UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________________________________________
Form 10-K
(Mark One)
|
| |
| þ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended September 30, 20132016
OR
|
| |
¨o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-11593
______________________________________________________________
The Scotts Miracle-Gro Company
(Exact name of registrant as specified in its charter)
|
| |
| Ohio | 31-1414921 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| | |
14111 Scottslawn Road, Marysville, Ohio | 43041 |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
937-644-0011
Securities registered pursuant to Section 12(b) of the Act:
|
| |
| Title of Each Class | Name of Each Exchange on Which Registered |
| Common Shares, without par value | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
______________________________________________________________
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No ¨o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes þ No ¨o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter)229.405) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
| Large accelerated filer | þ | Accelerated filer | ¨o |
| Non-accelerated filer | ¨o (Do not check if a smaller reporting company)
| Smaller reporting company | ¨o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨o No þ
The aggregate market value of Common Shares (the only common equity of the registrant) held by non-affiliates (for this purpose, executive officers and directors of the registrant are considered affiliates) as of March 30, 2013April 2, 2016 (the last business day of the most recently completed second quarter) was approximately $1,892,511,4133,300,118,585.
There were 61,985,31860,086,416 Common Shares of the registrant outstanding as of November 13, 2013.18, 2016.
______________________________________________________________
DOCUMENTS INCORPORATED BY REFERENCE:
Portions of the definitive Proxy Statement for the registrant’s 20142017 Annual Meeting of Shareholders are incorporated by reference into Part III of this Annual Report on Form 10-K. Such Proxy Statement will be filed with the Securities and Exchange Commission within 120 days of the registrant’s fiscal year ended September 30, 2016.
PART I
Company Description and Development of the Business
The discussion below provides a brief description of the business conducted by The Scotts Miracle-Gro Company (“Scotts Miracle-Gro” and, together with its subsidiaries, the “Company,” “we” or “us”), including general developments in the Company’s business during the fiscal year ended September 30, 20132016 (“fiscal 2013”2016”). For additional information on recent business developments, see “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS” of this Annual Report on Form 10-K.
We are a leading manufacturer and marketer of branded consumer lawn and garden products. Our products are marketed under some of the most recognized brand names in the industry, including, inindustry. In North America, key brands include Scotts® and Turf Builder® lawn and grass seed products, including the Scottsproducts; Miracle-Gro® LawnPro® Annual 4 Step® Program; Miracle-Gro, Nature’s Care®, Scotts®, LiquafeedLiquaFeed® and Osmocote®1 gardening and landscape products; and Ortho®, Roundup®2, Home Defense® and Home DefenseTomcat® branded insect control, weed control and rodenticide products; and Scotts® and Morning Song® wild bird foodrodent control products. In the United Kingdom, key brands include Miracle-Gro® plant fertilizers; Roundup®2, Weedol® and Pathclear® herbicides; EverGreen® lawn fertilizers; and Levington® gardening and landscape products. Other significant brands in Europe include Roundup®2, KB® and Fertiligène® in France; Roundup®2, Celaflor®, Nexa Lotte® and Substral® in Germany and Austria; and Roundup®2, ASEF®, KB® and Substral® in Belgium, the Netherlands and Luxembourg. We also operateare the exclusive agent of the Monsanto Company (“Monsanto”) for the marketing and distribution of consumer Roundup® non-selective herbicide products within the United States and other contractually specified countries. We have a presence in similar consumer branded products in Australia, the Far East and Latin America. In addition, with our recent acquisitions of Gavita Holdings B.V. (“Gavita”), General Hydroponics, Inc. (“General Hydroponics”) and Bio-Organic Solutions, Inc. (“Vermicrop”), and control of AeroGrow International, Inc. (“AeroGrow”), we are a leading producer of liquid plant food products, growing media, advanced indoor garden and lighting systems and accessories for hydroponic gardening. Prior to April 13, 2016, we operated the Scotts LawnService® business (the “SLS Business”), which providesprovided residential and commercial lawn care, tree and shrub care and limited pest control services in the United States.
Our heritage is tied On April 13, 2016, pursuant to the 1995 mergerterms of The the Contribution and Distribution Agreement (the “Contribution Agreement”) between the Company and TruGreen Holding Corporation (“TruGreen Holdings”), we completed the contribution of the SLS Business to a newly formed subsidiary of TruGreen Holdings (the “TruGreen Joint Venture”) in exchange for a minority equity interest of approximately 30% in the TruGreen Joint Venture. We now participate in the residential and commercial lawn care, tree and shrub care and pest control services segment in the United States and Canada through our interest in the TruGreen Joint Venture.
Scotts Company, whichMiracle-Gro, an Ohio corporation, traces its rootsheritage back to a company founded by O.M. Scott in Marysville, Ohio in 1868,1868. In the mid-1900s, we became widely known for the development of quality lawn fertilizers and grass seeds that led to the creation of a new industry-consumer lawn care. In the 1990s, we significantly expanded our product offering with three powerful leading brands in the U.S. home lawn and garden industry. First, in fiscal 1995, through a merger with Stern’s Miracle-Gro Products, Inc., which was formed on Long Island, New Yorkfounded by Horace Hagedorn and Otto Stern in 1951.Long Island, New York in 1951, we acquired the Miracle-Gro® brand, the industry leader in water-soluble garden plant foods. Second and third, in 1998, we acquired the Ortho® brand in the United States and obtained exclusive rights to market the consumer Roundup® brand within the United States and other contractually specified countries, thereby adding industry-leading weed, pest and disease control products to our portfolio. Today, we believe that Scotts®, Turf Builder®, Miracle-Gro is an Ohio corporation.
We®, Ortho® and Roundup® are dedicated to delivering strong, long-term financial results and outstanding shareholder returns by providing products of superior quality and value to enhance consumers’the most widely recognized brands in the consumer lawn and garden environments. In fiscal 2013,industry in the United States.
Our strategy is focused on (i) growing our core branded business, primarily in North America where we progressed a numbercan leverage our competitive advantages in emerging areas of key initiatives which focused on: (1) margin improvementgrowth including organics, hydroponics, live goods, water positive landscapes, and SG&A reductioninternet-enabled technology, (ii) maximizing the value of non-core-assets including the divestiture of Scotts LawnService® and (2) stronger balance sheetexploring alternatives in Europe, and operating(iii) cash flow withincluding near-term investments that will drive long-term growth, a bias towards returningnatural mid-term shift to integration of acquired businesses, and a long-term plan to return increasing amounts of cash to shareholders. After a late start to the season impacting first half results, strong consumer engagement and our initiatives came together in the second half of the year to lift full year results. We also continued our long term focus on innovation and global expansion.
|
| | |
| ________________________ |
1 Osmocote® is a registered trademark of Everris International B.V., a subsidiary of Israel Chemicals Ltd. |
2 Roundup® is a registered trademark of Monsanto Technology LLC, a company affiliated with Monsanto Company. |
2
Business Segments
We divide our business into the following reportable segments:
GlobalU.S. Consumer
| |
• | Scotts LawnService®Europe Consumer Other |
This division of reportable segments is consistent with how the segments report to and are managed by our Chief Executive Officer (the chief operating decision makerdecision-maker of the Company). Financial information about these segments for each of the three fiscal years ended September 30, 2016, 2015 and 2014 is presented in “NOTE 21.22. SEGMENT INFORMATION” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
As a result of the completion of the Company’s contribution of the SLS Business to the TruGreen Joint Venture on April 13, 2016, effective in its second quarter of fiscal 2016, the Company classified its results of operations for all periods presented to reflect the SLS Business as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. See “NOTE 2. DISCONTINUED OPERATIONS” for further discussion. Prior to being reported as discontinued operations, the SLS Business was included as its own reportable segment. Refer to “NOTE 22. SEGMENT INFORMATION” for discussion of the Company’s new reportable segments identified effective in the second quarter of fiscal 2016.
Principal Products and Services
Global Consumer
In our Global Consumer segment,reportable segments, we manufacture, market and marketsell consumer lawn and garden products in the following categories:
_____________
1 Osmocote® is a registered trademark of Everris International B.V., a subsidiary of Israel Chemicals Ltd.
2 Roundup® is a registered trademark of Monsanto Technology LLC, a company affiliated with Monsanto Company ("Monsanto")
2
Lawn Care: The lawn care category is designed to help consumers obtain and enjoy the lawn they want. In the United States and Canada, products within this category include lawn fertilizer products under the Scotts® and Turf Builder® brand names,names; grass seed products under the Scotts®, Turf Builder®, EZ Seed®, Water Smart® and PatchMaster® brand namesnames; and lawn-related weed, pest and disease control products primarily under the Scotts® and Lawn Pro®brand names,name, including sub-brands such as GrubEx®. A similar range of products is marketed in Europe and Australia under a variety of brands such as EverGreen®, Fertiligène®, Substral®, Miracle-Gro® Patch Magic®, Weedol®, Pathclear®, KB® and Celaflor®. The lawn care category also includes spreaders and other durables under the Scotts® brand name, including Turf Builder® EdgeGuard® spreaders, Snap® spreaders and Handy Green®II handheld spreaders. In addition, we market outdoor cleaners under the Scotts® OxiCleanTM3 brand name.
Gardening and Landscape: The gardening and landscape category is designed to help consumers grow and enjoy flower and vegetable gardens and beautify landscaped areas. This category also includes our recent entry into hydroponic, i.e., soil less, gardening. In the United States, products within this category include a complete line of water solublewater-soluble plant foods under the Miracle-Gro® brand and sub-brands such as LiquaFeed®, continuous-release plant foods under the OsmocoteMiracle-Gro®, Scotts® and Osmocote® brands and sub-brands of Miracle-Gro® such as Shake ‘N Feed®brand names,; potting mixes and garden soils under the Miracle-Gro®, Scotts®, Hyponex®, Earthgro® and SuperSoil® brand names,names; mulch and decorative groundcover products under the Scotts® brand, including the sub-brands Nature Scapes® and, Earthgro®, landscape weed prevention products under the Ortho and Hyponex® brand,; plant-related pest and disease control products under the Ortho® brand, wild bird food and bird feeder products under the Scotts Songbird Selections®, Morning Song® and Country Pride® brand names,brand; organic garden products under the Miracle-Gro® Organic Choice®, Nature’s Care®, Scotts® and, Whitney Farms® and EcoScraps®brand names, andnames; live goods and seeding solutions under the Miracle-Gro® brand and Gro-ables® sub-brand.sub-brand; and hydroponic gardening products under the General Hydroponics®, Gavita® and AeroGarden® brand names. Internationally, similar products are marketed under the Miracle-Gro®, Fertiligène®, Substral®, KB®, Celaflor®, ASEF®, Scotts®, Morning Melodies®, Scotts EcoSense®, Fertiligène Naturen®, Substral NaturenMiracle-Gro®, KB Naturen®, Carre Vert® and Miracle-Gro Organic Choice® and Fafard®brand names. In the second quarter of fiscal 2016, we entered into a Marketing, R&D and Ancillary Services Agreement (the “Services Agreement”) and a Term Loan Agreement (the “Term Loan Agreement”) with Bonnie Plants, Inc. (“Bonnie”) and its sole shareholder, Alabama Farmers Cooperative, Inc. (“AFC”), pursuant to which we provide financing and certain services to Bonnie’s business of planting, growing, developing, manufacturing, distributing, marketing, and selling to retail stores throughout the United States live plants, plant food, fertilizer and potting soil (the “Bonnie Business”). See “Acquisitions and Divestitures” for further discussion.
|
|
| ________________________ |
3OxiCleanTM is a registered trademark of Church & Dwight Co., Inc. |
Controls: The controls category is designed to help consumers protect their homes from pests and maintain external home areas. In the United States, insect control and rodenticide products are marketed under the Ortho® brand name, including Ortho Max®, Home Defense Max® and Bug B Gon Max® sub-brands,sub-brands; rodent control products are marketed under the Tomcat® and Ortho® brands; selective weed control products are marketed under the Ortho® Weed B Gon® sub-brand, whilesub-brand; and non-selective weed control products are marketed under the Roundup® and Groundclear® brand names. Internationally, products within this category are marketed under the Nexa Lotte®, Fertiligène®, KB®, Home Defence®, Home Defense®, Weedol®, Pathclear® and Roundup® brands. In addition, in October 2013 through our acquisition of the Tomcat® consumer rodent control business from Bell Laboratories, Inc., we began to market rodent control products under the Tomcat® brand.
Since 1999,1998, we have served as Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup® products in the consumer lawn and garden market within the United States and other specified countries, including Australia, Austria, Belgium, Canada, France, Germany, the Netherlands and the United Kingdom. In 2015, the territories were expanded to include all countries other than Japan and those subject to a comprehensive U.S. trade embargo or certain other embargoes and trade restrictions. Under the terms of the Amended and Restated Exclusive Agency and Marketing Agreement (the “Marketing Agreement”) between the Company and Monsanto, we are jointly responsible with Monsanto for developing global consumer and trade marketing programs for consumer Roundup®. We have responsibility forprovide manufacturing conversion services (in North America), distribution and logistics, and selling and marketing support for consumer Roundup®. We also entered into a lawn and garden brand extension agreement during 2015, providing us the ability to extend the Roundup® brand globally into other categories of lawn and garden beyond non-selective weed control. Monsanto continues to own the consumer Roundup® business and provides significant oversight of the brand. In addition, Monsanto continues to own and operate the agricultural Roundup® business. For additional details regarding the Marketing Agreement, see “ITEM 1A. RISK FACTORS — If Monsanto were to terminateIn the event of termination of the Marketing Agreement for consumer Roundup®products, we would lose a substantial source of future earnings and overhead expense absorption” of this Annual Report on Form 10-K and “NOTE 6. MARKETING AGREEMENT” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Scotts LawnService®Acquisitions and Divestitures
On October 3, 2016, the Company, through its subsidiary The Scotts LawnService® segment provides residentialHawthorne Gardening Company, completed the acquisition of American Agritech, L.L.C., d/b/a Botanicare, an Arizona-based leading producer of plant nutrients, plant supplements and commercial lawn care, treegrowing systems used for hydroponic gardening for an estimated purchase price of $90.0 million.
On May 26, 2016, our wholly-owned subsidiary, The Hawthorne Gardening Company, acquired majority control and shrub carea 75% economic interest in Gavita for $136.2 million. Gavita’s former ownership group retained a 25% noncontrolling interest in Gavita consisting of ownership of 5% of the outstanding shares of Gavita and limited pest control servicesa loan with interest payable based on distributions by Gavita. Gavita, which is based in the Netherlands, is a leading producer and marketer of indoor lighting used in the greenhouse and hydroponic markets, predominately in the United States through periodic applicationsand Europe. This transaction provides the Company’s Other segment with a presence in the lighting category of fertilizerindoor and urban gardening, which is a part of the Company’s long-term growth strategy.
In the third quarter of fiscal 2016, the Company completed an acquisition to expand its Canadian growing media operations for an estimated purchase price of $33.9 million.
In the second quarter of fiscal 2016, the Company entered into the Services Agreement and the Term Loan Agreement with Bonnie and AFC providing for the Company’s participation in the Bonnie Business. The Term Loan Agreement provides a loan from the Company to AFC, with Bonnie as guarantor, in the amount of $72.0 million with a fixed coupon rate of 6.95% (the “Term Loan”). Under the Services Agreement, the Company provides marketing, research and development and certain ancillary services to the Bonnie Business for a commission fee based on the profits of the Bonnie Business and the reimbursement of certain costs.
On May 15, 2015, we amended our Marketing Agreement with Monsanto and entered into a lawn and garden brand extension agreement, and a commercialization and technology agreement with Monsanto. We paid Monsanto $300.0 million in consideration for these agreements on August 14, 2015, using borrowings under our credit facility. These agreements provide us with the following significant rights:
| |
| • | The ability to extend the Roundup® brand globally into other categories of lawn and garden beyond non-selective weed control; |
| |
| • | The opportunity to introduce the consumer Roundup® brand into territories not included in the original Marketing Agreement, including China and Latin America. Only Japan and countries with U.S. trade embargoes are excluded from the Marketing Agreement; |
| |
| • | The opportunity to propose changes to product formulations if deemed necessary to grow and/or protect the Roundup® brand; |
| |
| • | A right of first offer and a right of last look in the event Monsanto were to sell the consumer Roundup® business and a credit to the purchase price in an amount equal to the then applicable termination fee in the event we make a bid in connection with such a sale; |
A “first look” related to Monsanto’s innovation pipeline that would provide Scotts Miracle-Gro with access to new technology and products that may be commercialized in the residential lawn and garden marketplace;
| |
| • | The enhancements of our rights in connection with the termination of the Marketing Agreement, including increasing the termination fee payable thereunder, eliminating certain of Monsanto’s termination rights and delaying the effectiveness of a termination in connection with a change of control of Monsanto or a sale of the consumer Roundup® business for five years after the notice of termination; and |
The expanded ability for us to transfer, and thereby monetize, our rights as marketing agent to a third party (1) with respect to (a) the North America territories and (b) one or more other included markets for up to three other assignments and (2) in connection with a change of control products. As of Scotts Miracle-Gro.
On March 30, 2015, the Company acquired the assets of General Hydroponics and Vermicrop for $120.0 million and $15.0 million, respectively. The Vermicrop purchase price was paid in common shares of Scotts Miracle-Gro (“Common Shares”) based on the average share price at the time of payment. This transaction provides the Company’s Other segment with an additional entry in the indoor and urban gardening category, which is a part of the Company’s long-term growth strategy. General Hydroponics and Vermicrop are leading producers of liquid plant food products, growing media and accessories for hydroponic gardening.
On September 30, 2013,2014, our wholly-owned subsidiary, Scotts LawnService® had 86 Company-operated locationsCanada Ltd., acquired Fafard & Brothers Ltd. (“Fafard”) for $59.8 million. In continuous operation since 1940 and based in Saint-Bonaventure, Quebec, Canada, Fafard is a producer of peat moss and growing media products for consumer and professional markets including peat-based and bark-based mixes, composts and premium soils. Fafard serves customers primarily across Ontario, Quebec, New Brunswick and the eastern United States.
During the fourth quarter of the fiscal year ended September 30, 2014 (“fiscal 2014”), as a reflection of our increased control of the operations of AeroGrow gained through a working capital loan made by the Company, we consolidated AeroGrow’s financial results into that of the Company. AeroGrow is a developer, marketer, direct-seller, and wholesaler of advanced indoor garden systems designed for consumer use in gardening, and home and office décor markets. AeroGrow operates primarily in the United States and Canada, as well as 93 locations operated by independent franchisees.
Acquisitionsselect countries in Europe, Asia and DivestituresAustralia.
On October 14, 2013, we acquired the Tomcat® consumer rodent control business from Bell Laboratories, Inc., located in Madison, Wisconsin, for $60 million. $60.0 million in an all-cash transaction. The acquisition included the Tomcat® brand and other intellectual property, as well as a long-term partnership to bring innovative technologies to the consumer rodent control market. Tomcat® consumer products are sold at home centers, mass retailers, and grocery, drug and general merchandise stores across the United States, Canada, Europe and Australia.
In addition, over the past five years, we have completed several smaller acquisitions within our controls and growing media and Scotts LawnService®businesses.
During the past five years, we have completed several divestitures, including the wind downlargest of which was our Smith & Hawken business completedApril 13, 2016 contribution of the SLS Business to the TruGreen Joint Venture in exchange for a minority equity interest of 30% in the first quarter of fiscal 2010 and the February 28, 2011 sale of our Global Professional (“Global Pro”) business to Israel Chemicals Ltd. (“ICL”) for $270 million.TruGreen Joint Venture. In the fourth quarter of the fiscal year ended September 30, 2012 (“fiscal 2012”), we completed the wind down of our professional grass seed business. In the second quarter of fiscal 2014, we completed the sale of our wild bird food business in the United States and Canada for $4.1 million in cash and $1.0 million in earn-out payments. We have classified our results of operations for all periods presented in this Annual Report on Form 10-K to reflect these businesses as discontinued operations.operations during the applicable periods. See “NOTE 2. DISCONTINUED OPERATIONS” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for additional information.
Principal Markets and Methods of Distribution
We sell our consumer products primarily to home centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers, and food and drug stores, and indoor gardening and hydroponic stores through both a direct sales force and our network of brokers and distributors. In addition, during fiscal 2013,2016, we employed approximately 2,2003,300 full-time and seasonal in-store associates within the U.S.United States to help our retail partners merchandise their lawn and garden departments directly to consumers of our products.
The majority of shipments to customers are made via common carriers or through distributors in the United States and through a network of public warehouses and distributors in Europe. We primarily utilize third parties to manage the key distribution centers for our Global Consumerconsumer business in North America, which are strategically placedlocated across the United States and Canada. The primary
distribution centers for our Global Consumerconsumer business internationally are located in the United Kingdom, France, Germany, Austria and Australia and are also managed by third-party logistics providers. Growing media products are generally shipped direct-to-store without passing through a distribution center. Fiscal 2013 marked year five of our multi-year plan to co-distribute lawn fertilizer and growing media products directly to our retail customers, which to date has helped eliminate the need for approximately 25% of our third-party warehouse space.
Raw Materials
We purchase raw materials for our products from various sources. We are subject to market risk as a result of the fluctuating prices of raw materials such as urea and other fertilizer inputs, resins, diesel, gasoline, natural gas, sphagnum peat, bark and grass seed and wild bird food grains.seed. Our objectives surrounding the procurement of these materials are to ensure continuous supply, to minimize costs and to improve predictability. We seek to achieve these objectives through negotiation of contracts with favorable terms directly with vendors. When appropriate, we commit to purchase a certain percentage of our needs in advance of the season to secure pre-determined prices. We also hedge certain commodities, particularly diesel, gasoline and urea, to improve cost predictability and control costs.control. Sufficient raw materials were available during fiscal 2013.2016.
Trademarks, Patents and Licenses
We consider our trademarks, patents and licenses to be key competitive advantages. We pursue a vigorous trademark protection strategy consisting of registration, renewal and maintenance of key trademarks and proactive monitoring and enforcement activities to protect against infringement. The Scotts®, Miracle-Gro®, Ortho®, Scotts LawnServiceTomcat®, Hyponex®, Earthgro®, General Hydroponics®, Vermicrop® and EarthgroGavita® brand names and logos, as well as a number of product trademarks, including Turf Builder®, EZ Seed®, Snap®, Organic Choice®, Nature’s Care®, Home Defense Max®, Nature Scapes® and Weed B Gon Max®, are registered in the United States and/or internationally and are considered material to our business.
In addition, we actively develop and maintain a vastan extensive portfolio of utility and design patents covering subject mattermatters such as fertilizer, chemical and growing media compositions and processes; grass seed varieties; and mechanical dispensing devices such as applicators, spreaders and sprayers. Our utility patents provide protection generally extending to 20 years from the date of filing, and many of our patents will continue well into the next decade. We also hold exclusive and non-exclusive patent licenses and supply arrangements, permitting the use and sale of additional patented fertilizers, pesticides and mechanical devices. Although our portfolio of patents and patent licenses is important to our success, no single patent or group of related patents is considered significant to anyeither of our business segments or the business as a whole.
Seasonality and Backlog
Our business is highly seasonal, with in excess ofmore than 75% of our annual net sales occurring in our second and third fiscal quarters combined. Our annual sales are further concentrated in our second and third fiscal quarters by retailers who rely on our ability to deliver products closer to when consumers buy our products, thereby reducing retailers’ pre-season inventories.
We anticipate significant orders for the upcoming spring season will start to be received late in the winter and continue through the spring season. Historically, substantially all orders arehave been received and shipped within the same fiscal year with minimal carryover of open orders at the end of the fiscal year.
Significant Customers
Approximately 89.7% ofWe sell our worldwide net sales in fiscal 2013 were made by our Global Consumer segment.consumer products primarily to home centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers, food and drug stores, and indoor gardening and hydroponic stores. Our three largest customers are Home Depot, Lowe’s and Walmart, which are reported within the GlobalU.S. Consumer segment and are the only customers that individually represent more than 10% of reported consolidated net sales. Approximately 65%For additional details regarding significant customers, see “ITEM 1A. RISK FACTORS — Because of the concentration of our Global Consumer segment net sales in fiscal 2013 were made to Home Depot, Lowe’s and Walmart. We face strong competition fora small number of retail customers, the business of these significant customers. The loss of anyone or more of, these customers or a substantial decreasesignificant reduction in the volume or profitability oforders from, our business with any of thesetop customers could have a material effect onadversely affect our financial condition, resultsresults” of operations or cash flows.
Competitive Marketplace
The markets in which we sell our products are highly competitive. We compete primarily on the basis of product innovation, product quality, product performance, value, brand strength, supply chain competency, field sales support, in-store sales support, the strength of our relationships with major retailers and advertising.
In the United StatesU.S. lawn and garden, and pest control and indoor gardening and hydroponic markets, our products compete against private-label as well as branded products. Primary competitors include Spectrum Brands Holdings, Inc., Bayer AG, Central Garden & Pet Company, Enforcer Products, Inc., Kellogg Garden Products, Old CastleOldcastle Retail, Inc., Infinity Lawn and Garden Inc. and Lebanon Seaboard Corporation.Corporation, Reckitt Benckiser, FoxFarm and Advanced Nutrients. In addition, we face competition from smaller regional competitors who compete primarily onoperate in many of the basis of price for commodity growing media products.areas where we compete.
Internationally, we face strong competition in the lawn and garden market, particularly in Europe.Europe, Australia and Canada. Our competitors in the European Union include Compo AcquiCo SARL, Bayer AG, Compo GmbH, Westland Horticulture Ltd, Neudorff, Yates, Premier Tech and a variety of local companies.
We have the second largest market share position in the fragmented U.S. lawn care service market. We compete against TruGreen®, a division of ServiceMaster®, which has a substantially larger share of this market than Scotts LawnService®, as well as numerous regional and local lawn care service operations and national and regional franchisors.companies including private label brands.
Research and Development
We continually invest in research and development, both in the laboratory and at the consumer level, to improve our products, manufacturing processes, packaging and delivery systems. Spending on research and development was $46.7$45.5 million,, $50.8 $44.4 million and $50.946.0 million in fiscal 2013,2016, fiscal 20122015 and fiscal 2011,2014, respectively, including product registration costs of $12.4$14.3 million,, $14.0 $13.0 million and $14.612.5 million, respectively. In addition to the benefits of our own research and development, we actively seek ways to leverage the research and development activities of our suppliers and other business partners.
Regulatory Considerations
Local, state, federal and foreign laws and regulations affect the manufacture, sale, distribution and application of our products in several ways. For example, in the United States, all products containing pesticides must comply with the Federal Insecticide, Fungicide, and Rodenticide Act of 1947, as amended (“FIFRA”), and be registeredmost require registration with the U.S. Environmental Protection Agency (the “U.S. EPA”) and similar state agencies before they can be sold or distributed. Fertilizer and growing media products are subject to state and foreign labeling regulations. Our manufacturing operations are subjectIn addition to waste, water and air quality permitting and other regulatory requirements ofthe regulations already described, federal, state and foreign agencies. Our wild bird food business is subject to regulation byagencies regulate the U.S. Fooddisposal, transport, handling and Drug Administrationstorage of waste, remediation of contaminated sites, air and various state regulations.water discharges from our facilities, and workplace health and safety. Our grass seed products are regulated by the Federal Seed Act and various state regulations. Most states require our Scotts LawnService® business locations and/or technicians to comply with strict licensing requirements prior to applying many of our products. The failure to comply with any of these laws or regulations could have an adverse effect on our business.
In addition, the use of certain pesticide and fertilizer products is regulated by various local, state, federal and foreign environmental and public health agencies. These regulations may include requirements that only certified or professional users apply the product or that certain products be used only on certain types of locations (such as “not for use on sod farms or golf courses”), may require users to post notices on properties to which products have been or will be applied, may require notification to individuals in the vicinity that products will be applied in the future or may ban the use of certain ingredients.
State, federal and foreign authorities generally require growing media facilities to obtain permits (sometimes on an annual basis) in order to harvest peat and to discharge storm water run-off or water pumped from peat deposits. The permits typically specify the condition in which the property must be left after the peat is fully harvested, with the residual use typically being natural wetland habitats combined with open water areas. We are generally required by these permits to limit our harvesting and to restore the property consistent with the intended residual use. In some locations, these facilities have been required to create water retention ponds to control the sediment content of discharged water.
For more information regarding how compliance with federal,local, state, localfederal and foreign laws and regulations may affect us, see “ITEM 1A. RISK FACTORS — Compliance with environmental and other public health regulations or changes in such regulations or regulatory enforcement priorities could increase our costs of doing business or limit our ability to market all of our products” of this Annual Report on Form 10-K.
Regulatory Matters
We are subject to various environmental proceedings, the majority of which are for site remediation. At September 30, 2013, $4.02016, $4.0 million was accrued for such environmental matters. During fiscal 2013,2016, fiscal 20122015 and fiscal 2011,2014, we expensed $0.4 million, $0.8$0.6 million and $2.4$3.1 million, respectively, for such environmental matters. We had no material capital expenditures during the last three fiscal years related to environmental or regulatory matters.
Employees
As of September 30, 2013,2016, we employed approximately 6,2005,100 employees. During peak sales and production periods, we employ approximately 8,4006,500 employees, including seasonal and temporary labor. These numbers do not include approximately 2,040 employees we lease to Outdoor Home Services Holdings LLC as part of an employee leasing agreement entered into in connection with the contribution of the SLS Business to the TruGreen Joint Venture.
Financial Information About Geographic Areas
For certain information concerning our international revenues and long-lived assets, see “NOTE 21.22. SEGMENT INFORMATION” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
General Information
We maintain a website at http://investor.scotts.com (this uniform resource locator, or URL, is an inactive textual reference only and is not intended to incorporate our website into this Annual Report on Form 10-K). We file reports with the Securities and Exchange Commission (the “SEC”) and make available, free of charge, on or through our website, our annual reportsAnnual Reports on Form 10-K, quarterly reportsQuarterly Reports on Form 10-Q, current reportsCurrent Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended, as well as our proxy and information statements, as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC maintains a website that contains electronic filings by Scotts Miracle-Gro and other issuers at www.sec.gov. In addition, the public may read and copy any materials Scotts Miracle-Gro files with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330.
Cautionary Note Regarding Forward-Looking Statements
This Annual Report on Form 10-K, including the exhibits hereto and the information incorporated by reference herein, as well as our 20132016 Annual Report to Shareholders (our “2013“2016 Annual Report”), containscontain “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which are subject to risks and uncertainties. Other than statements of historical fact, informationInformation regarding activities, events and developments that we expect or anticipate will or may occur in the future, including, but not limited to, information relating to our future growth and profitability targets and strategies designed to increase total shareholder value, are forward-looking statements based on management’s estimates, assumptions and projections. Forward-looking statements also include, but are not limited to, statements regarding our future economic and financial condition and results of operations, the plans and objectives of management and our assumptions regarding our performance and such plans and objectives, as well as the amount and timing of repurchases of Scotts Miracle-Gro common shares.our Common Shares or other uses of cash flows. Forward-looking statements generally can be identified through the use of words such as “guidance,” “outlook,” “projected,” “believe,” “target,” “predict,” “estimate,” “forecast,” “strategy,” “may,” “goal,” “expect,” “anticipate,” “intend,” “plan,” “foresee,” “likely,” “will,” “should” and other similar words and variations.
Forward-looking statements contained in this Annual Report on Form 10-K and our 20132016 Annual Report are predictions only and actual results could differ materially from management’s expectations due to a variety of factors, including those described below. All forward-looking statements attributable to us or persons working on our behalf are expressly qualified in their entirety by such risk factors.
The forward-looking statements that we make in this Annual Report on Form 10-K and our 20132016 Annual Report are based on management’s current views and assumptions regarding future events and speak only as of their dates. We disclaim any obligation to update developments of these risk factors or to announce publicly any revisions to any of the forward-looking statements that we make, or to make corrections to reflect future events or developments, except as required by the federal securities laws.
Compliance with environmental and other public health regulations or changes in such regulations or regulatory enforcement priorities could increase our costs of doing business or limit our ability to market all of our products.
Local, state, federal and foreign laws and regulations relating to environmental matters affect us in several ways. In the United States, all products containing pesticides must comply with FIFRA and most must be registered with the U.S. EPA and similar state agencies before they can be sold or distributed. TheOur inability to obtain or maintain such compliance, or the cancellation of any such registration of our products, could have an adverse effect on our business, the severity of which would depend on such matters as the products involved, whether another product could be substituted and whether our competitors were similarly affected. We attempt to anticipate regulatory developments and maintain registrations of, and access to, substitute active ingredients, but
there can be no assurance that we will be able to avoid or reduce these risks. In the European Union (the “EU”), the European Parliament has adopted various forms of regulation which may substantially restrict or eliminate our ability to market and sell certain of our consumer pesticide products in their current form in the EU. In addition, in Canada, regulations have been adopted by several provinces that substantially restrict our ability to market and sell certain of our consumer pesticide products.
Under the Food Quality Protection Act, enacted by the U.S. Congress in 1996, food-use pesticides are evaluated to determine whether there is reasonable certainty that no harm will result from the cumulative effects of pesticide exposures. Under this Act, the U.S. EPA is evaluating the cumulative and aggregate risks from dietary and non-dietary exposures to pesticides. The pesticides in our products, certain of which may be used on crops processed into various food products, are typically manufactured by independent third parties and continue to be evaluated by the U.S. EPA as part of this exposure risk assessment. The U.S. EPA or the third-party registrant may decide that a pesticide we use in our products will be limited or made unavailable to us. We cannot predict the outcome or the severity of the effect of these continuing evaluations.
In addition, the use of certain pesticide and fertilizer products is regulated by various local, state, federal and foreign environmental and public health agencies. These regulations may, include requirementsamong other things, ban the use of certain ingredients or require (i) that only certified or professional users apply the product, or(ii) that certain products be used only on certain types of locations, may require(iii) users to post notices on properties to which products have been or will be applied, may require(iv) notification to individuals in the vicinity that products will be applied in the future or may ban the use of certain ingredients. Most states require our Scotts LawnService® business locations and/or technicians to comply with strict licensing requirements prior to applying many of our products.future. Even if we are able to comply with all such regulations and obtain all necessary registrations and licenses, we cannot provide assurance that our products, particularly pesticide products, will not cause injury to the environment or to people under all circumstances. The costs of compliance, remediation or products liability have adversely affected operating results in the past and could materially adversely affect future quarterly or annual operating results.
TheOur products and operations may be subject to increased regulatory and environmental scrutiny in jurisdictions in which we do business. For example, we are subject to regulations relating to our harvesting of peat for our growing media business which has come under increasing regulatory and environmental scrutiny. In the United States, state regulations frequently require us to limit our harvesting and to restore the property to an agreed-upon condition. In some locations, we have been required to create water retention ponds to control the sediment content of discharged water. In Canada and the United Kingdom, our peat extraction efforts are also the subject of regulation.
In addition to the regulations already described, local, state, federal and foreign agencies regulate the disposal, transport, handling and storage of waste, remediation of contaminated sites, air and water discharges from our facilities, and workplace health and safety.
Under certain environmental laws, we may be liable for the costs of investigation regarding and remediation of the presence of certain regulated materials, as well as related costs of investigation and remediation of damage to natural resources, at various properties, including our current and former properties as well as offsite waste handling or disposal sites that we have used. Liability may be imposed upon us without regard to whether we knew of or caused the presence of such materials and, under certain circumstances, on a joint and several basis. There can be no assurances that the presence of such regulated materials at any such locations, or locations that we may acquire in the future, will not result in liability to us under such laws or expose us to third-party actions such as tort suits based on alleged conduct or environmental conditions.
The adequacy of our current non-FIFRA compliance-related environmental reserves and future provisions depends upon our operating in substantial compliance with applicable environmental and public health laws and regulations, as well as the assumptions that we have both identified all of the significant sites that must be remediated and that there are no significant conditions of potential contamination that are unknown to us. A significant change in the facts and circumstances surrounding these assumptions or in current enforcement policies or requirements, or a finding that we are not in substantial compliance with applicable environmental and public health laws and regulations, could have a material adverse effect on future environmental capital expenditures and other environmental expenses, as well as our financial condition, results of operations orand cash flows.
Damage to our reputation could have an adverse effect on our business.
Maintaining our strong reputation with both consumers and our retail customers is a key component in our success. Product recalls, our inability to ship, sell or transport affected products and governmental investigations may harm our reputation and acceptance of our products by consumers and our retail customers, and consumers, which may materially and adversely affect our business operations, decrease sales and increase costs.
In addition, perceptions that the products we produce and market are not safe could adversely affect us and contribute to the risk we will be subjected to legal action. We manufacture and market a variety of products, such as fertilizers, certain growing media, herbicides and pesticides. On occasion, allegations are made that some of our products have failed to perform up to expectations or have caused damage or injury to individuals or property. Based on reports of contamination at a third-party supplier’s vermiculite mine, the public may perceive that some of our products manufactured in the past using vermiculite are or may be contaminated. Public perception that our products are not safe, whether justified or not, could impair our reputation, involve us in litigation, damage our brand names and have a material adverse effect on our business.
TableCertain of Contentsour products may be purchased for use in new and emerging industries that are subject to inconsistent and rapidly changing laws and regulations and consumer perception.Certain of our products may be purchased for use in new and emerging industries that may not grow or achieve market acceptance as rapidly as we expect. The demand for such products may be negatively impacted if these industries grow more slowly than we expect. In addition, certain of our products, including, for example, our hydroponic gardening products, may be purchased for use in industries or segments that are subject to inconsistent and rapidly changing laws and regulations with evolving consumer perceptions. The demand for such products may be negatively impacted if the laws, regulations and consumer perceptions applicable to such industries evolve in a manner that adversely affects the industries. We cannot predict the nature of any future laws, regulations, administrative policies and consumer perceptions applicable to the industries in which our products are used, nor can we determine what effect, if any, such additional laws, regulations, administrative policies and consumer perceptions could have on our business.
Our marketing activities may not be successful.
We invest substantial resources in advertising, consumer promotions and other marketing activities in order to maintain, extend and expand our brand image. There can be no assurances that our marketing strategies will be effective or that the amount we invest in advertising activities will result in a corresponding increase in sales of our products. If our marketing initiatives are not successful, we will have incurred significant expenses without the benefit of higher revenues.
Our success depends upon the retention and availability of key personnel and the effective succession of senior management.
Our success largely depends on the performance of our management team and other key personnel. Our future operations could be harmed if we are unable to attract and retain talented, highly qualified senior executives and other key personnel. In addition, if we are unable to effectively provide for the succession of senior management, including our chief executive officer, our business, prospects, results of operations, financial condition and cash flows may be materially adversely affected.
Disruptions in availability or increases in the prices of raw materials or fuel costs could adversely affect our results of operations.
We source many of our commodities and other raw materials on a global basis. The general availability and price of those raw materials can be affected by numerous forces beyond our control, including political instability, trade restrictions and other government regulations, duties and tariffs, price controls, changes in currency exchange rates and weather.
A significant disruption in the availability of any of our key raw materials could negatively impact our business. In addition, increases in the prices of key commodities and other raw materials could adversely affect our ability to manage our cost structure. Market conditions may limit our ability to raise selling prices to offset increases in our raw material costs. Our proprietary technologies can limit our ability to locate or utilize alternative inputs for certain products. For certain inputs, new sources of supply may have to be qualified under regulatory standards, which can require additional investment and delay bringing a product to market.
We utilize hedge agreements periodically to fix the prices of a portion of our urea and fuel needs. The hedge agreements are designed to mitigate the earnings and cash flow fluctuations associated with the costs of urea and fuel. In periods of declining urea and fuel prices, utilizing hedge agreements may effectively increase our expenditures for these raw materials.
Our hedging arrangements expose us to certain counterparty risks.
In addition to commodity hedge agreements, we utilize interest rate swap agreements as a means to hedge our variable interest rate exposure on debt instruments as well as foreign currency forward contracts to manage the exchange rate risk associated with certain intercompany loans with foreign subsidiaries. Utilizing these hedge agreements exposes us to certain counterparty risks. The failure of one or more of these counterparties to fulfill their obligations under the hedge agreements, whether as a result of weakening financial stability or otherwise, could adversely affect our financial condition, results of operations or cash flows.
Economic conditions could adversely affect our business.
Uncertain global economic conditions could adversely affect our business. Negative global economic trends, such as decreased consumer and business spending, high unemployment levels, reduced rates of home ownership and housing starts, high foreclosure rates and declining consumer and business confidence, pose challenges to our business and could result in declining revenues, profitability and cash flow. Although we continue to devote significant resources to support our brands, unfavorable economic conditions may negatively affect consumer demand for our products. Consumers may reduce discretionary spending during periods of economic uncertainty, which could reduce sales volumes of our products or result in a shift in our product mix from higher margin to lower margin products.
The highly competitive nature of our markets could adversely affect our ability to maintain or grow revenues.
Each of our operating segments participates in markets that are highly competitive. Our products compete against national and regional products and private label products produced by various suppliers. Many of our competitors sell their products at prices lower than ours. Our most price sensitive customers may trade down to lower priced products during challenging economic times or if current economic conditions worsen. We compete primarily on the basis of product innovation, product quality, product performance, value, brand strength, supply chain competency, field sales support, in-store sales support, the strength of our relationships with major retailers and advertising. Some of our competitors have significant financial resources. The strong competition that we face in all of our markets may prevent us from achieving our revenue goals, which may have a material adverse effect on our financial condition, results of operations orand cash flows. Our inability to continue to develop and grow brands with leading market positions, maintain our relationships with key retailers and deliver high quality products on a reliable basis at competitive prices could have a material adverse effect on us.our business.
We may not successfully develop new product lines and products or improve existing product lines and products or maintain our effectiveness in reaching consumers through rapidly evolving communication vehicles.
Our future success depends, in part, upon our ability to improve our existing product lines and products and to develop, manufacture and market new innovativeproduct lines and products to meet evolving consumer needs, as well as our ability to leverage new mediums such as digital media and social networks to reach existing and potential consumers. We cannot be certain that we will be successful in the development,developing, manufacturing and marketing of new product lines and products or product innovations which satisfy consumer needs or achieve market acceptance, or that we will develop, manufacture and market new product lines and products or product innovations in a timely manner. If we fail to successfully develop, manufacture and market new or enhancedproduct lines and products or develop product innovations, or if we fail to reach existing and potential consumers, our ability to maintain or grow our market share may be adversely affected, which in turn could materially adversely affect our business, financial condition and results of operations. In addition, the development and introduction of new product lines and products and product innovations require substantial research, development and marketing expenditures, which we may be unable to recoup if such new product lines, products or innovations do not achieve market acceptance.
Many of the products we manufacture and market contain active ingredients that are subject to regulatory approval. The need to obtain such approval could delay the launch of new products or product innovations that contain active ingredients or otherwise prevent us from developing and manufacturing certain products and innovations, further exacerbating theproduct innovations.
Our ongoing investment in new product lines and products and technologies is inherently risky, and could disrupt our ongoing businesses.
We have invested and expect to continue to invest in new product lines, products, and technologies. Such endeavors may involve significant risks and uncertainties, including distraction of management from current operations, insufficient revenues to offset liabilities assumed and expenses associated with these new investments, inadequate return of capital on our business.investments, and unidentified issues not discovered in our due diligence of such strategies and offerings. Because these new ventures are inherently risky, no assurance can be given that such strategies and offerings will be successful and will not adversely affect our reputation, financial condition, and operating results.
Because of the concentration of our sales to a small number of retail customers, the loss of one or more of, or a significant reduction in orders from, our top customers could adversely affect our financial results.
Global Consumer net sales represented approximately 89.7% of our worldwide net sales in fiscal 2013. Our top three retail customers together accounted for 65%61% of our Global Consumer segment fiscal 20132016 net sales and 56% of our outstanding accounts receivable as of September 30, 20132016. The loss of, or reduction in orders from, our top three retail customers, Home Depot, Lowe’s, and Walmart, or any other significant customer could have a material adverse effect on our business, financial condition, results of operations orand cash flows, as could customer disputes regarding shipments, fees, merchandise condition or related matters. Our inability to collect accounts receivable from one of our major customers, or a significant deterioration in the financial condition of one of these customers, including a bankruptcy filing or a liquidation, could also have a material adverse effect on our financial condition, results of operations orand cash flows.
We do not have long-term sales agreements with, or other contractual assurances as to future sales to, any of our major retail customers. In addition, continued consolidation in the retail industry has resulted in an increasingly concentrated retail base, and as a result, we are significantly dependent upon sales to key retailers whosewho have significant bargaining strength is strong.strength. To the extent such concentration continues to occur, our net sales and income from operations may be increasingly sensitive to deterioration in the financial condition of, or other adverse developments involving our relationship with, one or more of our key customers. In addition, our business may be negatively affected by changes in the policies of our retailers, such as inventory destocking, limitations on access to shelf space, price demands and other conditions.
Our reliance on third-party manufacturers could harm our business.
We rely on third-party service providers to manufacture certain of our products. This reliance generates a number of risks, including decreased control over the production process, which could lead to production delays or interruptions and inferior product quality control. In addition, performance problems at these third-party providers could lead to cost overruns, shortages or other problems, which could increase our costs of production or result in servicedelivery delays to our customers.
If one or more of our third-party manufacturers becomes insolvent or unwilling to continue to manufacture products of acceptable quality, at acceptable costs, in a timely manner, our ability to deliver products to our retail customers could be significantly impaired. Substitute manufacturers might not be available or, if available, might be unwilling or unable to manufacture the products we need on acceptable terms. Moreover, if customer demand for our products increases, we may be unable to secure sufficient additional capacity from our current third-party manufacturers, or others, on commercially reasonable terms, or at all.
Our reliance on a limited base of suppliers may result in disruptions to our business and adversely affect our financial results.
WeAlthough we continue to implement risk-mitigation strategies for single-source suppliers, we rely on a limited number of suppliers for certain of our raw materials, product components and other necessary supplies, including certain active ingredients used in our products. If we are unable to maintain supplier arrangements and relationships, if we are unable to contract with suppliers at the quantity and quality levels needed for our business, or if any of our key suppliers becomes insolvent or experiencesexperience other financial distress, we could experience disruptions in production, which could have a material adverse effect on our financial results.
A significant interruption in the operation of our or our suppliers’ facilities could impact our capacity to produce products and service our customers, which could adversely affect revenues and earnings.
Operations at our and our suppliers’ facilities are subject to disruption for a variety of reasons, including fire, flooding or other natural disasters, disease outbreaks or pandemics, acts of war, terrorism, government shut-downs and work stoppages. A significant interruption in the operation of our or our suppliers’ facilities could significantly impact our capacity to produce products and service our retail customers in a timely manner, which could have a material adverse effect on our revenues, earnings and financial position. This is especially true for those products that we manufacture at a limited number of facilities, such as our fertilizer and liquid products in both the United States and Europe.
AdverseClimate change and unfavorable weather conditions could adversely impact financial results.
WeatherThe issue of climate change is receiving ever increasing attention worldwide. The possible effects, as described in various public accounts, could include changes in rainfall patterns, water shortages, changing storm patterns and intensities, and changing temperature levels that could adversely impact our costs and business operations and the supply and demand for our fertilizer, garden soils and pesticide products. In addition, fluctuating climatic conditions may result in North Americaunpredictable modifications in the manner in which consumers garden or their attitudes towards gardening, making it more difficult for us to provide appropriate products to appropriate markets in time to meet consumer demand.
Because of the uncertainty of weather volatility related to climate change and Europe can have a significantany resulting unfavorable weather conditions, we cannot predict its potential impact on the timing of sales in the spring selling season and overall annual sales. An abnormally wet and/or cold spring throughout North America or Europe, abnormally dry periods or droughts, and other severe weather conditions or events could adversely affect fertilizer, pesticide and insecticide sales and, therefore, our financial results.condition, results of operations and cash flows.
Our indebtedness could limit our flexibility and adversely affect our financial condition.
As of September 30, 20132016, we had $570.5$1,316.1 million of debt. Our inability to meet restrictive financial and non-financial covenants associated with that debt could adversely affect our financial condition.
Our ability to make payments on our indebtedness, fund planned capital expenditures and acquisitions, pay dividends and make share repurchases dependsof our Common Shares will depend on our ability to generate cash in the future. This, to some extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We cannot ensure that our business will generate sufficient cash flow from operating activities or that future borrowings will be available to us under our credit facility in amounts sufficient to enable us to pay our indebtedness or to fund our other liquidity needs.
Our credit facility the indenture governing our 7.25% Senior Notes due 2018 (the “7.25% Senior Notes”) and the indenture governing our 6.625%6.000% Senior Notes due 20202023 (the “6.625%“6.000% Senior Notes” and, collectively with the 7.25% Senior Notes, the “Senior Notes”) contain restrictive covenants and cross-default provisions. In addition, our credit facility requires us to maintain specified financial ratios. Our ability to comply with those covenants and satisfy those financial ratios can be affected by events beyond our control.control including prevailing economic, financial and industry conditions. A breach of any of those financial ratio covenants or other covenants could result in a default. UponIn the occurrenceevent of such an event of default, the lendersholders of such indebtedness could elect to declare all of the outstanding indebtedness immediatelyfunds borrowed thereunder to be due and payable, together with accrued and terminate all commitments to extendunpaid interest, and could cease making further credit.loans and institute foreclosure proceedings against our assets. We cannot ensureprovide any assurance that our lendersthe holders of such indebtedness would waive a default or that we could pay the indebtedness in full if it were accelerated.
Subject to compliance with certain covenants under our credit facility and the indenturesindenture governing ourthe 6.000% Senior Notes, we may incur additional debt in the future. If we incur additional debt, the risks described above could intensify.
Changes in credit ratings issued by nationally recognized statistical rating organizations (NRSROs) could adversely affect our cost of financing and the market price of our 6.000% Senior Notes.
NRSROs rate the 6.000% Senior Notes and the Company based on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the NRSROs can include maintaining, upgrading or downgrading the current rating or placing us on a watch list for possible future downgrading. Downgrading the credit rating of the 6.000% Senior Notes or placing us on a watch list for possible future downgrading could increase our cost of financing, limit our access to the capital markets and have an adverse effect on the market price of the 6.000% Senior Notes.
Our postretirement-related costs and funding requirements could increase as a result of volatility in the financial markets, changes in interest rates and actuarial assumptions.
We sponsor a number of defined benefit pension plans associated with our U.S. and international businesses, as well as a postretirement medical plan in the U.S.United States for certain retired associates and their dependents. The performance of the financial markets and changes in interest rates impact the funded status of these plans and cause volatility in our postretirement-related costs and future funding requirements. If the financial markets do not provide the expected long-term returns on invested assets, we could be required to make significant pension contributions. Additionally, changes in interest rates and legislation enacted by governmental authorities can impact the timing and amounts of contribution requirements.
We utilize third-party actuaries to evaluate assumptions used in determining projected benefit obligations and the fair value of plan assets for our pension and other postretirement benefit plans. In the event we determine that our assumptions should be revised, such as the discount rate, the expected long-term rate or expected return on assets, our future pension and postretirement benefit expenses could increase or decrease. The assumptions we use may differ from actual results, which could have a significant impact on our pension and postretirement liabilities and related costs and funding requirements.
Our international operations make us susceptible to the costs and risks associated with operating internationally.
We currently operate manufacturing, sales and service facilities outside of the United States, particularly in Canada, France, the United Kingdom and Germany. In fiscal 2013,2016, sales outside of the United States accounted for 17.2%18% of our total net sales. Accordingly, we are subject to risks associated with operating in foreign countries, including:
fluctuations in currency exchange rates;
limitations on the remittance of dividends and other payments by foreign subsidiaries;
additional costs of compliance with local regulations;
historically, in certain countries, higher rates of inflation than in the United States;
changes in the economic conditions or consumer preferences or demand for our products in these markets;
restrictive actions by multi-national governing bodies, foreign governments or subdivisions thereof;
changes in foreign labor laws and regulations affecting our ability to hire and retain employees;
changes in U.S. and foreign laws regarding trade and investment;
less robust protection of our intellectual property under foreign laws; and
difficulty in obtaining distribution and support for our products.
In addition, our operations outside the United States are subject to the risk of new and different legal and regulatory requirements in local jurisdictions, potential difficulties in staffing and managing local operations and potentially adverse tax consequences. The costs associated with operating our international business could adversely affect our results of operations, financial condition orand cash flows in the future.
FailureUnanticipated changes in our tax provisions, the adoption of new tax legislation or exposure to additional tax liabilities could affect our profitability and cash flows.
We are subject to income and other taxes in the United States federal jurisdiction and various local, state and foreign jurisdictions. Our effective tax rate in the future could be adversely affected by changes to our operating structure, changes in the mix of earnings in countries with differing statutory tax rates, changes in the valuation of deferred tax assets (such as net operating losses and tax credits) and liabilities, changes in tax laws and the discovery of new information in the course of our keytax return preparation process. In particular, the carrying value of deferred tax assets, which are predominantly related to our operations in the United States, is dependent on our ability to generate future taxable income of the appropriate character in the relevant jurisdiction.
From time to time, tax proposals are introduced or considered by the U.S. Congress or the legislative bodies in local, state and foreign jurisdictions that could also affect our tax rate, the carrying value of our deferred tax assets, or our tax liabilities. Our tax liabilities are also affected by the amounts we charge for inventory, services, licenses, funding and other items in intercompany transactions. We are subject to ongoing tax audits in various jurisdictions. In connection with these audits (or future audits), tax authorities may disagree with our intercompany charges, cross-jurisdictional transfer pricing or other matters and assess additional taxes. We regularly assess the likely outcomes of our audits in order to determine the appropriateness of our tax provision. As a result, the ultimate resolution of our tax audits, changes in tax laws or tax rates, and the ability to utilize our deferred tax assets could materially affect our tax provision, net income and cash flows in future periods.
Our operations may be impaired if our information technology systems could adversely impact our abilityfail to conduct business.perform adequately or if we are the subject of a data breach or cyber attack.
We rely on information technology systems in order to conduct business, including communicating with employees and our key retail customers, ordering and managing materials from suppliers, shipping products to retail customers and analyzing and reporting results of operations. While we have taken steps to ensure the security of our information technology systems, our systems may nevertheless be vulnerable to computer viruses, security breaches and other disruptions from unauthorized users. If our information technology systems are damaged or cease to function properly for an extended period of time, whether as a result of a significant cyber incident or otherwise, our ability to communicate internally as well as with our retail customers could be significantly impaired, which may adversely impact our business. Additionally, an operational failure or breach of security from increasingly sophisticated cyber threats could lead to the loss or disclosure of both our and our retail customers’ financial, product, and other confidential information, as well as personally identifiable information about our employees or customers, result in regulatory or other legal proceedings, and have a material adverse effect on our business and reputation.
We may not be able to adequately protect our intellectual property and other proprietary rights that are material to our business.
Our ability to compete effectively depends in part on our rights to service marks, trademarks, tradenames and other intellectual property rights we own or license, particularly our registered brand names and issued patents. We have not sought to register every one of our marks either in the United States or in every country in which they aresuch mark is used. Furthermore, because of the differences in foreign trademark, patent and other intellectual property or proprietary rights laws, we may not receive the same
protection in other countries as we would in the United States with respect to the registered brand names and issued patents we hold. If we are unable to protect our intellectual property, proprietary information and/or brand names, we could suffer a material adverse effect on our business, financial condition orand results of operations.
Litigation may be necessary to enforce our intellectual property rights and protect our proprietary information, or to defend against claims by third parties that our products or services infringe their intellectual property rights. Any litigation or claims brought by or against us could result in substantial costs and diversion of our resources. A successful claim of trademark, patent or other intellectual property infringement against us, or any other successful challenge to the use of our intellectual property, could subject us to damages or prevent us from providing certain products or services, or providing certain products or services under our recognized brand names, which could have a material adverse effect on our business, financial condition orand results of operations.
If Monsanto were to terminatetermination of the Marketing Agreement for consumer Roundup® products, we would lose a substantial source of future earnings and overhead expense absorption.
If we were to (i) become insolvent, (ii) commit a serious defaultmaterial breach, material fraud or material misconduct under the Marketing Agreement, with Monsanto for consumer Roundup® products,(iii) undergo certain events resulting in a change of control of the Company, or (iv) impermissibly assign or delegate our rights under the Marketing Agreement, Monsanto may have the right to terminate the Marketing Agreement. If Monsanto were to terminate the Marketing Agreement for cause, we would not be entitled to anywithout paying a termination fee. Monsanto may also be able to terminate the Marketing Agreement withinin the event of a given region, including North America, without paying uschange of control of Monsanto or a sale of the Roundup® business, but would have to pay a termination fee if unit volume sales to consumers in that region decline: (i) over a cumulative three-fiscal-year period; or (ii) by more than 5% for each of two consecutive years. Ifthe Company. In the event the Marketing Agreement was terminated for any reason,terminates, we would also lose all, or a substantial portion, of the significant source of earnings and overhead expense absorption the Marketing Agreement provides.
For additional information regarding the Marketing Agreement, see “NOTE 6. MARKETING AGREEMENT” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Hagedorn Partnership, L.P. beneficially owns approximately 27%26% of our common sharesCommon Shares and can significantly influence decisions that require the approval of shareholders.
Hagedorn Partnership, L.P. beneficially owned approximately 27%26% of our outstanding common sharesCommon Shares on a fully diluted basis as of November 13, 2013.18, 2016. As a result, it has sufficient voting power to significantly influence the election of directors and the approval of other actions requiring the approval of our shareholders, including the entering into of certain business combination transactions. In addition, because of the percentage of ownership and voting concentration in Hagedorn Partnership, L.P., elections of our board of directors will generally be within the control of Hagedorn Partnership, L.P. While all of our shareholders are entitled to vote on matters submitted to our shareholders for approval, the concentration of sharesour Common Shares and voting control presently lies with Hagedorn Partnership, L.P. As such, it would be difficult for shareholders to propose and have approved proposals not supported by Hagedorn Partnership, L.P. Hagedorn Partnership, L.P. may’s interests could differ from, or be in conflict with, the interests of other shareholders.
While we have, an interestover the past few years, increased the rate of cash dividends on, and engaged in repurchases of, our pursuing transactions that it believes may enhanceCommon Shares, any future decisions to reduce or discontinue paying cash dividends to our shareholders or repurchasing our Common Shares pursuant to our previously announced repurchase program could cause the valuemarket price for our Common Shares to decline.
Our payment of its equity investment in us, even though such transactions may involve certain risks.quarterly cash dividends on and repurchase of our Common Shares pursuant to our stock repurchase program are subject to, among other things, our financial position and results of operations, available cash and cash flow, capital requirements, and other factors. We have, over the past few years, increased the rate of cash dividends on, and repurchases of, our Common Shares. In the fourth quarter of fiscal 2016, we increased the amount of our quarterly cash dividend by 6% to $0.50 per share and increased the current share repurchase authorization by $500 million. The total remaining share repurchase authorization as of September 30, 2016 is $854.3 million.
We may pursue acquisitions, dispositions, investments, dividends, share repurchases and/further increase or other corporate transactions that we believe will maximize equity returns of our shareholders but may involve risks.
From time to time, we consider opportunities for acquisitions of businesses, product lines or other assets, potential dispositions and other strategic transactions. These types of transactions may involve risks, such as risks of integration of acquired businesses and loss of cash flows and market positions of disposed businesses, the possibility that anticipated synergies from strategic acquisitions may not materialize, and the risk that sales of acquired products may not meet expectations.
In addition, if our business performs according to our financial plan, subject to the discretion of our Board of Directors and to market and other conditions we may, over time, significantly increasedecrease the rate of cash dividends on, and the amount of repurchases of, our common shares. For example,Common Shares in the fourth quarterfuture. Any reduction or discontinuance by us of fiscal 2010 we doubled the amountpayment of our quarterly cash dividend, and our Board of Directors authorized the repurchase of up to $500 million of Scotts Miracle-Gro common shares. In fiscal 2011 we increased the amount of our dividend by an additional 20% and our Board of Directors authorized the repurchase of up to an additional $200 million of our common shares. We increased the amount of our dividend again in fiscal 2012. In the fourth quarter of fiscal 2013 we increased the amount of our dividend by an additional 35%. We may further increase the rate of dividends on, and the amount ofor repurchases of our common sharesCommon Shares pursuant to our current share repurchase authorization program could cause the market price of our Common Shares to decline. Moreover, in the future.event our payment of quarterly cash dividends on or repurchases of our Common Shares are reduced or discontinued, our failure or inability to resume paying cash dividends or repurchasing Common Shares at historical levels could result in a lower market valuation of our Common Shares.
There
Acquisitions, other strategic alliances and investments could result in operating difficulties, dilution, and other harmful consequences that may adversely impact our business and results of operations.
Acquisitions are an important element of our overall corporate strategy and use of capital, and these transactions could be material to our financial condition and results of operations. We expect to continue to evaluate and enter into discussions regarding a wide array of potential strategic transactions. The process of integrating an acquired company, business, or product has created, and will continue to create, unforeseen operating difficulties and expenditures. The areas where we face risks include:
Diversion of management time and focus from operating our business to acquisition integration challenges.
Failure to successfully further develop the acquired business or product lines.
Implementation or remediation of controls, procedures and policies at the acquired company.
Integration of the acquired company’s accounting, human resources and other administrative systems, and coordination of product, engineering and sales and marketing functions.
Transition of operations, users and customers onto our existing platforms.
Reliance on the expertise of our strategic partners with respect to market development, sales, local regulatory compliance and other operational matters.
Failure to obtain required approvals on a timely basis, if at all, from governmental authorities, or conditions placed upon approval, under competition and antitrust laws which could, among other things, delay or prevent us from completing a transaction, or otherwise restrict our ability to realize the expected financial or strategic goals of an acquisition.
In the case of foreign acquisitions, the need to integrate operations across different cultures and languages and to address the particular economic, currency, political and regulatory risks associated with specific countries.
Cultural challenges associated with integrating employees from the acquired company into our organization, and retention of employees from the businesses we acquire.
Liability for or reputational harm from activities of the acquired company before the acquisition or from our strategic partners, including patent and trademark infringement claims, violations of laws, commercial disputes, tax liabilities and other known and unknown liabilities.
Litigation or other claims in connection with the acquired company, including claims from terminated employees, customers, former shareholders or other third parties.
Our failure to address these risks or other problems encountered in connection with our past or future acquisitions and investments or strategic alliances could cause us to fail to realize the anticipated benefits of such acquisitions, investments or alliances, incur unanticipated liabilities, and harm our business generally.
Our acquisitions could also result in dilutive issuances of our equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or impairment of goodwill and purchased long-lived assets, and restructuring charges, any of which could harm our financial condition or results of operations and cash flows. Also, the anticipated benefits of many of our acquisitions may not materialize.
A failure to dispose of assets or businesses in a timely manner may cause the results of the Company to suffer.
The Company evaluates as necessary the potential disposition of assets and businesses that may no longer help it meet its objectives. When the Company decides to sell assets or a business, it may encounter difficulty in finding buyers or alternative exit strategies on acceptable terms in a timely manner, which could delay the accomplishment of its strategic objectives. Alternatively, the Company may dispose of a business at a price or on terms that are less than it had anticipated. After reaching an agreement with a buyer or seller for the disposition of a business, the Company is subject to the satisfaction of pre-closing conditions, which may prevent the Company from completing the transaction. Dispositions may also involve continued financial involvement in the divested business, such as through continuing equity ownership, guarantees, indemnities or other financial obligations. Under these arrangements, performance by the divested businesses or other conditions outside the Company’s control could affect its future financial results.
We are involved in a number of legal proceedings and, while we cannot predict the outcomes of such proceedings and other contingencies with certainty, some of these outcomes could adversely affect our business, financial condition, results of operations and cash flows.
We are involved in legal proceedings and are subject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, arising in the course of our business (see the discussion of Legal Proceedings in Part I, Item 3 of this Annual Report on Form 10-K). Legal proceedings, in general, can be no assurance that we will effect anyexpensive and disruptive. Some of these transactionssuits may purport or activities, but, if we do, certain risks may be increased, possibly materially.determined to be class actions and/or involve parties seeking large and/or indeterminate amounts of damages, including punitive or exemplary damages, and may remain unresolved for several years. For example, product liability claims challenging the safety of our products may also result in a decline in sales for a particular product and could damage the reputation or the value of related brands.
From time to time, the Company is also involved in legal proceedings as a plaintiff involving contract, intellectual property and other matters. We cannot predict with certainty the outcomes of these legal proceedings and other contingencies, and the costs incurred in litigation can be substantial, regardless of the outcome. Substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, we could from time to time incur judgments, enter into settlements or revise our expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on our results of operations in the period in which the amounts are accrued and/or our cash flows in the period in which the amounts are paid. The outcome of some of these legal proceedings and other contingencies could require us to take, or refrain from taking, actions which could negatively affect our operations and, depending on the nature of the allegations, could negatively impact our reputation. Additionally, defending against these legal proceedings may involve significant expense and diversion of management’s attention and resources.
| |
| ITEM 1B. | UNRESOLVED STAFF COMMENTS |
None.
Our corporate headquarters are located in Marysville, Ohio, where we own orapproximately 706 acres of land and lease approximately 730 acres.24 acres of land. We also lease property in Ecully, France which serves as the headquarters of our European operations. In addition, we own and lease numerous industrial, commercial and office space for sales, marketing and general operating activities as well as warehouse, distribution, and research and development throughoutproperties located in North America, Europe, Australia and Asia. We believeAsia that our facilities are adequate to serve their intended purposes and that our property leasing arrangements are satisfactory.
We own or lease numerous facilities throughoutsupport the world to support our business operations.
Global Consumer — We own or lease eight properties to supportmanagement, manufacturing, distribution and research and development of our products and services. We believe our properties are suitable and adequate to serve the needs of our business and that our leased properties are subject to appropriate lease agreements.
The Company has 52 owned properties and 97 leased properties. These properties are located in North America. In addition, we operate 31 stand-alonethe following countries:
|
| | | | |
| Location | | Owned | | Leased |
| United States | | 34 | | 59 |
| United Kingdom | | 7 | | 6 |
| Canada | | 9 | | 13 |
| France | | 2 | | 3 |
Rest of world (1) | | — | | 16 |
| Total | | 52 | | 97 |
(1) - “Rest of world” includes Australia, Austria, Belgium, China, Germany, Mexico, the Netherlands, Norway and Poland
We own or lease 72 manufacturing properties, four distribution properties and two research and development properties in the United States. We own or lease nine manufacturing properties in the United Kingdom, twenty manufacturing properties in Canada, two manufacturing properties in France, two manufacturing properties in Australia, one manufacturing property in the Netherlands, and one manufacturing property in China. We also lease one distribution property and own one research and development property in the United Kingdom, lease one distribution property in Mexico, lease one research and development property in Canada, and lease one research and development property in France. Most of the manufacturing properties, which include growing media facilities in North America,
25 of which are owned by the Companyproperties and six of which are leased. Most of these facilities includepeat harvesting properties, have production lines, warehouses, offices and field processing areas. We own three production facilities for our wild bird food operations in Indiana, South Dakota, and Texas.
We lease facilities for the headquarters of our international business in Ecully (Lyon), France. We own two manufacturing facilities in France and four manufacturing facilities in the United Kingdom. We own or lease four peat extraction facilities in Scotland and the United Kingdom.
| |
• | Scotts LawnService® — We lease facilities for each of our 86 Company-operated Scotts LawnService® locations.
|
ITEM 3. LEGAL PROCEEDINGS
As noted in the discussion in “ITEM 1. BUSINESS — Regulatory Considerations”Considerations — Regulatory Matters” of this Annual Report on Form 10-K, we are involved in several pending environmental and regulatory matters. We believe that our assessment of contingencies is reasonable and that the related reserves, in the aggregate, are adequate; however, there can be no assurance that the final resolution of these matters will not have a material effect on our financial condition, results of operations or cash flows.
We have been named as a defendant in a number of cases alleging injuries that the lawsuits claim resulted from exposure to asbestos-containing products, apparently based on our historic use of vermiculite in certain of our products. In many of these cases, the complaints are not specific about the plaintiffs’ contacts with us or our products. The cases vary, but complaints in these cases generally seek unspecified monetary damages (actual, compensatory, consequential and punitive) from multiple defendants. We believe that the claims against us are without merit and are vigorously defending against them. It is not currently possible to reasonably estimate a probable loss, if any, associated with the cases and, accordingly, no reserves have been recorded in our consolidated financial statements. We are reviewing agreements and policies that may provide insurance coverage or indemnity as to these claims and are pursuing coverage under some of these agreements and policies, although there can be no assurance of the results of these efforts. There can be no assurance that these cases, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material adverse effect on our financial condition, results of operations or cash flows.
In connection with the sale of wild bird food products that were the subject of a voluntary recall in 2008, we, along with our Chief Executive Officer, have been named as a defendantdefendants in four putative class actions filed on and after June 27, 2012, which have now been consolidated in the United States District Court for the Southern District of California as In re Morning Song Bird Food Litigation, Lead Case No. 3:12-cv-01592-JAH-RBB. The plaintiffs allege various statutory and common law claims associated with the Company'sCompany’s sale of wild bird food products and a plea agreement entered into in previously pending government proceedings associated with such sales. The plaintiffs allege, among other things, a purported class action on behalf of all persons and entities in the United States who purchased certain bird food products. The plaintiffs seekassert hundreds of millions of dollars in monetary damages (actual, compensatory, consequential, and restitution), punitive and treble); reimbursement, restitution, and disgorgement for benefits unjustly conferred;treble damages; injunctive and declaratory relief; pre-judgment and post-judgment interest; and costs and attorneys'attorneys’ fees. The Company intendsand our Chief Executive Officer dispute the plaintiffs’ assertions and intend to vigorously defend the consolidated action. GivenAt this point in the early stages ofproceedings, it is not currently possible to reasonably estimate a probable loss, if any, associated with the action we cannot makeand, accordingly, no reserves have been recorded in our consolidated financial statements with respect to the action. There can be no assurance that this action, whether as a determinationresult of an adverse outcome or as to whether it coulda result of significant defense costs, will not have a material adverse effect on the Company'sour financial condition, results of operations or cash flows and have not recorded any accruals with respect thereto.flows.
We are involved in other lawsuits and claims which arise in the normal course of our business. In our opinion, these claims individually and in the aggregate are not expected to result inhave a material adverse effect on our financial condition, results of operations or cash flows.
ITEM 4. MINE SAFETY DISCLOSURE
Not Applicable.
SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of Scotts Miracle-Gro, their positions and, as of November 13, 2013,18, 2016, their ages and years with Scotts Miracle-Gro (and its predecessors) are set forth below.
| | | Name | | Age | | Position(s) Held | | Years with Company | | Age | | Position(s) Held | | Years with Company |
| James Hagedorn | | 58 |
| | Chief Executive Officer and Chairman of the Board | | 26 |
| | 61 |
| | Chief Executive Officer and Chairman of the Board | | 29 |
|
| Barry W. Sanders | | 49 |
| | President and Chief Operating Officer | | 12 |
| |
| Lawrence A. Hilsheimer | | 56 |
| | Executive Vice President and Chief Financial Officer | | 1 |
| |
| Michael C. Lukemire | | | 58 |
| | President and Chief Operating Officer | | 20 |
|
| Thomas R. Coleman | | | 47 |
| | Executive Vice President and Chief Financial Officer | | 17 |
|
| Ivan C. Smith | | | 47 |
| | Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer | | 13 |
|
| Denise S. Stump | | 59 |
| | Executive Vice President, Global Human Resources and Chief Ethics Officer | | 13 |
| | 62 |
| | Executive Vice President, Global Human Resources and Chief Ethics Officer | | 16 |
|
| Ivan C. Smith | | 44 |
| | Executive Vice President, General Counsel, Corporate Secretary and Chief Compliance Officer | | 10 |
| |
| James R. Lyski | | 50 |
| | Executive Vice President, Chief Marketing Officer | | 3 |
| |
| Michael C. Lukemire | | 55 |
| | Executive Vice President, Business Execution | | 17 |
| |
Executive officers serve at the discretion of the Board of Directors of Scotts Miracle-Gro and pursuant to employmentexecutive severance agreements or other arrangements.
The business experience of each of the individuals listed above during at least the past five years is as follows:
Mr. Hagedorn was named Chairman of the Board of Scotts Miracle-Gro’s predecessor in January 2003 and named Chief Executive Officer of Scotts Miracle-Gro’s predecessor in May 2001. He also served as President of Scotts Miracle-Gro (or its predecessor) from October 2015 until February 2016, from November 2006 until October 2008 and from April 2000 until December 2005. Mr. Hagedorn serves on Scotts Miracle-Gro’s Board of Directors, a position he has held with Scotts Miracle-Gro (or its predecessor) since 1995. Mr. Hagedorn is the brother of Katherine Hagedorn Littlefield, a director of Scotts Miracle-Gro.
Mr. SandersLukemire was named President of Scotts Miracle-Gro in October 2010 and named Chief Operating Officer of Scotts Miracle-Gro in January 2012. In this position, Mr. Sanders oversees all business unit and operating functions at the Company. Prior to his appointmentFebruary 2016. He served as Executive Vice President and Chief Operating Officer of Scotts Miracle-Gro from December 2014 until February 2016. Prior to this appointment, Mr. SandersLukemire had served as the Company’s Executive Vice President, Global Consumer since June 2010. Previously, he served as Executive Vice President, North AmericaAmerican Operations of Scotts Miracle-Gro from April 2014 until December 2014, as Executive Vice President, Business Execution of Scotts Miracle-Gro from May 2013 until April 2014 and as President, U.S. Consumer Regions of Scotts Miracle-Gro from October 20072011 until June 2010. HeMay 2013. Prior to October 2011, he had served as Executive ViceRegional President of Global Technology and Operations of Scotts Miracle-Gro from January to October 2007, where he was responsible for the Company’s supply chain and information systems, as well as research and development efforts. Before January 2007, he led the North American and global supply chain organizations as well as the North American sales force.Southeast region since May 2009.
