluted average common shares used in the fiscal 2022 non-GAAP adjusted diluted income per common share calculation, and the calculation of the fiscal 2022 earnings per share impact from the GAAP to non-GAAP reconciling items, were 56.1 million, which included dilutive potential common shares of 0.6 million. Diluted average common shares used in the GAAP and non-GAAP diluted income per common share calculation were 57.2 million for fiscal 2021, which included dilutive potential common shares of 1.5 million.

We view our credit facility as material to our ability to fund operations, particularly in light of our seasonality. Refer to “ITEM 1A. RISK FACTORS — Risks Related to Our M&A, Lending and Financing Activities — Our indebtedness could limit our flexibility and adversely affect our financial condition” of this Form 10-K for a more complete discussion of the risks associated with our debt and our credit facility and the restrictive covenants therein. Our ability to generate cash flows sufficient to cover our debt service costs is essential to our ability to maintain our borrowing capacity. We believe that Adjusted EBITDA provides additional information for determining our ability to meet debt service requirements. Refer to “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources — Borrowing Agreements” of this Form 10-K for more information regarding our credit facility.

Beginning in fiscal 2022, equity in income / loss of unconsolidated affiliates is excluded from the calculation of non-GAAP Adjusted EBITDA. This exclusion is consistent with the calculation of that measure as required by the Company’s borrowing arrangements. This change was first reflected in the calculation of Adjusted EBITDA for fiscal 2022. The fiscal 2021 amounts have not been reclassified to conform to the revised calculation.

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Our calculation of Adjusted EBITDA does not represent and should not be considered as an alternative to net income or cash flows from operating activities as determined by GAAP. We make no representation or assertion that Adjusted EBITDA is indicative of our cash flows from operating activities or results of operations. We have provided a reconciliation of Adjusted EBITDA to net income solely for the purpose of complying with SEC regulations and not as an indication that Adjusted EBITDA is a substitute measure for net income.

A reconciliation of net income to Adjusted EBITDA is as follows:

Regulatory Matters

We are subject to local, state, federal and foreign environmental protection laws and regulations with respect to our business operations and believe we are operating in substantial compliance, or taking actions aimed at ensuring compliance with, such laws and regulations. We are involved in several legal actions with various governmental agencies related to environmental matters. While it is difficult to quantify the potential financial impact of actions involving these environmental matters, particularly remediation costs at waste disposal sites and future capital expenditures for environmental control equipment, in the opinion of management, the ultimate liability arising from such environmental matters, taking into account established accruals, is not expected to have a material effect on our financial condition, results of operations or cash flows. However, there can be no assurance that the resolution of these matters will not materially affect our future quarterly or annual results of operations, financial condition or cash flows. Additional information on environmental matters affecting us is provided in “ITEM 1. BUSINESS — Regulatory Considerations” and “ITEM 3. LEGAL PROCEEDINGS” of this Form 10-K.

Critical Accounting Policies and Estimates

The preparation of financial statements requires management to use judgment and make estimates that affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We evaluate our estimates on an ongoing basis. By their nature, these judgments are subject to uncertainty. We base our estimates on historical experience and on various other sources that we believe to be reasonable under the circumstances. Certain accounting policies are particularly significant, including those related to revenue recognition, income taxes and goodwill and intangible assets. Our critical accounting policies are reviewed periodically with the Audit Committee of the Board of Directors of Scotts Miracle-Gro.

Revenue Recognition and Promotional Allowances

Our revenue is primarily generated from sales of branded and private label lawn and garden care and indoor and hydroponic gardening finished products. Product sales are recognized at a point in time when control of products transfers to customers and we have no further obligation to provide services related to such products. Sales are typically recognized when products are delivered to or picked up by the customer. We are generally the principal in a transaction and, therefore, primarily record revenue on a gross basis. Revenue for product sales is recorded net of sales returns and allowances. Revenues are measured based on the amount of consideration that we expect to receive as derived from a list price, reduced by estimates for

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variable consideration. Variable consideration includes the cost of current and continuing promotional programs and expected sales returns.