Mr. Hilsheimer Colemanwas named Executive Vice President and Chief Financial Officer of Scotts Miracle-Gro in April 2013.2014. Prior to joining Scotts Miracle-Gro,this appointment, Mr. HilsheimerColeman had served as the President and Chief Operating Officer of Nationwide Retirement Plans for Nationwide Mutual Insurance Company from August 2012 to March 2013. Prior to that, Mr. Hilsheimer served as the President and Chief Operating Officer of Nationwide Direct and Customer Solutions, a post he had held since November 2009. Before November 2009, he served as the Chief Financial Officer and Executive Vice President of Nationwide Mutual Insurance Company.
Ms. Stump has served as ExecutiveSenior Vice President, Global Human ResourcesFinance Operations and Enterprise Performance Management Analytics for The Scotts Company LLC, a wholly-owned subsidiary of Scotts Miracle-Gro, (or its predecessor) since January 2011. Previously, Mr. Coleman served as Senior Vice President, North America Finance of Scotts LLC from November 2007 until January 2011. Mr. Coleman also previously served as interim principal financial officer of Scotts Miracle-Gro between February 2003. Effective October 31, 2013 Ms. Stump also was named Chief Ethics Officer.and March 2013.
Mr. Smithwas namedExecutive Vice President, General Counsel and Corporate Secretary of Scotts Miracle-Gro in July 2013. Effective October 31, 2013 Mr. Smith also was namedand Chief Compliance Officer.Officer of Scotts Miracle-Gro in October 2013. Prior to becoming Executive Vice President, General Counsel and Corporate Secretary, Mr. SmithJuly 2013, he had served as Vice President, Global Consumer Legal and Assistant General Counsel of Scotts LLC since October 2011. From April 2009 to September 2011, heMr. Smith served as Vice President, North America Legal and Assistant General Counsel. FromCounsel from April 2009 to September 2011 and as Vice President, Litigation of Scotts LLC from October 2007 to March 2009, he served as Vice President, Litigation.2009.
Mr. LyskiMs. Stump was named Executive Vice President, Global Human Resources of Scotts Miracle-Gro (or its predecessor) in February 2003 and Chief MarketingEthics Officer of Scotts Miracle-Gro in April 2011. He had previously served as interim Chief Marketing Officer since February 2011. Prior to joining Scotts Miracle-Gro, Mr. Lyski served as Executive Vice President, Chief Marketing Officer for Nationwide Mutual Insurance Company from October 2006 until January 2011, where he was responsible for corporate strategy, corporate marketing, brand management, advertising and communications. Mr. Lyski serves as President of the Board of Trustees for the Wexner Center Foundation.2013.
Mr. Lukemire was named Executive Vice President, Business Execution of Scotts Miracle-Gro in July 2013. In that position, Mr. Lukemire is responsible for leading the Company’s global supply chain, research and development, business transformation, operational strategy and environmental health and safety efforts. Prior to this appointment, Mr. Lukemire served as President, U.S. Consumer Regions since October 2011. Previously, he served as Regional President from May 2009 to September 2011, where he was responsible for leading the Company's business development, marketing and sales efforts in the Southeastern United States. Before May 2009, Mr. Lukemire served as Executive Vice President, Global Technologies and Operations, responsible for global supply chain, global research and development and global business information services.
PART II
| |
| ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES |
The common shares of Scotts Miracle-Gro (the “Common Shares”)Common Shares trade on the New York Stock Exchange under the symbol “SMG.” The quarterly high and low sale prices for the fiscal years ended September 30, 20132016 and September 30, 20122015 were as follows:
| | | | Sale Prices | Sale Prices |
| | High | | Low | High | | Low |
| FISCAL 2013 | | | | |
| FISCAL 2016 | | | | |
| First quarter | $ | 44.60 |
| | $ | 39.64 |
| $ | 72.26 |
| | $ | 60.25 |
|
| Second quarter | $ | 47.60 |
| | $ | 42.64 |
| $ | 75.13 |
| | $ | 62.20 |
|
| Third quarter | $ | 50.46 |
| | $ | 42.01 |
| $ | 73.16 |
| | $ | 65.80 |
|
| Fourth quarter | $ | 55.99 |
| | $ | 47.87 |
| $ | 83.73 |
| | $ | 68.24 |
|
| FISCAL 2012 | | | | |
| FISCAL 2015 | | | | |
| First quarter | $ | 50.85 |
| | $ | 40.57 |
| $ | 62.88 |
| | $ | 54.71 |
|
| Second quarter | $ | 55.58 |
| | $ | 46.17 |
| $ | 68.99 |
| | $ | 60.18 |
|
| Third quarter | $ | 55.95 |
| | $ | 35.49 |
| $ | 67.40 |
| | $ | 59.41 |
|
| Fourth quarter | $ | 45.00 |
| | $ | 37.97 |
| $ | 66.27 |
| | $ | 59.10 |
|
A quarterly dividend of $0.25 per Common Share was paid in December, March and June of fiscal 2011. On August 8, 2011,11, 2014, Scotts Miracle-Gro announced that its Board of Directors had increased the quarterly cash dividend to $0.30$0.45 per Common Share, which was paid in September of fiscal 20112014 and December, March and June of fiscal 2012.2015. On August 9, 2012,3, 2015, Scotts Miracle-Gro announced that its Board of Directors had increased the quarterly cash dividend to $0.47 per Common Share, which was paid in September of fiscal 2015 and December, March and June of fiscal 2016. On August 3, 2016, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.325$0.50 per Common Share, which was paid in September of fiscal 2012 and December, March and June of fiscal 2013. On August 6, 2013, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.4375 per Common Share, which was paid in September of fiscal 2013. 2016.
The payment of future dividends, if any, on the Common Shares will be determined by the Board of Directors in light of conditions then existing, including the Company’s earnings, financial condition and capital requirements, restrictions in financing agreements, business conditions and other factors. The Company’snew credit facility restricts futureagreement allows the Company to make unlimited restricted payments (as defined in the new credit agreement), including increased or one-time dividend payments toand Common Share repurchases, as long as the leverage ratio resulting from the making of such restricted payments is 4.00 or less. Otherwise the Company may only make restricted payments in an aggregate of $125amount for each fiscal year not to exceed the amount set forth for such fiscal year ($175.0 million annually throughfor fiscal 20132017 and $150$200.0 million annually beginningfor fiscal 2018 and in each fiscal 2014 if our leverage ratio, after giving effect to any such annual dividend payment, exceeds 2.50.year thereafter). Our leverage ratio was 2.053.10 at September 30, 2013.2016. See “NOTE 10.11. DEBT” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K for further discussion regarding the restrictions on dividend payments.
As of November 7, 2013,18, 2016, there were approximately 23,70052,000 shareholders, including holders of record and our estimate of beneficial holders.
On March 30, 2015, Scotts Miracle-Gro issued 154,737 Common Shares out of its treasury shares for payment of the acquisition of Vermicrop. The Common Shares were issued in reliance on an exemption from the registration requirements of the Securities Act of 1933, provided by Section 4(a)(2) of the Securities Act of 1933 as a private offering. The issuance did not involve a public offering, and was made without general solicitation or advertising.
The following table shows the purchases of Common Shares made by or on behalf of Scotts Miracle-Gro or any “affiliated purchaser” (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of Scotts Miracle-Gro for each of the three fiscal months in the quarter ended September 30, 20132016:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Common Shares Purchased(1) | | Average Price Paid per Common Share(2) | | Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs(3) | | Approximate Dollar Value of Common Shares That May Yet be Purchased Under the Plans or Programs(3) |
| June 30 through July 27, 2013 | | 184 |
| | $ | 49.34 |
| | — |
| | $ | 298,816,796 |
|
| July 28 through August 24, 2013 | | — |
| | $ | — |
| | — |
| | $ | 298,816,796 |
|
| August 25 through September 30, 2013 | | 1,508 |
| | $ | 54.95 |
| | — |
| | $ | 298,816,796 |
|
| Total | | 1,692 |
| | $ | 54.32 |
| | — |
| | |
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Common Shares Purchased(1) | | Average Price Paid per Common Share(2) | | Total Number of Common Shares Purchased as Part of Publicly Announced Plans or Programs(3) | | Approximate Dollar Value of Common Shares That May Yet be Purchased Under the Plans or Programs(3) |
| July 3 through July 30, 2016 | | 224,998 |
| | $ | 73.60 |
| | 223,602 |
| | $ | 387,454,088 |
|
| July 31 through August 27, 2016 | | 189,683 |
| | $ | 80.71 |
| | 188,375 |
| | $ | 372,342,681 |
|
| August 28 through September 30, 2016 | | 222,380 |
| | $ | 81.61 |
| | 220,568 |
| | $ | 854,341,229 |
|
| Total | | 637,061 |
| | $ | 78.51 |
| | 632,545 |
| | |
_____________
| |
| (1) | AmountsAll of the Common Shares purchased during the quarter were purchased in this column representopen market transactions. The total number of Common Shares purchased during the quarter includes 4,516 Common Shares purchased by the trustee of the rabbi trust established by the Company as permitted pursuant to the terms of The Scotts Company LLC Executive Retirement Plan (the “ERP”). The ERP is an unfunded, non-qualified deferred compensation plan which, among other things, provides eligible employees the opportunity to defer compensation above specified statutory limits applicable to The Scotts Company LLC Retirement Savings Plan and with respect to any Executive Management Incentive Pay (as defined in the ERP), Performance Award (as defined in the ERP) or other bonus awarded to such eligible employees. Pursuant to the terms of the ERP, each eligible employee has the right to elect an investment fund, including a fund consisting of Common Shares (the “Scotts Miracle-Gro Common Stock Fund”), against which amounts allocated to such employee’s account under the ERP, including employer contributions, will be benchmarked (all ERP accounts are bookkeeping accounts only and do not represent a claim against specific assets of the Company). Amounts allocated to employee accounts under the ERP represent deferred compensation obligations of the Company. The Company established the rabbi trust in order to assist the Company in discharging such deferred compensation obligations. When an eligible employee elects to benchmark some or all of the amounts allocated to such employee’s account against the Scotts Miracle-Gro Common Stock Fund, the trustee of the rabbi trust purchases the number of Common Shares equivalent to the amount so benchmarked. All Common Shares purchased by the trustee are purchased on the open market and are held in the rabbi trust until such time as they are distributed pursuant to the terms of the ERP. All assets of the rabbi trust, including any Common Shares purchased by the trustee, remain, at all times, assets of the Company, subject to the claims of its creditors. The terms of the ERP do not provide for a specified limit on the number of Common Shares that may be purchased by the trustee of the rabbi trust. |
| |
| (2) | The average price paid per Common Share is calculated on a settlement basis and includes commissions. |
| |
| (3) | InOn August 2010, the11, 2014, Scotts Miracle-Gro announced that its Board of Directors authorized the repurchase of up to $500 million of Common Shares over a four-yearfive-year period (through(effective November 1, 2014 through September 30, 2014)2019). On May 4, 2011, theAugust 3, 2016, Scotts Miracle-Gro announced that its Board of Directors authorizedincreased the repurchase of up tothen outstanding authorization by an additional $200 million$500 million. The amended authorization allows for repurchases of Common Shares resulting in authority to repurchase up to a total of $700 million of Common Shares$1.0 billion through September 30, 2014.2019. The dollar amounts in the “Approximate Dollar Value”Value of Common Shares That May Yet be Purchased Under the Plans or Programs” column reflect the remaining amountamounts that were available tofor repurchase under the $700original $500 million and incremental $500 million authorized repurchase program.programs. |
| |
| ITEM 6. | SELECTED FINANCIAL DATA |
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In millions, except per share amounts) |
| GAAP OPERATING RESULTS: | | | | | | | | | |
| Net sales | $ | 2,836.1 |
| | $ | 2,728.0 |
| | $ | 2,578.3 |
| | $ | 2,515.9 |
| | $ | 2,524.7 |
|
| Gross profit | 995.4 |
| | 908.0 |
| | 890.1 |
| | 843.6 |
| | 830.2 |
|
| Income from operations | 459.3 |
| | 262.1 |
| | 283.7 |
| | 280.2 |
| | 212.7 |
|
| Income from continuing operations | 253.3 |
| | 137.8 |
| | 145.5 |
| | 140.2 |
| | 93.0 |
|
| Income (loss) from discontinued operations, net of tax | 61.5 |
| | 20.9 |
| | 20.7 |
| | 20.9 |
| | 13.5 |
|
| Net income | 314.8 |
| | 158.7 |
| | 166.2 |
| | 161.1 |
| | 106.5 |
|
| Net income attributable to controlling interest | 315.3 |
| | 159.8 |
| | 166.5 |
| | 161.1 |
| | 106.5 |
|
NON-GAAP ADJUSTED OPERATING RESULTS(2): | | | | | | | | | |
| Adjusted income from operations | $ | 419.9 |
| | $ | 352.1 |
| | $ | 333.7 |
| | $ | 300.5 |
| | $ | 228.0 |
|
| Adjusted income from continuing operations | 241.1 |
| | 196.3 |
| | 185.4 |
| | 153.4 |
| | 104.7 |
|
| Adjusted income attributable to controlling interest from continuing operations | 241.6 |
| | 197.4 |
| | 185.7 |
| | 153.4 |
| | 104.7 |
|
| Pro Forma Adjusted Earnings | 232.6 |
| | 219.3 |
| | 206.3 |
| | 172.6 |
| | 123.3 |
|
| FINANCIAL POSITION: | | | | | | | | | |
Working capital(3) | $ | 398.6 |
| | $ | 500.6 |
| | $ | 373.4 |
| | $ | 359.8 |
| | $ | 555.2 |
|
Current ratio(3) | 1.7 |
| | 1.8 |
| | 1.7 |
| | 1.7 |
| | 2.4 |
|
| Property, plant and equipment, net | 470.8 |
| | 444.1 |
| | 429.4 |
| | 414.9 |
| | 420.3 |
|
| Total assets | 2,808.8 |
| | 2,527.2 |
| | 2,058.3 |
| | 1,937.1 |
| | 2,074.4 |
|
Total debt to total book capitalization(4) | 64.8 | % | | 65.1 | % | | 58.6 | % | | 44.4 | % | | 56.5 | % |
| Total debt | 1,316.1 |
| | 1,157.6 |
| | 782.7 |
| | 568.2 |
| | 782.6 |
|
| Total equity—controlling interest | 715.2 |
| | 620.7 |
| | 553.7 |
| | 710.5 |
| | 601.9 |
|
| CASH FLOWS: | | | | | | | | | |
| Cash flows provided by operating activities | $ | 237.4 |
| | $ | 246.9 |
| | $ | 240.9 |
| | $ | 342.0 |
| | $ | 153.4 |
|
| Investments in property, plant and equipment | 58.3 |
| | 61.7 |
| | 87.6 |
| | 60.1 |
| | 69.4 |
|
| Investment in marketing and license agreement | — |
| | 300.0 |
| | — |
| | — |
| | — |
|
| Investments in loans receivable | 90.0 |
| | — |
| | — |
| | — |
| | — |
|
| Net distributions from unconsolidated affiliates | 194.1 |
| | — |
| | — |
| | — |
| | — |
|
| Investments in acquired businesses, net of cash acquired and payments on sellers notes | 161.2 |
| | 181.7 |
| | 114.8 |
| | 4.0 |
| | 7.0 |
|
| Dividends paid | 116.6 |
| | 111.3 |
| | 230.8 |
| | 87.8 |
| | 75.4 |
|
| Purchases of Common Shares | 130.8 |
| | 14.8 |
| | 120.0 |
| | — |
| | 17.5 |
|
| PER SHARE DATA: | | | | | | | | | |
| GAAP earnings per common share from continuing operations: | | | | | | | | | |
| Basic | $ | 4.15 |
| | $ | 2.27 |
| | $ | 2.37 |
| | $ | 2.27 |
| | $ | 1.53 |
|
| Diluted | 4.09 |
| | 2.23 |
| | 2.32 |
| | 2.24 |
| | 1.50 |
|
| Non-GAAP adjusted earnings per common share from continuing operations: | | | | | | | | | |
Adjusted diluted(2) | 3.90 |
| | 3.17 |
| | 2.96 |
| | 2.45 |
| | 1.69 |
|
Pro Forma Adjusted Earnings(2) | 3.75 |
| | 3.53 |
| | 3.29 |
| | 2.76 |
| | 1.99 |
|
Dividends per common share(5) | 1.910 |
| | 1.820 |
| | 3.763 |
| | 1.413 |
| | 1.225 |
|
| Stock price at year-end | 83.27 |
| | 60.82 |
| | 55.00 |
| | 55.03 |
| | 43.47 |
|
| Stock price range—High | 83.73 |
| | 68.99 |
| | 60.30 |
| | 55.99 |
| | 55.95 |
|
| Stock price range—Low | 60.25 |
| | 54.71 |
| | 50.51 |
| | 39.64 |
| | 35.49 |
|
| OTHER: | | | | | | | | | |
Adjusted EBITDA(6) | $ | 517.4 |
| | $ | 471.8 |
| | $ | 412.4 |
| | $ | 390.5 |
| | $ | 302.9 |
|
Leverage ratio(6) | 3.10 |
| | 2.63 |
| | 2.18 |
| | 2.05 |
| | 2.93 |
|
Interest coverage ratio(6) | 7.88 |
| | 9.34 |
| | 9.41 |
| | 6.59 |
| | 4.90 |
|
| Weighted average Common Shares outstanding | 61.1 |
| | 61.1 |
| | 61.6 |
| | 61.7 |
| | 61.0 |
|
Common shares and dilutive potential common shares used in diluted EPS calculation | 62.0 |
| | 62.2 |
| | 62.7 |
| | 62.6 |
| | 62.1 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| | (In millions, except per share amounts) |
| OPERATING RESULTS: | | | | | | | | | |
| Net sales | $ | 2,816.5 |
| | $ | 2,826.1 |
| | $ | 2,799.7 |
| | $ | 2,873.0 |
| | $ | 2,715.3 |
|
| Gross profit | 982.4 |
| | 961.3 |
| | 1,009.2 |
| | 1,085.6 |
| | 986.7 |
|
| Income from operations | 313.2 |
| | 243.6 |
| | 274.8 |
| | 374.4 |
| | 273.4 |
|
| Income from continuing operations | 161.2 |
| | 113.2 |
| | 139.9 |
| | 207.7 |
| | 140.9 |
|
| Income (loss) from discontinued operations, net of tax | (0.1 | ) | | (6.7 | ) | | 28.0 |
| | (3.6 | ) | | 12.4 |
|
| Net income | 161.1 |
| | 106.5 |
| | 167.9 |
| | 204.1 |
| | 153.3 |
|
ADJUSTED OPERATING RESULTS(2): | | | | | | | | | |
| Adjusted income from operations | $ | 333.5 |
| | $ | 258.9 |
| | $ | 345.3 |
| | $ | 401.6 |
| | $ | 302.0 |
|
| Adjusted income from continuing operations | 174.4 |
| | 124.9 |
| | 187.2 |
| | 226.0 |
| | 159.0 |
|
| FINANCIAL POSITION: | | | | | | | | | |
Working capital(3) | $ | 371.2 |
| | $ | 566.4 |
| | $ | 523.9 |
| | $ | 381.3 |
| | $ | 382.7 |
|
Current ratio(3) | 1.7 |
| | 2.3 |
| | 2.1 |
| | 1.3 |
| | 1.3 |
|
| Property, plant and equipment, net | $ | 422.3 |
| | $ | 427.4 |
| | $ | 394.7 |
| | $ | 381.3 |
| | $ | 356.6 |
|
| Total assets | 1,937.2 |
| | 2,074.4 |
| | 2,052.2 |
| | 2,164.0 |
| | 2,220.1 |
|
Total debt to total book capitalization(4) | 44.5 | % | | 56.5 | % | | 58.7 | % | | 45.2 | % | | 58.1 | % |
| Total debt | $ | 570.5 |
| | $ | 782.6 |
| | $ | 795.0 |
| | $ | 631.7 |
| | $ | 810.1 |
|
| Total shareholders’ equity | 710.5 |
| | 601.9 |
| | 559.8 |
| | 764.5 |
| | 584.5 |
|
| CASH FLOWS: | | | | | | | | | |
| Cash flows from operating activities | $ | 342.0 |
| | $ | 153.4 |
| | $ | 122.1 |
| | $ | 295.9 |
| | $ | 264.6 |
|
| Investments in property, plant and equipment | 60.1 |
| | 69.4 |
| | 72.7 |
| | 83.4 |
| | 72.0 |
|
| Investments in intellectual property | — |
| | — |
| | — |
| | — |
| | 3.4 |
|
| Investments in acquisitions, net of cash acquired | 4.0 |
| | 7.0 |
| | 7.9 |
| | 0.6 |
| | 10.7 |
|
| Total cash dividends paid | 87.8 |
| | 75.4 |
| | 67.9 |
| | 42.6 |
| | 33.4 |
|
| Total purchases of common shares | — |
| | 17.5 |
| | 358.7 |
| | 25.0 |
| | — |
|
| PER SHARE DATA: | | | | | | | | | |
| Earnings per common share from continuing operations: | | | | | | | | | |
| Basic | $ | 2.61 |
| | $ | 1.86 |
| | $ | 2.16 |
| | $ | 3.13 |
| | $ | 2.17 |
|
| Diluted | 2.58 |
| | 1.82 |
| | 2.11 |
| | 3.07 |
| | 2.13 |
|
Adjusted diluted(2) | 2.79 |
| | 2.01 |
| | 2.83 |
| | 3.34 |
| | 2.40 |
|
Dividends per common share(5) | 1.4125 |
| | 1.225 |
| | 1.05 |
| | 0.625 |
| | 0.50 |
|
| Stock price at year-end | 55.03 |
| | 43.47 |
| | 44.60 |
| | 51.73 |
| | 42.95 |
|
| Stock price range—High | 55.99 |
| | 55.95 |
| | 60.62 |
| | 52.56 |
| | 44.25 |
|
| Stock price range—Low | 39.64 |
| | 35.49 |
| | 39.99 |
| | 37.50 |
| | 18.27 |
|
| OTHER: | | | | | | | | | |
Adjusted EBITDA(6) | $ | 390.5 |
| | $ | 302.9 |
| | $ | 393.0 |
| | $ | 440.1 |
| | $ | 350.5 |
|
Leverage ratio(6) | 2.05 |
| | 2.93 |
| | 1.98 |
| | 2.00 |
| | 3.20 |
|
Interest coverage ratio(6) | 6.59 |
| | 4.90 |
| | 7.47 |
| | 9.40 |
| | 6.21 |
|
| Weighted average common shares outstanding | 61.7 |
| | 61.0 |
| | 64.7 |
| | 66.3 |
| | 65.0 |
|
Common shares and dilutive potential common shares used in diluted EPS calculation | 62.6 |
| | 62.1 |
| | 66.2 |
| | 67.6 |
| | 66.1 |
|
| |
| (1) | On July 8, 2009, Scotts Miracle-Gro announced that its wholly-owned subsidiary, Smith & Hawken, Ltd., had adopted a plan to closeIn the Smith & Hawken business. During our firstfourth quarter of fiscal 2010, all Smith & Hawken stores were closed and substantially all operational activities2012, the Company completed the wind down of Smith & Hawken were discontinued.its professional seed business (“Pro Seed”). As a result, effective in our firstfourth quarter of fiscal 2010,2012, we classified Smith & HawkenPro Seed as a discontinued operationsoperation in accordance with accounting principles generally accepted in the United States of America (“GAAP”). Smith & Hawken® is a registered trademark of Target Brands, Inc. The Company sold the Smith & Hawken brand and certain intellectual property rights related thereto to Target Brands, Inc. on December 30, 2009, and subsequently changed the name of the subsidiary entity formerly known as Smith & Hawken, Ltd. to Teak 2, Ltd. References in this Annual Report on Form 10-K to Smith & Hawken refer to the subsidiary entity, not the brand itself.
GAAP. |
On February 28, 2011,In the second quarter of fiscal 2014, we completed the sale of Global Pro to ICL. In conjunction with the transaction, Scotts LLC and ICL entered into several product supply agreements which are generally up to five years in duration, as well as various trademark and technology licensing agreements with varying durations. Our continuing cash inflows and outflows related to these agreements are not considered to be significant in relation to the overall cash flows of Global Pro. Furthermore, none of these agreements permit us to influence the operating or financial policies of Global Pro under the ownership of ICL. Therefore, Global Pro met the criteria for presentation as discontinued operations.our wild bird food business. As such,a result, effective in the firstour second quarter of fiscal 2011,2014, we classified Global Prothe wild bird food business as a discontinued operationsoperation in accordance with GAAP.
In the fourth quarter of fiscal 2012,On April 13, 2016, the Company completed the wind downcontribution of the Company's professional seed business (“Pro Seed”)SLS Business to the TruGreen Joint Venture in exchange for a minority equity interest of 30%. As a result, effective in its fourthsecond quarter of fiscal 2012,2016, we classified Pro Seedthe SLS Business as a discontinued operationsoperation in accordance with GAAP.
The Selected Financial Data has been retrospectively updated to recast Smith & Hawken, Global Pro and Pro Seed, the wild bird food business and the SLS Business as discontinued operations for each period presented.
| |
| (2) | The Five-Year Summary includes non-GAAP financial measures, as defined in Item 10(e) of SEC Regulation S-K, which are included as additional supplemental information, of adjusted operatingnet income from operations, adjusted net income from continuing operations, adjusted net income attributable to controlling interest from continuing operations and adjusted diluted earnings per shareCommon Share from continuing operations (“Adjusted Earnings”), which exclude costs or gains related to discrete projects or transactions. Items excluded during the five-year period ended September 30, 20132016 consisted of charges or credits relating to refinancings, impairments, restructurings, product registration and recall matters, discontinued operations and other unusual items such as costs or gains related to discrete projects or transactions that are apart from and not indicative of the results of the operations of the business. Adjusted Earnings also exclude charges or credits relating to transaction related costs, restructurings and other discrete projects or transactions including a non-cash fair value write down adjustment related to deferred revenue and advertising as part of the transaction accounting that are apart from and not indicative of the results of the operations of the TruGreen Joint Venture. The comparable GAAP measures are reported operating income from operations, reported income from continuing operations and reported diluted earnings per share from continuing operations. Our management believes that these non-GAAP measures are the most indicative of our earnings capabilities and that disclosure of these non-GAAP financial measures therefore provides useful information to investors or other users of the financial statements, such as lenders. A reconciliation of the non-GAAP to the most directly comparable GAAP measures is presented in the following tables: |
The Five-Year Summary also includes non-GAAP financial measures, as defined in Item 10(e) of SEC Regulation S-K, which are included as additional supplemental information, of Pro Forma Adjusted Earnings and Pro Forma Adjusted Earnings per Common Share. These measures are calculated as net income attributable to controlling interest, excluding charges or credits relating to impairments, restructurings, product registration and recall matters and other unusual items such as costs or gains related to discrete projects or transactions that are apart from and not indicative of the results of the operations of the business. These measures also include income (loss) from discontinued operations related to the SLS Business; however, exclude the gain on the contribution of the SLS Business to the TruGreen Joint Venture. The comparable GAAP measures are reported income from operations, reported income from continuing operations and reported diluted earnings per share from continuing operations.
In addition to our GAAP measures, we use these non-GAAP measures to manage the business because we believe that these measures provide additional perspective on and, in some circumstances are more closely correlated to, the performance of our underlying, ongoing business. We believe that disclosure of these non-GAAP financial measures therefore provides useful supplemental information to investors or other users of the financial statements, such as lenders. Non-GAAP financial measures should be viewed in addition to, and not as an alternative for, the Company’s reported results prepared in accordance with GAAP. A reconciliation of the non-GAAP measures to the most directly comparable GAAP measures is presented in the following table:
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 |
| | (In millions, except per share data) |
| Income from operations | $ | 313.2 |
| | $ | 243.6 |
| | $ | 274.8 |
| | $ | 374.4 |
| | $ | 273.4 |
|
| Impairment, restructuring and other charges | 20.3 |
| | 7.1 |
| | 55.9 |
| | 18.5 |
| | — |
|
| Product registration and recall matters | — |
| | 8.2 |
| | 14.6 |
| | 8.7 |
| | 28.6 |
|
| Adjusted income from operations | $ | 333.5 |
| | $ | 258.9 |
| | $ | 345.3 |
| | $ | 401.6 |
| | $ | 302.0 |
|
| Income from continuing operations | $ | 161.2 |
| | $ | 113.2 |
| | $ | 139.9 |
| | $ | 207.7 |
| | $ | 140.9 |
|
| Impairment, restructuring and other charges, net of tax | 13.2 |
| | 4.3 |
| | 35.3 |
| | 12.7 |
| | — |
|
| Product registration and recall matters, net of tax | — |
| | 7.4 |
| | 12.0 |
| | 5.6 |
| | 18.1 |
|
| Adjusted income from continuing operations | $ | 174.4 |
| | $ | 124.9 |
| | $ | 187.2 |
| | $ | 226.0 |
| | $ | 159.0 |
|
| Diluted earnings per share from continuing operations | $ | 2.58 |
| | $ | 1.82 |
| | $ | 2.11 |
| | $ | 3.07 |
| | $ | 2.13 |
|
| Impairment, restructuring and other charges, net of tax | 0.21 |
| | 0.07 |
| | 0.53 |
| | 0.19 |
| | — |
|
| Product registration and recall matters, net of tax | — |
| | 0.12 |
| | 0.19 |
| | 0.08 |
| | 0.27 |
|
| Adjusted diluted earnings per share from continuing operations | $ | 2.79 |
| | $ | 2.01 |
| | $ | 2.83 |
| | $ | 3.34 |
| | $ | 2.40 |
|
|
| | | | | | | | | | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In millions, except per share data) |
| Income from operations | $ | 459.3 |
| | $ | 262.1 |
| | $ | 283.7 |
| | $ | 280.2 |
| | $ | 212.7 |
|
| Impairment, restructuring and other (recoveries) charges | (39.4 | ) | | 90.0 |
| | 50.0 |
| | 20.3 |
| | 7.1 |
|
| Product registration and recall matters | — |
| | — |
| | — |
| | — |
| | 8.2 |
|
| Adjusted income from operations | $ | 419.9 |
| | $ | 352.1 |
| | $ | 333.7 |
| | $ | 300.5 |
| | $ | 228.0 |
|
| Income from continuing operations | $ | 253.3 |
| | $ | 137.8 |
| | $ | 145.5 |
| | $ | 140.2 |
| | $ | 93.0 |
|
| Net loss attributable to noncontrolling interest | 0.5 |
| | 1.1 |
| | 0.3 |
| | — |
| | — |
|
| Net income (loss) attributable to controlling interest from continuing operations | 253.8 |
| | 138.9 |
| | 145.8 |
| | 140.2 |
| | 93.0 |
|
| Impairment, restructuring and other | (27.7 | ) | | 90.0 |
| | 50.0 |
| | 20.3 |
| | 7.1 |
|
| Costs related to refinancing | 8.8 |
| | — |
| | 10.7 |
| | — |
| | — |
|
| Product registration and recall matters | — |
| | — |
| | — |
| | — |
| | 8.2 |
|
| Adjustment to income tax expense from continuing operations | 6.7 |
| | (31.5 | ) | | (20.8 | ) | | (7.1 | ) | | (3.6 | ) |
| Adjusted income attributable to controlling interest from continuing operations | $ | 241.6 |
| | $ | 197.4 |
| | $ | 185.7 |
| | $ | 153.4 |
| | $ | 104.7 |
|
| Income from discontinued operations from SLS Business | $ | 102.9 |
| | $ | 32.5 |
| | $ | 30.9 |
| | $ | 30.3 |
| | $ | 28.5 |
|
| Gain on contribution of SLS Business | (131.2 | ) | | — |
| | — |
| | — |
| | — |
|
| Income (loss) from SLS Business in discontinued operations, net of gain on contribution of SLS Business | (28.3 | ) | | 32.5 |
| | 30.9 |
| | 30.3 |
| | 28.5 |
|
| Income tax benefit from SLS Business in discontinued operations | 10.5 |
| | (11.6 | ) | | (11.0 | ) | | (11.1 | ) | | (9.9 | ) |
| Income (loss) from SLS Business in discontinued operations, net of tax | (17.8 | ) | | 20.9 |
| | 19.9 |
| | 19.2 |
| | 18.6 |
|
| Impairment, restructuring and other from SLS Business in discontinued operations | 13.6 |
| | 1.5 |
| | 1.0 |
| | — |
| | — |
|
| Income tax expense from impairment, restructuring and other from SLS Business in discontinued operations | (4.8 | ) | | (0.5 | ) | | (0.3 | ) | | — |
| | — |
|
| Pro Forma Adjusted Earnings | $ | 232.6 |
| | $ | 219.3 |
| | $ | 206.3 |
| | $ | 172.6 |
| | $ | 123.3 |
|
| | | | | | | | | | |
| Diluted income per share from continuing operations | $ | 4.09 |
| | $ | 2.23 |
| | $ | 2.32 |
| | $ | 2.24 |
| | $ | 1.50 |
|
| Impairment, restructuring and other | (0.45 | ) | | 1.45 |
| | 0.80 |
| | 0.32 |
| | 0.11 |
|
| Costs related to refinancing | 0.14 |
| | — |
| | 0.17 |
| | — |
| | — |
|
| Product registration and recall matters | — |
| | — |
| | — |
| | — |
| | 0.13 |
|
| Adjustment to income tax expense from continuing operations | 0.11 |
| | (0.51 | ) | | (0.33 | ) | | (0.11 | ) | | (0.06 | ) |
| Adjusted diluted income per common share from continuing operations | $ | 3.90 |
| | $ | 3.17 |
| | $ | 2.96 |
| | $ | 2.45 |
| | $ | 1.69 |
|
| Income from discontinued operations from SLS Business | $ | 1.66 |
| | $ | 0.52 |
| | $ | 0.49 |
| | $ | 0.48 |
| | $ | 0.46 |
|
| Gain on contribution of SLS Business | (2.12 | ) | | — |
| | — |
| | — |
| | — |
|
| Income (loss) from SLS Business in discontinued operations, net of gain on contribution of SLS Business | (0.46 | ) | | 0.52 |
| | 0.49 |
| | 0.48 |
| | 0.46 |
|
| Income tax benefit from SLS Business in discontinued operations | 0.17 |
| | (0.19 | ) | | (0.18 | ) | | (0.18 | ) | | (0.16 | ) |
| Income (loss) from SLS Business in discontinued operations, net of tax | (0.29 | ) | | 0.34 |
| | 0.32 |
| | 0.31 |
| | 0.30 |
|
| Impairment, restructuring and other from SLS Business in discontinued operations | 0.22 |
| | 0.02 |
| | 0.01 |
| | — |
| | — |
|
| Income tax expense from impairment, restructuring and other from SLS Business in discontinued operations | (0.08 | ) | | — |
| | — |
| | — |
| | — |
|
| Pro Forma Adjusted Earnings per common share | $ | 3.75 |
| | $ | 3.53 |
| | $ | 3.29 |
| | $ | 2.76 |
| | $ | 1.99 |
|
The sum of the components may not equal the total due to rounding.
| |
| (3) | Working capital is calculated as current assets minus current liabilities. Current ratio is calculated as current assets divided by current liabilities. |
| |
| (4) | The total debt to total book capitalization percentage is calculated by dividing total debt by total debt plus shareholders’ equity.total equity—controlling interest. |
| |
| (5) | Scotts Miracle-Gro began payingpays a quarterly dividend to the holders of $0.125 perits Common Share in the fourth quarter of fiscal 2005. On August 10, 2010, Scotts Miracle-Gro announced that its Board of Directors had increased the quarterly cash dividend to $0.25 per Common Share, which was first paid in the fourth quarter of fiscal 2010.Shares. On August 8, 2011, Scotts Miracle-Gro announced that its Board of Directors had increased the quarterly cash dividend to $0.30 per Common Share, which was first paid in the fourth quarter of fiscal 2011. On August 9, 2012, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.325 per Common Share, which was first paid in the fourth quarter of fiscal 2012. On August 6, 2013, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.4375 per Common Share, which was first paid in the fourth quarter of fiscal 2013. |
quarterly cash dividend to $0.4375 per Common Share, which was first paid in the fourth quarter of fiscal 2013. On August 11, 2014, Scotts Miracle-Gro announced that its Board of Directors had (i) further increased the quarterly cash dividend to $0.45 per Common Share, which was first paid in the fourth quarter of fiscal 2014 and (ii) declared a special one-time cash dividend of $2.00 per Common Share, which was paid on September 17, 2014. On August 3, 2015, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.47 per Common Share, which was first paid in the fourth quarter of fiscal 2015. On August 3, 2016, Scotts Miracle-Gro announced that its Board of Directors had further increased the quarterly cash dividend to $0.50 per Common Share, which was paid in September 2016.
| |
| (6) | We view our credit facility as material to our ability to fund operations, particularly in light of our seasonality. Please refer to “ITEM 1A. RISK FACTORS — Our indebtedness could limit our flexibility and adversely affect our financial condition” of this Annual Report on 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. The presentation of Adjusted EBITDA herein is intended to be consistent with the calculation of that measure as required by our borrowing arrangements,agreements, and used to calculate a leverage ratio (maximum of 3.504.50 at September 30, 20132016) and an interest coverage ratio (minimum of 3.503.00 for the yeartwelve months ended September 30, 20132016). Leverage ratio is calculated as average total indebtedness, as described in our credit facility, relative todivided by Adjusted EBITDA. Interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in our credit facility, and excludes costs related to refinancings. Our leverage ratio was 2.053.10 at September 30, 20132016 and our interest coverage ratio was 6.597.88 for the yeartwelve months ended September 30, 20132016. Please refer to “ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS — Liquidity and Capital Resources”Resources — Borrowing Agreements” of this Annual Report on Form 10-K for a discussion of our credit facility. |
In accordance with the terms of our credit facility, Adjusted EBITDA is calculated as net income or loss(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. In addition, non-recurring cash items affecting net income that are incurred between April 3, 2011 and June 30, 2012 in an aggregate amount not to exceed $40 million are also excluded fromFor the determinationfourth quarter of fiscal 2015, the Company changed its calculation of Adjusted EBITDA.EBITDA to reflect the measure as defined in our fourth amended credit agreement. Prior periods have not been adjusted as they reflect the presentation consistent with the calculation as required by our borrowing agreements in place at that time. The revised calculation adds adjustments for share-based compensation expense, expense on certain leases, and impairment, restructuring and other charges (including cash and non-cash charges) and no longer includes an adjustment for mark-to-market adjustments on derivatives. 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 income from continuing operations solely for the purpose of complying with SEC regulations and not as an indication that Adjusted EBITDA is a substitute measure for income from continuing operations.
A numeric reconciliation of Adjusted EBITDA to income from continuing operations is as follows:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | | 2010 | | 2009 | 2016 | | 2015 | | 2014 | | 2013 | | 2012 |
| | (In millions, except per share data) | (In millions, except per share data) |
| Income from continuing operations | $ | 161.2 |
| | $ | 113.2 |
| | $ | 139.9 |
| | $ | 207.7 |
| | $ | 140.9 |
| $ | 253.3 |
| | $ | 137.8 |
| | $ | 145.5 |
| | $ | 140.2 |
| | $ | 93.0 |
|
| Income tax expense from continuing operations | 92.8 |
| | 68.6 |
| | 82.7 |
| | 123.5 |
| | 80.2 |
| 139.4 |
| | 73.8 |
| | 80.2 |
| | 80.8 |
| | 57.9 |
|
| Income (loss) from discontinued operations, net of tax (excluding Global Pro sale) | (0.1 | ) | | (5.0 | ) | | (11.5 | ) | | (3.6 | ) | | 12.4 |
| |
| Income tax expense (benefit) from discontinued operations | (0.2 | ) | | (2.0 | ) | | (7.2 | ) | | 3.1 |
| | (22.8 | ) | |
| Income from discontinued operations, net of tax | | 61.5 |
| | 20.9 |
| | 20.7 |
| | 20.9 |
| | 13.5 |
|
| Income tax expense from discontinued operations | | 41.4 |
| | 11.6 |
| | 11.9 |
| | 11.8 |
| | 10.4 |
|
| Gain on contribution of SLS Business, net of tax | | (79.3 | ) | | — |
| | — |
| | — |
| | — |
|
| Income tax expense from gain on contribution of SLS Business | | (51.9 | ) | | — |
| | — |
| | — |
| | — |
|
| Costs related to refinancings | — |
| | — |
| | 1.2 |
| | — |
| | — |
| 8.8 |
| | — |
| | 10.7 |
| | — |
| | — |
|
| Interest expense | 59.2 |
| | 61.8 |
| | 51.0 |
| | 43.2 |
| | 52.4 |
| 65.6 |
| | 50.5 |
| | 47.3 |
| | 59.2 |
| | 61.8 |
|
| Interest expense from discontinued operations | — |
| | — |
| | 1.7 |
| | 3.7 |
| | 4.0 |
| |
| Depreciation | 54.9 |
| | 51.5 |
| | 50.3 |
| | 48.5 |
| | 47.9 |
| 53.8 |
| | 51.4 |
| | 50.6 |
| | 54.9 |
| | 51.5 |
|
| Amortization | 11.2 |
| | 10.9 |
| | 11.4 |
| | 10.9 |
| | 12.5 |
| 19.7 |
| | 17.6 |
| | 13.8 |
| | 11.2 |
| | 10.9 |
|
| Loss on impairment and other charges | 11.2 |
| | 4.7 |
| | 64.3 |
| | 18.5 |
| | 7.4 |
| |
Gain on investment of unconsolidated affiliate(7) | | — |
| | — |
| | (3.3 | ) | | — |
| | — |
|
| Impairment, restructuring and other from continuing operations | | (27.7 | ) | | 90.0 |
| | 32.9 |
| | 11.2 |
| | 4.7 |
|
| Impairment, restructuring and other from discontinued operations | | 13.6 |
| | 1.5 |
| | 0.8 |
| | — |
| | — |
|
| Product registration and recall matters, non-cash portion | — |
| | 0.2 |
| | 8.7 |
| | 1.0 |
| | 2.9 |
| — |
| | — |
| | — |
| | — |
| | 0.2 |
|
| Mark-to-market adjustments on derivatives | 0.3 |
| | (1.0 | ) | | 0.5 |
| | — |
| | — |
| — |
| | — |
| | 1.3 |
| | 0.3 |
| | (1.0 | ) |
| Smith & Hawken closure process, non-cash portion | — |
| | — |
| | — |
| | (16.4 | ) | | 12.7 |
| |
| Expense on certain leases | | 3.6 |
| | 3.5 |
| | — |
| | — |
| | — |
|
| Share-based compensation expense | | 15.6 |
| | 13.2 |
| | — |
| | — |
| | — |
|
| Adjusted EBITDA | $ | 390.5 |
| | $ | 302.9 |
| | $ | 393.0 |
| | $ | 440.1 |
| | $ | 350.5 |
| $ | 517.4 |
| | $ | 471.8 |
| | $ | 412.4 |
| | $ | 390.5 |
| | $ | 302.9 |
|
| |
| (7) | Amount represents a gain on our investment in AeroGrow recognized during the fourth quarter of 2014 as a result of our consolidation of the business. Excluded from this amount is $2.4 million of earnings on AeroGrow’s unconsolidated results for fiscal year 2014 recorded within “Other income, net” in the Consolidated Statements of Operations. |
| |
| ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
The purpose of this discussion 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. Management’s Discussion and Analysis (“MD&A”) is divided into the following sections:
Executive summary
Results of operations
Segment results
Liquidity and capital resources
Regulatory matters
Critical accounting policies and estimates
Executive Summary
We are dedicated to delivering strong, long-term financial results and outstanding shareholder returns by providing products of superior quality and value to enhance consumers’ lawn and garden environments. We are a leading manufacturer and marketer of consumer branded products for lawn and garden care in North America and Europe. We are Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup® non-selective herbicide products within the United States and other contractually specified countries. We have a presence in similar consumer branded productsproduct categories in Australia, the Far East and Latin America. We also operateIn addition, as a result of our recent acquisitions of General Hydroponics, Vermicrop, Gavita and our control of AeroGrow, we are a leading producer of liquid plant food products, growing media, indoor lighting, advanced indoor garden systems and accessories for hydroponic gardening. Our operations are divided into three reportable segments: U.S. Consumer, Europe Consumer and Other. These segments differ from those used in prior years due to the change in our internal organizational structure associated with Project Focus, which is a series of initiatives announced in the first quarter of fiscal 2016 designed to maximize the value of our non-core assets and concentrate our focus on emerging categories of the lawn and garden industry in our core U.S. business.
On April 13, 2016, as part of Project Focus, we, pursuant to the terms of the Contribution and Distribution Agreement (the “Contribution Agreement”) between the Company and TruGreen Holding Corporation (“TruGreen Holdings”) completed the contribution of the Scotts LawnService®, business (the “SLS Business”) to a newly formed subsidiary of TruGreen Holdings (the “TruGreen Joint Venture”) in exchange for a minority equity interest of approximately 30% in the TruGreen Joint Venture. The fair value of this interest was estimated to be $294.0 million, resulting in a pre-tax gain of $131.2 million. As a result of this transaction, effective in our second largest U.S. lawn care service business. Ourquarter of fiscal 2016, we classified our results of operations are divided intofor all periods presented to reflect the following reportable segments: Global ConsumerSLS Business as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. Prior to being reported as a discontinued operation, the SLS Business was referred to as our former Scotts LawnService®.
In fiscal 2013, we progressed a number of key initiatives which focused on: (1) margin improvement business segment. At closing, the TruGreen Joint Venture obtained debt financing and, SG&A reduction and (2) stronger balance sheet and operating cash flow with a bias towards returning cash to shareholders. After a late startpursuant to the season impacting first half results, strong consumer engagement and our initiatives came together in the second halfterms of the yearContribution and Distribution Agreement, we received a pro rata cash distribution of $196.2 million, partially offset by an investment of $18.0 million in second lien term loan financing provided by us to lift full year results. We also continued our long-term focus on innovationthe TruGreen Joint Venture and global expansion.closing working capital adjustments.
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 on continually increasing brand and product awareness to inspire consumers and to create retail demand. We have successfully appliedimplemented this model for a number of years by focusing on research and development and investing approximately 5 - 6%5% of our annual net sales in advertising to support and promote our products and brands. We continually explore new and innovative ways to communicate with consumers. We believe that we receive a significant return onbenefit 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 increasing market share.
Our net sales in any one year are susceptible to weather conditions in the markets in which our products are sold.sold and our services are offered. For instance, periods of abnormally wet or dry weather can adversely impact the sale of certain products, while increasing demand for other products.products, or delay the timing of our provision of certain services. We believe that our diversified product line and our broad geographic diversification reduce this risk, although to a lesser extent in a year wherein which unfavorable weather is geographically wide-spreadwidespread 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 alterimpact longer-term category growth trends.
Due to the seasonal nature of the lawn and garden business, significant portions of our products ship to our retail customers during our second and third fiscal quarters, as noted in the chart below. 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, thereby reducing retailers’ pre-season inventories.
| | | | Percent of Net Sales from Continuing Operations by Quarter | Percent of Net Sales from Continuing Operations by Quarter |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| First Quarter | 7.3 | % | | 7.1 | % | | 8.1 | % | 6.9 | % | | 6.2 | % | | 5.6 | % |
| Second Quarter | 36.2 | % | | 41.4 | % | | 40.1 | % | 43.8 | % | | 39.3 | % | | 40.8 | % |
| Third Quarter | 40.8 | % | | 37.3 | % | | 37.4 | % | 35.1 | % | | 40.7 | % | | 39.7 | % |
| Fourth Quarter | 15.7 | % | | 14.2 | % | | 14.4 | % | 14.2 | % | | 13.8 | % | | 13.9 | % |
The Company follows a 13-week quarterly accounting cycle pursuant to which the first three fiscal quarters end on a Saturday and the fiscal year always ends on September 30. This fiscal calendar convention requires the Company to cycle forward the first three fiscal quarter ends every six years. Fiscal 2016 is the most recent year impacted by this process and, as a result, the first quarter of fiscal 2016 had six additional days and the fourth quarter of fiscal 2016 had five fewer days compared to the corresponding quarters of fiscal 2015.
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 profit margins, advertising to net sales ratios, income from operations, income from continuing operations, net income and earnings per share. To the extent applicable, these measures are evaluated with and without impairment, restructuring and other charges, as well as product registration and recall matters, which management believes are not indicative of the earnings capabilities of our businesses. We also focus on measures to optimize cash flow and return on invested capital, including the management of working capital and capital expenditures.
In August 2010, the Scotts Miracle-Gro Board of Directors authorized the repurchase of up to $500 million of Scotts Miracle-Gro’s common shares (the “Common Shares”)Common Shares over a four-year period throughending on September 30, 2014. In May 2011, the Scotts Miracle-Gro Board of Directors authorized the repurchase of up to an additional $200 million of theour Common Shares, resulting in authority to repurchase up to a total of $700up to $700 million of the Common Shares through September 30, 2014. SinceFrom the inception of thethis share repurchase program in the fourth quarter of fiscal 2010 through its expiration on September 30, 2013,2014, Scotts Miracle-Gro has repurchased 7.89.9 million Common Shares for $401.2$521.2 million to be held in treasury. Common Shares held in treasury leaving $298.8totaling 0.6 million and 0.9 million were reissued in support of share-based compensation awards and employee purchases under the employee stock purchase plan during fiscal 2016 and fiscal 2015, respectively.
In August 2014, the Scotts Miracle-Gro Board of Directors declared a special one-time cash dividend of $2.00 per Common Share that was paid on September 17, 2014.
In August 2014, the Scotts Miracle-Gro Board of Directors authorized for repurchasesthe repurchase of up to $500.0 million of Common Shares over a five-year period (starting November 1, 2014 through September 30, 2014.2019). On August 3, 2016, Scotts Miracle-Gro announced that its Board of Directors authorized a $500.0 million increase to the share repurchase authorization ending on September 30, 2019. The amended authorization allows for repurchases of Common Shares of $1.0 billion through September 30, 2019. From the inception of this share repurchase program in the fourth quarter of fiscal 2014 through September 30, 2016, Scotts Miracle-Gro repurchased approximately 2.1 million Common Shares for $145.7 million.
Further, onOn August 6, 2013,3, 2016, we announced that the Scotts Miracle-Gro Board of Directors increasedapproved an increase in our quarterly cash dividend from $0.325$0.47 to $0.4375$0.50 per common share. The decision to increase the amount of cash we intend to return to our shareholders reflects our continued confidence in the business and our desire to maintain a consistent capital structure.Common Share.
Results of Operations
WeEffective in our second quarter of fiscal 2016, we classified our professional seed business and Global Professional business (excluding our non-European professional business, “Global Pro”) as discontinuedresults of operations for all periods presented beginningto reflect the SLS Business as a discontinued operation. Effective in our fourth quarter of fiscal 2012 and our firstthe second quarter of fiscal 2011, respectively.2014, the Company classified its results of operations for all periods presented to reflect the wild bird food business as a discontinued operation. As a result, and unless specifically stated, all discussions regarding results for the fiscal years ended September 30, 20132016, 20122015 and 20112014 reflect results from our continuing operations.
The following table sets forth the components of income and expense as a percentage of net sales:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 |
| 2012 |
| 2011 | 2016 |
| 2015 |
| 2014 |
| Net sales | 100.0 | % | | 100.0 | % | | 100.0 | % | 100.0 | % | | 100.0 | % | | 100.0 | % |
| Cost of sales | 65.0 |
| | 66.0 |
| | 63.2 |
| 64.6 |
| | 66.5 |
| | 65.5 |
|
| Cost of sales—impairment, restructuring and other | 0.1 |
| | — |
| | 0.7 |
| 0.3 |
| | 0.2 |
| | — |
|
| Cost of sales—product registration and recall matters | — |
| | — |
| | 0.1 |
| |
| Gross profit | 34.9 |
| | 34.0 |
| | 36.0 |
| 35.1 |
| | 33.3 |
| | 34.5 |
|
| Operating expenses: | | | | | | | | | | |
| Selling, general and administrative | 23.5 |
| | 25.0 |
| | 24.4 |
| 21.1 |
| | 21.0 |
| | 22.0 |
|
| Impairment, restructuring and other | 0.6 |
| | 0.3 |
| | 1.3 |
| (1.7 | ) | | 2.8 |
| | 1.9 |
|
| Product registration and recall matters | — |
| | 0.3 |
| | 0.4 |
| |
| Other income, net | (0.3 | ) | | (0.1 | ) | | — |
| (0.5 | ) | | (0.1 | ) | | (0.4 | ) |
| Income from operations | 11.1 |
| | 8.5 |
| | 9.9 |
| 16.2 |
| | 9.6 |
| | 11.0 |
|
| Equity in loss of unconsolidated affiliates | | (0.3 | ) | | — |
| | — |
|
| Costs related to refinancing | — |
| | — |
| | 0.1 |
| 0.3 |
| | — |
| | 0.4 |
|
| Interest expense | 2.1 |
| | 2.2 |
| | 1.8 |
| 2.3 |
| | 1.9 |
| | 1.8 |
|
| Income from continuing operations before income taxes | 9.0 |
| | 6.3 |
| | 8.0 |
| 13.9 |
| | 7.7 |
| | 8.8 |
|
| Income tax expense from continuing operations | 3.3 |
| | 2.4 |
| | 3.0 |
| 4.9 |
| | 2.7 |
| | 3.2 |
|
| Income from continuing operations | 5.7 |
| | 3.9 |
| | 5.0 |
| 9.0 |
| | 5.0 |
| | 5.6 |
|
| Income (loss) from discontinued operations, net of tax | — |
| | (0.2 | ) | | 1.0 |
| |
| Income from discontinued operations, net of tax | | 2.2 |
| | 0.8 |
| | 0.8 |
|
| Net income | 5.7 | % | | 3.7 | % | | 6.0 | % | 11.2 | % | | 5.8 | % | | 6.4 | % |
Net Sales
Net sales for fiscal 20132016 decreased0.3%increased 4.0% to $2.82$2.84 billion from $2.83$2.73 billion in fiscal 20122015. Net sales for fiscal 20122015 increased 0.9%5.8% from $2.802.58 billion in fiscal 20112014. The change in net sales was attributable to the following:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| Acquisitions | | 2.8 | % | | 4.7 | % |
| Volume | (1.9 | )% | | 0.7 | % | 1.6 |
| | 4.4 |
|
| Pricing | 1.6 |
| | 0.7 |
| 0.4 |
| | (0.4 | ) |
| Foreign exchange rates | (0.2 | ) | | (0.7 | ) | (0.8 | ) | | (2.9 | ) |
| Acquisitions | 0.2 |
| | 0.2 |
| |
| Change in net sales | (0.3 | )% | | 0.9 | % | 4.0 | % | | 5.8 | % |
The increase in net sales for fiscal 2016 was primarily driven by:
the addition of net sales from acquisitions within our Other segment, primarily from General Hydroponics, Vermicrop, Gavita and a Canadian growing media operation;
increased sales volume in our Other segment, driven by increased sales of hydroponic gardening products;
| |
| • | the impact of our amended Marketing Agreement for consumer Roundup®; and |
a favorable impact of increased pricing in the U.S. Consumer segment;
partially offset by the prior year exit from the U.K. Solus business resulting in a decrease in net sales for the year ended September 30, 2013 was primarily driven by:
decreased volumeof $18.1 million in our GlobalEurope Consumer segment, driven by a decrease in sales within the U.S. of fertilizers, controlssegment; and wild bird food products, partially offset by increases within the U.S. for sales of mulch and grass seed products;
a decline in net sales attributable to reimbursements associated with our Marketing Agreement with Monsanto;
decreased sales in Corporate & Other related to ICL supply agreements, which were entered into in connection with the sale of Global Pro in February 2011;
an unfavorable impact of foreign exchange rates as a result of the strengthening of the U.S. dollar relative to other currencies;currencies including the Canadian dollar, euro and British pound.
partially offset by The increase in net sales for fiscal 2015 was primarily driven by:
the favorable impactaddition of increased pricing in the Global Consumernet sales from acquisitions within our Other segment primarily in the U.S.;including General Hydroponics, Vermicrop, AeroGrow, and Fafard; and
| |
| • | also partially offsetincreased sales volume in our U.S. Consumer segment, driven by increased volume within our Scotts LawnServicesales of controls, including increased sales of Tomcat® segment driven by higher customer countproducts, as well as growing media and a weather driven delay of sales from the fourth quarter of fiscal 2012 to the first quarter of fiscal 2013.cleaners products;
|
The increase in net sales for the year ended September 30, 2012 was primarily driven by:
increased volume in our Global Consumer segment, driven by an increase in sales within the U.S. of mulch and controls products, offset by declines within the U.S. of wild bird food, grass seed and plant food products; international sales were flat to fiscal 2011, excluding changes in foreign exchange rates;
| |
• | increased volume within our Scotts LawnService® segment driven by higher customer count;
|
increased sales in Corporate & Other related to ICL supply agreements, which were entered into in connection with the sale of Global Pro in February 2011; and
partially offset by the unfavorable impact of foreign exchange rates as a result of the strengthening of the U.S. dollar relative to other currencies.currencies including Canadian dollar, euro, and British pound; and
an unfavorable impact of decreased pricing in the U.S. Consumer segment related to controls products.
Cost of Sales
The following table shows the major components of cost of sales:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 |
| 2012 |
| 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Materials | $ | 1,113.1 |
| | $ | 1,142.2 |
| | $ | 1,079.5 |
| $ | 1,052.1 |
| | $ | 1,055.6 |
| | $ | 980.5 |
|
| Manufacturing labor and overhead | 332.4 |
| | 321.9 |
| | 319.3 |
| 369.5 |
| | 333.3 |
| | 296.1 |
|
| Distribution and warehousing | 324.4 |
| | 320.7 |
| | 306.5 |
| 345.9 |
| | 361.2 |
| | 348.6 |
|
Roundup® reimbursements | 62.0 |
| | 79.6 |
| | 63.7 |
| 65.5 |
| | 63.3 |
| | 63.0 |
|
| | 1,831.9 |
| | 1,864.4 |
| | 1,769.0 |
| 1,833.0 |
| | 1,813.4 |
| | 1,688.2 |
|
| Impairment, restructuring and other | 2.2 |
| | — |
| | 18.3 |
| 7.7 |
| | 6.6 |
| | — |
|
| Product registration and recall matters | — |
| | 0.4 |
| | 3.2 |
| |
| | $ | 1,834.1 |
| | $ | 1,864.8 |
| | $ | 1,790.5 |
| $ | 1,840.7 |
| | $ | 1,820.0 |
| | $ | 1,688.2 |
|
Factors contributing to the change in cost of sales are outlined in the following table:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| | (In millions) | (In millions) |
| Material costs | $ | (8.6 | ) | | $ | 68.3 |
| |
| Volume and product mix | (1.5 | ) | | 25.4 |
| $ | 52.0 |
| | $ | 174.4 |
|
Roundup® reimbursements | (17.6 | ) | | 15.9 |
| 2.2 |
| | 0.3 |
|
| Foreign exchange rates | (4.8 | ) | | (14.2 | ) | (15.7 | ) | | (53.1 | ) |
| Material costs | | (18.9 | ) | | 3.6 |
|
| | (32.5 | ) | | 95.4 |
| 19.6 |
| | 125.2 |
|
| Impairment, restructuring and other | 2.2 |
| | (18.3 | ) | 1.1 |
| | 6.6 |
|
| Product registration and recall matters | (0.4 | ) | | (2.8 | ) | |
| Change in cost of sales | $ | (30.7 | ) | | $ | 74.3 |
| $ | 20.7 |
| | $ | 131.8 |
|
The decreaseincrease in cost of sales excluding impairment, restructuring and other charges, and product registration and recall matters for fiscal 20132016 was primarily driven by:
costs related to increased sales in our U.S. Consumer and Other segments;
costs related to sales from acquisitions within our Other segment of $54.2 million, primarily from General Hydroponics, Vermicrop, Gavita and a Canadian growing media operation;
| |
| • | an increase in net sales attributable to reimbursements under our Marketing Agreement for consumer Roundup®; and |
| |
| • | an increase in other charges of $1.1 million primarily related to addressing the consumer complaints regarding our reformulated Bonus® S product sold during fiscal 2015; |
partially offset by lower reimbursements attributablematerial costs in our U.S. Consumer segment driven by lower commodity costs primarily related to fertilizer inputs and resin;
lower distribution costs within our Marketing Agreement with Monsanto;
a declineU.S. Consumer segment due to savings from lower fuel prices and reduced costs from efficiencies in our growing media material costs due to our product cost-out initiatives, partially offset by increased costs of fertilizer inputs and packaging;
decreased volume in our Global Consumer segment, driven by a decrease in sales within the U.S. of fertilizers, controls and wild bird food products, partially offset by increases within the U.S. for sales of growing media and grass seed products;business; and
athe favorable impact of foreign exchange rates as a result of thea strengthening of the U.S. dollar relative to other currencies.currencies including the Canadian dollar, euro and British pound.
The increase in cost of sales excluding impairment, restructuring and other charges, and product registration and recall matters for fiscal 20122015 was primarily driven by:
the increasecosts related to sales from acquisitions of $96.2 million within our U.S. Consumer, Europe Consumer and Other segments;
increased sales volume and unfavorable product mix due to increased sales of growing media products in our U.S. Consumer segment;
increased material costs primarily related to packagingwithin our U.S. Consumer segment for productsour grass seed and fertilizer inputs;
the impact of higher sales volume, including increased distribution costs resulting from an early season surge in consumer activity and continued and unplanned surge in mulch volume;
higher reimbursements attributable to our Marketing Agreement with Monsanto;growing media products; and
| |
| • | restructuring and liquidation costs of $6.6 million primarily related to the liquidation and exit from the U.K. Solus business and addressing the consumer complaints regarding our newly reformulated Bonus® S product; |
which were partially offset by the favorable impact of foreign exchange rates as a result of thea strengthening of the U.S. dollar relative to other currencies.currencies including Canadian dollar, euro, and British pound.
Gross Profit
As a percentage of net sales, our gross profit rate was 34.9%35.1%, 33.3% and 34.5% for fiscal 2013 compared to 34.0% for 2016, fiscal 2012. As a percentage of net sales, our gross profit rate was 34.0% for 2015 and fiscal 2012 compared to 36.0% for fiscal 2011.2014, respectively. Factors contributing to the change in gross profit rate are outlined in the following table:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| Material costs | | 0.7 | % | | (0.1 | )% |
| Product mix and volume | | 0.6 |
| | (0.1 | ) |
Roundup® commissions and reimbursements | | 0.5 |
| | 0.1 |
|
| Pricing | 1.0 | % | | 0.5 | % | 0.2 |
| | (0.3 | ) |
| Material costs | 0.3 |
| | (2.5 | ) | |
| Product mix and volume: | | | | |
Roundup® commissions and reimbursements | 0.2 |
| | (0.1 | ) | |
| Corporate & Other | 0.1 |
| | (0.2 | ) | |
Scotts LawnService® | 0.1 |
| | — |
| |
| Global Consumer mix and volume | (0.7 | ) | | (0.5 | ) | |
| Acquisitions | | 0.1 |
| | (0.4 | ) |
| | 1.0 |
| | (2.8 | ) | 2.1 |
| | (0.8 | ) |
| Impairment, restructuring and other | (0.1 | ) | | 0.7 |
| (0.3 | ) | | (0.4 | ) |
| Product registration and recall matters | — |
| | 0.1 |
| |
| Change in gross profit rate | 0.9 | % | | (2.0 | )% | 1.8 | % | | (1.2 | )% |
The increase in the gross profit rate excluding impairment, restructuring and other charges and product registration and recall matters, for fiscal 2013,2016 was primarily driven by:
lower material costs in our U.S. Consumer segment driven by lower commodity costs primarily related to fertilizer inputs and resin;
lower distribution costs within our U.S. Consumer segment due to savings from lower fuel prices and reduced costs from efficiencies in our growing media business;
| |
| • | an increase in net sales attributable to our Marketing Agreement for consumer Roundup®; |
a favorable impact of increased pricing for the Global Consumer segment, primarily in the U.S.;
decreased material costs in our Global Consumer segment due to a decline in growing media material costs resulting from product cost-out initiatives, partially offset by increased material costs for fertilizer inputs;
impact of zero margin dollar reimbursements, attributable to our Marketing Agreement with Monsanto;segment; and
partially offset by decreased volume ina favorable net impact from acquisitions, primarily from General Hydroponics and Vermicrop within our Global Consumer segment resulting in reduced leverage of fixed manufacturing and warehousing costs.Other segment;
| |
| • | partially offset by other charges of $7.7 million primarily related to addressing the consumer complaints regarding our reformulated Bonus® S product sold during fiscal 2015. |
The decrease in the gross profit rate excluding impairment, restructuring and other charges and product registration and recall matters, for fiscal 20122015, was primarily driven by:
unfavorable product mix within our U.S. Consumer segment due to increased sales of growing media and the net impact of acquisitions;
the unfavorable impact of decreased pricing within our U.S. Consumer segment related to controls products; and
increased material costs attributable primarily to packagingwithin our U.S. Consumer segment for productsour grass seed and fertilizer inputs;growing media products;
| |
| • | partially offset by increased commission income under our Marketing Agreement for consumer Roundup®. |
negative product mix, driven by increased sales of our mulch products within the U.S., and international;
increased costs for distribution as a result of an early season surge in consumer activity and continued and unplanned surge in mulch volume; and
increased sales associated with our supply agreements with ICL, which commenced with the sale of Global Pro in February 2011 and do not generate profit.
Selling, General and Administrative Expenses
The following table showssets forth the major components of Selling, Generalselling, general and Administrativeadministrative expenses (“SG&A”):
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Advertising | $ | 142.2 |
| | $ | 168.9 |
| | $ | 140.7 |
| $ | 132.2 |
| | $ | 133.2 |
| | $ | 132.1 |
|
| Advertising as a percentage of net sales | 5.0 | % | | 6.0 | % | | 5.0 | % | 4.7 | % | | 4.9 | % | | 5.1 | % |
| Share-based compensation | 10.3 |
| | 12.5 |
| | 15.9 |
| 15.6 |
| | 13.2 |
| | 11.1 |
|
| Research and development | 46.7 |
| | 50.8 |
| | 50.9 |
| 45.5 |
| | 44.4 |
| | 46.0 |
|
| Amortization of intangibles | 8.2 |
| | 8.2 |
| | 9.5 |
| 16.5 |
| | 12.7 |
| | 9.5 |
|
| Other selling, general and administrative | 453.7 |
| | 465.3 |
| | 469.3 |
| 387.3 |
| | 367.9 |
| | 368.4 |
|
| | $ | 661.1 |
| | $ | 705.7 |
| | $ | 686.3 |
| $ | 597.1 |
| | $ | 571.4 |
| | $ | 567.1 |
|
AdvertisingSG&A increased $25.7 million, or 4.5%, during fiscal 2016 compared to fiscal 2015. Share-based compensation expense decreased$26.7increased $2.4 million, or 15.8%18.2%, to $142.2$15.6 million in fiscal 20132016 compared to $13.2 million in fiscal 2015 as a result of additional expense associated with fiscal 2016 awards. Share-based compensation expense in fiscal 2015 increased $2.1 million, or 18.9%, compared to fiscal 2014, primarily as a result of additional expense associated with fiscal 2015 awards as well as lower prior year expense due to the impact of forfeitures of previously recognized share-based compensation for executive departures during fiscal 2014.
Amortization expense increased $3.8 million, or 29.9%, to $16.5 million in fiscal 2016 compared to $12.7 million in fiscal 2015. Amortization expense in fiscal 2015 increased $3.2 million, or 33.7%, compared to fiscal 2014. These increases are due to the impact of recent acquisitions.
Other SG&A increased $19.4 million, or 5.3%, in fiscal 2016 compared to $168.9 millionfiscal 2015 indriven by increased variable incentive compensation of $13.5 million and the impact of recent acquisitions and costs related to other transaction activity of $12.2 million, partially offset by foreign exchange rate impact of $5.4 million as the U.S. dollar has strengthened relative to other currencies including Canadian dollar, euro, and British pound. In fiscal 20122015. This decrease was primarily attributable to our planned reduction in media investment, reduced spending due to delay in the fiscal 2013 lawn and garden season and our media purchasing efficiencies within the Global Consumer segment. Advertising expense in fiscal 2012 increased $28.2, other SG&A decreased $0.5 million compared to fiscal 2011, driven by our planned increase in media and marketing initiatives, partially offset by $1.1 million of changes in foreign currency rates.
Share-based compensation decreased$2.2 million or 17.6% to $10.3 million in fiscal 2013 compared to $12.5 million in fiscal 2012. The decrease in share-based compensation expense in fiscal 2013 was primarily due to the forfeiture of shares associated with the departure of certain key executives. Fiscal 2012 share-based compensation expense declined $3.4 million primarily due to the acceleration of expense in fiscal 2011 for certain terminated employees. The majority of our share-based awards vest over three years, with the associated expense recognized ratably over the vesting period. In certain cases, such as individuals who are eligible for early retirement based on their age and years of service, the vesting period is shorter than three years.
Amortization expense was $8.2 million in fiscal 2013, compared to $8.2 million and $9.5 million in fiscal 2012 and fiscal 2011, respectively. The decline in fiscal 2012 was driven by assets that became fully amortized in fiscal 2011 and due to impairment of certain intangible assets in fiscal 2011.
Other SG&A decreased $11.6 million or 2.5% in fiscal 2013 compared to fiscal 20122014. The primary driver ofdrivers were a favorable foreign exchange rate impact as the decrease was dueU.S. dollar strengthened relative to a decline in outside consulting expenses, sellingother currencies including Canadian dollar, euro, and British pound, decreased variable incentive compensation and decreased marketing expenditures due to cost productivity initiatives,spending, partially offset by higher compensation expense, including incentive compensation, healthcare and severance. In fiscal 2012, Other SG&A spending was roughly flat compared to fiscal 2011.the impact of acquisitions of $25.6 million.
Impairment, Restructuring and Other (included in SG&A)
The following table showssets forth the breakdowncomponents of Impairment, Restructuringimpairment, restructuring and Other Charges (includedother charges recorded within the “Cost of sales—impairment, restructuring and other,” “Impairment, restructuring and other” and “Income from discontinued operations, net of tax” lines in SG&A):the Consolidated Statements of Operations:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Restructuring and other | $ | 2.2 |
| | $ | 1.8 |
| | $ | 18.2 |
|
| Property, plant and equipment impairments | — |
| | 2.1 |
| | — |
|
| Goodwill and intangible asset impairments | 15.9 |
| | 3.2 |
| | 19.4 |
|
| | $ | 18.1 |
| | $ | 7.1 |
| | $ | 37.6 |
|
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Cost of sales—impairment, restructuring and other: | | | | | |
| Restructuring and other charges | $ | 7.7 |
| | $ | 6.6 |
| | $ | — |
|
| Operating expenses: | | | | | |
| Restructuring and other (recoveries) charges | (47.2 | ) | | 76.6 |
| | 16.3 |
|
| Goodwill and intangible asset impairments | — |
| | — |
| | 33.7 |
|
| Impairment, restructuring and other (recoveries) charges from continuing operations | $ | (39.5 | ) | | $ | 83.2 |
| | $ | 50.0 |
|
| Restructuring and other (recoveries) charges from discontinued operations | 13.6 |
| | 1.4 |
| | 1.0 |
|
| Total impairment, restructuring and other (recoveries) charges | $ | (25.9 | ) | | $ | 84.6 |
| | $ | 51.0 |
|
In the first quarter of fiscal 20132016, we recordedannounced a series of initiatives called Project Focus designed to maximize the value of our non-core assets and focus on emerging categories of the lawn and garden industry in our core U.S. business. On April 13, 2016, as part of this project, we completed the contribution of the SLS Business to the TruGreen Joint Venture. As a result, effective in our second quarter of fiscal 2016, we classified our results of operations for all periods presented to reflect the SLS Business
as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. Refer to “NOTE 2. DISCONTINUED OPERATIONS” for more information. During fiscal 2016, we recognized a charge of $9.0 million for the resolution of a prior SLS Business litigation matter, as well as $4.6 million in transaction related costs associated with the divestiture of the SLS Business within the “Income from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
In addition, during fiscal 2016, we recognized restructuring chargescosts related to an international restructuring plan to reduce headcount and streamline management decision makingtermination benefits of $3.4 million within the GlobalU.S. Consumer segment. segment and $2.0 million within the Europe Consumer segment, as well as costs of $4.6 million related to other transaction activity. We recorded $8.2 million and $1.8 million of these costs within the “Impairment, restructuring and other” and the “Cost of sales—impairment, restructuring and other” lines in the Consolidated Statements of Operations, respectively.
During the third quarter of fiscal 2015, our U.S. Consumer segment began experiencing an increase in certain consumer complaints related to our newly reformulated Bonus® S fertilizer product sold in the southeastern United States indicating customers were experiencing damage to their lawns after application. During fiscal 20132016, we recognized $6.4 million in costs related to resolving these consumer complaints and the recognition of costs we expect to incur for current and expected consumer claims. Costs incurred through September 30, 2016 since the inception of this matter, excluding insurance reimbursement recoveries, are $73.8 million. We have received reimbursement payments of $60.8 million through the end of fiscal 2016, including $40.9 million received during fiscal 2016. We recorded offsetting insurance reimbursement recoveries upon resolution of the insurer’s review of claim documentation in the amount of $4.9 million in fiscal 2015 and $55.9 million in fiscal 2016. We recorded net recoveries of $55.4 million and costs of $5.9 million within the “Impairment, restructuring and other” and the “Cost of sales,—impairment, restructuring and other” lines in the Consolidated Statements of Operations, respectively.
During fiscal 2015, we incurred $6.9recognized $22.2 million in restructuring costs related to termination benefits provided to employees whoU.S. and international personnel as part of our restructuring of the U.S. administrative and overhead functions, the continuation of the international profitability improvement initiative and the liquidation and exit from the U.K. Solus business. The restructuring costs for fiscal 2015 include $4.3 million of costs related to the acceleration of equity compensation expense, and were involuntarily terminated and special termination benefits provided to certain employees upon future separation, which included $0.5comprised of $3.7 million related to curtailment gain for our international defined benefit pension plans. the U.S. Consumer segment, $10.3 million related to the Europe Consumer segment, $0.2 million related to the Other segment and $6.6 million related to Corporate. In addition, costs of $1.4 million related to the SLS Business were recognized within the “Income from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
During fiscal 2015, we also recognized $62.4 million in costs related to consumer complaints and claims related to the reformulated Bonus® S fertilizer product sold in the southeastern United States during fiscal 2015.
During the firstthird quarter of fiscal 2013, the Company recognized income of $4.7 million related to the reimbursement by a vendor for a portion of the costs incurred for the development and commercialization of products including the active ingredient MAT 28 for the Global Consumer segment.
During the first quarter of 2013, the Company recognized a $4.3 million asset impairment charge2014, as a result of issues with the commercialization of an insect repellent technology for the Global Consumer segment. Also, as a result of the Company's annual impairment review, performed in the fourth quarter of fiscal 2013, the Companywe recognized an impairment charge for a non-recurring fair value adjustment of $11.6$33.7 million within the GlobalU.S. Consumer segment related to the Ortho® brand and certain sub-brands of Ortho®.brand. The fair value was calculated based upon the evaluation of the historical performance and future growth expectations of the Ortho® business.
In During fiscal 2012, in continuation of the 2011 restructuring plan, we incurred an additional $1.6 million in restructuring costs related to termination benefits provided to employees who accepted voluntary retirement and special termination benefits provided to certain employees upon future separation as well as $0.2 million related to curtailment charges for our U.S. defined benefit pension and U.S. retiree medical plans. Additionally,2014, we recognized a $5.3 million asset impairment charge as a result of issues with commercialization of products including the active ingredient MAT 28 for the Global Consumer segment. Further, we have previously expensed product development and marketing costs associated with the previously planned launch of products containing MAT 28 and are evaluating our options for recovering those costs.
In fiscal 2011 we recorded restructuring charges designed to streamline management decision making and continue the regionalization of our operating structure, with the objective of reinvesting the savings generated in innovation and growth initiatives. During fiscal 2011, we incurred $23.7$12.5 million in restructuring costs related to termination benefits provided to employees who were involuntarily terminatedU.S. personnel as part of our restructuring of the U.S. administrative and special termination benefits provided to certain employees upon future separation, as well as $2.3overhead functions, including $1.0 million related to curtailment charges for our U.S. defined benefit pension and U.S. retiree medical plans. In addition, wethe SLS Business recognized chargeswithin the “Income from discontinued operations, net of $2.3tax” line in the Consolidated Statements of Operations. We also recognized $2.8 million for other intangible asset impairments and $1.4 million forof international restructuring and other charges.
Our fourth quarteradjustments during fiscal 2011 impairment analysis resulted in a non-cash charge of $17.1 million, primarily attributed to2014 for the intangible assets and goodwill associated with our wild bird food business, including Morning Song tradename. Losses generated by this business over the preceding two years combined with a revised long-term outlook had negatively impacted the valuecontinuation of the business.
Product Registrationprofitability improvement initiative announced in December 2012. In addition, during fiscal 2014, the Company recognized $2.0 million in additional ongoing monitoring and Recall Matters (included in SG&A)
As previously disclosed in the Company's Annual Report on Form 10-Kremediation costs for the fiscal year ended September 30, 2012, in fiscal year 2012, the Company resolved the previously disclosed U.S. EPA and U.S. Department of Justice (“U.S. DOJ”) investigations into pesticide product registration issues. Product registration and recall costs were $7.8 million and $11.4 million in fiscal 2012 and fiscal 2011, respectively. For fiscal 2013, there were no product registration and recall costs. Fiscal 2012 and fiscal 2011 costs include additional reserves established in connection with the fiscal 2012 settlement of previously disclosed U.S. EPA and U.S. DOJ investigations, as well as third-party compliance review, legal and consulting fees associated with these investigations. Fiscal 2011 costs primarily related to third-party compliance review, legal and consulting fees associated with these investigations. The Company does not expect to incur any additional costs related to these investigations, as they were settled in the fourth quarter of fiscal 2012.Company’s turfgrass biotechnology program.
Other Income, net
Other income, net, was $10.0 million, $2.9 million and $0.9 million in fiscal 2013, fiscal 2012 and fiscal 2011 respectively. The increase in other income for fiscal 2013 is primarily due to the sale of peat bog land in fiscal 2013 in the United Kingdom for a gain of $2.3 million and a non-recurring impairment charge of $4.4 million incurred in fiscal 2012 resulting from the revaluation of the Company's aircraft. Other income is comprised of activities outside our normal business operations, such as royalty income from the licensing of certain of our tradenames, franchise feebrand names, income earned from our Scotts LawnService® business,loans receivable, foreign exchange gains/losses and gains/losses from the sale of non-inventory assets. Other income, net, was $13.8 million, $2.1 million and $10.7 million in fiscal 2016, fiscal 2015 and fiscal 2014, respectively. The increase in other income for fiscal 2012 changes2016 was due to a gain on the sale of a growing media plant whose operations are being relocated, an increase in income on loans receivable and royalty income earned from the TruGreen Joint Venture related to its use of brand names. The decrease in other income for fiscal 2011 were not significant.2015 was primarily due to recognition of investment gains in fiscal 2014 related to our investment in AeroGrow.
Income from Operations
Income from operations in fiscal 2016 was $459.3 million compared to $262.1 million in fiscal 2015, an increase of $197.2 million, or 75.2%. The increase was driven by impairment, restructuring and other recoveries during fiscal 2016 as compared to charges during fiscal 2015, and an increase in net sales and gross profit rate, partially offset by higher SG&A.
Income from operations in fiscal 20132015 was $313.2$262.1 million compared to $243.6$283.7 million in fiscal 20122014, an increasea decrease of $69.6$21.6 million,, or 28.6%7.6%. ExcludingThe decrease was driven by higher impairment, restructuring and other charges and product registration and recall costs, income from operations increased by $74.6 million, or 28.8%, in during fiscal 2013, primarily driven by higher gross profit and2015 as compared to fiscal 2014, a decrease in SG&A spending.
Income from operations in fiscal 2012 was $243.6 million compared to $274.8 million in fiscal 2011,gross profit rate, a decrease in other income and an increase in SG&A, partially offset by an increase in net sales.
Equity in Income of $31.2Unconsolidated Affiliates
We hold a minority equity interest of 30% in the TruGreen Joint Venture. This interest was initially recorded at fair value on the transaction date and subsequently is accounted for using the equity method of accounting, with our proportionate share of TruGreen Joint Venture earnings reflected in the Condensed Consolidated Statements of Operations. We recognized equity in income of unconsolidated affiliates of $7.8 million, or 11.4%. Excluding impairment, in fiscal 2016. Included within income of unconsolidated affiliates for fiscal 2016 is our $11.7 million share of restructuring and other charges incurred by the TruGreen Joint Venture. These charges included $6.0 million for transaction and product registrationmerger costs, $4.4 million for nonrecurring integration and recallseparation costs income from operations decreased by $86.4and $1.3 million, or 25.0%, in for a non-cash fair value write-down adjustment on deferred revenue and advertising as part of the transaction accounting.
Costs Related to Refinancing
Costs related to refinancing were $8.8 million for fiscal 2012, primarily driven by lower gross profit2016. The costs incurred were associated with the redemption of our 6.625% Senior Notes on December 15, 2015, and additional SG&A spending.
Costs related to refinancing were $10.7 million for fiscal 2014. The costs incurred were associated with the redemption of our 7.25% Senior Notes.
Interest Expense
Interest expense in fiscal 20132016 was $59.2$65.6 million compared to $61.8$50.5 million and $51.0 million in fiscal 20122015 and fiscal 2011, respectively. The decline$47.3 million in fiscal 20132014. The increase in fiscal 2016 was primarily due to a decreasedriven by an increase in average borrowings partially offsetof $351.2 million, which is net of a decrease of $7.5 million due to the impact of foreign exchange rates. The increase in average borrowings was driven by recent acquisition and investment activity, primarily related to General Hydroponics, Vermicrop, Bonnie, Gavita, the amendment of our Marketing Agreement with Monsanto and repurchases of our Common Shares.
The increase in fiscal 2015 was driven by an increase in average borrowings of 24 basis points in our weighted average interest rate. Excluding$252.1 million, which is net of a decrease of $8.1 million due to the impact of foreign exchange rates, partially offset by a decrease in our weighted average borrowings decreased by approximately $80.9 million during fiscal 2013. The decline in average borrowings was driven by lower working capital needs associated with lower productioninterest rate of inventory and fewer raw material purchases. The increase in fiscal 2012 was78 basis points primarily due to an increase inreduced rates under our average borrowings. Excludingcredit facility and the impactredemption of foreign exchange rates, average borrowings increased by approximately $118.3 million during fiscal 2012.the 7.25% Senior Notes.
Income Tax Expense
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:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Effect of foreign operations | 0.8 |
| | (0.5 | ) | | (0.3 | ) | 0.1 |
| | (0.6 | ) | | 1.7 |
|
| State taxes, net of federal benefit | 2.9 |
| | 3.1 |
| | 2.8 |
| 2.7 |
| | 3.2 |
| | 2.7 |
|
| Domestic production activities deduction permanent difference | (2.1 | ) | | (1.5 | ) | | (2.3 | ) | (2.5 | ) | | (3.2 | ) | | (2.7 | ) |
| Effect of other permanent differences | 0.8 |
| | 2.4 |
| | 1.9 |
| 0.3 |
| | 0.1 |
| | 0.3 |
|
| Research and experimentation and other federal tax credits | (0.3 | ) | | (0.1 | ) | | (0.2 | ) | (0.2 | ) | | (0.2 | ) | | (0.9 | ) |
| Resolution of prior tax contingencies | 0.2 |
| | (0.9 | ) | | 0.7 |
| (0.2 | ) | | 0.4 |
| | 0.2 |
|
| Other | (0.8 | ) | | 0.2 |
| | (0.4 | ) | 0.3 |
| | 0.2 |
| | (0.7 | ) |
| Effective income tax rate | 36.5 | % | | 37.7 | % | | 37.2 | % | 35.5 | % | | 34.9 | % | | 35.6 | % |
The effective tax rate for continuing operations was 36.5%35.5% for fiscal 20132016, compared to 37.7%34.9% for fiscal 20122015 and 37.2%35.6% for fiscal 20112014. Excluding reserves established for product registrations and recall matters, the effective tax rate for continuing operations was 36.5%, 36.5% and 36.0% for fiscal 2013, fiscal 2012 and fiscal 2011, respectively.
Income and Earnings per Share from Continuing Operations
We reported income from continuing operations of $161.2$392.7 million,, or $2.58$4.09 per diluted share, in fiscal 20132016 compared to income from continuing operations of $113.2$211.6 million,, or $1.82$2.23 per diluted share, in fiscal 2012. In fiscal 2013, we incurred costs of $20.3 million relating to2015. The increase was driven by impairment, restructuring and other charges. In recoveries during fiscal 2012, we incurred $7.1 million of impairment, restructuring and other charges,2016 as well as $8.2 million in costs associated with product registration and recall matters. Excluding these items, adjusted income from continuing operations was $174.4 million in fiscal 2013 compared to $124.9charges during fiscal 2015, and an increase in net sales, gross profit rate and equity in income of unconsolidated affiliates, partially offset by increases in interest expense, costs related to refinancing and SG&A. Diluted average common shares used in the diluted income per common share calculation were 62.0 million in fiscal 2012, an increase of $49.52016 compared to 62.2 million, in fiscal 2015. The decrease was primarily driven by higher gross profit and lower SG&A spending and interest expense. Diluted weighted-average common shares outstanding increased from 62.1 million in fiscal 2012 to 62.6 million in fiscal 2013. The increase was primarily drivenshare repurchases, partially offset by the exercise of stock options and the issuance of stock for vested restricted share basedshare-based compensation awards partially offset by a decreaseand the payment of contingent consideration in Common Shares in
connection with the number of dilutive equivalent shares.Vermicrop acquisition. Dilutive equivalent shares for fiscal 20132016 and fiscal 20122015 were 0.9 million and 1.1 million,, respectively. The decrease in equivalent shares was primarily driven by the exercise of stock options, partially offset by an increase in our average share price.
We reported income from continuing operations of $113.2$211.6 million,, or $1.82$2.23 per diluted share, in fiscal 20122015 compared to income from continuing operations of $139.9$225.7 million,, or $2.11$2.32 per diluted share, in fiscal 2011. In fiscal 2012, we incurred costs of $7.1 million relating to2014. The decrease was driven by higher impairment, restructuring and other charges as well as $8.2 million in costs associated with product registration and recall matters. In during fiscal 2011, we incurred $55.9 million of impairment charges,2015 as well as $14.6 million in costs associated with product registration and recall matters. Excluding these items, adjusted income from continuing operations was $124.9 million in fiscal 2012 compared to $187.2fiscal 2014, a decrease in gross profit rate and other income, an increase in SG&A and an increase in interest expense, partially offset by an increase in net sales. Diluted average common shares used in the diluted income per common share calculation were 62.2 million in fiscal 2011, a decrease of $62.32015 compared to 62.7 million primarily driven by lower gross profit, higher SG&A spending and interest expense. Diluted weighted-average common shares outstanding decreased from 66.2 millionin fiscal 2011 to 62.1 million in fiscal 2012.2014. The decrease was primarily driven by share repurchases, of our common shares and a decrease in the number of dilutive equivalent shares, partially offset by the exercise of stock options.options and the issuance of share-based compensation awards and the payment of consideration in Common Shares in connection with the Vermicrop acquisition. Dilutive equivalent shares for fiscal 20122015 and fiscal 20112014 were 1.1 million and 1.51.1 million,, respectively. The decrease in equivalent shares was due to a decrease in our average share price.
Income (loss) from Discontinued Operations
In our fourth quarter of fiscal 2012,On April 13, 2016, we completed the wind downcontribution of the professional seed business.SLS Business to the TruGreen Joint Venture in exchange for a minority equity interest of approximately 30% in the TruGreen Joint Venture. As a result of this transaction, effective in our second quarter of fiscal 2016, we classified our results of operations for all periods presented to reflect the SLS Business as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. In our second quarter of fiscal 2014, we completed the sale of our wild bird food business at which time we began presenting this business within discontinued operations. In our second quarterThe prior period amounts have been reclassified to conform. During fiscal 2016, we recognized a charge of fiscal 2011 we completed$9.0 million for the saleresolution of Global Pro to ICL. As a resultprior SLS Business litigation matter, as well as $4.6 million in transaction related costs associated with the divestiture of the then-pending sale, effectiveSLS Business within the “Income from discontinued operations, net of tax” line in the first quarterConsolidated Statements of fiscal 2011, we began presenting Global Pro as discontinued operations.Operations.
LossIncome from discontinued operations, net of tax in fiscal 2016 was $0.1$61.5 million compared to $20.9 million in fiscal 2013, while2015. The increase is primarily driven by the after-tax gain on contribution of $79.3 million, partially offset by a net loss of $6.7 million and income of $28.0 million were recognized in fiscal 2012 and fiscal 2011, respectively. Fiscal 2013 and fiscal 2012 included activity associated withfrom the wind down and disposaloperations of the non-European professional seed business. Fiscal 2011 included aSLS Business of $17.8 million for fiscal 2016, as compared to net after-tax gainincome from the operations of $39.5the SLS Business of $20.9 million onfor fiscal 2015. Income from discontinued operations, net of tax in fiscal 2014 of $20.7 million includes net income from the saleoperations of Global Pro to ICL.the SLS Business of $19.9 million and net income from the operations of our wild bird food business of $0.8 million.
Segment Results
Our continuing operations are dividedWe divide our business into the followingthree reportable segments: GlobalU.S. Consumer, Europe Consumer and Scotts LawnService®.Other. These segments differ from those used in prior periods due to the change in our internal organizational structure associated with Project Focus, which is a series of initiatives announced in the first quarter of fiscal 2016 designed to maximize the value of our non-core assets and concentrate our focus on emerging categories of the lawn and garden industry in our core U.S. business. On April 13, 2016, as part of this project, we completed the contribution of the SLS Business to the TruGreen Joint Venture in exchange for a minority equity interest of approximately 30% in the TruGreen Joint Venture. As a result, effective in our second quarter of fiscal 2016, we classified our results of operations for all periods presented to reflect the SLS Business as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. The prior period amounts have been reclassified to conform with the new segments. This division of reportable segments is consistent with how the segments report to and are managed by the chief operating decision maker of the Company. We have made reclassifications to prior period segment amounts as a result
U.S. Consumer consists of the changeCompany’s consumer lawn and garden business located in our internal organization structure associated with the salegeographic United States. Europe Consumer consists of a significant majoritythe Company’s consumer lawn and garden business located in geographic Europe. Other consists of our previously reported Global Professional segment, which is now reportedthe Company’s consumer lawn and garden business in discontinued operations. Corporate & Other includesgeographies other than the U.S. and Europe, the Company’s indoor, urban and hydroponic gardening business, and revenues and expenses associated with the Company’s supply agreements with ICL and the amortization related to the Roundup® Marketing Agreement, as well as corporateIsrael Chemicals, Ltd. Corporate consists of general and administrative expenses and certain other income/expense items not allocated to the business segments.
We evaluate segmentSegment performance is evaluated based on several factors, including income (loss) from continuing operations before amortization, product registration and recall costs, and impairment, restructuring and other charges. Managementcharges, which is not a generally accepted accounting principle (“GAAP”) measure. Senior management uses this measure of operating profit (loss) to evaluate segment performance because we believethe Company believes this measure is the most indicative of performance trends and the overall earnings potential of each segment.
The following tables present segment information:
Net Salestable sets forth net sales by Segmentsegment:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Global Consumer | $ | 2,527.5 |
| | $ | 2,539.2 |
| | $ | 2,533.2 |
|
Scotts LawnService® | 257.8 |
| | 245.8 |
| | 235.6 |
|
| Segment total | 2,785.3 |
| | 2,785.0 |
| | 2,768.8 |
|
| Corporate & Other | 31.2 |
| | 41.1 |
| | 30.9 |
|
| Consolidated | $ | 2,816.5 |
| | $ | 2,826.1 |
| | $ | 2,799.7 |
|
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| U.S. Consumer | $ | 2,187.4 |
| | $ | 2,141.8 |
| | $ | 2,037.4 |
|
| Europe Consumer | 274.2 |
| | 304.7 |
| | 336.7 |
|
| Other | 374.5 |
| | 281.5 |
| | 204.2 |
|
| Consolidated | $ | 2,836.1 |
| | $ | 2,728.0 |
| | $ | 2,578.3 |
|
IncomeThe following table sets forth segment income from Continuing Operationscontinuing operations before Income Taxes by Segmentincome taxes:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Global Consumer | $ | 406.4 |
| | $ | 338.3 |
| | $ | 425.0 |
| |
Scotts LawnService® | 28.7 |
| | 27.0 |
| | 25.9 |
| |
| U.S. Consumer | | $ | 500.4 |
| | $ | 439.2 |
| | $ | 399.7 |
|
| Europe Consumer | | 13.5 |
| | 14.1 |
| | 20.9 |
|
| Other | | 20.8 |
| | 12.3 |
| | 17.4 |
|
| Segment total | 435.1 |
| | 365.3 |
| | 450.9 |
| 534.7 |
| | 465.6 |
| | 438.0 |
|
| Corporate & Other | (91.2 | ) | | (96.3 | ) | | (95.0 | ) | |
| Corporate | | (96.8 | ) | | (98.5 | ) | | (92.0 | ) |
| Intangible asset amortization | (10.4 | ) | | (10.1 | ) | | (10.6 | ) | (18.0 | ) | | (15.0 | ) | | (12.3 | ) |
| Product registration and recall matters | — |
| | (8.2 | ) | | (14.6 | ) | |
| Impairment, restructuring and other | (20.3 | ) | | (7.1 | ) | | (55.9 | ) | 27.7 |
| | (90.0 | ) | | (50.0 | ) |
| Equity in income of unconsolidated affiliates | | 19.5 |
| | — |
| | — |
|
| Costs related to refinancing | — |
| | — |
| | (1.2 | ) | (8.8 | ) | | — |
| | (10.7 | ) |
| Interest expense | (59.2 | ) | | (61.8 | ) | | (51.0 | ) | (65.6 | ) | | (50.5 | ) | | (47.3 | ) |
| Consolidated | $ | 254.0 |
| | $ | 181.8 |
| | $ | 222.6 |
| $ | 392.7 |
| | $ | 211.6 |
| | $ | 225.7 |
|
GlobalU.S. Consumer
GlobalU.S. Consumer segment net sales were $2.2 billion in fiscal 2016, an increase of 2.1% from fiscal 2015 net sales of $2.1 billion. The increase was driven by the favorable impact of volume, pricing and acquisitions of 1.3%, 0.7% and 0.1%, respectively. Increased sales volume in fiscal 2016 was driven by increased sales of growing media and grass seed products, as well as the favorable impact of the Marketing Agreement for consumer Roundupdecrease®d , partially offset by decreased sales of fertilizer products.
0.5% from $2.54 billionU.S. Consumer segment operating income increased $61.2 million, or 13.9%, in fiscal 2016 as compared to fiscal 2012 to $2.53 billion in fiscal 20132015. The change was driven by increased sales and improvements in gross profit rate due to lower material costs driven by commodities and lower distribution costs due to savings from lower fuel prices and reduced costs from efficiencies in our growing media business, partially offset by higher SG&A.
fiscal 2013U.S. Consumer segment net sales were $2.1 billion in fiscal 2015, an increase of 5.1% from fiscal 2014 net sales of $2.0 billion. The increase was unfavorably impacteddriven by the favorable impact of volume and foreign exchange ratesacquisitions of 2.2%4.7% and 0.3%0.7%, respectively, partially offset by favorablethe unfavorable impact of pricing of 1.9% and acquisitions of 0.1%0.3%. NetIncreased sales volume in the U.S. decreased by 0.5%,fiscal 2015 was driven by declines in reimbursements attributable to our Marketing Agreement with Monsanto,increased sales of controls, including increased sales of Tomcat® products, as well as growing media and cleaners products.
U.S. Consumer segment operating income increased $39.5 million, or 9.9%, in fiscal 2015 as compared to fiscal 2014. The change was driven by increased sales, partially offset by a decrease in gross profit rate due to unfavorable product mix as a result of increased sales of growing media and the net impact of acquisitions, the unfavorable impact of decreased pricing related to controls products and increased material costs for our controls, wild bird foodgrass seed and plant food products,growing media products.
Europe Consumer
Europe Consumer segment net sales were $274.2 million in fiscal 2016, a decrease of 10.0% from fiscal 2015 net sales of $304.7 million. The decrease was driven by the prior year exit from the U.K. Solus business of $18.1 million, or 5.9%, and the unfavorable impact of changes in foreign exchange rates and decreased pricing of 3.6% and 1.3%, respectively, partially offset by the favorable impact of volume of $2.4 million, or 0.8%.
Europe Consumer segment operating income decreased $0.6 million, or 4.3%, in fiscal 2016 as compared to fiscal 2015. The change was driven by decreased sales, partially offset by an increase in pricing,gross profit rate and increaseslower SG&A.
Europe Consumer segment net sales were $304.7 million in fiscal 2015, a decrease of 9.5% from fiscal 2014 net sales of mulch$336.7 million. The decrease was driven by the unfavorable impact of changes in foreign exchange rates and grass seed products. Net sales outsidedecreased pricing of the U.S. decreased 0.2% in fiscal 201313.9% and 1.2%, primarily attributable to volume declines in Europe and unfavorable effects of foreign currency changes as a result of the strengthening of the U.S. dollar relative to other currencies,respectively, partially offset by volume increases in Asia Pacific. Excluding the favorable impact of foreign currency rates,acquisitions and volume of 5.3% and 0.3%, respectively.
Europe Consumer segment operating income decreased $6.8 million, or 32.5%, in fiscal 2015 as compared to fiscal 2014. The change was driven by decreased sales and gross profit rate, partially offset by lower SG&A.
Other
Other segment net sales outside of the U.S. increased 1.1% compared to were $374.5 million in fiscal 2012.
Global Consumer segment income for fiscal 2013 was $406.4 million,2016, an increase of $68.1 million, or 20.1%, compared to 33.0% from fiscal 2012. Excluding the impact2015 net sales of foreign exchange movements, segment income increased by $67.3 million, or 20.0%, from fiscal 2012.$281.5 million. The increase in segment income for fiscal 2013was primarily driven by the favorable impact of pricing, decreased material costsacquisitions and a decrease in SG&A expenses resulting from our product cost-out initiatives.
Global Consumer segment net sales increased 0.2% from $2.53 billion in fiscal 2011 to $2.54 billion in fiscal 2012. The increase in fiscal 2012 net sales was favorably impacted by volume of 26.6% and pricing of 0.4% and 0.6%10.8%, respectively, partially offset by the unfavorable impact of changes in foreign exchange rates of 0.8%4.3%. Net sales in the U.S.from our indoor and urban gardening businesses increased by 1.3%, driven by an increase in pricing, higher sales of our controls and mulch products, and the national launch of our new Scotts Snap® spreader system, partially offset by declines in sales of grass seed, wild bird food and plant food products. Net sales outside of the U.S. decreased 4.0%$87.3 million in fiscal 2012, primarily attributable to the unfavorable effect of foreign currency changes as a result of the strengthening of the U.S. dollar relative to other currencies. Excluding the impact of foreign currency rates, net sales outside of the U.S. were roughly flat compared to fiscal 2011.2016.
Global ConsumerOther segment operating income for increased $8.5 million, or 69.1%, in fiscal 2012 was $338.3 million, a decrease of $86.7 million, or 20.4%,2016 as compared to fiscal 2011. Excluding the impact of foreign exchange movements, segment income decreased by $85.6 million, or 20.1%, for fiscal 20112015. The decrease in segment income for fiscal 2012change was primarily driven by gross profit decline and an increase in SG&A expenses. The decreased gross profit rate was primarily the result of increased material costs primarily due to packaging and fertilizer inputs, negative product mix within the U.S. driven by increased sales, of mulch products, and increased distribution and warehousing as a result of an early season surge in consumer activity and continued and unplanned surge in mulch volume. The increase in SG&A spending primarily related to costs associated with our planned increase in media and marketing initiatives.
Scotts LawnService®
Scotts LawnService® net sales increased by $12.0 million, or 4.9%, to $257.8 million in fiscal 2013, primarily due to increased customer count, acquisitions in fiscal 2013, and a weather driven delay of sales from the fourth quarter of fiscal 2012 into the first quarter of fiscal 2013. Scotts LawnService® segment income increased $1.7 million to $28.7 million in fiscal 2013. The improved operating results were driven by higher net sales and lower product costs, partially offset by higherincreased SG&A which was primarily the outcome of higher marketingfrom acquired businesses and selling expenses.transaction costs related to acquisition activity.
Scotts LawnService®Other segment net sales increasedwere $281.5 million in fiscal 2015, an increase of 37.9% from fiscal 2014 net sales of $204.2 million. The increase was driven by $10.2 million, or 4.3%, to $245.8 million in fiscal 2012, primarily due to increased customer retention, the full yearfavorable impact of acquisitions and new customer sales. Scotts LawnService® segment income increased $1.1 million to $27.0 million in fiscal 2012. The improved operating results were driven by higher net salesvolume of 45.0% and improved labor productivity,7.4%, respectively, partially offset by higher productthe unfavorable impact of changes in foreign exchange rates and decreased pricing of 14.4% and 0.3%, respectively. Net sales from our indoor and urban gardening businesses increased $49.2 million in fiscal 2015.
Other segment operating income decreased $5.1 million, or 29.3%, in fiscal 2015 as compared to fiscal 2014. The change was driven by increased SG&A from acquired businesses and transaction costs and SG&A, which was primarily the outcome of higher performance based variable compensation.related to acquisition activity, partially offset by increased sales.
Corporate & Other
Net sales for Corporate & Other decreased $9.9operating loss was $96.8 million to $31.2 million in fiscal 2013,2016, a decrease of 1.7% from fiscal 2015 operating loss of $98.5 million. The change was primarily due to our ICL supply agreements, which commenced shortly afteran increase in income on loans receivable and royalty income earned from the saleTruGreen Joint Venture related to its use of Global Pro in our second quarter of fiscal 2011. The net expense for Corporate & Other decrease of $5.1 million in fiscal 2013 was driven by reduced spending on outside consulting expenses and marketing related expenditures as part of our cost productivity initiatives,brand names, partially offset by higher employee related costs, including incentive compensation, health care and severance.
Net sales for Corporate & Other increased $10.2 million to $41.1 million in fiscal 2012, primarily due to our ICL supply agreements, which commenced shortly after the sale of Global Pro in our second quarter of fiscal 2011. Net expense for Corporate & Other increased by $1.3 million in fiscal 2012, driven by increased variable incentive compensation. Corporate operating loss was $98.5 million in fiscal 2015, an increase of 7.1% from fiscal 2014 operating loss of $92.0 million. The increase for fiscal 2015 was primarily related to higher share-based compensation of $1.3 million.expense and litigation settlement activity.
Liquidity and Capital Resources
Operating Activities
Cash provided by operating activities increasedtotaled $237.4 million for fiscal 2016, a decrease of $9.5 million as compared to cash provided by$188.6 million to $342.0 million in fiscal 2013. The change in our operating activities was primarily due to an increase in net income of $54.6$246.9 million and a reduction in inventory levels over the prior year of $89.0 million as a result of improved inventory management. In addition, income taxes paid declined in for fiscal 2013 due to the receipt of an overpayment of taxes related to fiscal 2012 of $37.8 million.
2015. Cash provided by operating activities from the SLS Business was $26.8 million and $28.2 million for fiscal 2016 and fiscal 2015, respectively. The change was driven by an increase in cash used for working capital related to increased inventory, timing of customer receipts as compared to payment of current liabilities and an increase in accounts receivable from the TruGreen Joint Venture of $14.9 million for expenses incurred pursuant to a transition services agreement and an employee leasing agreement, partially offset by $31.3insurance reimbursement recoveries of $40.9 million related to the Bonus$153.4 million® in S consumer complaint matter.
Cash provided by operating activities totaled $246.9 million for fiscal 2012 from $122.12015, an increase of $6.0 million in fiscal 2011. Excluding the impact of discontinued operations, as compared to cash provided by operating activities decreasedof $240.9 million for fiscal 2014. Cash provided by $48.2operating activities from the SLS Business was $28.2 million to $143.1and $19.2 million in for fiscal 2012 compared to2015 and fiscal 2014, respectively. The change was driven by a decrease of $118.1 million in fiscal 2011. Excluding discontinued operations and non-cash operating expenses, income from continuing operations decreasedcash used for working capital, partially offset by approximately $24.7 milliona decrease in net income. The decrease in cash used for working capital was primarily due to lower gross profit ratesless growth in accounts receivable and higher advertising expenses.inventory, partially offset by less growth in accounts payable.
The seasonal nature of our operations generally requires cash to fund significant increases in inventories during the first half of the fiscal year. Receivables and payables also build substantially in theour second quarter of the fiscal year in line with the timing of sales to support our retailers’ spring selling season. These balances liquidate during the June through September period as the lawn and garden season unwinds. Unlike our core Global Consumer segment, Scotts LawnService® typically has its highest receivables balance in the fourth quarter because of the seasonal timing of customer applications and service revenues.
Investing Activities
Cash used in investing activities totaled $64.2$134.4 million and $75.7 for fiscal 2016, a decrease of $402.0 million as compared to cash used infiscal 2013 and fiscal 2012, respectively. The change in our investing activities of $536.4 million for fiscal 2015. Cash used in investing activities related to the SLS Business was primarily driven by$1.4 million and $24.3 million for fiscal 2016 and fiscal 2015, respectively.
During fiscal 2016 we made an investment in Bonnie in the amount of $72.0 million, made an investment in an unconsolidated subsidiary of $2.0 million, provided a reductionworking capital contribution of capital$24.2 million and an $18.0 million investment in second lien term loan financing to the TruGreen Joint Venture and completed the acquisitions of Gavita and a Canadian growing media operation which included cash payments of $158.4 million. Cash used for investments in property, plant and equipment and acquisitionsduring fiscal 2016 was $58.3 million. These cash outflows were partially offset by an excess distribution of $9.3$196.2 million and $3.8 million, respectively and cash proceeds from the sale of long-lived assets of $3.6 million.TruGreen Joint Venture. Significant capital projects during fiscal 20132016 included investments in our mulchgrowing media production and packaging facilities, associated with our product cost-out initiatives, additional capital to increase capabilities in our fertilizer production facilities, improvements to our inventory warehouse management system andfor supply chain optimization projects, investments in information technology. Further, during fiscal 2013 we completed an acquisition of two franchisee businesses within our Scotts LawnService® segment for $3.2 milliontechnology and an investment of an unconsolidated affiliate in the indoor gardening market for $4.5 million.facility improvement and maintenance.
Cash used in investing activities totaled $75.7$536.4 million in for fiscal 2012,2015, an increase of $380.8 million as compared to cash provided byused in investing activities of $153.5$155.6 million for fiscal 2011.2014. Cash used in investing activities related to the SLS Business was $24.3 million and $3.4 million for fiscal 2015 and fiscal 2014, respectively. The change in cash used in our investing activities was primarily driven by the cash received frompayment of $300 million to Monsanto in consideration for Monsanto’s entry into the saleamendments to our Marketing Agreement for consumer Roundup®, the lawn and garden brand extension agreement and the commercialization and technology agreement, and increased acquisitions of our Global Pro business, which generated $253.6$66.2 million. During fiscal 2015, we completed the acquisitions of General Hydroponics and Vermicrop for $120.0 million and $15.0 million, respectively, in cash in fiscal 2011. Capital spending decreased from $72.7 million in addition to four acquisitions of growing media operations with an aggregate estimated purchase price of $40.2 million. Additionally, Scotts LawnServicefiscal 2011® to $69.4completed the acquisition of Action Pest for $21.7 million. These acquisitions included cash payments of $180.2 million in during fiscal 2012.2015. Significant capital projects during fiscal 20122015 included a newinvestments in our growing media plant in Texas,production and packaging facilities, additional capital for our liquid production facilitiessupply chain optimization projects, investments in Iowainformation technology, facility improvement and Mississippi, improvements at various other growing media production facilitiesmaintenance, and investments in information technology. Further, during fleet vehicles for Scotts LawnServicefiscal 2012 we completed an acquisition within our Global Consumer segment with total cash paid of $6.7 million®.
For the three fiscal years ended September 30, 2013,2016, our capital spending was allocated as follows: 62%70% for expansion and maintenance of existing Global Consumer productive assets; 17%13% for new productive assets supporting our Global Consumer segment; 11%assets; 10% to expand our information technology and transformation and integration capabilities; 3% for expansion and upgrades of Scotts LawnService® infrastructure; and 7% for Corporate & Other assets. We expect fiscal 2017 capital expenditures to be consistent with our recent capital spending amounts and allocations.
Financing Activities
Financing activities used cash of $280.6$122.2 million in fiscal 2016 and $79.3provided cash of $278.9 million in fiscal 2013 and fiscal 2012, respectively. Cash returned to shareholders through dividends2015. The change was the result of $87.8the repayment of $200.0 million and reduced borrowings under our credit facility aggregate principal amount of $196.76.625% Senior Notes, net repayments of $81.3 million were significant elements of cash used in financing activities in fiscal 2013. Net payments under our credit facilities were $207.3 millionin fiscal 2013,2016 compared to $10.6net borrowings of $378.0 million in fiscal 2012. Financing activities also included2015, payment of financing and issuance fees of $11.2 million related to our new credit agreement and the 6.000% Senior Notes, an increase in repurchases of our Common Shares of $116.0 million and a decrease in cash received from the exercise of stock options of $4.3$9.6 million, in fiscal 2013 compared to fiscal 2012. partially offset by the issuance of $400.0 million aggregate principal amount of 6.000% Senior Notes.
Financing activities provided cash of $278.9 million in fiscal 2015 and used cash of $79.3 million and $230.7$124.3 million in fiscal 20122014. The change related to financing activities was the result of the redemption of $200.0 million of our 7.25% Senior Notes during fiscal 2014, a decrease in dividends paid in fiscal 2015 as a result of the prior year special one-time cash dividend of $2.00 per share, or $122.1 million, and fiscal 2011, respectively. Cash returned to shareholders through dividends of $75.4 million and the repurchasinga decrease in repurchases of Common Shares of $17.5$105.2 million, were significant elements partially offset by a decrease in net borrowings under our credit facility of cash used in financing activities in fiscal 2012.$29.5 million. Net paymentsborrowings under our credit facilities in fiscal 2015 were $10.6$378.0 million compared to $407.5 million in fiscal 2012, compared to $22.0 million in fiscal 2011.2014. Financing activities also included a decreasean increase in cash received from the exercise of stock options of $13.9$4.3 million in fiscal 20122015 compared to fiscal 2011.2014.
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 withhaving original maturities of three months or less with a balance of $129.8 million as of September 30, 2013, compared to $131.9 million as of September 30, 2012.less. The cash and cash equivalents balancebalances of $50.1 million and $71.4 million at September 30, 20132016 and 2015, respectively, included $120.4$39.9 million and $55.1 million, respectively, held by controlled foreign corporations. Our current plans do not demonstrate a need to, nor do we have plans to, repatriate the retained earnings from these foreign corporations as the earnings are indefinitely reinvested. However, in the future, if we determine it is necessary to repatriate these funds, or if we sell or liquidate any of these foreign corporations, we may be required to pay associated taxes on the repatriation.repatriation, sale or liquidation.
Borrowing ArrangementsAgreements
Our primary sources of liquidity are cash generated by operations and borrowings under our credit agreementfacilities, which isare guaranteed by substantially all of ourScotts Miracle-Gro’s domestic subsidiaries. On June 30, 2011,December 20, 2013, we and certain of our subsidiaries entered into a secondthe third amended and restated credit agreement, providing us with a five-year senior secured creditrevolving loan facility providing for revolving loans in the aggregate principal amount of up to $1.7 billion over a five year term. Borrowings may be made in various currencies including U.S. dollars, Euros, British pounds, Australian dollars(the “former credit facility”). On October 29, 2015, we entered into the fourth amended and Canadian dollars. Under thisrestated credit facility, we may request up to an additional $450 million in revolving and/or term commitments, subject to certain specified conditions, including approval from the lenders. Theagreement (the “new credit facility replaced our previousagreement”), providing us with five-year senior secured creditloan facilities which were comprised of: (a) a senior secured revolving loan facility in the aggregate principal amount of $1.9 billion, comprised of a revolving credit facility of $1.6 billion and a term loan in the original principal amount of $300.0 million (the “new credit facilities”). The new credit agreement also provides us with the right to seek additional committed credit under the agreement in an aggregate amount of up to $1.59 billion and (b) a senior secured term loan facility totaling $560$500.0 million. The previous credit facilities were scheduled to expire in February 2012.
The terms of the credit facility provide for customary representations and warranties and affirmative covenants. The credit facility also contains customary negative covenants setting forth limitations, plus an unlimited additional amount, subject to negotiated carve-outs on liens; contingent obligations; fundamental changes; acquisitions, investments, loanscertain specified financial and advances; indebtedness; restrictions on subsidiary distributions; transactions with affiliates and officers; sales of assets; sale and leaseback transactions; changing our fiscal year end; modifications of certain debt instruments; negative pledge clauses; entering intoother conditions. Under the new lines of business; and restricted payments, which are limited to an aggregate of $125 million annually through fiscal 2013 and $150 million annually beginning in fiscal 2014 if our leverage ratio, after giving effect to any such annual dividend payment, exceeds 2.50. The credit facility is secured by collateral that includes the capital stock of specified subsidiaries, substantially all domestic accounts receivable (exclusive of any “sold” receivables), inventory and equipment. The credit facility is guaranteed by substantially all of our domestic subsidiaries.
Under our credit facility,agreement, we have the ability to obtain letters of credit up to $100.0 million. Borrowings on the revolving credit facility may be made in various currencies, including U.S. dollars, euro, British pounds, Australian dollars and Canadian dollars.$75 million outstanding.
At September 30, 2013, the Company2016, we had letters of credit outstanding in the aggregate face amount of $23.3 million outstanding, and $1.6 billion of availability under its credit facility.
On January 14, 2010, we issued $200 million aggregate principal amount of 7.25% Senior Notes due 2018.$26.5 million, and $1.2 billion of availability under the new credit agreement, subject to our continued compliance with the covenants discussed below. The net proceedsweighted average interest rates on average borrowings under the new credit agreement and the former credit facility were 3.5% and 4.0% for fiscal 2016 and fiscal 2015, respectively.
We maintain a Master Accounts Receivable Purchase Agreement (as amended, “MARP Agreement”), which provides for the discretionary sale by us, and the discretionary purchase (outside of the offering were usedcommitment period specified in the MARP Agreement) by the participating banks, on a revolving basis, of accounts receivable generated by sales to reduce outstanding borrowings under our then existing credit facilities. The 7.25% Senior Notes represent general unsecured senior obligations,three specified account debtors in an aggregate amount not to exceed $400.0 million.
On March 23, 2016, we entered into a Waiver and were soldFirst Amendment to the public at 99.254%MARP Agreement that amends the MARP Agreement in the following significant respects: (1) includes subsidiaries and affiliates of the principal amount thereof,approved debtors into the definition of approved debtors; (2) requires Scotts LLC to yield 7.375%repurchase all receivables (including any defaulted receivables) from the banks on each settlement date; and (3) provides the administrative agent and the banks with full recourse to maturity. The 7.25% Senior Notes have interest payment datesScotts LLC in case of January 15 and July 15non-payment of each year, which began on July 15, 2010 and may be redeemed prior to maturity at applicable redemption premiums. The 7.25% Senior Notes contain usual and customary incurrence-based covenants, which include, but are not limited to, restrictionsany purchased receivable on the incurrencematurity date thereof, regardless of additional indebtedness, the incurrencereason for such non-payment. Under the terms of liensthe amended MARP Agreement, the banks have the opportunity to purchase those accounts receivable offered by us at a discount (from the agreed base value thereof) effectively equal to the one-week LIBO rate plus 0.95%.
There were $138.6 million and $122.3 million in borrowings or receivables pledged as collateral under the issuanceMARP Agreement at September 30, 2016 and 2015, respectively. The carrying value of certain preferred shares,the receivables pledged as collateral was $174.7 million at September 30, 2016 and $152.9 million at September 30, 2015. As of September 30, 2016, there was $7.6 million of availability under the makingMARP Agreement.
The MARP Agreement terminated effective October 14, 2016 in accordance with its terms. We expect the $1.6 billion senior secured revolving credit facility available to us under the new credit agreement, together with our other existing sources of certain distributions, investments and other restricted payments,committed financing, to be sufficient to meet our funding needs on an ongoing basis. Additionally, we continue to consider alternative receivables-based funding sources, as well as other usual and customary covenants, which include, but are not limitedour new credit agreement allows for the periodic sale, discounting, factoring or securitization of accounts receivable up to restrictions on sale and leaseback transactions, restrictions on purchases or redemptionsa maximum at any one time outstanding of Scotts Miracle-Gro stock and prepayments of subordinated debt, limitations on asset sales and restrictions on transactions with affiliates. The 7.25% Senior Notes mature on $500 million.
On January 15, 2018. Substantially2014, we used a portion of our available former credit facility borrowings to redeem all of our domestic subsidiaries serve as guarantors of the 7.25% Senior Notes.
On December 16, 2010, we issued $200outstanding $200.0 million aggregate principal amount of 6.625%7.25% Senior Notes, paying a redemption price of $214.5 million, which included $7.25 million of accrued and unpaid interest, $7.25 million of call premium, and $200.0 million for outstanding principal amount. The $7.25 million call premium charge was recognized within the “Costs related to refinancing” line on the Consolidated Statement of Operations in our second quarter of fiscal 2014. Additionally, we had $3.5 million in unamortized bond discount and issuance costs associated with the 7.25% Senior Notes that were written-off and recognized in the “Costs related to refinancing” line on the Consolidated Statement of Operations in our second quarter of fiscal 2014.
On December 15, 2015, we used a portion of our available credit facility borrowings to redeem all $200.0 million aggregate principal amount of our outstanding 6.625% senior notes due 2020 (the “6.625% Senior Notes”) paying a redemption price of $213.2 million, comprised of $6.6 million of accrued and unpaid interest, $6.6 million of call premium and $200.0 million for outstanding principal amount. The $6.6 million call premium charge was recognized within the “Costs related to refinancing” line on the Consolidated Statement of Operations in a private placement exempt from the registration requirements underfirst quarter of fiscal 2016. Additionally, we had $2.2 million in unamortized bond discount and issuance costs associated with the Securities Act6.625% Senior Notes that were written off and recognized in the “Costs related to refinancing” line on the Consolidated Statement of 1933, as amended.Operations in the first quarter of fiscal 2016.
On October 13, 2015, we issued $400.0 million aggregate principal amount of 6.000% senior notes due 2023 (the “6.000% Senior Notes”). The net proceeds of the offering were used to repay outstanding borrowings under our then existingformer credit facilities and for general corporate purposes.facility. The 6.625%6.000% Senior Notes represent general unsecured senior obligations and rank equal in right of payment with our existing and future unsecured senior debt, including, without limitation, the 7.25% Senior Notes.debt. The 6.625%6.000% Senior Notes have interest payment dates of JuneApril 15 and DecemberOctober 15 of each year, which began on Junecommencing April 15, 2011, and2016. The 6.000% Senior Notes may be redeemed, prior to maturityin whole or in part, on or after October 15, 2018 at applicable redemption premiums. The 6.625%6.000% Senior Notes contain usual and customary incurrence-based covenants, as well as other usual and customary covenants substantially similar to those contained in the 7.25% Senior Notes. The 6.625% Senior Notesand events of default and mature on DecemberOctober 15, 2020.2023. Substantially all of our domestic subsidiaries serve as guarantors of the 6.625%6.000% Senior Notes.
We arewere in compliance with the terms of all debt covenants at as of September 30, 2013. The2016. Our new credit facilityagreement contains, among other obligations, an affirmative covenant regarding our leverage ratio on the last day of each quarter, calculated as average totalour net indebtedness as described in the our credit facility, relative to the our EBITDA, asdivided by adjusted pursuant to the terms of the credit facility (“Adjusted EBITDA”). Under the terms of the credit facility, theearnings before interest, taxes, depreciation and amortization. The maximum allowable leverage ratio was 3.504.50 as of September 30, 2013.2016. Our leverage ratio was 2.053.10 at September 30, 2013.2016. Our new credit facilityagreement also includes an affirmative covenant regarding our interest coverage ratio. Interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in the credit facility, and excludes costs related to refinancings. Under the terms of the credit facility, thecoverage. The minimum allowable interest coverage ratio was 3.503.00 for the yeartwelve months ended September 30, 2013.2016. Our interest coverage ratio was 6.597.88 for the yeartwelve months ended September 30, 2013.2016. The weighted average interest rates on average debt were 6.2%new credit agreement allows us to make unlimited restricted payments (as defined in the new credit agreement), including increased or one-time dividend payments and 6.0%Common Share repurchases, as long as the leverage ratio resulting from the making of such restricted payments is 4.00 or less. Otherwise we may only make restricted payments in an aggregate amount for each fiscal year not to exceed the amount set forth in the new credit agreement for such fiscal year ($175.0 million for fiscal 20132017 and $200.0 million for fiscal 2012, respectively.2018 and each fiscal year thereafter). Please see “ITEM 6. SELECTED FINANCIAL DATA” of this Annual Report on Form 10-K for further details pertaining to the calculations of the foregoing ratios.
We continue to monitor our compliance with the leverage ratio, interest coverage ratio and other covenants contained in the new credit agreement and, based upon our current operating assumptions, we expect to remain in compliance with the permissible leverage ratio and interest coverage ratio throughout fiscal 2017. However, an unanticipated shortfall in earnings, an increase in net indebtedness or other factors could materially affect our ability to remain in compliance with the financial or other covenants of our new credit agreement, potentially causing us to have to seek an amendment or waiver from our lending group which could result in repricing of our credit facilities. While we believe we have good relationships with our lending group, we can provide no assurance that such a request would result in a modified or replacement credit agreement on reasonable terms, if at all.
At September 30, 20132016, we had outstanding interest rate swap agreements with major financial institutions that effectively converted the LIBOR index portion of variable-rate debt denominated in U.S. dollars to a fixed rate. The swap agreements had a total U.S. dollar notional amount of $1,100$650.0 million at September 30, 20132016. Interest payments made between the effective date and expiration date are hedged by the swap agreements, except as noted below. On November 1, 2016, we executed interest rate swap agreements with notional amounts that adjust in accordance with a specified seasonal schedule and have a maximum total notional amount at any point in time of $500.0 million. These swap agreements effectively convert the LIBOR index on a portion of our variable-rate debt to a fixed rate of approximately 0.83% beginning in November 2016 through expiration dates in June and August 2018.
The notional amount, effective date, expiration date and rate of each of these swap agreements outstanding at September 30, 2016 are shown in the table below.
| | Notional Amount (in millions) | | Effective Date (a) | | Expiration Date | | Fixed Rate | Notional Amount (in millions) | | Effective Date (a) | | Expiration Date | | Fixed Rate |
| 50 | | 2/14/2012 | | 2/14/2016 | | 3.78% | |
| 150 | (b) | 2/7/2012 | | 5/7/2016 | | 2.42% | |
| 150 | (c) | 11/16/2009 | | 5/16/2016 | | 3.26% | |
| 50 | (b) | 2/16/2010 | | 5/16/2016 | | 3.05% | |
| 100 | (b) | 2/21/2012 | | 5/23/2016 | | 2.40% | |
| 150 | (c) | 12/20/2011 | | 6/20/2016 | | 2.61% | |
| 50 | (d) | 12/6/2012 | | 9/6/2017 | | 2.96% | |
| $ | | 50 |
| (d) | 12/6/2012 | | 9/6/2017 | | 2.96 | % |
| 200 | | 200 |
| | 2/7/2014 | | 11/7/2017 | | 1.28 | % |
| 150 | (b) | 2/7/2017 | | 5/7/2019 | | 2.12% | 150 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.12 | % |
| 50 | (b) | 2/7/2017 | | 5/7/2019 | | 2.25% | 50 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.25 | % |
| 200 | (c) | 12/20/2016 | | 6/20/2019 | | 2.12% | 200 |
| (c) | 12/20/2016 | | 6/20/2019 | | 2.12 | % |
| |
(a) | The effective date refers to the date on which interest payments were, or will be, first hedged by the applicable swap agreement. |
| |
(b) | Interest payments made during the three-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement. |
| |
| (c) | Interest payments made during the six-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement. |
| |
| (d) | Interest payments made during the nine-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement. |
The Company maintains a Master Accounts Receivable Purchase Agreement (“MARP Agreement”), which is uncommitted and provides for the discretionary sale by the Company, and the discretionary purchase by the banks, on a revolving basis, of accounts receivable generated by sales to three specified account debtors in an aggregate amount not to exceed $400 million. On October 25, 2013, the Company signed an amendment to the existing MARP Agreement which extended the termination date to August 29, 2014, or such later date as may be mutually agreed by the Company and the banks party thereto. Under the amended terms of the MARP Agreement, the banks have the opportunity to purchase those accounts receivable offered by the Company at a discount (from the agreed base value thereof) effectively equal to the one-week LIBOR plus 0.75%. There were $85.3 million of short-term borrowings as of September 30, 2013 and no short-term borrowings as of September 30, 2012 under the MARP Agreement. The carrying value of the receivables pledged as collateral was $106.7 million as of September 30, 2013.
We continue to monitorbelieve that our compliance with the leverage ratio, interest coverage ratio and other covenants contained in the credit facility and, based upon our current operating assumptions, we expect to remain in compliance with the permissible leverage ratio and interest coverage ratio throughout fiscal 2014. However, an unanticipated charge to earnings, an increase in debt or other factors could materially affect our ability to remain in compliance with the financial or other covenants of our credit facility, potentially causing us to have to seek an amendment or waiver from our lending group which could result in repricing of our credit facility.
In our opinion, cash flows from operations and capital resourcesborrowings under our agreements described herein will be sufficient to meet debt service, capital expenditures and working capital needs during fiscal 2014, and thereafter 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 credit facilityborrowing 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“Item 1A. RISK FACTORS — Our indebtedness could limit our flexibility and adversely affect our financial condition” of this Annual Report on Form 10-K.
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 reserves. We do not believe that any liabilities that may result from these pending judicial and administrative proceedings are reasonably likely to have a material effect on our financial condition, results of operations, or cash flows; however, there can be no assurance that future quarterly or annual operating results will not be materially affected by final resolutionthese proceedings, whether as a result of these matters.adverse outcomes or as a result of significant defense costs.
Contractual Obligations
The following table summarizes our future cash outflows for contractual obligations as of September 30, 20132016:
| | | | | | | Payments Due by Period | | | | Payments Due by Period |
| Contractual Cash Obligations | | Total | | Less Than 1 Year | | 1-3 Years | | 4-5 Years | | More Than 5 Years | | Total | | Less Than 1 Year | | 1-3 Years | | 3-5 Years | | More Than 5 Years |
| | | (In millions) | | (In millions) |
| Debt obligations | | $ | 570.5 |
| | $ | 92.4 |
| | $ | 76.1 |
| | $ | 201.0 |
| | $ | 201.0 |
| | $ | 1,316.1 |
| | $ | 185.0 |
| | $ | 31.3 |
| | $ | 661.5 |
| | $ | 438.3 |
|
| Interest expense on debt obligations | | 201.1 |
| | 43.9 |
| | 85.2 |
| | 52.8 |
| | 19.2 |
| | 286.8 |
| | 56.9 |
| | 100.4 |
| | 69.5 |
| | 60.0 |
|
| Operating lease obligations | | 179.0 |
| | 47.0 |
| | 66.1 |
| | 30.8 |
| | 35.1 |
| | 171.0 |
| | 40.9 |
| | 66.8 |
| | 41.8 |
| | 21.5 |
|
| Purchase obligations | | 211.3 |
| | 114.3 |
| | 75.7 |
| | 21.0 |
| | 0.3 |
| | 285.1 |
| | 140.4 |
| | 99.9 |
| | 38.6 |
| | 6.2 |
|
| Other, primarily retirement plan obligations | | 87.9 |
| | 9.9 |
| | 17.7 |
| | 15.3 |
| | 45.0 |
| | 97.2 |
| | 3.5 |
| | 7.9 |
| | 7.9 |
| | 77.9 |
|
| Total contractual cash obligations | | $ | 1,249.8 |
| | $ | 307.5 |
| | $ | 320.8 |
| | $ | 320.9 |
| | $ | 300.6 |
| | $ | 2,156.2 |
| | $ | 426.7 |
| | $ | 306.3 |
| | $ | 819.3 |
| | $ | 603.9 |
|
We have long-term debt obligations and interest payments due primarily under the 7.25% and 6.625%6.000% Senior Notes and our new credit facility. Amounts in the table represent scheduled future maturities of long-term debt principal for the periods indicated.
The interest payments for our new credit facility isare based on outstanding borrowings as of September 30, 20132016. 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, as well as commitments for warehouse services, grass seed and out-sourcedoutsourced information services which comprise the unconditional purchase obligations disclosed in “NOTE 17.18. COMMITMENTS” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
Other obligations include actuarially determined retiree benefit payments and pension funding to comply with local funding requirements. Pension funding requirements beyond fiscal 20132016 are based on preliminary estimates using actuarial assumptions determined as of September 30, 20132016. The above table excludes liabilities for unrecognized tax benefits and insurance accruals as the Company iswe are unable to estimate the timing of payments for these items.
Off-Balance Sheet Arrangements
At September 30, 20132016, the Company hadwe have letters of credit in the aggregate face amount of $23.3$26.5 million outstanding. Further, the Company haswe have a residual value guaranteesguarantee on Scotts LawnService® vehicles and theour corporate aircraft as disclosed in “NOTE 16.17. OPERATING LEASES” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.
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 with, 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, including those described in “ITEM 3. LEGAL PROCEEDINGS” of this Annual Report on Form 10-K and “NOTE 18. CONTINGENCIES” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K.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 reserves, should not 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”Considerations — Regulatory Matters” and “ITEM 3. LEGAL PROCEEDINGS” of this Annual Report on Form 10-K.
Critical Accounting Policies and Estimates
Our discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with GAAP. Certain accounting policies are particularly significant, including those related to revenue recognition, goodwill and intangibles, certain associate benefits and income taxes. We believe these accounting policies, and others set forth in “NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, should be reviewed as they are integral to understanding our results of operations and financial position. Our critical accounting policies are reviewed periodically with the Audit and Finance Committee of the Board of Directors of Scotts Miracle-Gro.
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. On an ongoing basis, we evaluate our estimates, including those related to customer programs and incentives, product returns, bad debts, inventories, intangible assets, income taxes, restructuring, environmental matters, contingencies and litigation. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Although actual results historically have not deviated significantly from those determined using our estimates, our results of operations or financial condition could differ, perhaps materially, from these estimates under different assumptions or conditions.
Revenue Recognition and Promotional Allowances
Most of our revenue is derived from the sale of inventory, and we recognize revenue when title and risk of loss transfer, generally when products are received by the customer. Provisions for payment discounts, product returns and allowances are recorded as a reduction of sales at the time revenue is recognized based on historical trends and adjusted periodically as circumstances warrant. Similarly, reserves for uncollectible receivables due from customers are established based on management’s judgment as to the ultimate collectability of these balances. We offer sales incentives through various programs, consisting principally of volume rebates, cooperative advertising, consumer coupons and other trade programs. The cost of these programs is recorded as a reduction of sales. The recognition of revenues, receivables and trade programs requires the use of estimates. While we believe these estimates to be reasonable based on the then current facts and circumstances, there can be no assurance that actual amounts realized will not differ materially from estimated amounts recorded.
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. We must make estimates and judgments on future taxable income, considering feasible tax planning strategies and taking into account existing facts and circumstances, to determine the proper valuation allowances. When we determine that deferred tax assets could be realized in greater or lesser amounts than recorded, the asset balance and consolidated statementConsolidated Statements of operationsOperations reflect the change in the period such determination is made. Due to changes in facts and circumstances and the estimates and judgments that are 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. We use an estimate of our annual effective tax rate at each interim period based on the facts and circumstances available at that time, while the actual effective tax rate is calculated at year-end.
Inventories
Inventories are stated at the lower of cost or market, principally determined by the first-in, first-out method of accounting. Inventories include the cost of raw materials, labor, manufacturing overhead and freight and in-bound handling costs incurred to pre-position goods in our warehouse network. Adjustments to net realizable value for excess and obsolete inventory are based on a variety of factors, including product changes and improvements, changes in active ingredient availability and regulatory acceptance, new product introductions and estimated future demand. The adequacy of our adjustments could be materially affected by changes in the demand for our products or regulatory actions.
Long-lived Assets, including Property, Plant and Equipment
Property, plant and equipment are stated at cost. Depreciation of property, plant and equipment is provided on the straight-line method and is based on the estimated useful economic lives of the assets. Intangible assets with finite lives, and therefore subject to amortization, include technology (e.g., patents), customer relationships and certain tradenames. These intangible assets are being amortized over their estimated useful economic lives typically ranging from 3 to 25 years. We review long-lived assets whenever circumstances change such that the recorded value of an asset may not be recoverable and therefore impaired.
Goodwill and Indefinite-lived Intangible Assets
We have significant investments in intangible assets and goodwill. Our annual goodwill and indefinite-lived intangible asset testing is performed as of the first day of our fiscal fourth quarter or more frequently if circumstances indicate potential impairment. In our evaluation of goodwill and indefinite-lived intangible assets impairment, 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 and indefinite-lived intangible assets. For the quantitative test, the review for impairment of goodwill and indefinite-lived intangible assets is primarily based on our estimates of discounted future cash flows, which are based upon annual budgets and longer-range strategic plans. These budgets and plans are used for internal purposes and are also the basis for communication with outside parties about future business trends. While we believe the assumptions we use 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. An asset’s value is deemed impaired if the discounted cash flows or earnings projections generated do not substantiate the carrying value of the asset. The estimation of such amounts requires management to exercise judgment with respect to revenue and expense growth rates, changes in working capital, future capital expenditure requirements and selection of an appropriate discount rate, as applicable. The use of different assumptions would increase or decrease discounted future operating cash flows or earnings projections and could, therefore, change impairment determinations.
Fair value estimates employed in our annual impairment review of indefinite-lived tradenamesintangible assets and goodwill were determined using discounted cash flow 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 used in determining the fair value of the reporting units and tradenames;intangible assets; (ii) royalty rates used in our tradenameintangible asset valuations; (iii) projected revenue and operating profit growth rates used in the reporting unit and tradenameintangible asset models; 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.
At September 30, 20132016, goodwill totaled $315.1$373.2 million,, with $183.1$211.9 million and $132.0$161.3 million of goodwill for Globalthe U.S. Consumer and Scotts LawnService®Other segments, respectively. No goodwill impairment was recognized as a result of the annual evaluation performed as of June 30, 2013.July 3, 2016. The estimated fair value of each reporting unit with a significant goodwill balance was substantially in excess of its carrying value as of the annual test date. If we were to alter our impairment testing by increasing the discount rate in the discounted cash flow analysis by 100 basis points, there still would not be any impairment indicated for any of these reporting units. At September 30, 2013,2016, indefinite-lived intangible assets comprisedconsisted of tradenames totaled $222.3of $184.8 million,. With as well as the exceptionMarketing Agreement Amendment of the Ortho® tradename, each$188.3 million and Brand Extension Agreement of these tradenames had an$111.7 million which were both acquired during fiscal 2015. The estimated fair value of each tradename was substantially in excess of its carrying value as of the annual test date. AsIf we were to alter our impairment testing by increasing the discount rate in the discounted cash flow analysis by 100 basis points, there still would not be any impairment indicated for any tradenames.
During the third quarter of fiscal 2014, as a result of the Company's annualan impairment review, performed in the fourth quarter of fiscal 2013, the Companywe recognized an impairment charge for a non-recurring fair value adjustment of $11.6$33.7 million within the GlobalU.S. Consumer segment related to the Ortho® brand and certain sub-brands of Ortho®.The fair value was calculated based upon the evaluation of the historical performance and future growth of the Ortho® business. If we were to increase the discount rate in the Ortho® brand fair value calculation by 100 basis points, the resulting non-recurring fair value adjustment would have increased by approximately $14.7 million.brand.
Associate Benefits
We sponsor various post-employment benefit plans, including pension plans, both defined contribution plans and defined benefit plans, and other post-employment benefit (“OPEB”) plans, consisting primarily of health care for retirees. For accounting purposes, the defined benefit pension and OPEB plans are dependent on a variety of assumptions to estimate the projected and accumulated benefit obligations and annual expense determined by actuarial valuations. These assumptions include the following: discount rate; expected salary increases; certain employee-related factors, such as turnover, retirement age and mortality; expected return on plan assets; and health care cost trend rates.
Assumptions are reviewed annually for appropriateness and updated as necessary. We base the discount rate assumption on investment yields available at fiscal year-end on high-quality corporate bonds that could be purchased to effectively settle the pension liabilities. The salary growth assumption reflects our long-term actual experience, the near-term outlook and assumed inflation. The expected return on plan assets assumption reflects asset allocation, investment strategy and the views of investment managers regarding the market. Retirement and mortality rates are based primarily on actual and expected plan experience. The effects of actual results that differ from our assumptions are accumulated and amortized over future periods.
Changes in the discount rate and investment returns can have a significant effect on the funded status of our pension plans and shareholders’ equity. We cannot predict discount rates or investment returns with certainty and, therefore, cannot determine whether adjustments to our shareholders’ equity for pension-related activity in subsequent years will be significant. We also cannot predict future investment returns, and therefore cannot determine whether future pension plan funding requirements could materially affect our financial condition, results of operations or cash flows. A 100 basis point change in the discount rate would have an immaterial effect on fiscal 20132016 pension expense. A 100 basis point change in the discount rate would have a $41.7$63.8 million change in our projected benefit obligationobligations as of September 30, 2013.2016.
Insurance and Self-Insurance
We maintain insurance for certain risks, including workers’ compensation, general liability and vehicle liability, and are self-insured for employee-related health care benefits up to a specified level for individual claims. We establish reserves for losses based on our claims experience and industry actuarial estimates of the ultimate loss amount inherent in the claims, including losses for claims incurred but not reported. Our estimate of self-insured liabilities is subject to change as new events or circumstances develop which might materially impact the ultimate cost to settle these losses.
Derivative Instruments
In the normal course of business, we are exposed to fluctuations in interest rates, the value of foreign currencies and the cost of commodities. A variety of financial instruments, including forward and swap contracts, are used to manage these exposures. Our objective in managing these exposures is to better control these elements of cost and mitigate the earnings and cash flow volatility associated with changes in the applicable rates and prices. We have established policies and procedures that encompass risk-management philosophy and objectives, guidelines for derivative-instrument usage, counterparty credit approval, and the monitoring and reporting of derivative activity. We do not enter into derivative instruments for the purpose of speculation.
Contingencies
As described more fully in “NOTE 18.19. CONTINGENCIES” of the Notes to Consolidated Financial Statements included in this Annual Report on Form 10-K, we are involved in environmental and legal mattersproceedings which have a high degree of uncertainty associated with them. We continually assess the likely outcome of these mattersproceedings and the adequacy of reserves, if any, provided for their resolution. There can be no assurance that the ultimate outcomes of these mattersproceedings will not differ
materially from our current assessment of them, nor that all mattersproceedings that may currently be brought against us are known by us at this time.
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 Annual Report on Form 10-K contain additional information related to our accounting policies, including recent accounting pronouncements, and should be read in conjunction with this discussion.
| |
| ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK |
As part of our ongoing business, we are exposed to certain market risks, including fluctuations in interest rates, foreign currency exchange rates and commodity prices. Financial derivative and other instruments are used to manage these risks. These instruments are not used for speculative purposes.
Interest Rate Risk
We had variable rate debt instruments outstanding at September 30, 20132016 and September 30, 20122015 that are impacted by changes in interest rates. As a means of managing our interest rate risk on these debt instruments, we entered into interest rate swap agreements with major financial institutions to effectively fix the LIBOR index on certain variable-rate debt obligations.
At September 30, 20132016 and September 30, 2012,2015, we had outstanding interest rate swap agreements with a total U.S. dollar equivalent notional value of $1,100.0$650.0 million and $700.0$1,300.0 million,, respectively. The weighted average fixed rate of swap agreements outstanding at September 30, 20132016 was 2.7%1.9%.
The following table summarizes information about our derivative financial instruments and debt instruments that are sensitive to changes in interest rates as of September 30, 20132016 and September 30, 2012.2015. For debt instruments, the table presents principal cash flows and related weighted-average interest rates by expected maturity dates. For interest rate swap agreements, the table presents expected cash flows based on notional amounts and weighted-average interest rates by contractual maturity dates. Weighted-average variable rates are based on rates in effect at September 30, 20132016 and September 30, 2012.2015. A change in our variable interest rate of 100 basis points for a full twelve-month period would have a $2.5 million impact on interest expense assuming approximately $250 million of our average fiscal 20132016 variable-rate debt had not been hedged via an interest rate swap agreement. The information is presented in U.S. dollars (in millions):
| | | | | Expected Maturity Date | | Total | | Fair Value | | Expected Maturity Date | | Total | | Fair Value |
| 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | 2018 | | After | | |
| 2016 | | | 2017 | | 2018 | | 2019 | | 2020 | | 2021 | | After | | Total | | Fair Value |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate debt | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 200.0 |
| | $ | 200.0 |
| | $ | 400.0 |
| | $ | 523.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 288.8 |
| | $ | 400.0 |
| | $ | 688.8 |
| | $ | 715.8 |
|
| Average rate | | — |
| | — |
| | — |
| | — |
| | 7.3 | % | | 6.6 | % | | 6.9 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | 2.6 | % | | 6.0 | % | | 5.7 | % | | — |
|
| Variable rate debt | | $ | 85.3 |
| | $ | — |
| | $ | 73.0 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 158.3 |
| | $ | 158.3 |
| | $ | 138.6 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 417.4 |
| | $ | — |
| | $ | 556.0 |
| | $ | 556.0 |
|
| Average rate | | 1.0 | % | | — |
| | 2.4 | % | | — |
| | — |
| | — |
| | 1.7 | % | | — |
| | 1.4 | % | | — |
| | — |
| | — |
| | 2.1 | % | | — |
| | 1.9 | % | | — |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | $ | — |
| | $ | — |
| | $ | (17.8 | ) | | $ | (2.6 | ) | | $ | 3.7 |
| | $ | — |
| | $ | (16.7 | ) | | $ | (16.7 | ) | | $ | (0.8 | ) | | $ | (0.9 | ) | | $ | (4.7 | ) | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (6.4 | ) | | $ | (6.4 | ) |
| Average rate | | — |
| | — |
| | 3.0 | % | | 3.0 | % | | 2.1 | % | | — |
| | 2.7 | % | | — |
| | 3.0 | % | | 1.3 | % | | 2.1 | % | | — |
| | — |
| | — |
| | 1.9 | % | | — |
|
| | | | | Expected Maturity Date | | Total | | Fair Value | | Expected Maturity Date | | Total | | Fair Value |
| 2012 | | 2013 | | 2014 | | 2015 | | 2016 | | 2017 | | After | | |
| 2015 | | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 | | After | | Total | | Fair Value |
| Long-term debt: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fixed rate debt | | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 400.0 |
| | $ | 400.0 |
| | $ | 429.5 |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | 200.0 |
| | $ | 200.0 |
| | $ | 206.3 |
|
| Average rate | | — |
| | — |
| | — |
| | — |
| | — |
| | 6.9 | % | | 6.9 | % | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 6.6 | % | | 6.6 | % | | — |
|
| Variable rate debt | | $ | — |
| | $ | — |
| | $ | — |
| | $ | 377.1 |
| | $ | — |
| | $ | — |
| | $ | 377.1 |
| | $ | 377.1 |
| | $ | 122.3 |
| | $ | — |
| | $ | — |
| | $ | 816.3 |
| | $ | — |
| | $ | — |
| | $ | 938.6 |
| | $ | 938.6 |
|
| Average rate | | — |
| | — |
| | — |
| | 2.7 | % | | — |
| | — |
| | 2.7 | % | | — |
| | 0.9 | % | | — |
| | — |
| | 2.3 | % | | — |
| | — |
| | 2.1 | % | | — |
|
| Interest rate derivatives: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Interest rate swaps | | $ | — |
| | $ | — |
| | $ | — |
| | $ | (24.9 | ) | | $ | (3.9 | ) | | $ | — |
| | $ | (28.8 | ) | | $ | (28.8 | ) | | $ | (6.2 | ) | | $ | (1.6 | ) | | $ | (2.4 | ) | | $ | (3.2 | ) | | $ | — |
| | $ | — |
| | $ | (13.4 | ) | | $ | (13.4 | ) |
| Average rate | | — |
| | — |
| | — |
| | 3.0 | % | | 3.0 | % | | — |
| | 3.0 | % | | — |
| | 2.9 | % | | 3.0 | % | | 1.3 | % | | 2.1 | % | | — |
| | — |
| | 2.0 | % | | — |
|
Excluded from the information provided above are $12.2$71.3 million and $5.519.0 million at September 30, 20132016 and September 30, 2012,2015, respectively, of miscellaneous debt instruments.
Other Market Risks
Through fiscal 20132016, we had transactions that were denominated in currencies other than the currency of the country of origin. We use foreign currency swapforward contracts to manage the exchange rate risk associated with intercompany loans with foreign subsidiaries that are denominated in local currencies. At September 30, 20132016, the notional amount of outstanding foreign currency swapforward contracts was $165.8 million $80.4 millionwith a negative fair value of $2.1 million.$0.4 million. At September 30, 20122015, the notional amount of outstanding foreign currency swapforward contracts was $61.852.3 million with a negative fair value of $1.00.7 million.