Our promotional programs primarily include rebates based on sales volumes, in-store promotional allowances, cooperative advertising programs, direct consumer rebate programs and special purchasing incentives. The cost of promotional programs is estimated considering all reasonably available information, including current expectations and historical experience. Promotional costs (including allowances and rebates) incurred during the year are expensed to interim periods in relation to revenues and are recorded as a reduction of net sales. Provisions for estimated returns and allowances are recorded at the time revenue is recognized based on historical rates and are periodically adjusted for known changes in return levels. Shipping and handling costs are accounted for as contract fulfillment costs and included in the “Cost of sales” line in the Consolidated Statements of Operations. We exclude from revenue any amounts collected from customers for sales or other taxes.

Income Taxes

Our annual effective tax rate is established based on our pre-tax income (loss), statutory tax rates and the tax impacts of items treated differently for tax purposes than for financial reporting purposes. We record income tax liabilities utilizing known obligations and estimates of potential obligations. A deferred tax asset or liability is recognized whenever there are future tax effects from existing temporary differences and operating loss and tax credit carryforwards. Valuation allowances are used to reduce deferred tax assets to the balances that are more likely than not to be realized. In determining whether a valuation allowance is warranted, we take into account many factors, including the specific tax jurisdiction, both historical and projected future earnings, carryback and carryforward periods and tax planning strategies. Many of the judgments made in adjusting valuation allowances involve assumptions and estimates that are highly subjective. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and Consolidated Statements of Operations reflect the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments involved in determining the proper valuation allowances, differences between actual future events and prior estimates and judgments could result in adjustments to these valuation allowances. During fiscal 2023, we recognized a non-cash, pre-tax other-than-temporary impairment charge related to our convertible debt investments of $101.3 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. Deferred tax assets related to unrealized losses on convertible debt investments were $33.4 and $25.3 at September 30, 2023 and 2022, respectively. A full valuation allowance has been established against these losses at September 30, 2023 as we do not expect to utilize them prior to their expiration.

We also establish a liability for tax return positions in which there is uncertainty as to whether or not the position will ultimately be sustained. These uncertain tax positions are adjusted as a result of changes in factors such as tax legislation, interpretations of laws by courts, rulings by tax authorities, new audit developments, changes in estimates and the expiration of the statute of limitations. Amounts for uncertain tax positions are adjusted in quarters when new information becomes available or when positions are effectively settled. Many of the judgments made in adjusting uncertain tax positions involve assumptions and estimates regarding audit outcomes and the timing of audit settlements, which are often uncertain and subject to change.

Goodwill and Indefinite-Lived Intangible Assets

We have significant investments in intangible assets and goodwill. We perform our annual goodwill and indefinite-lived intangible asset testing as of the first day of our fiscal fourth quarter or more frequently if circumstances indicate potential impairment. In our evaluation of impairment for goodwill and indefinite-lived intangible assets, we perform either an initial qualitative or quantitative evaluation for each of our reporting units and indefinite-lived intangible assets. Factors considered in the qualitative test include operating results as well as new events and circumstances impacting the operations or cash flows of the reporting unit or indefinite-lived intangible assets. For the quantitative test, the review for impairment of goodwill and indefinite-lived intangible assets is based on a combination of income-based approaches, including the relief-from-royalty method for indefinite-lived trade names, and market-based approaches. If it is determined that an impairment has occurred, an impairment loss is recognized for the amount by which the carrying value of the reporting unit or intangible asset exceeds its estimated fair value.

Under the income-based approach, we determine fair value using a discounted cash flow approach that requires significant judgment with respect to revenue and profitability growth rates, based upon annual budgets and longer-range strategic plans, and the selection of an appropriate discount rate. These budgets and plans are used for internal purposes and are also the basis for communication with outside parties about future business trends. Under the market-based approach, we determine fair value by comparing our reporting units to similar businesses or guideline companies whose securities are actively traded in public markets. We also use the guideline transaction method to determine fair value based on pricing multiples derived from the sale of companies that are similar to our reporting units.