We are subject to market risk from fluctuating prices of certain raw materials, including urea and other fertilizer inputs, resins, diesel, gasoline, natural gas, sphagnum peat, bark and grass seed and wild bird food grains.seed. Our objectives surrounding the procurement of these materials are to ensure continuous supply and to control costs. We seek to achieve these objectives through negotiation of contracts with favorable terms
directly with vendors. In addition, we entered into arrangementsuse derivatives to partially mitigate the effect of fluctuating directdiesel and indirect fuelgasoline costs on our Global Consumer and Scotts LawnService® businesses and hedged a portion of our fuel and urea needs for fiscal 2013 and fiscal 2012.businesses. We had outstanding derivative contracts for approximately 7,098,0008,106,000 and 8,022,000 gallons of fuel withat September 30, 2016 and 2015, respectively. The outstanding derivative contracts had a negative fair value of $0.3$0.1 million at September 30, 2013.2016, compared to a negative fair value of $3.2 million at September 30, 2015. We also enter into hedging arrangements designed to fix the price of a portion of our projected future urea requirements of our business. We had outstanding derivative contracts for approximately 11,984,000 gallons of fuel with a fair value of $1.2 million at September 30, 2012. We also had outstanding derivative contracts for 49,50040,500 and 34,50052,500 aggregate tons of urea at September 30, 20132016 and September 30, 2012,2015, respectively. The outstanding derivative contracts for 49,500 aggregate tons at September 30, 2013 had a negative fair value of $2.0$0.3 million while theat September 30, 2016, compared to a negative fair value of the outstanding derivative contracts for 34,500 aggregate tons$1.3 million at September 30, 20122015 was $0.8 million..
| |
| ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
The financial statements and other information required by this Item are contained in the Consolidated Financial Statements, Notes to Consolidated Financial Statements and Schedules Supporting the Consolidated Financial Statements listed in the “Index to Consolidated Financial Statements and Financial Statement Schedules” on page 4653 of this Annual Report on Form 10-K.
| |
| ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE |
None.
| |
| ITEM 9A. | CONTROLS AND PROCEDURES |
Evaluation of Disclosure Controls and Procedures
With the participation of the principal executive officer and the principal financial officer of The Scotts Miracle-Gro Company (the “Registrant”), the Registrant’s management has evaluated the effectiveness of the Registrant’s disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”))1934), as of the end of the fiscal year covered by this Annual Report on Form 10-K. Based upon that evaluation, the Registrant’s principal executive officer and principal financial officer have concluded that the Registrant’s disclosure controls and procedures were effective as of the end of the fiscal year covered by this Annual Report on Form 10-K.
Management’s Annual Report on Internal Control Over Financial Reporting
The “Annual Report of Management on Internal Control Over Financial Reporting” required by Item 308(a) of SEC Regulation S-K is included on page 4754 of this Annual Report on Form 10-K.
Attestation Report of Independent Registered Public Accounting Firm
The “Report of Independent Registered Public Accounting Firm” required by Item 308(b) of SEC Regulation S-K is included on page 4855 of this Annual Report on Form 10-K.
Changes in Internal Control Over Financial Reporting
No changes in the Registrant’s internal control over financial reporting (as defined in Rule 13a-15(f) under the Securities Exchange Act)Act of 1934) occurred during the Registrant’s fiscal quarter ended September 30, 2013,2016, that have materially affected, or are reasonably likely to materially affect, the Registrant’s internal control over financial reporting.
| |
| ITEM 9B. | OTHER INFORMATION |
None.
PART III
| |
| ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE |
Directors, Executive Officers and Persons Nominated or Chosen to Become Directors or Executive Officers
The information required by Item 401 of SEC Regulation S-K concerning the directors of Scotts Miracle-Gro and the nominees for election or re-election as directors of Scotts Miracle-Gro at the Annual Meeting of Shareholders to be held on January 30, 201427, 2017 (the “2014“2017 Annual Meeting”) is incorporated herein by reference from the disclosure which will be included under the caption “PROPOSAL NUMBER 1 — ELECTION OF DIRECTORS” in Scotts Miracle-Gro’s definitive Proxy Statement relating to the 20142017 Annual Meeting (“Scotts Miracle-Gro’s Definitive Proxy Statement”), which will be filed pursuant to SEC Regulation 14A not later than 120 days after the end of Scotts Miracle-Gro’s fiscal year ended September 30, 2013.2016.
The information required by Item 401 of SEC Regulation S-K concerning the executive officers of Scotts Miracle-Gro is incorporated herein by reference from the disclosure included under the caption “SUPPLEMENTAL ITEM. EXECUTIVE OFFICERS OF THE REGISTRANT” in Part I of this Annual Report on Form 10-K.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
The information required by Item 405 of SEC Regulation S-K is incorporated herein by reference from the disclosure which will be included under the caption “SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE” in Scotts Miracle-Gro’s Definitive Proxy Statement.
Procedures for Recommending Director Nominees
Information concerning the procedures by which shareholders of Scotts Miracle-Gro may recommend nominees to Scotts Miracle-Gro’s Board of Directors is incorporated herein by reference from the disclosures which will be included under the captions “CORPORATE GOVERNANCE — Nominations of Directors” and “MEETINGS AND COMMITTEES OF THE BOARD — Committees of the Board — GovernanceNominating and NominatingGovernance Committee” in Scotts Miracle-Gro’s Definitive Proxy Statement. These procedures have not materially changed from those described in Scotts Miracle-Gro’s definitive Proxy Statement for the 20132016 Annual Meeting of Shareholders held on January 17, 2013.28, 2016.
Audit and Finance Committee
The information required by Items 407(d)(4) and 407(d)(5) of SEC Regulation S-K is incorporated herein by reference from the disclosure which will be included under the caption “MEETINGS AND COMMITTEES OF THE BOARD — Committees of the Board — Audit and Finance Committee”Board” in Scotts Miracle-Gro’s Definitive Proxy Statement.
Committee Charters; Code of Business Conduct and& Ethics; Corporate Governance Guidelines
The Board of Directors of Scotts Miracle-Gro has adopted charters for each of the Audit and Finance Committee, the GovernanceNominating and NominatingGovernance Committee, the Compensation and Organization Committee, the Innovation and Technology Committee and the Strategy and Business DevelopmentFinance Committee, as well as Corporate Governance Guidelines, as contemplated by the applicable sections of the New York Stock Exchange Listed Company Manual.
In accordance with the requirements of Section 303A.10 of the New York Stock Exchange Listed Company Manual and Item 406 of SEC Regulation S-K, the Board of Directors of Scotts Miracle-Gro has adopted a Code of Business Conduct and& Ethics covering the members of Scotts Miracle-Gro’s Board of Directors and associates (employees) of Scotts Miracle-Gro and its subsidiaries, including, without limitation, Scotts Miracle-Gro’s principal executive officer, principal financial officer and principal accounting officer. Scotts Miracle-Gro intends to disclose the following events, if they occur, on its Internet website located at http://investor.scotts.com within four business days following their occurrence: (A) the date and nature of any amendment to a provision of Scotts Miracle-Gro’s Code of Business Conduct and& Ethics that (i) applies to Scotts Miracle-Gro’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, (ii) relates to any element of the code of ethics definition enumerated in Item 406(b) of SEC Regulation S-K, and (iii) is not a technical, administrative or other non-substantive amendment; and (B) a description of any waiver (including the nature of the waiver, the name of the person to whom the waiver was granted and the date of the waiver), including an implicit waiver, from a provision of the Code of Business Conduct and& Ethics granted to Scotts Miracle-Gro’s principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, that relates to one or more of the elements of the code of ethics definition enumerated in Item 406(b) of SEC Regulation S-K. In addition, Scotts Miracle-Gro will disclose any waivers from the provisions of the Code of Business Conduct & Ethics granted to an executive officer or a director of Scotts
Miracle-Gro on Scotts Miracle-Gro’s Internet website located at http://investor.scotts.com within four business days of the determination to grant any such waiver.
The text of Scotts Miracle-Gro’s Code of Business Conduct and& Ethics, Scotts Miracle-Gro’s Corporate Governance Guidelines, the Audit and Finance Committee charter, the GovernanceNominating and NominatingGovernance Committee charter, the Compensation and
Organization Committee charter, the Innovation and Technology Committee charter and the Strategy and Business DevelopmentFinance Committee charter are posted under the “Corporate Governance” link on Scotts Miracle-Gro’s Internet website located at http://investor.scotts.com. Interested persons and shareholders of Scotts Miracle-Gro may also obtain copies of each of these documents without charge by writing to The Scotts Miracle-Gro Company, Attention: Corporate Secretary, 14111 Scottslawn Road, Marysville, Ohio 43041. In addition, a copy of the Code of Business Conduct and Ethics, as revised effective January 18, 2012, is incorporated by reference in Exhibit 14 to this Annual Report on Form 10-K.
| |
| ITEM 11. | EXECUTIVE COMPENSATION |
The information required by Item 402 of SEC Regulation S-K is incorporated herein by reference from the disclosures which will be included under the captions “EXECUTIVE COMPENSATION” andCOMPENSATION,” “NON-EMPLOYEE DIRECTOR COMPENSATION”COMPENSATION,” “EXECUTIVE COMPENSATION TABLES,” “SEVERANCE AND CHANGE IN CONTROL (CIC) ARRANGEMENTS,” and “PAYMENTS ON TERMINATION OF EMPLOYMENT AND/OR CHANGE IN CONTROL” in Scotts Miracle-Gro’s Definitive Proxy Statement.
The information required by Item 407(e)(4) of SEC Regulation S-K is incorporated herein by reference from the disclosure which will be included under the caption “MEETINGS AND COMMITTEES OF THE BOARD — Compensation and Organization Committee Interlocks and Insider Participation” in Scotts Miracle-Gro’s Definitive Proxy Statement.
The information required by Item 407(e)(5) of SEC Regulation S-K is incorporated herein by reference from the disclosure which will be included under the caption “COMPENSATION COMMITTEE REPORT” in Scotts Miracle-Gro’s Definitive Proxy Statement.
| |
| ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS |
Ownership of Common Shares of Scotts Miracle-Gro
The information required by Item 403 of SEC Regulation S-K is incorporated herein by reference from the disclosure which will be included under the caption “SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT” in Scotts Miracle-Gro’s Definitive Proxy Statement.
Equity Compensation Plan Information
The information required by Item 201(d) of SEC Regulation S-K is incorporated herein by reference from the disclosure which will be included under the caption “EQUITY COMPENSATION PLAN INFORMATION” in Scotts Miracle-Gro’s Definitive Proxy Statement.
| |
| ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE |
Certain Relationships and Related Person Transactions
The information required by Item 404 of SEC Regulation S-K is incorporated herein by reference from the disclosures which will be included under the caption “CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS” in Scotts Miracle-Gro’s Definitive Proxy Statement.
Director Independence
The information required by Item 407(a) of SEC Regulation S-K is incorporated herein by reference from the disclosures which will be included under the captions “CORPORATE GOVERNANCE — Director Independence” and “MEETINGS AND COMMITTEES OF THE BOARD” in Scotts Miracle-Gro’s Definitive Proxy Statement.
| |
| ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES |
The information required by this Item 14 is incorporated herein by reference from the disclosures which will be included under the captions “AUDIT AND FINANCE COMMITTEE MATTERS — Fees of the Independent Registered Public Accounting Firm” and “AUDIT AND FINANCE COMMITTEE MATTERS — Pre-Approval of Services Performed by the Independent Registered Public Accounting Firm” in Scotts Miracle-Gro’s Definitive Proxy Statement.
PART IV
| |
| ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES |
(a) LIST OF DOCUMENTS FILED AS PART OF THIS REPORT
1 and 2. Financial Statements and Financial Statement Schedules:
The response to this portion of Item 15 is submitted as a separate section of this Annual Report on Form 10-K. Reference is made to the “Index to Consolidated Financial Statements and Financial Statement Schedules” on page 4653 of this Annual Report on Form 10-K.
(b) EXHIBITS
The exhibits listed on the “Index to Exhibits” beginning on page 110126 of this Annual Report on Form 10-K are filed or furnished with this Annual Report on Form 10-K or incorporated herein by reference as noted in the “Index to Exhibits.”
(c) FINANCIAL STATEMENT SCHEDULES
The financial statement schedule filed with this Annual Report on Form 10-K is submitted in a separate section hereof. For a description of such financial statement schedules, see “Index to Consolidated Financial Statements and Financial Statement Schedules” on page 4653 of this Annual Report on Form 10-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
| | | |
| | THE SCOTTS MIRACLE-GRO COMPANY |
| | | | |
| | By: | | /s/ JAMES HAGEDORN |
| | | | James Hagedorn, Chief Executive Officer and Chairman of the Board |
Dated: November 20, 201328, 2016
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ ALAN H. BARRY* | | Director | | November 20, 2013 |
Alan H. Barry | | | | |
| | | | |
/s/ LAWRENCE A. HILSHEIMERTHOMAS RANDAL COLEMAN | | Chief Financial Officer and Executive Vice President | | November 20, 201328, 2016 |
Lawrence A. HilsheimerThomas Randal Coleman | | (Principal Financial Officer and Principal Accounting Officer) | | |
| | | | | |
| /s/ JAMES HAGEDORN | | Chief Executive Officer, Chairman of the Board and Director | | November 20, 201328, 2016 |
| James Hagedorn | | (Principal Executive Officer) | | |
| | | | | |
| /s/ BRIAN D. FINN* | | Director | | November 28, 2016 |
| Brian D. Finn | | | | |
| | | | |
| /s/ ADAM HANFT* | | Director | | November 20, 201328, 2016 |
| Adam Hanft | | | | |
| | | | |
| /s/ MICHELLE A. JOHNSON* | | Director | | November 28, 2016 |
| Michelle A. Johnson | | | | |
| | | | | |
| /s/ STEPHEN L. JOHNSON* | | Director | | November 20, 201328, 2016 |
| Stephen L. Johnson | | | | |
| | | | | |
| /s/ THOMAS N. KELLY JR.* | | Director | | November 20, 201328, 2016 |
| Thomas N. Kelly Jr. | | | | |
| | | | | |
| /s/ KATHERINE HAGEDORN LITTLEFIELD* | | Director | | November 20, 201328, 2016 |
| Katherine Hagedorn Littlefield | | | | |
|
| | | | |
| Signature | | Title | | Date |
| | | | | |
/s/ NANCY G. MISTRETTA*JAMES F. MCCANN* | | Director | | November 20, 201328, 2016 |
Nancy G. MistrettaJames F. McCann | | | | |
| | | | | |
/s/ MICHAEL E. PORTER*NANCY G. MISTRETTA* | | Director | | November 20, 201328, 2016 |
Michael E. Porter | | | | |
| | | | |
/s/ STEPHANIE M. SHERN* | | Director | | November 20, 2013 |
Stephanie M. ShernNancy G. Mistretta | | | | |
| | | | | |
| /s/ JOHN R. VINES* | | Director | | November 20, 201328, 2016 |
| John R. Vines | | | | |
|
| |
| * | The undersigned, by signing his name hereto, does hereby sign this Report on behalf of each of the directors of the Registrant identified above pursuant to Powers of Attorney executed by the directors identified above, which Powers of Attorney are filed with this Report as exhibits. |
|
| | |
| By: | /s/ LAWRENCE A. HILSHEIMER THOMAS RANDAL COLEMAN | |
| | Lawrence A. Hilsheimer,Thomas Randal Coleman, Attorney-in-Fact | |
THE SCOTTS MIRACLE-GRO COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
|
| |
| | Page |
| Consolidated Financial Statements of The Scotts Miracle-Gro Company and Subsidiaries: | |
| |
| |
| |
| |
| |
| |
| |
| |
| Schedules Supporting the Consolidated Financial Statements: | |
| |
All other financial statement schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are omitted because they are not required or are not applicable, or the required information has been presented in the Consolidated Financial Statements or Notes thereto.
ANNUAL REPORT OF MANAGEMENT ON INTERNAL
CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of The Scotts Miracle-Gro Company and our consolidated subsidiaries; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of The Scotts Miracle-Gro Company and our consolidated subsidiaries are being made only in accordance with authorizations of management and directors of The Scotts Miracle-Gro Company and our consolidated subsidiaries, as appropriate; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the assets of The Scotts Miracle-Gro Company and our consolidated subsidiaries that could have a material effect on our consolidated financial statements.
Management, with the participation of our principal executive officer and principal financial officer, assessed the effectiveness of our internal control over financial reporting as of September 30, 2013,2016, the end of our fiscal year. Management based its assessment on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management’s assessment included evaluation of such elements as the design and operating effectiveness of key financial reporting controls, process documentation, accounting policies and our overall control environment. This assessment is supported by testing and monitoring performed under the direction of management. As allowed by the SEC guidance, management excluded from the assessment the internal control over financial reporting at Gavita Holdings B.V. and its subsidiaries and a Canadian growing media operation, which were acquired in fiscal 2016. These acquisitions constituted 9.5% of total assets, 1.4% and 0.5% of revenues and net income, respectively, included in our consolidated financial statements as of and for the fiscal year ended September 30, 2016.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluations of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even an effective system of internal control over financial reporting will provide only reasonable assurance with respect to financial statement preparation.
Based on our assessment, management has concluded that our internal control over financial reporting was effective as of September 30, 2013,2016, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with accounting principles generally accepted in the United States of America. We reviewed the results of management’s assessment with the Audit and Finance Committee of the Board of Directors of The Scotts Miracle-Gro Company.
Our independent registered public accounting firm, Deloitte & Touche LLP, independently audited our internal control over financial reporting as of September 30, 20132016 and has issued their attestation report which appears herein.
|
| | | | |
| /s/ JAMES HAGEDORN | | /s/ LAWRENCE A. HILSHEIMERTHOMAS RANDAL COLEMAN |
James Hagedorn | | Thomas Randal Coleman |
| Chief Executive Officer and Chairman of the Board | | Lawrence A. Hilsheimer
Executive Vice President and Chief Financial Officer |
| | | | | |
| Dated: | November 20, 201328, 2016 | | Dated: | November 20, 201328, 2016 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company
Marysville, Ohio
We have audited the accompanying consolidated balance sheets of The Scotts Miracle-Gro Company and subsidiaries (the "Company"“Company”) as of September 30, 20132016 and 2012,2015, and the related consolidated statements of operations, comprehensive income, shareholders’ equity, and cash flows for each of the three years in the period ended September 30, 2013.2016. Our audits also included the financial statement schedules listed in the Index to Consolidated Financial Statements and Financial Statement Schedules.at Item 15. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidatedthe financial statements and financial statement schedules based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of the Company as ofat September 30, 20132016 and 2012,2015, and the results of itstheir operations and itstheir cash flows for each of the three years in the period ended September 30, 2013,2016, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of September 30, 2013,2016, based on the criteria established in Internal Control — Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated November 20, 201328, 2016 expressed an unqualified opinion on the Company’s internal control over financial reporting.
|
| |
| /s/ DELOITTE & TOUCHE LLP | |
| | |
| Columbus, Ohio | |
November 20, 201328, 2016 | |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of
The Scotts Miracle-Gro Company
Marysville, Ohio
We have audited the internal control over financial reporting of The Scotts Miracle-Gro Company and subsidiaries (the "Company"“Company”) as of September 30, 2013,2016, based on criteria established in Internal Control—Control — Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. As described in Annual Report of Management on Internal Control Over Financial Reporting, management excluded from its assessment the internal control over financial reporting at Gavita Holdings B.V. and its subsidiaries and a Canadian growing media operation which were acquired in fiscal 2016. These acquisitions constituted 9.5% of total assets, 1.4% and 0.5% of revenues and net income, respectively, included in the consolidated financial statements as of and for the fiscal year ended September 30, 2016. Accordingly, our audit did not include the internal control over financial reporting at Gavita International BV. The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, which is included in the accompanying Annual Report of Management on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed by, or under the supervision of, the company’s principal executive and principal financial officers, or persons performing similar functions, and effected by the company’s board of directors, management, and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America ("generally accepted accounting principles").principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of September 30, 2013,2016, based on the criteria established in Internal Control—Control — Integrated Framework (1992)(2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements and financial statement schedules as of and for the year ended September 30, 20132016 of the Company and our report dated November 20, 201328, 2016 expressed an unqualified opinion on those consolidated financial statements and financial statement schedules.
/s/ DELOITTE & TOUCHE LLP
Columbus, Ohio
November 20, 2013
|
| |
| /s/ DELOITTE & TOUCHE LLP | |
| |
| Columbus, Ohio | |
| November 28, 2016 | |
THE SCOTTS MIRACLE-GRO COMPANY
Consolidated Statements of Operations
(In millions, except per share data)
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Net sales | $ | 2,816.5 |
| | $ | 2,826.1 |
| | $ | 2,799.7 |
| $ | 2,836.1 |
| | $ | 2,728.0 |
| | $ | 2,578.3 |
|
| Cost of sales | 1,831.9 |
| | 1,864.4 |
| | 1,769.0 |
| 1,833.0 |
| | 1,813.4 |
| | 1,688.2 |
|
| Cost of sales—impairment, restructuring and other | 2.2 |
| | — |
| | 18.3 |
| 7.7 |
| | 6.6 |
| | — |
|
| Cost of sales—product registration and recall matters | — |
| | 0.4 |
| | 3.2 |
| |
| Gross profit | 982.4 |
| | 961.3 |
| | 1,009.2 |
| 995.4 |
| | 908.0 |
| | 890.1 |
|
| Operating expenses: | | | | | | | | | | |
| Selling, general and administrative | 661.1 |
| | 705.7 |
| | 686.3 |
| 597.1 |
| | 571.4 |
| | 567.1 |
|
| Impairment, restructuring and other | 18.1 |
| | 7.1 |
| | 37.6 |
| (47.2 | ) | | 76.6 |
| | 50.0 |
|
| Product registration and recall matters | — |
| | 7.8 |
| | 11.4 |
| |
| Other income, net | (10.0 | ) | | (2.9 | ) | | (0.9 | ) | (13.8 | ) | | (2.1 | ) | | (10.7 | ) |
| Income from operations | 313.2 |
| | 243.6 |
| | 274.8 |
| 459.3 |
| | 262.1 |
| | 283.7 |
|
| Equity in income of unconsolidated affiliates | | (7.8 | ) | | — |
| | — |
|
| Costs related to refinancing | — |
| | — |
| | 1.2 |
| 8.8 |
| | — |
| | 10.7 |
|
| Interest expense | 59.2 |
| | 61.8 |
| | 51.0 |
| 65.6 |
| | 50.5 |
| | 47.3 |
|
| Income from continuing operations before income taxes | 254.0 |
| | 181.8 |
| | 222.6 |
| 392.7 |
| | 211.6 |
| | 225.7 |
|
| Income tax expense from continuing operations | 92.8 |
| | 68.6 |
| | 82.7 |
| 139.4 |
| | 73.8 |
| | 80.2 |
|
| Income from continuing operations | 161.2 |
| | 113.2 |
| | 139.9 |
| 253.3 |
| | 137.8 |
| | 145.5 |
|
| Income (loss) from discontinued operations, net of tax | (0.1 | ) | | (6.7 | ) | | 28.0 |
| |
| Income from discontinued operations, net of tax | | 61.5 |
| | 20.9 |
| | 20.7 |
|
| Net income | $ | 161.1 |
| | $ | 106.5 |
| | $ | 167.9 |
| $ | 314.8 |
| | $ | 158.7 |
| | $ | 166.2 |
|
| Net loss attributable to noncontrolling interest | | 0.5 |
| | 1.1 |
| | 0.3 |
|
| Net income attributable to controlling interest | | $ | 315.3 |
| | $ | 159.8 |
| | $ | 166.5 |
|
| | | | | | | |
| Basic income per common share: | | | | | | | | | | |
| Income from continuing operations | $ | 2.61 |
| | $ | 1.86 |
| | $ | 2.16 |
| $ | 4.15 |
| | $ | 2.27 |
| | $ | 2.37 |
|
| Income (loss) from discontinued operations | — |
| | (0.11 | ) | | 0.44 |
| |
| Income from discontinued operations | | 1.01 |
| | 0.35 |
| | 0.33 |
|
| Basic net income per common share | $ | 2.61 |
| | $ | 1.75 |
| | $ | 2.60 |
| $ | 5.16 |
| | $ | 2.62 |
| | $ | 2.70 |
|
| Diluted income per common share: | | | | | | | | | | |
| Income from continuing operations | $ | 2.58 |
| | $ | 1.82 |
| | $ | 2.11 |
| $ | 4.09 |
| | $ | 2.23 |
| | $ | 2.32 |
|
| Income (loss) from discontinued operations | (0.01 | ) | | (0.11 | ) | | 0.43 |
| |
| Income from discontinued operations | | 1.00 |
| | 0.34 |
| | 0.33 |
|
| Diluted net income per common share | $ | 2.57 |
| | $ | 1.71 |
| | $ | 2.54 |
| $ | 5.09 |
| | $ | 2.57 |
| | $ | 2.65 |
|
See Notes to Consolidated Financial Statements.
THE SCOTTS MIRACLE-GRO COMPANY
Consolidated Statements of Comprehensive Income
(In millions)
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Net income | $ | 161.1 |
| | $ | 106.5 |
| | $ | 167.9 |
| $ | 314.8 |
| | $ | 158.7 |
| | $ | 166.2 |
|
| Other comprehensive income (loss): | | | | | | | | | | |
| Net foreign currency translation adjustment | (5.2 | ) | | 2.3 |
| | (10.1 | ) | (6.2 | ) | | (14.2 | ) | | (8.2 | ) |
| Net unrealized losses on derivative instruments, net of tax of $2.1, $6.2 and $3.0 for fiscal 2013, 2012 and 2011, respectively | (3.3 | ) | | (9.3 | ) | | (13.0 | ) | |
| Reclassification of net unrealized losses on derivatives to net income, net of tax of $5.4, $5.6 and $2.3 for fiscal 2013, 2012 and 2011, respectively | 8.4 |
| | 8.4 |
| | 10.0 |
| |
| Net unrealized gains (losses) in pension and other post retirement benefits, net of tax of $2.4, $0.4 and $4.7 for fiscal 2013, 2012 and 2011, respectively | 5.8 |
| | (14.3 | ) | | 8.3 |
| |
| Reclassification of net pension and post-retirement benefit loss to net income, net of tax of $2.3, $2.2 and $2.2 for fiscal 2013, 2012 and 2011, respectively | 3.8 |
| | 3.6 |
| | 3.9 |
| |
| Net unrealized losses on derivative instruments, net of tax of $0.9, $5.3 and $3.0 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively | | (1.5 | ) | | (8.6 | ) | | (4.9 | ) |
| Reclassification of net unrealized losses on derivatives to net income, net of tax of $3.6, $4.0 and $5.9 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively | | 5.8 |
| | 6.5 |
| | 9.5 |
|
| Net unrealized losses in pension and other post retirement benefits, net of tax of $6.2, $4.6 and $4.9 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively | | (10.0 | ) | | (7.4 | ) | | (7.9 | ) |
| Reclassification of net pension and post-retirement benefit income to net income, net of tax of $1.1, $1.9 and $1.9 for fiscal 2016, fiscal 2015 and fiscal 2014, respectively | | 1.8 |
| | 3.1 |
| | 3.1 |
|
| Total other comprehensive income (loss) | 9.5 |
| | (9.3 | ) | | (0.9 | ) | (10.1 | ) | | (20.6 | ) | | (8.4 | ) |
| Comprehensive income | $ | 170.6 |
| | $ | 97.2 |
| | $ | 167.0 |
| 304.7 |
| | 138.1 |
| | 157.8 |
|
| Comprehensive income attributable to noncontrolling interest | | — |
| | — |
| | — |
|
| Comprehensive income attributable to controlling interest | | $ | 304.7 |
| | $ | 138.1 |
| | $ | 157.8 |
|
See Notes to Consolidated Financial Statements.
THE SCOTTS MIRACLE-GRO COMPANY
Consolidated Statements of Cash Flows
(In millions)
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| OPERATING ACTIVITIES | | | | | | | | | | |
| Net income | $ | 161.1 |
| | $ | 106.5 |
| | $ | 167.9 |
| $ | 314.8 |
| | $ | 158.7 |
| | $ | 166.2 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | | | | |
| Impairment, restructuring and other | 16.2 |
| | 5.3 |
| | 31.8 |
| 0.2 |
| | 4.3 |
| | 33.7 |
|
| Costs related to refinancing | — |
| | — |
| | 1.2 |
| 2.2 |
| | — |
| | 3.5 |
|
| Share-based compensation expense | 10.3 |
| | 12.5 |
| | 16.0 |
| 15.6 |
| | 13.2 |
| | 11.1 |
|
| Depreciation | 54.9 |
| | 51.5 |
| | 50.3 |
| 53.8 |
| | 51.4 |
| | 50.6 |
|
| Amortization | 11.2 |
| | 10.9 |
| | 11.4 |
| 19.7 |
| | 17.6 |
| | 13.8 |
|
| Deferred taxes | 24.2 |
| | 24.2 |
| | (11.3 | ) | 83.6 |
| | 1.3 |
| | 12.1 |
|
| Loss (gain) on sale of long-lived assets | (2.1 | ) | | 0.1 |
| | 0.8 |
| |
| (Gain) loss on sale of long-lived assets | | (0.8 | ) | | — |
| | 1.1 |
|
| Gain on contribution of SLS Business | | (131.2 | ) | | — |
| | — |
|
| Gain on sale of business | — |
| | — |
| | (93.0 | ) | — |
| | — |
| | (1.4 | ) |
| Equity in net loss of unconsolidated affiliates | 0.4 |
| | — |
| | — |
| |
| Equity in income of unconsolidated affiliates, net of distributions | | (0.3 | ) | | — |
| | — |
|
| Gain on investment of unconsolidated affiliates | | — |
| | — |
| | (5.7 | ) |
| Changes in assets and liabilities, net of acquired businesses: | | | | | | | | | | |
| Accounts receivable | 17.9 |
| | (6.9 | ) | | 10.4 |
| (29.8 | ) | | (12.5 | ) | | (29.4 | ) |
| Inventories | 89.0 |
| | (23.1 | ) | | (37.8 | ) | (29.4 | ) | | (17.5 | ) | | (38.7 | ) |
| Prepaid and other assets | 0.3 |
| | 17.3 |
| | (7.6 | ) | (9.3 | ) | | 1.8 |
| | (3.2 | ) |
| Accounts payable | (5.2 | ) | | (6.9 | ) | | 6.1 |
| (45.3 | ) | | 6.9 |
| | 52.6 |
|
| Other current liabilities | 5.4 |
| | (15.9 | ) | | (76.5 | ) | 22.9 |
| | 12.9 |
| | (22.9 | ) |
| Restructuring reserves | (8.1 | ) | | (19.4 | ) | | 29.1 |
| (7.3 | ) | | 12.1 |
| | 4.9 |
|
| Other non-current items | (32.6 | ) | | (9.0 | ) | | 13.0 |
| (18.4 | ) | | (3.4 | ) | | (14.6 | ) |
| Other, net | (0.9 | ) | | 6.3 |
| | 10.3 |
| (3.6 | ) | | 0.1 |
| | 7.2 |
|
| Net cash provided by operating activities | 342.0 |
| | 153.4 |
| | 122.1 |
| 237.4 |
| | 246.9 |
| | 240.9 |
|
| INVESTING ACTIVITIES | | | | | | | | | | |
| Proceeds from sale of long-lived assets | 3.6 |
| | 0.7 |
| | 0.2 |
| 2.4 |
| | 5.5 |
| | 3.7 |
|
| Proceeds from sale of business, net of transaction costs | — |
| | — |
| | 253.6 |
| — |
| | — |
| | 7.2 |
|
| Investments in property, plant and equipment | (60.1 | ) | | (69.4 | ) | | (72.7 | ) | (58.3 | ) | | (61.7 | ) | | (87.6 | ) |
| Contingent consideration and related payments | — |
| | — |
| | (20.0 | ) | |
| Investment in unconsolidated affiliates | (4.5 | ) | | — |
| | — |
| |
| Investments in loans receivable | | (90.0 | ) | | — |
| | — |
|
| Proceeds from sale and leaseback transaction | | — |
| | — |
| | 35.1 |
|
| Cash contributed to TruGreen Joint Venture | | (24.2 | ) | | — |
| | — |
|
| Net distributions from unconsolidated affiliates | | 194.1 |
| | — |
| | — |
|
| Investment in marketing and license agreement | | — |
| | (300.0 | ) | | — |
|
| Investments in acquired businesses, net of cash acquired | (3.2 | ) | | (7.0 | ) | | (7.6 | ) | (158.4 | ) | | (180.2 | ) | | (114.0 | ) |
| Net cash (used in) provided by investing activities | (64.2 | ) | | (75.7 | ) | | 153.5 |
| |
| Net cash used in investing activities | | (134.4 | ) | | (536.4 | ) | | (155.6 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | 1,474.8 |
| | 1,684.0 |
| | 1,610.1 |
| 2,069.1 |
| | 1,836.0 |
| | 1,932.8 |
|
| Repayments under revolving and bank lines of credit and term loans | (1,682.1 | ) | | (1,694.6 | ) | | (1,632.1 | ) | (2,150.4 | ) | | (1,458.0 | ) | | (1,525.3 | ) |
| Proceeds from issuance of Senior Notes | — |
| | — |
| | 200.0 |
| |
| Proceeds from issuance of 6.000% Senior Notes | | 400.0 |
| | — |
| | — |
|
| Repayment of 6.625% Senior Notes | | (200.0 | ) | | — |
| | — |
|
| Repayment of 7.25% Senior Notes | | — |
| | — |
| | (200.0 | ) |
| Financing and issuance fees | — |
| | — |
| | (18.9 | ) | (11.2 | ) | | (0.5 | ) | | (6.1 | ) |
| Dividends paid | (87.8 | ) | | (75.4 | ) | | (67.9 | ) | (116.6 | ) | | (111.3 | ) | | (230.8 | ) |
| Purchase of common shares | — |
| | (17.5 | ) | | (358.7 | ) | |
| Purchase of Common Shares | | (130.8 | ) | | (14.8 | ) | | (120.0 | ) |
| Payments on sellers notes | (0.8 | ) | | — |
| | (0.3 | ) | (2.8 | ) | | (1.5 | ) | | (0.8 | ) |
| Excess tax benefits from share-based payment arrangements | 2.0 |
| | 6.6 |
| | 5.6 |
| 5.8 |
| | 4.7 |
| | 5.9 |
|
| Cash received from exercise of stock options | 13.3 |
| | 17.6 |
| | 31.5 |
| 14.7 |
| | 24.3 |
| | 20.0 |
|
| Net cash used in financing activities | (280.6 | ) | | (79.3 | ) | | (230.7 | ) | |
| Net cash (used in) provided by financing activities | | (122.2 | ) | | 278.9 |
| | (124.3 | ) |
| Effect of exchange rate changes on cash | 0.7 |
| | 2.6 |
| | (2.1 | ) | (2.1 | ) | | (7.3 | ) | | (1.5 | ) |
| Net (decrease) increase in cash and cash equivalents | (2.1 | ) | | 1.0 |
| | 42.8 |
| |
| Net decrease in cash and cash equivalents | | (21.3 | ) | | (17.9 | ) | | (40.5 | ) |
| Cash and cash equivalents at beginning of year | 131.9 |
| | 130.9 |
| | 88.1 |
| 71.4 |
| | 89.3 |
| | 129.8 |
|
| Cash and cash equivalents at end of year | $ | 129.8 |
| | $ | 131.9 |
| | $ | 130.9 |
| $ | 50.1 |
| | $ | 71.4 |
| | $ | 89.3 |
|
| SUPPLEMENTAL CASH FLOW INFORMATION | | | | | | |
| Interest paid | $ | (56.6 | ) | | $ | (48.6 | ) | | $ | (44.5 | ) | |
| Income taxes paid | (44.0 | ) | | (79.6 | ) | | (115.1 | ) | |
See Notes to Consolidated Financial Statements.
THE SCOTTS MIRACLE-GRO COMPANY
Consolidated Balance Sheets
(In millions, except stated value per share)
| | | | September 30, | September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
ASSETS | | Current assets: | | | | | | |
| Cash and cash equivalents | $ | 129.8 |
| | $ | 131.9 |
| $ | 50.1 |
| | $ | 71.4 |
|
| Accounts receivable, less allowances of $9.5 in 2013 and $10.5 in 2012 | 206.6 |
| | 330.9 |
| |
| Accounts receivable, less allowances of $7.2 in 2016 and $6.5 in 2015 | | 196.4 |
| | 157.7 |
|
| Accounts receivable pledged | 106.7 |
| | — |
| 174.7 |
| | 152.9 |
|
| Inventories | 324.9 |
| | 414.9 |
| 448.2 |
| | 395.8 |
|
| Assets held for sale | | — |
| | 220.3 |
|
| Prepaid and other current assets | 113.0 |
| | 122.3 |
| 122.3 |
| | 121.1 |
|
| Total current assets | 881.0 |
| | 1,000.0 |
| 991.7 |
| | 1,119.2 |
|
| Investment in unconsolidated affiliates | | 101.0 |
| | — |
|
| Property, plant and equipment, net | 422.3 |
| | 427.4 |
| 470.8 |
| | 444.1 |
|
| Goodwill | 315.1 |
| | 309.4 |
| 373.2 |
| | 283.8 |
|
| Intangible assets, net | 284.4 |
| | 307.1 |
| 750.9 |
| | 655.1 |
|
| Other assets | 34.4 |
| | 30.5 |
| 121.2 |
| | 25.0 |
|
| Total assets | $ | 1,937.2 |
| | $ | 2,074.4 |
| $ | 2,808.8 |
| | $ | 2,527.2 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY |
| Current liabilities: | | | | | | |
| Current portion of debt | $ | 92.4 |
| | $ | 1.5 |
| $ | 185.0 |
| | $ | 132.6 |
|
| Accounts payable | 137.7 |
| | 152.3 |
| 165.9 |
| | 193.1 |
|
| Liabilities held for sale | | — |
| | 41.7 |
|
| Other current liabilities | 279.7 |
| | 279.8 |
| 242.2 |
| | 251.2 |
|
| Total current liabilities | 509.8 |
| | 433.6 |
| 593.1 |
| | 618.6 |
|
| Long-term debt | 478.1 |
| | 781.1 |
| 1,131.1 |
| | 1,025.0 |
|
| Other liabilities | 238.8 |
| | 257.8 |
| 350.3 |
| | 250.5 |
|
| Total liabilities | 1,226.7 |
| | 1,472.5 |
| 2,074.5 |
| | 1,894.1 |
|
| Commitments and contingencies (Notes 16, 17 and 18) |
| |
| |
| Shareholders’ equity: | | | | |
| Common shares and capital in excess of $.01 stated value per share; shares outstanding of 62.0 in 2013 and 61.3 in 2012 | 397.5 |
| | 408.6 |
| |
| Commitments and contingencies (Notes 17, 18 and 19) | |
| |
|
| Equity: | | | | |
| Common shares and capital in excess of $.01 stated value per share; shares outstanding of 60.3 in 2016 and 61.4 in 2015 | | 401.7 |
| | 400.4 |
|
| Retained earnings | 703.4 |
| | 630.2 |
| 881.8 |
| | 684.2 |
|
| Treasury shares, at cost; 6.1 shares in 2013 and 6.8 shares in 2012 | (312.6 | ) | | (349.6 | ) | |
| Treasury shares, at cost; 7.8 shares in 2016 and 6.7 shares in 2015 | | (451.4 | ) | | (357.1 | ) |
| Accumulated other comprehensive loss | (77.8 | ) | | (87.3 | ) | (116.9 | ) | | (106.8 | ) |
| Total shareholders’ equity | 710.5 |
| | 601.9 |
| |
| Total liabilities and shareholders’ equity | $ | 1,937.2 |
| | $ | 2,074.4 |
| |
| Total equity—controlling interest | | 715.2 |
| | 620.7 |
|
| Noncontrolling interest | | 19.1 |
| | 12.4 |
|
| Total equity | | 734.3 |
| | 633.1 |
|
| Total liabilities and equity | | $ | 2,808.8 |
| | $ | 2,527.2 |
|
See Notes to Consolidated Financial Statements.
THE SCOTTS MIRACLE-GRO COMPANY
Consolidated Statements of Shareholders’ Equity
(In millions, except per share data)
| | | | Common Shares | | Capital in Excess of Stated Value | | Retained Earnings | | Treasury Shares | | Accumulated Other Comprehensive Income (loss) | | | Common Shares | | Capital in Excess of Stated Value | | Retained Earnings | | Treasury Shares | | Accumulated Other Comprehensive Income (loss) | | | | Non-controlling Interest | | |
| | Shares | | Amount | | Shares | | Amount | | Total | Shares | | Amount | | Shares | | Amount | | Total | | Total |
| Balance at September 30, 2010 | 68.1 |
| | $ | 0.3 |
| | $ | 433.7 |
| | $ | 499.6 |
| | 1.8 |
| | $ | (92.0 | ) | | $ | (77.1 | ) | | $ | 764.5 |
| |
| Net income | | | | | | | 167.9 |
| | | | | | | | 167.9 |
| |
| Balance at September 30, 2013 | | 68.1 |
| | $ | 0.3 |
| | $ | 397.2 |
| | $ | 703.4 |
| | 6.1 |
| | $ | (312.6 | ) | | $ | (77.8 | ) | | $ | 710.5 |
| | $ | — |
| | $ | 710.5 |
|
| Net income (loss) | | | | | | | | 166.5 |
| | | | | | | | 166.5 |
| | (0.3 | ) | | 166.2 |
|
| Other comprehensive income | | | | | | | | | | | | | | (8.4 | ) | | (8.4 | ) | | | | (8.4 | ) |
| Share-based compensation | | | | | | 11.1 |
| | | | | | | | | | 11.1 |
| | | | 11.1 |
|
| Dividends declared ($3.7625 per share) | | | | | | | | (233.0 | ) | | | | | | | | (233.0 | ) | | | | (233.0 | ) |
| Treasury share purchases | | | | | | | | | | 2.1 |
| | (120.0 | ) | | | | (120.0 | ) | | | | (120.0 | ) |
| Treasury share issuances | | | | | | (13.3 | ) | | | | (0.8 | ) | | 40.3 |
| | | | 27.0 |
| | | | 27.0 |
|
| Investment in noncontrolling interest | | | | | |
|
| |
| | | | | | | | — |
| | 13.8 |
| | 13.8 |
|
| Balance at September 30, 2014 | | 68.1 |
| | 0.3 |
| | 395.0 |
| | 636.9 |
| | 7.4 |
| | (392.3 | ) | | (86.2 | ) | | 553.7 |
| | 13.5 |
| | 567.2 |
|
| Net income (loss) | | | | | | | | 159.8 |
| | | | | | | | 159.8 |
| | (1.1 | ) | | 158.7 |
|
| Other comprehensive loss | | | | | | | | | | | | | (0.9 | ) | | (0.9 | ) | | | | | | | | | | | | | (20.6 | ) | | (20.6 | ) | | | | (20.6 | ) |
| Share-based compensation | | | | | 16.0 |
| | | | | | | | | | 16.0 |
| | | | | 17.5 |
| | | | | | | | | | 17.5 |
| | | | 17.5 |
|
| Dividends declared ($1.05 per share) | | | | | | | (68.3 | ) | | | | | | | | (68.3 | ) | |
| Dividends declared ($1.8200 per share) | | | | | | | | (112.5 | ) | | | | | | | | (112.5 | ) | | | | (112.5 | ) |
| Treasury share purchases | | | | | | | | | 6.9 |
| | (358.7 | ) | | | | (358.7 | ) | | | | | | | | | 0.2 |
| | (14.8 | ) | | | | (14.8 | ) | | | | (14.8 | ) |
| Treasury share issuances | | | | | (24.3 | ) | | | | (1.2 | ) | | 62.2 |
| | | | 37.9 |
| | | | | (12.4 | ) | | | | (0.9 | ) | | 50.0 |
| | | | 37.6 |
| | | | 37.6 |
|
| Other | | | | | 1.4 |
| | | | | | | | | | 1.4 |
| |
| Balance at September 30, 2011 | 68.1 |
| | 0.3 |
| | 426.8 |
| | 599.2 |
| | 7.5 |
| | (388.5 | ) | | (78.0 | ) | | 559.8 |
| |
| Net income | | | | | | | 106.5 |
| | | | | | | | 106.5 |
| |
| Balance at September 30, 2015 | | 68.1 |
| | 0.3 |
| | 400.1 |
| | 684.2 |
| | 6.7 |
| | (357.1 | ) | | (106.8 | ) | | 620.7 |
| | 12.4 |
| | 633.1 |
|
| Net income (loss) | | | | | | | | 315.3 |
| | | | | | | | 315.3 |
| | (0.5 | ) | | 314.8 |
|
| Other comprehensive loss | | | | | | | | | | | | | (9.3 | ) | | (9.3 | ) | | | | | | | | | | | | | (10.1 | ) | | (10.1 | ) | | | | (10.1 | ) |
| Share-based compensation | | | | | 12.5 |
| | | | | | | | | | 12.5 |
| | | | | 21.6 |
| | | | | | | | | | 21.6 |
| | | | 21.6 |
|
| Dividends declared ($1.225 per share) | | | | | | | (75.4 | ) | | | | | | | | (75.4 | ) | |
| Dividends declared ($1.9100 per share) | | | | | | | | (117.7 | ) | | | | | | | | (117.7 | ) | | | | (117.7 | ) |
| Treasury share purchases | | | | | | | | | 0.4 |
| | (17.5 | ) | | | | (17.5 | ) | | | | | | | | | 1.8 |
| | (130.8 | ) | | | | (130.8 | ) | | | | (130.8 | ) |
| Treasury share issuances | | | | | (31.2 | ) | | | | (1.1 | ) | | 56.4 |
| | | | 25.2 |
| | | | | (20.3 | ) | | | | (0.7 | ) | | 36.5 |
| | | | 16.2 |
| | | | 16.2 |
|
| Other | | | | | 0.2 |
| | (0.1 | ) | | | | | | | | 0.1 |
| |
| Balance at September 30, 2012 | 68.1 |
| | 0.3 |
| | 408.3 |
| | 630.2 |
| | 6.8 |
| | (349.6 | ) | | (87.3 | ) | | 601.9 |
| |
| Net income | | | | | | | 161.1 |
| | | | | | | | 161.1 |
| |
| Other comprehensive income | | | | | | | | | | | | | 9.5 |
| | 9.5 |
| |
| Share-based compensation | | | | | 10.3 |
| | | | | | | | | | 10.3 |
| |
| Dividends declared ($1.4125 per share) | | | | | | | (87.8 | ) | | | | | | | | (87.8 | ) | |
| Treasury share issuances | | | | | (21.4 | ) | | | | (0.7 | ) | | 37.0 |
| | | | 15.6 |
| |
| Other | | | | | | | (0.1 | ) | | | | | | | | (0.1 | ) | |
| Balance at September 30, 2013 | 68.1 |
| | $ | 0.3 |
| | $ | 397.2 |
| | $ | 703.4 |
| | 6.1 |
| | $ | (312.6 | ) | | $ | (77.8 | ) | | $ | 710.5 |
| |
| Investment in noncontrolling interest | | | | | | | | | | | | | | | | — |
| | 7.2 |
| | 7.2 |
|
| Balance at September 30, 2016 | | 68.1 |
| | $ | 0.3 |
| | $ | 401.4 |
| | $ | 881.8 |
| | 7.8 |
| | $ | (451.4 | ) | | $ | (116.9 | ) | | $ | 715.2 |
| | $ | 19.1 |
| | $ | 734.3 |
|
See Notes to Consolidated Financial Statements.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
The Scotts Miracle-Gro Company (“Scotts Miracle-Gro” or “Parent”) and its subsidiaries (collectively, together with its subsidiaries,Scotts Miracle-Gro, the “Company”) are engaged in the manufacturing, marketing and sale of consumer branded products for consumer lawn and garden care. The Company’s primary customers include home centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers, and food and drug stores, and indoor gardening and hydroponic stores. The Company’s products are sold primarily in North America and the European Union. The
Prior to April 13, 2016, the Company also operatesoperated the Scotts LawnService® business (the “SLS Business”), which providesprovided residential and commercial lawn care, tree and shrub care and limited pest control services in the United States. On April 13, 2016, pursuant to the terms of the Contribution and Distribution Agreement (the “Contribution Agreement”) between the Company and TruGreen Holding Corporation (“TruGreen Holdings”), the Company completed the contribution of the SLS Business to a newly formed subsidiary of TruGreen Holdings (the “TruGreen Joint Venture”) in exchange for a minority equity interest of 30% in the TruGreen Joint Venture. As a result, effective in its second quarter of fiscal 2016, the Company classified its results of operations for all periods presented to reflect the SLS Business as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. See “NOTE 2. DISCONTINUED OPERATIONS” and “NOTE 8. INVESTMENT IN UNCONSOLIDATED AFFILIATES” for further discussion. Refer to “NOTE 22. SEGMENT INFORMATION” for discussion of the Company’s new reportable segments identified effective in the second quarter of fiscal 2016.
On February 28, 2011,In March 2014, the Company completed the sale of a significant majority of the assets of its Global Professional business (excluding the non-European professional seed business, “Global Pro”) to Israel Chemicals Ltd. (“ICL”). As a result of the then-pending sale, effective in the Company’s first quarter of fiscal 2011, the Company classified Global Pro as discontinued operations. In the fourth quarter of fiscal year 2012, the Company completed the wind down of the Company's professional seed business (“Pro Seed”).U.S. and Canadian wild bird food business. As a result, effective in its fourththe second quarter of fiscal 2012,2014, the Company classified Pro Seedits results of operations for all periods presented to reflect the wild bird food business as a discontinued operation.
In fiscal 2012 and fiscal 2011 the Company incurred product registration and recall costs of $8.2 million and $14.6 million, respectively. Fiscal 2012 and fiscal 2011 costs include reserves that were established in connection with the previously disclosed U.S. EPA and U.S. DOJ investigations into pesticide product registration issues, which, as previously disclosed in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, 2012, were settled in the fourth quarter of fiscal year 2012. The Company does not expect to incur any additional costs related to these investigations.
Due to the nature of the consumer lawn and garden business, the majority of the Company’s sales to customers occur in the Company’s second and third fiscal quarters. On a combined basis, net sales for the second and third quarters of the last three fiscal years represented in excess of 75% of the Company’s annual net sales.
The Company follows a 13-week quarterly accounting cycle pursuant to which the first three fiscal quarters end on a Saturday and the fiscal year always ends on September 30. This fiscal calendar convention requires the Company to cycle forward the first three fiscal quarter ends every six years. Fiscal 2016 is the most recent year impacted by this process and, as a result, the first quarter of fiscal 2016 had six additional days and the fourth quarter of fiscal 2016 had five fewer days compared to the corresponding quarters of fiscal 2015.
Organization and Basis of Presentation
The Company’s consolidated financial statements are presented in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The consolidated financial statements include the accounts of Scotts Miracle-Gro and all wholly-owned and majority-ownedits subsidiaries. All intercompany transactions and accounts arehave been eliminated in consolidation. The Company’s consolidation criteria are based on majority ownership (as evidenced by a majority voting interest in the entity) and an objective evaluation and determination of effective management control. AeroGrow International, Inc. (“AeroGrow”), and Gavita Holdings B.V., and its subsidiaries (collectively, “Gavita”), in which the Company has controlling interests, are consolidated, with the equity owned by other shareholders shown as noncontrolling interest in the Consolidated Balance Sheets, and the other shareholders’ portion of net earnings and other comprehensive income shown as net income (loss) or comprehensive income attributable to noncontrolling interest in the Consolidated Statements of Operations and Consolidated Statements of Comprehensive Income, respectively.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes.notes and related disclosures. Although these estimates are based on management’s best knowledge of current events and actions the Company may undertake in the future, actual results ultimately may differ from the estimates.
Revenue Recognition
Revenue is recognized when title and risk of loss transfer, which generally occurs when products or services are received by the retail customer. Provisions for estimated returns and allowances are recorded at the time revenue is recognized based on
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
historical rates and are periodically adjusted for known changes in return levels. Outbound shipping and handling costs are included in cost of sales.
Under the terms of the Amended and Restated Exclusive Agency and Marketing Agreement (the “Marketing Agreement”) between, pursuant to which the Company andhas served, since its 1998 fiscal year, as the exclusive agent to the Monsanto Company (“Monsanto”), for the marketing and distribution of consumer Roundup® herbicide products, the Company in its role as exclusive agent, performs certain functions, primarily manufacturing conversion services (in North America), distribution and logistics, and selling and marketing support, on behalf of Monsanto in the conduct of the consumer Roundup® business. The actual costs incurred for these activities are charged to and reimbursed by Monsanto. The Company records costs incurred under the Marketing Agreement for which the Company is the primary obligor on behalfa gross basis, recognizing such costs in the “Cost of sales” line and the consumer Roundupreimbursement of these costs in the “Net sales” line in the Consolidated Statement of Operations, with no effect on gross profit dollars or net income.® business are recovered from Monsanto through
Under the terms of the Marketing, Agreement. TheR&D and Ancillary Services Agreement (the “Services Agreement”) with Bonnie Plants, Inc. (“Bonnie”) and its sole shareholder, Alabama Farmers Cooperative, Inc. (“AFC”), entered into in the second quarter of fiscal 2016, the Company provides marketing, research and development and certain ancillary services to Bonnie for reimbursement of certain costs and a commission fee earned based on a percentage of the growth in earnings before interest, income taxes and amortization of Bonnie’s business of planting, growing, developing, manufacturing, distributing, marketing, and selling live plants, plant food, fertilizer and potting soil (the “Bonnie Business”). The commission earned under the Services Agreement is included in the “Net sales” line in the Consolidated Statements of Operations. Additionally, the Company records costs incurred under the Services Agreement for which the Company is considered the primary obligor is includedon a gross basis, recognizing such costs in the “Cost of sales” line and the reimbursement of these costs in the “Net sales” line, with no effect on gross profit dollars or net sales.income.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Promotional Allowances
The Company promotes its branded products through, among other things, cooperative advertising programs with retailers. Retailers may also be offered in-store promotional allowances and rebates based on sales volumes. Certain products are promoted with direct consumer rebate programs and special purchasing incentives. Promotion 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. Accruals for expected payouts under these programs are included in the “Other current liabilities” line in the Consolidated Balance Sheets.
Advertising
Advertising costs incurred during the year by our Global Consumer segment are expensed to interim periods in relation to revenues. All advertising costs, except for external production costs, are expensed within the fiscal year in which such costs are incurred. External production costs for advertising programs are deferred until the period in which the advertising is first aired.
Scotts LawnService® promotes its service offerings primarily through direct mail campaigns. External costs associated with these campaigns that qualify as direct response advertising costs are deferred and recognized as advertising expense in proportion to revenues over a period not beyond the end of the subsequent calendar year. Costs that do not qualify as direct response advertising costs are expensed within the fiscal year incurred on a monthly basis in proportion to net sales. There were no costs deferred at September 30, 2013. The costs deferred at September 30, 20122016 and 2015 were $1.1$0.2 million. and $0.7 million, respectively.
Advertising expenses were $142.2$132.2 million in fiscal 2013, $168.92016, $133.2 million in fiscal 20122015 and $140.7$132.1 million in fiscal 2011.2014.
Research and Development
All costs associated with research and development are charged to expense as incurred. Expenses for fiscal 20132016, fiscal 20122015 and fiscal 20112014 were $46.7$45.5 million,, $50.8 $44.4 million and $50.9$46.0 million,, respectively, including product registration costs of $12.4$14.3 million,, $14.0 $13.0 million and $14.6$12.5 million,, respectively.
Environmental Costs
The Company recognizes environmental liabilities when conditions requiring remediation are probable and the amounts can be reasonably estimated. Expenditures which extend the life of the related property or mitigate or prevent future environmental contamination are capitalized. Environmental liabilities are not discounted or reduced for possible recoveries from insurance carriers.
Share-Based Compensation Awards
The fair value of awards is expensed over the requisite service period which is typically the vesting period, generally three years, except in cases where employees are eligible for accelerated vesting based on having satisfied retirement requirements relating to age and years of service. Performance-based awards are expensed over the requisite service period based on achievement of performance criteria. The Company uses a binomial model to determine the fair value of its option grants. The Company classifies share-based compensation expense within selling, general and administrative expenses to correspond with the same line item as cash compensation paid to employees.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Earnings per Common Share
Basic earnings per common shareCommon Share is computed based on the weighted-average number of common sharesCommon Shares outstanding each period. Diluted earnings per common shareCommon Share is computed based on the weighted-average number of common sharesCommon Shares and dilutive potential common sharesCommon Shares (stock options, stock appreciation rights, performance shares restricted stock and restricted stock unit awards) outstanding each period.
Cash and Cash Equivalents
The Company considers all highly liquid financial instruments with original maturities of three months or less to be cash equivalents. The Company maintains cash deposits in banks which from time to time exceed the amount of deposit insurance available. Management periodically assesses the financial condition of the Company’s banks and believes that the risk of any potential credit loss is minimal.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Accounts Receivable and Allowances
Trade accounts receivable are recorded at the invoiced amount and do not bear interest. Allowances for doubtful accounts reflect the Company’s best estimate of amounts in its existing accounts receivable that may not be collected due to customer claims or customer inability or unwillingness to pay. The allowance is determined based on a combination of factors, including the Company’s risk assessment regarding the credit worthiness of its customers, historical collection experience and length of time the receivables are past due. Account balances are charged off against the allowance when the Company believes it is probable the receivable will not be recovered.
Inventories
Inventories are stated at the lower of cost or market, principally determined by the first in, first out method of accounting. Inventories include the cost of raw materials, labor, manufacturing overhead and freight and in-bound handling costs incurred to pre-position goods in the Company’s warehouse network. The Company makes provisions for obsolete or slow-moving inventories as necessary to properly reflect inventory at the lower of cost or market value. Adjustments to reflect inventories at net realizable values were $19.7$10.8 million and $21.0$17.8 million at September 30, 20132016 and 20122015, respectively.
Long-livedLoans Receivable
Loans receivable are carried at outstanding principal amount, and are recognized in the “Other assets” line in the Consolidated Balance Sheets. Loans receivable are impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. If it is determined that an impairment has occurred, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds the present value of expected future cash flows and recorded within “Operating expenses” in the Consolidated Statements of Operations. Interest income is recorded on an accrual basis, and is recognized in the “Other income, net” line in the Consolidated Statements of Operations.
Interest income is recorded on an accrual basis, and is recognized in the “Other income, net” line in the Consolidated Statements of Operations. Interest income was $3.9 million for fiscal 2016 and zero for fiscal 2015 and fiscal 2014.
Long-Lived Assets
Property, plant and equipment are stated at cost. Interest capitalized in property, plant and equipment amounted to $0.8$0.3 million,, $0.9 $0.4 million and $0.1$0.4 million during fiscal 2016, fiscal 2013, fiscal 20122015 and fiscal 20112014, respectively. Expenditures for maintenance and repairs are charged to expense as incurred. When properties are retired or otherwise disposed of, the cost of the asset and the related accumulated depreciation are removed from the accounts with the resulting gain or loss being reflected in income from operations.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Depreciation of property, plant and equipment is provided on the straight-line method and is based on the estimated useful economic lives of the assets as follows:
|
| |
| Land improvements | 10 –25– 25 years |
| Buildings | 10 –40– 40 years |
| Machinery and equipment | 3 –15– 15 years |
| Furniture and fixtures | 6 –10– 10 years |
| Software | 3 – 8 years |
Intangible assets with finite lives, and therefore subject to amortization include technology, such as patents, customer relationships, non-compete agreements and certain tradenames. These intangible assets are being amortized over their estimated useful economic lives, which typically range from 3 to 25 years. The Company’s fixed assets and intangible assets subject to amortization are required to be tested for recoverability whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. If an evaluation of recoverability was required, the estimated undiscounted future cash flows associated with the asset would be compared to the asset’s carrying amount to determine if a write-down is required. If the undiscounted cash flows are less than the carrying amount, an impairment loss is recorded to the extent that the carrying amount exceeds fair value and classified as “Impairment, restructuring and other charges” within “Operating expenses” in the Consolidated Statements of Operations.
The Company had noncashnon-cash investing activities of $7.3$12.4 million,, $17.3 $8.5 million and $8.7$7.0 million during fiscal 2016, fiscal 2015 and fiscal 2014, respectively, representing unpaid liabilities incurred during each fiscal 2013, fiscal 2012 and fiscal 2011year to acquire property, plant and equipment.
Statements of Cash Flows
Supplemental cash flow information was as follows for fiscal 2016, fiscal 2015 and fiscal 2014: |
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Interest paid | $ | (54.1 | ) | | $ | (47.6 | ) | | $ | (46.9 | ) |
| Call premium on 6.625% Senior Notes | (6.6 | ) | | — |
| | — |
|
| Call premium on 7.25% Senior Notes | — |
| | — |
| | (7.3 | ) |
| Income taxes paid | (80.9 | ) | | (108.3 | ) | | (55.3 | ) |
The Company uses the “cumulative earnings” approach for determining cash flow presentation of distributions from unconsolidated affiliates. Distributions received are included in the Consolidated Statements of Cash Flows as operating activities, unless the cumulative distributions exceed the portion of the cumulative equity in the net earnings of the unconsolidated affiliate, in which case the excess distributions are deemed to be returns of the investment and are classified as investing activities in the Consolidated Statements of Cash Flows.
Internal Use Software
The costs of internal use software are expensed or capitalized depending on whether they are incurred in the preliminary project stage, application development stage or the post-implementation/operation stage. As of September 30, 20132016 and September 30, 2012,2015, the Company had $17.5$11.3 million and $18.6$18.3 million,, respectively, in unamortized capitalized internal use computer software costs. Amortization of these costs was $7.3$6.8 million,, $8.0 $6.0 million and $9.0$8.3 million during fiscal 2013, 2016, fiscal 20122015 and fiscal 2011,2014, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Goodwill and Indefinite-lived Intangible Assets
Goodwill and indefinite-lived intangible assets are not subject to amortization. Goodwill and indefinite-lived intangible assets are reviewed for impairment by applying a fair-value based test on an annual basis, as of the first day of the Company’s fiscal fourth quarter, or more frequently if circumstances indicate impairment may have occurred. With respect to goodwill, the Company performs either a qualitative or quantitative evaluation for each of its reporting units. Factors considered in the qualitative test include reporting unit specific operating results as well as new events and circumstances impacting the operations of the reporting units. For the quantitative test, the Company assesses goodwill for impairment by comparing the carrying value of its reporting units to their respective fair values and reviewing the Company’s market value of invested capital. A reporting unit is defined as an operating segment or one level below an operating segment. The Company has identified sixfive reporting units. The Company determines the fair value of its reporting units under the income-based approach utilizing discounted cash flows and incorporates assumptions it believes marketplace participants would utilize. The Company also uses a comparative market-based approach using market multiples and other factors to corroborate the discounted cash flow results used.
With respect to indefinite-lived intangible assets, the Company performs either a qualitative or quantitative evaluation for each of its indefinite-lived intangible assets. Factors considered in the qualitative test include indefinite-lived intangible asset specific operating results as well as new events and circumstances impacting the cash flows of the indefinite-lived intangible assets. For the quantitative test, the value of all indefinite-lived intangible assets is determined under the income-based approach utilizing discounted cash flows and incorporating assumptions the Company believes marketplace participants would utilize. For tradenames, value was determined using a royalty savings methodology similar to that employed when the associated businesses were acquired but using updated estimates of sales, cash flow and profitability. If it is determined that an impairment has occurred, an impairment loss is recognized for the amount by which the carrying value of the asset exceeds its estimated fair value and classified as “Impairment, restructuring and other charges” within “Operating expenses” in the Consolidated Statements of Operations.
Insurance and Self-Insurance
The Company maintains insurance for certain risks, including workers’ compensation, general liability and vehicle liability, and is self-insured for employee-related health care benefits up to a specified level for individual claims. The Company accrues for the expected costs associated with these risks by considering historical claims experience, demographic factors, severity factors and other relevant information. Costs are recognized in the period the claim is incurred, and accruals include an actuarially determined estimate of claims incurred but not yet reported.
Income Taxes
The Company uses the asset and liability method to account for income taxes. Deferred tax assets and liabilities are recognized for the anticipated future tax consequences attributable to differences between financial statement amounts and their respective tax bases. Management reviews the Company’s deferred tax assets to determine whether their value can be realized based upon available evidence. A valuation allowance is established when management believes that it is more likely than not that some portion of its deferred tax assets will not be realized. Changes in valuation allowances from period to period are included in the Company’s tax provision in the period of change.
The Company establishes a liability for tax return positions in which there is uncertainty as to whether or not the position will ultimately be sustained. Amounts for uncertain tax positions are adjusted in quarters when new information becomes available or when positions are effectively settled. The Company recognizes interest expense and penalties related to these unrecognized tax benefits within income tax expense.
U.S. income tax expense and foreign withholding taxes are provided on unremitted foreign earnings that are not indefinitely reinvested at the time the earnings are generated. Where foreign earnings are indefinitely reinvested, no provision for U.S. income or foreign withholding taxes is made. When circumstances change and the Company determines that some or all of the undistributed earnings will be remitted in the foreseeable future, the Company accrues an expense in the current period for U.S. income taxes and foreign withholding taxes attributable to the anticipated remittance.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Translation of Foreign Currencies
The functional currency for each Scotts Miracle-Gro subsidiary is generally its local currency. Assets and liabilities of these subsidiaries are translated at the exchange rate in effect at each fiscal year-end. Income and expense accounts are translated at the average rate of exchange prevailing during the year. Translation gains and losses arising from the use of differing exchange rates from period to period are included in accumulated other comprehensive income (loss) within shareholders’ equity. Foreign currency transaction gains and losses are included in the determination of net income and classified as “Other (income) expense,income, net” in the Consolidated Statements of Operations.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Derivative Instruments
In the normal course of business, theThe Company is exposed to fluctuationsmarket risks, such as changes in interest rates, the value of foreign currenciescurrency exchange rates and the cost of commodities.commodity prices. A variety of financial instruments, including forward and swap contracts, are used to manage these exposures. These financial instruments are recognized at fair value on the balance sheet,Consolidated Balance Sheets, and all changes in fair value are recognized in net income or shareholders’ equity through accumulated other comprehensive income (loss). The Company’s objective in managing these exposures is to better control these elements of cost and mitigate the earnings and cash flow volatility associated with changes in the applicable rates and prices.
The Company has established policies and procedures that encompass risk-management philosophy and objectives, guidelines for derivative-instrument usage, counterparty credit approval, and the monitoring and reporting of derivative activity. The Company does not enter into derivative instruments for the purpose of speculation.
The Company formally designates and documents instruments at inception that qualify for hedge accounting of underlying exposures in accordance with GAAP. The Company formally assesses, both at inception and at least quarterly, whether the financial instruments used in hedging transactions are effective at offsetting changes in cash flows of the related underlying exposure. Fluctuations in the value of these instruments generally are offset by changes in the cash flows of the underlying exposures being hedged. This offset is driven by the high degree of effectiveness between the exposure being hedged and the hedging instrument. GAAP requires all derivative instruments to be recognized as either assets or liabilities at fair value in the Consolidated Balance Sheets. The Company designates commodity hedges as cash flow hedges of forecasted purchases of commodities and interest rate swap agreements as cash flow hedges of interest payments on variable rate borrowings. Any ineffective portion of a change in the fair value of a qualifying instrument is immediately recognized in earnings. The amounts recorded in earnings related to ineffectiveness of derivative hedges for the years ended September 30, 2013, September 30, 2012 and September 30, 2011 were not significant.
RECENT ACCOUNTING PRONOUNCEMENTS
Comprehensive IncomeRevenue Recognition from Contracts with Customers
In June 2011,May 2014, the FASBFinancial Accounting Standards Board (“FASB”) issued amended accounting guidance that replaces most existing revenue recognition guidance under GAAP. This guidance requires companies to recognize revenue in a manner that depicts the transfer of promised goods or services to customers in amounts that reflect the consideration to which a company expects to be entitled in exchange for those goods or services. The new standard also will result in enhanced disclosures about the nature, amount, timing and uncertainty of revenue and cash flows arising from contracts with customers. Subsequently, additional guidance was issued on several areas including guidance intended to improve the operability and understandability of the implementation of principal versus agent considerations and clarifications on the presentationidentification of comprehensive income. The amendedperformance obligations and implementation of guidance requires that all non-owner changes in stockholders’ equity be presented either in a single continuous statement of comprehensive income or in two separate but consecutive statements.related to licensing. The provisions wereare effective for the Company’s financial statements forno later than the fiscal year beginning October 1, 20122018. The standard allows for either a full retrospective or a modified retrospective transition method. The Company is currently evaluating the impact of this standard on its consolidated results of operations, financial position and cash flows.
Discontinued Operations Reporting
In April 2014, the Company electedFASB issued an accounting standard update that amends the accounting guidance related to present net incomediscontinued operations. This amendment defines discontinued operations as a component or group of components that is disposed of or is classified as held for sale and other comprehensive income in two separate but consecutive statements.represents a strategic shift that has or will have a major effect on an entity’s operations and financial results. This amendment also introduces new disclosures for disposals that do not meet the criteria of discontinued operations. The provisions are effective for fiscal years beginning after December 15, 2014 and apply to new disposals and new classifications of disposal groups as held for sale after the effective date. The adoption of the amended guidance impacts presentation and disclosure of future divestitures and did not have a significant impact on the Company'sCompany’s consolidated financial statements and related disclosures.position, results of operations or cash flows.
Balance Sheet Offsetting
In December 2011, the FASB issued an amendment to accounting guidance on the presentation of offsetting of derivatives, and financial assets and liabilities. The amended guidance requires quantitative disclosures regarding the gross amounts and their location within the statement of financial position. The provisions are effective for the Company's financial statements for the fiscal year beginning October 1, 2013. The adoption of the amended guidance will not have a significant impact on the Company's financial statements and related disclosures.
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
In February 2013, the FASB issued an amendment to accounting guidance on the reporting of amounts reclassified out of accumulated other comprehensive income. The amended guidance requires presentation of reclassification adjustments from each component of accumulated other comprehensive income either in a single note or parenthetically on the face of the financial statements, for those amounts required to be reclassified into net income in their entirety in the same reporting period. For amounts that are not required to be reclassified in their entirety in the same reporting period, cross-reference to other disclosures is required. The provisions are effective for the Company's financial statements for the fiscal year beginning October 1, 2013. The Company elected to early adopt the amended guidance for the financial statements presented. The adoption of the amended guidance did not have a significant impact on the Company's financial statements and related disclosures.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Going Concern
In April 2014, the FASB issued a new accounting standard that requires management to assess if there is substantial doubt about an entity’s ability to continue as a going concern for each annual and interim period. If conditions or events give rise to substantial doubt, disclosures are required. The new accounting standard will be effective as of December 31, 2016 and is not expected to have an impact on the Company’s financial statement disclosures.
Inventory
In July 2015, the FASB issued an accounting standard update that requires inventory to be measured “at the lower of cost and net realizable value,” thereby simplifying the current guidance that requires inventory to be measured at the lower of cost or market (market in this context is defined as one of three different measures, one of which is net realizable value). The provisions are effective prospectively for fiscal years beginning after December 15, 2016 and are not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
Debt Issuance Costs
In April 2015, the FASB issued an accounting standard update that requires debt issuance costs related to a recognized debt liability to be presented in the balance sheet as a direct deduction from the corresponding debt liability rather than as an asset. The provisions are effective retrospectively for the Company’s financial statements for the fiscal year beginning October 1, 2016. The adoption of the amended guidance impacts presentation and disclosure of debt issuance costs and is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows. The Company had unamortized debt issuance costs of $16.7 million and $11.3 million at September 30, 2016 and 2015, respectively.
Cloud Computing Arrangements
In April 2015, the FASB issued an accounting standard update that clarifies how customers in cloud computing arrangements should determine whether the arrangement includes a software license, and requires acquired software licenses to be accounted for as licenses of intangible assets. The provisions are effective for fiscal years beginning after December 15, 2015 and are not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
Business Combinations
In September 2015, the FASB issued an accounting standard update to simplify the accounting for measurement-period adjustments by requiring an acquirer to recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined, and requiring disclosure of the portion of the amount recorded in current-period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. The provisions are effective prospectively for the Company’s financial statements no later than the fiscal year beginning October 1, 2016 and are not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows.
Income Taxes
In November 2015, the FASB issued an accounting standard update to simplify the presentation of deferred income taxes by requiring that deferred income tax liabilities and assets be classified as noncurrent in a classified statement of financial position. The provisions are effective for the Company’s financial statements no later than the fiscal year beginning October 1, 2017. The standard allows for either a retrospective or prospective transition method and is not expected to have a significant impact on the Company’s consolidated financial position, results of operations or cash flows. At September 30, 2016, net current deferred tax assets classified with prepaid and other current assets were $62.1 million.
Leases
In February 2016, the FASB issued an accounting standard update which significantly changes the accounting for leases. This guidance requires lessees to recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The provisions are effective for the Company’s financial statements no later than the fiscal year beginning October 1, 2019 and require a modified retrospective transition approach for leases that exist or are entered into after the beginning of the earliest comparative period presented in the financial statements. The Company is currently evaluating the impact of this standard on its consolidated results of operations, financial position and cash flows.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Share-Based Compensation
In March 2016, the FASB issued an accounting standard update that simplifies several aspects of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures, and statutory tax withholding requirements, as well as classification in the statement of cash flows. The provisions are effective for the Company’s financial statements no later than the fiscal year beginning October 1, 2017. The Company is currently evaluating the impact of this standard on its consolidated results of operations, financial position and cash flows.
NOTE 2. DISCONTINUED OPERATIONS
Pro SeedScotts LawnService®
InOn April 13, 2016, pursuant to the fourth quarterterms of fiscal year 2012,the Contribution Agreement, the Company completed the wind downcontribution of the Company's professional seed business.SLS Business to the TruGreen Joint Venture in exchange for a minority equity interest of 30% in the TruGreen Joint Venture. As a result, effective in its fourthsecond quarter of fiscal 2012,2016, the Company classified its results of operations for all periods presented to reflect the professional seedSLS Business as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. The Company’s gain on the contribution of $131.2 million, partially offset by the provision for deferred income taxes of $51.9 million, has been recorded in fiscal 2016 within results from discontinued operations.
Wild Bird Food
In March 2014, the Company completed the sale of its U.S. and Canadian wild bird food business, including intangible assets, certain on-hand inventory and fixed assets, for $4.1 million in cash and $1.0 million in earn-out payments. As a result, effective in the second quarter of fiscal 2014, the Company classified its results of operations for all periods presented to reflect the wild bird food business as a discontinued operation. In 2013,addition, in the third quarter of fiscal 2014, the Company recorded a $0.1received $3.1 million loss related to for the wind-downsale of the professional seed business. The Company recorded restructuring and other charges of $0.1 million and $3.4 million in fiscal 2012 and fiscal 2011, respectively related to termination benefits provided to employees and other restructuring charges. The company also recorded a $0.5 million impairment charge related to the investment in Turf-Seed (Europe) Limited in fiscal 2012.
On May 26, 2011, the Company and the former owners of Turf-Seed, Inc. agreed to an early settlement of the contingent consideration associated with the Company’s fiscal 2006 acquisition of Turf-Seed, Inc. Concurrently, several other contracts and agreements between the Company and the former owners of Turf-Seed, Inc. were terminated or amended. The Company agreed to pay a total of $21.3 million to resolve these matters,remaining wild bird food manufacturing facilities resulting in a net chargegain of $1.2 million.
$10.3 million after consideration of previously recorded liabilities and other aspectsThe following table summarizes the results of the agreements. InSLS Business and the fourth quarter of fiscal 2011, the Company also recorded impairment and other charges of $6.5 million related to the investment in Turf-Seed (Europe) Limited.
Global Pro
On February 28, 2011, the Company completed the sale of Global Pro to ICL for $270 million. After agreed upon adjustments (including post-closing adjustments), the Company received $270.9 million net proceeds, or $253.6 million after transaction costs. Results fromwild bird food business within discontinued operations for fiscal 2011 include an after-tax gain on the sale of Global Pro of $39.5 million, which includes transaction costs. In addition, in fiscal 2012, the Company recorded an adjustment of $1.7 million as a change in estimate on the tax due on the sale of Global Pro.
Pursuant to the termseach of the indenture governing the Company’s periods presented:7.25% Senior Notes due 2018 and the indenture governing the Company’s 6.625% Senior Notes due 2020, the Company had a period of 360 days to apply an amount equal to the net proceeds received from the sale of Global Pro or any other asset sales to repay indebtedness, acquire equity interests in certain entities, make capital expenditures, acquire other assets useful in a related business and/or make investments in certain joint ventures. Any amount not so applied must be used to make an offer to repurchase the Senior Notes, provided that such repurchase offer may be deferred until such time as the unutilized net proceeds from the sale of Global Pro and any other asset sales exceed $50 million (at which time the entire unutilized net proceeds, and not just the amount in excess of $50 million, shall be applied to make such repurchase offer). As of September 30, 2013, the Company had applied all but approximately $45 million of the net proceeds from the sale of Global Pro to one or more of the uses permitted by the indentures. The Company has no unutilized net proceeds from any other asset sales.The Company’s decision to exit the professional ornamental horticulture, turf and specialty agriculture markets and sell Global Pro was another step in its strategy to evolve its business portfolio to better leverage growth opportunities within its Global Consumer and Scotts LawnService® business segments.
In conjunction with the transaction, The Scotts Company LLC (“Scotts LLC”), a wholly owned subsidiary of Scotts Miracle-Gro, and ICL entered into several product supply agreements which are generally up to five years in duration, as well as various trademark and technology licensing agreements with varying durations. The purpose of these agreements is to allow each party to continue leveraging existing production capabilities and intellectual property to meet customer demand for their respective products. Scotts LLC estimates that it will supply ICL with approximately $30 million of product under these agreements, as well as purchase approximately $15 million of materials from ICL, each on an annualized basis.
The Company’s continuing cash inflows and outflows related to these agreements are not considered to be significant in relation to the overall cash flows of Global Pro. Furthermore, none of these agreements permit the Company to influence the operating or financial policies of Global Pro under the ownership of ICL. Therefore, Global Pro met the criteria for presentation as discontinued operations. As such, effective in the first quarter of fiscal 2011, the Company classified Global Pro as discontinued operations for all periods presented. The Global Pro results from discontinued operations include an allocation of interest expense relating to the amount of our then existing credit facilities that was required to be repaid from the sale proceeds. |
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Net sales | $ | 101.2 |
| | $ | 288.5 |
| | $ | 281.1 |
|
| Operating costs | 117.4 |
| | 258.6 |
| | 252.7 |
|
| Impairment, restructuring and other | 13.6 |
| | 1.4 |
| | 1.0 |
|
| Other income, net | (1.5 | ) | | (4.0 | ) | | (4.0 | ) |
| Gain on sale of wild bird food assets | — |
| | — |
| | (1.2 | ) |
| Gain on contribution of SLS Business | (131.2 | ) | | — |
| | — |
|
| Income (loss) from discontinued operations before income taxes | 102.9 |
| | 32.5 |
| | 32.6 |
|
| Income tax expense from discontinued operations | 41.4 |
| | 11.6 |
| | 11.9 |
|
| Income (loss) from discontinued operations, net of tax | $ | 61.5 |
| | $ | 20.9 |
| | $ | 20.7 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the resultsmajor classes of Pro Seedassets and Global Pro as discontinued operations:liabilities of the SLS Business for each of the periods presented:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Net sales | $ | — |
| | $ | 26.7 |
| | $ | 124.7 |
|
| Operating costs | 0.3 |
| | 32.7 |
| | 122.5 |
|
| Impairment, restructuring and other | — |
| | 0.6 |
| | 20.2 |
|
| Gain on sale of Global Pro business | — |
| | — |
| | (93.0 | ) |
| Global Pro sale related transaction costs | — |
| | — |
| | 17.3 |
|
| Other (income) expense, net | — |
| | 0.3 |
| | (1.0 | ) |
| Interest expense | — |
| | — |
| | 1.7 |
|
| Income (loss) from discontinued operations before income taxes | (0.3 | ) | | (6.9 | ) | | 57.0 |
|
| Income tax expense (benefit) from discontinued operations | (0.2 | ) | | (0.2 | ) | | 29.0 |
|
| Income (loss) from discontinued operations | $ | (0.1 | ) | | $ | (6.7 | ) | | $ | 28.0 |
|
|
| | | |
| | Year Ended September 30, |
| | 2015 |
| | (In millions) |
| Accounts receivable, net | $ | 33.6 |
|
| Inventories | 11.8 |
|
| Prepaid and other assets | 8.3 |
|
| Property, plant and equipment, net | 9.6 |
|
| Goodwill and intangible assets, net | 157.0 |
|
| Assets held for sale | $ | 220.3 |
|
| | |
| Current portion of debt | $ | 2.2 |
|
| Accounts payable | 4.8 |
|
| Other current liabilities | 29.2 |
|
| Long-term debt | 3.5 |
|
| Other liabilities | 2.0 |
|
| Liabilities held for sale | $ | 41.7 |
|
The Consolidated Statements of Cash Flows do not present the cash flows from discontinued operations separately from cash flows from continuing operations. Cash provided by operating activities from the SLS Business was $26.8 million, $28.2 million and $19.2 million for fiscal 2016, fiscal 2015 and fiscal 2014, respectively. Cash used in investing activities related to the SLS Business was $1.4 million, $24.3 million and $3.4 million for fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
NOTE 3. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES
Activity described herein is classified within the “Cost of sales—impairment, restructuring and other,” “Impairment, restructuring and other” and “Income from discontinued operations, net of tax” lines in the Consolidated Statements of Operations. The following table details impairment, restructuring and other and rolls forward the restructuring and other accrued incharges during fiscal 2016, fiscal 2013, fiscal 20122015 and fiscal 20112014:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Restructuring and other | $ | 4.4 |
| | $ | 1.8 |
| | $ | 27.4 |
|
| Property, plant and equipment impairments | — |
| | 2.1 |
| | 9.1 |
|
| Goodwill and intangible asset impairments | 15.9 |
| | 3.2 |
| | 19.4 |
|
| Total impairment, restructuring and other | $ | 20.3 |
| | $ | 7.1 |
| | $ | 55.9 |
|
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Cost of sales—impairment, restructuring and other: | | | | | |
| Restructuring and other charges | $ | 7.7 |
| | $ | 6.6 |
| | $ | — |
|
| Operating expenses: | | | | | |
| Restructuring and other (recoveries) charges | (47.2 | ) | | 76.6 |
| | 16.3 |
|
| Goodwill and intangible asset impairments | — |
| | — |
| | 33.7 |
|
| Impairment, restructuring and other (recoveries) charges from continuing operations | $ | (39.5 | ) | | $ | 83.2 |
| | $ | 50.0 |
|
| Restructuring and other (recoveries) charges from discontinued operations | 13.6 |
| | 1.4 |
| | 1.0 |
|
| Total impairment, restructuring and other (recoveries) charges | $ | (25.9 | ) | | $ | 84.6 |
| | $ | 51.0 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table summarizes the activity related to liabilities associated with the restructuring and other, excluding insurance reimbursement recoveries, during fiscal 2016, fiscal 2015 and fiscal 2014:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Amounts reserved for restructuring and other at beginning of year | $ | 10.2 |
| | $ | 29.6 |
| | $ | 0.5 |
| $ | 28.1 |
| | $ | 16.0 |
| | $ | 11.1 |
|
| Restructuring and other in continuing operations | 9.1 |
| | 1.8 |
| | 27.4 |
| |
| Restructuring and other in discontinued operations | — |
| | 0.1 |
| | 20.2 |
| |
| Restructuring and other charges from continuing operations | | 16.4 |
| | 83.2 |
| | 16.3 |
|
| Restructuring and other charges from discontinued operations | | 13.6 |
| | 1.4 |
| | 1.0 |
|
| Payments and other | (8.2 | ) | | (21.3 | ) | | (18.5 | ) | (37.3 | ) | | (72.5 | ) | | (12.4 | ) |
| Amounts reserved for restructuring and other at end of year | $ | 11.1 |
| | $ | 10.2 |
| | $ | 29.6 |
| $ | 20.8 |
| | $ | 28.1 |
| | $ | 16.0 |
|
Included in the restructuring reserves, as of September 30, 2013,2016, is $3.1$1.5 million that is classified as long-term. Payments against the long-term reserves will be incurred as the employees covered by the 2011 restructuring plan retire.retire or through the passage of time. The remaining amounts reserved will continue to be paid out over the course of fiscal 2014.the next twelve months.
Fiscal 20132016
During
In the first quarter of fiscal 2013,2016, the Company announced a series of initiatives called Project Focus designed to maximize the value of its non-core assets and focus on emerging categories of the lawn and garden industry in its core U.S. business. On April 13, 2016, as part of this project, the Company completed the contribution of the SLS Business to the TruGreen Joint Venture. As a result, effective in its second quarter of fiscal 2016, the Company classified its results of operations for all periods presented to reflect the SLS Business as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. Refer to “NOTE 2. DISCONTINUED OPERATIONS” for more information. During fiscal 2016, the Company recognized incomea charge of $9.0 million for the resolution of a prior SLS Business litigation matter, as well as $4.6 million in transaction related costs associated with the divestiture of the SLS Business within the “Income from discontinued operations, net of tax” line in the Consolidated Statements of Operations. In addition, during fiscal 2016, the Company recognized restructuring costs related to termination benefits of $3.4 million within the U.S. Consumer segment and $2.0 million within the Europe Consumer segment, as well as costs of $4.6 million related to other transaction activity within the “Impairment, restructuring and other” line in the Consolidated Statements of Operations.
$4.7 millionDuring the third quarter of fiscal 2015, the Company’s U.S. Consumer segment began experiencing an increase in certain consumer complaints related to the reformulated Bonus® S fertilizer product sold in the southeastern United States during fiscal 2015 indicating customers were experiencing damage to their lawns after application. During fiscal 2016, the Company recognized $6.4 million in costs related to resolving these consumer complaints and the recognition of costs the Company expects to incur for current and expected consumer claims. Costs incurred through September 30, 2016 since the inception of this matter, excluding insurance reimbursement by a vendor for a portionrecoveries, are $73.8 million. The Company has received reimbursement payments of $60.8 million through the end of fiscal 2016, including $40.9 million received during fiscal 2016. The Company recorded offsetting insurance reimbursement recoveries upon resolution of the insurer’s review of claim documentation in the amount of $4.9 million in fiscal 2015 and $55.9 million in fiscal 2016.
Fiscal 2015
During fiscal 2015, the Company recognized $22.2 million in restructuring costs incurredrelated to termination benefits provided to U.S. and international personnel as part of the Company’s restructuring of its U.S. administrative and overhead functions, the continuation of the international profitability improvement initiative and the liquidation and exit from the U.K. Solus business. The restructuring costs for fiscal 2015 include $4.3 million of costs related to the developmentacceleration of equity compensation expense, and commercializationwere comprised of products including$3.7 million related to the active ingredient MAT 28 forU.S. Consumer segment, $10.3 million related to the GlobalEurope Consumer segment. segment, $0.2 million related to the Other segment and $6.6 million related to Corporate. In addition, costs of $1.4 million related to the SLS Business were recognized within the “Income from discontinued operations, net of tax” line in the Consolidated Statements of Operations.
During fiscal 2015, the Company recognized $62.4 million in costs related to consumer complaints and claims related to the reformulated Bonus® S fertilizer product sold in the southeastern United States during fiscal 2015.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fiscal 2014
During the firstthird quarter of 2013, the Company also recognized a $4.3 million asset impairment chargefiscal 2014, as a result of issues with the commercialization of an insect repellent technology for the Global Consumer segment. Also, as a result of the Company's annual impairment review performed in the fourth quarter of fiscal 2013,financial performance, the Company recognized an impairment charge for a non-recurring fair value adjustment of $11.6$33.7 million within the GlobalU.S. Consumer segment related to the Ortho® brand and certain sub-brands of Ortho®.brand. The fair value was calculated based upon the evaluation of the historical performance and future growth expectations of the Ortho® business.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
During fiscal 2013,2014, the Company recognized $9.1$12.5 million in restructuring costs related to termination benefits provided to U.S. personnel as part of the Company’s restructuring of its U.S. administrative and overhead functions, including $1.0 million related to the SLS Business recognized within the “Income from discontinued operations, net of tax” line in the Consolidated Statements of Operations. The Company also recognized $2.8 million of international employees in relation torestructuring and other adjustments during fiscal 2014 for the continuation of the profitability improvement initiative announced in December 2012, associated with the international restructuring plan to reduce headcount and streamline management decision making within the Global Consumer segment.
Fiscal 2012
During making. In addition, during fiscal 2012, in continuation of the 2011 restructuring plan, the Company incurred an additional $1.6 million in restructuring costs related to termination benefits provided to employees who accepted voluntary retirement and special termination benefits provided to certain employees upon future separation as well as $0.2 million related to curtailment charges for its U.S. defined benefit pension and U.S. retiree medical plans.
For the year ended September 30, 2012,2014, the Company recognized a $5.3$2.0 million asset impairment charge as a result of issues with commercialization of products including the active ingredient MAT 28 in additional ongoing monitoring and remediation costs for the Global Consumer segment.Company’s turfgrass biotechnology program.
Fiscal 2011
On August 8, 2011, the Company announced a restructuring plan designed to streamline management decision making and continue the regionalization of the Company’s operating structure, with the objective of reinvesting the savings generated in innovation and growth initiatives. During fiscal 2011, the Company incurred $23.7 million in restructuring costs related to termination benefits provided to employees who were involuntarily terminated and special termination benefits provided to certain employees upon future separation, as well as $2.3 million related to curtailment charges for its U.S. defined benefit pension and U.S. retiree medical plans.
In connection with the Company’s annual impairment review, the Company recognized impairment charges related to the Wild Bird Food reporting unit of $9.1 million for property, plant and equipment, $16.8 million for intangible assets and $0.3 million for goodwill, based on their respective estimated fair values. Losses generated by this business over the past two years, combined with a revised long-term outlook have negatively impacted the value of this business.
In addition, the Company recognized charges of $2.3 million for other intangible asset impairments and $1.4 million for restructuring and other charges.
NOTE 4. GOODWILL AND INTANGIBLE ASSETS, NET
The following table displays a rollforward of the carrying amount of goodwill by reportable segment, as well as Corporate & Other:segment:
| | | | Global Consumer | | Scotts LawnService® | | Corporate & Other | | Total | U.S. Consumer | | Europe Consumer | | Other | | Total |
| | (In millions) | (In millions) |
| Goodwill | $ | 244.6 |
| | $ | 127.3 |
| | $ | 24.6 |
| | $ | 396.5 |
| $ | 202.5 |
| | $ | 58.5 |
| | $ | 20.8 |
| | $ | 281.8 |
|
| Accumulated impairment losses | (62.8 | ) | | — |
| | (24.6 | ) | | (87.4 | ) | (1.8 | ) | | (58.5 | ) | | (2.5 | ) | | (62.8 | ) |
| Balance at September 30, 2011 | 181.8 |
| | 127.3 |
| | — |
| | 309.1 |
| |
| Acquisitions, net of purchase price adjustments | 0.3 |
| | — |
| | — |
| | 0.3 |
| |
| Balance at September 30, 2014 | | 200.7 |
| | — |
| | 18.3 |
| | 219.0 |
|
| Acquisitions, net of purchase price adjustments and foreign currency translation | | 10.6 |
| | — |
| | 54.2 |
| | 64.8 |
|
| | | | | | | | | | | | | | | |
| Goodwill | $ | 244.9 |
| | $ | 127.3 |
| | $ | 24.6 |
| | $ | 396.8 |
| $ | 213.1 |
| | $ | 58.5 |
| | $ | 75.0 |
| | $ | 346.6 |
|
| Accumulated impairment losses | (62.8 | ) | | — |
| | (24.6 | ) | | (87.4 | ) | (1.8 | ) | | (58.5 | ) | | (2.5 | ) | | (62.8 | ) |
| Balance at September 30, 2012 | 182.1 |
| | 127.3 |
| | — |
| | 309.4 |
| |
| Acquisitions, net of purchase price adjustments | 1.0 |
| | 4.7 |
| | — |
| | 5.7 |
| |
| Balance at September 30, 2015 | | 211.3 |
| | — |
| | 72.5 |
| | 283.8 |
|
| Acquisitions, net of purchase price adjustments and foreign currency translation | | 0.6 |
| | — |
| | 88.8 |
| | 89.4 |
|
| | | | | | | | | | | | | | | |
| Goodwill | $ | 245.9 |
| | $ | 132.0 |
| | $ | — |
| | $ | 377.9 |
| $ | 213.7 |
| | $ | 58.5 |
| | $ | 161.3 |
| | $ | 433.5 |
|
| Accumulated impairment losses | (62.8 | ) | | — |
| | — |
| | (62.8 | ) | (1.8 | ) | | (58.5 | ) | | — |
| | (60.3 | ) |
| Balance at September 30, 2013 | $ | 183.1 |
| | $ | 132.0 |
| | $ | — |
| | $ | 315.1 |
| |
| Balance at September 30, 2016 | | $ | 211.9 |
| | $ | — |
| | $ | 161.3 |
| | $ | 373.2 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents intangible assets, net:
| | | | September 30, 2013 | | September 30, 2012 | September 30, 2016 | | September 30, 2015 |
| | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount | | Gross Carrying Amount | | Accumulated Amortization | | Net Carrying Amount |
| | (In millions) | (In millions) |
| Finite-lived intangible assets: | | | | | | | | | | | | | | | | | | | | | | |
| Technology | $ | 61.8 |
| | $ | (53.8 | ) | | $ | 8.0 |
| | $ | 60.9 |
| | $ | (47.1 | ) | | $ | 13.8 |
| $ | 70.3 |
| | $ | (59.2 | ) | | $ | 11.1 |
| | $ | 69.7 |
| | $ | (56.9 | ) | | $ | 12.8 |
|
| Customer accounts | 81.2 |
| | (65.0 | ) | | 16.2 |
| | 82.6 |
| | (65.6 | ) | | 17.0 |
| 144.7 |
| | (41.2 | ) | | 103.5 |
| | 95.6 |
| | (32.1 | ) | | 63.5 |
|
| Tradenames | 47.0 |
| | (24.8 | ) | | 22.2 |
| | 47.0 |
| | (22.7 | ) | | 24.3 |
| 150.7 |
| | (22.3 | ) | | 128.4 |
| | 94.6 |
| | (16.9 | ) | | 77.7 |
|
| Other | 103.9 |
| | (88.2 | ) | | 15.7 |
| | 101.2 |
| | (81.5 | ) | | 19.7 |
| 97.9 |
| | (74.8 | ) | | 23.1 |
| | 88.7 |
| | (72.4 | ) | | 16.3 |
|
| Total finite-lived intangible assets, net | | | | | 62.1 |
| | | | | | 74.8 |
| | | | | 266.1 |
| | | | | | 170.3 |
|
| Indefinite-lived intangible assets: | | | | | | | | | | | | |
| Indefinite-lived tradenames | | | | | 222.3 |
| | | | | | 232.3 |
| | | | | 184.8 |
| | | | | | 184.8 |
|
| Marketing Agreement Amendment | | | | | | 188.3 |
| | | | | | 188.3 |
|
| Brand Extension Agreement | | | | | | 111.7 |
| | | | | | 111.7 |
|
| Total indefinite-lived intangible assets | | | | | | 484.8 |
| | | | | | 484.8 |
|
| Total intangible assets, net | | | | | $ | 284.4 |
| | | | | | $ | 307.1 |
| | | | | $ | 750.9 |
| |
| | | | $ | 655.1 |
|
Fiscal 20132016
During the first quarter of 2013, the Company recognized a $4.3 million asset impairment charge asAs a result of issues with the commercialization of an insect repellent technology for the Global Consumer segment. Duringannual impairment review in the fourth quarter of fiscal 2013,2016, the Company determined that no charges for impairment of goodwill or intangible assets were required. The estimated fair value of each reporting unit with a significant goodwill balance was substantially in excess of its carrying value as of the annual test date. Each of the indefinite-lived tradenames, the Marketing Agreement Amendment, and Brand Extension Agreement had an estimated fair value substantially in excess of its carrying value as of the annual test date.
Fiscal 2015
As a result of the annual impairment review, in the fourth quarter of fiscal 2015, the Company determined that no charges for impairment of goodwill or intangible assets were required. The estimated fair value of each reporting unit with a significant goodwill balance was substantially in excess of its carrying value as of the annual test date. Each of the indefinite-lived tradenames had an estimated fair value substantially in excess of its carrying value as of the annual test date, with the exception of the Ortho®
brand.
Fiscal 2014
During the third quarter of 2014, the Company completed its annualan impairment review and recognized an impairment charge for a non-recurring fair value adjustment of $11.6$33.7 million,, which includes $11.1 million for indefinite-lived tradenames and $0.5 million for finite-lived tradenames, within the GlobalU.S. Consumer segment related to the Ortho® brandbrand. The fair value was calculated based upon the evaluation of the historical performance and certain sub-brandsfuture growth expectations of the Ortho®. business. The impact of the fair value adjustment was to reduce the carrying value of the indefinite-lived Ortho® brand and sub-brands from $137.1$126.0 million to $126.0$92.3 million. The impairment charge is discussed further in “NOTE 3. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES.” As a result of the annual impairment review, the Company also determined that no other charges for impairment of goodwill or intangible assets were required. The estimated fair value of each reporting unit with a significant goodwill balance was substantially in excess of its carrying value as of the annual test date. Each of the indefinite-lived tradenames had an estimated fair value substantially in excess of its carrying value as of the annual test date, with the exception of the Ortho® brand.
Fiscal 2012
The Company recognized a $3.2 million impairment charge related to an intangible asset associated with the active ingredient MAT 28. The impairment charge is discussed further in “NOTE 3. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES.”
During the fourth quarter of fiscal 2012, the Company completed its annual impairment analysis and determined that no additional charges for impairment of goodwill or intangible assets were required. The estimated fair value of each reporting unit was substantially in excess of its carrying value as of the annual test date. Each of the indefinite-lived tradenames had an estimated fair value substantially in excess of its carrying value as of the annual test date, with the exception of the Ortho® tradename and French tradenames of KB® and Fertiligene®. The carrying value of the Ortho® tradename and French tradenames (KB® and Fertiligene®) at September 30, 2012 were $137.1 million and $17.7 million, respectively. The excess fair value over the carrying value of Ortho® tradename and French tradenames were 7.4% and 14.1%, respectively. If future analyses indicate that fair value has declined below carrying value, the result will be an impairment of a portion of the indefinite-lived intangible asset value.
Fiscal 2011
In connection with the Company’s annual impairment review, the Company recognized impairment charges related to the Wild Bird Food reporting unit of $16.8 million for intangible assets and $0.3 million for goodwill, based on their respective estimated fair values. The impairment charges are discussed further in “NOTE 3. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES.”
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total amortization expense for the years ended September 30, 2013, 2012,2016, 2015, and 20112014 was $11.2$18.8 million,, $10.9 $15.7 million and $11.4$13.0 million,, respectively. Amortization expense is estimated to be as follows for the years ending September 30 (in millions):
|
| | | |
| 2014 | $ | 11.4 |
|
| 2015 | 9.7 |
|
| 2016 | 7.3 |
|
| 2017 | 5.1 |
|
| 2018 | 3.8 |
|
|
| | | |
| 2017 | $ | 19.2 |
|
| 2018 | 18.5 |
|
| 2019 | 17.2 |
|
| 2020 | 16.4 |
|
| 2021 | 15.9 |
|
NOTE 5. DETAIL OF CERTAIN FINANCIAL STATEMENT ACCOUNTS
The following is detail of certain financial statement accounts:
| | | | September 30, | September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| | (In millions) | (In millions) |
| INVENTORIES: | | | | | | |
| Finished goods | $ | 182.6 |
| | $ | 224.6 |
| $ | 248.7 |
| | $ | 218.9 |
|
| Work-in-progress | 42.7 |
| | 48.3 |
| 56.9 |
| | 48.3 |
|
| Raw materials | 99.6 |
| | 142.0 |
| 142.6 |
| | 128.6 |
|
| | $ | 324.9 |
| | $ | 414.9 |
| $ | 448.2 |
| | $ | 395.8 |
|
| PREPAID AND OTHER ASSETS: | | | | |
| PREPAID AND OTHER CURRENT ASSETS: | | | | |
| Deferred tax asset | $ | 67.1 |
| | $ | 76.5 |
| $ | 62.1 |
| | $ | 78.2 |
|
| Accounts receivable, non-trade | 12.9 |
| | 13.4 |
| 17.7 |
| | 10.9 |
|
| Other | 33.0 |
| | 32.4 |
| 42.5 |
| | 32.0 |
|
| | $ | 113.0 |
| | $ | 122.3 |
| $ | 122.3 |
| | $ | 121.1 |
|
| | | | September 30, | September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| | (In millions) | (In millions) |
| PROPERTY, PLANT AND EQUIPMENT, NET: | | | | | | |
| Land and improvements | $ | 79.6 |
| | $ | 74.4 |
| $ | 113.0 |
| | $ | 96.5 |
|
| Buildings | 216.3 |
| | 205.2 |
| 249.1 |
| | 219.7 |
|
| Machinery and equipment | 508.7 |
| | 462.9 |
| 552.2 |
| | 538.3 |
|
| Furniture and fixtures | 39.7 |
| | 45.1 |
| 39.8 |
| | 36.8 |
|
| Software | 116.7 |
| | 120.8 |
| 114.8 |
| | 111.5 |
|
| Aircraft | 15.1 |
| | 22.3 |
| 6.7 |
| | 6.7 |
|
| Construction in progress | 19.6 |
| | 39.3 |
| 28.5 |
| | 28.5 |
|
| | 995.7 |
| | 970.0 |
| 1,104.1 |
| | 1,038.0 |
|
| Less: accumulated depreciation | (573.4 | ) | | (542.6 | ) | (633.3 | ) | | (593.9 | ) |
| | $ | 422.3 |
| | $ | 427.4 |
| $ | 470.8 |
| | $ | 444.1 |
|
| OTHER ASSETS: | | | | |
| Unamortized debt issuance costs | | $ | 16.7 |
| | $ | 11.3 |
|
| Loans receivable | | 90.0 |
| | — |
|
| Other | | 14.5 |
| | 13.7 |
|
| | | $ | 121.2 |
| | $ | 25.0 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | September 30, | September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| | (In millions) | (In millions) |
| OTHER CURRENT LIABILITIES: | | | | | | |
| Payroll and other compensation accruals | $ | 66.6 |
| | $ | 38.9 |
| $ | 72.6 |
| | $ | 56.5 |
|
| Advertising and promotional accruals | 103.0 |
| | 152.5 |
| 65.8 |
| | 67.0 |
|
| Other | 110.1 |
| | 88.4 |
| 103.8 |
| | 127.7 |
|
| | $ | 279.7 |
| | $ | 279.8 |
| $ | 242.2 |
| | $ | 251.2 |
|
| OTHER NON-CURRENT LIABILITIES: | | | | | | |
| Accrued pension and postretirement liabilities | $ | 96.5 |
| | $ | 118.5 |
| $ | 94.8 |
| | $ | 92.5 |
|
| Deferred tax liability | 96.2 |
| | 71.6 |
| |
| Deferred tax liabilities | | 219.1 |
| | 125.4 |
|
| Other | 46.1 |
| | 67.7 |
| 36.4 |
| | 32.6 |
|
| | $ | 238.8 |
| | $ | 257.8 |
| $ | 350.3 |
| | $ | 250.5 |
|
| | | | September 30, | September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| ACCUMULATED OTHER COMPREHENSIVE LOSS: | | | | | | | | | | |
| Unrecognized loss on derivatives, net of tax of $7.1, $10.6 and $9.6 | $ | (11.5 | ) | | $ | (16.6 | ) | | $ | (15.7 | ) | |
| Pension and other postretirement liabilities, net of tax of $31.4, $36.1 and $33.5 | (58.0 | ) | | (67.6 | ) | | (56.9 | ) | |
| Unrecognized loss on derivatives, net of tax of $2.8, $5.6 and $4.3 | | $ | (4.7 | ) | | $ | (9.0 | ) | | $ | (6.9 | ) |
| Pension and other postretirement liabilities, net of tax of $41.2, $39.3 and $38.6 | | (66.9 | ) | | (63.7 | ) | | (62.4 | ) |
| Foreign currency translation adjustment | (8.3 | ) | | (3.1 | ) | | (5.4 | ) | (45.3 | ) | | (34.1 | ) | | (16.9 | ) |
| | $ | (77.8 | ) | | $ | (87.3 | ) | | $ | (78.0 | ) | $ | (116.9 | ) | | $ | (106.8 | ) | | $ | (86.2 | ) |
NOTE 6. MARKETING AGREEMENT
The Scotts Company isLLC (“Scotts LLC”) and Monsanto are parties to the Marketing Agreement, pursuant to which the Company has served since its 1998 fiscal year, as Monsanto’s exclusive agent for the marketing and distribution of consumer Roundup® herbicide products (with additional rights to new products containing glyphosate or other similar non-selective herbicides) in the consumer lawn and garden market within the United States and other specified countries, including Australia, Austria, Belgium, Canada, France, Germany, the Netherlands and the United Kingdom.market. Under the terms of the Marketing Agreement, the Company is entitled to receive an annual commission from Monsanto as consideration for the performance of the Company’s duties as agent. The annual gross commission under the Marketing Agreement is calculated as a percentage of the actual earnings before interest and income taxes (EBIT) of the consumer Roundup® business in the markets covered by the Marketing Agreement and is based onsubject to the achievement of twoannual earnings thresholds, as defined in the Marketing Agreement.thresholds. The Marketing Agreement also requires the Company to make annual payments of $20.0 million to Monsanto as a contribution against the overall expenses of the consumer Roundup® business. The annual contribution payment is defined inFrom 1998 until May 15, 2015, the Marketing Agreement covered the United States and other specified countries, including Australia, Austria, Belgium, Canada, France, Germany, the Netherlands and the United Kingdom. On May 15, 2015, the territories were expanded to cover additional countries as $20 million.outlined below.
In consideration for the rights granted to the Company under the Marketing Agreement for North America,in 1998, the Company was required to paypaid a marketing fee of $32$32 million to Monsanto. The Company has deferred this amount on the basis that the payment will provide a future benefit through commissions that will be earned under the Marketing Agreement. The economic useful life over which the marketing fee is being amortized is 20twenty years, with a remaining unamortized amount of $1.6 million and remaining amortization period of fivetwo years as of September 30, 20132016.
On May 15, 2015, the Company and Monsanto entered into an Amendment to the Marketing Agreement (the “Marketing Agreement Amendment”), a Lawn and Garden Brand Extension Agreement (the “Brand Extension Agreement”) and a Commercialization and Technology Agreement (the “Commercialization and Technology Agreement”). In consideration for these agreements, the Company paid $300.0 million to Monsanto on August 14, 2015 using borrowings under its credit facility.
Among other things, the Marketing Agreement Amendment amends the Marketing Agreement in the following significant respects:
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Expands the territories in which the Company may serve as Monsanto’s exclusive agent in the consumer lawn and garden market to include all countries other than Japan and countries subject to a comprehensive U.S. trade embargo or certain other embargoes and trade restrictions.
Eliminates the initial and renewal terms that the original Marketing Agreement applied to European Union (“EU”) countries. As amended, the term of the Marketing Agreement will now continue indefinitely for all included markets, including EU countries within the included markets, unless and until otherwise terminated in accordance with the Marketing Agreement.
| |
| • | Revises the procedures of the Marketing Agreement relating to a potential sale of the consumer Roundup® business to (1) require Monsanto to negotiate exclusively with the Company with respect to any potential Roundup® sale for 60 days after the Company receives notice from Monsanto regarding a potential Roundup® sale and (2) provide the Company with a right of first offer and a right of last look in connection with a potential Roundup® sale to a third party. In addition, if the Company makes a bid in connection with a Roundup® sale, the then-applicable termination fee would serve as a credit against the purchase price and the Monsanto board of directors would not be permitted to discount the value of the Company’s bid compared to a competing bid as a result of the termination fee discount. |
Requires the Company to (1) provide notice to Monsanto of certain proposals and processes that may result in a sale of the Company and (2) conduct non-exclusive negotiations with Monsanto with respect to such a sale.
Increases the minimum termination fee payable under the Marketing Agreement to the greater of (1) $200.0 million or (2) four times (A) the average of the program earnings before interest or income taxes for the three trailing program years prior to the year of termination, minus (B) the 2015 program earnings before interest or income taxes.
Amends Monsanto’s termination rights and provides additional rights to the Company in the event of a termination, as follows:
| |
| ◦ | delays the effectiveness of a notice of termination given by Monsanto as a result of a change of control with respect to Monsanto or a sale of the consumer Roundup® business to a third party from (1) the end of the later of 12 months or the next program year to (2) the end of the fifth full program year after Monsanto gives such notice; |
| |
| ◦ | eliminates Monsanto’s termination rights for a regional performance default, a change of significant ownership of the Company or an uncured or incurable egregious injury (as each is defined in the Marketing Agreement); and |
| |
| ◦ | eliminates Monsanto’s termination rights in connection with a change in control of the Company or Scotts Miracle-Gro as long as the Company has determined, in its reasonable commercial opinion, that the acquirer can and will fully perform the duties and obligations of the Company under the Marketing Agreement. |
Expands the Company’s termination rights to include termination for a brand decline event (as defined in the Marketing Agreement Amendment) occurring before program year 2023.
Expands the Company’s assignment rights to allow the Company to transfer its rights, interests and obligations under the Marketing Agreement with respect to (1) the North America territories and (2) one or more other included markets for up to three other assignments.
Amends the commission structure by (1) eliminating the commission threshold for program years 2016, 2017 and 2018, (2) setting the commission threshold for the subsequent program years at $40 million and (3) establishing the commission payable by Monsanto to the Company for each program year at an amount equal to 50% of the program earnings before interest and income taxes for such program year.
The Brand Extension Agreement provides the Company a worldwide, exclusive license to use the Roundup® brand on additional products offered by the Company outside of the non-selective weed category within the residential lawn and garden market. The application of the Roundup® brand to these additional products is subject to a product review and approval process developed between the Company and Monsanto. Monsanto will maintain oversight of its brand, the handling of brand registrations covering these new products and new territories, as well as primary responsibility for brand enforcement. The Brand Extension Agreement has an initial term of twenty years, which will automatically renew for additional successive twenty year terms, at the Company’s sole option, for no additional monetary consideration.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Commercialization and Technology Agreement provides for the Company and Monsanto to further develop and commercialize new products and technology developed at Monsanto and intended for introduction into the residential lawn and garden market. Under the Commercialization and Technology Agreement, the Company receives an exclusive first look at new Monsanto technology and products and an annual review of Monsanto’s developing products and technologies. The Commercialization and Technology Agreement has a term of thirty years (subject to early termination upon a termination event under the Marketing Agreement or the Brand Extension Agreement).
The Company recorded the $300.0 million consideration paid by the Company to Monsanto in connection with the entry into the Marketing Agreement Amendment, the Brand Extension Agreement and the Commercialization and Technology Agreement as intangible assets and the related economic useful life of such assets is indefinite. The identifiable intangible assets include the Marketing Agreement Amendment and the Brand Extension Agreement with allocated fair value of $188.3 million and $111.7 million, respectively. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate rate of return.
Under the terms of the Marketing Agreement, the Company performs certain functions, primarily manufacturing conversion services (in North America), distribution and logistics, and selling and marketing support, on behalf of Monsanto in the conduct of the consumer Roundup® business. The actual costs incurred for these activities are charged to and reimbursed by Monsanto. The Company records costs incurred under the Marketing Agreement for which the Company is the primary obligor on a gross basis, recognizing such costs in the “Cost of sales” line and the reimbursement of these costs in the “Net sales,”sales” line in the Consolidated Statement of Operations, with no effect on gross profit dollars or net income.
The gross commission earned under the Marketing Agreement, the contribution payments to Monsanto and the amortization of the initial marketing fee paid to Monsanto in 1998 are included in the calculation of net sales in the Company’s Consolidated Statements of Operations. The elements of the net commission earned under the Marketing Agreement and reimbursements associated withearned under the Marketing Agreement and included in “Net sales” wereare as follows:
|
| | | | | | | | | | | |
| | Year Ended September 30 |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Gross commission | $ | 109.1 |
| | $ | 88.7 |
| | $ | 85.2 |
|
| Contribution expenses | (20.0 | ) | | (20.0 | ) | | (20.0 | ) |
| Amortization of marketing fee | (0.8 | ) | | (0.8 | ) | | (0.8 | ) |
| Net commission income | 88.3 |
| | 67.9 |
| | 64.4 |
|
| Reimbursements associated with Marketing Agreement | 65.5 |
| | 63.3 |
| | 63.0 |
|
| Total net sales associated with Marketing Agreement | $ | 153.8 |
| | $ | 131.2 |
| | $ | 127.4 |
|
NOTE 7. ACQUISITIONS AND INVESTMENTS
Fiscal 2016
On May 26, 2016, the Company, through its wholly-owned subsidiary The Hawthorne Gardening Company, acquired majority control and a 75% economic interest in Gavita for $136.2 million. The remaining 25% interest was retained by Gavita’s former ownership group. This transaction provides the Company’s Other segment with a presence in the lighting category of Contentsindoor and urban gardening, which is a part of the Company’s long-term growth strategy. Gavita, which is based in the Netherlands, is a leading producer and marketer of indoor lighting used in the greenhouse and hydroponic markets, predominately in the United States and Europe. The purchase price includes contingent consideration with an estimated fair value of $2.5 million, the payment of which will depend on the performance of the business through calendar year 2019. The preliminary valuation of the acquired assets included (i) $6.4 million of cash, prepaid and other current assets, (ii) $38.3 million of inventory and accounts receivable, (iii) $1.5 million in fixed assets, (iv) $18.7 million of accounts payable and other current liabilities, (v) $5.5 million of short term debt, (vi) $102.6 million of finite-lived identifiable intangible assets, (vii) $82.7 million of goodwill, and (viii) $25.7 million of deferred tax liabilities. Identifiable intangible assets included tradenames, customer relationships and non-compete arrangements with useful lives ranging between 5 and 25 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate. Net sales for Gavita included within the Other segment for fiscal 2016 were $35.7 million. Gavita’s former ownership group has retained a 25% noncontrolling interest in Gavita consisting of ownership of 5% of the outstanding shares of Gavita and a loan with interest payable based on distributions
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | |
| | Year Ended September 30 |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Gross commission | $ | 81.8 |
| | $ | 81.3 |
| | $ | 77.9 |
|
| Contribution expenses | (20.0 | ) | | (20.0 | ) | | (20.0 | ) |
| Amortization of marketing fee | (0.8 | ) | | (0.8 | ) | | (0.8 | ) |
| Net commission income | 61.0 |
| | 60.5 |
| | 57.1 |
|
| Reimbursements associated with Marketing Agreement | 62.0 |
| | 79.6 |
| | 63.7 |
|
| Total net sales associated with Marketing Agreement | $ | 123.0 |
| | $ | 140.1 |
| | $ | 120.8 |
|
by Gavita. The Marketingloan represents a non-cash financing activity and has been recorded at fair value in the “Long-term debt” line in the Consolidated Balance Sheets. The preliminary valuation of the loan was $37.7 million. The fair value measurement was classified in Level 3 of the fair value hierarchy.
In the third quarter of fiscal 2016, the Company completed an acquisition within the Other segment to expand its Canadian growing media operations for an estimated purchase price of $33.9 million. The purchase price includes contingent consideration with an estimated fair value of $10.8 million, the payment of which will depend on the performance of the business in fiscal years 2016 and 2017. The preliminary valuation of the acquired assets included (i) $4.7 million of inventory and accounts receivable, (ii) $18.6 million in fixed assets, (iii) $11.4 million of finite-lived identifiable intangible assets, (iv) $1.4 million of deferred tax liabilities, (v) an investment in an unconsolidated joint venture of $0.7 million and (vi) $2.1 million of goodwill. Identifiable intangible assets included peat bog lease rights, tradenames, customer relationships and non-compete arrangements with useful lives ranging between 5 and 25 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate. Net sales related to this acquisition included within the Other segment for fiscal 2016 were $6.4 million.
These acquisitions include non-cash investing activities of $13.3 million representing contingent consideration. The payment of these amounts will depend on the future performance of the business, subject to adjustment for certain contractually defined metrics.
On October 3, 2016, the Company, through its wholly-owned subsidiary The Hawthorne Gardening Company, completed the acquisition of American Agritech, L.L.C., d/b/a Botanicare, an Arizona-based leading producer of plant nutrients, plant supplements and growing systems used for hydroponic gardening for an estimated purchase price of $90.0 million.
In the second quarter of fiscal 2016, the Company entered into definitive agreements with Bonnie and its sole shareholder, AFC, providing for the Company’s participation in the Bonnie Business. The Company’s participation includes a Term Loan Agreement has no definite term exceptfrom the Company to AFC, with Bonnie as it relatesguarantor, in the amount of $72.0 million with a fixed coupon rate of 6.95% (the “Term Loan”) as well as a Services Agreement pursuant to which the Company will provide marketing, research and development and certain ancillary services to the European Union countries (the “EU term”). The current EU term extends through September 30, 2015. Thereafter,Bonnie Business for a commission fee based on the Marketing Agreement providesprofits of the Bonnie Business and the reimbursement of certain costs. These agreements also include options beginning in fiscal 2020 that provide for either (i) the parties may agreeCompany to renew the EU term for an additional three years.
The Marketing Agreement provides Monsanto with the right to terminate the Marketing Agreement upon an event of default (as definedincrease its economic interest in the Marketing Agreement) byBonnie Business or (ii) AFC and Bonnie to repurchase the Company’s economic interest in the Bonnie Business. During fiscal 2016, the Company a changerecognized commission fees of $3.6 million and recognized cost reimbursements of $0.6 million, respectively.
The Company’s option to increase its economic interest in control of Monsanto or the sale of the consumer Roundup® business. The Marketing Agreement provides the Company with the right to terminate the Marketing Agreement in certain circumstances, including an event of default by Monsanto or the sale of the consumer Roundup® business. Unless Monsanto terminates the Marketing Agreement due to an event of default by the Company, MonsantoBonnie Business (the “Bonnie Option”) is required to pay a termination fee to the Company that varies by program year. The termination fee is calculatedbe accounted for as a percentagederivative instrument and is recorded at fair value in the “Other assets” line in the Consolidated Balance Sheets, with changes in fair value recognized in the “Other income (loss), net” line in the Consolidated Statement of theOperations. The estimated fair value of the Roundup® business exceedingBonnie Option was determined using a certain threshold, butsimulation approach, whereby the total value of the loan receivable and optional exchange for additional equity was estimated considering a distribution of possible future cash flows discounted to present value using an appropriate discount rate. The estimated fair value of the Bonnie Option was $10.9 million as of September 30, 2016, and the fair value measurement was classified in no event willLevel 3 of the termination fee be less than $16 million. Monsanto may also be able to terminate the Marketing Agreement within a given region, including North America, without paying a termination fee if unit volume sales to consumers in that region decline: (1) over a cumulative three-fiscal-year period; or (2) by more than 5% for each of two consecutive years. If the Marketing Agreement was terminated for any reason,fair value hierarchy.
Fiscal 2015
On March 30, 2015, the Company would also lose all, oracquired the assets of General Hydroponics, Inc. (“General Hydroponics”) and Bio-Organic Solutions, Inc. (“Vermicrop”) for $120.0 million and $15.0 million, respectively. This transaction provided the Company’s Other segment with an additional entry into the indoor and urban gardening market, which is a substantialpart of the Company’s long-term growth strategy. General Hydroponics and Vermicrop are leading producers of liquid plant food products, growing media, and accessories for the hydroponic markets. The General Hydroponics purchase price included non-cash investing activity of $1.0 million representing the deferral of a portion of the significant sourcepurchase price into fiscal 2016, of earningswhich $0.5 million was paid in the second quarter of fiscal 2016. The Vermicrop purchase price included $5.0 million of contingent consideration, which was paid during the third quarter of fiscal 2016. The Vermicrop purchase price and overhead expense absorptioncontingent consideration was paid in common shares of Scotts Miracle-Gro (“Common Shares”) based on the Marketing Agreement provides.
Underaverage share price at the Marketing Agreement, Monsanto must provide the Company with noticetime of any proposed salepayment. The valuation of the consumer Roundup® business, allowacquired assets was determined during the Company to participatethird quarter of fiscal 2015 and included (i) $14.2 million of inventory and accounts receivable, (ii) $5.7 million in the sale processfixed assets, (iii) $65.0 million of finite-lived identifiable intangible assets, and negotiate in good faith(iv) $53.9 million of tax-deductible goodwill. Identifiable intangible assets included tradenames, customer relationships and non-compete arrangements with the Company with respect to any such proposed sale. In the event the Company acquires the consumer Roundup® business in such a sale, the Company would receive as a credit against the purchase price the amountuseful lives ranging between 5 and 26 years. The estimated fair values of the termination feeidentifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that would have been paidan asset will generate over the remaining useful life discounted to present value using an appropriate discount rate. Net sales for General Hydroponics and Vermicrop included within the Company if Monsanto had exercised its right to terminate the Marketing Agreement in connection with a sale to another party. If Monsanto decides to sell the consumer Roundup® business to another party, the Company must let Monsanto know whether the Company intends to terminate the Marketing AgreementOther segment for fiscal 2016 and forfeit any right to a termination fee. For additional details regarding the Marketing Agreement, see “ITEM 1A. RISK FACTORS - If Monsantofiscal 2015 were to terminate the Marketing Agreement for consumer Roundup® products, we would lose a substantial source of future earnings$64.1 million and overhead expense absorption” of this Annual Report on Form 10-K.$30.9 million, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 7. ACQUISITIONS
During fiscal 2013, 2012 and 2011,2015, the Company completed several acquisition within its controls,four acquisitions of growing media operations, two within the U.S. Consumer segment and Scotts LawnService® businesses that individually and intwo within the aggregate were not significant. TheOther segment, for an aggregate purchase price of these$40.2 million. These acquisitions was $7.2expand the Company’s growing media operations and distribution capabilities within its U.S. Consumer and Other segments. The valuation of the acquired assets for the transactions included (i) $10.1 million, $6.7 in finite-lived identifiable intangible assets, (ii) $11.4 million in fixed assets, (iii) $10.6 million in tax deductible goodwill, and $10.9(iv) $9.9 million in fiscal 2013, fiscal 2012 of inventory and fiscal 2011, respectively.accounts receivable. Identifiable intangible assets include tradenames and customer relationships with useful lives ranging between 7 and 20 years. The Consolidated Financial Statementsestimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate.
The consolidated financial statements include the results of operations fromfor these business combinations from the date of each acquisition.
On October 14, 2013,Fiscal 2014
During the fourth quarter of fiscal 2014, the Company obtained control of the operations of AeroGrow through its increased involvement, influence, and working capital loan of $4.5 million provided in July 2014. AeroGrow is a developer, marketer, direct-seller, and wholesaler of advanced indoor garden systems designed for consumer use in gardening, cooking, healthy eating, and home and office décor markets. AeroGrow operates primarily in the United States and Canada, as well as Australia and select countries in Europe and Asia. The valuation of acquired substantially allassets included finite-lived identifiable intangible assets of $13.7 million, and goodwill of $11.6 million. Identifiable intangible assets included tradename and customer relationships with useful lives ranging between 9 to 20 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate. Net sales for AeroGrow included in the Other segment for fiscal 2016, fiscal 2015 and fiscal 2014 were $21.4 million, $17.1 million and $1.7 million, respectively.
On September 30, 2014, Scotts Miracle-Gro’s wholly-owned subsidiary, Scotts Canada Ltd., acquired Fafard & Brothers Ltd. (“Fafard”) for $59.8 million. Fafard is a Canadian based producer of peat moss and growing media products for the consumer and professional markets, including peat-based and bark-based mixes, composts and premium soils. The acquisition of Fafard increases the Company’s presence within Canada as Fafard serves customers primarily across Ontario, Quebec and New Brunswick. The valuation of acquired assets included working capital of $17.6 million, property, plant, and equipment of $23.4 million, finite-lived identifiable intangible assets of $12.6 million, and tax deductible goodwill of $7.9 million. Working capital included accounts receivable of $4.7 million, inventory of $17.7 million, and accounts payable of $4.8 million. Identifiable intangible assets included tradename, customer relationships, non-compete agreements, and peat harvesting rights with useful lives ranging between 1 to 20 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will generate over the remaining useful life discounted to present value using an appropriate discount rate. Included in the purchase price of Fafard is $7.1 million of contingent consideration, the payment of which will depend on the performance of the business through fiscal 2016. Net sales for Fafard included in the Other segment for fiscal 2016 and fiscal 2015 were $37.5 million and $37.8 million, respectively.
During the first quarter of fiscal 2014, in an effort to expand the rodenticide product offerings, the Company completed the $60.0 million all-cash acquisition of the assets of the Tomcat® consumer rodent control business from Bell Laboratories, Inc. located in Madison, Wisconsin for $60 million. The initial purchase price accounting for theWisconsin. Tomcat® consumer products are sold at home centers, mass retailers, and grocery, drug and general merchandise stores across the United States, Canada, Europe and Australia. The valuation of the acquired assets included finite-lived identifiable intangible assets of $39.8 million, and tax deductible goodwill of $18.2 million. Also, the Company received a $2.0 million credit toward the purchase of finished goods in the months subsequent to acquisition date. Identifiable intangible assets included tradename, technology, customer relationships, product registrations and non-compete agreements with useful lives ranging between 10 to 30 years. The estimated fair values of the identifiable intangible assets were determined using an income-based approach, which includes market participant expectations of cash flows that an asset will be provided duringgenerate over the first quarterremaining useful life discounted to present value using an appropriate rate of return.
The Company completed an acquisition of the assets of the U.K. based Solus Garden and Leisure Limited (“Solus”) in fiscal 2014.2014 within its Europe Consumer segment for $7.4 million, $1.1 million of which was paid in cash and $6.3 million of which was paid through the forgiveness of outstanding accounts receivable owed by Solus to the Company. Solus is a supplier of garden and leisure products and offers a diverse mix of brands.
The consolidated financial statements include the results of operations for these business combinations from the date of each acquisition.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 8. INVESTMENT IN UNCONSOLIDATED AFFILIATES
As of September 30, 2016, the Company held a minority equity interest of 30% in the TruGreen Joint Venture. This interest was initially recorded at an estimated fair value of $294.0 million on the transaction date and subsequently is accounted for using the equity method of accounting, with the Company’s proportionate share of the TruGreen Joint Venture earnings reflected in the Consolidated Statements of Operations. In addition, the Company and TruGreen Holdings entered into a limited liability company agreement (the “LLC Agreement”) governing the management of the TruGreen Joint Venture, as well as certain ancillary agreements including a transition services agreement and an employee leasing agreement. The LLC Agreement provides the Company with minority representation on the board of directors of the TruGreen Joint Venture.
In connection with the closing of the transactions contemplated by the Contribution Agreement on April 13, 2016, the TruGreen Joint Venture obtained debt financing and made an excess distribution of $196.2 million to the Company which has been recorded as a return of investment and classified as a cash inflow from investing activities in the Consolidated Statement of Cash Flows. The Company also invested $18.0 million in second lien term loan financing to the TruGreen Joint Venture. The Company was reimbursed $52.6 million during fiscal 2016, has accounts receivable of $14.9 million at September 30, 2016 for expenses incurred pursuant to a short-term transition services agreement and an employee leasing agreement and has an indemnification asset of $9.6 million at September 30, 2016 for future payments on claims associated with insurance programs. The Company received distributions from unconsolidated affiliates intended to cover required tax payments of $7.5 million during fiscal 2016.
The following tables present summarized financial information for the TruGreen Joint Venture as of September 30, 2016 and for the Company’s fiscal 2016:
|
| | | |
| | September 30, 2016 |
| | (in millions) |
| Cash and cash equivalents | $ | 92.3 |
|
| Other current assets | 159.1 |
|
| Intangible assets, net | 916.8 |
|
| Goodwill | 165.3 |
|
| Other assets | 376.0 |
|
| Total assets | $ | 1,709.5 |
|
| | |
| Current liabilities | $ | 210.9 |
|
| Current portion of debt | 6.9 |
|
| Long-term debt | 726.0 |
|
| Other liabilities | 80.6 |
|
| Equity | 685.1 |
|
| Total liabilities and equity | $ | 1,709.5 |
|
|
| | | |
| | Year Ended September 30, |
| | 2016 |
| | (in millions) |
| Net sales | $ | 808.4 |
|
| Gross margin | 308.6 |
|
| Depreciation and amortization | 51.2 |
|
| Interest expense | 30.8 |
|
| Selling, general, administrative and other | 164.8 |
|
| Restructuring and other charges | 34.8 |
|
| Net income | $ | 27.0 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The summarized financial information for the TruGreen Joint Venture includes activity from the date of formation of the TruGreen Joint Venture on April 13, 2016 through September 30, 2016. Net income does not include income taxes, which are recognized and paid by the partners of the TruGreen Joint Venture. The income taxes associated with the Company’s share of net income has been recorded in the “Income tax expense from continuing operations” line in the Consolidated Statement of Operations.
The Company recognized equity in income of unconsolidated affiliates of $7.8 million in fiscal 2016. Included within income of unconsolidated affiliates for fiscal 2016 is the Company’s $11.7 million share of restructuring and other charges incurred by the TruGreen Joint Venture. These charges included $6.0 million for transaction and merger costs, $4.4 million for nonrecurring integration and separation costs and $1.3 million for a non-cash fair value write-down adjustment on deferred revenue and advertising as part of the transaction accounting. At September 30, 2016, consolidated retained earnings contained undistributed earnings of $0.2 million, net of tax, of unconsolidated affiliates.
NOTE 8.9. RETIREMENT PLANS
The Company sponsors a defined contribution 401(k) plan for substantially all U.S. associates. The Company matches 150% of associates’ initial 4% contribution and 50% of their remaining contribution up to 6%. The Company may make additional discretionary profit sharing matching contributions to eligible employees on their initial 4% contribution. The Company recorded charges of $13.1$13.0 million,, $12.9 $11.5 million and $13.2$11.7 million under the plan in fiscal 20132016, fiscal 20122015 and fiscal 20112014, respectively.
The Company sponsors two defined benefit pension plans for certain U.S. associates. Benefits under these plans have been frozen and closed to new associates since 1997. The benefits under the primary plan are based on years of service and the associates’ average final compensation or stated amounts. The Company’s funding policy, consistent with statutory requirements and tax
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
considerations, is based on actuarial computations using the Projected Unit Credit method. The second frozen plan is a non-qualified supplemental pension plan. This plan provides for incremental pension payments so that total pension payments equal amounts that would have been payable from the Company’s pension plan if it were not for limitations imposed by the income tax regulations. In connection with the restructuring plan discussed in “NOTE 3. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES,” the Company recognized a plan curtailment gain of $0.5 million in fiscal 2013 and charge of $0.2 million in fiscal 2012 for a change in the benefit obligations associated with these plans.
The Company sponsors defined benefit pension plans associated with its international businesses in the United Kingdom, Germany, France and the Netherlands. These plans generally cover all associates of the respective businesses, with retirement benefits primarily based on years of service and compensation levels. In fiscal 2013, the Company'sCompany’s remaining obligations were settled for the defined benefit pension plan associated with its Netherlands business. Two of the Company’s previously-sponsored international defined benefit plans were transferred to ICL in connection with the sale of Global Pro on February 28, 2011. On July 1, 2010, the Company froze its two U.K. defined benefit pension plans and transferred participants to an amended defined contribution plan. Under the frozen defined benefit plans, participants are no longer credited for future service; however, future salary increases will continue to be factored into each participant’s final pension benefit.
67
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present information about benefit obligations, plan assets, annual expense, assumptions and other information about the Company’s defined benefit pension plans. The defined benefit pension plans are valued using a September 30 measurement date.
| | | | U.S. Defined Benefit Plans | | International Defined Benefit Plans | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension Plans |
| | 2013 | | 2012 | | 2013 | | 2012 | 2016 | | 2015 | | 2016 | | 2015 |
| | (In millions) | (In millions) |
| Change in projected benefit obligation | | | | | | | | |
| Change in projected benefit obligation: | | | | | | | | |
| Benefit obligation at beginning of year | $ | 118.8 |
| | $ | 109.6 |
| | $ | 188.0 |
| | $ | 159.6 |
| $ | 117.3 |
| | $ | 109.2 |
| | $ | 198.1 |
| | $ | 208.3 |
|
| Service cost | — |
| | — |
| | 1.2 |
| | 1.1 |
| — |
| | — |
| | 1.1 |
| | 1.2 |
|
| Interest cost | 3.9 |
| | 4.6 |
| | 7.8 |
| | 8.6 |
| 4.3 |
| | 4.0 |
| | 6.5 |
| | 7.3 |
|
| Actuarial (gain) loss | (8.8 | ) | | 11.5 |
| | 4.5 |
| | 22.2 |
| |
| Actuarial loss | | 3.8 |
| | 11.4 |
| | 45.5 |
| | 4.5 |
|
| Benefits paid | (7.2 | ) | | (7.1 | ) | | (6.1 | ) | | (6.6 | ) | (7.2 | ) | | (7.3 | ) | | (8.0 | ) | | (6.4 | ) |
| Curtailment loss (gain) | — |
| | 0.2 |
| | (0.8 | ) | | — |
| |
| Settlement (gain) | — |
| | — |
| | (4.6 | ) | | — |
| |
| Other | — |
| | — |
| | (1.3 | ) | | (0.9 | ) | — |
| | — |
| | (0.9 | ) | | (1.1 | ) |
| Foreign currency translation | — |
| | — |
| | 2.0 |
| | 4.0 |
| — |
| | — |
| | (26.9 | ) | | (15.7 | ) |
| Projected benefit obligation at end of year | $ | 106.7 |
| | $ | 118.8 |
| | $ | 190.7 |
| | $ | 188.0 |
| $ | 118.2 |
| | $ | 117.3 |
| | $ | 215.4 |
| | $ | 198.1 |
|
| Accumulated benefit obligation at end of year | $ | 106.7 |
| | $ | 118.8 |
| | $ | 184.8 |
| | $ | 179.9 |
| $ | 118.2 |
| | $ | 117.3 |
| | $ | 209.7 |
| | $ | 192.0 |
|
| Change in plan assets | | | | | | | | |
| Change in plan assets: | | | | | | | | |
| Fair value of plan assets at beginning of year | $ | 85.3 |
| | $ | 74.3 |
| | $ | 139.8 |
| | $ | 118.2 |
| $ | 83.5 |
| | $ | 89.8 |
| | $ | 168.6 |
| | $ | 166.3 |
|
| Actual return on plan assets | 3.4 |
| | 13.0 |
| | 12.1 |
| | 15.3 |
| 9.9 |
| | (1.4 | ) | | 37.1 |
| | 13.9 |
|
| Employer contribution | 2.8 |
| | 5.1 |
| | 8.2 |
| | 9.3 |
| 3.2 |
| | 2.4 |
| | 6.1 |
| | 7.4 |
|
| Benefits paid | (7.2 | ) | | (7.1 | ) | | (6.1 | ) | | (6.6 | ) | (7.2 | ) | | (7.3 | ) | | (8.0 | ) | | (6.4 | ) |
| Settlement | — |
| | — |
| | (4.6 | ) | | — |
| |
| Foreign currency translation | — |
| | — |
| | 0.7 |
| | 4.3 |
| — |
| | — |
| | (26.4 | ) | | (11.5 | ) |
| Other | — |
| | — |
| | (1.3 | ) | | (0.7 | ) | — |
| | — |
| | (0.9 | ) | | (1.1 | ) |
| Fair value of plan assets at end of year | $ | 84.3 |
| | $ | 85.3 |
| | $ | 148.8 |
| | $ | 139.8 |
| $ | 89.4 |
| | $ | 83.5 |
| | $ | 176.5 |
| | $ | 168.6 |
|
| Underfunded status at end of year | $ | (22.4 | ) | | $ | (33.5 | ) | | $ | (41.9 | ) | | $ | (48.2 | ) | $ | (28.8 | ) | | $ | (33.8 | ) | | $ | (38.9 | ) | | $ | (29.5 | ) |
| Information for pension plans with an accumulated benefit obligation in excess of plan assets | | | | | | | | |
| Information for pension plans with an accumulated benefit obligation in excess of plan assets: | | | | | | | | |
| Projected benefit obligation | $ | 106.7 |
| | $ | 118.8 |
| | $ | 190.7 |
| | $ | 188.0 |
| $ | 118.2 |
| | $ | 117.3 |
| | $ | 215.4 |
| | $ | 198.1 |
|
| Accumulated benefit obligation | 106.7 |
| | 118.8 |
| | 184.8 |
| | 179.9 |
| 118.2 |
| | 117.3 |
| | 209.7 |
| | 192.0 |
|
| Fair value of plan assets | 84.3 |
| | 85.3 |
| | 148.8 |
| | 139.8 |
| 89.4 |
| | 83.5 |
| | 176.5 |
| | 168.6 |
|
| Amounts recognized in the Consolidated Balance Sheets consist of: | | | | | | | | | | | | | | |
| Noncurrent assets | | $ | — |
| | $ | — |
| | $ | 0.5 |
| | $ | 2.4 |
|
| Current liabilities | $ | (0.2 | ) | | $ | (0.2 | ) | | $ | (1.0 | ) | | $ | (0.9 | ) | (0.2 | ) | | (0.2 | ) | | (0.9 | ) | | (0.9 | ) |
| Noncurrent liabilities | (22.2 | ) | | (33.4 | ) | | (40.9 | ) | | (47.3 | ) | (28.6 | ) | | (33.6 | ) | | (38.5 | ) | | (31.0 | ) |
| Total amount accrued | $ | (22.4 | ) | | $ | (33.6 | ) | | $ | (41.9 | ) | | $ | (48.2 | ) | $ | (28.8 | ) | | $ | (33.8 | ) | | $ | (38.9 | ) | | $ | (29.5 | ) |
| Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | | | | | | | | | |
| Actuarial loss | $ | 36.9 |
| | $ | 48.8 |
| | $ | 56.1 |
| | $ | 55.5 |
| $ | 46.4 |
| | $ | 49.2 |
| | $ | 64.2 |
| | $ | 57.8 |
|
| Prior service cost | — |
| | — |
| | 0.4 |
| | 0.5 |
| — |
| | — |
| | 0.3 |
| | 0.3 |
|
| Net amount recognized | $ | 36.9 |
| | $ | 48.8 |
| | $ | 56.5 |
| | $ | 56.0 |
| |
| Total amount recognized | | $ | 46.4 |
| | $ | 49.2 |
| | $ | 64.5 |
| | $ | 58.1 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | U.S. Defined Benefit Plans | | International Defined Benefit Plans | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension Plans |
| | 2013 | | 2012 | | 2013 | | 2012 | 2016 | | 2015 | | 2016 | | 2015 |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Total change in other comprehensive loss attributable to: | | | | | | | | | | | | | | |
| Pension benefit gain (loss) during the period | $ | 7.1 |
| | $ | (5.1 | ) | | $ | (0.3 | ) | | $ | (14.8 | ) | |
| Pension benefit (loss) gain during the period | | $ | 1.1 |
| | $ | (18.2 | ) | | $ | (15.8 | ) | | $ | 0.5 |
|
| Reclassification of pension benefit losses to net income | 4.8 |
| | 5.1 |
| | 1.2 |
| | 0.8 |
| 1.8 |
| | 3.3 |
| | 1.6 |
| | 1.7 |
|
| Curtailment gain during the period | — |
| | — |
| | (1.0 | ) | | — |
| |
| Foreign currency translation | — |
| | — |
| | (0.4 | ) | | (1.6 | ) | — |
| | — |
| | 7.8 |
| | 4.8 |
|
| Total change in other comprehensive loss | $ | 11.9 |
| | $ | — |
| | $ | (0.5 | ) | | $ | (15.6 | ) | $ | 2.9 |
| | $ | (14.9 | ) | | $ | (6.4 | ) | | $ | 7.0 |
|
| Amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost in fiscal 2014 are as follows: | | | | | | | | |
| Amounts in accumulated other comprehensive loss expected to be recognized as components of net periodic benefit cost in fiscal 2017 are as follows: | | | | | | | | |
| Actuarial loss | $ | 3.6 |
| | | | $ | 1.3 |
| | | $ | 1.7 |
| | | | $ | 2.1 |
| | |
| Prior service cost | — |
| | | | — |
| | | — |
| | | | — |
| | |
| Amount to be amortized into net periodic benefit cost | $ | 3.6 |
| | | | $ | 1.3 |
| | | $ | 1.7 |
| | | | $ | 2.1 |
| | |
| Weighted average assumptions used in development of projected benefit obligation | | | | | | | | |
| Weighted average assumptions used in development of projected benefit obligation: | | | | | | | | |
| Discount rate | 4.32 | % | | 3.39 | % | | 4.32 | % | | 4.45 | % | 3.07 | % | | 3.82 | % | | 2.07 | % | | 3.52 | % |
| Rate of compensation increase | n/a |
| | n/a |
| | 3.74 | % | | 3.40 | % | n/a |
| | n/a |
| | 3.46 | % | | 3.49 | % |
| | | | U.S. Defined Benefit Plans | | International Defined Benefit Plans | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension Plans |
| | 2013 | | 2012 | | 2011 | | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 | | 2016 | | 2015 | | 2014 |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Components of net periodic benefit cost | | | | | | | | | | | | |
| Components of net periodic benefit cost: | | | | | | | | | | | | |
| Service cost | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.2 |
| | $ | 1.1 |
| | $ | 1.3 |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | 1.1 |
| | $ | 1.2 |
| | $ | 1.2 |
|
| Interest cost | 3.8 |
| | 4.6 |
| | 4.8 |
| | 7.8 |
| | 8.6 |
| | 8.9 |
| 4.3 |
| | 4.0 |
| | 4.5 |
| | 6.5 |
| | 7.3 |
| | 8.3 |
|
| Expected return on plan assets | (5.2 | ) | | (5.5 | ) | | (5.1 | ) | | (8.7 | ) | | (8.4 | ) | | (8.4 | ) | (5.0 | ) | | (5.4 | ) | | (5.2 | ) | | (7.4 | ) | | (8.9 | ) | | (9.4 | ) |
| Net amortization | 4.8 |
| | 5.1 |
| | 4.9 |
| | 1.2 |
| | 0.8 |
| | 1.2 |
| 1.8 |
| | 3.3 |
| | 3.7 |
| | 1.6 |
| | 1.7 |
| | 1.4 |
|
| Net periodic benefit cost | 3.4 |
| | 4.2 |
| | 4.6 |
| | 1.5 |
| | 2.1 |
| | 3.0 |
| 1.1 |
| | 1.9 |
| | 3.0 |
| | 1.8 |
| | 1.3 |
| | 1.5 |
|
| Curtailment loss (gain) | — |
| | 0.2 |
| | 1.1 |
| | (0.5 | ) | | — |
| | — |
| |
| Settlement | — |
| | — |
| | — |
| | (0.5 | ) | | — |
| | — |
| |
| Contractual termination benefits | — |
| | — |
| | — |
| | — |
| | 0.3 |
| | — |
| — |
| | — |
| | — |
| | — |
| | — |
| | 0.3 |
|
| Total benefit cost | $ | 3.4 |
| | $ | 4.4 |
| | $ | 5.7 |
| | $ | 0.5 |
| | $ | 2.4 |
| | $ | 3.0 |
| $ | 1.1 |
| | $ | 1.9 |
| | $ | 3.0 |
| | $ | 1.8 |
| | $ | 1.3 |
| | $ | 1.8 |
|
| Weighted average assumptions used in development of net periodic benefit cost | | | | | | | | | | | | |
| Weighted average assumptions used in development of net periodic benefit cost: | | | | | | | | | | | | |
| Discount rate | 3.39 | % | | 4.29 | % | | 4.66 | % | | 4.45 | % | | 5.46 | % | | 5.01 | % | 3.81 | % | | 3.81 | % | | 4.32 | % | | 3.52 | % | | 3.73 | % | | 4.32 | % |
| Expected return on plan assets | 6.25 | % | | 7.50 | % | | 7.50 | % | | 6.52 | % | | 7.00 | % | | 7.00 | % | 5.50 | % | | 6.25 | % | | 6.25 | % | | 4.70 | % | | 5.63 | % | | 6.17 | % |
| Rate of compensation increase | n/a |
| | n/a |
| | n/a |
| | 3.4 | % | | 3.5 | % | | 3.5 | % | n/a |
| | n/a |
| | n/a |
| | 3.5 | % | | 3.7 | % | | 3.7 | % |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | U.S. Defined Benefit Plans | | International Defined Benefit Plans | U.S. Defined Benefit Pension Plans | | International Defined Benefit Pension Plans |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Other information: | | | | | | |
| Plan asset allocations: | | | | | | |
| Target for September 30, 2014: | | | | |
| Target for September 30, 2017: | | | | |
| Equity securities | 33 | % | | 49 | % | 25 | % | | 30 | % |
| Debt securities | 67 | % | | 49 | % | 70 | % | | 68 | % |
| Real estate securities | | 5 | % | | — | % |
| Cash and cash equivalents | — | % | | — | % | — | % | | — | % |
| Insurance Contracts | — | % | | 2 | % | |
| September 30, 2013: | | | | |
| Insurance contracts | | — | % | | 2 | % |
| September 30, 2016: | | | | |
| Equity securities | 33 | % | | 47 | % | 23 | % | | 29 | % |
| Debt securities | 66 | % | | 44 | % | 70 | % | | 69 | % |
| Real estate securities | | 4 | % | | — | % |
| Cash and cash equivalents | 1 | % | | — | % | 3 | % | | — | % |
| Insurance Contracts | — | % | | 9 | % | |
| September 30, 2012: | | | | |
| Insurance contracts | | — | % | | 2 | % |
| September 30, 2015: | | | | |
| Equity securities | 36 | % | | 54 | % | 23 | % | | 31 | % |
| Debt securities | 61 | % | | 41 | % | 70 | % | | 67 | % |
| Real estate securities | | 4 | % | | — | % |
| Cash and cash equivalents | 3 | % | | — | % | 3 | % | | — | % |
| Insurance Contracts | — | % | | 5 | % | |
| Expected company contributions in fiscal 2014 | $ | 3.9 |
| | $ | 7.3 |
| |
| Insurance contracts | | — | % | | 2 | % |
| Expected Company contributions in fiscal 2017 | | $ | 3.7 |
| | $ | 4.7 |
|
| Expected future benefit payments: | | | | | | |
| 2014 | $ | 7.1 |
| | $ | 6.2 |
| |
| 2015 | 7.1 |
| | 6.5 |
| |
| 2016 | 7.2 |
| | 6.6 |
| |
| 2017 | 7.2 |
| | 7.0 |
| $ | 7.7 |
| | $ | 6.0 |
|
| 2018 | 7.3 |
| | 7.3 |
| 7.7 |
| | 6.3 |
|
| 2019 – 2023 | 36.1 |
| | 43.0 |
| |
| 2019 | | 7.7 |
| | 6.6 |
|
| 2020 | | 7.7 |
| | 6.6 |
|
| 2021 | | 7.6 |
| | 7.0 |
|
| 2022 – 2027 | | 36.5 |
| | 41.8 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables set forth the fair value of the Company’s pension plan assets, segregated by level within the fair value hierarchy:
| | | | September 30, 2013 | September 30, 2016 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total |
| | (In millions) | (In millions) |
| U.S. Defined Benefit Plan Assets | | | | | | | | |
| U.S. Defined Benefit Pension Plan Assets | | | | | | | | |
| Cash and cash equivalents | $ | 1.5 |
| | $ | — |
| | $ | — |
| | $ | 1.5 |
| $ | 2.2 |
| | $ | — |
| | $ | — |
| | $ | 2.2 |
|
| Mutual funds—real estate | | — |
| | 3.8 |
| | — |
| | 3.8 |
|
| Mutual funds—equities | — |
| | 27.5 |
| | — |
| | 27.5 |
| — |
| | 20.9 |
| | — |
| | 20.9 |
|
| Mutual funds—fixed income | — |
| | 55.3 |
| | — |
| | 55.3 |
| — |
| | 62.5 |
| | — |
| | 62.5 |
|
| Total | $ | 1.5 |
| | $ | 82.8 |
| | $ | — |
| | $ | 84.3 |
| $ | 2.2 |
| | $ | 87.2 |
| | $ | — |
| | $ | 89.4 |
|
| International Defined Benefit Plan Assets | | | | | | | | |
| International Defined Benefit Pension Plan Assets | | | | | | | | |
| Cash and cash equivalents | $ | 1.6 |
| | $ | — |
| | $ | — |
| | $ | 1.6 |
| $ | 0.7 |
| | $ | — |
| | $ | — |
| | $ | 0.7 |
|
| Insurance contracts | — |
| | 3.3 |
| | — |
| | 3.3 |
| — |
| | 2.6 |
| | — |
| | 2.6 |
|
| Mutual funds—equities | — |
| | 73.9 |
| | — |
| | 73.9 |
| — |
| | 51.8 |
| | — |
| | 51.8 |
|
| Mutual funds—fixed income | — |
| | 70.0 |
| | — |
| | 70.0 |
| — |
| | 121.4 |
| | — |
| | 121.4 |
|
| Total | $ | 1.6 |
| | $ | 147.2 |
| | $ | — |
| | $ | 148.8 |
| $ | 0.7 |
| | $ | 175.8 |
| | $ | — |
| | $ | 176.5 |
|
| | | | September 30, 2012 | September 30, 2015 |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total |
| | (In millions) | (In millions) |
| U.S. Defined Benefit Plan Assets | | | | | | | | |
| U.S. Defined Benefit Pension Plan Assets | | | | | | | | |
| Cash and cash equivalents | $ | 2.3 |
| | $ | — |
| | $ | — |
| | $ | 2.3 |
| $ | 2.6 |
| | $ | — |
| | $ | — |
| | $ | 2.6 |
|
| Mutual funds—real estate | | — |
| | 3.5 |
| | — |
| | 3.5 |
|
| Mutual funds—equities | 30.8 |
| | — |
| | — |
| | 30.8 |
| — |
| | 19.0 |
| | — |
| | 19.0 |
|
| Mutual funds—fixed income | 52.2 |
| | — |
| | — |
| | 52.2 |
| — |
| | 58.4 |
| | — |
| | 58.4 |
|
| Total | $ | 85.3 |
| | $ | — |
| | $ | — |
| | $ | 85.3 |
| $ | 2.6 |
| | $ | 80.9 |
| | $ | — |
| | $ | 83.5 |
|
| International Defined Benefit Plan Assets | | | | | | | | |
| International Defined Benefit Pension Plan Assets | | | | | | | | |
| Cash and cash equivalents | $ | 1.0 |
| | $ | — |
| | $ | — |
| | $ | 1.0 |
| $ | 0.6 |
| | $ | — |
| | $ | — |
| | $ | 0.6 |
|
| Insurance contracts | — |
| | 3.4 |
| | 4.4 |
| | 7.8 |
| — |
| | 2.6 |
| | — |
| | 2.6 |
|
| Mutual funds—equities | — |
| | 73.2 |
| | — |
| | 73.2 |
| — |
| | 52.3 |
| | — |
| | 52.3 |
|
| Mutual funds—fixed income | — |
| | 57.9 |
| | — |
| | 57.9 |
| — |
| | 113.1 |
| | — |
| | 113.1 |
|
| Total | $ | 1.0 |
| | $ | 134.5 |
| | $ | 4.4 |
| | $ | 139.9 |
| $ | 0.6 |
| | $ | 168.0 |
| | $ | — |
| | $ | 168.6 |
|
The fair value of the mutual funds are valued at the exchange-listed year end closing price or at the net asset value of shares held by the fund at the end of the year. Insurance contracts are valued by discounting the related cash flows using a current year end market rate or at cash surrender value, which is presumed to equal fair value. Funds of hedge funds are valued at the net asset value of shares held by the fund at the end of the year.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The table below sets forth a summary of changes in the fair value of the Company’s level 3 pension plan assets:
|
| | | |
| | Level 3 Assets Insurance contracts |
| | (In millions) |
| Balance, September 30, 2011 | $ | 3.7 |
|
| Realized gain on plan assets | 1.0 |
|
| Unrealized gain on plan assets | — |
|
| Foreign currency translation | (0.1 | ) |
| Purchases, sales, issuances and settlements (net) | (0.2 | ) |
| Balance, September 30, 2012 | 4.4 |
|
| Realized gain on plan assets | 0.3 |
|
| Unrealized gain on plan assets | — |
|
| Foreign currency translation | — |
|
| Purchases, sales, issuances and settlements (net) | (4.7 | ) |
| Balance, September 30, 2013 | $ | — |
|
Investment Strategy
Target allocation percentages among various asset classes are maintained based on an individual investment policy established for each of the various pension plans. Asset allocations are designed to achieve long-term objectives of return while mitigating against downside risk and considering expected cash requirements necessary to fund benefit payments. However, the Company cannot predict future investment returns and therefore cannot determine whether future pension plan funding requirements could materially and adversely affect its financial condition, results of operations or cash flows.