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Fair value estimates employed in our annual impairment review of indefinite-lived intangible assets and goodwill were determined using models involving several assumptions. Changes in our assumptions could materially impact our fair value estimates. Assumptions critical to our fair value estimates were: (i) discount rates; (ii) royalty rates used in our intangible asset valuations; (iii) projected future revenues and profitability; and (iv) projected long-term growth rates used in the derivation of terminal year values. These and other assumptions are impacted by economic conditions and expectations of management and may change in the future based on period specific facts and circumstances. While we believe the assumptions we used to estimate future cash flows are reasonable, there can be no assurance that the expected future cash flows will be realized. As a result, impairment charges that possibly would have been recognized in earlier periods may not be recognized until later periods if actual results deviate unfavorably from earlier estimates. The use of different assumptions would increase or decrease discounted cash flows or earnings projections and, therefore, could change impairment determinations.

We performed annual goodwill impairment testing as of the first day of our fourth quarter of fiscal 2023. This test resulted in a non-cash, pre-tax goodwill impairment charge of $10.3 related to our Other segment, which was recorded during the fourth quarter of fiscal 2023 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. The impairment was driven by revisions to our internal forecasts in response to decreased sales volume and inflationary cost pressures. The carrying value of goodwill of our Other segment reporting unit, after recognizing the impairment, is zero. The estimated fair value of our Other segment reporting unit was based upon an equal weighting of the income-based and market-based approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. The fair value estimate utilizes significant unobservable inputs and thus represents a Level 3 fair value measurement. While we consider our assumptions to be reasonable and appropriate, they are complex and subjective. Refer to “NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET” for more information.

During fiscal 2022, our Hawthorne reporting unit experienced adverse financial results due to decreased sales volume and higher transportation and warehousing costs. Sales volume decreased due to an oversupply of cannabis, which significantly decreased cannabis wholesale prices and indoor and outdoor cannabis cultivation. As a result, we revised our internal forecasts relating to our Hawthorne reporting unit. We concluded that the changes in circumstances in this reporting unit and the decline in the Company’s market capitalization triggered the need for an interim impairment review of its goodwill during the third quarter of fiscal 2022. We elected to bypass the qualitative assessment and perform quantitative interim goodwill impairment testing for our Hawthorne reporting unit. We updated our assumptions from prior periods to include the longer duration and increased significance of lower sales volumes and cost increases. This quantitative test resulted in a non-cash, pre-tax goodwill impairment charge of $522.4 related to our Hawthorne reporting unit, which was recorded during the third quarter of fiscal 2022 in the “Impairment, restructuring and other” line in the Consolidated Statements of Operations. The carrying value of goodwill of our Hawthorne reporting unit, after recognizing the impairment, is zero. The estimated fair value of our Hawthorne reporting unit was based upon an equal weighting of the income-based and market-based approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit. The fair value estimate utilizes significant unobservable inputs and, therefore, represents a Level 3 fair value measurement. While we consider our assumptions to be reasonable and appropriate, they are complex and subjective. Refer to “NOTE 5. GOODWILL AND INTANGIBLE ASSETS, NET” for more information.

At September 30, 2023, goodwill totaled $243.9, all of which was associated with our U.S. Consumer segment. Based on the results of the annual quantitative evaluation for fiscal 2023, the fair value of our U.S. Consumer segment reporting unit exceeded its carrying value by 182%. A 100 basis point change in the discount rate would not have resulted in an impairment for this reporting unit.

At September 30, 2023, indefinite-lived intangible assets consisted of trade names of $168.2 and the Roundup® marketing agreement amendment of $155.7, all of which were associated with our U.S. Consumer segment. Based on the results of the annual quantitative evaluation for fiscal 2023, the fair values of our indefinite-lived intangible assets exceeded their respective carrying values in a range of 14% to over 1,200%. A 100 basis point change in the discount rate would not have resulted in an impairment of any of our indefinite-lived intangible assets.

Other Significant Accounting Policies

Other significant accounting policies, primarily those with lower levels of uncertainty than those discussed above, are also critical to understanding the consolidated financial statements. The Notes to Consolidated Financial Statements included in this Form 10-K contain additional information related to our accounting policies, including recent accounting pronouncements, and should be read in conjunction with this discussion.

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