Basis for Long-Term Rate of Return on Asset Assumptions
The Company’s expected long-term rate of return on asset assumptions are derived from studies conducted by third parties. The studies include a review of anticipated future long-term performance of individual asset classes and consideration of the appropriate asset allocation strategy given the anticipated requirements of the plans to determine the average rate of earnings expected. While the studies give appropriate consideration to recent fund performance and historical returns, the assumptions primarily represent expectations about future rates of return over the long term. The decrease in expected long-term rate of return assumptions during fiscal 2016 is driven by a decline in fixed income yields.
NOTE 9.10. ASSOCIATE MEDICAL BENEFITS
The Company provides comprehensive major medical benefits to certain of its retired associates and their dependents. Substantially all of the Company’s domestic associates who were hired before January 1, 1998 become eligible for these benefits if they retire at age 55 or older with more than 10 years of service. The retiree medical plan requires certain minimum contributions from retired associates and includes provisions to limit the overall cost increases the Company is required to cover. The Company funds its portion of retiree medical benefits on a pay-as-you-go basis.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table sets forth information about the retiree medical plan for domestic associates. The retiree medical plan is valued using a September 30 measurement date.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
| | | | 2013 | | 2012 | 2016 | | 2015 |
| | (In millions, except percentage figures) | (In millions, except percentage figures) |
| Change in Accumulated Plan Benefit Obligation (APBO) | | | | |
| Change in Accumulated Plan Benefit Obligation (APBO): | | | | |
| Benefit obligation at beginning of year | $ | 36.3 |
| | $ | 34.4 |
| $ | 26.0 |
| | $ | 32.4 |
|
| Service cost | 0.5 |
| | 0.5 |
| 0.2 |
| | 0.4 |
|
| Interest cost | 1.3 |
| | 1.6 |
| 1.0 |
| | 1.3 |
|
| Plan participants’ contributions | 1.1 |
| | 1.0 |
| 0.5 |
| | 1.2 |
|
| Actuarial (loss) gain | (4.4 | ) | | 1.5 |
| |
| Early retirement reinsurance program receipts | — |
| | 0.2 |
| |
| Benefits paid (net of federal subsidy of $0.3 and $0.3) | (3.2 | ) | | (2.9 | ) | |
| Actuarial loss | | 1.3 |
| | 2.0 |
|
| Benefits paid (net of federal subsidy of $0.0 and $0.3) | | (2.8 | ) | | (3.1 | ) |
| Plan changes | | — |
| | (8.2 | ) |
| Benefit obligation at end of year | $ | 31.6 |
| | $ | 36.3 |
| $ | 26.2 |
| | $ | 26.0 |
|
| Change in plan assets | | | | |
| Change in plan assets: | | | | |
| Fair value of plan assets at beginning of year | $ | — |
| | $ | — |
| $ | — |
| | $ | — |
|
| Employer contribution | 2.4 |
| | 2.0 |
| 2.3 |
| | 2.2 |
|
| Plan participants’ contributions | 1.1 |
| | 1.0 |
| 0.5 |
| | 1.2 |
|
| Gross benefits paid | (3.5 | ) | | (3.0 | ) | (2.8 | ) | | (3.4 | ) |
| Fair value of plan assets at end of year | — |
| | — |
| $ | — |
| | $ | — |
|
| Unfunded status at end of year | $ | (31.6 | ) | | $ | (36.3 | ) | $ | (26.2 | ) | | $ | (26.0 | ) |
| Amounts recognized in the Consolidated Balance Sheets consist of: | | | | | | |
| Current liabilities | $ | (2.4 | ) | | $ | (2.5 | ) | $ | (1.8 | ) | | $ | (2.1 | ) |
| Noncurrent liabilities | (29.2 | ) | | (33.8 | ) | (24.4 | ) | | (23.9 | ) |
| Total amount accrued | $ | (31.6 | ) | | $ | (36.3 | ) | $ | (26.2 | ) | | $ | (26.0 | ) |
| Amounts recognized in accumulated other comprehensive loss consist of: | | | | | | |
| Actuarial loss | $ | 0.4 |
| | $ | 3.4 |
| $ | 4.7 |
| | $ | 3.4 |
|
| Unamortized prior service credit | | (6.9 | ) | | (8.1 | ) |
| Total amount recognized | | $ | (2.2 | ) | | $ | (4.7 | ) |
| Total change in other comprehensive loss attributable to: | | | | | | |
| Benefit (gain) loss during the period | $ | (4.3 | ) | | $ | 1.6 |
| |
| Net (gain) loss amortized during the year | (0.2 | ) | | 0.1 |
| |
| Total change in other comprehensive (gain) loss | $ | (4.5 | ) | | $ | 1.7 |
| |
| Benefit loss during the period | | $ | 1.5 |
| | $ | 2.1 |
|
| Net prior service credit | | — |
| | (8.2 | ) |
| Net amortization of prior service credit and actuarial loss during the year | | 1.0 |
| | — |
|
| Total change in other comprehensive loss (income) | | $ | 2.5 |
| | $ | (6.1 | ) |
| | | | | | | |
| Discount rate used in development of APBO | 4.54 | % | | 3.66 | % | 3.26 | % | | 4.03 | % |
| | | | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Components of net periodic benefit cost | | | | | | | | | | |
| Service cost | $ | 0.5 |
| | $ | 0.6 |
| | $ | 0.5 |
| $ | 0.2 |
| | $ | 0.4 |
| | $ | 0.4 |
|
| Interest cost | 1.3 |
| | 1.6 |
| | 1.6 |
| 1.0 |
| | 1.3 |
| | 1.4 |
|
| Curtailment loss | — |
| | — |
| | 1.1 |
| |
| Amortization of actuarial loss | 0.1 |
| | — |
| | — |
| 0.1 |
| | — |
| | — |
|
| Amortization of prior service credit | | (1.1 | ) | | — |
| | — |
|
| Total postretirement benefit cost | $ | 1.9 |
| | $ | 2.2 |
| | $ | 3.2 |
| $ | 0.2 |
| | $ | 1.7 |
| | $ | 1.8 |
|
| | | | | | | |
| Discount rate used in development of net periodic benefit cost | 3.66 | % | | 4.66 | % | | 4.91 | % | 4.03 | % | | 4.08 | % | | 4.54 | % |
The estimated actuarial gainloss and prior service credit that will be amortized from accumulated loss into net periodic benefit cost over the next fiscal year is immaterial. In connection with the restructuring plan discussed in “NOTE 3. IMPAIRMENT, RESTRUCTURING AND OTHER CHARGES,” the Company recognized a plan curtailment charge of $1.1$0.4 million in fiscal 2011 for an increase in the benefit obligation associated with its retiree medical plan. and $1.1 million, respectively.
On December 8, 2003, the Medicare Prescription Drug, Improvement and Modernization Act (the “Act”) became law. The Act provides for a federal subsidy to sponsors of retiree health care benefit plans that provide a prescription drug benefit that is at least actuarially equivalent to the benefit established by the Act. The APBO at September 30, 2013, has been reduced by a deferred actuarial gain in the amount of $0.3 million to reflect the effect of the subsidy related to benefits attributed to past service.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The amortization of the actuarial gain and reduction of service and interest costs served to reduce net periodic post retirement benefit cost for fiscal 2013, fiscal 2012 and fiscal 2011 by $0.3 million, $0.2 million and $1.1 million, respectively.
For measurement as of September 30, 2013,2016, management has assumed that health care costs will increase at an annual rate of 7.00% in fiscal 2013,2016, and thereafter decreasing 0.25% per year to an ultimate trend rate of 5.00% in 2021.2024. A 1% increase in health cost trend rate assumptions would increase the APBO by $1.4$0.1 million as of September 30, 2013.2016 and a 1% decrease would decrease the APBO by $0.1 million as of September 30, 2016. A 1% increase or decrease in the health cost trend rate assumptions would decrease the APBO by $1.3 million as of September 30, 2013. A 1% increase or decrease in the same rate would not have a material effect on service or interest costs.
On January 1, 2016, a plan change became effective whereby Medicare eligible participants are covered under a Health Reimbursement Arrangement (“HRA”) and a catastrophic prescription drug plan provided by the Company that can be used by retirees to purchase individual insurance policies that supplement or replace Medicare through a private exchange. This plan change resulted in a decrease in the benefit obligation of $8.2 million during fiscal 2015.
The following benefit payments under the plan are expected to be paid by the Company and the retirees for the fiscal years indicated:
|
| | | | | | | | | | | | | | | |
| | Gross Benefit Payments | | Retiree Contributions | | Medicare Part D Subsidy | | Net Company Payments |
| | (In millions) |
| 2014 | $ | 4.0 |
| | $ | (1.2 | ) | | $ | (0.4 | ) | | $ | 2.4 |
|
| 2015 | 4.2 |
| | (1.4 | ) | | (0.4 | ) | | 2.4 |
|
| 2016 | 4.4 |
| | (1.6 | ) | | (0.4 | ) | | 2.4 |
|
| 2017 | 4.6 |
| | (1.8 | ) | | (0.5 | ) | | 2.3 |
|
| 2018 | 4.8 |
| | (2.0 | ) | | (0.5 | ) | | 2.3 |
|
| 2019 – 2023 | 27.3 |
| | (13.6 | ) | | (3.0 | ) | | 10.7 |
|
|
| | | | | | | | | | | |
| | Gross Benefit Payments | | Retiree Contributions | | Net Company Payments |
| | (In millions) |
| 2017 | $ | 2.1 |
| | $ | (0.3 | ) | | $ | 1.8 |
|
| 2018 | 2.3 |
| | (0.4 | ) | | 1.9 |
|
| 2019 | 2.5 |
| | (0.5 | ) | | 2.0 |
|
| 2020 | 2.6 |
| | (0.6 | ) | | 2.0 |
|
| 2021 | 2.6 |
| | (0.6 | ) | | 2.0 |
|
| 2022 – 2026 | 11.9 |
| | (3.2 | ) | | 8.7 |
|
The Company also provides comprehensive major medical benefits to its associates. The Company is self-insured for certain health benefits up to $0.5$0.6 million per occurrence per individual. The cost of such benefits is recognized as expense in the period the claim is incurred. This cost was $35.1$31.8 million,, $28.7 $29.6 million and $27.9$29.0 million in fiscal 2016, fiscal 2013, fiscal 20122015 and fiscal 20112014, respectively.
NOTE 10.11. DEBT
The components of long-term debt are as follows:
| | | | September 30, | September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| | (In millions) | (In millions) |
| | | | | |
| Credit Facilities - Revolving loans | $ | 73.0 |
| | $ | 377.1 |
| |
| Senior Notes – 7.25% | 200.0 |
| | 200.0 |
| |
| Credit Facilities: | | | | |
| Revolving loans | | $ | 417.4 |
| | $ | 816.3 |
|
| Term loans | | 288.8 |
| | — |
|
| Senior Notes – 6.625% | 200.0 |
| | 200.0 |
| — |
| | 200.0 |
|
| Senior Notes – 6.000% | | 400.0 |
| | — |
|
| Master Accounts Receivable Purchase Agreement | 85.3 |
| | — |
| 138.6 |
| | 122.3 |
|
| Other | 12.2 |
| | 5.5 |
| 71.3 |
| | 19.0 |
|
| | 570.5 |
| | 782.6 |
| 1,316.1 |
| | 1,157.6 |
|
| Less current portions | 92.4 |
| | 1.5 |
| 185.0 |
| | 132.6 |
|
| Long term debt | $ | 478.1 |
| | $ | 781.1 |
| |
| Long-term debt | | $ | 1,131.1 |
| | $ | 1,025.0 |
|
The Company’s debt matures as follows for each of the next five fiscal years and thereafter (in millions):
|
| | | |
| 2014 | $ | 92.4 |
|
| 2015 | 1.9 |
|
| 2016 | 74.2 |
|
| 2017 | 0.5 |
|
| 2018 | 200.5 |
|
| Thereafter | 201.0 |
|
| | $ | 570.5 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Company’s debt matures as follows for each of the next five fiscal years and thereafter (in millions):
|
| | | |
| 2017 | $ | 185.0 |
|
| 2018 | 15.7 |
|
| 2019 | 15.6 |
|
| 2020 | 15.4 |
|
| 2021 | 646.1 |
|
| Thereafter | 438.3 |
|
| | $ | 1,316.1 |
|
Credit Facilities
Scotts Miracle-GroOn December 20, 2013, the Company entered into the third amended and restated credit agreement, providing the Company and certain of its subsidiaries are parties to an amended and restatedwith a five-year senior secured creditrevolving loan facility providing for revolving loans in the aggregate principal amount of up to $1.7$1.7 billion over (the “former credit facility”). On October 29, 2015, the Company entered into the fourth amended and restated credit agreement (the “new credit agreement”), providing the Company and certain of its subsidiaries with five-year senior secured loan facilities in the aggregate principal amount of $1.9 billion, comprised of a five-year term.revolving credit facility of $1.6 billion and a term loan in the original principal amount of $300.0 million (the “new credit facilities”). The new credit agreement also provides the Company with the right to seek additional committed credit under the agreement in an aggregate amount of up to $500.0 million plus an unlimited additional amount, subject to certain specified financial and other conditions. Under the new credit agreement, the Company has the ability to obtain letters of credit up to $100.0 million. The new credit agreement replaces the former credit facility, and will terminate on October 29, 2020. Borrowings on the revolving credit facility may be made in various currencies, including U.S. dollars, Euros,euro, British pounds, Australian dollars and Canadian dollars. Under this credit facility, the Company may request up to an additional $450 million in revolving and/or term commitments, subject to certain specified conditions, including approval from the Company’s lenders.
The terms of the new credit facility provide foragreement include customary representations and warranties, and affirmative covenants. The credit facility also contains customaryand negative covenants, setting forth limitations, subjectfinancial covenants and events of default. The proceeds of borrowings on the new credit facilities may be used: (i) to negotiated carve-outs on liens; contingent obligations; fundamental changes; acquisitions, investments, loansfinance working capital requirements and advances; indebtedness; restrictions on subsidiary distributions; transactions with affiliatesother general corporate purposes of the Company and officers; sales of assets; saleits subsidiaries; and leaseback transactions; changing(ii) to refinance the Company’s fiscal year end; modifications of certain debt instruments; negative pledge clauses; entering into new lines of business; and restricted payments, which were limited to an aggregate of $125 million annually through fiscal 2013 and $150 million annually beginning in fiscal 2014 if the Company's leverage ratio, after giving effect to any such annual dividend payment, exceeds 2.50. The credit facility is secured by collateral that includes the capital stock of specified subsidiaries of Scotts Miracle-Gro, substantially all domestic accounts receivable (exclusive of any “sold” receivables), inventory and equipment. The credit facility is guaranteed by substantially all of Scotts Miracle-Gro’s domestic subsidiaries, which have a carrying value of $1.5 billion.
Loans madeamounts outstanding under the former credit facilityfacility.
Under the terms of the new credit agreement, loans bear interest, at the Company’s election, at a rate per annum equal to either the ABR or LIBOR rate,Adjusted LIBO Rate (both as defined)defined in the new credit agreement) plus anthe applicable margin. Amounts outstanding underThe new credit facilities are guaranteed by substantially all of the credit facility at Company’s domestic subsidiaries, and are secured by (i) a perfected first priority security interest in all of the accounts receivable, inventory and equipment of the Company and the Company’s domestic subsidiaries that are guarantors and (ii) the pledge of all of the capital stock of the Company’s domestic subsidiaries that are guarantors.
At September 30, 2013 were at interest rates based on LIBOR applicable to the borrowed currencies plus 200 basis points. Under the credit facility, the Company has the ability to obtain letters of credit up to $75 million outstanding. At September 30, 2013,2016, the Company had letters of credit outstanding in the aggregate face amount of $23.3 million outstanding on the credit facility, and $1.6 billion of availability under its credit facility.
Senior Notes- 7.25%
On January 14, 2010, Scotts Miracle-Gro issued $200 million aggregate principal amount of 7.25% Senior Notes due 2018 (the “7.25% Senior Notes”).$26.5 million, and $1.2 billion of availability under the new credit agreement, subject to the Company’s continued compliance with the covenants discussed below. The net proceeds of the offering were used to reduce outstandingweighted average interest rates on average borrowings under the new credit agreement and the former credit facility were 3.5% and 4.0% for fiscal 2016 and fiscal 2015, respectively.
The new credit agreement contains, among other obligations, an affirmative covenant regarding the Company’s then existing credit facilities. The 7.25% Senior Notes represent general unsecured senior obligationsleverage ratio on the last day of Scotts Miracle-Gro,each quarter calculated as average total indebtedness, divided by the Company’s earnings before interest, taxes, depreciation and were soldamortization (“EBITDA”), as adjusted pursuant to the public at 99.254%terms of the principal amount thereof,new credit agreement (“Adjusted EBITDA”). The maximum leverage ratio was 4.50 as of September 30, 2016. The Company’s leverage ratio was 3.10 at September 30, 2016. The new credit agreement also includes an affirmative covenant regarding its interest coverage ratio. The interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described in the new credit agreement, and excludes costs related to yield 7.375%refinancings. The minimum interest coverage ratio was 3.00 for the twelve months ended September 30, 2016. The Company’s interest coverage ratio was 7.88 for the twelve months ended September 30, 2016. The new credit agreement allows the Company to maturity. The 7.25% Senior Notes have interest payment dates of January 15make unlimited restricted payments (as defined in the new credit agreement), including increased or one-time dividend payments and July 15 of each year, which began on July 15, 2010 and may be redeemed prior to maturity at applicable redemption premiums. The 7.25% Senior Notes contain usual and customary incurrence-based covenants, which include, but are not limited to, restrictions onCommon Share repurchases, as long as the incurrence of additional indebtedness, the incurrence of liens and the issuance of certain preferred shares, andleverage ratio resulting from the making of certain distributions, investments and othersuch restricted payments as well as other usualis 4.00 or less. Otherwise the Company may only make restricted payments in an aggregate amount for each fiscal year not to exceed the amount set forth in the new credit agreement for such fiscal year ($175.0 million for fiscal 2017 and customary covenants, which include, but are not limited to, restrictions on sale$200.0 million for fiscal 2018 and leaseback transactions, restrictions on purchases or redemptions ofeach fiscal year thereafter).
Senior Notes - 6.625%
On December 15, 2015, Scotts Miracle-Gro stock and prepayments of subordinated debt, limitations on asset sales and restrictions on transactions with affiliates. The 7.25% Senior Notes mature on January 15, 2018. Substantiallyredeemed all of Scotts Miracle-Gro's domestic subsidiaries serve as guarantors of the 7.25% Senior Notes.
Senior Notes- 6.625%
On December 16, 2010, Scotts Miracle-Gro issued $200$200.0 million aggregate principal amount of its outstanding 6.625% Senior Notes senior notes due 2020 (the “6.625%”“6.625% Senior Notes”) paying a redemption price of $213.2 million, comprised
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of $6.6 million of accrued and unpaid interest, $6.6 million of call premium and $200.0 million for outstanding principal amount. The $6.6 million call premium charge was recognized within the “Costs related to refinancing” line on the Consolidated Statement of Operations in a private placement exempt from the registration requirements underfirst quarter of fiscal 2016. Additionally, the Securities ActCompany had $2.2 million in unamortized bond discount and issuance costs associated with the 6.625% Senior Notes that were written off and recognized in the “Costs related to refinancing” line on the Consolidated Statement of 1933, as amended.Operations in the first quarter of fiscal 2016.
Senior Notes - 6.000%
On October 13, 2015, Scotts Miracle-Gro issued $400.0 million aggregate principal amount of 6.000% senior notes due 2023 (the “6.000% Senior Notes”). The net proceeds of the offering were used to repay outstanding borrowings under the Company’s then existingformer credit facilities and for general corporate purposes.facility. The 6.625%6.000% Senior Notes represent general unsecured senior obligations of Scotts Miracle-Gro and rank equal in right of payment with the Company’s existing and future unsecured senior debt, including, without limitation, the 7.25% Senior Notes.debt. The 6.625%6.000% Senior Notes have interest payment dates of JuneApril 15 and DecemberOctober 15 of each year, which began on June 15, 2011, andyear. The 6.000% Senior Notes may be redeemed, prior to maturityin whole or in part, on or after October 15, 2018 at applicable redemption premiums. The 6.625%6.000% Senior Notes contain usual and customary incurrence-based covenants, as well as other usual and customary covenants substantially similar to those contained in the 7.25% Senior Notes. The 6.625% Senior Notesand events of default and mature on DecemberOctober 15, 2020.2023. Substantially all of Scotts Miracle-Gro’s domestic subsidiaries serve as guarantors of the 6.625%6.000% Senior Notes.
Master Accounts Receivable Purchase Agreement
The Company was in compliance withmaintains a Master Accounts Receivable Purchase Agreement (“MARP Agreement”), which provides for the termsdiscretionary sale by the Company, and the discretionary purchase (outside of all debt covenants at September 30, 2013. The credit facility contains, among other obligations, an affirmative covenant regarding the Company’s leverage ratio, calculated as average total indebtedness, as describedcommitment period specified in the Company’s credit facility, relativeMARP Agreement) by the participating banks, on a revolving basis, of accounts receivable generated by sales to three specified account debtors in an aggregate amount not to exceed $400.0 million. The MARP Agreement is subject to renewal by mutual agreement at least annually.
On March 23, 2016, Scotts Miracle-Gro and Scotts LLC entered into a Waiver and First Amendment to the Company’s EBITDA, as adjusted pursuant toMARP Agreement that amends the termsMARP Agreement in the following significant respects: (1) includes subsidiaries and affiliates of the credit facility (“Adjusted EBITDA”).approved debtors in the definition of approved debtors; (2) requires Scotts LLC to repurchase all receivables (including any defaulted receivables) from the banks on each settlement date; and (3) provides the administrative agent and the banks with full recourse to Scotts LLC in case of non-payment of any purchased receivable on the maturity date thereof, regardless of the reason for such non-payment. Under the terms of the credit facility,amended MARP Agreement, the maximum leverage ratio was 3.50banks have the opportunity to purchase those accounts receivable offered by the Company at a discount (from the agreed base value thereof) effectively equal to the one-week LIBO rate plus 0.95%.
The Company accounts for the sale of receivables under the MARP Agreement (as amended) as short-term debt and continues to carry the receivables on its Consolidated Balance Sheet, primarily as a result of the Company’s requirement to repurchase receivables sold. There were $138.6 million and $122.3 million in borrowings or receivables pledged as collateral under the MARP Agreement at September 30, 2013.2016 and 2015, respectively. The Company’s leverage ratiocarrying value of the receivables pledged as collateral was 2.05$174.7 million at September 30, 2013. The Company’s credit facility also includes an affirmative
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
covenant regarding its interest coverage ratio. Interest coverage ratio is calculated as Adjusted EBITDA divided by interest expense, as described inOn August 25, 2016, Scotts Miracle-Gro and Scotts LLC entered into a Second Amendment to the credit facility, and excludes costs related to refinancings. UnderMARP Agreement that extended the termsstated termination date of the credit facility,Agreement through October 14, 2016. The MARP Agreement terminated effective October 14, 2016 in accordance with its terms.
Other
In connection with the minimumacquisition of a controlling interest coverage ratioin Gavita, the Company recorded a loan to the noncontrolling ownership group of Gavita. The fair value of the loan was 3.50 for the year ended $38.3 million at September 30, 2013. The Company’s interest coverage ratio was 6.59 for the year ended September 30, 2013. The weighted average interest rates on average debt were 6.2% and 6.0% for fiscal 2013 and fiscal 2012, respectively.2016.
Interest Rate Swap Agreements
At September 30, 2013, theThe Company hadhas outstanding interest rate swap agreements with major financial institutions that effectively converted the LIBOR indexconvert a portion of the Company’s variable-rate debt denominated in U.S. dollars to a fixed rate. The swap agreements had a total U.S. dollar equivalent notional amount of $1,100$650.0 million and $1,300.0 million at September 30, 2013.2016 and September 30, 2015. Interest payments made between the effective date and expiration date are hedged by the swap agreements, except as noted below. below, respectively. On November 1, 2016, the Company executed interest rate swap agreements with notional amounts that adjust in accordance with a specified seasonal schedule and have a maximum total notional amount at any point in time of $500.0 million. These swap agreements effectively convert the LIBOR index on a portion of the Company’s variable-rate debt to a fixed rate of approximately 0.83% beginning in November 2016 through expiration dates in June and August 2018.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The notional amount, effective date, expiration date and rate of each of these swap agreements outstanding at September 30, 2016 are shown in the table below.
| | Notional Amount (in millions) | Notional Amount (in millions) | | Effective Date (a) | | Expiration Date | | Fixed Rate | Notional Amount (in millions) | | Effective Date (a) | | Expiration Date | | Fixed Rate |
| $ | 50 |
| | 2/14/2012 | | 2/14/2016 | | 3.78 | % | 50 |
| (d) | 12/6/2012 | | 9/6/2017 | | 2.96 | % |
| 150 |
| (b) | 2/7/2012 | | 5/7/2016 | | 2.42 | % | |
| 150 |
| (c) | 11/16/2009 | | 5/16/2016 | | 3.26 | % | |
| 50 |
| (b) | 2/16/2010 | | 5/16/2016 | | 3.05 | % | |
| 100 |
| (b) | 2/21/2012 | | 5/23/2016 | | 2.40 | % | |
| 150 |
| (c) | 12/20/2011 | | 6/20/2016 | | 2.61 | % | |
| 50 |
| (d) | 12/6/2012 | | 9/6/2017 | | 2.96 | % | |
| 200 | | 200 |
|
| 2/7/2014 | | 11/7/2017 | | 1.28 | % |
| 150 | 150 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.12 | % | 150 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.12 | % |
| 50 | 50 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.25 | % | 50 |
| (b) | 2/7/2017 | | 5/7/2019 | | 2.25 | % |
| 200 | 200 |
| (c) | 12/20/2016 | | 6/20/2019 | | 2.12 | % | 200 |
| (c) | 12/20/2016 | | 6/20/2019 | | 2.12 | % |
| |
| (a) | The effective date refers to the date on which interest payments were, or will be, first hedged by the applicable swap agreement. |
| |
| (b) | Interest payments made during the three-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement. |
| |
| (c) | Interest payments made during the six-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement. |
| |
| (d) | Interest payments made during the nine-month period of each year that begins with the month and day of the effective date are hedged by the swap agreement. |
Master Accounts Receivable Purchase Agreement
The Company maintains a Master Accounts Receivable Purchase Agreement (“MARP Agreement”), which is uncommitted and provides for the discretionary sale by the Company, and the discretionary purchase by the banks, on a revolving basis, of accounts receivable generated by sales to three specified account debtors in an aggregate amount not to exceed $400 million. On October 25, 2013, the Company signed an amendment to the existing MARP Agreement which extended the termination date to August 29, 2014, or such later date as may be mutually agreed by the Company and the banks party thereto. Under the amended terms of the MARP Agreement, the banks have the opportunity to purchase those accounts receivable offered by the Company at a discount (from the agreed base value thereof) effectively equal to the one-week LIBOR plus 0.75%.
The Company accounts for the sale of receivables under its MARP Agreement as short-term debt and continues to carry the receivables on its Consolidated Balance Sheet, primarily as a result of the Company’s right to repurchase receivables sold. There were $85.3 million of short-term borrowings as of September 30, 2013 and no short-term borrowings as of September 30, 2012 under the MARP Agreement. The carrying value of the receivables pledged as collateral was $106.7 million as of September 30, 2013.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Estimated Fair Values
A description of theThe methods and assumptions used to estimate the fair values of the Company’s debt instruments is as follows:are described below:
Credit FacilityFacilities
The interest rate currently available to the Company fluctuates with the applicable LIBORLIBO rate, prime rate or Federal Funds Effective Rate and thus the carrying value is a reasonable estimate of fair value. The fair value measurement for the new credit facilityfacilities was classified in Level 2 of the fair value hierarchy.
7.25%6.000% Senior Notes
The fair value of the 7.25%6.000% Senior Notes can be determined based on the trading value of the 7.25%6.000% Senior Notes in the open market. The difference between the carrying value and the fair value of the 7.25%6.000% Senior Notes represents the premium or discount on that date. The fair value measurement for the 7.25%6.000% Senior Notes was classified in Level 1 of the fair value hierarchy.
6.625% Senior Notes
The fair value of the 6.625% Senior Notes can bewas determined based on the trading value of the 6.625% Senior Notes in the open market. The difference between the carrying value and the fair value of the 6.625% Senior Notes representsrepresented the premium or discount on that date. The fair value measurement for the 6.625% Senior Notes was classified in Level 1 of the fair value hierarchy.
Accounts Receivable Pledged
The interest rate on the short-term debt associated with accounts receivable pledged under the MARP Agreement fluctuatesfluctuated with the applicable LIBORLIBO rate and thus the carrying value isrepresented a reasonable estimate of fair value. The fair value measurement for the MARP agreementAgreement was classified in Level 2 of the fair value hierarchy.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The estimated fair values of the Company’s debt instruments are as follows:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value | Carrying Amount | | Fair Value | | Carrying Amount | | Fair Value |
| | (In millions) | (In millions) |
| Revolving loans | $ | 73.0 |
| | $ | 73.0 |
| | $ | 377.1 |
| | $ | 377.1 |
| $ | 417.4 |
| | $ | 417.4 |
| | $ | 816.3 |
| | $ | 816.3 |
|
| Senior Notes – 7.25% | 200.0 |
| | 209.5 |
| | 200.0 |
| | 212.0 |
| |
| Term loans | | 288.8 |
| | 288.8 |
| | — |
| | — |
|
| Senior Notes – 6.625% | 200.0 |
| | 213.5 |
| | 200.0 |
| | 217.5 |
| — |
| | — |
| | 200.0 |
| | 206.3 |
|
| Senior Notes – 6.000% | | 400.0 |
| | 427.0 |
| | — |
| | — |
|
| Master Accounts Receivable Purchase Agreement | 85.3 |
| | 85.3 |
| | — |
| | — |
| 138.6 |
| | 138.6 |
| | 122.3 |
| | 122.3 |
|
| Other | 12.2 |
| | 12.2 |
| | 5.5 |
| | 5.5 |
| 71.3 |
| | 71.3 |
| | 19.0 |
| | 19.0 |
|
Weighted Average Interest Rate
The weighted average interest rate on the Company’s debt was 4.2% for fiscal 2016 and fiscal 2015.
NOTE 11. SHAREHOLDERS’12. EQUITY
Authorized and issued capital shares consisted of the following:
| | | | September 30, | September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| | (In millions) | (In millions) |
| Preferred shares, no par value: | | |
| Authorized | 0.2 shares | | 0.2 shares | 0.2 shares | | 0.2 shares |
| Issued | 0.0 shares | | 0.0 shares | 0.0 shares | | 0.0 shares |
| Common shares, no par value, $.01 stated value per share | | |
| Common shares, no par value, $.01 stated value per share: | | |
| Authorized | 100.0 shares | | 100.0 shares | 100.0 shares | | 100.0 shares |
| Issued | 68.1 shares | | 68.1 shares | 68.1 shares | | 68.1 shares |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
In fiscal 1995, The Scotts Company merged with Stern’s Miracle-Gro Products, Inc. (“Miracle-Gro”). At September 30, 20132016, the former shareholders of Miracle-Gro, including the Hagedorn Partnership L.P., owned approximately 27%26% of Scotts Miracle-Gro’s outstanding common sharesCommon Shares and, thus, have the ability to significantly influence the election of directors and other actions requiring the approval of Scotts Miracle-Gro’s shareholders.
Under the terms of the merger agreement with Miracle-Gro, the former shareholders of Miracle-Gro may not collectively acquire, directly or indirectly, beneficial ownership of Voting Stock (as that term is defined in the Miracle-Gro merger agreement) representing more than 49% of the total voting power of the outstanding Voting Stock, except pursuant to a tender offer for 100% of that total voting power, which tender offer is made at a price per share which is not less than the market price per share on the last trading day before the announcement of the tender offer and is conditioned upon the receipt of at least 50% of the Voting Stock beneficially owned by shareholders of Scotts Miracle-Gro other than the former shareholders of Miracle-Gro and their affiliates and associates.
Share Repurchases
In August 2010, the Scotts Miracle-Gro Board of Directors authorized the repurchase of up to $500$500 million of Scotts Miracle-Gro’s common shares (the “Common Shares”)Common Shares over a four-yearfour-year period throughending on September 30, 2014. OnIn May 4, 2011, the Scotts Miracle-Gro Board of Directors authorized the repurchase of up to an additional $200$200 million of the Common Shares, resulting in authority to repurchase up to a total of $700up to $700 million of the Common Shares through September 30, 2014. From the inception of this share repurchase program in the fourth quarter of fiscal 2010 through its expiration on September 30, 2014, Scotts Miracle-Gro repurchased 9.9 million Common Shares for $521.2 million to be held in treasury.
In August 2014, the Scotts Miracle-Gro Board of Directors authorized the repurchase of up to $500.0 million of Common Shares over a five-year period (effective November 1, 2014 through September 30, 2019). On August 3, 2016, Scotts Miracle-Gro announced that its Board of Directors authorized a $500.0 million increase to the share repurchase authorization ending on
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
September 30, 2019. The amended authorization allows for repurchases of Common Shares of $1.0 billion through September 30, 2019. The authorization provides the Company with flexibility to purchase the Common Shares from time to time in open market purchases or through privately negotiated transactions. All or part of the repurchases may be made under Rule 10b5-1 plans, which the Company may enter into from time to time and which enable the repurchases to occur on a more regular basis, or pursuant to accelerated share repurchases. The share repurchase authorization, which expires September 30, 2014,2019, may be suspended or discontinued at any time, and there can be no guarantee as to the timing or amount of any repurchases. SinceFrom the inception of this share repurchase program in the fourth quarter of fiscal 20102014 through September 30, 2013,2016, Scotts Miracle-Gro has repurchased approximately 7.82.1 million Common Shares for $401.2 million$145.7 million.
Special Dividend
In August 2014, the Scotts Miracle-Gro Board of Directors declared a special one-time cash dividend of $2.00 per Common Share that was paid on September 17, 2014. The payment of the special one-time cash dividend required Scotts Miracle-Gro to be held in treasury.adjust the number of Common Shares held in treasury totaling 0.7 million and 1.1 million were reissued in support of share-based compensation awards and employee purchasessubject to stock options outstanding under the employeeScotts Miracle-Gro share-based awards programs, as well as the price at which the awards may be exercised. The adjustments to the outstanding awards resulted in an increase in the number of Common Shares subject to outstanding stock purchase plan during fiscal 2013options in an aggregate amount of 0.1 million Common Shares. The methodology used to adjust the awards was consistent with Internal Revenue Code (IRC) Section 409A and fiscal 2012, respectively.the then-proposed regulations promulgated thereunder and IRC Section 424 and the regulations promulgated thereunder, compliance with which was necessary to avoid adverse tax consequences for the holder of an award. Such methodology also resulted in a fair value for the adjusted awards post-dividend equal to that of the unadjusted awards pre-dividend, with the result that there was no additional compensation expense in accordance with the accounting for modifications to awards under ASC 718.
Share-Based Awards
Scotts Miracle-Gro grants share-based awards annually to officers and certain other employees of the Company and non-employee directors of Scotts Miracle-Gro. The share-based awards have consisted of stock options, restricted stock restricted stock units, deferred stock units and performance-based awards. Stock appreciation rights (“SARs”) have been granted, though not in recent years. SARs result in less dilution than stock options as the SAR holder receives a net share settlement upon exercise. All of these share-based awards have been made under plans approved by the shareholders. Generally, employee share-based awards provide for three-year cliff vesting. Vesting for non-employee director awards varies based on the length of service and age of each director at the time of the award. Vesting of performance-based awards areis dependent on service and achievement of specified performance targets. Share-based awards are forfeited if a holder terminates employment or service with the Company prior to the vesting date. The Company estimates that 15%20% of its share-based awards will be forfeited based on an analysis of historical trends. This assumption is re-evaluated on an annual basis and adjusted as appropriate. Stock options and SAR awards have exercise prices equal to the market price of the underlying common sharesCommon Shares on the date of grant with a term of 10 years. If available, Scotts Miracle-Gro will typically use treasury shares, or if not available, newly-issued Common Shares, in satisfaction of its share-based awards.
A maximum of 2323.1 million Common Shares are available for issuance under share-based award plans. At September 30, 2013,2016, approximately 3.31.9 million Common Shares were not subject to outstanding awards and were available to underlie the grant of new share-based awards.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following is a recap of the share-based awards granted during the periods indicated:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Employees | | | | | | | | | | |
| Options | — |
| | 464,061 |
| | 429,700 |
| 444,890 |
| | 440,690 |
| | — |
|
| Restricted stock units | 178,030 |
| | 107,373 |
| | 65,939 |
| 74,467 |
| | 78,463 |
| | 112,315 |
|
| Performance units | 178,321 |
| | 110,079 |
| | 53,874 |
| 56,315 |
| | 78,352 |
| | 161,229 |
|
| Board of Directors | | | | | | | | | | |
| Deferred stock units | 33,253 |
| | 30,943 |
| | 30,296 |
| 28,621 |
| | 29,913 |
| | 38,418 |
|
| Options due to special $2.00 dividend | | — |
| | — |
| | 98,186 |
|
| Total share-based awards | 389,604 |
| | 712,456 |
| | 579,809 |
| 604,293 |
| | 627,418 |
| | 311,962 |
|
| Aggregate fair value at grant dates (in millions) | $ | 17.5 |
| | $ | 17.4 |
| | $ | 13.8 |
| $ | 16.4 |
| | $ | 17.0 |
| | $ | 17.5 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Total share-based compensation was as follows for the periods indicated:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Share-based compensation | $ | 10.3 |
| | $ | 12.5 |
| | $ | 16.0 |
| $ | 15.6 |
| | $ | 13.2 |
| | $ | 11.1 |
|
| Tax benefit recognized | 3.9 |
| | 4.8 |
| | 6.2 |
| 6.0 |
| | 5.1 |
| | 3.9 |
|
As of September 30, 2013,2016, total unrecognized compensation cost related to non-vested share-based awards amounted to $10.7 million.$10.3 million. This cost is expected to be recognized over a weighted-average period of 1.91.7 years. The tax benefit realized from the tax deductions associated with the exercise of share-based awards and the vesting of restricted stock totaled $4.5$15.1 million for fiscal 2013.2016.
During fiscal 2015, Scotts Miracle-Gro issued 0.2 million Common Shares, which represented a carrying value of $8.3 million, out of its treasury shares for payment of the acquisition of Vermicrop. During fiscal 2016, Scotts Miracle-Gro issued 0.1 million Common Shares, which represented a carrying value of $4.2 million, out of its treasury shares for payment of contingent consideration related to the acquisition of Vermicrop.
Stock Options/SARs
Aggregate stock option and SARsSAR activity consisted of the following for the year ended September 30, 2013fiscal 2016 (options/SARs in millions):
| | | | No. of Options/SARs | | WTD. Avg. Exercise Price | No. of Options/SARs | | WTD. Avg. Exercise Price |
| Beginning balance | 3.3 |
| | $ | 37.28 |
| 1.8 |
| | $ | 44.38 |
|
| Granted | — |
| | — |
| 0.4 |
| | 68.68 |
|
| Exercised | (0.5 | ) | | 31.88 |
| (0.4 | ) | | 38.21 |
|
| Forfeited | (0.1 | ) | | 49.50 |
| — |
| | — |
|
| Ending balance | 2.7 |
| | 37.60 |
| 1.8 |
| | 51.38 |
|
| Exercisable | 2.0 |
| | 33.53 |
| 1.0 |
| | 38.42 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
At September 30, 2013,2016, the Company expects 0.70.8 million of the remaining unexercisable stock options (after forfeitures), with a weighted-average exercise price of $49.57,$66.09, intrinsic value of $3.7$12.9 million and average remaining term of 7.88.8 years, to vest in the future. The following summarizes certain information pertaining to stock option and SAR awards outstanding and exercisable at September 30, 2013 (options/SARs2016 (options in millions):
|
| | | | | | | | | | | | | | | | | | |
| | | Awards Outstanding | | Awards Exercisable |
Range of Exercise Price | | No. of Options/ SARs | | WTD. Avg. Remaining Life | | WTD. Avg. Exercise Price | | No. of Options/ SARS | | WTD. Avg. Remaining Life | | WTD. Avg. Exercise Price |
| $20.12 – $21.65 | | 0.3 |
| | 5.01 | | $ | 21.65 |
| | 0.3 |
| | 5.01 | | $ | 21.65 |
|
| $24.45 – $28.72 | | 0.2 |
| | 0.21 | | 24.72 |
| | 0.2 |
| | 0.21 | | 24.72 |
|
| $29.01 – $31.62 | | 0.3 |
| | 1.33 | | 29.16 |
| | 0.3 |
| | 1.33 | | 29.16 |
|
| $33.25 – $37.48 | | 0.3 |
| | 2.05 | | 35.80 |
| | 0.3 |
| | 2.05 | | 35.80 |
|
| $37.89 – $38.90 | | 0.6 |
| | 3.59 | | 38.56 |
| | 0.6 |
| | 3.59 | | 38.56 |
|
| $40.81 – $51.73 | | 1.0 |
| | 7.05 | | 47.32 |
| | 0.3 |
| | 5.14 | | 42.55 |
|
| | | 2.7 |
| | 4.38 | | $ | 37.60 |
| | 2.0 |
| | 3.20 | | $ | 33.53 |
|
|
| | | | | | | | | | | | | | | | | | |
| | | Awards Outstanding | | Awards Exercisable |
Range of Exercise Price | | No. of Options/ SARs | | WTD. Avg. Remaining Life | | WTD. Avg. Exercise Price | | No. of Options/ SARS | | WTD. Avg. Remaining Life | | WTD. Avg. Exercise Price |
| $20.59 – $20.59 | | 0.2 |
| | 2.01 | | $ | 20.59 |
| | 0.2 |
| | 2.01 | | $ | 20.59 |
|
| $30.07 – $36.86 | | 0.2 |
| | 1.09 | | 36.47 |
| | 0.2 |
| | 1.09 | | 36.47 |
|
| $38.81 – $49.19 | | 0.6 |
| | 4.43 | | 45.42 |
| | 0.6 |
| | 4.43 | | 45.42 |
|
| $63.43 – $68.68 | | 0.8 |
| | 8.86 | | 66.24 |
| | — |
| | 0 | | — |
|
| | | 1.8 |
| | 5.89 | | $ | 51.38 |
| | 1.0 |
| | 3.31 | | $ | 38.42 |
|
The intrinsic value of the stock option and SAR awards outstanding and exercisable at September 30, 2016 were as follows (in millions):
| | | | 2013 | 2016 |
| Outstanding | $ | 47.2 |
| $ | 57.7 |
|
| Exercisable | 43.4 |
| 43.3 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The grant date fair value of stock option awards areis estimated using a binomial model and the assumptions in the following table. Expected market price volatility is based on implied volatilities from traded options on Scotts Miracle-Gro’s common sharesCommon Shares and historical volatility specific to the common shares.Common Shares. Historical data, including demographic factors impacting historical exercise behavior, is used to estimate stock option exercises and employee terminations within the valuation model. The risk-free rate for periods within the contractual life (normally ten years) of the stock option is based on the U.S. Treasury yield curve in effect at the time of grant. The expected life of stock options is based on historical experience and expectations for grants outstanding. No stock options awards were granted in fiscal 2013. The weighted average assumptions for awards granted in fiscal 2012 and 20112016 are as follows:
| | | | Year Ended September 30, | | | |
| | | 2012 | | 2011 | | 2016 |
| Expected market price volatility | | 33.2 | % | | 31.9 | % | | 25.5 | % |
| Risk-free interest rates | | 1.2 | % | | 2.4 | % | | 1.5 | % |
| Expected dividend yield | | 2.5 | % | | 1.9 | % | | 2.7 | % |
| Expected life of stock options in years | | 5.96 |
| | 5.97 |
| | 6.0 |
|
| Estimated weighted-average fair value per stock option | | 11.50 |
| | 14.06 |
| | $ | 12.33 |
|
The total intrinsic value of stock options exercised was $8.1$13.6 million,, $23.9 $16.3 million and $22.4$21.3 million during fiscal 20132016, fiscal 20122015 and fiscal 20112014, respectively. Cash received from the exercise of stock options for fiscal 20132016, fiscal 2015 and fiscal 20122014 was $13.3$14.7 million, $24.3 million and $17.6$20.0 million,, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Restricted share-based awards
Restricted share-based award activity (including restricted stock, restricted stock units and deferred stock units) was as follows:
| | | | No. of Shares | | WTD. Avg. Grant Date Fair Value per Share | No. of Shares | | WTD. Avg. Grant Date Fair Value per Share |
| Awards outstanding at September 30, 2010 | 840,426 |
| | $ | 33.52 |
| |
| Awards outstanding at September 30, 2013 | | 409,651 |
| | $ | 47.36 |
|
| Granted | 96,235 |
| | 51.99 |
| 150,733 |
| | 59.35 |
|
| Vested | (136,355 | ) | | 38.44 |
| (81,597 | ) | | 41.88 |
|
| Forfeited | (103,400 | ) | | 32.76 |
| (44,895 | ) | | 47.43 |
|
| Awards outstanding at September 30, 2011 | 696,906 |
| | 35.22 |
| |
| Awards outstanding at September 30, 2014 | | 433,892 |
| | 52.55 |
|
| Granted | 138,316 |
| | 47.53 |
| 108,376 |
| | 63.85 |
|
| Vested | (301,132 | ) | | 22.25 |
| (135,562 | ) | | 47.33 |
|
| Forfeited | (36,891 | ) | | 45.28 |
| (25,197 | ) | | 58.44 |
|
| Awards outstanding at September 30, 2012 | 497,199 |
| | 45.75 |
| |
| Awards outstanding at September 30, 2015 | | 381,509 |
| | 57.22 |
|
| Granted | 211,283 |
| | 44.80 |
| 103,088 |
| | 69.00 |
|
| Vested | (251,855 | ) | | 40.87 |
| (161,440 | ) | | 47.21 |
|
| Forfeited | (46,976 | ) | | 53.54 |
| (17,494 | ) | | 60.18 |
|
| Awards outstanding at September 30, 2013 | 409,651 |
| | 47.36 |
| |
| Awards outstanding at September 30, 2016 | | 305,663 |
| | 66.31 |
|
The total fair value of restricted stock units and deferred stock units vested was $10.3$7.6 million,, $3.1 $6.2 million and $0.6$3.4 million during fiscal 20132016, fiscal 20122015 and fiscal 20112014, respectively. The total fair value of restricted stock vested was $3.6 million and $4.6 million during fiscal 2012 and fiscal 2011, respectively. The Company has no outstanding restricted stock as of September 30, 2012.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Performance-based awards
Performance-based award activity was as follows:
| | | | No. of Units | | WTD. Avg. Grant Date Fair Value per Unit | No. of Units | | WTD. Avg. Grant Date Fair Value per Unit |
| Awards outstanding at September 30, 2010 | 24,200 |
| | $ | 29.85 |
| |
| Awards outstanding at September 30, 2013 | | 261,917 |
| | $ | 46.81 |
|
| Granted | 53,874 |
| | 51.91 |
| 161,229 |
| | 59.39 |
|
| Vested | (35,774 | ) | | 32.57 |
| — |
| | — |
|
| Forfeited | — |
| | — |
| (111,897 | ) | | 53.24 |
|
| Awards outstanding at September 30, 2011 | 42,300 |
| | 51.73 |
| |
| Awards outstanding at September 30, 2014 | | 311,249 |
| | 51.21 |
|
| Granted | 114,279 |
| | 47.63 |
| 78,352 |
| | 63.36 |
|
| Vested | — |
| | — |
| (49,467 | ) | | 47.66 |
|
| Forfeited | (2,670 | ) | | 47.66 |
| (910 | ) | | 47.66 |
|
| Awards outstanding at September 30, 2012 | 153,909 |
| | 45.48 |
| |
| Awards outstanding at September 30, 2015 | | 339,224 |
| | 54.86 |
|
| Granted | 178,321 |
| | 45.06 |
| 56,315 |
| | 68.68 |
|
| Vested | — |
| | — |
| (128,941 | ) | | 45.06 |
|
| Forfeited | (70,313 | ) | | 46.62 |
| — |
| | — |
|
| Awards outstanding at September 30, 2013 | 261,917 |
| | 46.81 |
| |
| Awards outstanding at September 30, 2016 | | 266,598 |
| | 62.52 |
|
NOTE 12.13. EARNINGS PER COMMON SHARE
Basic earningsincome per common share areCommon Share is computed by dividing income attributable to controlling interest from continuing operations, income (loss) from discontinued operations or net income attributable to controlling interest by the weighted average number of common sharesCommon Shares outstanding. Diluted earningsincome per common share areCommon Share is computed by dividing income attributable to controlling interest from continuing operations, income (loss) from discontinued operations or net income attributable to controlling interest by the weighted average number of common sharesCommon Shares outstanding plus all potentially dilutive securities.securities outstanding each period. Stock options with exercise prices greater than the average market price of the underlying common sharesCommon Shares are excluded from the computation of diluted earningsincome per common shareCommon Share because they are out-of-the-money and the effect of their inclusion would be anti-dilutive. The number of common sharesCommon Shares covered by out-of-the-money options was 0.2 million and 0.3 million for the years ended September 30, 2016 and 2015, respectively. There were no Common Shares covered by out-of-the-money options for the year ended September 30, 2014. The following table presents information necessary to calculate basic and diluted income per Common Share.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
covered by out-of-the-money stock options was 0.8 million, 0.7 million and 0.2 million for the years ended September 30, 2013, 2012 and 2011, respectively. The following table presents information necessary to calculate basic and diluted earnings per common share.
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions, except per share data) | (In millions, except per share data) |
| Income attributable to controlling interest from continuing operations | | $ | 253.8 |
| | $ | 138.9 |
| | $ | 145.8 |
|
| Income from discontinued operations | | 61.5 |
| | 20.9 |
| | 20.7 |
|
| Net income attributable to controlling interest | | $ | 315.3 |
| | $ | 159.8 |
| | $ | 166.5 |
|
| BASIC EARNINGS PER COMMON SHARE: | |
| | | | |
Weighted-average Common Shares outstanding during the period | | 61.1 |
| | 61.1 |
| | 61.6 |
|
| Income from continuing operations | $ | 161.2 |
| | $ | 113.2 |
| | $ | 139.9 |
| $ | 4.15 |
| | $ | 2.27 |
| | $ | 2.37 |
|
| Income (loss) from discontinued operations | (0.1 | ) | | (6.7 | ) | | 28.0 |
| |
| Net income | $ | 161.1 |
| | $ | 106.5 |
| | $ | 167.9 |
| |
| BASIC EARNINGS PER COMMON SHARE: |
| | | |
| |
Weighted-average common shares outstanding during the period | 61.7 |
| | 61.0 |
| | 64.7 |
| |
| Income from continuing operations | $ | 2.61 |
| | $ | 1.86 |
| | $ | 2.16 |
| |
| Income (loss) from discontinued operations | — |
| | (0.11 | ) | | 0.44 |
| |
| Income from discontinued operations | | 1.01 |
| | 0.35 |
| | 0.33 |
|
| Net income | $ | 2.61 |
| | $ | 1.75 |
| | $ | 2.60 |
| $ | 5.16 |
| | $ | 2.62 |
| | $ | 2.70 |
|
| DILUTED EARNINGS PER COMMON SHARE: | | | | |
| | | | | |
Weighted-average common shares outstanding during the period | 61.7 |
| | 61.0 |
| | 64.7 |
| |
| Dilutive potential common shares | 0.9 |
| | 1.1 |
| | 1.5 |
| |
| Weighted-average number of common shares outstanding and dilutive potential common shares | 62.6 |
| | 62.1 |
| | 66.2 |
| |
Weighted-average Common Shares outstanding during the period | | 61.1 |
| | 61.1 |
| | 61.6 |
|
| Dilutive potential Common Shares | | 0.9 |
| | 1.1 |
| | 1.1 |
|
| Weighted-average number of Common Shares outstanding and dilutive potential Common Shares | | 62.0 |
| | 62.2 |
| | 62.7 |
|
| Income from continuing operations | $ | 2.58 |
| | $ | 1.82 |
| | $ | 2.11 |
| $ | 4.09 |
| | $ | 2.23 |
| | $ | 2.32 |
|
| Income (loss) from discontinued operations | (0.01 | ) | | (0.11 | ) | | 0.43 |
| |
| Income from discontinued operations | | 1.00 |
| | 0.34 |
| | 0.33 |
|
| Net income | $ | 2.57 |
| | $ | 1.71 |
| | $ | 2.54 |
| $ | 5.09 |
| | $ | 2.57 |
| | $ | 2.65 |
|
NOTE 13.14. INCOME TAXES
The provision (benefit) for income taxes allocated to continuing operations consisted of the following:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Current: | | | | | | | | | | |
| Federal | $ | 57.1 |
| | $ | 31.0 |
| | $ | 66.2 |
| $ | 93.4 |
| | $ | 63.8 |
| | $ | 60.2 |
|
| State | 7.5 |
| | 6.0 |
| | 8.3 |
| 12.4 |
| | 8.3 |
| | 7.5 |
|
| Foreign | 4.5 |
| | 7.2 |
| | 5.4 |
| 4.4 |
| | 2.2 |
| | 3.5 |
|
| Total Current | 69.1 |
| | 44.2 |
| | 79.9 |
| 110.2 |
| | 74.3 |
| | 71.2 |
|
| Deferred: | | | | | | | | | | |
| Federal | 22.7 |
| | 23.5 |
| | 2.2 |
| 28.2 |
| | (1.0 | ) | | 7.9 |
|
| State | 1.1 |
| | 1.3 |
| | (0.1 | ) | 2.3 |
| | 1.2 |
| | 1.2 |
|
| Foreign | (0.1 | ) | | (0.4 | ) | | 0.7 |
| (1.3 | ) | | (0.7 | ) | | (0.1 | ) |
| Total Deferred | 23.7 |
| | 24.4 |
| | 2.8 |
| 29.2 |
| | (0.5 | ) | | 9.0 |
|
| Provision for income taxes | $ | 92.8 |
| | $ | 68.6 |
| | $ | 82.7 |
| $ | 139.4 |
| | $ | 73.8 |
| | $ | 80.2 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The domestic and foreign components of income from continuing operations before income taxes were as follows:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Domestic | $ | 238.3 |
| | $ | 165.3 |
| | $ | 205.7 |
| $ | 362.3 |
| | $ | 185.2 |
| | $ | 200.1 |
|
| Foreign | 15.7 |
| | 16.5 |
| | 16.9 |
| 30.4 |
| | 26.4 |
| | 25.6 |
|
| Income from continuing operations before income taxes | $ | 254.0 |
| | $ | 181.8 |
| | $ | 222.6 |
| $ | 392.7 |
| | $ | 211.6 |
| | $ | 225.7 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
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:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Statutory income tax rate | 35.0 | % | | 35.0 | % | | 35.0 | % | 35.0 | % | | 35.0 | % | | 35.0 | % |
| Effect of foreign operations | 0.8 |
| | (0.5 | ) | | (0.3 | ) | 0.1 |
| | (0.6 | ) | | 1.7 |
|
| State taxes, net of federal benefit | 2.9 |
| | 3.1 |
| | 2.8 |
| 2.7 |
| | 3.2 |
| | 2.7 |
|
| Domestic Production Activities Deduction permanent difference | (2.1 | ) | | (1.5 | ) | | (2.3 | ) | (2.5 | ) | | (3.2 | ) | | (2.7 | ) |
| Effect of other permanent differences | 0.8 |
| | 2.4 |
| | 1.9 |
| 0.3 |
| | 0.1 |
| | 0.3 |
|
| Research and Experimentation and other federal tax credits | (0.3 | ) | | (0.1 | ) | | (0.2 | ) | (0.2 | ) | | (0.2 | ) | | (0.9 | ) |
| Resolution of prior tax contingencies | 0.2 |
| | (0.9 | ) | | 0.7 |
| (0.2 | ) | | 0.4 |
| | 0.2 |
|
| Other | (0.8 | ) | | 0.2 |
| | (0.4 | ) | 0.3 |
| | 0.2 |
| | (0.7 | ) |
| Effective income tax rate | 36.5 | % | | 37.7 | % | | 37.2 | % | 35.5 | % | | 34.9 | % | | 35.6 | % |
Included in “Effect of other permanent differences” in the effective tax rate reconciliation table above are nondeductible fines and penalties of $0.4 million, $4.8 million and $7.7 million for the fiscal years ended September 30, 2013, 2012, and 2011 respectively, from the settlement of previously disclosed U.S. EPA and U.S. DOJ investigations. The Company does not expect to incur additional costs related to these investigations.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Deferred income taxes arise from temporary differences between financial reporting and tax reporting bases of assets and liabilities, and operating loss and tax credit carryforwards for tax purposes. The components of the deferred income tax assets and liabilities were as follows:
| | | | September 30, | September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| | (In millions) | (In millions) |
| DEFERRED TAX ASSETS | | | | | | |
| Inventories | $ | 13.7 |
| | $ | 17.0 |
| $ | 10.8 |
| | $ | 14.1 |
|
| Accrued liabilities | 59.2 |
| | 61.5 |
| 58.8 |
| | 71.6 |
|
| Postretirement benefits | 33.7 |
| | 41.2 |
| 33.3 |
| | 30.3 |
|
| Accounts receivable | 7.3 |
| | 7.9 |
| 6.3 |
| | 8.3 |
|
| State NOL carryovers | 1.1 |
| | 1.9 |
| 0.6 |
| | 1.0 |
|
| Foreign NOL carryovers | 51.6 |
| | 48.2 |
| 45.3 |
| | 45.0 |
|
| Foreign tax credit carryovers | 8.6 |
| | 8.3 |
| 7.4 |
| | 8.6 |
|
| Interest rate swaps | 6.3 |
| | 11.0 |
| 2.4 |
| | 4.9 |
|
| Other | 6.0 |
| | 4.2 |
| 3.4 |
| | 3.3 |
|
| Gross deferred tax assets | 187.5 |
| | 201.2 |
| 168.3 |
| | 187.1 |
|
| Valuation allowance | (51.5 | ) | | (48.4 | ) | (45.1 | ) | | (45.8 | ) |
| Total deferred tax assets | 136.0 |
| | 152.8 |
| 123.2 |
| | 141.3 |
|
| DEFERRED TAX LIABILITIES | | | | | | |
| Property, plant and equipment | (62.3 | ) | | (58.9 | ) | (65.7 | ) | | (59.7 | ) |
| Intangible assets | (99.5 | ) | | (85.8 | ) | (114.2 | ) | | (114.8 | ) |
| Outside basis difference in equity investments | | (83.3 | ) | | — |
|
| Other | (3.3 | ) | | (3.2 | ) | (17.0 | ) | | (14.0 | ) |
| Total deferred tax liabilities | (165.1 | ) | | (147.9 | ) | (280.2 | ) | | (188.5 | ) |
| Net deferred tax (liability) asset | $ | (29.1 | ) | | $ | 4.9 |
| |
| Net deferred tax liability | | $ | (157.0 | ) | | $ | (47.2 | ) |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The net current and non-current components of deferred income taxes recognized in the Consolidated Balance Sheets were:
|
| | | | | | | |
| | September 30, |
| | 2013 | | 2012 |
| | (In millions) |
| Net current deferred tax assets (classified with prepaid and other assets) | $ | 67.1 |
| | $ | 76.5 |
|
| Net non-current deferred tax liabilities (classified with other liabilities) | (96.2 | ) | | (71.6 | ) |
| Net deferred tax asset (liability) | $ | (29.1 | ) | | $ | 4.9 |
|
|
| | | | | | | |
| | September 30, |
| | 2016 | | 2015 |
| | (In millions) |
| Net current deferred tax assets (classified with prepaid and other current assets) | $ | 62.1 |
| | $ | 78.2 |
|
| Net non-current deferred tax liabilities (classified with other liabilities) | (219.1 | ) | | (125.4 | ) |
| Net deferred tax liability | $ | (157.0 | ) | | $ | (47.2 | ) |
GAAP requires that a valuation allowance be recorded against a deferred tax asset if it is more likely than not that the tax benefit associated with the asset will not be realized in the future. As shown in the table above, valuation allowances were recorded against $51.5$45.1 million and $48.4$45.8 million of deferred tax assets as of September 30, 2013,2016 and September 30, 2012,2015, respectively. Most of these valuation allowances relate to certain foreign net operating losses, as explained more fullyfurther below.
The Company has elected to treat certain foreign entities as disregarded entities for U.S. tax purposes, which results in their net income or loss being recognized currently in the Company’s U.S. tax return. As such, the tax benefit of net operating losses available for foreign statutory tax purposes has already been recognized for U.S. purposes. Accordingly, a full valuation allowance is required on the tax benefit of these net operating losses on global consolidation. The foreign net operating losses of these foreign disregarded entities were $195.7$171.5 million at September 30, 2013,2016, the majority of which have indefinite carryforward periods. The statutory tax benefit of these net operating loss carryovers, and related full valuation allowances thereon, amounted to $49.7$40.7 million and $46.4$41.2 million for the fiscal years ended September 30, 20132016 and September 30, 2012,2015, respectively.
Foreign net operating losses of certain controlled foreign corporations were $7.2$17.8 million as of September 30, 2013,2016, the majority of which have indefinite carryforward periods. Due to a history of losses in many of these entities, a full valuation allowance has also been placed against the statutory tax benefit associated with all but $3.7 million of these losses amounting to $1.8 million and $1.8 millionat September 30, 20132016.
Foreign tax credits were $7.4 million and $8.6 million at September 30, 2012,2016 and 2015, respectively.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
State net operating losses were $22.6$6.1 million as of September 30, 2013,2016, with carryforward periods ranging from 5 to 20 years. Any losses not utilized within a specific state’s carryforward period will expire. Tax benefits associated with state tax credits will expire if not utilized and amounted to $0.5$0.7 million and $0.6 million at both September 30, 20132016 and 2015. A valuation allowance was recorded against $0.4 million of deferred tax assets as of September 30, 2012. No valuation allowance has been placed against these2016 for state net operating losses and credits asthat the Company should fully utilize thesecompany does not expect to realize within their respective carryover periods. A valuation allowance in the amount of $0.2 million has been established related to state credits the Company does not expect to utilize.
The Company recognized a deferred tax liability of $83.3 million as of September 30, 2016 related to the outside basis difference in the TruGreen Joint Venture. See “NOTE 2. DISCONTINUED OPERATIONS” and “NOTE 8. INVESTMENT IN UNCONSOLIDATED AFFILIATE” for further discussion.
Deferred taxes have not been provided on unremitted earnings of $147.0$139.0 million for certain foreign subsidiaries and foreign corporate joint ventures as such earnings have been indefinitely reinvested. These foreign entities held cash and cash equivalents of $120.4$39.9 million and $118.6$55.1 million at September 30, 20132016 and September 30, 2012,2015, respectively. Our current plans do not demonstrate a need to, nor do we have plans to,project we will, repatriate the retained earnings from these subsidiaries as the earnings are indefinitely reinvested. In the future, if we determine it is necessary to repatriate these funds, or we sell or liquidate any of these subsidiaries, we may be required to pay associated taxes on the repatriation. We may also be required to withhold foreign taxes depending on the foreign jurisdiction from which the funds are repatriated. The effective rate of tax on such repatriations may materially differ from the federal statutory tax rate and could have a material impact on tax expense in the year of repatriation; however, the Company cannot reasonably estimate the amount of such a tax event.
GAAP provides that a tax benefit from an uncertain tax position may be recognized when it is more likely than not that the position will be sustained upon examination, including resolutions of any related appeals or litigation processes, based on the technical merits of the position. The amount recognized is measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement.
The Company had $6.7$5.1 million,, $7.0 $9.2 million and $8.9$11.2 million of gross unrecognized tax benefits related to uncertain tax positions at September 30, 2013, 20122016, 2015 and 2011,2014, respectively. Included in the September 30, 2013, 20122016, 2015 and 20112014 balances were
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
$6.73.5 million,, $6.9 $6.6 million and $7.3$8.5 million,, respectively, of unrecognized tax benefits that, if recognized, would have an impact on the effective tax rate.
A reconciliation of the unrecognized tax benefits is as follows:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Balance at beginning of year | $ | 7.0 |
| | $ | 8.9 |
| | $ | 7.8 |
| $ | 9.2 |
| | $ | 11.2 |
| | $ | 6.7 |
|
| Additions for tax positions of the current year | 0.3 |
| | 1.0 |
| | 1.1 |
| 0.3 |
| | 0.2 |
| | 0.2 |
|
| Additions for tax positions of prior years | 4.3 |
| | 2.9 |
| | 1.9 |
| 1.9 |
| | 4.1 |
| | 7.6 |
|
| Reductions for tax positions of prior years | (3.8 | ) | | (4.1 | ) | | (1.2 | ) | (2.6 | ) | | (3.2 | ) | | (2.7 | ) |
| Settlements with tax authorities | (0.4 | ) | | (0.5 | ) | | (0.6 | ) | (2.7 | ) | | (2.7 | ) | | — |
|
| Expiration of statutes of limitation | (0.7 | ) | | (1.2 | ) | | (0.1 | ) | (1.0 | ) | | (0.4 | ) | | (0.6 | ) |
| Balance at end of year | $ | 6.7 |
| | $ | 7.0 |
| | $ | 8.9 |
| $ | 5.1 |
| | $ | 9.2 |
| | $ | 11.2 |
|
The Company continues to recognize accrued interest and penalties related to unrecognized tax benefits as a component of the provision for income taxes. As of September 30, 2013, 20122016, 2015 and 2011,2014, respectively, the Company had $1.8$1.1 million,, $1.8 $1.8 million and $1.6$1.8 million accrued for the payment of interest that, if recognized, would impact the effective tax rate. As of September 30, 2013, 20122016, 2015 and 2011,2014, respectively, the Company had $0.7$0.5 million,, $0.8 $0.7 million and $0.7$0.6 million accrued for the payment of penalties that, if recognized, would impact the effective tax rate. For the fiscal year ended September 30, 2013,2016, the Company recognized $0.1a benefit of $0.9 million of for tax interest and tax penalties in its statementConsolidated Statement of operations.Operations.
Scotts Miracle-Gro or one of its subsidiaries files income tax returns in the U.S. federal jurisdiction and various state, local and foreign jurisdictions. With fewSubject to the following exceptions, which are discussed below, the Company is no longer subject to examinationsexamination by these tax authorities for fiscal years prior to 2010.2013. The Company is currently under examination by the Internal Revenue Service and certain foreign and U.S. state and local tax authorities. RegardingThe U.S. federal examination is limited to fiscal years 2011 and 2012. With respect to the foreign jurisdictions, ana German audit is currently underway in France forongoing covering fiscal years 20102009 through 2012. Audits closed during the fiscal year ended September 30, 2013 for Austria, Belgium and Canada with no material impact on the Company's consolidated financial position, results of operations or cash flows. In regard to the multiple U.S. state and local audits, the tax periods under examinationsexamination are limited to fiscal years 19972008 through 2011.fiscal 2014. In addition to thesethe aforementioned audits, certain other tax deficiency notices and refund claims for previous years remain unresolved.
The Company currently anticipates that few of its open and active audits will be resolved inwithin the next 12twelve months. The Company is unable to make a reasonably reliable estimate as to when or if cash settlements with taxing authorities may occur.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Although audit outcomes and the timing of audit payments are subject to significant uncertainty, the Company does not anticipate that the resolution of these tax matters or any events related thereto will result in a material change to its consolidated financial position, results of operations or cash flows.
On September 13, 2013, the United States Treasury and Internal Revenue Service issued final tangible personal property regulations that broadly apply to amounts paid to acquire, produce or improve tangible property, as well as dispositions of such property. In review of these regulations, the Company has concluded that there is no material impact on its consolidated financial position, results of operations or cash flows.
Management judgment is required in determining tax provisions and evaluating tax positions. Management believes its tax positions and related provisions reflected in the consolidated financial statements are fully supportable and appropriate. The Company established reserves for additional income taxes that may become due if the tax positions are challenged and not sustained, and as such, the Company’s tax provision includes the impact of recording reserves and changes thereto.
NOTE 14.15. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company is exposed to market risks, such as changes in interest rates, currency exchange rates and commodity prices. To manage a portion of the volatility related to these exposures, the Company enters into various financial transactions. The utilization of these financial transactions is governed by policies covering acceptable counterparty exposure, instrument types and other hedging practices. The Company does not hold or issue derivative financial instruments for speculative trading purposes.
Exchange Rate Risk Management
The Company periodically uses foreign currency forward contracts to manage the exchange rate risk associated with intercompany loans with foreign subsidiaries that are denominated in local currencies. At September 30, 2013,2016, the notional amount of outstanding foreign currency forward contracts was $80.4$165.8 million,, with a negative fair value of $2.1 million.$0.4 million. At September 30, 2012,2015, the notional amount of outstanding foreign currency swapforward contracts was $61.8$52.3 million,, with a negative fair value of $1.0 million.$0.7 million. The unrealized loss on the foreignfair value of currency forward contracts approximatesis determined using forward rates in commonly quoted intervals for the unrealized gain onfull term of the intercompany loans recognized by the Company’s lending subsidiaries.contracts. The outstanding contracts will mature over the next fiscal year.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Interest Rate Risk Management
The Company enters into interest rate swap agreements as a means to hedge its variable interest rate risk on debt instruments. The fair values are reflected in the Company’s Consolidated Balance Sheets. Net amounts to be received or paid under the swap agreements are reflected as adjustments to interest expense. Since the interest rate swap agreements have been designated as hedging instruments, unrealized gains or losses resulting from adjusting these swaps to fair value are recorded as elements of accumulated other comprehensive income (loss) (“AOCI”) within the Consolidated Balance Sheets.Sheets except for any ineffective portion of the change in fair value, which is immediately recorded in interest expense. The fair value of the swap agreements is determined based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date.
At September 30, 2013 and 2012, theThe Company hadhas outstanding interest rate swap agreements with major financial institutions that effectively convertedconvert a portion of the Company’s variable-rate debt to a fixed rate. The swap agreements had a total U.S. dollar equivalent notional amount of $1,100.0$650.0 million and $700.0$1,300.0 million at September 30, 20132016 and 20122015, respectively. Refer to “NOTE 10.11. DEBT” for the terms of the swap agreements outstanding at 2013.September 30, 2016. Included in the AOCI balance at September 30, 2013 is2016 was a loss of $5.0$2.0 million related to interest rate swap agreements that is expected to be reclassified to earnings during the next 12twelve months, consistent with the timing of the underlying hedged transactions.
Commodity Price Risk Management
The Company had outstanding derivative contracts at September 30, 2013enters into hedging arrangements designed to fix the price of a portion of its projected future urea requirements. The contracts are designated as hedges of the Company’s exposure to future cash flow fluctuations associated with the cost of urea. The objective of the hedges is to mitigate the earnings and cash flow volatility attributable to the risk of changing prices. UnrealizedSince the contracts have been designated as hedging instruments, unrealized gains or losses in theresulting from adjusting these contracts to fair value of these contracts are recorded toas elements of AOCI within the AOCI component of shareholders’ equity.Consolidated Balance Sheets. Realized gains or losses remain as a component of AOCI until the related inventory is sold. Upon sale of the underlying inventory, the gain or loss is reclassified to cost of sales. Included in the AOCI balance at September 30, 20132016 was a loss of $1.0$0.2 million related to urea derivatives that is expected to be reclassified to earnings during the next 12twelve months, consistent with the timing of the underlying hedged transactions.
Periodically, theThe Company also uses derivatives to partially mitigate the effect of fluctuating diesel and gasoline costs on operating results. Any such derivatives that do not qualify for hedge accounting treatment in accordance with GAAPThese financial instruments are recordedcarried at fair value with unrealized gains and losses on open contracts and realized gains or losses on settled contracts recorded as an element of cost of sales. Unrealized gains or losseswithin the Consolidated Balance Sheets. Changes in the fair value of derivative contracts that do qualify for hedge accounting
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
are recorded in accumulated other comprehensive income (expense),AOCI except for any ineffective portion of the change in fair value, which is immediately recorded in earnings. For theThe effective portion of the change in fair value realized gains or losses remainremains as a component of AOCI until the related fuel is consumed. Upon consumption ofconsumed, at which time the fuel, theaccumulated gain or loss on the derivative contract is reclassified to cost of sales. IncludedChanges in the AOCI balance at fair value of derivatives that do not qualify for hedge accounting are recorded as an element of cost of sales. At September 30, 2013 was an immaterial gain related to fuel derivatives that is expected to be reclassified to earnings during the next 12 months, consistent with the timing of the underlying hedged transactions.2016, there were no amounts included within AOCI.
The Company had the following outstanding commodity contracts that were entered into to hedge forecasted purchases:
| | | | September 30, | September 30, |
| | 2013 | | 2012 | 2016 | | 2015 |
| Commodity | | | | | | |
| Urea | 49,500 tons | | 34,500 tons | 40,500 tons | | 52,500 tons |
| Diesel | 3,528,000 gallons | | 6,552,000 gallons | 6,384,000 gallons | | 5,250,000 gallons |
| Gasoline | 630,000 gallons | | 224,000 gallons | |
| Heating Oil | 2,940,000 gallons | | 5,208,000 gallons | 1,722,000 gallons | | 2,772,000 gallons |
Fair Values of Derivative Instruments
The following table summarizes the fair values of the Company’s derivative instruments and the respective lines in which they were recorded in the Consolidated Balance Sheets at September 30:
|
| | | | | | | | | |
| | | Assets / (Liabilities) |
| | | | 2013 | | 2012 |
| Derivatives Designated As Hedging Instruments | | Balance Sheet Location | Fair Value |
| | | | (In millions) |
| Interest rate swap agreements | | Other assets | $ | 3.7 |
| | $ | — |
|
| | | Other current liabilities | (8.3 | ) | | (8.2 | ) |
| | | Other liabilities | (12.1 | ) | | (20.6 | ) |
| Commodity hedging instruments | | Prepaid and other assets | 0.1 |
| | 1.0 |
|
| | | Other current liabilities | (2.0 | ) | | — |
|
| Total derivatives designated as hedging instruments | | | $ | (18.6 | ) | | $ | (27.8 | ) |
| | | | | | |
| Derivatives Not Designated As Hedging Instruments | | Balance Sheet Location | | | |
| Foreign currency forward contracts | | Other current liabilities | $ | (2.1 | ) | | $ | (1.0 | ) |
| Commodity hedging instruments | | Prepaid and other assets | — |
| | 1.0 |
|
| | | Other current liabilities | (0.3 | ) | | — |
|
| Total derivatives not designated as hedging instruments | | | $ | (2.4 | ) | | $ | — |
|
| Total derivatives | | | $ | (21.0 | ) | | $ | (27.8 | ) |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Fair Values of Derivative Instruments
The fair values of the Company’s derivative instruments were as follows:
|
| | | | | | | | | | |
| | | | | Assets / (Liabilities) |
| | | | | 2016 | | 2015 |
| Derivatives Designated As Hedging Instruments | | Balance Sheet Location | | Fair Value |
| | | | | (In millions) |
| Interest rate swap agreements | | Other current liabilities | | $ | (3.3 | ) | | $ | (8.8 | ) |
| | | Other liabilities | | (3.1 | ) | | (4.6 | ) |
| Commodity hedging instruments | | Other current liabilities | | (0.3 | ) | | (1.3 | ) |
| Total derivatives designated as hedging instruments | | | | $ | (6.7 | ) | | $ | (14.7 | ) |
| | | | | | | |
| Derivatives Not Designated As Hedging Instruments | | Balance Sheet Location | | | | |
| Currency forward contracts | | Prepaid and other current assets | | $ | 1.2 |
| | $ | — |
|
| | | Other current liabilities | | (0.8 | ) | | (0.7 | ) |
| Commodity hedging instruments | | Other current liabilities | | (0.1 | ) | | (3.2 | ) |
| Total derivatives not designated as hedging instruments | | | | 0.3 |
| | (3.9 | ) |
| Total derivatives | | | | $ | (6.4 | ) | | $ | (18.6 | ) |
The effect of derivative instruments on AOCI and the Consolidated Statements of Operations for the yearyears ended September 30 was as follows:
| | | | | Amount of Gain/(Loss) Recognized in AOCI | | Amount of Gain / (Loss) Recognized in AOCI |
| Derivatives in Cash Flow Hedging Relationships | | 2013 | | 2012 | | 2016 | | 2015 |
| | | (In millions) | | (In millions) |
| Interest rate swap agreements | | $ | (1.0 | ) | | $ | (10.9 | ) | | $ | (0.9 | ) | | $ | (7.7 | ) |
| Commodity hedging instruments | | (2.3 | ) | | 1.6 |
| | (0.6 | ) | | (0.9 | ) |
| Total | | $ | (3.3 | ) | | $ | (9.3 | ) | | $ | (1.5 | ) | | $ | (8.6 | ) |
| | | | | Reclassified From AOCI Into | | Amount of Gain/(Loss) | | Reclassified From AOCI Into | | Amount of Gain / (Loss) |
| Derivatives in Cash Flow Hedging Relationships | | Statement of Operations | | 2013 | | 2012 | | Statement of Operations | | 2016 | | 2015 |
| | | (In millions) | | (In millions) |
| Interest rate swap agreements | | Interest expense | | $ | (8.4 | ) | | $ | (10.0 | ) | | Interest expense | | $ | (5.0 | ) | | $ | (6.5 | ) |
| Commodity hedging instruments | | Cost of sales | | — |
| | 1.6 |
| | Cost of sales | | (0.8 | ) | | — |
|
| Total | | $ | (8.4 | ) | | $ | (8.4 | ) | | $ | (5.8 | ) | | $ | (6.5 | ) |
| | | | | Amount of Gain/(Loss) | | Amount of Gain / (Loss) |
| Derivatives not Designated As Hedging Instruments | | Recognized in Statement of Operations | | 2013 | | 2012 | |
| Derivatives Not Designated As Hedging Instruments | | | Recognized in Statement of Operations | | 2016 | | 2015 |
| | | (In millions) | | (In millions) |
| Foreign currency forward contracts | | Interest expense | | $ | 6.7 |
| | $ | (6.6 | ) | |
| Currency forward contracts | | | Other income, net | | $ | (8.0 | ) | | $ | 8.1 |
|
| Commodity hedging instruments | | Cost of sales | | (0.6 | ) | | 2.3 |
| | Cost of sales | | (2.8 | ) | | (10.4 | ) |
| Total | | $ | 6.1 |
| | $ | (4.3 | ) | | $ | (10.8 | ) | | $ | (2.3 | ) |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 15.16. FAIR VALUE MEASUREMENTS
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A three-level fair value hierarchy prioritizes the inputs used to measure fair value. The hierarchy requires entities to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are as follows:
Level 1—1 — Quoted prices in active markets for identical assets or liabilities.
Level 2—2 — Observable inputs other than quoted prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated by observable market data.
Level 3—3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. This includes pricing models, discounted cash flow methodologies and similar techniques that use significant unobservable inputs.
The following describes the valuation methodologies used for financial assets and liabilities measured at fair value on a recurring basis, as well as the general classification within the valuation hierarchy.
Derivatives
Derivatives consist of foreign currency, interest rate and commodity derivative instruments. Foreign currencyCurrency forward contracts are valued using observable forward rates in commonly quoted intervals for the full term of the contracts. Interest rate swap agreements are valued based on the present value of the estimated future net cash flows using implied rates in the applicable yield curve as of the valuation date. Commodity contracts are measured using observable commodity exchange prices in active markets.
These derivative instruments are classified within Level 2 of the valuation hierarchy and are included within other assets and other liabilities in ourthe Company’s Consolidated Balance Sheets, except for derivative instruments expected to be settled within the next 12 months, which are included within prepaid and other current assets and other current liabilities.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Cash equivalentsEquivalents
Cash equivalents consist of highly liquid investments purchasedfinancial instruments with a maturityoriginal maturities of three months or less. The carrying value of these cash equivalents approximates fair value due to their short-term maturities.
Other
Other financial assets consistconsists of investment securities in non-qualified retirement plan assets. Theseassets and the Bonnie Option. Investment securities in non-qualified retirement plan assets are valued using observable market prices in active markets.markets and are classified within Level 1 of the valuation hierarchy. The fair value of the Bonnie Option is determined using a simulation approach, whereby the total value of the loan receivable and optional exchange for additional equity was estimated considering a distribution of possible future cash flows discounted to present value using an appropriate discount rate, and is classified in Level 3 of the fair value hierarchy.
Long-Term Debt
Long-term debt consists of a loan provided to the noncontrolling ownership group of Gavita. The estimated fair value of the loan was determined using an income-based approach, which includes market participant expectations of cash flows over the remaining useful life discounted to present value using an appropriate discount rate. The estimate requires subjective assumptions to be made, including those related to future business results and discount rates. The fair value measurement is based on significant inputs unobservable in the market and thus represents a Level 3 measurement.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 20132016:
| | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total |
| | (In millions) | (In millions) |
| Assets | | | | | | | | | | | | | | |
| Cash equivalents | $ | 83.9 |
| | $ | — |
| | $ | — |
| | $ | 83.9 |
| $ | 11.5 |
| | $ | — |
| | $ | — |
| | $ | 11.5 |
|
| Derivatives | | | | | | | | | | | | | | |
| Interest rate swap agreements | — |
| | 3.7 |
| | — |
| | 3.7 |
| |
| Commodity hedging instruments | — |
| | 0.1 |
| | — |
| | 0.1 |
| |
| Currency forward contracts | | — |
| | 1.2 |
| | — |
| | 1.2 |
|
| Other | 7.0 |
| | — |
| | — |
| | 7.0 |
| 11.8 |
| | — |
| | 10.9 |
| | 22.7 |
|
| Total | $ | 90.9 |
| | $ | 3.8 |
| | $ | — |
| | $ | 94.7 |
| $ | 23.3 |
| | $ | 1.2 |
| | $ | 10.9 |
| | $ | 35.4 |
|
| Liabilities | | | | | | | | | | | | | | |
| Derivatives | | | | | | | | | | | | | | |
| Interest rate swap agreements | $ | — |
| | $ | (20.4 | ) | | $ | — |
| | $ | (20.4 | ) | $ | — |
| | $ | (6.4 | ) | | $ | — |
| | $ | (6.4 | ) |
| Foreign currency forward contracts | — |
| | (2.1 | ) | | — |
| | (2.1 | ) | |
| Currency forward contracts | | — |
| | (0.8 | ) | | — |
| | (0.8 | ) |
| Commodity hedging instruments | — |
| | (2.3 | ) | | — |
| | (2.3 | ) | — |
| | (0.4 | ) | | — |
| | (0.4 | ) |
| Long-term debt | | — |
| | — |
| | (38.3 | ) | | (38.3 | ) |
| Total | $ | — |
| | $ | (24.8 | ) | | $ | — |
| | $ | (24.8 | ) | $ | — |
| | $ | (7.6 | ) | | $ | (38.3 | ) | | $ | (45.9 | ) |
The following presents the Company’s non-financial assets and liabilities measured at fair value on a non-recurring basis at September 30, 2013 and describes the valuation methodologies used for non-financial assets and liabilities measured at fair value, as well as the general classification within the valuation hierarchy:
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total Losses |
| | (In millions) |
| Global Consumer insect repellent technology | $ | — |
| | $ | — |
| | $ | — |
| | $ | 4.3 |
|
Ortho® brands and sub-brands | — |
| | — |
| | 126.0 |
| | 11.6 |
|
The intangible asset related to the insect repellent technology was determined to be fully impaired based on the estimated future cash flows associated with the insect repellent technology in relation to its carrying value. Also, as a result of the Company's annual impairment review performed in the fourth quarter of fiscal 2013, the Company recognized an impairment charge for a non-recurring fair value adjustment of $11.6 million within the Global Consumer segment related to the Ortho® brand and certain sub-brands of Ortho®.Certain finite-lived sub-brands of Ortho® were determined to be fully impaired. The remaining fair value of the indefinite-lived Ortho® brand and sub-brands is $126.0 million. The fair value was calculated based upon the evaluation of the historical performance and future growth of the Ortho® business using a royalty savings methodology similar to that employed when the associated business was acquired with updated estimates of sales, cash flow and profitability.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents the Company’s financial assets and liabilities measured at fair value on a recurring basis at September 30, 2012:2015:
| | | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total |
| | (In millions) | (In millions) |
| Assets | | | | | | | | | | | | | | |
| Cash equivalents | $ | 41.1 |
| | $ | — |
| | $ | — |
| | $ | 41.1 |
| $ | 28.6 |
| | $ | — |
| | $ | — |
| | $ | 28.6 |
|
| Derivatives |
| |
| |
| |
| |
| Commodity hedging instruments | — |
| | 2.0 |
| | — |
| | 2.0 |
| |
| Other | 6.4 |
| | — |
| | — |
| | 6.4 |
| 8.9 |
| | — |
| | — |
| | 8.9 |
|
| Total | $ | 47.5 |
| | $ | 2.0 |
| | $ | — |
| | $ | 49.5 |
| $ | 37.5 |
| | $ | — |
| | $ | — |
| | $ | 37.5 |
|
| Liabilities |
| |
| |
| |
|
| |
| |
| |
|
| Derivatives |
| |
| |
| |
|
| |
| |
| |
|
| Interest rate swap agreements | $ | — |
| | $ | (28.8 | ) | | $ | — |
| | $ | (28.8 | ) | $ | — |
| | $ | (13.4 | ) | | $ | — |
| | $ | (13.4 | ) |
| Currency forward contracts | | — |
| | (0.7 | ) | | — |
| | (0.7 | ) |
| Commodity hedging instruments | — |
| | (1.0 | ) | | — |
| | (1.0 | ) | — |
| | (4.5 | ) | | — |
| | (4.5 | ) |
| Total | $ | — |
| | $ | (29.8 | ) | | $ | — |
| | $ | (29.8 | ) | $ | — |
| | $ | (18.6 | ) | | $ | — |
| | $ | (18.6 | ) |
The following presents the Company’s non-financial assets and liabilities measured at fair value on a non-recurring basis at September 30, 2012 and describes the valuation methodologies used for non-financial assets and liabilities measured at fair value, as well as the general classification within the valuation hierarchy:
|
| | | | | | | | | | | | | | | |
| | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Other Observable Inputs (Level 2) | | Unobservable Inputs (Level 3) | | Total Losses |
| | (In millions) |
| Assets of MAT 28 | $ | — |
| | $ | — |
| | $ | 1.2 |
| | $ | 5.3 |
|
Certain property, plant and equipment and other assets were written down to their fair value, resulting in an impairment charge of $5.3 million, which was included in earnings for the period. The value of the property, plant and equipment was determined using the market approach, which is a valuation technique based on what other purchasers and sellers in the market have agreed to as prices for comparable assets, adjusted for such factors as age, condition and location of the respective assets being valued. The intangible asset was determined to be fully impaired based on estimated future cash flows associated with this active ingredient in relation to its carrying value.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 16.17. OPERATING LEASES
The Company leases certain property and equipment from third parties under various non-cancelable operating lease agreements. Certain lease agreements contain renewal and purchase options. The lease agreements generally require that the Company pay taxes, insurance and maintenance expenses related to the leased assets. Future minimum lease payments for non-cancelable operating leases at September 30, 20132016, were as follows (in millions):
| | | 2014 | $ | 47.0 |
| |
| 2015 | 37.8 |
| |
| 2016 | 28.3 |
| |
| 2017 | 17.4 |
| $ | 40.9 |
|
| 2018 | 13.4 |
| 36.1 |
|
| 2019 | | 30.7 |
|
| 2020 | | 23.5 |
|
| 2021 | | 18.3 |
|
| Thereafter | 35.1 |
| 21.5 |
|
| Total future minimum lease payments | $ | 179.0 |
| $ | 171.0 |
|
The Company also leases certain vehicles (primarily cars and light trucks) under agreements that are cancelable after the first year, but typically continue on a month-to-month basis until canceled by the Company. The vehicle leases and certain other non-cancelable operating leases contain residual value guarantees that create a contingent obligation on the part of the Company to compensate the lessor if the leased asset cannot be sold for an amount in excess of a specified minimum value at the conclusion of the lease term. If all such vehicle leases had been canceled as of September 30, 20132016, the Company’s residual value guarantee would have approximated $9.4 million.$2.6 million.
Other residual value guarantee amounts that apply at the conclusion of non-cancelable lease terms are as follows:
|
| | | | | |
| | Amount of Guarantee | | Lease Termination Date |
| | (In millions) | | |
Scotts LawnService® vehicles | $ | 0.2 |
| | 2020 |
| Corporate aircraft | 3.9 |
| | 2016 |
|
| | | | | |
| | Amount of Guarantee | | Lease Termination Date |
| | (In millions) | | |
| Corporate aircraft | $ | 27.0 |
| | 2019 |
Rent expense for fiscal 20132016, fiscal 20122015 and fiscal 20112014 totaled $61.9$58.8 million,, $69.0 $56.2 million and $67.2$50.6 million,, respectively.
NOTE 17.18. COMMITMENTS
The Company has the following unconditional purchase obligations due during each of the next five fiscal years that have not been recognized onin the Consolidated Balance Sheet at September 30, 20132016 (in millions):
| | | 2014 | $ | 114.3 |
| |
| 2015 | 54.3 |
| |
| 2016 | 21.4 |
| |
| 2017 | 11.6 |
| $ | 140.4 |
|
| 2018 | 9.4 |
| 66.1 |
|
| 2019 | | 33.8 |
|
| 2020 | | 23.0 |
|
| 2021 | | 15.6 |
|
| Thereafter | 0.3 |
| 6.2 |
|
| | $ | 211.3 |
| $ | 285.1 |
|
Purchase obligations primarily represent commitments for materials used in the Company’s manufacturing processes, as well as commitments for warehouse services, grass seed and out-sourced information services. In addition, the Company leases certain property and equipment from third parties under various non-cancelable operating lease agreements. Future minimum lease payments for non-cancelable operating leases not included above are included in “NOTE 16.17. OPERATING LEASES.”
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 18.19. CONTINGENCIES
Management regularly evaluates the Company’s contingencies, including various lawsuits and claims which arise in the normal course of business, product and general liabilities, workers’ compensation, property losses and other liabilities for which the Company is self-insured or retains a high exposure limit. Self-insurance reserves are established based on actuarial loss estimates for specific individual claims plus actuarially estimated amounts for incurred but not reported claims and adverse development factors applied to existing claims. Legal costs incurred in connection with the resolution of claims, lawsuits and other contingencies generally are expensed as incurred. In the opinion of management, itsthe assessment of contingencies is reasonable and related reserves, in the aggregate, are adequate; however, there can be no assurance that final resolution of these matters will not have a material effect on the Company’s financial condition, results of operations or cash flows.
Regulatory Matters
At September 30, 2013, $4.02016, $4.0 million was accrued in the “Other liabilities” line in the Consolidated Balance Sheet for environmental actions, the majority of which isare for site remediation. The amounts accrued are believed to be adequate to cover such known environmental exposures based on current facts and estimates of likely outcomes. Although it is reasonably possible that the costs to resolve such known environmental exposures will exceed the amounts accrued, any variation from accrued amounts is not expected to be material.
Other
The Company has been named as a defendant in a number of cases alleging injuries that the lawsuits claim resulted from exposure to asbestos-containing products, apparently based on the Company’s historic use of vermiculite in certain of its products. In many of these cases, the complaints are not specific about the plaintiffs’ contacts with the Company or its products. The cases vary, but complaints in these cases generally seek unspecified monetary damages (actual, compensatory, consequential and punitive) from multiple defendants. The Company believes that the claims against it are without merit and is vigorously defending against them. It is not currently possible to reasonably estimate a probable loss, if any, associated with these cases and, accordingly, no reserves have been recorded in the Company’s Consolidated Financial Statements.consolidated financial statements. The Company is reviewing agreements and policies that may provide insurance coverage or indemnity as to these claims and is pursuing coverage under some of these agreements and policies, although there can be no assurance of the results of these efforts. There can be no assurance that these cases, whether as a result of adverse outcomes or as a result of significant defense costs, will not have a material effect on the Company’s financial condition, results of operations or cash flows.
In connection with the sale of wild bird food products that were the subject of a voluntary recall in 2008, the Company has been named as a defendant in four putative class actions filed on and after June 27, 2012, which have now been consolidated in the United States District Court for the Southern District of California as In re Morning Song Bird Food Litigation, Lead Case No. 3:12-cv-01592-JAH-RBB. The plaintiffs allege various statutory and common law claims associated with the Company'sCompany’s sale of wild bird food products and a plea agreement entered into in previously pending government proceedings associated with such sales. The plaintiffs allege, among other things, a purported class action on behalf of all persons and entities in the United States who purchased certain bird food products. The plaintiffs seekassert hundreds of millions of dollars in monetary damages (actual, compensatory, consequential, and restitution), punitive and treble); reimbursement, restitution, and disgorgement for benefits unjustly conferred;treble damages; injunctive and declaratory relief; pre-judgment and post-judgment interest; and costs and attorneys'attorneys’ fees. The Company disputes the plaintiffs’ assertions and intends to vigorously defend the consolidated action. GivenAt this point in the early stages ofproceedings, it is not currently possible to reasonably estimate a probable loss, if any, associated with the action and, accordingly, no reserves have been recorded in the Company cannot makeCompany’s consolidated financial statements with respect to the action. There can be no assurance that this action, whether as a determinationresult of an adverse outcome or as to whether it coulda result of significant defense costs, will not have a material adverse effect on the Company'sCompany’s financial condition, results of operations or cash flows and the Company has not recorded any accruals with respect thereto.flows.
The Company is involved in other lawsuits and claims which arise in the normal course of business. These claims individually and in the aggregate are not expected to result in a material effect on the Company’s financial condition, results of operations or cash flows.
NOTE 19.20. CONCENTRATIONS OF CREDIT RISK
The Company maintains cash depository accounts with major financial institutions around the world and invests in high quality, short-term liquid investments. Such investments are made only in investments issued by highly rated institutions. These investments mature within three months and have not historically incurred any losses.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Trade accounts receivable are exposed to a concentration of credit risk with retailers principally located in the United States. The Company'sCompany’s retail customers include home centers, mass merchandisers, warehouse clubs, large hardware chains, independent hardware stores, nurseries, garden centers, and food and drug stores, and indoor gardening and hydroponic stores. Concentrations of net sales and accounts receivable by segment in the United States as a percentage of consolidated net sales and accounts receivable at September 30 were as follows:
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
|
| | | | | | | | | | | | | | |
| | Percentage of Net Sales | | Percentage of Gross Accounts Receivable at September 30, |
| | 2013 | | 2012 | | 2011 | | 2013 | | 2012 |
| Global Consumer segment | 73 | % | | 73 | % | | 72 | % | | 63 | % | | 67 | % |
Scotts LawnService® segment | 9 | % | | 9 | % | | 8 | % | | 9 | % | | 8 | % |
| Total Concentration in United States | 82 | % | | 82 | % | | 80 | % | | 72 | % | | 75 | % |
|
| | | | | | | | | | | | | | |
| | Percentage of Net Sales | | Percentage of Net Accounts Receivable at September 30, |
| | 2016 | | 2015 | | 2014 | | 2016 | | 2015 |
| Concentration in United States | 82 | % | | 81 | % | | 80 | % | | 74 | % | | 69 | % |
The remainder of the Company’s net sales and accounts receivable at September 30, 2013, 20122016, 2015 and 20112014 were generated from customers located outside of the United States, primarily retailers, distributors and nurseries in Europe, Canada and Australia. No concentrations of these customers or individual customers within this group accounted for more than 10% of the Company’s net sales andor accounts receivable for any period presented above.
The Company’s three largest customers are reported within the Global Consumer segment and are the only customers that individually represent more than 10% of reported consolidated net sales and accounts receivable for each of the last three fiscal years. These three customers accounted for the following percentages of Global Consumer segment net sales for the fiscal years ended September 30:
| | | | Percentage of Net Sales | Percentage of Net Sales |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Home Depot | 34 | % | | 32 | % | | 31 | % | 34 | % | | 33 | % | | 35 | % |
| Lowe's | 18 | % | | 17 | % | | 17 | % | |
| Lowe’s | | 16 | % | | 17 | % | | 19 | % |
| Walmart | 13 | % | | 14 | % | | 14 | % | 11 | % | | 12 | % | | 13 | % |
Accounts receivable for these three largest customers as a percentage of consolidated accounts receivable were 56% and 52%60% for September 30, 20132016 and 2012,2015, respectively.
NOTE 20.21. OTHER INCOME, NET
Other (income) expense consisted of the following:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Royalty income, net | $ | (4.7 | ) | | $ | (4.9 | ) | | $ | (4.3 | ) | $ | (6.2 | ) | | $ | (1.3 | ) | | $ | (1.8 | ) |
| Franchise fees | (0.3 | ) | | (0.3 | ) | | (0.3 | ) | |
| Foreign currency (gains) losses | 0.4 |
| | (0.7 | ) | | 1.4 |
| |
| Interest on loans receivable | | (3.9 | ) | | — |
| | — |
|
| Foreign currency losses | | 0.7 |
| | 1.6 |
| | 1.0 |
|
| Gain on investment of unconsolidated affiliate | | — |
| | — |
| | (5.7 | ) |
| Other | (5.4 | ) | | 3.0 |
| | 2.3 |
| (4.4 | ) | | (2.4 | ) | | (4.2 | ) |
| Total | $ | (10.0 | ) | | $ | (2.9 | ) | | $ | (0.9 | ) | $ | (13.8 | ) | | $ | (2.1 | ) | | $ | (10.7 | ) |
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 21.22. SEGMENT INFORMATION
The Company divides its business into the following segments — Globalthree reportable segments: U.S. Consumer, Europe Consumer and Scotts LawnService®.Other. These segments differ from those used in prior periods due to the change in internal organization structure associated with Project Focus, which is a series of initiatives announced in the first quarter of fiscal 2016 designed to maximize the value of the Company’s non-core assets and focus on emerging categories of the lawn and garden industry in its core U.S. business. On April 13, 2016, as part of this project, the Company completed the contribution of the SLS Business to a newly formed subsidiary of TruGreen Holdings in exchange for a minority equity interest of approximately 30% in the TruGreen Joint Venture. As a result, effective in its second quarter of fiscal 2016, the Company classified its results of operations for all periods presented to reflect the SLS Business as a discontinued operation and classified the assets and liabilities of the SLS Business as held for sale. The prior period amounts have been reclassified to conform with the new segments. This division of reportable segments is consistent with how the segments report to and are managed by the chief operating decision maker of the Company. The Company has made reclassifications to prior period segment amounts as a result of the change in internal organization structure associated with the disposal of the Company's professional seed business, which is now reported in discontinued operations. For additional information regarding the sale, refer to “NOTE 2. DISCONTINUED OPERATIONS.”
The GlobalU.S. Consumer segment consists of the U.S. ConsumerCompany’s consumer lawn and International Consumergarden business groups. The business groups comprising this segment manufacture, market and sell dry, granular slow-release lawn fertilizers, combination lawn fertilizer and control products, grass seed, spreaders, water-soluble, liquid and continuous release garden and indoor plant foods, plant care products, potting, garden and lawn soils, mulches and other growing media products, wild bird food, pesticide and rodenticide products. Products are marketed to mass merchandisers, home centers, large hardware chains, warehouse clubs, distributors, garden centers and grocerslocated in the United States, Canada, Europe, Latin America and Australia.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The Scotts LawnService® segment provides residential and commercial lawn fertilization, disease and insect control and other related services such as core aeration, tree and shrub fertilization and limited pest control services through Company-owned branches and independent franchisees in thegeographic United States.
Segment performance is evaluated based on several factors, including income from continuing operations before amortization, product registration and recall costs, and impairment, restructuring and other charges, which is not a GAAP measure. Senior management Europe Consumer consists of the Company uses this measure of operating profit to evaluate segment performance because the Company believes this measure is the most indicative of performance trendsCompany’s consumer lawn and the overall earnings potential of each segment. Total assets reported for the Company’s operating segments include the intangible assets for the acquired businesses within those segments. The accounting policies of the segments are the same as those describedgarden business located in the “NOTE 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES.”
Corporate &geographic Europe. Other consists of the Company’s consumer lawn and garden businesses in geographies other than the U.S. and Europe, the Company’s indoor, urban and hydroponic gardening business, and revenues and expenses associated with the Company’s supply agreements with ICL and the amortization related to the Roundup® Marketing Agreement, as well as corporate,Israel Chemicals, Ltd. Corporate consists of general and administrative expenses and certain other income/expense items not allocated to the business segments. Corporate & Other assets primarily include deferred financing
Segment performance is evaluated based on several factors, including income (loss) from continuing operations before amortization, impairment, restructuring and debt issuance costsother charges, which is not a GAAP measure. Senior management uses this measure of operating profit (loss) to evaluate segment performance because the Company believes this measure is indicative of performance trends and corporate intangible assets, as well as deferred tax assets.the overall earnings potential of each segment.
The following table presents summarized financial information concerning the Company’s reportable segments:
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 |
| | (In millions) |
| Net sales: | | | | | |
| Global Consumer | $ | 2,527.5 |
| | $ | 2,539.2 |
| | $ | 2,533.2 |
|
Scotts LawnService® | 257.8 |
| | 245.8 |
| | 235.6 |
|
| Segment total | 2,785.3 |
| | 2,785.0 |
| | 2,768.8 |
|
| Corporate & Other | 31.2 |
| | 41.1 |
| | 30.9 |
|
| Consolidated | $ | 2,816.5 |
| | $ | 2,826.1 |
| | $ | 2,799.7 |
|
| Income from continuing operations before income taxes: | | | | | |
| Global Consumer | $ | 406.4 |
| | $ | 338.3 |
| | $ | 425.0 |
|
Scotts LawnService® | 28.7 |
| | 27.0 |
| | 25.9 |
|
| Segment total | 435.1 |
| | 365.3 |
| | 450.9 |
|
| Corporate & Other | (91.2 | ) | | (96.3 | ) | | (95.0 | ) |
| Intangible asset amortization | (10.4 | ) | | (10.1 | ) | | (10.6 | ) |
| Product registration and recall matters | — |
| | (8.2 | ) | | (14.6 | ) |
| Impairment, restructuring and other | (20.3 | ) | | (7.1 | ) | | (55.9 | ) |
| Costs related to refinancing | — |
| | — |
| | (1.2 | ) |
| Interest expense | (59.2 | ) | | (61.8 | ) | | (51.0 | ) |
| Consolidated | $ | 254.0 |
| | $ | 181.8 |
| | $ | 222.6 |
|
| Depreciation and amortization: | | | | | |
| Global Consumer | $ | 48.7 |
| | $ | 44.2 |
| | $ | 43.6 |
|
Scotts LawnService® | 4.0 |
| | 4.1 |
| | 3.4 |
|
| Corporate & Other | 13.4 |
| | 14.1 |
| | 13.8 |
|
| | $ | 66.1 |
| | $ | 62.4 |
| | $ | 60.8 |
|
| Capital expenditures: | | | | | |
| Global Consumer | $ | 53.3 |
| | $ | 64.6 |
| | $ | 59.0 |
|
Scotts LawnService® | 3.1 |
| | 1.9 |
| | 3.0 |
|
| Corporate & Other | 3.7 |
| | 2.9 |
| | 8.1 |
|
| | $ | 60.1 |
| | $ | 69.4 |
| | $ | 70.1 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following tables present summarized financial information concerning the Company’s reportable segments for the periods indicated:
|
| | | | | | | |
| | September 30, |
| | 2013 | | 2012 |
| | (In millions) |
| Total assets: | | | |
| Global Consumer | $ | 1,564.2 |
| | $ | 1,676.4 |
|
Scotts LawnService® | 189.8 |
| | 181.5 |
|
| Corporate & Other | 183.2 |
| | 216.5 |
|
| | $ | 1,937.2 |
| | $ | 2,074.4 |
|
|
| | | | | | | | | | | |
| | Year Ended September 30, |
| | 2016 | | 2015 | | 2014 |
| | (In millions) |
| Net sales: | | | | | |
| U.S. Consumer | $ | 2,187.4 |
| | $ | 2,141.8 |
| | $ | 2,037.4 |
|
| Europe Consumer | 274.2 |
| | 304.7 |
| | 336.7 |
|
| Other | 374.5 |
| | 281.5 |
| | 204.2 |
|
| Consolidated | $ | 2,836.1 |
| | $ | 2,728.0 |
| | $ | 2,578.3 |
|
| Income from continuing operations before income taxes: | | | | | |
| U.S. Consumer | $ | 500.4 |
| | $ | 439.2 |
| | $ | 399.7 |
|
| Europe Consumer | 13.5 |
| | 14.1 |
| | 20.9 |
|
| Other | 20.8 |
| | 12.3 |
| | 17.4 |
|
| Segment total | 534.7 |
| | 465.6 |
| | 438.0 |
|
| Corporate | (96.8 | ) | | (98.5 | ) | | (92.0 | ) |
| Intangible asset amortization | (18.0 | ) | | (15.0 | ) | | (12.3 | ) |
| Impairment, restructuring and other | 27.7 |
| | (90.0 | ) | | (50.0 | ) |
| Equity in income of unconsolidated affiliates | 19.5 |
| | — |
| | — |
|
| Costs related to refinancing | (8.8 | ) | | — |
| | (10.7 | ) |
| Interest expense | (65.6 | ) | | (50.5 | ) | | (47.3 | ) |
| Consolidated | $ | 392.7 |
| | $ | 211.6 |
| | $ | 225.7 |
|
| Depreciation and amortization: | | | | | |
| U.S. Consumer | $ | 47.7 |
| | $ | 45.5 |
| | $ | 43.5 |
|
| Europe Consumer | 7.2 |
| | 8.6 |
| | 11.5 |
|
| Other | 15.5 |
| | 9.6 |
| | 5.5 |
|
| | $ | 70.4 |
| | $ | 63.7 |
| | $ | 60.5 |
|
| Capital expenditures: | | | | | |
| U.S. Consumer | $ | 46.3 |
| | $ | 52.5 |
| | $ | 78.6 |
|
| Europe Consumer | 3.0 |
| | 3.1 |
| | 4.1 |
|
| Other | 7.4 |
| | 2.4 |
| | 1.7 |
|
| | $ | 56.7 |
| | $ | 58.0 |
| | $ | 84.4 |
|
|
| | | | | | | |
| | September 30, |
| | 2016 | | 2015 |
| | (In millions) |
| Total assets: | | | |
| U.S. Consumer | $ | 1,770.7 |
| | $ | 1,622.5 |
|
| Europe Consumer | 192.1 |
| | 217.9 |
|
| Other | 568.1 |
| | 324.1 |
|
| Corporate | 277.9 |
| | 142.4 |
|
| Assets held for sale | — |
| | 220.3 |
|
| Consolidated | $ | 2,808.8 |
| | $ | 2,527.2 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following table presents net sales by product category for the Global Consumer segment:category:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| Net sales: | | | | | | | | | | |
| Lawn care | 34 | % | | 34 | % | | 34 | % | 29 | % | | 31 | % | | 33 | % |
| Growing media | 34 |
| | 33 |
| | 31 |
| 38 |
| | 38 |
| | 36 |
|
| Controls | 14 |
| | 14 |
| | 13 |
| 15 |
| | 16 |
| | 16 |
|
Roundup® Marketing Agreement | 5 |
| | 6 |
| | 5 |
| 5 |
| | 4 |
| | 5 |
|
| Wild bird food | 2 |
| | 2 |
| | 3 |
| |
| Other, primarily gardening and landscape | 11 |
| | 11 |
| | 14 |
| |
| Other, primarily gardening, hydroponics and landscape | | 13 |
| | 11 |
| | 10 |
|
| Segment total product sales | 100 | % | | 100 | % | | 100 | % | 100 | % | | 100 | % | | 100 | % |
The following table presents net sales and long-lived assets (property, plant and equipment and finite-lived intangibles) by geographic area:
| | | | Year Ended September 30, | Year Ended September 30, |
| | 2013 | | 2012 | | 2011 | 2016 | | 2015 | | 2014 |
| | (In millions) | (In millions) |
| Net sales: | | | | | | | | | | |
| United States | $ | 2,332.4 |
| | $ | 2,340.9 |
| | $ | 2,294.4 |
| $ | 2,315.1 |
| | $ | 2,220.0 |
| | $ | 2,065.2 |
|
| International | 484.1 |
| | 485.2 |
| | 505.3 |
| 521.0 |
| | 508.0 |
| | 513.1 |
|
| | $ | 2,816.5 |
| | $ | 2,826.1 |
| | $ | 2,799.7 |
| $ | 2,836.1 |
| | $ | 2,728.0 |
| | $ | 2,578.3 |
|
| Long-lived assets: | | | | | | | | | | |
| United States | $ | 419.9 |
| | $ | 432.0 |
| | $ | 411.3 |
| $ | 531.0 |
| | $ | 540.6 |
| | $ | 448.0 |
|
| International | 64.5 |
| | 70.2 |
| | 69.8 |
| 205.9 |
| | 73.8 |
| | 91.1 |
|
| | $ | 484.4 |
| | $ | 502.2 |
| | $ | 481.1 |
| $ | 736.9 |
| | $ | 614.4 |
| | $ | 539.1 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
NOTE 22.23. QUARTERLY CONSOLIDATED FINANCIAL INFORMATION (UNAUDITED)
The following is a summary of the unaudited quarterly results of operations.operations:
| | | | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Full Year | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | | Full Year |
| | (In millions, except per share data) | (In millions, except per share data) |
| FISCAL 2013 | | | | | | | | | | |
| Net sales | $ | 205.8 |
| | $ | 1,019.6 |
| | $ | 1,148.1 |
| | $ | 443.0 |
| | $ | 2,816.5 |
| |
| Gross profit | 31.1 |
| | 378.7 |
| | 441.8 |
| | 130.8 |
| | 982.4 |
| |
| Income (loss) from continuing operations | (68.3 | ) | | 99.9 |
| | 148.2 |
| | (18.6 | ) | | 161.2 |
| |
| Income (loss) from discontinued operations | 0.6 |
| | 0.1 |
| | — |
| | (0.8 | ) | | (0.1 | ) | |
| Net income (loss) | (67.7 | ) | | 100.0 |
| | 148.2 |
| | (19.4 | ) | | 161.1 |
| |
| Basic income (loss) per common share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (1.11 | ) | | $ | 1.62 |
| | $ | 2.40 |
| | $ | (0.30 | ) | | $ | 2.61 |
| |
| Income (loss) from discontinued operations, net of tax | 0.01 |
| | — |
| | — |
| | (0.01 | ) | | — |
| |
| Basic net income (loss) per common share | $ | (1.10 | ) | | $ | 1.62 |
| | $ | 2.40 |
| | $ | (0.31 | ) | | $ | 2.61 |
| |
| Common shares used in basic EPS calculation | 61.4 |
| | 61.6 |
| | 61.7 |
| | 62.0 |
| | 61.7 |
| |
| Diluted income (loss) per common share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (1.11 | ) | | $ | 1.60 |
| | $ | 2.37 |
| | $ | (0.30 | ) | | $ | 2.58 |
| |
| Income (loss) from discontinued operations, net of tax | 0.01 |
| | — |
| | — |
| | (0.01 | ) | | (0.01 | ) | |
| Diluted net income (loss) per common share | $ | (1.10 | ) | | $ | 1.60 |
| | $ | 2.37 |
| | $ | (0.31 | ) | | $ | 2.57 |
| |
| Common shares and dilutive potential common shares used in diluted EPS calculation | 61.4 |
| | 62.4 |
| | 62.6 |
| | 62.0 |
| | 62.6 |
| |
| FISCAL 2012 | | | | | | | | | | |
| FISCAL 2016 | | | | | | | | | | |
| Net sales | $ | 199.6 |
| | $ | 1,170.4 |
| | $ | 1,054.9 |
| | $ | 401.2 |
| | $ | 2,826.1 |
| $ | 194.5 |
| | $ | 1,245.2 |
| | $ | 994.1 |
| | $ | 402.3 |
| | $ | 2,836.1 |
|
| Gross profit | 25.6 |
| | 461.7 |
| | 369.0 |
| | 105.0 |
| | 961.3 |
| 16.7 |
| | 521.6 |
| | 357.4 |
| | 99.7 |
| | 995.4 |
|
| Income (loss) from continuing operations | (73.1 | ) | | 126.5 |
| | 96.4 |
| | (36.6 | ) | | 113.2 |
| (79.3 | ) | | 225.8 |
| | 127.0 |
| | (20.2 | ) | | 253.3 |
|
| Income (loss) from discontinued operations, net of tax | (0.8 | ) | | 0.7 |
| | (3.1 | ) | | (3.5 | ) | | (6.7 | ) | (1.5 | ) | | (16.0 | ) | | 85.7 |
| | (6.7 | ) | | 61.5 |
|
| Net income (loss) | (73.9 | ) | | 127.2 |
| | 93.3 |
| | (40.1 | ) | | 106.5 |
| (80.8 | ) | | 209.8 |
| | 212.7 |
| | (26.9 | ) | | 314.8 |
|
| Basic income (loss) per common share: | | | | | | | | | | |
| Income (loss) attributable to controlling interest | | (81.3 | ) | | 210.1 |
| | 213.1 |
| | (26.6 | ) | | 315.3 |
|
| Basic income (loss) per Common Share: | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | (1.30 | ) | | $ | 3.68 |
| | $ | 2.09 |
| | $ | (0.33 | ) | | $ | 4.15 |
|
| Income (loss) from discontinued operations, net of tax | | (0.02 | ) | | (0.26 | ) | | 1.40 |
| | (0.11 | ) | | 1.01 |
|
| Basic net income (loss) per Common Share | | $ | (1.32 | ) | | $ | 3.42 |
| | $ | 3.49 |
| | $ | (0.44 | ) | | $ | 5.16 |
|
| Common Shares used in basic EPS calculation | | 61.5 |
| | 61.4 |
| | 61.1 |
| | 60.6 |
| | 61.1 |
|
| Diluted income (loss) per Common Share: | | | | | | | | | | |
| Income (loss) from continuing operations | | $ | (1.30 | ) | | $ | 3.64 |
| | $ | 2.06 |
| | $ | (0.33 | ) | | $ | 4.09 |
|
| Income (loss) from discontinued operations, net of tax | | (0.02 | ) | | (0.26 | ) | | 1.38 |
| | (0.11 | ) | | 1.00 |
|
| Diluted net income (loss) per Common Share | | $ | (1.32 | ) | | $ | 3.38 |
| | $ | 3.44 |
| | $ | (0.44 | ) | | $ | 5.09 |
|
| Common Shares and dilutive potential Common Shares used in diluted EPS calculation | | 61.5 |
| | 62.2 |
| | 61.9 |
| | 60.6 |
| | 62.0 |
|
| FISCAL 2015 | | | | | | | | | | |
| Net sales | | $ | 169.5 |
| | $ | 1,071.8 |
| | $ | 1,111.3 |
| | $ | 375.4 |
| | $ | 2,728.0 |
|
| Gross profit | | 6.6 |
| | 424.8 |
| | 385.8 |
| | 90.8 |
| | 908.0 |
|
| Income (loss) from continuing operations | | (74.6 | ) | | 138.6 |
| | 115.1 |
| | (41.3 | ) | | 137.8 |
|
| Income (loss) from discontinued operations, net of tax | | 0.6 |
| | (14.3 | ) | | 17.9 |
| | 16.7 |
| | 20.9 |
|
| Net income (loss) | | (74.0 | ) | | 124.3 |
| | 133.0 |
| | (24.6 | ) | | 158.7 |
|
| Income (loss) attributable to controlling interest | | (74.6 | ) | | 124.6 |
| | 133.4 |
| | (23.6 | ) | | 159.8 |
|
| Basic income (loss) per Common Share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (1.20 | ) | | $ | 2.08 |
| | $ | 1.58 |
| | $ | (0.60 | ) | | $ | 1.86 |
| $ | (1.24 | ) | | $ | 2.28 |
| | $ | 1.89 |
| | $ | (0.65 | ) | | $ | 2.27 |
|
| Income (loss) from discontinued operations | (0.01 | ) | | 0.01 |
| | (0.05 | ) | | (0.06 | ) | | (0.11 | ) | 0.01 |
| | (0.23 | ) | | 0.29 |
| | 0.27 |
| | 0.35 |
|
| Basic net income (loss) per common share | $ | (1.21 | ) | | $ | 2.09 |
| | $ | 1.53 |
| | $ | (0.66 | ) | | $ | 1.75 |
| |
| Common shares used in basic EPS calculation | 60.9 |
| | 60.9 |
| | 61.1 |
| | 61.2 |
| | 61.0 |
| |
| Diluted income (loss) per common share: | | | | | | | | | | |
| Basic net income (loss) per Common Share | | $ | (1.23 | ) | | $ | 2.05 |
| | $ | 2.18 |
| | $ | (0.38 | ) | | $ | 2.62 |
|
| Common Shares used in basic EPS calculation | | 60.8 |
| | 60.9 |
| | 61.3 |
| | 61.4 |
| | 61.1 |
|
| Diluted income (loss) per Common Share: | | | | | | | | | | |
| Income (loss) from continuing operations | $ | (1.20 | ) | | $ | 2.04 |
| | $ | 1.55 |
| | $ | (0.60 | ) | | $ | 1.82 |
| $ | (1.24 | ) | | $ | 2.24 |
| | $ | 1.85 |
| | $ | (0.65 | ) | | $ | 2.23 |
|
| Income (loss) from discontinued operations | (0.01 | ) | | 0.01 |
| | (0.05 | ) | | (0.06 | ) | | (0.11 | ) | 0.01 |
| | (0.23 | ) | | 0.29 |
| | 0.27 |
| | 0.34 |
|
| Diluted net income (loss) per common share | $ | (1.21 | ) | | $ | 2.05 |
| | $ | 1.50 |
| | $ | (0.66 | ) | | $ | 1.71 |
| |
| Common shares and dilutive potential common shares used in diluted EPS calculation | 60.9 |
| | 62.0 |
| | 62.2 |
| | 61.2 |
| | 62.1 |
| |
| Diluted net income (loss) per Common Share | | $ | (1.23 | ) | | $ | 2.01 |
| | $ | 2.14 |
| | $ | (0.38 | ) | | $ | 2.57 |
|
| Common Shares and dilutive potential Common Shares used in diluted EPS calculation | | 60.8 |
| | 62.1 |
| | 62.3 |
| | 61.4 |
| | 62.2 |
|
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Common share equivalents, such as share-based awards, are excluded from the diluted loss per common shareCommon Share calculation in periods where there is a loss from continuing operations because the effect of their inclusion would be anti-dilutive. The Company’s business is highly seasonal, with approximately 75% of net sales occurring in the second and third fiscal quarters.
Unusual items during fiscal 2013 consisted ofSignificant impairment, restructuring and other. These items areother charges / recoveries reflected in the quarterly financial information during fiscal 2016 are as follows: first quarter restructuring costs of $9.3 million including $5.4 million in costs related to consumer complaints and claims related to the reformulated Bonus® S fertilizer product sold in the southeastern United States during fiscal 2015, $2.8 million in transaction related costs associated with the divestiture of the SLS Business and costs of $0.9 million related to other transaction activity associated with Project Focus; second quarter net recoveries of $36.5 million including insurance reimbursement recoveries of $50.0 million related to Bonus® S insurance reimbursements, a charge of $9.0 million for the resolution of a prior SLS Business litigation matter, $1.6 million in transaction related costs associated with the divestiture of the SLS Business and costs of $1.7 million related to other transaction activity associated with Project Focus; third quarter net recoveries of $5.4 million related to Bonus® S insurance reimbursements; and fourth quarter restructuring costs of $6.7 million associated with Project Focus including costs of $5.4 million related to termination benefits for U.S. and international employees and costs of $2.3 million related to other transaction activity.
Significant impairment, restructuring and other of $(0.4) million; second quarter impairment, restructuring and other of 0.1 million in cost of sales and $0.1 million in SG&A; third quarter impairment, restructuring and other
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
of 1.5 million in cost of sales and $7.0 million in SG&A; and fourth quarter impairment, restructuring and other of 0.6 million in cost of sales and $11.4 million in SG&A.
Unusual items during fiscal 2012 consisted of product registration and recall charges and impairment, restructuring and other. These items are reflected in the quarterly financial information during fiscal 2015 are as follows: first quarter product registrationrestructuring costs of $9.6 million related to termination benefits for U.S. and recall charges of $0.3 million and impairment, restructuring and other of $2.5 million;international employees; second quarter product registrationrestructuring costs of $5.1 million related to termination benefits for U.S. and recall charges of $3.5 million and impairment, restructuring and other of $5.0 million;international employees; third quarter restructuring costs of $6.6 million related to termination benefits for U.S. and international employees and the liquidation and exit from the U.K. Solus business, and $37.7 million in costs related to consumer complaints and claims related to the reformulated Bonus® S fertilizer product registration and recall charges of $4.0 million and an adjustment to impairment, restructuring and other of $(0.4) million;sold in the southeastern United States during fiscal 2015; and fourth quarter product registration and recall chargesrestructuring costs of $0.4 million. In the fourth quarter of fiscal year 2012, the Company completed the wind down of the Company's professional seed business. As a result, effective in its fourth quarter of fiscal 2012, the Company classified its results of operations for all periods presented to reflect the professional seed business as a discontinued operation. The company recorded a $0.4$0.9 million impairment charge related to the investmenttermination benefits for U.S. and international employees, and $24.7 million in Turf-Seed (Europe) Limited in charges related to Bonusfiscal 2012®. In addition, in the third quarter of fiscal 2012, the Company recorded an adjustment of $1.7 million as a change in estimate on the tax due on the sale of Global Pro. S insurance reimbursements.
NOTE 23.24. FINANCIAL INFORMATION FOR SUBSIDIARY GUARANTORS AND NON-GUARANTORS
The 7.25% and 6.625%6.000% Senior Notes (collectively, the “Senior Notes”)were issued by Scotts Miracle-Gro on January 14, 2010October 13, 2015 and December 16, 2010, respectively, are guaranteed by certain of itsthe Company’s domestic subsidiaries and, therefore, the Company has disclosedreports condensed consolidating financial information in accordance with SEC Regulation S-X Rule 3-10, Financial Statements of Guarantors and Issuers of Guaranteed Securities Registered or Being Registered. Registered. On January 15, 2014 and December 15, 2015, Scotts Miracle-Gro redeemed, respectively, all of its outstanding $200.0 million aggregate principal amount of 7.25% Senior Notes and $200.0 million aggregate principal amount of 6.625% Senior Notes, each of which were previously guaranteed by certain of its domestic subsidiaries. The guarantees are “full and unconditional,” as those terms are used in Regulation S-X Rule 3-10, except that a subsidiary’s guarantee will be released in certain customary circumstances, such as (1) upon any sale or other disposition of all or substantially all of the assets of the subsidiary (including by way of merger or consolidation) to any person other than Scotts Miracle-Gro or any “restricted subsidiary” under the indenture governing the 6.000% Senior Notes; (2) if the subsidiary merges with and into Scotts Miracle-Gro, with Scotts Miracle-Gro surviving such merger; (3) if the subsidiary is designated an “unrestricted subsidiary” in accordance with the indenture governing the 6.000% Senior Notes or otherwise ceases to be a “restricted subsidiary” (including by way of liquidation or dissolution) in a transaction permitted by such indenture; (4) upon legal or covenant defeasance; (5) at the election of Scotts Miracle-Gro following the subsidiary’s release as a guarantor under the new credit agreement, except a release by or as a result of the repayment of the new credit agreement; or (6) if the subsidiary ceases to be a “restricted subsidiary” and the subsidiary is not otherwise required to provide a guarantee of the 6.000% Senior Notes pursuant to the indenture governing the 6.000% Senior Notes. SLS Holdings, Inc. was added as a guarantor effective in the three-month period ending July 2, 2016, and HGCI, Inc. and GenSource, Inc. were added as guarantors effective in the three-month period ending January 2, 2016, and have been classified as Guarantors for all periods presented. SLS Holdings, Inc., HGCI, Inc. and GenSource, Inc. did not have any activity for fiscal 2015.
The following 100% directly or indirectly owned subsidiaries fully and unconditionally guarantee at September 30, 2016 the 6.000% Senior Notes on a joint and several basis: EG Systems, Inc., dba Scotts LawnService®; Gutwein & Co., Inc.; Hyponex Corporation; Miracle-Gro Lawn Products, Inc.; OMS Investments, Inc.; Rod McLellan Company; Sanford Scientific, Inc.; Scotts Temecula Operations, LLC; Scotts Manufacturing Company; Scotts Products Co.; Scotts Professional Products Co.; Scotts-Sierra Investments LLC; SMG Growing Media, Inc.; SMGM LLC; Swiss Farms Products, Inc.; andSMGM LLC; The Scotts Company LLCLLC; The Hawthorne Gardening Company; Hawthorne Hydroponics LLC; HGCI, Inc.; GenSource, Inc.; and SLS Holdings, Inc. (collectively, the “Guarantors”). SMGM LLCEffective in the three-month period ending July 2, 2016, the SLS Business was added as a Guarantorcontributed to the TruGreen Joint Venture and the Company classified its results of the Senior Notes on September 30, 2013. Accordingly, SMGM LLC has been classified as a Guarantoroperations for all periods presented into reflect the condensed, consolidatingSLS Business as a discontinued operation and classified the assets and liabilities as held for sale within the financial information accompanying this Note 23. SMG Brands,of the Guarantors. Subsequent to their contribution to the TruGreen Joint Venture, EG Systems, LLC (formerly known as EG Systems, Inc. was merged into OMS Investments., Inc. effective September 27, 2013.) and SLS Franchise Systems LLC are no longer guarantors of the 6.000% Senior Notes.
THE SCOTTS MIRACLE-GRO COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
The following information presents condensed, consolidatingCondensed Consolidating Statements of Operations Statementfor each of the three years ended September 30, 2016, 2015 and 2014, Condensed Consolidating Statements of Comprehensive Income (Loss) for each of the three years ended September 30, 2016, 2015 and 2014, Condensed Consolidating Statements of Cash Flows for each of the three years ended September 30, 2013,2016, 2015 and condensed, consolidating2014, and Condensed Consolidating Balance Sheets as of September 30, 20132016 and September 30, 2012.2015. The condensed consolidating financial information presents, in separate columns, financial information for: Scotts Miracle-Gro on a Parent-only basis, carrying its investment in subsidiaries under the equity method; Guarantors on a combined basis, carrying their investments in subsidiaries which do not guarantee the debt (collectively, the “Non-Guarantors”) under the equity method; Non-Guarantors on a combined basis; and eliminating entries. The eliminating entries primarily reflect intercompany transactions, such as interest expense, accounts receivable and payable, short and long-term debt, and the elimination of equity investments, return on investments and income in subsidiaries. Because the Parent is obligated to pay the unpaid principal amount and interest on all amounts borrowed by the Guarantors or Non-Guarantors under the credit facility (and was obligated to pay the unpaid principal amount and interest on all amounts borrowed by the Guarantors and Non-Guarantors under the previous senior secured five-year revolving loan facility), the borrowings and related interest expense for the loans outstanding of the Guarantors and Non-Guarantors are also presented in the accompanying Parent-only financial information, and are then eliminated. Included in the Parent Condensed Consolidating Statement of Cash Flows for fiscal 2016 are $934.4 million of dividends paid by the Guarantors and Non-Guarantors to the Parent representing return of investments and as such are classified within cash flows used in investing activities. Included in the Parent Condensed Consolidating Statement of Cash Flows for fiscal 2015 and fiscal 2014 are $255.5 million and $422.8 million, respectively, of dividends paid by the Guarantors and Non-Guarantors to the Parent representing return on investments and as such are classified within cash flows from operating activities.
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Operations
for the fiscal year ended September 30, 20132016
(in millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 2,317.4 |
| | $ | 499.1 |
| | $ | — |
| | $ | 2,816.5 |
| $ | — |
| | $ | 2,285.6 |
| | $ | 550.5 |
| | $ | — |
| | $ | 2,836.1 |
|
| Cost of sales | — |
| | 1,480.4 |
| | 351.5 |
| | — |
| | 1,831.9 |
| — |
| | 1,434.4 |
| | 398.6 |
| | — |
| | 1,833.0 |
|
| Cost of sales - impairment, restructuring and other | — |
| | — |
| | 2.2 |
| | — |
| | 2.2 |
| |
| Cost of sales—impairment, restructuring and other | | — |
| | 5.9 |
| | 1.8 |
| | — |
| | 7.7 |
|
| Gross profit | — |
| | 837.0 |
| | 145.4 |
| | — |
| | 982.4 |
| — |
| | 845.3 |
| | 150.1 |
| | — |
| | 995.4 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | — |
| | 516.8 |
| | 144.3 |
| | — |
| | 661.1 |
| — |
| | 455.4 |
| | 140.2 |
| | 1.5 |
| | 597.1 |
|
| Impairment, restructuring and other | — |
| | 11.2 |
| | 6.9 |
| | — |
| | 18.1 |
| — |
| | (49.1 | ) | | 1.9 |
| | — |
| | (47.2 | ) |
| Other income, net | — |
| | (6.9 | ) | | (3.1 | ) | | — |
| | (10.0 | ) | |
| Income from operations | — |
| | 315.9 |
| | (2.7 | ) | | — |
| | 313.2 |
| |
| Equity income in subsidiaries | (180.9 | ) | | 1.3 |
| | — |
| | 179.6 |
| | — |
| |
| Other non-operating income | (20.4 | ) | | — |
| | — |
| | 20.4 |
| | — |
| |
| Other (income) loss, net | | (0.5 | ) | | (12.8 | ) | | (0.5 | ) | | — |
| | (13.8 | ) |
| Income (loss) from operations | | 0.5 |
| | 451.8 |
| | 8.5 |
| | (1.5 | ) | | 459.3 |
|
| Equity (income) loss in subsidiaries | | (348.2 | ) | | (8.4 | ) | | — |
| | 356.6 |
| | — |
|
| Other non-operating (income) loss | | (22.0 | ) | | — |
| | (22.4 | ) | | 44.4 |
| | — |
|
| Equity in (income)/loss of unconsolidated affiliates | | — |
| | (7.9 | ) | | 0.1 |
| | — |
| | (7.8 | ) |
| Costs related to refinancing | | 8.8 |
| | — |
| | — |
| | — |
| | 8.8 |
|
| Interest expense | 52.4 |
| | 25.2 |
| | 2.0 |
| | (20.4 | ) | | 59.2 |
| 62.1 |
| | 43.6 |
| | 4.3 |
| | (44.4 | ) | | 65.6 |
|
| Income (loss) from continuing operations before income taxes | 148.9 |
| | 289.4 |
| | (4.7 | ) | | (179.6 | ) | | 254.0 |
| 299.8 |
| | 424.5 |
| | 26.5 |
| | (358.1 | ) | | 392.7 |
|
| Income tax (benefit) expense from continuing operations | (12.2 | ) | | 106.7 |
| | (1.7 | ) | | — |
| | 92.8 |
| (17.2 | ) | | 147.3 |
| | 9.3 |
| | — |
| | 139.4 |
|
| Income from continuing operations | 161.1 |
| | 182.7 |
| | (3.0 | ) | | (179.6 | ) | | 161.2 |
| |
| Loss from discontinued operations, net of tax | — |
| | (0.1 | ) | | — |
| | — |
| | (0.1 | ) | |
| Income (loss) from continuing operations | | 317.0 |
| | 277.2 |
| | 17.2 |
| | (358.1 | ) | | 253.3 |
|
| Income from discontinued operations, net of tax | | — |
| | 61.5 |
| | — |
| | — |
| | 61.5 |
|
| Net income (loss) | $ | 161.1 |
| | $ | 182.6 |
| | $ | (3.0 | ) | | $ | (179.6 | ) | | $ | 161.1 |
| $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (358.1 | ) | | $ | 314.8 |
|
| Net (income) loss attributable to noncontrolling interest | | — |
| | — |
| | — |
| | 0.5 |
| | 0.5 |
|
| Net income (loss) attributable to controlling interest | | $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (357.6 | ) | | $ | 315.3 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, ConsolidatedConsolidating Statement of Comprehensive Income (Loss)
for the fiscal yeartwelve months endedSeptember 30, 20132016
(In millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net income | $ | 161.1 |
| | $ | 182.6 |
| | $ | (3.0 | ) | | $ | (179.6 | ) | | $ | 161.1 |
| |
| Net income (loss) | | $ | 317.0 |
| | $ | 338.7 |
| | $ | 17.2 |
| | $ | (358.1 | ) | | $ | 314.8 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | |
| Net foreign currency translation adjustment | — |
| | — |
| | (5.2 | ) | | — |
| | (5.2 | ) | (6.2 | ) | | — |
| | (6.2 | ) | | 6.2 |
| | (6.2 | ) |
| Net change in derivatives | 7.2 |
| | (2.1 | ) | | — |
| | — |
| | 5.1 |
| 4.3 |
| | 0.3 |
| | — |
| | (0.3 | ) | | 4.3 |
|
| Net change in pension and other post retirement benefits | — |
| | 10.6 |
| | (1.0 | ) | | — |
| | 9.6 |
| (8.2 | ) | | 0.4 |
| | (8.6 | ) | | 8.2 |
| | (8.2 | ) |
| Total other comprehensive income (loss) | 7.2 |
| | 8.5 |
| | (6.2 | ) | | — |
| | 9.5 |
| (10.1 | ) | | 0.7 |
| | (14.8 | ) | | 14.1 |
| | (10.1 | ) |
| Comprehensive income | $ | 168.3 |
| | $ | 191.1 |
| | $ | (9.2 | ) | | $ | (179.6 | ) | | $ | 170.6 |
| |
| Comprehensive income (loss) | | $ | 306.9 |
| | $ | 339.4 |
| | $ | 2.4 |
| | $ | (344.0 | ) | | $ | 304.7 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 20132016
(in millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | $ | (18.0 | ) | | $ | 245.9 |
| | $ | 114.1 |
| | $ | — |
| | $ | 342.0 |
| |
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES(a) | | $ | 18.0 |
| | $ | 212.8 |
| | $ | 10.2 |
| | $ | (3.6 | ) | | $ | 237.4 |
|
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of long-lived assets | — |
| | 0.2 |
| | 3.4 |
| | — |
| | 3.6 |
| — |
| | 2.4 |
| | — |
| | — |
| | 2.4 |
|
| Investments in property, plant and equipment | — |
| | (44.6 | ) | | (15.5 | ) | | — |
| | (60.1 | ) | — |
| | (49.0 | ) | | (9.3 | ) | | — |
| | (58.3 | ) |
| Investment in unconsolidated affiliates | — |
| | (4.5 | ) | | — |
| | — |
| | (4.5 | ) | |
| Investments in loans receivable | | — |
| | (90.0 | ) | | — |
| | — |
| | (90.0 | ) |
| Net distributions from unconsolidated affiliates | | — |
| | 194.1 |
| | — |
| | — |
| | 194.1 |
|
| Cash contributed to TruGreen Joint Venture | | — |
| | (24.2 | ) | | — |
| | — |
| | (24.2 | ) |
| Investments in acquired businesses, net of cash acquired | — |
| | (3.2 | ) | | — |
| | — |
| | (3.2 | ) | — |
| | — |
| | (158.4 | ) | | — |
| | (158.4 | ) |
| Net cash used in investing activities | — |
| | (52.1 | ) | | (12.1 | ) | | — |
| | (64.2 | ) | |
| Return of investments from affiliates | | 934.3 |
| | — |
| | — |
| | (934.3 | ) | | — |
|
| Investing cash flows from (to) affiliates | | (914.2 | ) | | (29.1 | ) | | — |
| | 943.3 |
| | — |
|
| Net cash provided by (used in) investing activities | | 20.1 |
| | 4.2 |
| | (167.7 | ) | | 9.0 |
| | (134.4 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | — |
| | 1,130.4 |
| | 344.4 |
| | — |
| | 1,474.8 |
| — |
| | 1,819.5 |
| | 249.6 |
| | — |
| | 2,069.1 |
|
| Repayments under revolving and bank lines of credit and term loans | — |
| | (1,078.5 | ) | | (603.6 | ) | | — |
| | (1,682.1 | ) | — |
| | (1,937.7 | ) | | (212.7 | ) | | — |
| | (2,150.4 | ) |
| Proceeds from issuance of 6.000% Senior Notes | | 400.0 |
| | — |
| | — |
| | — |
| | 400.0 |
|
| Repayment of 6.625% Senior Notes | | (200.0 | ) | | — |
| | — |
| | — |
| | (200.0 | ) |
| Financing and issuance fees | | (11.2 | ) | | — |
| | — |
| | — |
| | (11.2 | ) |
| Dividends paid | (87.8 | ) | | — |
| | — |
| | — |
| | (87.8 | ) | (116.6 | ) | | (909.4 | ) | | (26.5 | ) | | 935.9 |
| | (116.6 | ) |
| Purchase of Common Shares | | (130.8 | ) | | — |
| | — |
| | — |
| | (130.8 | ) |
| Payments on seller notes | — |
| | (0.8 | ) | | — |
| | — |
| | (0.8 | ) | — |
| | (2.3 | ) | | (0.5 | ) | | — |
| | (2.8 | ) |
| Excess tax benefits from share-based payment arrangements | — |
| | 2.0 |
| | — |
| | — |
| | 2.0 |
| 5.8 |
| | — |
| | — |
| | — |
| | 5.8 |
|
| Cash received from exercise of stock options | 13.3 |
| | — |
| | — |
| | — |
| | 13.3 |
| 14.7 |
| | — |
| | — |
| | — |
| | 14.7 |
|
| Intercompany financing | 92.5 |
| | (246.9 | ) | | 154.4 |
| | — |
| | — |
| |
| Financing cash flows from (to) affiliates | | — |
| | 808.2 |
| | 133.1 |
| | (941.3 | ) | | — |
|
| Net cash provided by (used in) financing activities | 18.0 |
| | (193.8 | ) | | (104.8 | ) | | — |
| | (280.6 | ) | (38.1 | ) | | (221.7 | ) | | 143.0 |
| | (5.4 | ) | | (122.2 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | 0.7 |
| | — |
| | 0.7 |
| — |
| | — |
| | (2.1 | ) | | — |
| | (2.1 | ) |
| Net decrease in cash and cash equivalents | — |
| | — |
| | (2.1 | ) | | — |
| | (2.1 | ) | |
| Net increase (decrease) in cash and cash equivalents | | — |
| | (4.7 | ) | | (16.6 | ) | | — |
| | (21.3 | ) |
| Cash and cash equivalents at beginning of year | — |
| | 2.6 |
| | 129.3 |
| | — |
| | 131.9 |
| — |
| | 7.4 |
| | 64.0 |
| | — |
| | 71.4 |
|
| Cash and cash equivalents at end of year | $ | — |
| | $ | 2.6 |
| | $ | 127.2 |
| | $ | — |
| | $ | 129.8 |
| $ | — |
| | $ | 2.7 |
| | $ | 47.4 |
| | $ | — |
| | $ | 50.1 |
|
| |
| (a) | Cash received by the Parent from the Guarantors and non Guarantors in the form of dividends in the amount of $934.4 million represent return of investments and are included in cash flows from investing activities. Cash received by the Guarantors from the Non-Guarantors in the form of dividends in the amount of $1.5 million represent return on investments and are included in the cash flows from operating activities. |
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Balance Sheet
As of September 30, 20132016
(in millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
ASSETS | | Current assets: | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 2.6 |
| | $ | 127.2 |
| | $ | — |
| | $ | 129.8 |
| $ | — |
| | $ | 2.7 |
| | $ | 47.4 |
| | $ | — |
| | $ | 50.1 |
|
| Accounts receivable, net | — |
| | 119.7 |
| | 86.9 |
| | — |
| | 206.6 |
| — |
| | 92.4 |
| | 104.0 |
| | — |
| | 196.4 |
|
| Accounts receivable pledged | — |
| | 106.7 |
| | — |
| | — |
| | 106.7 |
| — |
| | 174.7 |
| | — |
| | — |
| | 174.7 |
|
| Inventories | — |
| | 247.2 |
| | 77.7 |
| | — |
| | 324.9 |
| — |
| | 327.8 |
| | 120.4 |
| | — |
| | 448.2 |
|
| Prepaid and other current assets | — |
| | 76.4 |
| | 36.6 |
| | — |
| | 113.0 |
| 0.1 |
| | 82.8 |
| | 39.4 |
| | — |
| | 122.3 |
|
| Total current assets | — |
| | 552.6 |
| | 328.4 |
| | — |
| | 881.0 |
| 0.1 |
| | 680.4 |
| | 311.2 |
| | — |
| | 991.7 |
|
| Investment in unconsolidated affiliates | | — |
| | 100.3 |
| | 0.7 |
| | — |
| | 101.0 |
|
| Property, plant and equipment, net | — |
| | 377.9 |
| | 44.4 |
| | — |
| | 422.3 |
| — |
| | 392.1 |
| | 78.7 |
| | — |
| | 470.8 |
|
| Goodwill | — |
| | 314.4 |
| | 0.7 |
| | — |
| | 315.1 |
| — |
| | 260.4 |
| | 101.2 |
| | 11.6 |
| | 373.2 |
|
| Intangible assets, net | — |
| | 244.8 |
| | 39.6 |
| | — |
| | 284.4 |
| — |
| | 596.4 |
| | 144.3 |
| | 10.2 |
| | 750.9 |
|
| Other assets | 22.4 |
| | 19.5 |
| | 26.5 |
| | (34.0 | ) | | 34.4 |
| 19.2 |
| | 103.8 |
| | 0.7 |
| | (2.5 | ) | | 121.2 |
|
| Equity investment in subsidiaries | 317.1 |
| | — |
| | — |
| | (317.1 | ) | | — |
| 808.8 |
| | — |
| | — |
| | (808.8 | ) | | — |
|
| Intercompany assets | 725.7 |
| | — |
| | — |
| | (725.7 | ) | | — |
| 1,013.0 |
| | — |
| | — |
| | (1,013.0 | ) | | — |
|
| Total assets | $ | 1,065.2 |
| | $ | 1,509.2 |
| | $ | 439.6 |
| | $ | (1,076.8 | ) | | $ | 1,937.2 |
| $ | 1,841.1 |
| | $ | 2,133.4 |
| | $ | 636.8 |
| | $ | (1,802.5 | ) | | $ | 2,808.8 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY |
| Current liabilities: | | | | | | | | | | | | | | | | | | |
| Current portion of debt | $ | — |
| | $ | 87.3 |
| | $ | 5.1 |
| | $ | — |
| | $ | 92.4 |
| $ | 15.0 |
| | $ | 154.2 |
| | $ | 30.8 |
| | $ | (15.0 | ) | | $ | 185.0 |
|
| Accounts payable | — |
| | 83.9 |
| | 53.8 |
| | — |
| | 137.7 |
| — |
| | 108.8 |
| | 57.1 |
| | — |
| | 165.9 |
|
| Other current liabilities | 16.0 |
| | 183.4 |
| | 80.3 |
| | — |
| | 279.7 |
| 16.6 |
| | 143.6 |
| | 82.0 |
| | — |
| | 242.2 |
|
| Total current liabilities | 16.0 |
| | 354.6 |
| | 139.2 |
| | — |
| | 509.8 |
| 31.6 |
| | 406.6 |
| | 169.9 |
| | (15.0 | ) | | 593.1 |
|
| Long-term debt | 327.0 |
| | 67.9 |
| | 10.2 |
| | 73.0 |
| | 478.1 |
| 1,091.1 |
| | 575.7 |
| | 117.2 |
| | (652.9 | ) | | 1,131.1 |
|
| Other liabilities | 11.7 |
| | 213.3 |
| | 47.8 |
| | (34.0 | ) | | 238.8 |
| 3.2 |
| | 268.7 |
| | 76.0 |
| | 2.4 |
| | 350.3 |
|
| Equity investment in subsidiaries | — |
| | 173.3 |
| | — |
| | (173.3 | ) | | — |
| — |
| | 161.0 |
| | — |
| | (161.0 | ) | | — |
|
| Intercompany liabilities | — |
| | 652.1 |
| | 146.6 |
| | (798.7 | ) | | — |
| — |
| | 147.2 |
| | 187.1 |
| | (334.3 | ) | | — |
|
| Total liabilities | 354.7 |
| | 1,461.2 |
| | 343.8 |
| | (933.0 | ) | | 1,226.7 |
| 1,125.9 |
| | 1,559.2 |
| | 550.2 |
| | (1,160.8 | ) | | 2,074.5 |
|
| Total shareholders’ equity | 710.5 |
| | 48.0 |
| | 95.8 |
| | (143.8 | ) | | 710.5 |
| |
| Total liabilities and shareholders’ equity | $ | 1,065.2 |
| | $ | 1,509.2 |
| | $ | 439.6 |
| | $ | (1,076.8 | ) | | $ | 1,937.2 |
| |
| Total equity—controlling interest | | 715.2 |
| | 574.2 |
| | 86.6 |
| | (660.8 | ) | | 715.2 |
|
| Noncontrolling interest | | — |
| | — |
| | — |
| | 19.1 |
| | 19.1 |
|
| Total equity | | 715.2 |
| | 574.2 |
| | 86.6 |
| | (641.7 | ) | | 734.3 |
|
| Total liabilities and equity | | $ | 1,841.1 |
| | $ | 2,133.4 |
| | $ | 636.8 |
| | $ | (1,802.5 | ) | | $ | 2,808.8 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Operations
for the fiscal year ended September 30, 20122015
(in millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 2,320.9 |
| | $ | 505.2 |
| | $ | — |
| | $ | 2,826.1 |
| $ | — |
| | $ | 2,192.1 |
| | $ | 535.9 |
| | $ | — |
| | $ | 2,728.0 |
|
| Cost of sales | — |
| | 1,511.2 |
| | 353.2 |
| | — |
| | 1,864.4 |
| — |
| | 1,426.7 |
| | 386.7 |
| | — |
| | 1,813.4 |
|
| Cost of sales - product registration and recall matters | — |
| | 0.4 |
| | — |
| | — |
| | 0.4 |
| |
| Cost of sales—impairment, restructuring and other | | — |
| | 3.1 |
| | 3.5 |
| | — |
| | 6.6 |
|
| Gross profit | — |
| | 809.3 |
| | 152.0 |
| | — |
| | 961.3 |
| — |
| | 762.3 |
| | 145.7 |
| | — |
| | 908.0 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | — |
| | 552.9 |
| | 152.8 |
| | — |
| | 705.7 |
| — |
| | 429.4 |
| | 140.3 |
| | 1.7 |
| | 571.4 |
|
| Impairment, restructuring and other | — |
| | 7.9 |
| | (0.8 | ) | | — |
| | 7.1 |
| — |
| | 69.6 |
| | 7.0 |
| | — |
| | 76.6 |
|
| Product registration and recall matters | — |
| | 7.8 |
| | — |
| | — |
| | 7.8 |
| |
| Other income, net | — |
| | (1.1 | ) | | (1.8 | ) | | — |
| | (2.9 | ) | |
| Income from operations | — |
| | 241.8 |
| | 1.8 |
| | — |
| | 243.6 |
| |
| Equity income in subsidiaries | (126.4 | ) | | 1.6 |
| | — |
| | 124.8 |
| | — |
| |
| Other non-operating income | (24.5 | ) | | — |
| | — |
| | 24.5 |
| | — |
| |
| Other (income) loss, net | | — |
| | (3.2 | ) | | 1.1 |
| | — |
| | (2.1 | ) |
| Income (loss) from operations | | — |
| | 266.5 |
| | (2.7 | ) | | (1.7 | ) | | 262.1 |
|
| Equity (income) loss in subsidiaries | | (179.2 | ) | | (6.1 | ) | | — |
| | 185.3 |
| | — |
|
| Other non-operating (income) loss | | (27.9 | ) | | — |
| | (23.5 | ) | | 51.4 |
| | — |
|
| Costs related to refinancing | | — |
| | — |
| | — |
| | — |
| | — |
|
| Interest expense | 56.5 |
| | 25.4 |
| | 4.4 |
| | (24.5 | ) | | 61.8 |
| 55.2 |
| | 44.1 |
| | 2.6 |
| | (51.4 | ) | | 50.5 |
|
| Income (loss) from continuing operations before income taxes | 94.4 |
| | 214.8 |
| | (2.6 | ) | | (124.8 | ) | | 181.8 |
| 151.9 |
| | 228.5 |
| | 18.2 |
| | (187.0 | ) | | 211.6 |
|
| Income tax (benefit) expense from continuing operations | (12.1 | ) | | 81.7 |
| | (1.0 | ) | | — |
| | 68.6 |
| (9.6 | ) | | 77.0 |
| | 6.4 |
| | — |
| | 73.8 |
|
| Income (loss) from continuing operations | 106.5 |
| | 133.1 |
| | (1.6 | ) | | (124.8 | ) | | 113.2 |
| 161.5 |
| | 151.5 |
| | 11.8 |
| | (187.0 | ) | | 137.8 |
|
| Loss from discontinued operations, net of tax | — |
| | (6.7 | ) | | — |
| | — |
| | (6.7 | ) | |
| Income from discontinued operations, net of tax | | — |
| | 20.9 |
| | — |
| | — |
| | 20.9 |
|
| Net income (loss) | $ | 106.5 |
| | $ | 126.4 |
| | $ | (1.6 | ) | | $ | (124.8 | ) | | $ | 106.5 |
| $ | 161.5 |
| | $ | 172.4 |
| | $ | 11.8 |
| | $ | (187.0 | ) | | $ | 158.7 |
|
| Net (income) loss attributable to noncontrolling interest | | — |
| | — |
| | — |
| | 1.1 |
| | 1.1 |
|
| Net income (loss) attributable to controlling interest | | $ | 161.5 |
| | $ | 172.4 |
| | $ | 11.8 |
| | $ | (185.9 | ) | | $ | 159.8 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, ConsolidatedConsolidating Statement of Comprehensive Income (Loss)
for the fiscal yeartwelve months ended September 30, 20122015
(In millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net income (loss) | $ | 106.5 |
| | $ | 126.4 |
| | $ | (1.6 | ) | | $ | (124.8 | ) | | $ | 106.5 |
| $ | 161.5 |
| | $ | 172.4 |
| | $ | 11.8 |
| | $ | (187.0 | ) | | $ | 158.7 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | |
| Net foreign currency translation adjustment | — |
| | — |
| | 2.3 |
| | — |
| | 2.3 |
| (14.2 | ) | | — |
| | (14.2 | ) | | 14.2 |
| | (14.2 | ) |
| Net change in derivatives | 0.1 |
| | (1.0 | ) | | — |
| | — |
| | (0.9 | ) | (2.1 | ) | | (0.8 | ) | | — |
| | 0.8 |
| | (2.1 | ) |
| Net change in pension and other post retirement benefits | — |
| | (1.2 | ) | | (9.5 | ) | | — |
| | (10.7 | ) | (4.3 | ) | | (5.4 | ) | | 1.1 |
| | 4.3 |
| | (4.3 | ) |
| Total other comprehensive income (loss) | 0.1 |
| | (2.2 | ) | | (7.2 | ) | | — |
| | (9.3 | ) | (20.6 | ) | | (6.2 | ) | | (13.1 | ) | | 19.3 |
| | (20.6 | ) |
| Comprehensive income (loss) | $ | 106.6 |
| | $ | 124.2 |
| | $ | (8.8 | ) | | $ | (124.8 | ) | | $ | 97.2 |
| $ | 140.9 |
| | $ | 166.2 |
| | $ | (1.3 | ) | | $ | (167.7 | ) | | $ | 138.1 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 20122015
(in millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | $ | (20.0 | ) | | $ | 163.6 |
| | $ | 9.8 |
| | $ | — |
| | $ | 153.4 |
| |
NET CASH PROVIDED BY (USED IN)OPERATING ACTIVITIES(a) | | $ | 239.4 |
| | $ | 249.3 |
| | $ | 39.5 |
| | $ | (281.3 | ) | | $ | 246.9 |
|
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of long-lived assets | — |
| | 0.7 |
| | — |
| | — |
| | 0.7 |
| — |
| | 5.5 |
| | — |
| | — |
| | 5.5 |
|
| Investments in property, plant and equipment | — |
| | (61.2 | ) | | (8.2 | ) | | — |
| | (69.4 | ) | — |
| | (56.6 | ) | | (5.1 | ) | | — |
| | (61.7 | ) |
| Investing cash flows from (to) affiliates | | (141.9 | ) | | — |
| | — |
| | 141.9 |
| | — |
|
| Investments in acquired businesses, net of cash acquired | — |
| | (6.7 | ) | | (0.3 | ) | | — |
| | (7.0 | ) | — |
| | (170.8 | ) | | (9.4 | ) | | — |
| | (180.2 | ) |
| Investment in marketing and license agreement | | — |
| | (300.0 | ) | | — |
| | — |
| | (300.0 | ) |
| Net cash used in investing activities | — |
| | (67.2 | ) | | (8.5 | ) | | — |
| | (75.7 | ) | (141.9 | ) | | (521.9 | ) | | (14.5 | ) | | 141.9 |
| | (536.4 | ) |
| FINANCING ACTIVITIES | �� | | | | | | | | | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | — |
| | 853.4 |
| | 830.6 |
| | — |
| | 1,684.0 |
| — |
| | 1,568.1 |
| | 267.9 |
| | — |
| | 1,836.0 |
|
| Repayments under revolving and bank lines of credit and term loans | — |
| | (1,016.2 | ) | | (678.4 | ) | | — |
| | (1,694.6 | ) | — |
| | (1,284.1 | ) | | (173.9 | ) | | — |
| | (1,458.0 | ) |
| Financing and issuance fees | | (0.4 | ) | | (0.1 | ) | | — |
| | — |
| | (0.5 | ) |
| Dividends paid | (75.4 | ) | | — |
| | — |
| | — |
| | (75.4 | ) | (111.3 | ) | | (255.5 | ) | | (25.8 | ) | | 281.3 |
| | (111.3 | ) |
| Purchase of common shares | (17.5 | ) | | — |
| | — |
| | — |
| | (17.5 | ) | |
| Purchase of Common Shares | | (14.8 | ) | | — |
| | — |
| | — |
| | (14.8 | ) |
| Payments on seller notes | | — |
| | (1.5 | ) | | — |
| | — |
| | (1.5 | ) |
| Excess tax benefits from share-based payment arrangements | — |
| | 6.6 |
| | — |
| | — |
| | 6.6 |
| 4.7 |
| | — |
| | — |
| | — |
| | 4.7 |
|
| Cash received from exercise of stock options | 17.6 |
| | — |
| | — |
| | — |
| | 17.6 |
| 24.3 |
| | — |
| | — |
| | — |
| | 24.3 |
|
| Intercompany financing | 95.3 |
| | 58.1 |
| | (153.4 | ) | | — |
| | — |
| |
| Financing cash flows from (to) affiliates | | — |
| | 230.0 |
| | (88.1 | ) | | (141.9 | ) | | — |
|
| Net cash provided by (used in) financing activities | 20.0 |
| | (98.1 | ) | | (1.2 | ) | | — |
| | (79.3 | ) | (97.5 | ) | | 256.9 |
| | (19.9 | ) | | 139.4 |
| | 278.9 |
|
| Effect of exchange rate changes on cash | — |
| | — |
| | 2.6 |
| | — |
| | 2.6 |
| — |
| | — |
| | (7.3 | ) | | — |
| | (7.3 | ) |
| Net increase (decrease) in cash and cash equivalents | — |
| | (1.7 | ) | | 2.7 |
| | — |
| | 1.0 |
| — |
| | (15.7 | ) | | (2.2 | ) | | — |
| | (17.9 | ) |
| Cash and cash equivalents at beginning of year | — |
| | 4.3 |
| | 126.6 |
| | — |
| | 130.9 |
| — |
| | 23.1 |
| | 66.2 |
| | — |
| | 89.3 |
|
| Cash and cash equivalents at end of year | $ | — |
| | $ | 2.6 |
| | $ | 129.3 |
| | $ | — |
| | $ | 131.9 |
| $ | — |
| | $ | 7.4 |
| | $ | 64.0 |
| | $ | — |
| | $ | 71.4 |
|
| |
| (a) | Cash received by the Parent from the Guarantors in the form of dividends in the amount of $255.5 million represent return on investments and are included in cash flows from operating activities. Cash received by the Guarantors from the Non-Guarantors in the form of dividends in the amount of $25.8 million represent return on investments and are included in the cash flows from operating activities. |
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Balance Sheet
As of September 30, 20122015
(in millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
ASSETS | | Current assets: | | | | | | | | | | | | | | | | | | |
| Cash and cash equivalents | $ | — |
| | $ | 2.6 |
| | $ | 129.3 |
| | $ | — |
| | $ | 131.9 |
| $ | — |
| | $ | 7.4 |
| | $ | 64.0 |
| | $ | — |
| | $ | 71.4 |
|
| Accounts receivable, net | — |
| | 248.4 |
| | 82.5 |
| | — |
| | 330.9 |
| — |
| | 63.3 |
| | 94.4 |
| | — |
| | 157.7 |
|
| Accounts receivable, pledged | | — |
| | 152.9 |
| | — |
| | — |
| | 152.9 |
|
| Inventories | — |
| | 332.1 |
| | 82.8 |
| | — |
| | 414.9 |
| — |
| | 306.9 |
| | 88.9 |
| | — |
| | 395.8 |
|
| Assets held for sale | | — |
| | 220.3 |
| | — |
| | — |
| | 220.3 |
|
| Prepaid and other current assets | — |
| | 88.5 |
| | 33.8 |
| | — |
| | 122.3 |
| — |
| | 86.4 |
| | 34.7 |
| | — |
| | 121.1 |
|
| Total current assets | — |
| | 671.6 |
| | 328.4 |
| | — |
| | 1,000.0 |
| — |
| | 837.2 |
| | 282.0 |
| | ��� |
| | 1,119.2 |
|
| Property, plant and equipment, net | — |
| | 380.6 |
| | 46.8 |
| | — |
| | 427.4 |
| — |
| | 388.0 |
| | 56.1 |
| | — |
| | 444.1 |
|
| Goodwill | — |
| | 308.7 |
| | 0.7 |
| | — |
| | 309.4 |
| — |
| | 260.2 |
| | 12.0 |
| | 11.6 |
| | 283.8 |
|
| Intangible assets, net | — |
| | 264.2 |
| | 42.9 |
| | — |
| | 307.1 |
| — |
| | 584.6 |
| | 58.8 |
| | 11.7 |
| | 655.1 |
|
| Other assets | 29.8 |
| | 11.2 |
| | 32.8 |
| | (43.3 | ) | | 30.5 |
| 16.3 |
| | 11.0 |
| | 15.0 |
| | (17.3 | ) | | 25.0 |
|
| Equity investment in subsidiaries | 828.5 |
| | — |
| | — |
| | (828.5 | ) | | — |
| 461.3 |
| | — |
| | — |
| | (461.3 | ) | | — |
|
| Intercompany assets | 556.6 |
| | — |
| | — |
| | (556.6 | ) | | — |
| 1,179.4 |
| | — |
| | — |
| | (1,179.4 | ) | | — |
|
| Total assets | $ | 1,414.9 |
| | $ | 1,636.3 |
| | $ | 451.6 |
| | $ | (1,428.4 | ) | | $ | 2,074.4 |
| $ | 1,657.0 |
| | $ | 2,081.0 |
| | $ | 423.9 |
| | $ | (1,634.7 | ) | | $ | 2,527.2 |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |
| LIABILITIES AND EQUITY | | LIABILITIES AND EQUITY |
| Current liabilities: | | | | | | | | | | | | | | | | | | |
| Current portion of debt | $ | — |
| | $ | 1.2 |
| | $ | 0.3 |
| | $ | — |
| | $ | 1.5 |
| $ | — |
| | $ | 122.9 |
| | $ | 9.7 |
| | $ | — |
| | $ | 132.6 |
|
| Accounts payable | — |
| | 105.4 |
| | 46.9 |
| | — |
| | 152.3 |
| — |
| | 136.7 |
| | 56.4 |
| | — |
| | 193.1 |
|
| Liabilities held for sale | | — |
| | 41.7 |
| | — |
| | — |
| | 41.7 |
|
| Other current liabilities | 15.9 |
| | 177.4 |
| | 86.5 |
| | — |
| | 279.8 |
| 15.5 |
| | 162.7 |
| | 73.0 |
| | — |
| | 251.2 |
|
| Total current liabilities | 15.9 |
| | 284.0 |
| | 133.7 |
| | — |
| | 433.6 |
| 15.5 |
| | 464.0 |
| | 139.1 |
| | — |
| | 618.6 |
|
| Long-term debt | 777.1 |
| | 99.8 |
| | 281.3 |
| | (377.1 | ) | | 781.1 |
| 1,016.3 |
| | 724.9 |
| | 100.1 |
| | (816.3 | ) | | 1,025.0 |
|
| Other liabilities | 20.0 |
| | 227.2 |
| | 54.0 |
| | (43.4 | ) | | 257.8 |
| 4.5 |
| | 226.0 |
| | 32.3 |
| | (12.3 | ) | | 250.5 |
|
| Equity investment in subsidiaries | — |
| | 304.4 |
| | — |
| | (304.4 | ) | | — |
| — |
| | 156.2 |
| | — |
| | (156.2 | ) | | — |
|
| Intercompany liabilities | — |
| | 62.6 |
| | 116.8 |
| | (179.4 | ) | | — |
| — |
| | 296.6 |
| | 47.5 |
| | (344.1 | ) | | — |
|
| Total liabilities | 813.0 |
| | 978.0 |
| | 585.8 |
| | (904.3 | ) | | 1,472.5 |
| 1,036.3 |
| | 1,867.7 |
| | 319.0 |
| | (1,328.9 | ) | | 1,894.1 |
|
| Total shareholders’ equity | 601.9 |
| | 658.3 |
| | (134.2 | ) | | (524.1 | ) | | 601.9 |
| |
| Total liabilities and shareholders’ equity | $ | 1,414.9 |
| | $ | 1,636.3 |
| | $ | 451.6 |
| | $ | (1,428.4 | ) | | $ | 2,074.4 |
| |
| Total equity—controlling interest | | 620.7 |
| | 213.3 |
| | 104.9 |
| | (318.2 | ) | | 620.7 |
|
| Noncontrolling interest | | — |
| | — |
| | — |
| | 12.4 |
| | 12.4 |
|
| Total equity | | 620.7 |
| | 213.3 |
| | 104.9 |
| | (305.8 | ) | | 633.1 |
|
| Total liabilities and equity | | $ | 1,657.0 |
| | $ | 2,081.0 |
| | $ | 423.9 |
| | $ | (1,634.7 | ) | | $ | 2,527.2 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Operations
for the fiscal year ended September 30, 20112014
(in millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net sales | $ | — |
| | $ | 2,276.6 |
| | $ | 523.1 |
| | $ | — |
| | $ | 2,799.7 |
| $ | — |
| | $ | 2,051.0 |
| | $ | 527.3 |
| | $ | — |
| | $ | 2,578.3 |
|
| Cost of sales | — |
| | 1,422.9 |
| | 346.1 |
| | — |
| | 1,769.0 |
| — |
| | 1,318.8 |
| | 369.4 |
| | — |
| | 1,688.2 |
|
| Cost of sales — impairment, restructuring and other | — |
| | 17.3 |
| | 1.0 |
| |
|
| | 18.3 |
| |
| Cost of sales — product registration and recall matters | — |
| | 3.2 |
| | — |
| | — |
| | 3.2 |
| |
| Gross profit | — |
| | 833.2 |
| | 176.0 |
| | — |
| | 1,009.2 |
| — |
| | 732.2 |
| | 157.9 |
| | — |
| | 890.1 |
|
| Operating expenses: | | | | | | | | | | | | | | | | | | |
| Selling, general and administrative | — |
| | 523.3 |
| | 163.0 |
| | — |
| | 686.3 |
| — |
| | 421.9 |
| | 145.2 |
| | — |
| | 567.1 |
|
| Impairment, restructuring and other | — |
| | 34.1 |
| | 3.5 |
| | — |
| | 37.6 |
| — |
| | 47.2 |
| | 2.8 |
| | — |
| | 50.0 |
|
| Product registration and recall matters | — |
| | 11.4 |
| | — |
| | — |
| | 11.4 |
| |
| Other income, net | — |
| | (0.5 | ) | | (0.4 | ) | | — |
| | (0.9 | ) | |
| Income from operations | — |
| | 264.9 |
| | 9.9 |
| | — |
| | 274.8 |
| |
| Equity income in subsidiaries | (186.8 | ) | | (41.3 | ) | | — |
| | 228.1 |
| | — |
| |
| Other non-operating income | (19.4 | ) | | — |
| | — |
| | 19.4 |
| | — |
| |
| Other (income) loss, net | | — |
| | (8.6 | ) | | (2.1 | ) | | — |
| | (10.7 | ) |
| Income (loss) from operations | | — |
| | 271.7 |
| | 12.0 |
| | — |
| | 283.7 |
|
| Equity (income) loss in subsidiaries | | (193.2 | ) | | (8.9 | ) | | — |
| | 202.1 |
| | — |
|
| Other non-operating (income) loss | | (21.3 | ) | | — |
| | (22.2 | ) | | 43.5 |
| | — |
|
| Costs related to refinancing | 1.2 |
| | — |
| | — |
| | — |
| | 1.2 |
| 10.7 |
| | — |
| | — |
| | — |
| | 10.7 |
|
| Interest expense | 48.1 |
| | 20.0 |
| | 2.3 |
| | (19.4 | ) | | 51.0 |
| 52.5 |
| | 37.4 |
| | 0.9 |
| | (43.5 | ) | | 47.3 |
|
| Income from continuing operations before income taxes | 156.9 |
| | 286.2 |
| | 7.6 |
| | (228.1 | ) | | 222.6 |
| |
| Income (loss) from continuing operations before income taxes | | 151.3 |
| | 243.2 |
| | 33.3 |
| | (202.1 | ) | | 225.7 |
|
| Income tax (benefit) expense from continuing operations | (11.0 | ) | | 90.9 |
| | 2.8 |
| | — |
| | 82.7 |
| (14.9 | ) | | 83.6 |
| | 11.5 |
| | — |
| | 80.2 |
|
| Income from continuing operations | 167.9 |
| | 195.3 |
| | 4.8 |
| | (228.1 | ) | | 139.9 |
| |
| Income (loss) from continuing operations | | 166.2 |
| | 159.6 |
| | 21.8 |
| | (202.1 | ) | | 145.5 |
|
| Income (loss) from discontinued operations, net of tax | — |
| | (8.5 | ) | | 36.5 |
| | — |
| | 28.0 |
| — |
| | 20.3 |
| | 0.4 |
| | — |
| | 20.7 |
|
| Net income | $ | 167.9 |
| | $ | 186.8 |
| | $ | 41.3 |
| | $ | (228.1 | ) | | $ | 167.9 |
| |
| Net income (loss) | | $ | 166.2 |
| | $ | 179.9 |
| | $ | 22.2 |
| | $ | (202.1 | ) | | $ | 166.2 |
|
| Net (income) loss attributable to noncontrolling interest | | 0.3 |
| | 0.3 |
| | — |
| | (0.3 | ) | | 0.3 |
|
| Net income (loss) attributable to controlling interest | | $ | 166.5 |
| | $ | 180.2 |
| | $ | 22.2 |
| | $ | (202.4 | ) | | $ | 166.5 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, ConsolidatedConsolidating Statement of Comprehensive Income (Loss)
for the fiscal yeartwelve months ended September 30, 20112014
(In millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| Net income | $ | 167.9 |
| | $ | 186.8 |
| | $ | 41.3 |
| | $ | (228.1 | ) | | $ | 167.9 |
| |
| Net income (loss) | | $ | 166.2 |
| | $ | 179.9 |
| | $ | 22.2 |
| | $ | (202.1 | ) | | $ | 166.2 |
|
| Other comprehensive income (loss), net of tax: | | | | | | | | | | | | | | | | | | |
| Net foreign currency translation adjustment | — |
| | — |
| | (10.1 | ) | | — |
| | (10.1 | ) | (8.2 | ) | | — |
| | (8.2 | ) | | 8.2 |
| | (8.2 | ) |
| Net change in derivatives | (4.3 | ) | | 1.3 |
| | — |
| | — |
| | (3.0 | ) | 4.6 |
| | 1.3 |
| | — |
| | (1.3 | ) | | 4.6 |
|
| Net change in pension and other post retirement benefits | — |
| | (1.6 | ) | | 13.8 |
| | — |
| | 12.2 |
| (4.8 | ) | | 0.7 |
| | (5.5 | ) | | 4.8 |
| | (4.8 | ) |
| Total other comprehensive income (loss) | (4.3 | ) | | (0.3 | ) | | 3.7 |
| | — |
| | (0.9 | ) | (8.4 | ) | | 2.0 |
| | (13.7 | ) | | 11.7 |
| | (8.4 | ) |
| Comprehensive income | $ | 163.6 |
| | $ | 186.5 |
| | $ | 45.0 |
| | $ | (228.1 | ) | | $ | 167.0 |
| |
| Comprehensive income (loss) | | $ | 157.8 |
| | $ | 181.9 |
| | $ | 8.5 |
| | $ | (190.4 | ) | | $ | 157.8 |
|
THE SCOTTS MIRACLE-GRO COMPANY
Condensed, Consolidating Statement of Cash Flows
for the fiscal year ended September 30, 20112014
(in millions)
| | | | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated | Parent | | Subsidiary Guarantors | | Non- Guarantors | | Eliminations | | Consolidated |
| NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES | $ | (10.5 | ) | | $ | 85.2 |
| | $ | 47.4 |
| | $ | — |
| | $ | 122.1 |
| |
NET CASH PROVIDED BY (USED IN)OPERATING ACTIVITIES(a) | | $ | 388.8 |
| | $ | 254.5 |
| | $ | 21.7 |
| | $ | (424.1 | ) | | $ | 240.9 |
|
INVESTING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Proceeds from sale of long-lived assets | — |
| | 0.2 |
| | — |
| | — |
| | 0.2 |
| — |
| | 3.7 |
| | — |
| | — |
| | 3.7 |
|
| Proceeds from sale of business, net of transaction costs | — |
| | 158.7 |
| | 94.9 |
| | — |
| | 253.6 |
| — |
| | 6.6 |
| | 0.6 |
| | — |
| | 7.2 |
|
| Investments in property, plant and equipment | — |
| | (64.5 | ) | | (8.2 | ) | | — |
| | (72.7 | ) | — |
| | (81.0 | ) | | (6.6 | ) | | — |
| | (87.6 | ) |
| Contingent consideration and related payments | — |
| | (20.0 | ) | | — |
| | — |
| | (20.0 | ) | |
| Investment in acquired businesses, net of cash acquired | — |
| | (7.6 | ) | | — |
| | — |
| | (7.6 | ) | |
| Net cash provided by investing activities | — |
| | 66.8 |
| | 86.7 |
| | — |
| | 153.5 |
| |
| Proceeds from sale and leaseback transaction | | — |
| | 35.1 |
| | — |
| | — |
| | 35.1 |
|
| Investments in acquired businesses, net of cash acquired | | — |
| | (58.9 | ) | | (55.1 | ) | | — |
| | (114.0 | ) |
| Net cash used in investing activities | | — |
| | (94.5 | ) | | (61.1 | ) | | — |
| | (155.6 | ) |
| FINANCING ACTIVITIES | | | | | | | | | | | | | | | | | | |
| Borrowings under revolving and bank lines of credit and term loans | — |
| | 908.2 |
| | 701.9 |
| | — |
| | 1,610.1 |
| — |
| | 1,596.1 |
| | 336.7 |
| | — |
| | 1,932.8 |
|
| Repayments under revolving and bank lines of credit and term loans | (302.4 | ) | | (660.8 | ) | | (668.9 | ) | | — |
| | (1,632.1 | ) | — |
| | (1,184.7 | ) | | (340.6 | ) | | — |
| | (1,525.3 | ) |
| Proceeds from issuance of Senior Notes, net of discount | 200.0 |
| | — |
| | — |
| | — |
| | 200.0 |
| |
| Repayment of 7.25% Senior Notes | | (200.0 | ) | | — |
| | — |
| | — |
| | (200.0 | ) |
| Financing and issuance fees | (18.9 | ) | | — |
| | — |
| | — |
| | (18.9 | ) | (6.1 | ) | | — |
| | — |
| | — |
| | (6.1 | ) |
| Dividends paid | (67.9 | ) | | — |
| | — |
| | — |
| | (67.9 | ) | (230.8 | ) | | (404.9 | ) | | (19.2 | ) | | 424.1 |
| | (230.8 | ) |
| Purchase of common shares | (358.7 | ) | | — |
| | — |
| | — |
| | (358.7 | ) | |
| Purchase of Common Shares | | (120.0 | ) | | — |
| | — |
| | — |
| | (120.0 | ) |
| Payments on seller notes | — |
| | (0.3 | ) | | — |
| | — |
| | (0.3 | ) | — |
| | (0.8 | ) | | — |
| | — |
| | (0.8 | ) |
| Excess tax benefits from share-based payment arrangements | — |
| | 5.6 |
| | — |
| | — |
| | 5.6 |
| — |
| | 5.9 |
| | — |
| | — |
| | 5.9 |
|
| Cash received from exercise of stock options | 31.5 |
| | — |
| | — |
| | — |
| | 31.5 |
| 20.0 |
| | — |
| | — |
| | — |
| | 20.0 |
|
| Intercompany financing | 526.9 |
| | (405.3 | ) | | (121.6 | ) | | — |
| | — |
| 148.1 |
| | (151.1 | ) | | 3.0 |
| | — |
| | — |
|
| Net cash provided by (used in) financing activities | 10.5 |
| | (152.6 | ) | | (88.6 | ) | | — |
| | (230.7 | ) | |
| Net cash used in financing activities | | (388.8 | ) | | (139.5 | ) | | (20.1 | ) | | 424.1 |
| | (124.3 | ) |
| Effect of exchange rate changes on cash | — |
| | — |
| | (2.1 | ) | | — |
| | (2.1 | ) | — |
| | — |
| | (1.5 | ) | | — |
| | (1.5 | ) |
| Net (decrease) increase in cash and cash equivalents | — |
| | (0.6 | ) | | 43.4 |
| | — |
| | 42.8 |
| |
| Net increase (decrease) in cash and cash equivalents | | — |
| | 20.5 |
| | (61.0 | ) | | — |
| | (40.5 | ) |
| Cash and cash equivalents at beginning of year | — |
| | 5.1 |
| | 83.0 |
| | — |
| | 88.1 |
| — |
| | 2.6 |
| | 127.2 |
| | — |
| | 129.8 |
|
| Cash and cash equivalents at end of year | $ | — |
| | $ | 4.5 |
| | $ | 126.4 |
| | $ | — |
| | $ | 130.9 |
| $ | — |
| | $ | 23.1 |
| | $ | 66.2 |
| | $ | — |
| | $ | 89.3 |
|
| |
| (a) | Cash received by the Parent from the Guarantors in the form of dividends in the amount of $422.8 million represent return on investments and are included in cash flows from operating activities. Cash received by the Guarantors from the Non-Guarantors in the form of dividends in the amount of $1.3 million represent return on investments and are included in the cash flows from operating activities. |
Schedule II—Valuation and Qualifying Accounts
for the fiscal year ended September 30, 20132016
| | | Column A | Column B | | Column C | | Column D | | Column E | | Column F | | Column B | | Column C | | Column D | | Column E | | Column F |
| Classification | Balance at Beginning of Period | | Reserves Acquired | | Additions Charged to Expense | | Deductions Credited and Write-Offs | | Balance at End of Period | | Balance at Beginning of Period | | Reserves Acquired | | Additions Charged to Expense | | Deductions Credited and Write-Offs | | Balance at End of Period |
| | (In millions) | | (In millions) |
| Valuation and qualifying accounts deducted from the assets to which they apply: | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 10.5 |
| | $ | — |
| | $ | 5.5 |
| | $ | (6.5 | ) | | $ | 9.5 |
| | $ | 6.5 |
| | $ | — |
| | $ | 4.1 |
| | $ | (3.4 | ) | | $ | 7.2 |
|
| Income tax valuation allowance | 48.4 |
| | — |
| | (4.0 | ) | | 7.1 |
| | 51.5 |
| | 45.8 |
| | — |
| | (0.9 | ) | | 0.2 |
| | 45.1 |
|
Schedule II—Valuation and Qualifying Accounts
for the fiscal year ended September 30, 20122015
| | | Column A | Column B | | Column C | | Column D | | Column E | | Column F | | Column B | | Column C | | Column D | | Column E | | Column F |
| Classification | Balance at Beginning of Period | | Reserves Acquired | | Additions Charged to Expense | | Deductions Credited and Write-Offs | | Balance at End of Period | | Balance at Beginning of Period | | Reserves Acquired | | Additions Charged to Expense | | Deductions Credited and Write-Offs | | Balance at End of Period |
| | (In millions) | | (In millions) |
| Valuation and qualifying accounts deducted from the assets to which they apply: | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 12.9 |
| | $ | — |
| | $ | 19.1 |
| | $ | (21.5 | ) | | $ | 10.5 |
| | $ | 5.5 |
| | $ | — |
| | $ | 1.4 |
| | $ | (0.4 | ) | | $ | 6.5 |
|
| Income tax valuation allowance | 44.3 |
| | — |
| | (0.6 | ) | | 4.7 |
| | 48.4 |
| | 48.3 |
| | — |
| | 1.5 |
| | (4.0 | ) | | 45.8 |
|
Schedule II—Valuation and Qualifying Accounts
for the fiscal year ended September 30, 20112014
| | | Column A | Column B | | Column C | | Column D | | Column E | | Column F | | Column B | | Column C | | Column D | | Column E | | Column F |
| Classification | Balance at Beginning of Period | | Reserves Acquired | | Additions Charged to Expense | | Deductions Credited and Write-Offs | | Balance at End of Period | | Balance at Beginning of Period | | Reserves Acquired | | Additions Charged to Expense | | Deductions Credited and Write-Offs | | Balance at End of Period |
| | (In millions) | | (In millions) |
| Valuation and qualifying accounts deducted from the assets to which they apply: | | | | | | | | | | | | | | | | | | | |
| Allowance for doubtful accounts | $ | 7.7 |
| | $ | 0.1 |
| | $ | 9.5 |
| | $ | (4.4 | ) | | $ | 12.9 |
| | $ | 7.5 |
| | $ | — |
| | $ | 1.6 |
| | $ | (3.6 | ) | | $ | 5.5 |
|
| Income tax valuation allowance | 42.3 |
| | — |
| | (2.0 | ) | | 4.0 |
| | 44.3 |
| | 51.5 |
| | — |
| | (1.5 | ) | | (1.7 | ) | | 48.3 |
|
The Scotts Miracle-Gro Company
Index to Exhibits
|
| | | | |
Exhibit No. | | Description | | Location |
| 3.1(a) | | Initial Articles of Incorporation of The Scotts Miracle-Gro Company as filed with the Ohio Secretary of State on November 22, 2004 | | Incorporated herein by reference to the Current Report on Form 8-K of The Scotts Miracle-Gro Company (the “Registrant”) filed March 24, 2005 (File No. 1-11593) [Exhibit 3.1] |
| | | | | |
| 3.1(b) | | Certificate of Amendment by Shareholders to Articles of Incorporation of The Scotts Miracle-Gro Company as filed with the Ohio Secretary of State on March 18, 2005 | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed March 24, 2005 (File No. 1-11593) [Exhibit 3.2] |
| | | | | |
| 3.2 | | Code of Regulations of The Scotts Miracle-Gro Company | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed March 24, 2005 (File No. 1-11593) [Exhibit 3.3] |
| | | | | |
| 4.1(a) | | Indenture, dated January 14, 2010, among The Scotts Miracle-Gro Company, the guarantors from time to time party thereto and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 14, 2010 (File No. 1-11593) [Exhibit 4.1] |
| | | | |
4.1(b) | | First Supplemental Indenture, dated January 14, 2010, among The Scotts Miracle-Gro Company, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 14, 2010 (File No. 1-11593) [Exhibit 4.2] |
| | | | |
4.1(c) | | Second Supplemental Indenture, dated September 28, 2011, among The Scotts Miracle-Gro Company, the subsidiary guarantors named therein and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant's Annual Report on Form 10-K for the fiscal year ended September 30, 2011 (File No. 1-11593) [Exhibit 4.1(c)] |
| | | | |
4.1(d) | | Form of 7.25% Senior Notes due 2018 | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 14, 2010 (File No. 1-11593) [Included in Exhibit 4.2] |
| | | | |
4.2(a) | | Indenture, dated as of December 16, 2010, by and among The Scotts Miracle-Gro Company, the Guarantors (as defined therein) and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 16, 2010 (File No. 1-11593) [Exhibit 4.1] |
| | | | | |
4.2(b)4.1(b) | | First Supplemental Indenture, dated as of September 28, 2011, by and among The Scotts Miracle-Gro Company, the Guarantors (as defined therein) and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant'sRegistrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2011 (File No. 1-11593)filed November 23, 2011 [Exhibit 4.2(b)] |
| | | | | |
4.2(c)4.1(c) | | Second Supplemental Indenture, dated as of September 30, 2013, among The Scotts Miracle-Gro Company, the Guarantors (as defined therein) and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2013 filed February 6, 2014 [Exhibit 4.2] |
| | | | |
| 4.1(d) | | Third Supplemental Indenture, dated as of February 25, 2014, among The Scotts Miracle-Gro Company, the Guarantors (as defined therein) and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2014 filed May 8, 2014 [Exhibit 4.1] |
| | | | |
| 4.1(e) | | Fourth Supplemental Indenture, dated March 27, 2015, among The Scotts Miracle-Gro Company, the Guarantors (as defined therein) and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2015 filed May 7, 2015 [Exhibit 4] |
| | | | |
| 4.1(f) | | Fifth Supplemental Indenture, dated October 26, 2015, among The Scotts Miracle-Gro Company, the Guarantors (as defined therein) and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2015 filed November 24, 2015 [Exhibit 4.1(f)] |
| | | | |
| 4.1(g) | | Form of 6.625% Senior Notes due 2020 | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 16, 2010 (File No. 1-11593) [Included in Exhibit[Exhibit 4.2] |
| | | | |
| 4.2(a) | | Indenture, dated as of October 13, 2015, by and among The Scotts Miracle-Gro Company, the Guarantors (as defined therein) and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed October 14, 2015 [Exhibit 4.1] |
| | | | | |
| 4.2(b) | | First Supplemental Indenture, dated May 26, 2016, by and among The Scotts Miracle-Gro Company, the Guarantors (as defined therein) and U.S. Bank National Association, as trustee | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 2, 2016 filed August 10, 2016 [Exhibit 4] |
| | | | |
| 4.2(c) | | Form of 6.000% Senior Notes due 2023 | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed October 14, 2015 [Exhibit 4.2] |
| | | | |
|
| | | | |
| 4.2(d) | | Registration Rights Agreement, dated as of December 16, 2010,October 13, 2015, by and among The Scotts Miracle-Gro Company, the guarantors named therein and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 16, 2010 (File No. 1-11593)October 14, 2015 [Exhibit 4.3] |
| | | | | |
| 4.3 | | Agreement to furnish copies of instruments and agreements defining rights of holders of long-term debt | | * |
| | | | | |
|
| | | | |
| 10.1(a) | | Amended and Restated Agreement and Plan of Merger, dated as of May 19, 1995, among Stern’s Miracle-Gro Products, Inc., Stern’s Nurseries, Inc., Miracle-Gro Lawn Products Inc., Miracle-Gro Products Limited, Hagedorn Partnership, L.P., the general partners of Hagedorn Partnership, L.P., Horace Hagedorn, Community Funds, Inc., and John Kenlon, The Scotts Company and ZYX Corporation | | Incorporated herein by reference to the Current Report on Form 8-K of The Scotts Company, a Delaware corporation, filed June 2, 1995 (File No. 0-19768) [Exhibit 2(b)] |
| | | | | |
| 10.1(b) | | First Amendment to Amended and Restated Agreement and Plan of Merger, made and entered into as of October 1, 1999, among The Scotts Company, Scotts’ Miracle-Gro Products, Inc. (as successor to ZYX Corporation and Stern’s Miracle-Gro Products, Inc.), Miracle-Gro Lawn Products Inc., Miracle-Gro Products Limited, Hagedorn Partnership, L.P., Community Funds, Inc., Horace Hagedorn and John Kenlon, and James Hagedorn, Katherine Hagedorn Littlefield, Paul Hagedorn, Peter Hagedorn, Robert Hagedorn and Susan Hagedorn | | Incorporated herein by reference to the Current Report on Form 8-K of The Scotts Company, an Ohio corporation, filed October 5, 1999 (File No. 1-13292) [Exhibit 2] |
| | | | | |
10.210.2(a) | | SecondFourth Amended and Restated Credit Agreement, dated as of June 30, 2011,October 29, 2015, by and among The Scotts Miracle-Gro Company, as the “Borrower”a Borrower; the Subsidiary Borrowers (as defined intherein); JPMorgan Chase Bank, N.A., as Administrative Agent; Bank of America, N.A. and Wells Fargo Bank, National Association, as Co- Syndication Agents; CoBank, ACB, Mizuho Bank, LTD., Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”, New York Branch, TD Bank N.A. and U.S. Bank National Association, as Co-Documentation Agents; and the Second Amended and Restated Credit Agreement); the several other banks and other financial institutions from time to time parties to the Second Amended and Restated Credit Agreement (the “Lenders”); Bank of America, N.A., as Syndication Agent; Cobank, ACB, BNP Paribas, Credit Agricole Corporate and Investment Bank, Rabobank Nederland, Citizens Bank of Pennsylvania, The Bank of Nova Scotia and Wells Fargo Bank, N.A., as Documentation Agents; and JPMorgan Chase Bank, N.A., as Administrative Agentthereto | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed July 1, 2011 (File No. 1-11593)November 3, 2015 [Exhibit 4.1]10.1] |
| | | | | |
10.310.2(b) | | SecondAmendment No. 1, dated as of February 8, 2016, to Fourth Amended and Restated Credit Agreement dated October 29, 2015, by and among The Scotts Miracle-Gro Company, as a Borrower; the Subsidiary Borrowers (as defined therein); JPMorgan Chase Bank, N.A., as Administrative Agent; Bank of America, N.A. and Wells Fargo Bank, National Association, as Co- Syndication Agents; CoBank, ACB, Mizuho Bank, LTD., Coöperatieve Rabobank U.S., New York Branch (formerly known as Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. “Rabobank Nederland”, New York Branch), TD Bank N.A. and U.S. Bank National Association, as Co-Documentation Agents; and the several other banks and other financial institutions from time to time parties thereto | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 2, 2016 filed February 11, 2016 [Exhibit 10.3] |
| | | | |
| 10.2(c) | | Fourth Amended and Restated Guarantee and Collateral Agreement, dated as of June 30, 2011,October 29, 2015, made by The Scotts Miracle-Gro Company, each domestic Subsidiary Borrower under the SecondFourth Amended and Restated Credit Agreement, and certain of its and their domestic subsidiaries, in favor of JPMorgan Chase Bank, N.A., as Administrative Agent | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed July 1, 2011 (File No. 1-11593)November 3, 2015 [Exhibit 4.2] |
| | | | |
10.4(a)† | | The Scotts Miracle-Gro Company Amended and Restated 1996 Stock Option Plan (effective as of October 30, 2007) | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 (File No. 1-11593) [Exhibit 10(d)(4)] |
| | | | |
10.4(b)† | | Specimen form of Stock Option Agreement for Non-Qualified Stock Options granted to employees under The Scotts Company 1996 Stock Option Plan (now known as The Scotts Miracle-Gro Company Amended and Restated 1996 Stock Option Plan) | | Incorporated herein by reference to the Current Report on Form 8-K of The Scotts Company, an Ohio corporation, filed November 19, 2004 (File No. 1-11593) [Exhibit 10.7] |
| | | | |
10.5(a)† | | The Scotts Miracle-Gro Company Amended and Restated 2003 Stock Option and Incentive Equity Plan (effective as of October 30, 2007) | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 (File No. 1-11593) [Exhibit 10(j)(3)] |
| | | | |
10.5(b)(i) | | Specimen form of Award Agreement for Directors used to evidence grants of Nonqualified Stock Options made under The Scotts Company 2003 Stock Option and Incentive Equity Plan (now known as The Scotts Miracle-Gro Company Amended and Restated 2003 Stock Option and Incentive Equity Plan) [2003 version] | | Incorporated herein by reference to the Current Report on Form 8-K of The Scotts Company, an Ohio corporation, filed November 19, 2004 (File No. 1-11593) [Exhibit 10.9]10.2] |
| | | | | |
|
| | | | |
10.5(b)(ii)10.2(d) | | Specimen formAmendment No. 1, dated July 29, 2016, to Fourth Amended and Restated Guarantee and Collateral Agreement, dated as of Award Agreement for Directors used to evidence grants of Nonqualified Stock OptionsOctober 29, 2015, made underby The Scotts Miracle-Gro Company, 2003 Stock Option and Incentive Equity Plan (now known as The Scotts Miracle-Gro Companyeach domestic Subsidiary Borrower under the Fourth Amended and Restated 2003 Stock OptionCredit Agreement, and Incentive Equity Plan) [post-2003 version]certain of its and their domestic subsidiaries, in favor of JPMorgan Chase Bank, N.A., as Administrative Agent | | Incorporated herein by reference to the Registrant’s AnnualQuarterly Report on Form 10-K10-Q for the fiscal yearquarterly period ended September 30, 2005 (File No. 1-11593)July 2, 2016 filed August 10, 2016 [Exhibit 10(v)]10] |
| | | | | |
10.5(c)(i)† | | Specimen form of Award Agreement for Nondirectors used to evidence grants of Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock and Performance Stock made under The Scotts Company 2003 Stock Option and Incentive Equity Plan (now known as The Scotts Miracle-Gro Company Amended and Restated 2003 Stock Option and Incentive Equity Plan) [pre-December 1, 2004 version] | | Incorporated herein by reference to the Current Report on Form 8-K of The Scotts Company, an Ohio corporation, filed November 19, 2004 (File No. 1-11593) [Exhibit 10.8] |
| | | | |
10.5(c)(ii)† | | Specimen form of Award Agreement for Nondirectors used to evidence grants of Incentive Stock Options, Nonqualified Stock Options, Stock Appreciation Rights, Restricted Stock and Performance Shares made under The Scotts Miracle-Gro Company 2003 Stock Option and Incentive Equity Plan (now known as The Scotts Miracle-Gro Company Amended and Restated 2003 Stock Option and Incentive Equity Plan) [effective December 1, 2004] | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005 (File No. 1-11593) [Exhibit 10(u)] |
| | | | |
10.6(a)10.3(a)† | | The Scotts Miracle-Gro Company Long-Term Incentive Plan (effective(reflects amendment and restatement of plan formerly known as The Scotts Miracle-Gro Company 2006 Long-Term Incentive Plan) [effective as of January 17, 2013)2013] | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 24, 2013 (File No. 1-11593) [Exhibit 10.1] |
| | | | | |
10.6(b) | | Specimen form of Award Agreement for Nonemployee Directors used to evidence grants of Time-Based Nonqualified Stock Options which may be made under The Scotts Miracle-Gro Company 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed February 2, 2006 (File No. 1-11593) [Exhibit 10.3] |
| | | | |
10.6(c)(i)10.3(b)† | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units made under The Scotts Miracle-Gro Company Amended and Restated 2006the Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (February 4, 2008 through January 22, 2009 version) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2007 (File No. 1-11593) [Exhibit 10(m)] |
| | | | |
10.6(c)(ii) | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (January 23, 2009 through January 19, 2012) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2009 (File No. 1-11593)2015 filed May 7, 2015 [Exhibit 10.1]10.3] |
| | | | | |
10.6(c)(iii)10.3(c)† | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors Retainer Deferrals (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006the Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (January 20, 2012 through January 17, 2013) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (File No. 1-11593) [Exhibit 10.4]
|
| | | | |
|
| | | | |
10.6(c)(iv) | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units made on January 20, 2012 to Adam Hanft and William G. Jurgensen under The Scotts Miracle-Gro Company Amended and Restated Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (File No. 1-11593) [Exhibit 10.5]
|
| | | | |
10.6(c)(v) | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units which may be made under The Scotts Miracle-Gro Company Long-Term Incentive Plan (post-January 17, 2013 version) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2012 (File No. 1-11593) [Exhibit 10.3]
|
| | | | |
10.6(c)(vi) | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units made on January 18, 2013 to William G. Jurgensen under The Scotts Miracle-Gro Company Long-Term Incentive Plan | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2012 (File No. 1-11593) [Exhibit 10.4] |
| | | | |
10.6(d)(i) | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (Deferral of Cash Retainer — January 22, 2010 through January 20, 2011 version) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 2, 2010 (File No. 1-11593) [Exhibit 10.1] |
| | | | |
10.6(d)(ii) | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (Deferral of Cash Retainer — January 21, 2011 through January 19, 2012) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 1, 2011 (File No. 1-11593)March 28, 2015 filed May 7, 2015 [Exhibit 10.4] |
| | | | | |
10.6(d)(iii)
| | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (Deferral of Cash Retainer — January 20, 2012 through January 17, 2013) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (File No. 1-11593) [Exhibit 10.6]
|
| | | | |
10.6(d)(iv) | | Specimen form of Deferred Stock Unit Award Agreement for Nonemployee Directors (with Related Dividend Equivalents) used to evidence grants of Deferred Stock Units which may be made under The Scotts Miracle-Gro Company Long-Term Incentive Plan (Deferral of Cash Retainer — post-January 17, 2013 version) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2012 (File No. 1-11593) [Exhibit 10.2]
|
| | | | |
|
| | | | |
10.6(e)† | | Specimen form of Award Agreement used to evidence grants of Restricted Stock Units, Performance Shares, Nonqualified Stock Options, Incentive Stock Options, Restricted Stock and Stock Appreciation Rights made under The Scotts Miracle-Gro Company 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) [pre-October 30, 2007 version] | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2005 (File No. 1-11593) [Exhibit 10(b)] |
| | | | |
10.6(f)10.3(d)(i)† | | Specimen formForm of Restricted Stock Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants of Restricted Stock Units which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (January 20, 2010 through January 19, 2012 version) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 2, 2010 (File No. 1-11593) [Exhibit 10.2] |
| | | | |
10.6(f)(ii)†
| | Specimen form of Restricted Stock Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants of Restricted Stock Units which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (January 20, 2012 through January 17, 2013) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (File No. 1-11593) [Exhibit 10.2]
|
| | | | |
10.6(f)(iii)† | | Specimen form of Restricted Stock Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants of Restricted Stock Units which may be made under The Scotts Miracle-Gro Company Long-Term Incentive Plan (post-January 17, 2013 version) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2012 (File No. 1-11593) [Exhibit 10.5] |
| | | | |
10.6(f)(iv)† | | Specimen form of Restricted Stock Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grantsgrant of Restricted Stock Units made on April 1, 2013 to Lawrence A. Hilsheimer under The Scotts Miracle-Gro Company Long-Term Incentive Plan | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2013 (File No. 1-11593) [Exhibit 10.6]
|
| | | | |
10.6(g)(i)† | | Specimen form of Performance Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants of Performance Units which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (January 21, 2011 through January 19, 2012 version) | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed January 26, 2011 (File No. 1-11593) [Exhibit 10.1] |
| | | | |
10.6(g)(ii)†
| | Specimen form of Performance Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants of Performance Units which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (January 20, 2012 through January 17, 2013 | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (File No. 1-11593) [Exhibit 10.1]
|
| | | | |
10.6(g)(iii)† | | Specimen form of Performance Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants of Performance Units which may be made under The Scotts Miracle-Gro Company Long-Term Incentive Plan (January
17, 2013 version)
| | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2012 (File No. 1-11593) [Exhibit 10.6]
|
| | | | |
|
| | | | |
10.6(g)(iv)† | | Specimen form of Performance Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants of Performance Units made on January 18,11, 2013 to James Hagedorn under The Scotts Miracle-Gro Company Long-Term Incentive Plan | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 28, 2013 filed February 6, 2014 [Exhibit 10.10] |
| | | | |
| 10.3(d)(ii)† | | Specimen form of Restricted Stock Unit Award Agreement for Third Party Service-Providers (with Related Dividend Equivalents) used to evidence grants which may be made under the Long-Term Incentive Plan | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 30, 2013 (File No. 1-11593)28, 2015 filed May 7, 2015 [Exhibit 10.5] |
| | | | |
| 10.3(d)(iii)† | | Specimen form of Restricted Stock Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants which may be made under the Long-Term Incentive Plan | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2015 filed May 7, 2015 [Exhibit 10.8] |
| | | | | |
10.6(h)10.3(e)† | | Specimen form of Performance Unit Award Agreement for Employees (with Related Dividend Equivalents) used to evidence grants which may be made under the Long-Term Incentive Plan | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 28, 2015 filed May 7, 2015 [Exhibit 10.6] |
| | | | |
| 10.3(f)(i)† | | Specimen form of Nonqualified Stock Option Award Agreement for Employees used to evidence grants of Nonqualified Stock Options made under The Scotts Miracle-Gro Company 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) [October 30, 2007 through October 8, 2008 version] | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 (File No. 1-11593)filed November 29, 2007 [Exhibit 10(t)(3)] |
| | | | | |
10.6(h)10.3(f)(ii)† | | Specimen form of Nonqualified Stock Option Award Agreement for Employees used to evidence grants of Nonqualified Stock Options made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (October 9, 2008[January 20, 2010 through January 19, 2010 version)2012 version] | | Incorporated herein by reference to the Registrant’s AnnualQuarterly Report on Form 10-K10-Q for the fiscal yearquarterly period ended September 30, 2008 (File No. 1-11593)January 2, 2010 filed February 11, 2010 [Exhibit 10.7(f)(ii)]10.4] |
| | | | | |
10.6(h)
|
| | | | |
10.3(f)(iii)†
| | Specimen form of Nonqualified Stock Option Award Agreement for Employees used to evidence grants of Nonqualified Stock Options which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (January[January 20, 20102012 through January 19,17, 2013 version] | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 filed February 8, 2012 version)[Exhibit 10.3]
|
| | | | |
| 10.3(f)(iv)† | | Specimen form of Nonqualified Stock Option Award Agreement for Employees used to evidence grants which may be made under the Long-Term Incentive Plan [post-January 17, 2013 version] | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 2, 2010 (File No. 1-11593) [Exhibit 10.4] |
| | | | |
10.6(h)(iv)†
| | Specimen form of Nonqualified Stock Option Award Agreement for Employees used to evidence grants of Nonqualified Stock Options which may be made under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) (January 20, 2012 through January 17, 2013) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 31, 2011 (File No. 1-11593) [Exhibit 10.3]
|
| | | | |
10.6(h)(v)† | | Specimen form of Nonqualified Stock Option Award Agreement for Employees used to evidence grants of Nonqualified Stock Options which may be made under The Scotts Miracle-Gro Company Long-Term Incentive Plan (post-January 17, 2013 version) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2012 (File No. 1-11593)March 28, 2015 filed May 7, 2015 [Exhibit 10.7] |
| | | | | |
10.7(a)(i)10.4(a)† | | The Scotts Company LLC Amended and Restated Executive/Management Incentive Plan (approved on November 7, 2007 and effective as of October 30, 2007) | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2007 (File No. 1-11593) [Exhibit 10(b)(2)] |
| | | | |
10.7(a)(ii)† | | Amendment to The Scotts Company LLC Amended and Restated Executive/ManagementExecutive Incentive Plan (effective as of November 5, 2008) [amended the name of the plan to be The Scotts Company LLC Amended and Restated Executive Incentive Plan]January 30, 2014) | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed November 12, 2008 (File No. 1-11593)February 5, 2014 [Exhibit 10.2]10.1] |
| | | | | |
10.7(b)10.4(b)(i)† | | Specimen form of Employee Confidentiality, Noncompetition, Nonsolicitation Agreement for employees participating in The Scotts Company Executive/Management Incentive Plan (now known as The Scotts Company LLC Amended and Restated Executive Incentive Plan) [2005 version] | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008 (File No. 1-11593)filed November 25, 2008 [Exhibit 10.2(b)(i)] |
| | | | | |
|
| | | | |
10.7(b)10.4(b)(ii)† | | Specimen form of Employee Confidentiality, Noncompetition, Nonsolicitation Agreement for employees participating in The Scotts Company LLC Executive/Management Incentive Plan (now known as The Scotts Company LLC Amended and Restated Executive Incentive Plan) [post-2005 version] | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended July 1, 2006 (File No. 1-11593)filed August 10, 2006 [Exhibit 10.1] |
| | | | | |
10.7(c)10.4(b)(iii)† | | Employee Confidentiality, Noncompetition, Nonsolicitation Agreement, dated as of December 12, 2013, by and between The Scotts Company LLC, all companies controlled by, controlling or under common control with The Scotts Company LLC, and James Hagedorn | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 17, 2013 [Exhibit 10.2] |
| | | | |
| 10.4(c)† | | Form of Retention Award Agreement evidencing the payment of a cash bonus on April 12, 2013 and the grant of Restricted Stock Units on May 8, 2013 under The Scotts Miracle-Gro Company Amended and Restated 2006 Long-Term Incentive Plan (now known as The Scotts Miracle-Gro Company Long-Term Incentive Plan) to Thomas Coleman (executed by The Scotts Company LLC on May 14, 2013 and by Thomas Coleman on May 16, 2013) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended March 29, 2014 filed May 8, 2014 [Exhibit 10.2] |
| | | | |
| 10.4(d)† | | Executive Officers of The Scotts Miracle-Gro Company who are parties to form of Employee Confidentiality, Noncompetition, Nonsolicitation Agreement for employees participating in The Scotts Company LLC Amended and Restated Executive Incentive Plan incorporated in this Annual Report on Form 10-K as Exhibit 10.4(b)(ii) | | * |
| | | | | |
10.8(a)(i)†10.5† | | The Scotts Company LLC Executive Retirement Plan, As Amended and Restated as of January 1, 2011 (executed December 22, 2010) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 1, 2011 (File No. 1-11593) [Exhibit 10.3] |
| | | | |
10.8(a)(ii)† | | First Amendment to The Scotts Company LLC Executive Retirement Plan, as Amended and Restated as of January 1, 2011 (effective as of January 1, 2011) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended2015 (executed December 29, 2012 (File No. 1-11593) [Exhibit 10.8] |
| | | | |
10.8(a)(iii)† | | Second Amendment to The Scotts Company LLC Executive Retirement Plan, as Amended and Restated as of January 1, 2011 (effective as of January 1, 2012) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2012 (File No. 1-11593) [Exhibit 10.9] |
| | | | |
10.8(a)(iv)† | | Third Amendment to The Scotts Company LLC Executive Retirement Plan, as Amended and Restated as of January 1, 2011 (effective as of January 1, 2013) | | Incorporated herein by reference to the Registrant's Quarterly Report on Form 10-Q for the quarterly period ended December 29, 2012 (File No. 1-11593) [Exhibit 10.10] |
| | | | |
10.8(b)† | | Form of Executive Retirement Plan Retention Award Agreement between The Scotts Company LLC and each of David C. Evans, Barry W. Sanders, Denise S. Stump, Michael C. Lukemire and Vincent C. Brockman (entered into on November 4, 2008) | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed October 15, 2008 (File No. 1-11593) [Exhibit 10.2] |
| | | | |
10.9 | | Summary of Compensation for Nonemployee Directors of The Scotts Miracle-Gro Company (effective as of January 22, 2010) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 3, 2010 (File No. 1-11593) [Exhibit 10.7] |
| | | | |
10.10(a)† | | Employment Agreement, dated as of May 19, 1995, between The Scotts Company and James Hagedorn | | Incorporated herein by reference to the Annual Report on Form 10-K of The Scotts Company, an Ohio corporation, for the fiscal year ended September 30, 1995 (File No. 1-11593) [Exhibit 10(p)] |
| | | | |
10.10(b)† | | Amendments to Employment Agreement by and among The Scotts Miracle-Gro Company, The Scotts Company LLC and James Hagedorn, effective as of October 1, 2008 (executed by Mr. Hagedorn on December 22, 2008 and on behalf of The Scotts Miracle-Gro Company and The Scotts Company LLC by Denise Stump on December 22, 2008 and Vincent C. Brockman on December 30, 2008)31, 2014) | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended December 27, 2008 (File No. 1-11593)2014 filed February 5, 2015 [Exhibit 10.16]10.2] |
| | | | | |
10.10(c)†10.6† | | Summary of Compensation for Nonemployee Directors of The Scotts Miracle-Gro Company (effective as of May 1, 2014) | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014 filed November 25, 2014 [Exhibit 10.9] |
| | | | |
| 10.7† | | Executive Severance Agreement, dated as of December 11, 2013, by and between The Scotts Company LLC and James Hagedorn | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 17, 2013 [Exhibit 10.1] |
|
| | | | |
| | | | |
| 10.8† | | Separation Agreement and Release of All Claims, entered into and effective as of July 10, 2013,December 18, 2014, by and between The Scotts Company LLC and Vincent C. BrockmanBarry W. Sanders | | Incorporated herein by reference to the Registrant'sRegistrant’s Current Report on Form 8-K filed July 11, 2013 (File No. 1-11593)December 19, 2014 [Exhibit 10.1] |
| | | | | |
10.10(d)10.9(a)† | | Consulting Agreement, dated as of May 9, 2013,March 6, 2015, between The Scotts Miracle-Gro Company LLC and Dr. Michael PorterHanft Projects LLC [expired January 31, 2016] | | Incorporated herein by reference to the Registrant'sRegistrant’s Quarterly Report on Form 10-Q for the quarterly period ended June 29, 2013 (File No. 1-11593)March 28, 2015 filed May 7, 2015 [Exhibit 10.2] |
| | | | |
| 10.9(b)† | | Consulting Agreement, dated February 12, 2016, between The Scotts Company LLC and Hanft Projects LLC | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 2, 2016 filed May 11, 2016 [Exhibit 10.3] |
| | | | | |
10.10† | | Incentive Compensation/Retention Award Agreement, dated February 11, 2016, between The Scotts Miracle-Gro Company and Michael C. Lukemire | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 2, 2016 filed May 11, 2016 [Exhibit 10.2] |
| | | | |
| 10.11(a)† | | The Scotts Company LLC Executive Severance Plan, adopted on May 4, 2011 | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed May 10, 2011 (File No. 1-11593) [Exhibit 10.1] |
| | | | | |
| 10.11(b)† | | Form of Tier 1 Participation Agreement under The Scotts Company LLC Executive Severance Plan | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed May 10, 2011 (File No. 1-11593) [Exhibit 10.2] |
| | | | | |
| 10.11(c)† | | Executive Officers of The Scotts Miracle-Gro Company who are parties to form of Tier 1 Participation Agreement under The Scotts Company LLC Executive Severance Plan incorporated in this Annual Report on Form 10-K as Exhibit 10.11(b) | | * |
| | | | | |
| 10.12(a) | | Amended and Restated Exclusive Agency and Marketing Agreement, effective as of September 30, 1998, and amended and restated as of November 11, 1998, by and between Monsanto Company and The Scotts Company LLC (as successor to The Scotts Company)Company, an Ohio corporation) | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2005 (File No. 1-11593)filed December 15, 2005 [Exhibit 10(x)] |
| | | | | |
| 10.12(b) | | Letter Agreement, dated March 10, 2005, amending the Amended and Restated Exclusive Agency and Marketing Agreement, dated as of September 30, 1998, between Monsanto Company and The Scotts Company LLC (as successor to The Scotts Company)Company, an Ohio corporation) | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2009 (File No. 1-11593)filed November 24, 2009 [Exhibit 10.17(b)] |
| | | | | |
| 10.12(c) | | Letter Agreement, dated March 28, 2008, amending the Amended and Restated Exclusive Agency and Marketing Agreement, dated as of September 30, 1998, between Monsanto Company and The Scotts Company LLC | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2008 (File No. 1-11593)filed November 25, 2008 [Exhibit 10.18(b)] |
| | | | |
| 10.12(d) | | Amendment to Amended and Restated Exclusive Agency and Marketing Agreement, dated as of May 15, 2015, between Monsanto Company and The Scotts Company LLC | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K/A filed May 20, 2015 [Exhibit 10.2] |
| | | | |
| 10.12(e) | | Lawn and Garden Brand Extension Agreement, dated as of May 15, 2015, between Monsanto Company and The Scotts Company LLC | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K/A filed May 20, 2015 [Exhibit 10.3] |
| | | | |
| 10.12(f) | | Commercialization and Technology Agreement, dated as of May 15, 2015, between Monsanto Company and The Scotts Company LLC | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K/A filed May 20, 2015 [Exhibit 10.4] |
| | | | | |
| 10.13 | | Purchase Agreement, dated as of December 13, 2010, among The Scotts Miracle-Gro Company, the subsidiary guarantors named therein and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed December 16, 2010 (File No. 1-11593)[Exhibit 10.1] |
| | | | |
|
| | | | |
| 10.14 | | Purchase Agreement, dated October 7, 2015, among The Scotts Miracle-Gro Company, the subsidiary guarantors named therein and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the several initial purchasers named therein | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed October 14, 2015 [Exhibit 10.1] |
| | | | | |
10.1410.15(a) | | ShareAmended and Business SaleRestated Master Accounts Receivable Purchase Agreement, dated as of February 23, 2011, by andSeptember 25, 2015, among The Scotts Miracle-Gro Company, The Scotts Company LLC, as Seller, each of the Share SellersBanks party thereto and Business Sellers (as defined therein), Israel ChemicalsMizuho Bank, Ltd., as Purchaser, eachAdministrative Agent | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed September 30, 2015 [Exhibit 10.1] |
| | | | |
| 10.15(b) | | Waiver and First Amendment, dated as of March 23, 2016, to the Share PurchasersAmended and Business Purchasers (as defined therein) andRestated Master Accounts Receivable Purchase Agreement, dated as of September 25, 2015, among The Scotts Miracle-Gro Company, The Scotts Company LLC, the Banks party thereto and Mizuho Bank, Ltd., as Seller GuarantorAdministrative Agent | | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed March 1, 2011 (File No. 1-11593)29, 2016 [Exhibit 10.1] |
| | | | | |
10.15(a)10.15(c) | | Second Amendment, dated as of August 25, 2016, to the Amended and Restated Master Accounts Receivable Purchase Agreement, dated as of November 15, 2012, by andSeptember 25, 2015, among The Scotts Miracle-Gro Company, The Scotts Company LLC, The Bank of Nova Scotia, Suntrust Bank, RB Receivables LLC and Mizuho Corporate Bank, Ltd., as Administrative Agent and as a Bank | | Incorporated herein by reference to the Registrant’s Annual Report on Form 10-K for the fiscal year ended September 30, 2012 (File No. 1-11593) [Exhibit 10.16] |
| | | | |
10.15(b) | | First Amendment, dated as of October 25, 2013, to the Master Accounts Receivable Purchase Agreement, dated as of November 15, 2012, among The Scotts Miracle-Gro Company, The Scotts Company LLC, The Bank of Nova Scotia, Suntrust Bank, RB Receivables LLCBanks party thereto and Mizuho Bank, Ltd., as Administrative Agent and as a Bank
| | Incorporated herein by reference to the Registrant’s Current Report on Form 8-K filed October 31, 2013 (File No. 1-11593)August 26, 2016 [Exhibit 10.1] |
| | | | |
| 10.16 | | Contribution and Distribution Agreement, dated as of December 10, 2015, by and among The Scotts Miracle-Gro Company and TruGreen Holdings Corporation | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended January 2, 2016 filed February 11, 2016 [Exhibit 10.5] |
| | | | |
| 10.17 | | Form of Aircraft Time Sharing Agreement for Executive Officers | | Incorporated herein by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarterly period ended April 2, 2016 filed May 11, 2016 [Exhibit 10.4] |
| | | | | |
| 12 | | Computation of Ratio of Earnings to Fixed Charges | | * |
| | | | |
14 | | The Scotts Miracle-Gro Company Code of Business Conduct & Ethics (as revised effective January 18, 2012) | | Incorporated herein by reference to the Registrant's Current Report on Form 8-K filed January 24, 2012 (File No. 1-11593) [Exhibit 14.1] |
| | | | | |
| 21 | | Subsidiaries of The Scotts Miracle-Gro Company | | * |
| | | | | |
| 23 | | Consent of Independent Registered Public Accounting Firm — Deloitte & Touche LLP | | * |
| | | | | |
|
| | | | |
| 24 | | Powers of Attorney of Executive Officers and Directors of The Scotts Miracle-Gro Company | | * |
| | | | | |
| 31.1 | | Rule 13a-14(a)/15d-14(a) Certifications (Principal Executive Officer) | | * |
| | | | | |
| 31.2 | | Rule 13a-14(a)/15d-14(a) Certifications (Principal Financial Officer) | | * |
| | | | | |
| 32 | | Section 1350 Certifications (Principal Executive Officer and Principal Financial Officer) | | * |
| | | | | |
101.INS**101.INS | | XBRL Instance Document | | * |
| | | | | |
101.SCH**101.SCH | | XBRL Taxonomy Extension Schema | | * |
| | | | | |
101.CAL**101.CAL | | XBRL Taxonomy Extension Calculation Linkbase | | * |
| | | | | |
101.DEF**101.DEF | | XBRL Taxonomy Extension Definition Linkbase | | * |
| | | | | |
101.LAB**101.LAB | | XBRL Taxonomy Extension Label Linkbase | | * |
| | | | | |
101.PRE**101.PRE | | XBRL Taxonomy Extension Presentation Linkbase | | * |
|
| |
| * | Filed or furnished herewith. |
** | Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability. |
† | Management contract, compensatory plan or arrangement. |